-----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, RiN2XqF8D1aT2xcxi9ZNZ/X1kEBzPErktK233/hSezZQUvTW5Y+Pxym/96dEEpF4 L05OIDVfAUyKk7PEPnVGKw== 0000737468-97-000003.txt : 19970325 0000737468-97-000003.hdr.sgml : 19970325 ACCESSION NUMBER: 0000737468-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON TRUST BANCORP INC CENTRAL INDEX KEY: 0000737468 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050404671 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13091 FILM NUMBER: 97561538 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ----------------------- OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------ 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) Registrant's telephone number, including area code (401) 348-1200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE 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 $128,982,909 at March 17, 1997 which includes $11,620,375 held by The Washington Trust Company under trust agreements and other instruments. The number of shares of common stock of the registrant outstanding as of March 17, 1997 was 4,372,302. Page 1 of 90 Exhibit Index page 21 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's 1996 Annual Report to Shareholders. (Parts I, II and IV) 2. Portions of the Registrant's Proxy Statement dated March 19, 1997 for the 1997 Annual Meeting of Shareholders. (Part III) =============================================================================== FORM 10-K WASHINGTON TRUST BANCORP, INC. For the Year Ended December 31, 1996 TABLE OF CONTENTS Description Page Number ----------- ----------- 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 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 forward-looking information, including statements regarding the Corporation's plans, objectives, expectations and intentions. The Corporation's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, (i) changes in the economy in the geographic region served by the Corporation; (ii) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Corporation must comply; (iii) the effect of changes in accounting policies and practices; (iv) the effect on the Corporation's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; and (v) the effect of changes in interest rates. PART I ------ ITEM 1. BUSINESS - ----------------- WASHINGTON TRUST BANCORP, INC. Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1996 the Corporation had total consolidated assets of $695 million, deposits of $477 million and equity capital of $59 million. THE WASHINGTON TRUST COMPANY The Washington Trust Company was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See "Market Area and Competition" below for further information. 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 - - VISA and Mastercard accounts - Safe deposit boxes - - Merchant credit card services - Trust and investment services Automated teller machines (ATMs) are located at each of the Bank's banking offices. The Bank is a member of the NYCE, Plus and Cashstream ATM networks. Data processing for most of the Bank's deposit and loan accounts and other applications is conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's Trust and Investment Department provides fiduciary services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency and custodial investment services to individuals and institutions; and as a trustee for employee benefit plans. The market value of total trust assets amounted to $539 million as of December 31, 1996. The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, office supplies, merchant processing, deposit taxes and assessments, advertising and promotion and other administrative expenses. The following is a summary of the relative amounts of income producing functions as a percentage of gross operating income during the past five years:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Interest and fees on: Residential real estate loans 27% 29% 31% 33% 37% Commercial and other loans 30 33 32 30 31 Consumer loans 10 10 9 8 9 - --------------------------------------- ------------ ------------ ------------ ------------ ------------ Total loan income 67 72 72 71 77 Interest and dividends on securities 18 13 13 13 9 Trust income 7 7 7 7 6 Other noninterest income 8 8 8 9 8 - --------------------------------------- ------------ ------------ ------------ ------------ ------------ Gross operating income 100% 100% 100% 100% 100% - --------------------------------------- ------------ ------------ ------------ ------------ ------------
The percentage of gross income derived from interest and fees on loans was 67% in 1996, down from a five-year high of 77% in 1992, primarily due to a higher level of securities as a percentage of total assets. (See the caption "Securities" included in Management's Analysis of Financial Statements of the Corporation's 1996 Annual Report to Shareholders incorporated herein by reference.) 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 seven banking offices in these Rhode Island counties and opened its first banking office in Connecticut in March 1997. The locations of the banking offices are as follows: Westerly, RI (2 locations) Charlestown, RI Narragansett, RI Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities. The North Kingstown branch facility opened in February 1997 and the Mystic branch was acquired from another bank in March 1997. Additionally, the Bank plans to open two supermarket branches during the second quarter of 1997. 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 29% of total deposits reported by financial institutions for banking offices within its market area as of June 30, 1996. The closest competitor held 24%, and the second closest competitor held 18% of total deposits in the market area. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department which is responsible for the review of existing products and services and the development of new products and services. EMPLOYEES As of December 31, 1996 the Corporation employed approximately 274 full-time and 39 part-time employees, an increase of 7.1% over 1995. Additional staffing was added primarily to accommodate the banking offices scheduled to open in early 1997. Management believes that its employee relations are good. SUPERVISION AND REGULATION General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. 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 which affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined. The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports as the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, 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 or certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit. The Bank is subject to the supervision of, and examination by, the FDIC and the State of Rhode Island. The Bank is also subject to various Rhode Island 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, 1996, 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 included in its 1996 Annual Report to Shareholders incorporated herein by reference 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, who present the highest risk, will pay the highest rates. FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those which generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions. 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. Also, effective June 1, 1997, the Interstate Act will authorize the interstate merger of banks, subject to the right of individual states to "opt in" or "opt out" of this authority prior to such date. 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. 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 included in its 1996 Annual Report to Shareholders incorporated herein by reference 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 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, 1996, net risk-weighted assets amounted to $401.3 million, the Tier 1 capital ratio was 13.67% and the total risk-based capital ratio was 14.93%. The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other banking organizations are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given banking organization. The Corporation's Tier 1 leverage ratio was 8.62% as of December 31, 1996. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. GUIDE 3 STATISTICAL DISCLOSURES - ------------------------------- The following tables contain additional consolidated statistical data about the Corporation and the Bank. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL - ------------------------------------------------------------------------------- A. Average balance sheets are presented on page 21 of the Corporation's 1996 Annual Report to Shareholders under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)", and are incorporated herein by reference. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages. B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented on page 21 of the Corporation's 1996 Annual Report to Shareholders under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)", and is incorporated herein by reference. Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis by assuming a 34% marginal federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Item III.C.1. C. An analysis of rate/volume changes in interest income and interest expense is presented on page 22 of the Corporation's 1996 Annual Report to Shareholders under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)", and is incorporated herein by reference. The net change attributable to both volume and rate has been allocated proportionately. II. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------------ A. The carrying amounts of securities held to maturity as of the dates indicated are presented in the following table:
December 31, 1996 1995 1994 ---------------------------------------- -------------------- --------------------- -------------------- U.S. Treasury obligations and obligations of U.S. government- sponsored agencies $ -- $ -- $20,413,017 Mortgage-backed securities 12,343,916 13,947,011 21,696,508 States and political subdivisions 15,581,939 14,925,980 10,387,091 ---------------------------------------- --------------------- --------------------- -------------------- $27,925,855 $28,872,991 $52,496,616 ---------------------------------------- --------------------- --------------------- --------------------
The carrying amounts of securities available for sale as of the dates indicated are summarized in the table below. Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Statement requires that securities available for sale be reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Therefore, the carrying value of securities available for sale presented below is equal to market value.
December 31, 1996 1995 1994 ------------------------------------------- -------------------- -------------------- -------------------- U.S. Treasury obligations and obligations of U.S. government- sponsored agencies $ 49,102,377 $37,877,528 $24,533,220 Mortgage-backed securities 128,503,618 30,026,897 -- Corporate stocks 20,711,458 17,647,910 9,076,095 ------------------------------------------- -------------------- -------------------- -------------------- $198,317,453 $85,552,335 $33,609,315 ------------------------------------------- -------------------- -------------------- --------------------
During the fourth quarter of 1995, the Corporation transferred a pool of debt securities with a book value of $37.1 million, consisting primarily of U.S. Treasury and government agency obligations and mortgage-backed securities, from the held-to-maturity category to the available-for-sale category. The transfer was made in response to a special report issued by the Financial Accounting Standards Board which allowed enterprises a one-time opportunity to reassess the appropriateness of their securities classifications under SFAS No. 115. B. Maturities of debt securities as of December 31, 1996 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 were not computed on a tax equivalent basis.
