-----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, QboK0gq2E24sjJ2QO28o5zX6lCNuVlLY+jbgvwbmOSaLUam+/wQZIn79p3Xwz1L5 QSi/v8gsjD3DrIQ8ejCK0w== 0000737468-00-000003.txt : 20000322 0000737468-00-000003.hdr.sgml : 20000322 ACCESSION NUMBER: 0000737468-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON TRUST BANCORP INC CENTRAL INDEX KEY: 0000737468 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050404671 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13091 FILM NUMBER: 574615 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-K 1 FORM 10-K FOR WASHINGTON TRUST BANCORP, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 000-13091 -------------------------------- WASHINGTON TRUST BANCORP, INC. (Exact name of registrant as specified in its charter) -------------------------------- RHODE ISLAND 05-0404671 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23 BROAD STREET WESTERLY, RHODE ISLAND 02891 (Address of principal executive offices) (Zip Code) 401-348-1200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.0625 PAR VALUE PER SHARE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was $142,500,385 at February 25, 2000 which includes $14,090,548 held by The Washington Trust Company under trust agreements and other instruments. The number of shares of common stock of the registrant outstanding as February 25, 2000 was 10,933,884. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated March 21, 2000 for the Annual Meeting of Shareholders to be held April 25, 2000 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K WASHINGTON TRUST BANCORP, INC. For the Year Ended December 31, 1999 TABLE OF CONTENTS Description Part I Item 1 Business Item 2 Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant Part II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about Market Risk Item 8 Financial Statements and Supplementary Data Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III Item 10 Directors and Executive Officers of the Registrant Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management Item 13 Certain Relationships and Related Transactions Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures This report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan default and charge-off rates, and changes in the assumptions used in making such forward-looking statements. PART I ITEM 1. BUSINESS Washington Trust Bancorp, Inc. Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1999 the Corporation had total consolidated assets of $1.105 billion, deposits of $660.8 million and equity capital of $77.2 million. In the third quarter of 1999, the Corporation completed its acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of merger of Pier Bank with and into The Washington Trust Company, the wholly-owned subsidiary of the Corporation. The acquisition of Pier Bank was a tax-free reorganization accounted for as a pooling of interests. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to reflect the acquisition at the beginning of the earliest period presented. At December 31, 1998, Pier Bank had total assets of $59.4 million and total shareholders' equity of $4.5 million. The Washington Trust Company The Washington Trust Company was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See discussion under "Market Area and Competition" for further information. The Bank provides a broad range of financial services, including: Residential mortgages Commercial and consumer demand deposits Commercial loans Savings, NOW and money market deposits Construction loans Certificates of deposit Consumer installment loans Retirement accounts Home equity lines of credit Cash management services Merchant credit card services Safe deposit boxes Automated teller machines (ATMs) Trust and investment management services Telephone banking services Automated teller machines (ATMs) are located throughout the Bank's market area. The Bank is a member of various ATM networks. Data processing for most of the Bank's deposit and loan accounts and other applications are conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees, gains and fees from mortgage banking activities and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, merchant processing, office supplies, advertising and promotion and other administrative expenses. The Bank's lending activities are conducted primarily in southern Rhode Island and southeastern Connecticut. The Bank provides a variety of commercial and retail lending products. The Bank generally underwrites its residential mortgages based upon secondary market standards. Loans are originated both for sale in the secondary market as well as for portfolio. Most secondary market loans have been sold with servicing retained, however, in the fourth quarter of 1999, the Corporation began selling loans with servicing released. Also in 1999, the Corporation sold its $4.6 million portfolio of credit card loans at a gain, net of expenses and related income taxes, of $285 thousand. The Bank provides trust and investment management services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency, custodial and management investment services to individuals and institutions; and as a trustee for employee benefit plans. In addition, the Bank provides a full-line of investment management and trust services, including financial planning, estate and tax planning, to customers of Bank Rhode Island. This alliance enables the Bank to generate fee income and also enables Bank Rhode Island to offer professional trust services to its customers. In January 2000, the Bank opened a trust and investment management office in Providence, Rhode Island. The market value of total trust assets amounted to $964.2 million as of December 31, 1999. The following is a summary of recurring sources of income, which excludes net gains on sales of securities and the 1999 net gain on sale of the credit card portfolio, as a percentage of total income (net interest income plus recurring noninterest income) during the past five years: 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- Net interest income 71% 72% 75% 77% 78% Trust revenue 12 11 11 10 10 Other noninterest income 17 17 14 13 12 --------------------------------------------------------------------------- Total income 100% 100% 100% 100% 100% --------------------------------------------------------------------------- Market Area and Competition The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island, as well as a portion of New London County in southeastern Connecticut. The Bank operates thirteen banking offices in these Rhode Island and Connecticut counties. The locations of the banking offices are as follows: Westerly, RI (3 locations) Charlestown, RI Wakefield, RI Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT (3 locations) The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities. In the first quarter of 1998, the Bank opened a financial services branch office in New London, Connecticut, which offers trust and investment management, commercial lending and residential mortgage origination. The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. The Bank had 34% of total deposits reported by all financial institutions for communities in which the Bank operates banking offices as of June 30, 1999. The closest competitor held 23%, and the second closest competitor held 13% of total deposits in the same communities. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department that is responsible for the review of existing products and services and the development of new products and services. Employees As of December 31, 1999 the Corporation had 387 employees, of which 338 were full-time and 49 were part-time. Supervision and Regulation General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change regulations and laws that affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined. The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports that the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended. The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank. Provided that the Corporation does not become a "financial holding company" under the recently enacted Gramm-Leach-Bliley Act (as discussed below), the BHC Act also requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit. The Bank is subject to the supervision of, and examination by, the FDIC, the State of Rhode Island and the State of Connecticut, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized". A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 1999, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements. Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, which present the highest risk, will pay the highest rates. FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those that generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) - The Interstate Act permits adequately capitalized bank holding companies to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state. Both Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers. Gramm-Leach-Bliley Act - The general effect of the Gramm-Leach-Bliley Act, which became law on November 12, 1999, is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system, such as the Corporation, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the Gramm-Leach-Bliley Act is intended to permit bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities than the activities previously permitted for bank holding companies. Generally, although significant implementing regulations have yet to be published, the Gramm-Leach-Bliley Act: o repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; o broadens the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; o provides an enhanced framework for protecting the privacy of consumer information; o adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the FHLB system; o modifies the laws governing the implementation of the Community Reinvestment Act of 1977; and o addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Corporation, must meet certain tests and file an election form with the Federal Reserve Board, which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Corporation has no immediate plans to become a financial holding company. Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends. Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain (loss) on securities available for sale. Tier 2 capital consists of a portion of the allowance for loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 1999, the Corporation's net risk-weighted assets amounted to $607.9 million, its Tier 1 capital ratio was 12.57% and its total risk-based capital ratio was 14.24%. The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other bank holding companies are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given bank holding company. The Corporation's Tier 1 leverage ratio was 7.14% as of December 31, 1999. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. Allowance for Loan Losses The Corporation evaluates the adequacy of the allowance for loan losses based upon the composition of the loan portfolio, historical experience, industry statistics, prevailing economic and business conditions and industry concentration. The Corporation utilizes a credit rating system that assesses individual loans in the commercial, commercial mortgage and commercial construction and development portfolios. Management applies the allowance percentages it considers appropriate to the balances in each rating classification. In addition, specific allowances for loans in these categories considered impaired are determined in accordance with the Statement of Financial Accounting Standards No. 114, "Allowance for Loan Losses". Loans in other portfolios are not individually assessed utilizing the credit rating system mentioned above, but may be similarly rated when information is known to management which indicates such action is warranted. For loans in other portfolios, management applies the allowance percentages it considers appropriate to each portfolio. Loss allocation percentages are based on the Corporation's historical loss experience, industry trends and the actual or anticipated impact of economic conditions on the borrowers. As a result, the percentage allocations are adjusted as necessary when changes in the aforementioned factors warrant. Based on analyses performed, the allowance for loan losses is maintained at levels considered adequate by management to provide for loan losses inherent in the loan portfolio. GUIDE 3 STATISTICAL DISCLOSURES The following tables contain additional consolidated statistical data about the Corporation and the Bank. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. Average balance sheets are presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages. B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Statistical Disclosures - Item III.C.1. C. An analysis of rate/volume changes in interest income and interest expense is presented under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The net change attributable to both volume and rate has been allocated proportionately. II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY A. The carrying amounts of securities as of the dates indicated are presented in the following tables: (Dollars in thousands) December 31, 1999 1998 1997 --------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $86,310 $118,348 $92,994 Mortgage-backed securities 189,086 145,806 124,583 Corporate bonds 33,684 27,503 2,000 Corporate stocks 21,351 28,184 22,266 --------------------------------------------------------------------------- Total securities available for sale $330,431 $319,841 $241,843 --------------------------------------------------------------------------- (Dollars in thousands) December 31, 1999 1998 1997 --------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $28,231 $21,987 $23,932 Mortgage-backed securities 62,209 46,088 10,695 States and political subdivisions 25,932 27,572 17,180 --------------------------------------------------------------------------- Total securities held to maturity $116,372 $95,647 $51,807 --------------------------------------------------------------------------- B. Maturities of debt securities as of December 31, 1999 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated prepayments. Yields on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands) Due in After 1 Year After 5 Years 1 Year but Within 5 but Within 10 After Securities Available for Sale or Less Years Years 10 Years Totals ------------------------------------------------------------------------------------------------------------ U.S. Treasury obligations and obligations of U.S. government-sponsored agencies: Amortized cost $10,366 $47,993 $21,897 $7,302 $87,558 Weighted average yield 6.13% 6.27% 6.48% 7.18% 6.38% Mortgage-backed securities: Amortized cost 26,687 84,702 52,217 28,328 191,934 Weighted average yield 6.50% 6.53% 6.76% 7.02% 6.66% Corporate bonds: Amortized cost 374 16,993 4,531 12,466 34,364 Weighted average yield 6.53% 6.63% 6.38% 6.64% 6.60% ------------------------------------------------------------------------------------------------------------ Total debt securities: Amortized cost $37,427 $149,688 $78,645 $48,096 $313,856 Weighted average yield 6.39% 6.46% 6.66% 6.95% 6.58% ------------------------------------------------------------------------------------------------------------ Fair value $36,824 $147,197 $77,421 $47,638 $309,080 ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Due in After 1 Year After 5 Years 1 Year but Within 5 but Within 10 After Securities Held to Maturity or Less Years Years 10 Years Totals ----------------------------------------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government-sponsored agencies: Amortized cost $1,812 $13,310 $13,109 $ - $28,231 Weighted average yield 6.81% 6.34% 6.51% - 6.45% Mortgage-backed securities: Amortized cost 10,140 34,774 16,610 685 62,209 Weighted average yield 6.55% 6.54% 6.48% 6.59% 6.53% States and political subdivisions: Amortized cost 2,923 8,502 14,507 - 25,932 Weighted average yield 4.60% 4.30% 4.26% - 4.31% ------------------------------------------------------------------------------------------------------------ Total debt securities: Amortized cost $14,875 $56,586 $44,226 $685 $116,372 Weighted average yield 6.18% 6.15% 5.78% 6.53% 6.02% ------------------------------------------------------------------------------------------------------------ Fair value $14,498 $54,921 $42,788 $661 $112,868 ------------------------------------------------------------------------------------------------------------
C. Not applicable. III. LOAN PORTFOLIO A. The following table sets forth the composition of the Corporation's loan portfolio for each of the past five years:
(Dollars in thousands) December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------- Commercial: Mortgages $113,719 $87,132 $76,483 $77,482 $68,783 Construction and development 2,902 2,855 5,508 5,314 5,968 Other 115,739 113,372 129,258 110,491 97,763 ------------------------------------------------------------------------------------------------------------- Total commercial 232,360 203,359 211,249 193,287 172,514 Residential real estate: Mortgages 212,719 191,101 188,729 177,450 173,267 Homeowner construction 12,995 15,052 8,414 6,977 4,795 ------------------------------------------------------------------------------------------------------------- Total residential real estate 225,714 206,153 197,143 184,427 178,062 ------------------------------------------------------------------------------------------------------------- Consumer 90,951 87,458 81,394 68,198 57,209 ------------------------------------------------------------------------------------------------------------- Total Loans $549,025 $496,970 $489,786 $445,912 $407,785 -------------------------------------------------------------------------------------------------------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 1999 follows:
(Dollars in thousands) One Year One to Five After Five Matures in: or Less Years Years Totals ------------------------------------------------------------------------------------------------------------- Construction and development (1) $4,237 $4,372 $7,288 $15,897 Commercial - other 39,657 51,262 24,820 115,739 ------------------------------------------------------------------------------------------------------------- $43,894 $55,634 $32,108 $131,636 ------------------------------------------------------------------------------------------------------------- (1) Includes homeowner construction and commercial construction and development. Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction.