Mortgage-backed States and Political Securities Subdivisions Total Debt Securities ------------------------ ------------------------ -------------------------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Fair SECURITIES HELD TO Cost Yield Cost Yield Cost Yield Value MATURITY ------------------------ ------------------------ ----------------------- ------------- Due in 1 year or less $1,796,251 7.66% $1,485,770 4.34% $3,282,021 6.16% $3,315,110 After 1 year but within 5,425,184 7.66 13,279,707 4.25 18,704,891 5.23 18,786,147 5 years After 5 years but within 3,866,478 7.64 517,088 4.27 4,383,566 7.24 4,439,374 10 years After 10 years 1,256,003 7.87 299,374 3.82 1,555,377 7.09 1,573,796 ------------------------ ------------------------ ----------------------- ------------- Totals $12,343,916 7.67% $15,581,939 4.25% $27,925,855 5.76% $28,114,427 ------------------------ ------------------------ ----------------------- -------------
U.S. Treasury obligations and obligations of U.S. Mortgage-backed government-sponsored Securities Total Debt Securities agencies ------------------------ ------------------------- --------------------------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Fair SECURITIES AVAILABLE FOR Cost Yield Cost Yield Cost Yield Value SALE ------------------------ ------------------------- ------------------------- ------------- Due in 1 year or less $7,129,827 5.69% $18,988,404 6.75% $26,118,231 6.46% $26,026,634 After 1 year but within 34,223,151 6.42 48,900,560 6.75 83,123,711 6.62 82,868,699 5 years After 5 years but within 6,868,943 6.79 25,459,500 6.79 32,328,443 6.79 32,301,117 10 years After 10 years 491,675 13.00 35,883,118 6.66 36,374,793 6.75 36,409,545 ------------------------ ------------------------- ------------------------ -------------- Totals $48,713,596 6.43% $129,231,582 6.73% $177,945,178 6.65% $177,605,995 ------------------------ ------------------------- ------------------------- -------------
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:
December 31, 1996 1995 1994 1993 1992 ---------------------------------- ----------------- ---------------- ---------------- ---------------- ---------------- Residential real estate: Mortgages $171,422,970 $167,510,929 $170,366,731 $153,506,179 $142,322,653 Homeowner construction 4,631,288 3,071,177 6,933,793 6,120,171 5,124,603 ----------------- ---------------- ---------------- ---------------- ---------------- Total residential real estate 176,054,258 170,582,106 177,300,524 159,626,350 147,447,256 ----------------- ---------------- ---------------- ---------------- ---------------- Commercial: Mortgages: 66,223,610 58,837,483 56,014,628 49,194,243 41,952,619 Construction and development 4,173,630 5,968,404 12,089,966 10,719,271 11,923,274 Other 109,485,405 96,830,889 103,334,837 103,721,694 100,013,004 ----------------- ---------------- ---------------- ---------------- ---------------- Total commercial 179,882,645 161,636,776 171,439,431 163,635,208 153,888,897 ----------------- ---------------- ---------------- ---------------- ---------------- Consumer 63,056,511 54,240,010 45,186,245 34,100,374 32,645,643 ----------------- ---------------- ---------------- ---------------- ---------------- $418,993,414 $386,458,892 $393,926,200 $357,361,932 $333,981,796 ----------------- ---------------- ---------------- ---------------- ----------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 1996 follows:
One Year One to five After five Matures in: or Less Years Years Total ---------------------------------------- ----------------- ---------------- ----------------- --------------- Construction and development (*) $2,249,583 $759,049 $5,796,286 $8,804,918 Commercial - other 41,675,601 44,318,590 23,491,214 109,485,405 --------------------------------------- ----------------- ---------------- ----------------- ---------------- $43,925,184 $45,077,639 $29,287,500 $118,290,323 --------------------------------------- ----------------- ---------------- ----------------- ---------------- (*) Includes homeowner construction and commercial construction and development. Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction.
Sensitivity to changes in interest rates for all such loans due after one year is as follows:
Floating or Predetermined Adjustable Rates Rates Totals ------------------- ------------------------------ ----------- Principal due after one year $18,143,168 $56,221,971 $74,365,139 ------------------ ------------------------- ------------------
C. Risk Elements Reference is made to the caption "Asset Quality" included in Management's Analysis of Financial Statements on pages 25-28 of the Corporation's 1996 Annual Report to Shareholders incorporated herein by reference. 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, 1996. 1. Nonaccrual, Past Due and Restructured Loans. a) Nonaccrual loans as of the dates indicated were as follows:
December 31, 1996 1995 1994 1993 1992 ----------------- ------------------ ----------------- ------------------ ----------------- ----------------- $7,542,400 $8,573,656 $10,911,999 $16,221,963 $21,306,840 ------------------ ----------------- ------------------ ----------------- -----------------
Loans, with the exception of credit card loans and certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. 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, 1996, 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 $843,000. Interest recognized on these loans amounted to approximately $495,000. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 1996. b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
December 31, 1996 1995 1994 1993 1992 ----------------- ------------------ ----------------- ------------------ ----------------- ----------------- $1,446,967 $256,276 $24,124 $22,455 $42,648 ------------------ ----------------- ------------------ ----------------- -----------------
c) Restructured accruing loans for the dates indicated were as follows:
December 31, 1996 1995 1994 1993 1992 ----------------- ------------------ ----------------- ------------------ ----------------- ----------------- $ -- $ -- $364,824 $ -- $1,476,000 ------------------ ----------------- ------------------ ----------------- -----------------
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. No loans were restructured during 1996. 2. Potential Problem Loans. Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 1996, 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, 1996, potential problem loans amounted to approximately $5.2 million. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection. Depending on future events, the potential problem loans referred to above, and others not currently identified, could be classified as nonperforming in the future. 3. Foreign Outstandings. None 4. Loan Concentrations. The Corporation has no concentration of loans which exceed 10% of its total loans except as disclosed by types of loan in Section III.A. D. Other Interest-Bearing Assets: None 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. Analysis of the Allowance for Loan Losses
December 31, 1996 1995 1994 1993 1992 ------------------------------------- -------------- -------------- -------------- --------------- --------------- Balance at beginning of year $7,784,516 $9,327,942 $9,089,775 $7,872,351 $6,474,272 Charge-offs (domestic): Residential: Mortgages 147,107 301,182 158,526 203,472 260,848 Homeowner construction -- -- -- -- -- Commercial: Mortgages 320,834 795,858 405,624 927,720 24,154 Construction and development 15,000 526,224 9,240 -- 114,315 Other 414,678 1,451,066 512,020 374,424 2,522,916 Consumer 375,529 341,737 250,840 375,575 494,756 -------------- -------------- -------------- --------------- --------------- Total charge-offs 1,273,148 3,416,067 1,336,260 1,884,191 3,416,989 -------------- -------------- -------------- --------------- --------------- Recoveries (domestic): Residential: Mortgages 10,571 114,083 21,329 2,278 -- Homeowner construction -- -- -- -- -- Commercial: Mortgages 31,198 13,384 21,830 84,351 200 Construction and development -- -- 10,948 20,756 29,424 Other 628,095 217,078 188,722 174,976 192,844 Consumer 113,906 128,096 74,686 44,847 62,524 -------------- -------------- -------------- --------------- --------------- Total recoveries 783,770 472,641 317,515 327,208 284,992 -------------- -------------- -------------- --------------- --------------- Net charge-offs 489,378 2,943,426 1,018,745 1,556,983 3,131.997 Additions charged to earnings 1,200,000 1,400,000 1,256,912 2,774,407 4,530,076 -------------- -------------- -------------- --------------- --------------- Balance at end of year $8,495,138 $7,784,516 $9,327,942 $9,089,775 $7,872,351 -------------- -------------- -------------- --------------- --------------- Net charge-offs to average loans .12% .75% .27% .45% .87% -------------- -------------- -------------- --------------- ---------------
B. The following table presents the allocation of the allowance for loan losses.
December 31, 1996 1995 1994 1993 1992 ---------------------------------- ------------ ------------ ------------ ------------ ------------- Residential: Mortgages $1,229,578 1,066,281 1,134,916 1,136,341 1,132,855 % of these loans to all loans 40.9% 43.4% 43.2% 43.0% 42.6% Homeowner construction 33,219 19,412 44,047 33,661 35,222 % of these loans to all loans 1.1% .8% 1.8% 1.7% 1.5% Commercial: Mortgages 1,189,194 1,640,176 1,364,993 1,246,070 1,253,447 % of these loans to all loans 15.8% 15.2% 14.2% 13.8% 12.6% Construction and development 49,015 133,754 275,681 150,110 247,535 % of these loans to all loans 1.0% 1.5% 3.1% 3.0% 3.6% Other 2,447,990 2,245,789 2,870,242 2,890,785 2,899,120 % of these loans to all loans 26.1% 25.1% 26.2% 29.0% 29.9% Consumer 1,084,583 911,069 862,323 561,177 694,390 % of these loans to all loans 15.1% 14.0% 11.5% 9.5% 9.8% Unallocated 2,461,559 1,768,035 2,775,740 3,071,631 1,609,782 ------------ ------------ ------------ ------------ ------------- $8,495,138 7,784,516 9,327,942 9,089,775 7,872,351 100.0% 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:
1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid --------------- ------------ --------------- ------------ --------------- ------------ Demand deposits $62,464,000 -- $55,189,000 -- $49,369,000 -- Savings deposits: Regular 90,829,000 2.70% 92,739,000 2.69% 98,851,000 2.70% NOW 56,732,000 1.30% 55,831,000 1.39% 57,834,000 1.36% Money market 27,004,000 2.24% 30,096,000 2.23% 40,101,000 2.17% --------------- --------------- --------------- Total savings 174,565,000 2.18% 178,666,000 2.21% 196,786,000 2.20% Time deposits 232,007,000 5.38% 224,169,000 5.25% 183,950,000 4.30% --------------- --------------- --------------- Total deposits $469,036,000 $458,024,000 $430,105,000 --------------- --------------- ---------------
B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100,000 or more at December 31, 1996 was as follows:
Over 3 Over 6 3 months through through Over 12 or less 6 months 12 months months Total --------------- ---------------- ----------------- ----------------- ------------------ Time remaining until maturity: $24,057,153 4,022,435 4,974,986 6,726,994 $39,781,568 --------------- --------------- ---------------- ----------------- --------------------
E. Not applicable VI. RETURN ON EQUITY AND ASSETS - --------------------------------
1996 1995 1994 --------------------------------------------------------- ------------- ------------- ------------- Return on average assets 1.44% 1.44% 1.25% Return on average shareholders' equity 14.95% 15.47% 14.11% Dividend payout ratio 36.55% 33.97% 33.02% Average equity to average total assets 9.61% 9.31% 8.84%
VII. SHORT-TERM BORROWINGS - --------------------------- Short-term borrowings consist of securities sold under agreements to repurchase and federal funds purchased. Securities sold under agreements to repurchase generally mature within 90 days. Federal funds purchased generally mature the following day. At December 31, 1996, short-term borrowings consisted solely of securities sold under agreements to repurchase. The balance at December 31, 1996 and weighted average rate paid on these short-term borrowings amounted to $14 million and 5.68%, respectively. The following is a summary of amounts relating to short-term borrowings:
Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------ ---------------- ----------------- ----------------- Maximum amount outstanding at any month-end $14,000,000 $ -- $4,908,500 Average amount outstanding $3,260,035 $93,471 $1,160,354 Weighted average yield 5.59% 5.88% 4.22% ---------------- ----------------- -----------------
ITEM 2. PROPERTIES - ------------------- At December 31, 1996 the Corporation operated six facilities including its main office located in Westerly, Rhode Island and five branch banking facilities located in Westerly, Charlestown, Narragansett, Richmond and Block Island, Rhode Island. All sites are owned, except for the Block Island branch facility, which is leased. The main office premises, which contain the corporate offices and a banking facility, consist of a five story building and an adjacent two story building. The buildings, which are connected, contain approximately 50,000 square feet of space, 42,000 square feet of which is occupied by the Corporation. The remaining space is leased to merchant and professional tenants under short-term lease arrangements and could be used for expansion of the Corporation's offices. In 1996, the Corporation built a three story, 15,000 square foot building adjacent to its main office. The Trust and Investment Department occupies two of the three floors, while the third floor is unfinished and available for expansion. The main office location also contains a three level retail parking garage with 80,000 square feet of space. The Charlestown banking office opened in 1988 in a newly constructed facility. The Narragansett banking office began operations in 1989 in a building which had been acquired in 1988 and was completely renovated. A major renovation and expansion of the Richmond banking office was completed in January of 1990. The Richmond site also contains a separate building operated as a restaurant by a restaurant chain under a long-term lease. During 1996, the Corporation constructed a new 5,700 square foot branch office in North Kingstown, Rhode Island. This branch office opened in February 1997. In March 1997, the Corporation acquired a branch in Mystic, Connecticut from another bank. The office consists of a 2,800 square foot facility which is leased. Additionally, the Corporation plans to open two supermarket branches during the second quarter of 1997. These facilities expansion plans, along with existing structures, are adequate to meet the Corporation's facilities needs for the foreseeable future. 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 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 duties, negligence, breach of contract, unjust enrichment and conversion. The suit seeks recovery for losses directly related to the embezzlement of approximately $3 million, as well as consequential damages amounting to approximately $2.7 million. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has meritorious defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its principal shareholder as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit as well as to vigorously pursue its counterclaims. Management and legal counsel are unable to form an opinion regarding the outcome of this matter. 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, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------ The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service with the Corporation. Years of Officers of the Corporation Age service (1) - --------------------------- --- ----------- Joseph J. Kirby Chief Executive Officer 65 34 John C. Warren President and Chief Operating Officer 51 1 David V. Devault, CPA Vice President and Chief Financial Officer 42 10 Louis J. Luzzi Vice President and Treasurer 55 36 Harvey C. Perry II Vice President and Secretary 46 22 (1) Includes years of service with the Bank. Joseph J. Kirby joined the Bank in 1963 as an Investment Officer. He was elected Vice President and Investment Officer in 1965 and Executive Vice President in 1972. He was elected President in 1982 and was named Chief Executive Officer in February, 1996. John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. He served as President and Chief Executive Officer of Sterling Bancshares Corporation from 1990 to 1994 and as Chairman from 1993 to 1994. David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bank in 1990. Prior to joining the Bank he was a Senior Manager with the firm of KPMG Peat Marwick LLP. Louis J. Luzzi joined the Bank in 1960 and was elected Assistant Vice President in 1969. He was elected Vice President in 1979 and Vice President and Treasurer in 1983. Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Bank in 1990. Years of Officers of the Bank Age Service - -------------------- --- ------- Stephen M. Bessette Senior Vice President - Retail Lending 49 0 Vernon F. Bliven Senior Vice President - Human Resources 47 24 Robert G. Cocks, Jr. Senior Vice President - Lending 52 4 Louis W. Gingerella, Jr. Senior Vice President - Credit Administration 44 6 B. Michael Rauh, Jr. Senior Vice President - Retail Banking 37 5 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. He was Executive Vice President at Old Stone Development Corporation from May 1990 to January 1993. Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993. Robert G. Cocks, Jr. joined the Bank in 1992 as Senior Vice President - Lending. Prior to joining the Bank he served as Executive Vice President at Bay Bank South from 1987 to 1991. From 1991 to 1992 he worked as an independent consultant. Louis W. Gingerella, Jr. joined the Bank in 1990 as Vice President - Credit Administration. He was elected Senior Vice President - Credit Administration in 1992. Prior to joining the Bank he held the position of Senior Vice President with Bank of New England since 1988. B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking. Prior to joining the Bank he was Executive Vice President with the advertising agency of Chaffee & Partners since 1989. 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 tier of The Nasdaq Stock 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, 1996 and 1995 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 1995 and for the first and second quarters of 1996 have been restated to reflect a 3-for-2 stock split paid in the form of a stock dividend on October 15, 1996.