Sensitivity to changes in interest rates for all such loans due after one year is as follows: (Dollars in thousands) Floating or Predetermined Adjustable Rates Rates Totals --------------------------------------------------------------------------- Principal due after one year $50,682 $37,060 $87,742 --------------------------------------------------------------------------- C. Risk Elements Reference is made to the caption "Asset Quality" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Included therein is a discussion of the Corporation's credit review and accounting practices, as well as information relevant to nonperforming assets at December 31, 1999. 1. Nonaccrual, Past Due and Restructured Loans a) Nonaccrual loans as of the dates indicated were as follows: (Dollars in thousands) December 31, 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- $3,798 $5,846 $7,644 $8,197 $9,231 --------------------------------------------------------------------------- Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Cash receipts on nonaccrual loans are recorded as interest income or as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. For the year ended December 31, 1999, 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 $342 thousand. Interest recognized on these loans amounted to approximately $105 thousand. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 1999. b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows: (Dollars in thousands) December 31, 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- $120 $235 $651 $1,517 $256 --------------------------------------------------------------------------- c) Restructured accruing loans for the dates indicated were as follows: (Dollars in thousands) December 31, 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- $446 $ - $ - $ - $ - --------------------------------------------------------------------------- Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate. 2. Potential Problem Loans Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 1999, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in Section III.C.1 above. At December 31, 1999, potential problem loans amounted to approximately $160 thousand. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection. Depending on future events, these potential problem loans, and others not currently identified, could be classified as nonperforming in the future. 3. Foreign Outstandings: None 4. Loan Concentrations: The Corporation has no concentration of loans that exceed 10% of its total loans except as disclosed by types of loan in Section III.A. D. Other Interest-Bearing Assets: None IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The allowance for loan losses is 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:
(Dollars in thousands) December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------ Balance at beginning of year $10,966 $9,335 $9,009 $8,322 $9,888 Charge-offs Commercial: Mortgages 170 - 248 330 813 Construction and development 119 - - 15 528 Other 304 322 740 415 1,451 Residential: Mortgages - 14 174 166 301 Homeowner construction 23 - - - - Consumer 351 317 360 395 372 ------------------------------------------------------------------------------------------------------------ Total charge-offs 967 653 1,522 1,321 3,465 ------------------------------------------------------------------------------------------------------------ Recoveries Commercial: Mortgages 44 51 110 33 14 Construction and development - - 7 - - Other 202 270 233 628 222 Residential: Mortgages 135 9 13 13 115 Homeowner construction 1 - - - - Consumer 128 75 61 116 130 ------------------------------------------------------------------------------------------------------------ Total recoveries 510 405 424 790 481 ------------------------------------------------------------------------------------------------------------ Net charge-offs 457 248 1,098 531 2,984 Additions charged to earnings 1,840 1,879 1,424 1,218 1,418 ------------------------------------------------------------------------------------------------------------ Balance at end of year $12,349 $10,966 $9,335 $9,009 $8,322 ------------------------------------------------------------------------------------------------------------ Net charge-offs to average loans .09% .05% .23% .13% .73% ------------------------------------------------------------------------------------------------------------
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands) December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------- Commercial: Mortgages $1,920 $1,604 $1,368 $1,410 $1,912 % of these loans to all loans 20.7% 17.5% 15.6% 17.4% 16.9% Construction and development 56 45 72 61 137 % of these loans to all loans .5% .6% 1.1% 1.2% 1.4% Other 1,979 2,142 2,461 2,452 2,287 % of these loans to all loans 21.1% 22.8% 26.4% 24.8% 24.0% Residential: Mortgages 1,165 1,108 1,127 1,273 1,095 % of these loans to all loans 38.7% 38.5% 38.6% 39.8% 42.5% Homeowner construction 71 87 50 50 30 % of these loans to all loans 2.4% 3.0% 1.7% 1.5% 1.2% Consumer 1,155 1,189 1,117 1,173 961 % of these loans to all loans 16.6% 17.6% 16.6% 15.3% 14.0% Unallocated 6,003 4,791 3,140 2,590 1,900 ------------------------------------------------------------------------------------------------------------ Balance at end of year $12,349 $10,966 $9,335 $9,009 $8,322 100.0% 100.0% 100.0% 100.0% 100.0% -------------------------------------------------------------------------------------------------------------
V. DEPOSITS A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:
(Dollars in thousands) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid ----------------------------------------------------------------------------------------------------------- Demand deposits $97,716 - $83,100 - $71,687 - Savings deposits: Regular 128,218 2.19% 112,914 2.39% 100,279 2.54% NOW 75,167 .93% 67,617 .94% 60,713 1.05% Money market 25,547 2.11% 23,969 2.12% 25,025 2.39% --------------------------------------------------------------------------------------------------------- Total savings 228,932 1.77% 204,500 1.87% 186,017 2.03% Time deposits 318,281 4.99% 309,094 5.42% 286,714 5.49% --------------------------------------------------------------------------------------------------------- Total deposits $644,929 3.09% $596,694 3.45% $544,418 3.58% ---------------------------------------------------------------------------------------------------------
B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100 thousand or more at December 31, 1999 was as follows:
(Dollars in thousands) Over 3 Over 6 3 months through through Over 12 Time remaining until maturity or less 6 months 12 months months Totals -------------------------------------------------------------------------------------------------------------- $63,319 $7,951 $14,358 $14,944 $100,572 --------------------------------------------------------------------------------------------------------------
E. Not applicable VI. RETURN ON EQUITY AND ASSETS
1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Return on average assets 1.01% 1.13% 1.15% Operating return on average assets (1) 1.10% 1.13% 1.15% Return on average shareholders' equity 13.45% 14.03% 13.97% Operating return on average shareholders' equity (1) 14.74% 14.03% 13.97% Dividend payout ratio (2) 41.90% 42.11% 40.70% Average equity to average total assets 7.48% 8.09% 8.25% (1) Excludes 1999 acquisition related expenses of $1.3 million, after tax, and 1999 net gain on sale of credit card portfolio of $285 thousand, after tax. Also excludes 1995 change in valuation allowance component of Pier Bank's income tax expense of $460 thousand. (2) Represents the ratio of historical per share dividends declared by Washington Trust Bancorp, Inc. to diluted operating earnings per share restated for the pooling effect of Washington Trust Bancorp, Inc. and Pier Bank.
VII. SHORT-TERM BORROWINGS The following is a summary of amounts relating to short-term borrowings which consist primarily of securities sold under repurchase agreements generally maturing within 90 days: (Dollars in thousands) Years ended December 31, 1999 1998 1997 --------------------------------------------------------------------------- Balance at end of year $4,209 $15,033 $20,337 Maximum amount outstanding at any month-end 23,525 26,767 26,820 Average amount outstanding 12,324 15,085 14,773 Weighted average interest rate during the year 5.04% 5.56% 5.64% Weighted average interest rate at end of year 4.56% 5.12% 5.58% ITEM 2. PROPERTIES The Corporation conducts its business from its corporate headquarters and other properties listed below all of which are considered to be in good condition and adequate for the purposes for which they are used. The following table sets forth certain information relating to bank premises owned or used by the Corporation in conducting its business:
Own/Lease Location Description Expiration Date - ------------------------------------------------------------------------------------------------------------------- 23 Broad Street, Westerly, RI Corporate headquarters Own 1200 Main Street, Wyoming (Richmond), RI Branch office Own 126 Franklin Street, Westerly, RI Branch office Own Ocean Avenue, New Shoreham (Block Island), RI Branch office Lease / 2001 (1) 4137 Old Post Road, Charlestown, RI Branch office Own 20 Point Judith Road, Narragansett, RI Branch office Own 7625 Post Road, North Kingstown, RI Branch office Own 730 Kingstown Road, Wakefield, RI Branch office Lease / 2000 (1) 885 Boston Neck Road, Narragansett, RI Branch office Own Olde Mistick Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003 McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2002 (1) McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2002 (1) A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2002 (1) 66 South Main Street, Providence, RI Trust financial services branch Lease / 2004 (1) 2 Union Plaza, New London, CT Limited financial services branch Lease / 2004 (1) 5 Ledward Avenue, Westerly, RI Operations facility Lease / 2001 (1) 2 Crosswinds Drive, Westerly, RI Operations facility Own (1) Lease may be extended by the Corporation beyond the indicated expiration date
ITEM 3. LEGAL PROCEEDINGS On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president and treasurer. The suit alleges that the Bank wrongly permitted this individual, while an officer of Maxson, to divert funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. The suit as originally filed sought recovery for losses alleged to be directly related to the embezzlement of approximately $3.1 million, as well as consequential damages amounting to approximately $2.6 million. On March 19, 1998, the plaintiffs amended their claims to seek recovery of an additional $2.6 million in losses, plus an unspecified amount of interest thereon, which were alleged to be directly related to the embezzlement. On or about November 23, 1999, the plaintiffs further amended their claims to seek recovery of approximately $8.0 million in total damages, plus an unspecified amount of interest thereon. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its principal shareholder as well as claims against the officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The case is currently in discovery and is currently scheduled for trial in late April 2000. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service, followed by certain biographical information.
Years of Name Title Age Service ---------------------------------------------------------------------------------------------------------------- John C. Warren Chairman and Chief Executive Officer of the Corporation and the 54 4 Bank John F. Treanor President and Chief Operating Officer of the Corporation and the 52 1 Bank David V. Devault, CPA Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and the Bank 45 13 Harvey C. Perry II Senior Vice President and Secretary of the Corporation and the 50 25 Bank Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 52 3 Vernon F. Bliven Senior Vice President - Human Resources of the Bank 50 27 Robert G. Cocks, Jr. Senior Vice President - Commercial Lending of the Bank 55 7 William D. Gibson Senior Vice President - Credit Administration of the Bank 53 1 Joseph E. LaPlume Senior Vice President and Regional Manager of the Bank 54 - Barbara J. Perino Senior Vice President - Operations and Technology of the Bank 37 10 B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 39 7 James M. Vesey Senior Vice President - Commercial Lending of the Bank 51 1
John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer. In 1999, he was elected Chairman and Chief Executive Officer of the Corporation and the Bank. John F. Treanor joined the Bank and the Corporation in April 1999 as President and Chief Operating Officer. He served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc. from 1994 to 1999. David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bank in 1990. In 1997, he was also elected Treasurer of the Bank and the Corporation. In 1998 he was elected Executive Vice President, Treasurer and Chief Financial Officer of the Bank and the Corporation. Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Bank in 1990. Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995. From February 1993 to May 1995 he held the position of President at New England Pacific Mortgage Company, Inc. 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. William D. Gibson joined the Bank in March 1999 as Senior Vice President - Credit Administration. Prior to joining the Bank, he served as Senior Vice President of Credit Review and Senior Vice President of Credit and Loan Administration of Citizens Bank since October 1977. Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and Regional Manager. Prior to joining the Bank he served as President and Chief Executive Officer of Pier Bank since November 1993. Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She was named Controller in 1989 and Vice President - Controller in 1992. In 1998 she was promoted to Senior Vice President - Operations and Technology. B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking. James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial Lending. Prior to joining the Bank he held the position of Senior Vice President and Director of Business Banking at Citizens Bank since December 1995. He previously worked for Fleet Bank for 24 years serving in a variety of positions. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987. The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 1999 and 1998 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, second and third quarters of 1998 have been restated to reflect a 3-for-2 stock split paid in the form of stock dividend on August 3, 1998. 1999 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $21.88 $20.38 $18.00 $19.00 Low 16.50 15.75 14.75 15.25 Cash dividend declared per share $.11 $.11 $.11 $.11 1998 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $24.17 $27.00 $28.50 $26.00 Low 20.00 20.00 20.00 18.00 Cash dividend declared per share $.10 $.10 $.10 $.10 The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years. The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 15 to the Consolidated Financial Statements. At February 25, 2000 there were 2,112 holders of record of the Corporation's common stock. ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA SELECTED OPERATING DATA AND FINANCIAL RATIOS: (Dollars in thousands) At or for the years ended December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------ Financial Results: (1) Interest income $72,999 $67,222 $61,393 $48,613 $44,557 Interest expense 37,392 34,655 31,155 20,941 17,999 --------------------------------------------------------------------------------------------------------------- Net interest income 35,607 32,567 30,238 27,672 26,558 Provision for loan losses 1,840 1,879 1,424 1,218 1,418 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 33,767 30,688 28,814 26,454 25,140 Noninterest income 15,409 13,432 10,944 8,912 7,712 --------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 49,176 44,120 39,758 35,366 32,852 Noninterest expense 33,833 29,378 26,457 22,250 20,690 --------------------------------------------------------------------------------------------------------------- Income before income taxes 15,343 14,742 13,301 13,116 12,162 Income tax expense 4,754 4,235 3,884 4,457 3,748 --------------------------------------------------------------------------------------------------------------- Net income $10,589 $10,507 $9,417 $8,659 $8,414 --------------------------------------------------------------------------------------------------------------- Per share information ($): (1) Earnings per share: Basic .97 .98 .89 .84 .84 Basic - operating (2) 1.07 .98 .89 .84 .80 Diluted .96 .95 .86 .81 .82 Diluted - operating (2) 1.05 .95 .86 .81 .78 Cash dividends declared (3) .44 .40 .35 .31 .27 Book value 7.08 7.21 6.71 6.02 5.46 Market value - closing stock price 17.75 21.50 23.33 13.78 8.59 Performance Ratios (%): Return on average assets 1.01 1.13 1.15 1.40 1.50 Operating return on average assets (2) 1.10 1.13 1.15 1.40 1.42 Return on average shareholders' equity 13.45 14.03 13.97 14.59 16.15 Operating return on average shareholders' equity (2) 14.74 14.03 13.97 14.59 15.27 Dividend payout ratio (4) 41.90 42.11 40.70 38.27 34.62 Asset Quality Ratios (%): Nonperforming loans to total loans .69 1.18 1.56 1.84 2.26 Nonperforming assets to total assets .35 .61 .99 1.34 1.98 Allowance for loan losses to nonaccrual 325.15 187.59 122.12 109.91 90.15 loans Allowance for loan losses to total loans 2.25 2.21 1.91 2.02 2.04 Net charge-offs to average loans .09 .05 .23 .13 .73 Capital Ratios (%): Total equity to total assets 6.99 7.80 8.28 8.60 9.72 Tier 1 leverage capital ratio 7.14 7.30 7.52 8.70 9.10 Total risk-based capital ratio 14.24 14.75 14.23 14.87 15.23 (1) Adjusted to reflect the 3-for-2 stock splits paid on August 3, 1998, November 19, 1997 and October 15, 1996. (2) Excludes 1999 acquisition related expenses of $1.3 million, after tax, and 1999 net gain on sale of credit card portfolio of $285 thousand, after tax. Also excludes 1995 change in valuation allowance component of Pier Bank's income tax expense of $460 thousand. (3) Represents historical per share dividends declared by Washington Trust Bancorp, Inc. (4) Represents the ratio of historical per share dividends declared by Washington Trust Bancorp, Inc. to diluted operating earnings per share restated for the pooling effect of Washington Trust Bancorp, Inc. and Pier Bank.