1996 QUARTERS 1 2 3 4 - ----------------------------------- ------------ ------------- ------------- ------------- Stock prices: high 20.33 24.33 27.33 34.00 low 18.33 19.50 23.67 26.67 Cash dividend declared .17 .18 .18 .18 1995 QUARTERS 1 2 3 4 - ----------------------------------- ------------ ------------- ------------- ------------- Stock prices: high 15.00 18.33 18.67 20.00 low 12.67 13.67 17.33 17.33 Cash dividend declared .14 .15 .16 .16
The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation has recorded consecutive quarterly dividends for over one hundred years. On March 20, 1997, the Corporation's Board of Directors declared a cash dividend of $.19 per share, an increase of 5.6% over the previous dividend amount. The dividend is payable April 15, 1997 to shareholders of record as of April 3, 1997. 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 included in the 1996 Annual Report to Shareholders which is incorporated herein by reference. At March 17, 1997 there were 1,453 holders of record of the Corporation's common stock. Recent Sales of Unregistered Securities - --------------------------------------- As of October 1, 1996, pursuant to the Corporation's 1996 Directors' Stock Plan, the Corporation made a one-time grant of 9,554 shares of its Common Stock, subject to certain restrictions, to certain of its non-employee directors in consideration of the termination of the Corporation's Outside Director Retainer Continuation Plan. The Corporation issued that number of shares to each such director which was equivalent in value to the accrued benefit actuarially determined for such director with respect to service rendered as a director through September 30, 1996, using a per share price of $22.23. The aggregate value of the restricted shares issued, using this per share price, was $212,385. An additional 1,698 unrestricted shares of Common Stock were issued to certain other non-employee directors; these shares were registered by the Corporation on Form S-8. With regard to the foregoing transaction, the Company relied upon Section 4(2) of the Act, as an exemption from the registration requirements of the Act. No commissions were paid to any underwriter in connection with the securities issued in the foregoing transaction. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Selected consolidated financial data for the five years ended December 31, 1996 appears under the caption "Five Year Summary of Selected Consolidated Financial Data" on page 18 of the Corporation's 1996 Annual Report to Shareholders which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The information required by this Item appears under the caption "Management's Analysis of Financial Statements" on pages 19-30 of the Corporation's 1996 Annual Report to Shareholders which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The financial statements and supplementary data are contained in the Corporation's 1996 Annual Report to Shareholders, filed as Exhibit 13, on the pages indicated in the following table, and are incorporated herein by reference. Page of 1996 Annual Report ----------------- Consolidated Balance Sheets 31 Consolidated Statements of Income 32 Consolidated Statements of Changes in Shareholders' Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 Parent Company Financial Statements 53 Independent Auditors' Report 55 Summary of Unaudited Quarterly Financial Information 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------------------------- None. 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 19, 1997 prepared for the 1997 Annual Meeting of Shareholders and incorporated herein by reference. Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant". Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 19, 1997 prepared for the 1997 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by this Item appears under the caption "Compensation of Directors and Executive Officers Executive Compensation" in the Corporation's Proxy Statement dated March 19, 1997 prepared for the 1997 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 19, 1997 prepared for the 1997 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 19, 1997 prepared for the 1997 Annual Meeting of Shareholders. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) 1. The financial statements of Washington Trust Bancorp, Inc. required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference. 2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. (b) No reports on Form 8-K have been filed during the fourth quarter of the year ended December 31, 1996. (c) Exhibit Index. Page of Exhibit Number this report - -------------------- ------------- 3. (i) Restated articles of incorporation (6) 3. (ii) By-laws of the Corporation (2) 4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (3) * 10.1 Supplemental Pension Benefit and Profit Sharing Plan (1) * 10.2 Short Term Incentive Plan (4) * 10.3 Plan for Deferral of Directors' Fees (1) * 10.4 Amended and Restated 1988 Stock Option Plan (1) * 10.5 Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan (5) 11 Computation of Earnings Per Share 13 1996 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors * Management contract or compensatory plan or arrangement (1) Incorporated herein by reference to Exhibit 10 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, previously filed with the Commission. (2) Incorporated herein by reference to Exhibit 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, previously filed with the Commission. (3) Incorporated herein by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (4) Incorporated herein by reference to Exhibit 10 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, previously filed with the Commission. (5) Incorporated herein by reference to 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. (6) Incorporated herein by reference to Exhibit 3.(i) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, previously filed with the Commission. (d) Financial Statement Schedules. None. 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 20, 1997 By Joseph J. Kirby -------------- --------------- Joseph J. Kirby, Chairman, Chief Executive Officer and Director Date March 20, 1997 By David V. Devault --------------- ---------------- David V. Devault, Vice President, Chief Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date March 20, 1997 Gary P. Bennett -------------- -------------------------------- Gary P. Bennett, Director Date March 20, 1997 Steven J. Crandall -------------- -------------------------------- Steven J. Crandall, Director Date March 20, 1997 Richard A. Grills -------------- -------------------------------- Richard A. Grills, Director Date March 20, 1997 Larry J. Hirsch -------------- -------------------------------- Larry J. Hirsch, Director Date March 20, 1997 Katherine W. Hoxsie -------------- -------------------------------- Katherine W. Hoxsie, Director Date -------------- -------------------------------- Mary E. Kennard, Director Date March 20, 1997 James W. McCormick, Jr. -------------- -------------------------------- James W. McCormick, Jr., Director Date March 20, 1997 Brendan P. O'Donnell -------------- -------------------------------- Brendan P. O'Donnell, Director Date March 20, 1997 Victor J. Orsinger II -------------- -------------------------------- Victor J. Orsinger II, Director Date March 20, 1997 Anthony J. Rose, Jr. -------------- -------------------------------- Anthony J. Rose, Jr., Director Date March 20, 1997 James P. Sullivan -------------- -------------------------------- James P. Sullivan, Director Date March 20, 1997 Neil H. Thorp -------------- -------------------------------- Neil H. Thorp, Director Date March 20, 1997 John C. Warren -------------- -------------------------------- John C. Warren, President, Chief Operating Officer and Director EX-11 2 EXHIBIT 11 Washington Trust Bancorp, Inc. Computation of Primary and Fully Diluted Earnings Per Share For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 --------------- --------------- --------------- Primary: Weighted average shares 4,326,904 4,249,454 4,224,741 Common stock equivalents 155,935 115,848 83,799 --------------- --------------- --------------- Primary weighted average shares 4,482,839 4,365,302 4,308,540 --------------- --------------- --------------- Fully diluted: Weighted average shares 4,326,904 4,249,454 4,224,741 Common stock equivalents 181,530 158,521 84,421 --------------- --------------- --------------- Fully diluted weighted average shares 4,508,434 4,407,975 4,309,162 --------------- --------------- --------------- Net income $8,425,338 $7,687,967 $6,264,640 --------------- --------------- --------------- Primary earnings per share $1.88 $1.76 $1.45 --------------- --------------- --------------- Fully diluted earnings per share $1.87 $1.74 $1.45 --------------- --------------- ---------------
EX-13 3 EXHIBIT 13 Washington Trust Bancorp, Inc. 1996 Annual Report to Shareholders (Portions Incorporated by Reference) Five Year Summary of Selected Consolidated Financial Data
1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- Financial Condition: (1) Cash and cash equivalents $18,966,550 $28,650,646 $18,404,910 $21,650,128 $21,817,649 Securities available for sale 198,317,453 85,552,335 33,609,315 34,263,743 33,743,289 Securities held to maturity 27,925,855 28,872,991 52,496,616 52,497,832 39,106,642 Net loans 410,498,276 378,674,376 384,598,258 348,272,157 326,109,445 Other real estate owned, net 1,089,943 1,705,147 2,007,212 3,412,421 5,242,054 Other 38,147,681 24,203,809 24,563,652 27,232,543 31,679,861 - ---------------------------------------------------------------------------------------------------------------------- Total assets $694,945,758 $547,659,304 $515,679,963 $487,328,824 $457,698,940 ====================================================================================================================== Deposits $476,561,281 $467,854,012 $440,731,142 $423,374,620 $404,660,005 Federal Home Loan Bank advances 138,493,288 20,951,266 23,522,343 20,500,000 14,000,000 Other liabilities 20,464,533 5,917,528 5,643,494 4,991,279 4,089,140 Shareholders' equity 59,426,656 52,936,498 45,782,984 38,462,925 34,949,795 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $694,945,758 $547,659,304 $515,679,963 $487,328,824 $457,698,940 ====================================================================================================================== Operating Results: Interest income $45,805,964 $42,286,180 $36,661,688 $34,927,863 $35,868,747 Interest expense 19,666,541 17,015,264 13,588,582 14,178,779 16,800,218 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 26,139,423 25,270,916 23,073,106 20,749,084 19,068,529 Provision for loan losses 1,200,000 1,400,000 1,256,912 2,774,407 4,530,076 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 24,939,423 23,870,916 21,816,194 17,974,677 14,538,453 Noninterest income 7,952,269 6,707,020 6,237,576 6,083,500 5,577,685 Net gains on sales of securities 367,518 495,817 684,590 345,674 196,606 - ---------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 33,259,210 31,073,753 28,738,360 24,403,851 20,312,744 Noninterest expense 20,535,872 19,354,786 19,447,720 17,672,320 15,558,388 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting 12,723,338 11,718,967 9,290,640 6,731,531 4,754,356 Income tax expense 4,298,000 4,031,000 3,026,000 2,255,000 1,604,000 - ---------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 8,425,338 7,687,967 6,264,640 4,476,531 3,150,356 Cumulative effect of change in accounting for income taxes -- -- -- 305,000 -- - ---------------------------------------------------------------------------------------------------------------------- Net income $8,425,338 $7,687,967 $6,264,640 $4,781,531 $3,150,356 ====================================================================================================================== Per share information: (2) Earnings per share (3) $1.87 $1.74 $1.45 $1.13 $ .76 Cash dividends declared $ .71 $ .61 $ .49 $ .39 $ .35 Book value (1) $13.62 $12.37 $10.81 $9.14 $8.39 Market value (1) (4) $31.00 $19.33 $14.50 $11.00 $7.78 Ratios: Return on average assets 1.44% 1.44% 1.25% 1.01% .70% Return on average shareholders' equity 14.95% 15.47% 14.11% 12.92% 9.15% Dividend payout ratio 36.55% 33.97% 33.02% 34.30% 46.85% Total equity to total assets 8.55% 9.67% 8.88% 7.89% 7.64% Net charge-offs to average loans .12% .75% .27% .45% .87% (1) At December 31 (2) Adjusted to reflect the 3-for-2 stock splits paid in the form of a stock dividend on October 15, 1996 and August 31, 1994 (3) Fully diluted, including $.07 per share accounting change in 1993 (4) Closing stock price
MANAGEMENT'S ANALYSIS OF FINANCIAL STATEMENTS Washington Trust Bancorp, Inc. and Subsidiary FINANCIAL OVERVIEW Washington Trust Bancorp, Inc. and its subsidiary ("Washington Trust" or the "Corporation") recorded net income of $8.4 million for 1996, an increase of 9.6% over the $7.7 million of net income recorded in 1995. Fully diluted earnings per share amounted to $1.87 for 1996, up 7.5% from $1.74 per share earned on net income in 1995. Washington Trust's rates of return on average assets and average equity ("ROA" and "ROE") for 1996 were 1.44% and 14.95%, respectively. ROA and ROE for the year ended December 31, 1995 amounted to 1.44% and 15.47%, respectively. Total assets rose by 26.9% during 1996 to $694.9 million at year end, up from $547.7 million at December 31, 1995. Average assets amounted to $586.0 million in 1996, up by 9.8% from the 1995 amount of $533.9 million. The growth in total assets was primarily attributable to an investment program implemented during 1996 which resulted in an increase in securities available for sale to $198.3 million, up from $85.6 million at the end of 1995. The objective of the program was to increase net interest income and improve the return on equity while limiting the impact on the Bank's interest rate risk profile. Approximately $100 million of adjustable rate mortgage-backed securities were purchased under this program and funded with Federal Home Loan Bank (FHLB) advances. Net loans amounted to $410.5 million at December 31, 1996, up 8.4% from the prior year balance of $378.7 million. Total deposits amounted to $476.6 million and $467.9 million at December 31, 1996 and 1995, respectively. Total shareholders' equity amounted to $59.4 million at December 31, 1996, up 12.3% from the December 31, 1995 amount of $52.9 million. Included in shareholders' equity at December 31, 1996 and 1995 was $4.5 million and $4.4 million, respectively, attributable to unrealized gains on securities available for sale, net of tax. Book value per share as of December 31, 1996 and 1995 amounted to $13.62 and $12.37, respectively. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $8.6 million or 1.2% of total assets at December 31, 1996, down from $10.3 million, or 1.9%, at December 31, 1995. The Corporation's loan loss provision was $1.2 million and $1.4 million in 1996 and 1995, respectively. For the year ended December 31, 1996, net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) amounted to $26.1 million, up by 3.4% over the 1995 amount. The net interest margin for the year ended December 31, 1996 amounted to 4.99%, compared to 5.24% in 1995. Other noninterest income (noninterest income excluding net gains on sales of securities and net gain and losses on loan sales) amounted to $7.7 million for the year ended December 31, 1996, up 13.0% from $6.8 million in 1995. Total noninterest expense amounted to $20.5 million in 1996, up by 6.1% from the 1995 amount of $19.4 million. Increases in salaries and employee benefits and other noninterest expenses were partially offset by declines in deposit taxes and assessments and foreclosed property costs. 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 investments to be comparable to taxable loans and investments. FTE net interest income increased by $1.2 million or 4.6% from 1995 to 1996. Growth in interest-earning assets was responsible for the improvement in net interest income. The interest rate spread declined by 31 basis points to 4.33% in 1996, while the net interest margin (FTE net interest income as a percentage of average interest-earning assets) fell from 5.24% in 1995 to 4.99% in 1996. Earning asset yields fell by 8 basis points during 1996, while the cost of interest-bearing liabilities increased by 23 basis points, thereby narrowing the net interest spread. Growth in the securities portfolios and increases in interest-bearing sources of funding relative to noninterest-bearing sources of funding (i.e., demand deposits and shareholders' equity), as well as interest expense associated with increases in FHLB advances, were primarily responsible for the decrease in the net interest margin. FTE interest income totaled $47.0 million in 1996, up from $43.1 million in 1995. The yield on interest-earning assets was 8.57% in 1996, down from 8.65% in 1995. Average interest-earning assets increased by $49.7 million or 10.0% in 1996, most of which was attributable to increases in securities. Total average securities increased by $43.2 million or 40.7% in 1996. The growth reflects purchases of securities which were funded with Federal Home Loan Bank advances in order to enhance net interest income and returns on equity. The majority of growth in net interest income in 1996 was attributable to this investment program. The FTE rate of return on securities was 7.23% in 1996, up from 6.91% in 1995. The increase in yield reflects the general rise in interest rates during 1996, which resulted in higher-yield securities added to the portfolio relative to the prior year. The FTE rate of return on total loans was 9.08% in 1996, down slightly from 9.12% in 1995. Yields on residential real estate loans and consumer loans fell slightly, but were partially offset by increased yields on commercial loans. In addition, interest earned on commercial loans was increased by 11 basis points due to the effect of interest rate floor contracts. (See Note 7 to the consolidated financial statements for