SELECTED BALANCE SHEET DATA: (Dollars in thousands) December 31, 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------- Financial Condition: Cash and cash equivalents $44,260 $34,477 $31,937 $23,041 $30,973 Total securities 446,803 415,488 293,949 229,970 116,534 Federal Home Loan Bank stock 17,627 16,583 16,444 11,683 2,995 Net loans 536,676 486,004 480,451 436,903 399,463 Other 59,298 41,793 37,801 30,242 25,896 ----------------------------------------------------------------------------------------------------------------- Total assets $1,104,664 $994,345 $860,582 $731,839 $575,861 ----------------------------------------------------------------------------------------------------------------- Deposits $660,753 $627,763 $572,803 $509,797 $492,819 Short-term borrowings 4,209 15,033 20,337 14,000 - Federal Home Loan Bank advances 352,548 264,106 187,001 138,493 20,951 Other liabilities 9,907 9,870 9,168 6,577 6,100 Shareholders' equity 77,247 77,573 71,273 62,972 55,991 ----------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,104,664 $994,345 $860,582 $731,839 $575,861 ----------------------------------------------------------------------------------------------------------------- Asset Quality: Nonaccrual loans $3,798 $5,846 $7,644 $8,197 $9,231 Other real estate owned, net 49 243 888 1,574 2,196 ----------------------------------------------------------------------------------------------------------------- Total nonperforming assets $3,847 $6,089 $8,532 $9,771 $11,427 -----------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 1999 Q1 (1) Q2 (1) Q3 Q4 Year - ---------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $10,809 $11,079 $11,418 $11,522 $44,828 Income from securities 6,643 6,725 7,005 7,283 27,656 Interest on federal funds sold and other short-term investments 160 127 130 98 515 - ---------------------------------------------------------------------------------------------------------------- Total interest income 17,612 17,931 18,553 18,903 72,999 - ---------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 947 1,003 1,053 1,040 4,043 Time deposits 3,888 3,945 3,987 4,051 15,871 Federal Home Loan Bank advances 3,845 4,027 4,257 4,726 16,855 Other 220 254 119 30 623 - ---------------------------------------------------------------------------------------------------------------- Total interest expense 8,900 9,229 9,416 9,847 37,392 - ---------------------------------------------------------------------------------------------------------------- Net interest income 8,712 8,702 9,137 9,056 35,607 Provision for loan losses 482 458 450 450 1,840 - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,230 8,244 8,687 8,606 33,767 - ---------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 1,419 1,475 1,488 1,515 5,897 Service charges on deposit accounts 758 794 777 840 3,169 Merchant processing fees 249 393 599 294 1,535 Mortgage banking activities 498 378 295 205 1,376 Net gains (losses) on sales of securities 262 122 (4) 298 678 Net gain on sale of credit card portfolio - - 438 - 438 Other income 360 674 644 638 2,316 - ---------------------------------------------------------------------------------------------------------------- Total noninterest income 3,546 3,836 4,237 3,790 15,409 - ---------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 4,138 4,284 4,336 4,455 17,213 Net occupancy 566 597 625 589 2,377 Equipment 717 761 768 751 2,997 Merchant processing costs 159 299 536 319 1,313 Office supplies 168 166 162 224 720 Advertising and promotion 192 328 203 260 983 Acquisition related expenses - - 1,552 - 1,552 Other 1,886 1,548 1,494 1,750 6,678 - ---------------------------------------------------------------------------------------------------------------- Total noninterest expense 7,826 7,983 9,676 8,348 33,833 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes 3,950 4,097 3,248 4,048 15,343 Income tax expense 1,206 1,243 1,229 1,076 4,754 - ---------------------------------------------------------------------------------------------------------------- Net income $2,744 $2,854 $2,019 $2,972 $10,589 - ---------------------------------------------------------------------------------------------------------------- Basic earnings per share $.25 $.26 $.19 $.27 $.97 Diluted earnings per share $.25 $.26 $.18 $.27 $.96 Cash dividends declared per share (2) $.11 $.11 $.11 $.11 $.44 (1) Amounts have been restated as a result of the acquisition of Pier Bank in the third quarter of 1999 and differ from those reported in previously filed Forms 10-Q. (2) Represents historical per share dividends declared by Washington Trust Bancorp, Inc.
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 1998 (1) Q1 Q2 Q3 Q4 Year - ---------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $10,981 $10,986 $10,971 $10,931 $43,869 Income from securities 5,163 5,744 5,707 6,093 22,707 Interest on federal funds sold and other short-term investments 205 148 198 95 646 - ---------------------------------------------------------------------------------------------------------------- Total interest income 16,349 16,878 16,876 17,119 67,222 - ---------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 896 919 1,004 1,015 3,834 Time deposits 4,290 4,354 4,136 3,964 16,744 Federal Home Loan Bank advances 3,072 3,331 3,341 3,469 13,213 Other 232 288 122 222 864 - ---------------------------------------------------------------------------------------------------------------- Total interest expense 8,490 8,892 8,603 8,670 34,655 - ---------------------------------------------------------------------------------------------------------------- Net interest income 7,859 7,986 8,273 8,449 32,567 Provision for loan losses 462 465 473 479 1,879 - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,397 7,521 7,800 7,970 30,688 - ---------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 1,224 1,361 1,344 1,301 5,230 Service charges on deposit accounts 658 771 746 780 2,955 Merchant processing fees 155 223 557 286 1,221 Mortgage banking activities 538 614 460 606 2,218 Net gains (losses) on sales of securities 41 351 232 (120) 504 Other income 293 240 272 499 1,304 - ---------------------------------------------------------------------------------------------------------------- Total noninterest income 2,909 3,560 3,611 3,352 13,432 - ---------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 3,759 3,817 3,948 3,951 15,475 Net occupancy 493 548 659 595 2,295 Equipment 605 662 670 718 2,655 Merchant processing costs 111 227 440 227 1,005 Office supplies 176 202 207 175 760 Advertising and promotion 148 194 238 214 794 Other 1,511 1,770 1,495 1,618 6,394 - ---------------------------------------------------------------------------------------------------------------- Total noninterest expense 6,803 7,420 7,657 7,498 29,378 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes 3,503 3,661 3,754 3,824 14,742 Income tax expense 1,002 1,048 1,076 1,109 4,235 - ---------------------------------------------------------------------------------------------------------------- Net income $2,501 $2,613 $2,678 $2,715 $10,507 - ---------------------------------------------------------------------------------------------------------------- Basic earnings per share $.23 $.25 $.25 $.25 $.98 Diluted earnings per share $.23 $.23 $.24 $.25 $.95 Cash dividends declared per share (2) $.10 $.10 $.10 $.10 $.40 (1) Amounts have been restated as a result of the acquisition of Pier Bank in the third quarter of 1999 and differ from those reported in Form 10-K for the year ended December 31, 1998. (2) Represents historical per share dividends declared by Washington Trust Bancorp, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Overview Washington Trust recorded net income of $10.6 million, or $.96 per diluted share, for 1999. In the third quarter of 1999, the Corporation completed the acquisition of Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and shareholders' equity of $4.5 million. The acquisition was accounted for under the pooling of interests method and, accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to reflect the acquisition at the beginning of the earliest period presented. 1999 results included one-time acquisition related expenses of $1.3 million, net of tax, resulting from the acquisition of Pier Bank. Also in 1999, the Corporation sold its $4.6 million portfolio of credit card loans at a gain, net of expenses and related income taxes, of $285 thousand. Results excluding these non-recurring items are referred to herein as operating. Operating earnings for the year ended December 31, 1999 amounted to $11.6 million, an increase of 10.4% from $10.5 million reported for 1998. Diluted earnings per share, on an operating basis, amounted to $1.05 for 1999, up from $.95 per share in 1998. The Corporation's rates of return on average assets and average equity, on an operating basis, for 1999 were 1.10% and 14.74%, respectively. Comparable amounts for the year ended December 31, 1998 were 1.13% and 14.03%, respectively. Total assets amounted to $1.105 billion at December 31, 1999, up 11.1% from the December 31, 1998 balance of $994.3 million. Average assets rose 13.7% during 1999 and amounted to $1.052 billion. The growth in assets was primarily attributable to growth in the loan portfolio, as well as purchases of securities. Increases in Federal Home Loan Bank ("FHLB") advances as well as a 5.3% increase in total deposits funded the growth in assets. Total deposits amounted to $660.8 million and $627.8 million at December 31, 1999 and 1998, respectively. FHLB advances totaled $352.5 million at December 31, 1999, up 33.5% from the prior year balance of $264.1 million. Total shareholders' equity amounted to $77.2 million at December 31, 1999, compared to $77.6 million at December 31, 1998. The decrease was attributable to a decline in the value of the available for sale securities portfolio. Included in shareholders' equity at December 31, 1999 was a net unrealized loss on securities available for sale, net of tax, of $191 thousand compared to a net unrealized gain of $7.4 million at December 31, 1998. Book value per share as of December 31, 1999 and 1998 amounted to $7.08 and $7.21, respectively. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $3.8 million or .35% of total assets at December 31, 1999, down from $6.1 million or .61% of total assets at December 31, 1998. The Corporation's loan loss provision was $1.8 million and $1.9 million in 1999 and 1998, respectively. For the year ended December 31, 1999, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $35.6 million, up 9.3% over the 1998 amount. The net interest margin for the year ended December 31, 1999 amounted to 3.71%, compared to 3.85% in 1998. Other noninterest income (noninterest income excluding net gains on sales of securities and net gain on the sale of the credit card portfolio) amounted to $14.3 million for the year ended December 31, 1999, up 10.6% from $12.9 million in 1998. The increase was primarily due to increases in other income and growth in revenues for trust services. Included in other income was $677 thousand of earnings on bank-owned life insurance ("BOLI") which was purchased during the second quarter of 1999. Further discussion of BOLI is provided under the caption "Noninterest Income". Total operating noninterest expense amounted to $32.3 million, up 9.9% over the comparable 1998 amount. The increase was primarily attributable to higher salaries and benefits expense and increases in equipment costs. Equipment costs rose 12.9% over the prior year period due primarily to depreciation expense associated with 1998 investments in technology. Included in other noninterest expense for the twelve months ended December 31, 1999 and 1998 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $270 thousand and $323 thousand, respectively. These transactions resulted in realized securities gains of $262 thousand and $313 thousand, respectively, for the same periods. Acquisition of Pier Bank On August 25, 1999, following receipt of all required regulatory and shareholder approvals, the Corporation completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of the merger of Pier Bank with and into The Washington Trust Company, the wholly-owned subsidiary of the Corporation. Under the terms of the agreement, the Corporation exchanged .468 shares of its common stock for each share of common stock held by a Pier Bank shareholder, with cash in lieu of fractional share interests. The conversion of customer deposit and loan accounts took place on September 24, 1999. The acquisition of Pier Bank was a tax-free reorganization accounted for as a pooling of interests. Accordingly, the financial information for all periods presented has been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. Expenses directly attributable to the merger amounted to $1.6 million ($1.3 million, net of tax) and were charged to earnings at the date of combination. Acquisition expenses consisted of professional fees, data processing/integration costs, write-down of assets and severance obligations. Expansion In April 1999, the Corporation announced its intention to open a trust and investment management office in Providence, Rhode Island. The Corporation has leased a facility for this office and commenced operations in February 2000. Net Interest Income Net interest income is the primary source of Washington Trust's operating income. The level of net interest income is affected by the volume of average interest-earning assets and interest-bearing liabilities, market interest rates and other factors. The following discussion presents net interest income on a fully taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. FTE net interest income increased $3.1 million or 9.4% from 1998 to 1999, due primarily to the growth in interest-earning assets and lower cost of funds. The net interest margin (FTE net interest income as a percentage of average interest-earning assets) for 1999 and 1998 were 3.71% and 3.85%, respectively. The interest rate spread declined 7 basis points to 3.19% in 1999. Earning asset yields fell 34 basis points during 1999, while the cost of interest-bearing liabilities declined 27 basis points, thereby narrowing the net interest spread. Growth in the securities portfolio as well as interest expense associated with the increases in Federal Home Loan Bank ("FHLB") advances, were primarily responsible for the decrease in the net interest margin. FTE interest income totaled $74.1 million in 1999, up from $68.2 million in 1998. The yield on interest-earning assets was 7.49% in 1999, down from 7.83% in 1998. Average interest-earning assets amounted to $989.4 million or 13.6% over the comparable 1998 amount. The growth in average interest-earning assets was primarily due to growth in the securities portfolio. Total average securities rose $86.7 million or 22.8% in 1999, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.24% in 1999, down from 6.37% in 1998. The decrease in yield reflects lower marginal rates on investment purchases during 1999 relative to the prior year. Average loans amounted to $522.8 million in 1999, up $31.8 million from 1998. The FTE rate of return on total loans was 8.60% in 1999, down from 8.96% in 1998, due primarily to lower yields on new loan originations. The yields on commercial loans amounted to 9.37% and 9.66% in 1999 and 1998, respectively. The decrease in yields on commercial loans was mainly due to refinancing activity and commercial loan originations with lower yields. Average commercial loans amounted to $219.4 million in 1999, up 5.6% from the $207.8 million prior year level. The yield on residential real estate loans amounted to 7.79% in 1999, compared to 8.20% in 1998. Average residential mortgages rose 7.4% in 1999 and amounted to $214.1 million. Average consumer loans increased 6.4% in 1999 to $89.3 million. The yield on consumer loans amounted to 8.63% in 1999, down from 9.05% in 1998. As a result of higher levels of FHLB advances and increases in savings and time deposits, average interest-bearing liabilities increased 14.7% to $869.2 million at December 31, 1999, and interest expense increased 7.9% and totaled $37.4 million in 1999. The rate paid on interest-bearing liabilities declined 27 basis points to 4.30% in 1999 primarily due to lower interest rates. Average FHLB advances increased by $81.3 million or 35.6% from 1998 and amounted to $309.6 million in 1999. The advances were used primarily to match fund the purchase of securities. The average rate paid on FHLB advances for 1999 was 5.44%, a decrease of 35 basis points from the prior year. Average savings deposits increased by $24.4 million or 11.9% from 1998 and fell 10 basis points in the rate paid. Average time deposits grew $9.2 million or 3.0% in 1999 with a decrease of 43 basis points in the rate paid. In addition, average demand deposits, an interest-free source of funding, increased by 17.6% from 1998 and amounted to $97.7 million in 1999. Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------ Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------ Assets: Residential real estate loans $214,124 16,687 7.79 $199,347 16,347 8.20 $191,053 15,814 8.28 Commercial and other loans 219,394 20,564 9.37 207,787 20,072 9.66 204,599 19,742 9.65 Consumer loans 89,291 7,707 8.63 83,882 7,587 9.05 73,932 6,918 9.36 ------------------------------------------------------------------------------------------------------------------ Total loans 522,809 44,958 8.60 491,016 44,006 8.96 469,584 42,474 9.05 Federal funds sold and other short term investments 10,539 515 4.89 11,940 646 5.41 9,067 492 5.42 Taxable debt securities 399,058 24,432 6.12 315,177 19,706 6.25 243,956 16,594 6.80 Nontaxable debt securities 26,945 1,786 6.63 22,533 1,435 6.37 15,789 1,048 6.64 Corporate stocks and FHLB 30,041 2,394 7.97 30,265 2,409 7.96 27,993 2,343 8.37 stock ------------------------------------------------------------------------------------------------------------------ Total securities 466,583 29,127 6.24 379,915 24,196 6.37 296,805 20,477 6.90 ------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 989,392 74,085 7.49 870,931 68,202 7.83 766,389 62,951 8.21 ------------------------------------------------------------------------------------------------------------------ Cash and due from banks 18,432 16,860 17,328 Allowance for loan losses (11,767) (10,194) (9,209) Premises and equipment, net 24,122 23,676 21,793 Other 32,098 24,576 20,962 ------------------------------------------------------------------------------------------------------------------ Total assets $1,052,277 $925,849 $817,263 ------------------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity: Savings deposits $228,932 4,043 1.77 $204,500 3,834 1.87 $186,017 3,778 2.03 Time deposits 318,281 15,871 4.99 309,094 16,744 5.42 286,714 15,738 5.49 FHLB advances 309,594 16,855 5.44 228,295 13,213 5.79 182,781 10,782 5.90 Other 12,383 623 5.03 15,626 864 5.53 15,250 857 5.62 ------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 869,190 37,392 4.30 757,515 34,655 4.57 670,762 31,155 4.64 ------------------------------------------------------------------------------------------------------------------ Demand deposits 97,716 83,100 71,687 Other liabilities 6,305 7,942 6,245 Shareholders' equity 79,066 77,292 68,569 ------------------------------------------------------------------------------------------------------------------ Total liabilities and Shareholders' equity $1,052,277 $925,849 $817,263 ------------------------------------------------------------------------------------------------------------------ Net interest income $36,693 $33,547 $31,796 ------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.19 3.26 3.57 Net interest margin 3.71 3.85 4.15 ------------------------------------------------------------------------------------------------------------------ Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency for the years indicated: (Dollars in thousands) Years ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Commercial and other loans $130 $137 $159 Taxable debt securities (1) - - 614 Nontaxable debt securities 605 485 372 Corporate stocks and FHLB stock 351 358 413 (1) Represents adjustment for U.S. Treasury and government agency obligations that are exempt from state income taxes only.