additional information on floor contracts.) Since interest rates generally rose during 1996 (with the important exception of the prime rate), the decline in loan yields is attributable more to increasingly competitive loan pricing than fluctuations in interest rates. Average loans amounted to $398.7 million in 1996, up from $392.2 million in 1995. Average consumer loans rose 16.9% in 1996, while average residential real estate loans and average commercial loans were down slightly from the prior year. Average interest-bearing liabilities increased by $40.0 million during 1996. Interest expense grew by $2.7 million or 15.6% from 1995. The increase was mainly due to increased Federal Home Loan Bank advances outstanding as well as higher rates paid on time deposits. The rate paid on interest-bearing liabilities rose from 4.01% in 1995 to 4.24% in 1996 as a result of the change in deposit mix and increases in time deposit rates. Average savings deposits declined by 2.3% from 1995 and fell 3 basis points in the rate paid, while average time deposits grew 3.5% in 1996 with an increase of 13 basis points in the rate paid. These factors offset the benefit of an increase in average demand deposits, an interest-free source of funding. Average demand deposits increased by $7.3 million or 13.2% from 1995. Average Federal Home Loan Bank advances increased by $53.0 million or 111.6% from 1995. The advances were used primarily to match fund the purchase of securities. The average rate paid on Federal Home Loan Bank advances for 1996 was 5.95%, a decrease of 24 basis points from the prior year. AVERAGE BALANCES/NET INTEREST MARGIN (FULLY TAXABLE EQUIVALENT BASIS) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis by assuming a 34% federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income), are included in amounts presented for loans.
Years ended 1996 1995 1994 December 31, - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Average Yield/ Average Yield/ Average Yield/ (Dollars in Balance Interest Rate Balance Interest Rate Balance Interest Rate thousands) - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- ASSETS: Residential real $174,964 14,391 8.23% $175,248 14,589 8.32% $170,619 13,473 7.90% estate loans Commercial and 166,566 16,271 9.77 168,060 16,286 9.69 166,670 13,963 8.38 other loans (1) Consumer loans 57,188 5,535 9.68 48,922 4,916 10.05 38,492 3,768 9.79 - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Total loans 398,718 36,197 9.08 392,230 35,791 9.12 375,781 31,204 8.30 Federal funds sold and securities purchased under agreements to resell 3,927 209 5.32 14,770 855 5.79 6,531 256 3.92 Taxable debt 111,553 7,661 6.87 69,168 4,540 6.56 69,041 4,181 6.06 securities (1) Nontaxable debt 15,794 1,033 6.54 11,148 743 6.67 8,812 562 6.38 securities (1) Corporate stocks (1) 18,075 1,889 10.45 11,046 1,201 10.87 7,905 949 12.00 - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Total 548,067 46,989 8.57% 498,362 43,130 8.65% 468,070 37,152 7.94% interest-earning assets - ------------------- ----------- ---------- ------------ ---------- ---------- ------------ ----------- --------- ---------- Cash and due from 15,627 13,866 14,032 banks Allowance for (8,291) (8,740) (9,249) loan losses Premises and 15,850 14,784 14,524 equipment, net Other 14,759 15,641 14,904 - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Total assets $586,012 $533,913 $502,281 - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Savings deposits $174,565 3,797 2.18% $178,666 3,946 2.21% $196,786 4,335 2.20% Time deposits 232,007 12,478 5.38 224,169 11,770 5.25 183,950 7,917 4.30 Federal Home Loan 53,604 3,188 5.95 20,603 1,274 6.19 22,268 1,279 5.74 Bank advances Other 3,650 203 5.56 420 25 5.91 1,439 58 4.04 - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Total 463,826 19,666 4.24% 423,858 17,015 4.01% 404,443 13,589 3.36% interest-bearing liabilities - ------------------- ----------- ---------- ------------ ---------- ---------- ------------ ----------- --------- ---------- Demand deposits 62,464 55,189 49,369 Other liabilities 3,381 5,172 4,081 Shareholders' 56,341 49,694 44,388 equity - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Total liabilities and shareholders' $586,012 $533,913 $502,281 equity - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Net interest $27,323 $26,115 $23,563 income - ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- -------- Interest rate 4.33% 4.64% 4.58% spread Net interest 4.99% 5.24% 5.03% margin (1) Interest amounts are presented on a fully taxable equivalent basis (see page 22 for additional information).
Interest income amounts presented in the table on page 21 include the following adjustments for taxable equivalency for the years indicated (in thousands):
Years ended December 31, 1996 1995 1994 - ----------------------------------- ------------- ---------------- ----------------- Commercial and other loans $91 $87 $88 Taxable debt securities (1) 254 197 106 Nontaxable debt securities 368 283 93 Corporate stocks 470 277 203 (1) Represents adjustment for U.S. Treasury and government agency obligations which are exempt from state income taxes only.
VOLUME/RATE ANALYSIS - INTEREST INCOME AND EXPENSE (FULLY TAXABLE EQUIVALENT BASIS)
1996/1995 1995/1994 1994/1993 - ------------------- -------- ------------- -------- -------- ------------- -------- ------- -------------- ------- Net Net Net (In thousands) Volume Rate Change Volume Rate Change Volume Rate Change - ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- Interest on: Interest-earning assets: Residential $(24) (174) (198) $372 744 1,116 $1,043 (1,291) (248) real estate loans Commercial and (145) 130 (15) 118 2,205 2,323 657 722 1,379 other loans Consumer loans 806 (187) 619 1,046 102 1,148 615 (202) 413 Federal funds sold and securities purchased under agreements to (581) (65) (646) 434 165 599 (165) 99 (66) resell Taxable debt 2,913 208 3,121 28 331 359 493 (172) 321 securities Nontaxable 304 (14) 290 155 26 181 139 (16) 123 debt securities Corporate 1,009 (321) 688 348 (96) 252 (666) 393 (273) stocks - ------------------- ---------- ---------- --------- ---------- ---------- --------- ---------- -------- ----------- Total 4,282 (423) 3,859 2,501 3,477 5,978 2,116 (467) 1,649 interest-earning assets - ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- Interest-bearing liabilities: Savings deposits (90) (59) (149) (400) 11 (389) (29) (600) (629) Time deposits 417 291 708 1,921 1,932 3,853 350 (545) (195) Federal Home Loan Bank 1,965 (51) 1,914 (99) 95 (4) 211 (25) 186 advances Other 180 (2) 178 (56) 22 (34) 49 (1) 48 - ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- 4.01% Total 2,472 179 2,651 1,366 2,060 3,426 581 (1,171) (590) interest-bearing liabilities - ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------- Net interest $1,810 (602) 1,208 $1,135 1,417 2,552 $1,535 704 2,239 income - ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
NONINTEREST INCOME Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 1996, noninterest income, excluding net gains on sales of securities, accounted for 14.8% of gross revenue. Washington Trust generates recurring noninterest income by charging for trust-related services such as management of customer investment portfolios, trusts and estates, and by assessing fees for servicing deposit accounts, servicing residential mortgages sold in the secondary market, and processing merchant bankcard activity. Income from trust-related services continues to be the largest component of noninterest income. Trust income represented 45% of noninterest income and amounted to $3.8 million in 1996, up by 15.4% from the $3.3 million reported in 1995. This increase in trust income reflects a change in the fee structure, as well as a 15.3% increase in assets under management, which were $538.6 million at December 31, 1996. Service charges on deposit accounts rose 11.1% to $2.2 million in 1996. 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. Net gains on loan sales totaled $220,259 for the year ended December 31, 1996, up from net losses of $135,851 reported during 1995. The 1996 gains on loan sales include the capitalization of mortgage servicing rights of $153,600 which resulted from the adoption of SFAS No. 122. (See Note 4 to the consolidated financial statements for additional information regarding SFAS No. 122.) The 1995 net losses on loan sales include a loss of approximately $200,000 from the sale of a pool of loans with a book value of approximately $3.3 million, most of which were nonperforming. The Corporation retains servicing rights on all residential mortgage loans sold. Mortgage servicing fees amounted to $345,000 for the year ended December 31, 1996, down slightly from the prior year amount. Servicing income as a percentage of average loans serviced was 36 basis points in 1996, down from 38 basis points in the prior year due to the amortization of mortgage servicing rights. The balance of serviced loans at December 31, 1996 amounted to $101.3 million, compared to $95.1 million at December 31, 1995.
% Change ---------------------------------- (Dollars in thousands) 1996 1995 1994 1996 vs. 1995 1995 vs. 1994 - ------------------------------------------ ------------ ----------- ----------- ----------------- ---------------- Trust income $3,757 $3,255 $3,284 15.4% (0.9)% Service charges on deposit accounts 2,168 1,951 1,611 11.1 21.1 Merchant processing fees 817 730 622 11.8 17.4 Net gains on sales of securities 368 496 685 (25.9) (27.6) Net gains (losses) on loan sales 220 (136) (16) 262.1 (749.2) Fees, service charges and other 645 557 394 16.1 40.9 Mortgage servicing fees 345 350 342 (1.5) 2.3 - ------------------------------------------ ------------ ----------- ----------- ------------------ --------------- Total noninterest income $8,320 $7,203 $6,922 15.5% 4.1% - ------------------------------------------ ------------ ----------- ----------- ------------------- ----------------
NONINTEREST EXPENSE Total noninterest expense rose 6.1% to $20.5 million in 1996. Salaries and employee benefits accounted for the majority of the increase, rising by 9.3% due to increased staffing levels, normal salary adjustments and higher profit sharing and incentive plan costs. Deposit taxes and assessments amounted to $274,000 in 1996, down by 64.4% from the 1995 amount of $770,000. During the third quarter of 1995, the FDIC reduced rates paid by banks for deposit insurance premiums retroactive to June 1, 1995. This reduction lowered the Corporation's 1996 and 1995 expense to $2,000 and $514,000, respectively. Also included in this expense category is a state tax on deposits which amounted to $272,000 and $256,000 in 1996 and 1995, respectively. The state tax rate on deposits is scheduled to be reduced by 50% in 1997 and this tax is scheduled to be eliminated in 1998. Foreclosed property costs totaled $147,000 in 1996, down from $364,000 in 1995. The decrease of 59.5% is primarily due to a decline in the number of properties owned and increased gains realized upon the sale of foreclosed properties. The Corporation's efficiency ratio is defined as the ratio of noninterest expense, excluding nonrecurring expenses, as a percentage of fully taxable equivalent net interest income and noninterest income excluding securities transactions, loan sales and nonrecurring items. In 1996, the efficiency ratio amounted to 58.6%, down slightly from the comparable 1995 amount of 58.8%.
% Change ---------------------------------- (Dollars in thousands) 1996 1995 1994 1996 vs. 1995 1995 vs. 1994 - ------------------------------------------ ------------ ----------- ----------- ----------------- ---------------- Salaries $9,241 $8,518 $8,343 8.5% 2.1% Employee benefits 1,930 1,705 1,587 13.2 7.4 Depreciation - occupancy 553 540 539 2.3 .2 Other occupancy costs 748 682 667 9.7 2.2 Depreciation - equipment 902 791 774 14.0 2.2 Other equipment costs 635 501 414 26.8 20.8 Deposit taxes and assessments 274 770 1,279 (64.4) (39.8) Merchant processing costs 637 529 430 20.5 23.0 Foreclosed property costs, net 147 364 (16) (59.5) -- Office supplies 534 462 606 15.7 (23.8) Advertising and promotion 611 538 505 13.5 6.5 Credit and collection 393 438 513 (10.2) (14.6) Postage 430 405 363 6.3 11.6 Correspondent bank service charges 349 315 321 10.6 (1.7) Charitable contributions 192 120 700 60.0 (82.9) Other 2,960 2,677 2,423 10.5 10.5 - ------------------------------------------ ------------ ----------- ----------- ----------------- ---------------- Total noninterest expense $20,536 $19,355 $19,448 6.1% (0.5)% - ------------------------------------------ ------------ ----------- ----------- ----------------- ----------------
INCOME TAXES Income tax expense amounted to $4.3 million and $4.0 million in 1996 and 1995, respectively. The Corporation's effective tax rate was 33.8% in 1996, down from the 1995 rate of 34.4%. These rates differed from the federal rate of 34.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the expense resulting from state income taxes. The Corporation had a net deferred tax liability amounting to $258,000 and $19,000 at December 31, 1996 and 1995, respectively. A significant portion of the Corporation's gross deferred tax asset is expected to be realized for tax purposes within a five year period from future taxable income and the reversal of existing deferred tax liabilities. (See Note 13 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 debt securities available for sale at December 31, 1996 amounted to $177.9 million, an increase of $110.6 million over the 1995 amount. This increase resulted from an investment program which was implemented in the second quarter of 1996. The objective of the program is to increase net interest income and improve returns on equity, while incurring limited interest rate risk. Approximately $100 million of adjustable rate mortgage-backed securities were purchased under this program and funded with Federal Home Loan Bank advances with similar interest rate repricing characteristics. Additional purchases of securities under the investment program are planned for 1997. At December 31, 1996, the net unrealized gains on securities available for sale amounted to $7.5 million, an increase of $204,000 over the 1995 year-end amount. The unrealized gains on corporate stocks increased by $1.1 million as a result of the continuing improvement in general equity market conditions. This increase was partially offset by a decline in the market value of U.S. Treasury obligations and mortgage-backed securities of $142,000 and $730,000, respectively, which reflects the rise in medium-term and long-term Treasury rates that occurred during 1996. (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 decreased by $947,000, to $27.9 million at December 31, 1996. This reduction was primarily due to principal repayments on mortgage-backed securities. The net unrealized gain on securities held to maturity amounted to $189,000 and $560,000 at December 31, 1996 and 1995, respectively, representing a reduction of $371,000 for the year. This decline was attributable to the rise in medium-term and long-term Treasury rates that has occurred since December 31, 1995. Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock which is based on the level of its FHLB advances. As a result of the increase in FHLB advances during 1996, the Corporation increased its investment in FHLB stock from $3.0 million at December 31, 1995 to $11.7 million at December 31, 1996. Loans Total loans amounted to $419.0 million at December 31, 1996, up $32.5 million, or 8.4%, from the December 31, 1995 amount of $386.5 million. All categories of loans, except for commercial construction and development, exhibited increases over prior year levels. Total residential real estate loans increased by $5.5 million, or 3.2%, in 1996. This increase is primarily attributable to a decision by the Corporation to retain 15-year fixed rate mortgages in its portfolio of loans. The Corporation continues to sell substantially all 30-year fixed rate residential mortgage originations to the secondary market. Fixed rate mortgages originated for sale amounted to $18.4 million in 1996, up from $16.2 million in 1995. The Corporation has retained servicing rights on all residential mortgage loans sold. The balance of serviced loans at December 31, 1996 and 1995 amounted to $101.3 million and $95.1 million, respectively. (See Note 4 to the consolidated financial statements for additional information on mortgage servicing activities.) Total commercial loans increased by $18.2 million, or 11.3%, in 1996. During 1996, the Corporation added additional lending staff and expanded its market area into contiguous communities in anticipation of opening full service branches in these communities. This expanded lending effort contributed to the increase in commercial loans. In addition, overall demand for commercial loans has improved after being relatively soft during 1995. The strong growth in consumer loans experienced during 1995 has continued in 1996. Consumer loans were up by $8.8 million, or 16.3%, in 1996, with the largest increase occurring in the home equity loan portfolio. Special promotional programs and efforts to maintain the competitiveness of products offered contributed to the increase in home equity loans. The Corporation has continued its efforts to establish and strengthen relationships with auto and other dealers to promote growth of indirect consumer loans. At December 31, 1996, credit card loans amounted to $4.7 million, or 1.1% of total loans, compared to $3.9 million, or 1.0% of total loans, at December 31, 