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) 1999/1998 1998/1997 1997/1996 ------------------------------------------------------------------------------------------------------------------- Net Net Net (Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change ------------------------------------------------------------------------------------------------------------------- Interest on: Interest-earning assets: Residential real estate loans $1,176 (835) 341 $681 (148) 533 $671 (131) 540 Commercial and other loans 1,099 (606) 493 308 21 329 2,450 (276) 2,174 Consumer loans 476 (358) 118 906 (236) 670 1,209 (229) 980 Federal funds sold and other short term investments (35) (96) (131) 155 (1) 154 198 8 206 Taxable debt securities 5,145 (420) 4,725 4,539 (1,427) 3,112 8,827 (41) 8,786 Nontaxable debt securities 290 62 352 431 (44) 387 - 15 15 Corporate stocks and FHLB stock (18) 3 (15) 184 (118) 66 1,112 (659) 453 ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 8,133 (2,250) 5,883 7,204 (1,953) 5,251 14,467 (1,313) 13,154 ------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits 440 (231) 209 359 (303) 56 88 (331) (243) Time deposits 487 (1,360) (873) 1,215 (209) 1,006 1,947 261 2,208 FHLB advances 4,466 (824) 3,642 2,638 (207) 2,431 7,620 (26) 7,594 Other (168) (73) (241) 20 (13) 7 651 3 654 ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,225 (2,488) 2,737 4,232 (732) 3,500 10,306 (93) 10,213 ------------------------------------------------------------------------------------------------------------------- Net interest income $2,908 238 3,146 $2,972 (1,221) 1,751 $4,161 (1,220) 2,941 -------------------------------------------------------------------------------------------------------------------
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 1999, recurring noninterest income, which excludes net gains on sales of securities and the net gain on the sale of the credit card portfolio, accounted for 29% of total revenues (net interest income plus recurring noninterest income). Washington Trust's primary sources of recurring noninterest income are trust revenues, mortgage banking activities, servicing of deposit accounts, mortgage servicing fees, and merchant credit card processing fees. Also included in noninterest income are earnings generated from BOLI purchased in 1999. Revenue from trust-related services, such as management of customer investment portfolios, trusts and estates, continues to be the largest component of noninterest income. Trust revenue represented 41.3% of noninterest income and amounted to $5.9 million in 1999, up by 12.8% from the $5.2 million reported in 1998. This increase in trust revenue is primarily attributable to the increase in assets under management, which amounted to $964.2 million at December 31, 1999, up 22.1% from $789.8 million in 1998. Service charges on deposit accounts rose 7.2% to $3.2 million in 1999. Changes in the fee structures of various deposit products during the year, as well as growth in the Corporation's total deposit base, were contributing factors in this increase. Revenue from mortgage banking activities associated with the originations of loans for the secondary market totaled $1.4 million in 1999, down from $2.2 million in 1998, due to decreased loan sales resulting from lower mortgage refinancing activity. Mortgage banking activities include the capitalization of mortgage servicing rights of $313 thousand and $553 thousand in 1999 and 1998, respectively. Most secondary market loans have been sold with servicing retained, however, in the fourth quarter of 1999, the Corporation began selling substantially all residential mortgage loans with servicing released. Mortgage servicing fee income amounted to $426 thousand for the year ended December 31, 1999, up from the prior year amount of $165 thousand. Due to increases in interest rates, a lower amount of valuation adjustments on mortgage servicing rights was required in 1999 than in 1998. Servicing income, excluding valuation adjustments and amortization, as a percentage of average loans serviced was 30 basis points in 1999, down from 34 basis points in the prior year. The balance of serviced loans at December 31, 1999 amounted to $193.9 million, compared to $174.7 million at December 31, 1998. In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. Included in other income was $677 thousand of earnings on BOLI for the year ended December 31, 1999. (See additional discussion on BOLI under the caption "Financial Condition".) Noninterest Expense Total noninterest expense, excluding one-time acquisition related expenses, rose 9.9% to $32.3 million in 1999. This increase was primarily attributable to higher salary and benefit expenses along with increases in equipment costs due to depreciation and maintenance expenses incurred in connection with 1998 investments in technology. Equipment costs totaled $3.0 million in 1999, up 12.9% from the 1998 amount of $2.7 million. Income Taxes Income tax expense amounted to $4.8 million and $4.2 million in 1999 and 1998, respectively. The Corporation's effective tax rate was 31.0% in 1999, compared to a rate of 28.7% in 1998. These rates differed from the federal rate of 35.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the results of the tax planning strategies designed to reduce income taxes. The Corporation had a net deferred tax asset amounting to $3.6 million at December 31, 1999 compared to a net deferred tax liability of $1.1 million at December 31, 1998. In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.) Financial Condition Securities Securities are designated as either available for sale or held to maturity at the time of purchase. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity are reported at amortized cost. Securities Available for Sale The amortized cost of securities available for sale at December 31, 1999 amounted to $329.7 million, an increase of $22.1 million over the 1998 amount. This increase was due primarily to purchases of debt securities. At December 31, 1999, the net unrealized gains on securities available for sale amounted to $742 thousand, a decrease of $11.5 million from the comparable 1998 amount. This decrease was attributable to the effect of increases in interest rates that occurred throughout 1999. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.) Securities Held to Maturity The amortized cost of securities held to maturity increased $20.7 million, to $116.4 million at December 31, 1999. This increase is primarily attributable to purchases of mortgage-backed securities. The net unrealized losses on securities held to maturity amounted to $3.5 million at December 31, 1999, compared to $900 thousand in net unrealized gains at December 31, 1998. The decline was primarily due to the effects of increases in interest rates that occurred throughout 1999. Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock that currently is based on the level of its FHLB advances. As of December 31, 1999 and 1998, the Corporation's investment in FHLB stock totaled $17.6 million and $16.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to issue new capitalization requirements to be implemented by May 2002. Loans Total loans amounted to $549.0 million at December 31, 1999, up $52.1 million, or 10.5%, from the December 31, 1998 amount of $497.0 million. The increase in total loans was led by growth in the commercial and commercial real estate portfolios. Total commercial loans increased $29.0 million, or 14.3%, in 1999, with the largest increase occurring in the commercial mortgage portfolio. Total residential real estate loans increased $19.6 million, or 9.5%, in 1999. During the third quarter of 1999, the Corporation sold its $4.6 million portfolio of credit card loans at a gain, net of expenses and related income taxes, of $285 thousand. At December 31, 1998, credit card loans amounted to $5.4 million, or 1.1% of loans. Excluding the effect of the sale, consumer loans were up $8.9 million, or 10.8%, in 1999. The Corporation will continue to provide merchant credit card processing services. Other Assets Other assets totaled $28.2 million at December 31, 1999, up $22.2 million from $6.0 million at December 31, 1998. The increase was primarily due to the purchase of BOLI during the second quarter of 1999. The Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an interest sensitive asset on the Corporation's consolidated balance sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is included in other assets on the Corporation's consolidated balance sheets at its cash surrender value. Increases in BOLI's cash surrender value are reported as other income in the Corporation's consolidated statements of income. Deposits Total deposits at December 31, 1999 amounted to $660.8 million, up 5.3% from the prior year balance of $627.8 million. The increase in deposits is attributable to growth in all categories of deposits in 1999. Demand deposits rose 9.5% to $102.4 million. Savings deposits increased $12.3 million offsetting a decrease of $3.7 million in retail certificates of deposit. Time deposits totaled $323.0 million at December 31, 1999, compared to $311.2 million at December 31, 1998. The $11.7 million increase in time deposits was attributable to the addition of $9.8 million in brokered certificates of deposit as well as growth in time deposits in denominations of $100 thousand or more which increased by $17.3 million in 1999. Borrowings Washington Trust uses advances from the Federal Home Loan Bank of Boston as well as other short-term borrowings as part of its overall funding strategy. The additional FHLB advances and short-term borrowings were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. Total advances amounted to $352.5 million at December 31, 1999, up from $264.1 million one year earlier. (See Note 10 to the Consolidated Financial Statements for additional information about borrowings.) Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets declined to .35% of total assets at December 31, 1999 compared to .61% of total assets at December 31, 1998. Nonaccrual loans as a percentage of total loans fell from 1.18% at the end of 1998 to .69% at December 31, 1999. Approximately $1.9 million, or 49.9% of total nonaccrual loans, were less than 90 days past due at December 31, 1999. The following table presents nonperforming assets and related ratios: (Dollars in thousands) December 31, 1999 1998 --------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $1,015 $1,437 Commercial and other: Mortgages 702 1,577 Construction and development 95 119 Other 1,242 2,159 Consumer 744 554 --------------------------------------------------------------------------- Total nonaccrual loans 3,798 5,846 Other real estate owned, net 49 243 --------------------------------------------------------------------------- Total nonperforming assets $3,847 $6,089 --------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .69% 1.18% Nonperforming assets as a percentage of total assets .35% .61% Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. Included in accruing loans 90 days or more past due at December 31, 1999 are residential mortgages amounting to $109 thousand which are considered well-collateralized and in the process of collection and therefore are deemed to have no loss exposure. (Dollars in thousands) December 31, 1999 1998 --------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,902 $2,654 Nonaccrual loans less than 90 days past due 1,896 3,192 --------------------------------------------------------------------------- Total nonaccrual loans $3,798 $5,846 --------------------------------------------------------------------------- Accruing loans 90 days or more past due, primarily all residential mortgages (1) $120 $235 --------------------------------------------------------------------------- (1) Not included in nonperforming assets Restructured Loans Loans are considered restructured when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Included in nonaccrual loans at December 31, 1999 and 1998, are loans whose terms have been restructured amounting to $142 thousand and $1.1 million, respectively. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is comprised of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for potential declines in market value, known declines in market value, and estimated selling costs. The balance of OREO amounted to $49 thousand at December 31, 1999, down from the prior year amount of $243 thousand. Decreases in OREO resulted from sales of foreclosed properties and repossessed assets that exceeded the level of foreclosures and repossessions. During 1999, proceeds from sales of foreclosed properties and repossessed assets amounted to $513 thousand. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Allowance for Loan Losses The allowance for loan losses represents the amount available for credit losses inherent in the loan portfolio. 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, prevailing economic and business conditions, industry concentrations, the size and characteristics of the loan portfolio and other pertinent factors. Based on this review, the management believes that its year-end allowance for loan losses is adequate. Loans are charged off once the probability of loss has been established, through the review of the factors mentioned above. The determination of the adequacy of the allowance is necessarily judgmental and involves consideration of various factors and assumptions. Management believes that an allocation of the allowance is not necessarily indicative of the specific amount of future charge-offs or the specific loan categories in which these charge-offs may ultimately occur. The unallocated component of the allowance for loan losses represents management's evaluation of the loan portfolio, including its size and complexity, with consideration given to the Corporation's expanded market area and industry concentrations. Also, management realizes that there are losses that have been incurred within the portfolio that have not yet been specifically identified. The allowance for loan losses amounted to $12.3 million, or 2.25% of total loans at December 31, 1999, compared to $11.0 million or 2.21% at December 31, 1998. The following table reflects the activity in the allowance for loan losses: (Dollars in thousands) Years ended December 31, 1999 1998 ------------------------------------------------------------------------- Beginning balance $10,966 $9,335 Charge-offs, net of recoveries: Residential: Real estate 135 (5) Construction (22) - Commercial: Mortgages (126) 51 Construction and development (119) - Other (102) (52) Consumer (223) (242) ------------------------------------------------------------------------- Net charge-offs (457) (248) Provision for loan losses 1,840 1,879 ------------------------------------------------------------------------- Ending balance $12,349 $10,966 ------------------------------------------------------------------------- Allowance for loan losses to nonaccrual loans 325.15% 187.59% Allowance for loan losses to total loans 2.25% 2.21% ------------------------------------------------------------------------- The provision for loan losses amounted to $1.8 million in 1999, down from $1.9 million in 1998. The provision amount is determined by management to maintain the allowance at a level that is deemed appropriate. Capital Resources Total shareholders' equity decreased $326 thousand during 1999 and amounted to $77.2 million at December 31, 1999. The overall decline was mainly attributable to reductions in net unrealized gains on securities of $7.6 million. Capital growth resulted from $6.0 million of earnings retention and $1.3 million from stock option exercises. Cash dividends declared per share amounted to $.44 and $.40 in 1999 and 1998, respectively. The ratio of total equity to total assets amounted to 7.0% at December 31, 1999, compared to 7.8% at December 31, 1998. The reduction in this ratio was due primarily to the growth in assets resulting from growth in the loan portfolio, purchases of securities and the purchase of bank-owned life insurance as a financing tool for employee benefits. Book value per share at December 31, 1999 amounted to $7.08, down slightly from the year-earlier amount of $7.21 per share. The Corporation and the Bank are subject to various regulatory capital requirements. The Corporation and the Bank are categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 15 to the Consolidated Financial Statements for additional discussion of capital requirements.) Litigation The Bank is party to a lawsuit filed by a former corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by an officer of the customer. The suit as originally filed sought recovery from the Bank for losses directly related to the embezzlement of approximately $3.1 million, as well as consequential damages amounting to approximately $2.6 million. On March 19, 1998, the customer amended its claims to seek recovery of an additional $2.6 million in losses, plus an unspecified amount of interest thereon, which were alleged to be directly related to the embezzlement. On or about November 23, 1999, the customer further amended its claim to now seek recovery of approximately $8 million in total damages, plus an unspecified amount of interest thereon. Management believes, based on its review with counsel of the development of this matter to date that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The case is currently in discovery and is currently scheduled for trial in late April 2000. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded. Year 2000 The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. During 1999, the Corporation completed a detailed assessment of all its information technology (IT) and non-information technology (non-IT) systems with respect to the century date change (the transition from the year 1999 to 2000), with special emphasis on mission-critical systems. IT and non-IT hardware and software were inventoried and those not Year 2000 ready were identified, remediated and tested. While the Corporation's assessment of Year 2000 issues is ongoing and subject to on-going regulatory mandated verification and review through March 31, 2000, the Corporation has not yet experienced any effects from Year 2000 issues. The Corporation expects that the total costs associated with the project will amount to approximately $525 thousand. The Corporation has accounted for most of these costs as expense items. In some cases, acquired hardware and software items were capitalized and amortized in accordance with the Corporation's existing accounting policy. Total costs incurred through December 31, 1999 amounted to approximately $500 thousand. These costs consisted primarily of system testing and modification, internal staffing and consulting, and were primarily recorded in noninterest expenses. The remaining project costs will be incurred in the first half of 2000. The costs of the project are based on management's best estimates, which are derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee that the systems of other companies, or outside vendors, on which the Corporation's systems rely, have been fully remedied. Therefore, the Corporation could possibly experience a negative impact to the extent other entities not affiliated with the Corporation are not Year 2000 compliant. The Corporation's risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business-critical system. These procedures were expanded to include specific procedures for potential Year 2000 issues, and contingency plans to protect against Year 2000-related interruptions. These plans include backup procedures and identification of alternative suppliers. Recent Accounting Developments Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires a corporation to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. This Statement defines conditions and criteria to be used in designating a derivative as a specific type of hedging instrument. SFAS No. 133 also explains the accounting for changes in the fair value of a derivative, which depends on the intended use and the resulting designation. Under this Statement, a corporation is required to establish at the inception of the hedge the method to be used for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the corporation's approach to managing risk. In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 and is not to be applied retroactively to the financial statements of prior periods. The Corporation has not yet determined what the effect of the adoption of this pronouncement will have on the financial position and earnings of the Corporation. Comparison of 1998 with 1997 Washington Trust recorded net income of $10.5 million in 1998, an 11.6% increase over the $9.4 million of net income recorded in 1997. Diluted earnings per share amounted to $.95 for 1998, up from $.86 per share earned in 1997. ROA and ROE amounted to 1.13% and 14.03%, respectively in 1998. Comparable amounts for 1997 were 1.15% and 13.97%. Fully taxable equivalent net interest income rose 5.5% over the 1997 amount. The interest rate spread declined 31 basis points to 3.26% in 1998, while the net interest margin fell from 4.15% in 1997 to 3.85% in 1998. Growth in the securities portfolios in combination with lower marginal rates on investment purchases during 1998 relative to the prior year were primarily responsible for the decrease in the interest rate spread and the net interest margin. The yield on total interest-earning assets amounted to 7.83% in 1998, down from 8.21% in 1997. The Corporation's cost of funds remained flat in 1998 at 4.57% due to lower interest rates paid on higher deposit and borrowed funds balances. Noninterest income was $13.4 million and $10.9 million for the year ended December 31, 1998 and 1997, respectively. The $2.5 million increase resulted primarily from increases in income from mortgage banking activities, higher revenues for trust services and increases in service charges on deposits. Noninterest expenses amounted to $29.4 million for 1998 compared to $26.5 million for 1997, an increase of 11.0%. The increase was primarily attributable to higher salaries and benefits expense. Total assets rose $133.8 million or 15.5% during 1998 to $994.3 million at December 31, 1998. Average assets amounted to $925.8 million in 1998, up 13.3% over the prior year. Asset growth was primarily attributable to an increase of $121.5 million in total securities. Securities available for sale amounted to $319.8 million at the end of 1998, a 32.3% increase over the prior year. Securities held to maturity increased 84.6% in 1998 to $95.6 million. As a result of higher levels of FHLB advances and increases in savings and time deposits, average interest-bearing liabilities amounted to $757.5 million at December 31, 1998, up 12.9% from December 31, 1997. Nonperforming assets declined to .61% of total assets at December 31, 1998, down from .99% at December 31,1997. The Corporation's loan loss provision amounted to $1.9 million in 1998, compared to $1.4 million in 1997. Net loan charge-offs amounted to $248 thousand in 1998, down from $1.1 million in 1997. The allowance for loan losses represented 2.21% of total loans at December 31, 1998 compared to 1.91% at December 31, 1997. Shareholders' equity rose by 8.8% in 1998. Approximately $6.4 million of this increase was attributable to earnings retention and $2.6 million from stock option exercises. Book value per share increased to $7.21 at December 31, 1998, up from the year-earlier amount of $6.71 per share. The ratio of capital to assets was 7.8% and 8.3% at December 31, 1998 and 1997, respectively. Dividends paid per share amounted to $.40 in 1998, up 14.3% from the prior year. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity and Liquidity Interest rate risk is one of the major market risks faced by the Corporation. The Corporation's Asset/Liability Committee ("ALCO") is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO establishes and monitors guidelines for proper origination and matching of assets and funding sources, and determines asset/liability origination and pricing strategies to meet its goals. The ALCO meets regularly to review the economic environment and the volume, mix and maturity of assets and liabilities, and implements appropriate changes in strategy that will manage the Corporation's exposure to interest rate risk and liquidity risk. The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 60-month period. The ALCO uses both parallel and non-parallel rate shifts of up to 300 basis points and Monte Carlo rate simulations based on the historical volatility of interest rates to perform income simulations. The simulations assume that the composition of the Corporation's balance sheet remains constant over the 60-month simulation horizon, and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Prepayment estimates for the Corporation's loans are based on historical experience. Call options and prepayment characteristics for securities are calculated using industry-standard pricing and prepayment estimates. Non-contractual savings deposits are classified as short-term (three months or less) for both maturity and repricing purposes. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. The ALCO reviews simulation results to determine whether the negative exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. In addition, the ALCO reviews 60-month horizon results to assess longer-term risk inherent in the balance sheet, although no 60-month horizon tolerance levels are specified. As of December 31, 1999 and December 31, 1998, net interest income simulation indicated exposure to changing interest rates over a 24-month horizon to a degree that remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months and no more than 10% over the second 12 months of the simulation horizon. The following table summarizes the effect that interest rate shifts would have on net interest income for a 24-month period using the Corporation's on and off-balance sheet financial instruments as of December 31, 1999. Interest rates are assumed to shift by a parallel 200 basis points over a 12-month period, except for core savings deposits, which are assumed to shift by only 100 basis points due to their historical insensitivity to rate changes. Further, core savings are assumed to have certain minimum rate levels below that they will not fall. It should be noted that the rate scenario used does not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. The following table presents these 24-month net interest income simulation results:
(Dollars in thousands) Flat Falling Rising Rates Rates Rates ---------------------------------------------------------------------------------------------------------- Interest-earning assets: Fixed rate mortgage-backed securities $16,708 $15,904 $17,005 Adjustable rate mortgage-backed securities 17,753 14,809 19,876 Callable securities 9,770 9,743 9,860 Other securities 19,191 18,678 19,705 Fixed rate mortgages 21,826 20,707 22,584 Adjustable rate mortgages 12,505 11,455 13,370 Other fixed rate loans 33,529 32,093 34,962 Other adjustable rate loans 25,276 21,962 58,590 Interest rate floor contracts (net of premium amortization) (125) 260 (125) ---------------------------------------------------------------------------------------------------------- Total interest income 156,443 144,409 167,029 ---------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Core savings deposits 8,142 6,116 11,185 Time deposits 31,904 25,746 38,069 Short-term borrowings 444 321 567 Federal Home Loan Bank advances 43,915 38,779 49,050 ---------------------------------------------------------------------------------------------------------- Total interest expense 84,405 70,962 98,871 ---------------------------------------------------------------------------------------------------------- Net interest income results as of December 31, 1999 $72,038 $73,447 $68,158 ---------------------------------------------------------------------------------------------------------- Net interest income results as of December 31, 1998 (1) $60,997 $61,944 $58,445 ---------------------------------------------------------------------------------------------------------- (1) Represents Washington Trust Bancorp, Inc. historical results as previously reported in the Corporation's 1998 Annual Report on Form 10-K.
The ALCO estimates that the negative exposure of net interest income to rising rates results from a gradual balance sheet shift toward longer term fixed rate assets and away from variable rate assets during 1999. The shift reflects increased customer demand for fixed rate loans as interest rates declined throughout the year. In the event of an increase in interest rates, funding costs may rise more rapidly than asset yields over the near term, reducing interest income. Conversely, net interest income may increase as rates fall because shorter-term liabilities would decrease in cost over the near term, while yields on fixed rate assets decline more slowly. While the ALCO reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments, especially core savings deposits, may change to a different degree than estimated. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The Corporation also monitors the potential change in market value of its available for sale debt securities in parallel rate shifts of up to 200 basis points. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data. The Corporation uses the results to manage the effect of market value changes on the Corporation's capital position. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 1999 and 1998 resulting from immediate 200 basis point parallel rate shifts:
(Dollars in thousands) Falling Rising Rates Rates --------------------------------------------------------------------------------------------------------- Security Type: U.S. Treasury and government-sponsored agency securities (noncallable) $956 $(895) U.S. government-sponsored agency securities (callable) 744 (2,049) Corporate securities 1,202 (1,206) Fixed rate mortgage-backed securities 3,187 (4,292) Adjustable rate mortgage-backed securities 1,016 (2,041) Fixed rate collateralized mortgage obligations 180 (583) Adjustable rate collateralized mortgage obligations 510 (3,083) --------------------------------------------------------------------------------------------------------- Total change in market value as of December 31, 1999 $7,795 $(14,149) --------------------------------------------------------------------------------------------------------- Total change in market value as of December 31, 1998 (1) $5,558 $(11,141) --------------------------------------------------------------------------------------------------------- (1) Represents Washington Trust Bancorp, Inc. historical results as previously reported in the Corporation's 1998 Annual Report on Form 10-K.
The Corporation also monitors the potential change in market value of its available for sale debt securities using "value at risk" analysis. "Value at risk" analysis measures the theoretical maximum market value loss over a given time period based on recent historical price activity of different classes of securities. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at December 31, 1999, including both debt and equity securities, was 5.2%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis. At December 31, 1999, gap analysis showed that the Corporation's cumulative one-year gap was a negative $176.5 million, or 19.8% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 1999 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities that mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and consumer installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. Management believes that gap analysis has substantial limitations as a measure of interest rate risk, as it does not address the effect of changes in interest rates nor the magnitude of resulting changes in net interest income. For this reason, the ALCO does not use gap analysis to establish interest rate risk targets or assess interest rate risk exposure. The following table summarizes the Corporation's gap analysis as of December 31, 1999:
(Dollars in thousands) 3 Months 3 to 6 6 Months 1 to 5 Over or Less Months to 1 Year Years 5 Years ------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans $142,144 $46,415 $78,618 $183,639 $99,855 Debt securities 96,762 25,446 59,553 166,751 76,940 Other 20,471 0 0 0 35,978 ------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 259,377 71,861 138,171 350,390 212,773 Interest-bearing liabilities: Deposits 346,752 48,973 98,352 64,242 49 Short-term borrowings 4,209 0 0 0 0 Federal Home Loan Bank advances 69,000 77,340 69,000 105,675 31,533 ------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 419,961 126,313 167,352 169,917 31,582 ------------------------------------------------------------------------------------------------------------------ Interest sensitivity gap per period $(160,584) $(54,452) $(29,181) $180,473 $181,191 ------------------------------------------------------------------------------------------------------------------ Cumulative interest sensitivity gap $(160,584) $(215,036) $(244,217) $(63,744) $117,447 ------------------------------------------------------------------------------------------------------------------ Cumulative interest sensitivity gap - 1998 (1) $(179,011) $(175,869) $(176,537) $(27,462) $128,674 ------------------------------------------------------------------------------------------------------------------ (1) Represents Washington Trust Bancorp, Inc. historical amounts as previously reported in the Corporation's 1998 Annual Report on Form 10-K.
On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk. During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. During 1998, the Corporation entered into additional floor contracts with a notional principal amount of $20 million and a five-year term maturing in March 2003. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. These contracts were purchased for a total premium of $1.2 million, which is amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. During 1999, the Corporation recorded income, net of premium amortization, of $300 thousand on its floor contracts. (See Note 7 to the Consolidated Financial Statements for additional information regarding the floor contracts.) Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings and demand deposits) funded approximately 61.3% of total average assets in 1999. Other sources of funding include discretionary use of purchased liabilities (i.e., Federal Home Loan Bank term advances, securities sold under agreements to repurchase and federal funds purchased), cash flows from the Corporation's securities portfolios and loan repayments. In addition, securities designated as available for sale may be sold in response to short-term or long-term liquidity needs. The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 1999. Net loans as a percentage of total assets amounted to 48.6% at December 31, 1999, compared to 48.9% at December 31, 1998. Total securities as a percentage of total assets amounted to 40.5% at December 31, 1999, down from 41.8% at December 31, 1998. These changes resulted primarily from the 11.1% increase in total assets in 1999. For the year ended December 31, 1999, net cash provided by financing activities was $107.5 million. Proceeds from FHLB advances totaled $550.8 million, while repayments of FHLB advances totaled $462.4 million in 1999. Additionally, $33.0 million was generated from overall growth in deposits. Net cash used in investing activities was $121.3 million in 1999, the majority of which was used to purchase securities. While the Corporation does not have any significant capital commitments, it expects to continue to expend funds to upgrade and expand equipment and premises to support its operations. Net cash provided by operating activities amounted to $23.6 million in 1999, $10.6 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are contained herein. Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT [firm logo here][KPMG] The Board of Directors and Shareholders Washington Trust Bancorp, Inc.: We have audited the consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Providence, Rhode Island January 17, 2000
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $26,960 $20,575 Federal funds sold and other short-term investments 17,300 13,902 Mortgage loans held for sale 1,647 5,863 Securities: Available for sale, at fair value 330,431 319,841 Held to maturity, at cost; fair value $112,868 in 1999 and $96,547 in 1998 116,372 95,647 - ------------------------------------------------------------------------------------------------------------------- Total securities 446,803 415,488 Federal Home Loan Bank stock, at cost 17,627 16,583 Loans 549,025 496,970 Less allowance for loan losses 12,349 10,966 - ------------------------------------------------------------------------------------------------------------------- Net loans 536,676 486,004 Premises and equipment, net 23,409 24,021 Accrued interest receivable 6,010 5,913 Other assets 28,232 5,996 - ------------------------------------------------------------------------------------------------------------------- Total assets $1,104,664 $994,345 - ------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits: Demand $102,384 $93,478 Savings 235,395 223,047 Time 322,974 311,238 - ------------------------------------------------------------------------------------------------------------------- Total deposits 660,753 627,763 Dividends payable 1,202 1,005 Short-term borrowings 4,209 15,033 Federal Home Loan Bank advances 352,548 264,106 Accrued expenses and other liabilities 8,705 8,865 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,027,417 916,772 - ------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 1999 and 1998; issued 10,914,763 shares in 1999 and 10,779,630 shares in 1998 682 674 Paid-in capital 9,990 9,050 Retained earnings 66,766 60,803 Accumulated other comprehensive (loss) income (191) 7,400 Treasury stock, at cost; 27,799 shares in 1998 - (354) - ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 77,247 77,573 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,104,664 $994,345 - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share amounts) Years ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $44,828 $43,869 $42,315 Interest on securities 25,613 20,656 16,656 Dividends on corporate stock and Federal Home Loan Bank stock 2,043 2,051 1,930 Interest on federal funds sold and other short-term investments 515 646 492 - -------------------------------------------------------------------------------------------------------------------- Total interest income 72,999 67,222 61,393 - -------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 4,043 3,834 3,778 Time deposits 15,871 16,744 15,738 Federal Home Loan Bank advances 16,855 13,213 10,782 Other 623 864 857 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 37,392 34,655 31,155 - -------------------------------------------------------------------------------------------------------------------- Net interest income 35,607 32,567 30,238 Provision for loan losses 1,840 1,879 1,424 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 33,767 30,688 28,814 - -------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 5,897 5,230 4,470 Service charges on deposit accounts 3,169 2,955 2,542 Merchant processing fees 1,535 1,221 994 Mortgage banking activities 1,376 2,218 1,106 Net gains on sales of securities 678 504 733 Net gain on sale of credit card portfolio 438 - - Other income 2,316 1,304 1,099 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 15,409 13,432 10,944 - -------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 17,213 15,475 13,711 Net occupancy 2,377 2,295 2,111 Equipment 2,997 2,655 2,263 Merchant processing costs 1,313 1,005 809 Office supplies 720 760 755 Advertising and promotion 983 794 809 Acquisition related expenses 1,552 - - Other 6,678 6,394 5,999 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 33,833 29,378 26,457 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 15,343 14,742 13,301 Income tax expense 4,754 4,235 3,884 - -------------------------------------------------------------------------------------------------------------------- Net income $10,589 $10,507 $9,417 - -------------------------------------------------------------------------------------------------------------------- Per share information: Basic earnings per share $.97 $.98 $.89 Diluted earnings per share $.96 $.95 $.86 Cash dividends declared per share (1) $.44 $.40 $.35 (1) Represents historical per share dividends declared by Washington Trust Bancorp, Inc.
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Accumulated Other Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings (Loss) Income Stock Total - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1999 $674 $9,050 $60,803 $7,400 $(354) $77,573 Net income 10,589 10,589 Other comprehensive loss, net of tax: Net unrealized losses on securities, net of reclassification adjustment (7,591) (7,591) -------- Comprehensive income 2,998 Cash dividends declared (4,626) (4,626) Shares issued 8 1,318 12 1,338 Shares retired (378) 378 - Shares repurchased (36) (36) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $682 $9,990 $66,766 $(191) $ - $77,247 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1998 $460 $9,839 $54,586 $7,074 $(687) $71,272 Net income 10,507 10,507 Other comprehensive income, net of tax: Net unrealized gains on securities, net of reclassification adjustment 326 326 --------- Comprehensive income 10,833 Cash dividends declared (4,083) (4,083) Stock split in form of stock dividend 207 (207) - Shares issued 7 (789) 3,338 2,556 Shares repurchased (3,005) (3,005) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $674 $9,050 $60,803 $7,400 $(354) $77,573 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 $314 $9,073 $49,431 $4,507 $(354) $62,971 Net income 9,417 9,417 Other comprehensive income, net of tax: Net unrealized gains on securities, net of reclassification adjustment 2,567 2,567 --------- Comprehensive income 11,984 Cash dividends declared (3,475) (3,475) Stock dividend 4 645 (649) - Stock split in form of stock dividend 138 (138) - Shares issued 4 121 1,256 1,381 Shares repurchased (1,589) (1,589) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $460 $9,839 $54,586 $7,074 $(687) $71,272 - ----------------------------------------------------------------------------------------------------------------------
Disclosure of Reclassification Amount: Years ended December 31, 1999 1998 1997 - ---------------------------------------------------------------- -------------------- ----------------- --------------- Net unrealized holding (losses) gains arising during the period $(10,826) $1,024 $4,950 Less: Income tax effect 3,682 (381) (1,937) Reclassification adjustment for net gains included in net income (678) (504) (733) Income tax effect on reclassification adjustment 231 187 287 - ---------------------------------------------------------------- -------------------- ---------------- ---------------- Net unrealized (losses) gains on securities $(7,591) $326 $2,567 - ---------------------------------------------------------------- -------------------- ---------------- ----------------
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999 1998 1997 - -------------------------------------------------------------------- ----------------- ---------------- ------------- Cash flows from operating activities: Net income $10,589 $10,507 $9,417 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,840 1,879 1,424 Depreciation of premises and equipment 2,983 2,617 2,200 Amortization of premium in excess of accretion of discount on debt securities 461 1,001 961 Deferred income tax (benefit) expense (796) (323) 81 Net gains on sales of securities (678) (504) (733) Net gains on loan sales (695) (1,436) (547) Net gain on sale of credit card portfolio (438) - - Proceeds from sale of credit card portfolio 5,192 - - Proceeds from sales of loans 47,627 89,533 32,375 Loans originated for sale (42,785) (90,940) (32,532) Increase in accrued interest receivable (97) (741) (785) (Increase) decrease in other assets (1,355) 374 (1,510) Increase in accrued expenses and other liabilities 1,476 626 784 Other, net 242 7 45 - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Net cash provided by operating activities 23,566 12,600 11,180 - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Cash flows from investing activities: Securities available for sale: Purchases (168,644) (232,273) (146,388) Proceeds from sales 81,398 95,666 63,600 Maturities and principal repayments 65,379 58,621 47,011 Securities held to maturity: Purchases (54,948) (52,582) (29,060) Maturities and principal repayments 34,212 8,727 5,166 Purchases of Federal Home Loan Bank stock (1,044) (139) (4,761) Principal collected on loans under loan originations (57,622) (7,289) (47,170) Purchase of loans - - (324) Proceeds from sales of other real estate owned 513 1,381 1,072 Purchases of premises and equipment (2,508) (3,850) (5,181) Purchase of deposits, net of premium paid - - 7,014 Purchase of bank-owned life insurance (18,000) - - - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Net cash used in investing activities (121,264) (131,738) (109,021) - ---------------------------------------------------------------- ---------------- ----------------- -----------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 1999 1998 1997 - -------------------------------------------------------------------- ----------------- ---------------- ------------- Cash flows from financing activities: Net increase in deposits 32,990 54,960 54,805 Net (decrease) increase in short-term borrowings (10,824) (5,305) 6,337 Proceeds from Federal Home Loan Bank advances 550,837 611,300 468,600 Repayment of Federal Home Loan Bank advances (462,395) (534,195) (420,092) Purchase of treasury stock (36) (3,005) (1,589) Proceeds from issuance of common stock 1,338 2,556 1,381 Cash dividends paid (4,429) (4,005) (3,333) - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Net cash provided by financing activities 107,481 122,306 106,109 - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Net increase in cash and cash equivalents 9,783 3,168 8,268 Cash and cash equivalents at beginning of year 34,477 31,309 23,041 - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Cash and cash equivalents at end of year $44,260 $34,477 $31,309 - ---------------------------------------------------------------- ---------------- ----------------- ----------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned $576 $789 $993 Loans charged off 967 653 1,521 Loans made to facilitate the sale of other real estate owned 180 61 633 (Decrease) increase in unrealized gain on securities available for sale, net of tax (7,591) 326 2,567 Supplemental Disclosures: Interest payments $36,687 $34,758 $30,583 Income tax payments 4,363 2,324 4,040
The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS General Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation provides a complete product line of financial services through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial, residential and consumer lending, retail and commercial deposit products and trust services through its branch offices in Rhode Island and Connecticut. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The activities of the Corporation and the Bank are subject to the regulatory supervision of the Federal Reserve Board and the FDIC, respectively. Both companies are subject to various Rhode Island and Connecticut business and banking regulations. On August 25, 1999, the Corporation completed its acquisition of Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and total shareholders' equity of $4.5 million. The acquisition of Pier Bank was accounted as a pooling of interests and, accordingly, the financial information for all periods presented has been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. (1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. The Corporation has one reportable operating segment. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change is the determination of the allowance for loan losses. Securities Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method. Securities Held to Maturity The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method). Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB"). As a requirement of membership, the Bank must own a minimum amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In addition, the FHLB may require members to redeem stock in excess of the requirement. FHLB stock is redeemable at par, which equals cost. Since no market exists for these shares, they are valued at par. Mortgage Banking Activities Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Unrealized losses, if any, are charged to current period earnings. Mortgage Servicing Rights Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated mortgage loans that are sold with servicing rights retained is allocated between the mortgage servicing rights and the loans without the mortgage servicing rights based on their relative fair values. Capitalized mortgage servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance. Portfolio Loans Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans. Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. Impaired Loans A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable. Restructured Loans Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Allowance for Loan Losses The Corporation continually evaluates the allowance for loan losses by performing ongoing reviews of certain individual loans, the size and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, industry concentrations and other pertinent factors. The allowance for loan losses is maintained at levels considered adequate by management to provide for losses inherent in the loan portfolio. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for known specific and potential market declines and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs. Transfers and Servicing of Assets and Extinguishments of Liabilities The Corporation accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the Corporation accounts for a transfer as a secured borrowing with a pledge of collateral. Interest Rate Risk Management Agreements The Corporation uses off-balance sheet financial instruments from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into agreements for trading or speculative purposes. Therefore, these agreements are not marked to market. The net amounts to be paid or received on outstanding interest rate risk management agreements are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Premiums paid for interest rate floor agreements are amortized as an adjustment to interest income over the term of the agreements. Unamortized premiums are included in other assets. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged. Pension Costs The Corporation accounts for pension benefits using the net periodic benefit cost method, which recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period. Stock-Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123. Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Earnings Per Share Diluted EPS is computed by dividing net income by the average number of common shares and common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents from the denominator. Comprehensive Income Comprehensive income is defined as all changes in equity, except for those resulting from investments by and distribution to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments. Generally, federal funds are sold on an overnight basis. (2) Cash and Due from Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve. Such reserve balances amounted to $6.0 million and $3.8 million at December 31, 1999 and 1998, respectively. (3) Securities Securities are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $87,558 $347 $(1,595) $86,310 Mortgage-backed securities 191,934 70 (2,918) 189,086 Corporate bonds 34,364 31 (711) 33,684 Corporate stocks 15,833 6,582 (1,064) 21,351 ---------------------------------------------------------------------------------------------------------- Total securities available for sale 329,689 7,030 (6,288) 330,431 ---------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 28,231 - (895) 27,336 Mortgage-backed securities 62,209 54 (2,189) 60,074 States and political subdivisions 25,932 23 (497) 25,458 ---------------------------------------------------------------------------------------------------------- Total securities held to maturity 116,372 77 (3,581) 112,868 ---------------------------------------------------------------------------------------------------------- Total securities $446,061 $7,107 $(9,869) $443,299 ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $116,561 $1,799 $(12) $118,348 Mortgage-backed securities 145,637 677 (508) 145,806 Corporate bonds 27,533 179 (209) 27,503 Corporate stocks 17,864 10,414 (94) 28,184 ---------------------------------------------------------------------------------------------------------- Total securities available for sale 307,595 13,069 (823) 319,841 ---------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 21,987 133 (1) 22,119 Mortgage-backed securities 46,088 335 (97) 46,326 States and political subdivisions 27,572 531 (1) 28,102 ---------------------------------------------------------------------------------------------------------- Total securities held to maturity 95,647 999 (99) 96,547 ---------------------------------------------------------------------------------------------------------- Total securities $403,242 $14,068 $(922) $416,388 ----------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 1999 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $8.2 million and a fair value of $7.7 million. Call features on these stocks range from five months to eight years. The contractual maturities and weighted average yields of debt securities are summarized below. Weighted average yields are computed on a fully taxable basis. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.
(Dollars in thousands) Weighted Amortized Fair Average December 31, 1999 Cost Value Yield ---------------------------------------------------------------------------------------------------------- Securities Available for Sale: Due in 1 year or less $37,427 $36,824 6.39% After 1 but within 5 years 149,688 147,197 6.46% After 5 but within 10 years 78,645 77,421 6.66% After 10 years 48,096 47,638 6.95% ---------------------------------------------------------------------------------------------------------- Total debt securities available for sale 313,856 309,080 6.58% ---------------------------------------------------------------------------------------------------------- Securities Held to Maturity: Due in 1 year or less 14,875 14,498 6.18% After 1 but within 5 years 56,586 54,921 6.15% After 5 but within 10 years 44,226 42,788 5.78% After 10 years 685 661 6.53% ---------------------------------------------------------------------------------------------------------- Total debt securities held to maturity 116,372 112,868 6.02% ---------------------------------------------------------------------------------------------------------- Total debt securities $430,228 $421,948 6.42% ----------------------------------------------------------------------------------------------------------
At December 31, 1999, the Corporation owned debt securities with an aggregate carrying value of $56.3 million that are callable at the discretion of the issuers. The majority of these securities are U.S. Treasury and government-sponsored agency obligations, included in both the available-for-sale and held-to-maturity categories. Final maturities of these securities range from twenty-one months to twenty-nine years with call features ranging from one month to seven years. The following is a summary of amounts relating to sales of securities available for sale: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------- Proceeds from sales $81,398 $95,666 $63,600 ------------------------------------------------------------------------- Realized gains $2,213 $1,161 $1,252 Realized losses (1,535) (657) (519) ------------------------------------------------------------------------- Net realized gains $678 $504 $733 ------------------------------------------------------------------------- Securities available for sale with a fair value of $47.2 million and $27.8 million were pledged to secure public deposits and for other purposes at December 31, 1999 and 1998, respectively. (4) Loans The following is a summary of loans: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------- Commercial and other: Mortgages (1) $113,719 $87,132 Construction and development (2) 2,902 2,855 Other (3) 115,739 113,372 ------------------------------------------------------------------------- Total commercial and other 232,360 203,359 Residential real estate: Mortgages 212,719 191,101 Homeowner construction 12,995 15,052 ------------------------------------------------------------------------- Total residential real estate 225,714 206,153 Consumer 90,951 87,458 ------------------------------------------------------------------------- Total loans $549,025 $496,970 ------------------------------------------------------------------------- (1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, commercial real estate properties, and for land development. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area. Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 1999 and 1998 was $3.8 million and $5.8 million, respectively. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $342 thousand in 1999 and $550 thousand in 1998. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $105 thousand in 1999 and $149 thousand in 1998. Included in nonaccrual loans at December 31, 1999 and 1998 are loans amounting to $142 thousand and $1.1 million, respectively, whose terms have been restructured. Impaired Loans Impaired loans consist of all nonaccrual commercial loans. The following is a summary of impaired loans: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------- Impaired loans requiring an allowance $2,039 $3,684 Impaired loans not requiring an allowance - 171 ------------------------------------------------------------------------- Total recorded investment in impaired loans $2,039 $3,855 ------------------------------------------------------------------------- (Dollars in thousands) Years ended December 31, 1999 1998 ------------------------------------------------------------------------- Average recorded investment in impaired loans $3,418 $5,223 ------------------------------------------------------------------------- Interest income recognized on impaired loans $351 $448 ------------------------------------------------------------------------- Mortgage Servicing Activities At December 31, 1999 and 1998, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $193.9 million and $174.7 million, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. The following is a summary of capitalized mortgage servicing rights: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------- Balance at beginning of year $808 $334 Additions 313 553 Amortization (125) (79) ------------------------------------------------------------------------- Balance at end of year $996 $808 ------------------------------------------------------------------------- Capitalized mortgage servicing rights are periodically evaluated for impairment. As of December 31, 1999 and 1998, the balance of the valuation allowance amounted to $320 thousand and $296 thousand, respectively. Loans to Related Parties The Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. Activity related to these loans in 1999 and 1998 was as follows: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------- Balance at beginning of year $2,455 $2,756 Additions 1,406 1,064 Reductions (1,582) (1,365) ------------------------------------------------------------------------- Balance at end of year $2,279 $2,455 ------------------------------------------------------------------------- (5) Allowance for Loan Losses The following is an analysis of the allowance for loan losses: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------- Balance at beginning of year $10,966 $9,335 $9,009 Provision charged to expense 1,840 1,879 1,424 Recoveries of loans previously charged off 510 405 424 Loans charged off (967) (653) (1,522) ------------------------------------------------------------------------- Balance at end of year $12,349 $10,966 $9,335 ------------------------------------------------------------------------- Included in the allowance for loan losses at December 31, 1999, 1998 and 1997 was an allowance for impaired loans amounting to $475 thousand, $803 thousand and $921 thousand, respectively. (6) Premises and Equipment The following is a summary of premises and equipment: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------- Land and improvements $2,245 $2,104 Premises and improvements 24,624 23,341 Furniture, fixtures and equipment 18,307 17,489 ------------------------------------------------------------------------- 45,176 42,934 Less accumulated depreciation 21,767 18,913 ------------------------------------------------------------------------- Total premises and equipment, net $23,409 $24,021 ------------------------------------------------------------------------- (7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees and interest rate swaps and floors. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
(Dollars in thousands) December 31, 1999 1998 ---------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $38,380 $28,161 Home equity lines 38,428 28,683 Credit card lines (portfolio was sold in the third quarter of 1999) - 17,968 Other loans 15,479 14,542 Standby letters of credit 500 1,472 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate floor contracts 70,000 70,000
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors from time to time as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g. fixed-rate for variable-rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and thus, are not a measure of the Corporation's potential loss exposure. During 1995, the Corporation entered into interest rate floor contracts with a total notional amount of $50 million that mature in February 2000. The Corporation receives payment under the 1995 contracts with a total notional value of $30 million when the prime rate falls below 9.0% and on the remaining $20 million when 3-month LIBOR at quarterly resetting dates is below 6.1875%. In March 1998, the Corporation entered into a five-year interest rate floor contract with a notional amount of $20 million that matures in February 2003. The 1998 floor contract entitles the Corporation to receive payment from counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The prime rate and 3-month LIBOR applicable to the outstanding floor contracts at December 31, 1999 were 8.50% and 6.0425%, respectively. At December 31, 1999, the fair value, or the value to the Corporation of terminating the contracts, was $111 thousand. The remaining unamortized premium for these contracts, included in other assets, amounted to $224 thousand at December 31, 1999. The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses. (8) Other Real Estate Owned Other real estate owned is included in other assets on the Corporation's consolidated balance sheets. An analysis of the composition of OREO follows: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------ Residential real estate $43 $204 Commercial real estate 55 27 Repossessed assets 45 - Land - 81 ------------------------------------------------------------------------ 143 312 Valuation allowance (94) (69) ------------------------------------------------------------------------ Other real estate owned, net $49 $243 ------------------------------------------------------------------------ An analysis of the activity relating to OREO follows: (Dollars in thousands) Years ended December 31, 1999 1998 ------------------------------------------------------------------------ Balance at beginning of year $312 $964 Net transfers from loans 576 789 Sales (745) (1,457) Other - 16 ------------------------------------------------------------------------ 143 312 Valuation allowance (94) (69) ------------------------------------------------------------------------ Other real estate owned, net $49 $243 ------------------------------------------------------------------------ The following is an analysis of activity relating to the OREO valuation allowance: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------ Balance at beginning of year $69 $76 $205 Provision charged to expense 99 14 42 Sales (53) (1) (131) Selling expenses incurred (21) (20) (40) ------------------------------------------------------------------------ Balance at end of year $94 $69 $76 ------------------------------------------------------------------------ Net realized gains on dispositions of properties amounted to $39 thousand, $50 thousand, and $74 thousand in 1999, 1998 and 1997, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income. (9) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 1999 were as follows: (Dollars in thousands) Years ending December 31: 2000 $258,793 2001 45,573 2002 8,675 2003 6,737 2004 3,147 2005 and thereafter 49 ------------------------------------------------------------------------ Balance at December 31, 1999 $322,974 ------------------------------------------------------------------------ The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $100.6 million and $83.3 million at December 31, 1999 and 1998, respectively. (10) Borrowings Short-Term Borrowings The following is a summary of short-term borrowings: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------ Securities sold under repurchase agreements $ - $13,472 Other borrowings 4,209 1,561 ------------------------------------------------------------------------ Short-term borrowings $4,209 $15,033 ------------------------------------------------------------------------ Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligation to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to securities sold under repurchase agreements: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------ Maximum amount outstanding at any month-end $23,525 $26,767 $26,820 Average amount outstanding $10,316 $13,323 $12,808 Weighted average rate 5.05% 5.56% 5.69% Federal Home Loan Bank Advances The following table presents scheduled maturities and weighted average interest rates paid on Federal Home Loan Bank advances outstanding at December 31, 1999: (Dollars in thousands) Weighted Average Rate Amount ------------------------------------------------------------------------- Years ending December 31: 2000 5.57% $213,660 2001 5.69% 47,571 2002 5.71% 21,215 2003 5.42% 19,993 2004 5.87% 10,353 2005 and thereafter 5.62% 39,756 ------------------------------------------------------------------------- Balance at December 31, 1999 $352,548 ------------------------------------------------------------------------- Included in the outstanding amounts disclosed are callable advances totaling $35.5 million. Call features on these advances range from one to five years. In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $13.9 million at December 31, 1999. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 1999. (11) Employee Benefits Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The prepaid benefit costs relating to the defined benefit pension plan amounted to $448 thousand and $938 thousand at October 1, 1999 and 1998, respectively. The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The accrued pension liability related to this plan amounted to $400 thousand and $323 thousand at October 1, 1999 and 1998, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's tax-qualified pension plan. The projected benefit obligation for this plan amounted to $1.1 million and $777 thousand at October 1, 1999 and 1998, respectively. The following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Corporation's defined benefit pension plans: (Dollars in thousands) Years ended October 1, 1999 1998 ------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of plan year $14,479 $12,390 Service cost 652 502 Interest cost 1,001 915 Amendments 174 - Actuarial (gain) loss (1,801) 1,299 Benefits paid (682) (627) ------------------------------------------------------------------------- Benefit obligation at end of plan year $13,823 $14,479 ------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of plan year $16,349 $14,392 Actual return on plan assets 2,053 2,006 Employer contribution 60 578 Benefits paid (682) (627) ------------------------------------------------------------------------- Fair value of plan assets at end of plan year $17,780 $16,349 ------------------------------------------------------------------------- Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows: (Dollars in thousands) October 1, 1999 1998 ------------------------------------------------------------------------- Funded status $3,957 $1,870 Unrecognized transition asset (49) (55) Unrecognized prior service cost 620 522 Unrecognized net actuarial gain (4,480) (1,722) ------------------------------------------------------------------------- Prepaid benefit cost $48 $615 ------------------------------------------------------------------------- October 1, 1999 1998 ------------------------------------------------------------------------- Assumptions Used: Discount rate 7.50% 6.75% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 5.00% 5.00% The components of net pension cost include the following: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------- Components of Net Periodic Benefit Cost: Service cost $652 $502 $376 Interest cost 1,002 915 791 Expected return on plan assets (1,106) (992) (826) Amortization of transition asset (6) (6) (6) Amortization of prior service cost 75 75 75 Recognized net actuarial loss 11 6 13 ------------------------------------------------------------------------- Net periodic benefit cost $628 $500 $423 ------------------------------------------------------------------------- 401(k) Plan The Corporation's 401(k) Plan provides a specified match of employee contributions for substantially all employees. Total employer matching contributions under this plan amounted to $275 thousand, $256 thousand and $232 thousand in 1999, 1998 and 1997, respectively. Profit Sharing Plan The Corporation has a nonqualified profit sharing plan that rewards employees, excluding those key employees participating in the Short-Term Incentive Plan, for their contributions to the Corporation's success. The annual profit sharing benefit is determined by a formula tied to return on equity and is subject to approval by the Corporation's Board of Directors each year. The amount of the profit sharing benefit was $333 thousand, $322 thousand and $294 thousand for 1999, 1998 and 1997, 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 $969 thousand, $688 thousand and $640 thousand in 1999, 1998 and 1997, respectively. Directors' Retainer Continuation Plan The Corporation previously offered a nonqualified plan that provided retirement benefits to non-officer directors. In 1996, the provisions of the plan were terminated for active directors and the related accrued benefit was settled. The benefits provided under this plan continue for retired directors. The expense of this plan is included in other noninterest expense and amounted to $24 thousand, $25 thousand and $36 thousand for 1999, 1998 and 1997, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $248 thousand and $256 thousand at December 31, 1999 and 1998, respectively. Deferred Compensation Plan The Plan for Deferral of Director' Fees adopted by the Corporation effective March 31, 1988 was amended, restated and renamed the Nonqualified Deferred Compensation Plan effective January 1, 1999. The Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The Corporation has recorded the assets and liabilities for the deferred compensation plan at the lower of cost or market in the consolidated balance sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $953 thousand at December 31, 1999 and is included in other liabilities on the accompanying consolidated balance sheets. The corresponding invested assets are reported in other assets. (12) Income Taxes The components of income tax expense were as follows: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------ Current expense: Federal $5,507 $4,564 $3,576 State 43 50 286 ------------------------------------------------------------------------ Total current expense 5,550 4,614 3,862 ------------------------------------------------------------------------ Deferred expense (benefit): Federal (796) (371) 462 State - (8) (440) ------------------------------------------------------------------------ Total deferred expense (796) (379) 22 ------------------------------------------------------------------------ Total income tax expense $4,754 $4,235 $3,884 ------------------------------------------------------------------------ Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows: (Dollars in thousands) Years ended December 31, 1999 1998 1997 ------------------------------------------------------------------------ Tax expense at Federal statutory rate $5,226 $5,052 $4,522 Increase (decrease) in taxes resulting from: Tax-exempt income (422) (401) (282) Acquisition related expenses 268 - - Dividends received deduction (246) (261) (253) Bank owned life insurance (237) - - State tax, net of Federal income tax benefit 28 26 (102) Other 137 (181) (1) ------------------------------------------------------------------------ Total income tax expense $4,754 $4,235 $3,884 ------------------------------------------------------------------------ The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1999 and 1998 are as follows: (Dollars in thousands) December 31, 1999 1998 ------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $4,214 $3,592 Deferred loan origination fees 366 363 Net operating loss carryover 287 310 Other 1,271 1,102 ------------------------------------------------------------------------ Gross deferred tax assets 6,138 5,367 ------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (252) (4,164) Premises and equipment (1,115) (1,119) Deferred loan origination costs (811) (687) Pension (146) (308) Other (235) (218) ------------------------------------------------------------------------ Gross deferred tax liabilities (2,559) (6,496) ------------------------------------------------------------------------ Net deferred tax asset (liability) $3,579 $(1,129) ------------------------------------------------------------------------ In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (13) Operating Leases At December 31, 1999, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $339 thousand, $391 thousand and $164 thousand for 1999, 1998 and 1997, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows: (Dollars in thousands) Years ending December 31: 2000 $373 2001 319 2002 198 2003 121 2004 41 ------------------------------------------------------------------------ $1,052 ------------------------------------------------------------------------ (14) Litigation On January 28, 1997, a suit was filed against the Bank by a former corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by the customer's former president and treasurer. The suit alleges that the Bank wrongly permitted this individual, while an officer of the customer, to divert funds from the customer's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duties, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constituted fraud. The suit as originally filed sought recovery for losses directly related to the embezzlement of approximately $3.1 million, as well as consequential damages amounting to approximately $2.6 million. On March 19, 1998, the plaintiffs amended their claims to seek recovery of an additional $2.6 million in losses, plus an unspecified amount of interest thereon, which were alleged to be directly related to the embezzlement. On or about November 23, 1999, the plaintiffs further amended their claims to seek recovery of approximately $8.0 million in total damages, plus an unspecified amount of interest thereon. Management believes, based on its review with counsel of the development of this matter to date that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The case is in discovery and is currently scheduled for trial in late April 2000. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. (15) Shareholders' Equity Stock Splits A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3, 1998 to shareholders of record on July 17, 1998. A 3-for-2 stock split on shares of common stock was also paid on November 19, 1997 to shareholders of record on November 5, 1997. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect these stock splits. Stock Repurchase Plan In December 1997, the Corporation's Board of Directors approved a program to repurchase up to 225,000, or approximately 2.3%, of its outstanding common shares. This plan replaces the June 1996 authorization to repurchase 195,750 shares. The Corporation planned to hold the repurchased shares as treasury stock to be used for general corporate purposes. Approximately 139,274 shares were repurchased in 1998 at a total cost of $3.0 million. In April 1999, the Corporation's Board of Directors approved the termination of the Corporation's stock repurchase plan. Rights On August 1996, the Corporation declared a dividend of one common share purchase right (a "Right") for each share of common stock payable on September 3, 1996 to shareholders of record on that date. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $35.56 per share, subject to adjustment. The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Corporation at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right. Dividends The primary source of funds for dividends paid by the Corporation is dividends received from the Bank. The Corporation and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Corporation. Generally the Bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $31.5 million as of December 31, 1999. Stock Option Plans The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting of options and other equity incentives to key employees, directors, advisors, and consultants. Up to 1,012,500 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired awards. Options are designated either as non-qualified or as incentive options. The exercise price of each option may not be less than the fair market value on the date of the grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Awards may be granted at any time until April 29, 2007. The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Corporation's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. The 1997 Plan and the 1988 Plan permit options to be granted with stock appreciation rights ("SARs"), however, no options have been granted with SARs. Options granted under the plans vest according to various terms at the end of ten years. The following table presents changes in options outstanding during 1999, 1998 and 1997:
Years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------ Outstanding at January 1 851,329 $8.90 1,128,584 $7.73 1,106,077 $5.73 Granted 160,104 $17.64 24,435 $21.33 239,404 $14.67 Exercised (194,430) $4.95 (292,618) $5.22 (210,829) $5.05 Cancelled (10,323) $16.04 (9,072) $15.87 (6,068) $10.24 - ------------------------------------------------------------------------------------------------------------------ Outstanding at December 31 806,680 $11.49 851,329 $8.90 1,128,584 $7.73 - ------------------------------------------------------------------------------------------------------------------ Exercisable at December 31 613,367 $9.73 682,249 $7.32 857,987 $6.04 - ------------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 1999 were as follows:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - ----------------------------------------------------------------------------------------------------------------- $2.13 to $4.27 89,609 2.5 years $3.47 89,609 $3.47 $4.28 to $6.40 27,171 4.4 years $5.57 27,171 $5.57 $6.41 to $8.53 170,784 3.2 years $7.02 170,784 $7.02 $8.54 to $10.67 125,624 4.9 years $9.60 125,624 $9.60 $10.68 to $12.80 114,723 7.2 years $11.65 90,486 $11.68 $14.93 to $17.07 18,172 9.3 years $16.17 4,542 $16.17 $17.08 to $19.20 212,530 8.6 years $17.84 81,118 $17.98 $19.21 to $21.33 48,067 8.8 years $20.43 24,033 $21.33 - ----------------------------------------------------------------------------------------------------------------- Total 806,680 5.9 years $11.49 613,367 $9.73 - -----------------------------------------------------------------------------------------------------------------
As discussed in Note 1, the Corporation accounts for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25, and in addition, is required to disclose pro forma net income and earnings per share using the fair value based method prescribed by SFAS No. 123. Accordingly, no compensation cost for these plans has been recognized in the Consolidated Statements of Income for 1999, 1998 and 1997. In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 1999, 1998 and 1997: (Dollars in thousands, except per share amounts) Years ended December 31, 1999 1998 1997 -------------------------------------------------------------------------- Net income As reported $10,589 $10,507 $9,417 Pro forma $10,020 $10,167 $9,112 Basic earnings per share As reported $.97 $.98 $.89 Pro forma $.92 $.95 $.86 Diluted earnings per share As reported $.96 $.95 $.86 Pro forma $.90 $.92 $.83 Weighted average fair value $5.36 $5.40 $4.31 Expected life 9.0 years 8.6 years 8.4 years Risk-free interest rate 5.91% 6.04% 6.3% Expected volatility 32.8% 25.9% 21.2% Expected dividend yield 3.9% 4.0% 4.25% The pro forma effect on net income and earnings per share for 1999, 1998 and 1997 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995. Dividend Reinvestment Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan. Reserved Shares As of December 31, 1999, a total of 2,419,741 common stock shares were reserved for issuance under the 1988 Amended and Restated Stock Option Plan, the 1997 Equity Incentive Plan and the Amended and Restated Dividend Reinvestment and Stock Purchase Plan. Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1999, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category. The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 1999 and 1998, as well as the corresponding minimum regulatory amounts and ratios:
(Dollars in thousands) To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Action Actual Purposes Provisions ---------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------- As of December 31, 1999: Total Capital (to Risk-Weighted Assets): Consolidated $86,584 14.24% $48,635 8.00% $60,793 10.00% Bank $84,550 13.91% $48,635 8.00% $60,793 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $76,443 12.57% $24,317 4.00% $36,476 6.00% Bank $74,409 12.24% $24,317 4.00% $36,476 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $76,443 7.14% $42,834 4.00% $53,542 5.00% Bank $74,409 6.95% $42,834 4.00% $53,542 5.00% As of December 31, 1998: Total Capital (to Risk-Weighted Assets): Consolidated $80,407 14.75% $43,616 9.00% $54,520 10.00% Bank $78,625 14.36% $43,616 8.00% $54,520 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $69,008 12.66% $21,808 4.00% $32,712 6.00% Bank $66,866 12.26% $21,808 4.00% $32,712 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $69,008 7.30% $37,837 4.00% $47,297 5.00% Bank $66,866 7.07% $37,840 4.00% $47,301 5.00% (1) Leverage ratio
(16) Earnings per Share (Dollars in thousands, except per share amounts)
Years ended December 31, 1999 1998 1997 ---------------------------------------------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted ---------------------------------------------------------------- Net income $10,589 $10,589 $10,507 $10,507 $9,417 $9,417 Share amounts, in thousands: Average outstanding 10,863.6 10,863.6 10,715.1 10,715.1 10,562.3 10,562.3 Common stock equivalents - 218.7 - 380.1 - 415.9 --------------------------------------------------------------------------------------------------------- Weighted average outstanding 10,863.6 11,082.3 10,715.1 11,095.2 10,562.3 10,978.2 --------------------------------------------------------------------------------------------------------- Earnings per share $.97 $.96 $.98 $.95 $.89 $.86 ---------------------------------------------------------------------------------------------------------
(17) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows: Cash and Securities The carrying amount of short-term instruments such as cash and federal funds sold is used as an estimate of fair value. The fair value of securities available for sale and held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon termination of FHLB membership and is therefore valued at par, which equals cost. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market. Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 1999 and 1998 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, 1999 and 1998. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit. Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value. Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances. Off-Balance Sheet Instruments The fair values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The following table presents the fair values of the Corporation's financial instruments:
(Dollars in thousands) December 31, 1999 1998 -------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------- Financial Assets On-balance sheet: Cash and cash equivalents $44,260 $44,260 $34,477 $34,477 Mortgage loans held for sale 1,647 1,647 5,863 5,863 Securities available for sale 330,431 330,431 319,841 319,841 Securities held to maturity 116,372 112,868 95,647 96,547 Federal Home Loan Bank stock 17,627 17,627 16,583 16,583 Loans, net of allowance for loan losses 536,676 537,019 486,004 501,598 Accrued interest receivable 6,010 6,010 5,913 5,913 Off-balance sheet financial instruments relating to assets: Interest rate floor contracts 224 111 469 1,404 Financial Liabilities On-balance sheet: Noninterest bearing demand deposits $102,384 $102,384 $93,478 $93,478 Non-term savings accounts 235,395 235,395 223,047 223,047 Certificates of deposit 322,974 324,184 311,238 313,341 Short term borrowings 4,209 4,209 15,033 15,033 Federal Home Loan Bank advances 352,548 347,568 264,106 268,523 Accrued interest payable 3,322 3,322 2,617 2,617
Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods that are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed. (18) Parent Company Financial Statements The following are parent company only financial statements of 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.
(Dollars in thousands) Balance Sheets December 31, 1999 1998 --------------------------------------------------------------------------------------------------------- Assets: Cash on deposit with bank subsidiary $2,397 $1,947 Investment in bank subsidiary at equity value 75,212 75,431 Dividend receivable from bank subsidiary 840 1,200 Due from bank subsidiary - - --------------------------------------------------------------------------------------------------------- Total assets $78,449 $78,578 --------------------------------------------------------------------------------------------------------- Liabilities: Dividends payable $1,202 $1,005 --------------------------------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 1999 and 1998; issued 10,914,763 shares in 1999 and 10,770,630 shares in 1998 682 674 Paid-in capital 9,990 9,050 Retained earnings 66,766 60,803 Net unrealized (loss) gain on securities available for sale (191) 7,400 Treasury stock, at cost - (354) --------------------------------------------------------------------------------------------------------- Total shareholders' equity 77,247 77,573 --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $78,449 $78,578 ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) Statements of Income Years ended December 31, 1999 1998 1997 ---------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary $4,080 $6,480 $3,750 Other expense - - 40 ---------------------------------------------------------------------------------------------------------- Net income before income taxes and undistributed earnings of subsidiary 4,080 6,480 3,710 Income tax benefit - - 14 ---------------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiary 4,080 6,480 3,724 Equity in undistributed earnings of subsidiary 6,509 4,027 5,693 ---------------------------------------------------------------------------------------------------------- Net income $10,589 $10,507 $9,417 ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) Statements of Cash Flows Years ended December 31, 1999 1998 1997 --------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $10,589 $10,507 $9,417 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (6,509) (4,027) (5,693) Decrease (increase) in dividend receivable 360 - (450) Decrease (increase) in due from bank subsidiary - 100 (100) --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,440 6,580 3,174 --------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Payments for investments in and advances to subsidiaries (863) (1,567) (182) --------------------------------------------------------------------------------------------------------- Net cash used in investing activities (863) (1,567) (182) --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock (36) (3,005) (1,589) Proceeds from issuance of common stock 1,338 2,556 1,381 Cash dividends paid (4,429) (4,005) (3,333) --------------------------------------------------------------------------------------------------------- Net cash used in financing activities (3,127) (4,454) (3,541) --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 450 559 (549) Cash at beginning of year 1,947 1,388 1,937 --------------------------------------------------------------------------------------------------------- Cash at end of year $2,397 $1,947 $1,388 ---------------------------------------------------------------------------------------------------------
(19) Acquisition Related Expenses Expenses directly attributable to the 1999 acquisition of Pier Bank amounted to $1.6 million ($1.3 million, net of tax) and were charged to earnings at the date of combination. Acquisition related expenses consisted of professional fees, data processing/integration costs, write-down of assets and severance obligations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 21, 2000 prepared for the Annual Meeting of Shareholders to be held April 25, 2000 and incorporated herein by reference. Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant". Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 21, 2000 prepared for the Annual Meeting of Shareholders to be held April 25, 2000, 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 21, 2000 prepared for the Annual Meeting of Shareholders to be held April 27, 1999, 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 21, 2000 prepared for the Annual Meeting of Shareholders to be held April 25, 2000, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 21, 2000 prepared for the Annual Meeting of Shareholders to be held April 25, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The financial statements of the Registrant required in response to this Item are listed in response to Part II, Item 8 of this Report. 2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Registrant have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. (b) There were no reports on Form 8-K filed during the quarter ended December 31, 1999. (c) Exhibit Index. Exhibit Number -------------------- 3.a Restated Articles of Incorporation of the Registrant - Filed as Exhibit 3(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) 3.b Amendment to Restated Articles of Incorporation - Filed as Exhibit 3.i to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) 3.c Amended and Restated By-Laws of the Corporation - Filed as Exhibit 3.c to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (1) 4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (including Form of Right Certificate attached thereto as Exhibit A) - Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (1) 10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) (2) 10.b Short Term Incentive Plan Description - Filed as Exhibit 10.b to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (1) (2) 10.c Amended and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-72277) filed with the Commission on February 12, 1999. (1) (2) 10.d Amended and Restated 1988 Stock Option Plan - Filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) (2) 10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed as Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-13167) filed with the Commission on October 1, 1996. (1) (2) 10.f The Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2) 10.g Change in Control Agreements with Executive Officers - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2) 10.h Change in Control Agreements with Executive Officers - Filed as Exhibit 10.h to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (2) 10.i Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. (2) 10.j Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. (2) 10.k Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999. (2) 21 Subsidiaries of the Registrant - Filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (1) 23 Consent of Independent Auditors - Filed herewith. 27 Financial Data Schedules, Article 9 - Filed herewith. -------------------- (1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein. (2) Management contract or compensatory plan or arrangement (d) Financial Statement Schedules. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON TRUST BANCORP, INC. ----------------------------------------------- (Registrant) Date: March 3, 2000 By John C. Warren -------------------- ---------------------------------------------- John C. Warren Chairman, Chief Executive Officer and Director (principal executive officer) Date: March 3, 2000 By David V. Devault -------------------- ---------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and principal accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 3, 2000 Alcino G. Almeida -------------------- ---------------------------------- Alcino G. Almeida, Director Date: March 3, 2000 Gary P. Bennett -------------------- ---------------------------------- Gary P. Bennett, Director Date: March 3, 2000 Steven J. Crandall -------------------- ---------------------------------- Steven J. Crandall, Director Date: March 3, 2000 Richard A. Grills -------------------- ---------------------------------- Richard A. Grills, Director Date: March 3, 2000 Larry J. Hirsch -------------------- ---------------------------------- Larry J. Hirsch, Director Date: March 3, 2000 Katherine W. Hoxsie -------------------- ---------------------------------- Katherine W. Hoxsie, Director Date: March 3, 2000 Mary E. Kennard -------------------- ---------------------------------- Mary E. Kennard, Director Date: March 3, 2000 Joseph J. Kirby -------------------- ---------------------------------- Joseph J. Kirby, Director Date: March 3, 2000 James W. McCormick, Jr. -------------------- ---------------------------------- James W. McCormick, Jr., Director Date: -------------------- ---------------------------------- Brendan P. O'Donnell, Director Date: March 3, 2000 Victor J. Orsinger II -------------------- ---------------------------------- Victor J. Orsinger II, Director Date: March 3, 2000 Anthony J. Rose, Jr. -------------------- ---------------------------------- Anthony J. Rose, Jr., Director Date: March 3, 2000 James P. Sullivan -------------------- ---------------------------------- James P. Sullivan, Director Date: March 3, 2000 Neil H. Thorp -------------------- ---------------------------------- Neil H. Thorp, Director Date: March 3, 2000 John C. Warren -------------------- ---------------------------------- John C. Warren, Director EX-23 2 INDEPENDENT ACCOUNTANTS' CONSENT EXHIBIT 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Washington Trust Bancorp, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-72277, 333-48315, 333-13167 and 33-23048) on Forms S-8 and in the registration statements (Nos. 333-13821 and 33-28065) on Forms S-3 of Washington Trust Bancorp, Inc. and subsidiary of our report dated January 17, 2000, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, 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, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Washington Trust Bancorp, Inc. KPMG LLP Providence, Rhode Island March 21, 2000 EX-27 3 FDS ARTICLE 9
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST BANCORP, INC. AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 26,960 0 17,300 0 330,431 116,372 112,868 549,025 12,349 1,104,664 660,753 4,209 362,455 0 0 0 682 76,565 1,104,664 44,828 27,656 515 72,999 19,914 37,392 35,607 1,840 678 33,833 15,343 15,343 0 0 10,589 .97 .96 3.71 3,798 120 446 160 10,966 967 510 12,349 12,349 0 6,003
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