1995. Deposits Total deposits at December 31, 1996 amounted to $476.6 million, up $8.7 million from the prior year balance of $467.9 million. In response to higher interest rates paid on time deposits in 1996, Washington Trust experienced a shift in deposit mix from the savings category into time deposits. Time deposits rose by 4.7% to $241.4 million during 1996, while savings deposits (regular savings, NOW and money market accounts) declined by $7.7 million or 4.3%. Growth in demand deposits, an interest-free source of funds, continued in 1996. Total demand deposits rose by 9.3% and 11.4% during 1996 and 1995, respectively. Borrowings Washington Trust utilizes 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 under the investment program implemented in the second quarter of 1996. (See discussion under the caption Securities.) Total advances amounted to $138.5 million at December 31, 1996, up from $21.0 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 1.2% of total assets at December 31, 1996, compared to 1.9% of total assets at December 31, 1995. Nonaccrual loans as a percentage of total loans fell from 2.2% at the end of 1995 to 1.8% at December 31, 1996. Approximately $4.4 million, or 58.9% of total nonaccrual loans, were less than 90 days past due at December 31, 1996. In 1996, loans placed on nonaccrual status were more than offset by sales of foreclosed properties, repayments and charge-offs of nonaccrual loans and return of nonaccrual loans to accruing status. The following table presents nonperforming assets and related ratios (dollars in thousands):
December 31, 1996 1995 - ------------------------------------------------------------ ------------------ ------------------- Nonaccrual loans: Residential real estate $2,067 $2,280 Commercial and other: Mortgages 2,133 2,798 Construction and development 80 280 Other 2,881 2,779 Consumer 381 437 - ------------------------------------------------------------ ------------------ ------------------- Total nonaccrual loans 7,542 8,574 - ------------------------------------------------------------ ------------------ ------------------- Other real estate owned, net 1,090 1,705 - ------------------------------------------------------------ ------------------ ------------------- Total nonperforming assets $8,632 $10,279 - ------------------------------------------------------------ ------------------ ------------------- Nonaccrual loans as a percentage of total loans 1.8% 2.2% Nonperforming assets as a percentage of total assets 1.2% 1.9%
Nonaccrual Loans Loans, with the exception of credit card loans and certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more 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. Credit card loans remain on accruing status after becoming 90 days or more past due, but are generally charged off after becoming 180 days past due. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. Included in accruing loans 90 days or more past due at December 31, 1996 are residential mortgages amounting to $1.4 million which are considered well-collateralized and in the process of collection and therefore are deemed to have no loss exposure. In addition, at year-end 1996 there were approximately $54,000 of credit card loans which were 90 days or more past due and still accruing.
December 31, 1996 1995 - ------------------------------------------------------------ ------------------ ------------------- Nonaccrual loans 90 days or more past due $3,099 $4,616 Nonaccrual loans less than 90 days past due 4,443 3,958 - ------------------------------------------------------------ ------------------ ------------------- Total nonaccrual loans $7,542 $8,574 - ------------------------------------------------------------ ------------------ ------------------- Accruing loans 90 days or more past due (not included in nonperforming assets) $1,447 $257 - ------------------------------------------------------------ ------------------ -------------------
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, 1996, are loans amounting to $1.9 million whose terms have been restructured. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is 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 $1.1 million at December 31, 1996, down from the prior year amount of $1.7 million. Sales of foreclosed properties were greater than the rate of foreclosures in 1996. During 1996, sales of foreclosed properties amounted to $1.6 million. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Allowance for Loan Losses Washington Trust assesses the quality of its loans by performing ongoing reviews of its portfolio to determine potential loss exposure and to assess delinquency trends. During this review, management gives consideration to such factors as overall borrower relationship, delinquency trends, credit and collateral quality, prior loss experience, current and expected economic conditions, and other pertinent factors. As a result of this process, charge-offs and other potential problem loans are identified and loan loss allowances are established. The following table reflects the activity in the allowance for loan losses (dollars in thousands):
Years ended December 31, 1996 1995 - ------------------------------------------------------------ ------------------- ------------------- Beginning balance $7,785 $9,328 Net charge-offs: Residential real estate (136) (187) Commercial: Mortgages (290) (782) Construction and development (15) (526) Other 213 (1,234) Consumer (262) (214) - ------------------------------------------------------------ ------------------- ------------------- Net charge-offs (490) (2,943) Provision for loan losses 1,200 1,400 - ------------------------------------------------------------ ------------------- ------------------- Ending balance $8,495 $7,785 - ------------------------------------------------------------ ------------------- ------------------- Allowance for loan losses to nonaccrual loans 112.6% 90.8% Allowance for loan losses to total loans 2.0% 2.0% - ------------------------------------------------------------ ------------------- -------------------
Net charge-offs decreased by $2.5 million in 1996. Included in 1995 net charge-offs is approximately $620,000 in charge-offs associated with the sale of a pool of loans, most of which were nonperforming. In addition, the 1996 net charge-off experience was positively affected by several recoveries from commercial borrowers. The provision for loan losses amounted to $1.2 million in 1996, down from $1.4 million in 1995. The provision amount is determined by management to maintain the allowance at a level which is deemed appropriate. INTEREST RATE SENSITIVITY AND LIQUIDITY The Corporation's Asset/Liability Committee ("ALCO") is responsible for establishing policy guidelines on acceptable exposure to interest rate risk and liquidity. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO establishes and monitors guidelines for proper origination and matching of assets and funding sources, and determines asset/liability origination and pricing strategies to meet its goals. The ALCO meets regularly to review the economic environment and the volume, mix and maturity of assets and liabilities, and implements appropriate changes in strategy that will manage the Corporation's exposure to interest rate risk and liquidity risk. The ALCO manages the Corporation's interest rate risk using both income simulation and gap analysis. Simulation is used as the primary tool for measuring interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect on net interest income over a 24-month period of interest rate shifts of up to 200 basis points over a 12-month period. These simulations take into account repricing, maturity and mortgage prepayment characteristics of individual products which may vary under different interest rate scenarios. The ALCO reviews simulation results to determine whether the downside exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. As of December 31, 1996, net interest income simulation indicated exposure to falling interest rates to a degree that remains within tolerance levels established by the Corporation. While the ALCO consistently reviews simulation assumptions to ensure that they reflect historical experience, it should be noted that income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments may change to a different degree than estimated. During 1996, the Corporation purchased approximately $100 million in securities (primarily adjustable rate mortgage-backed securities which reprice in one year or less) to enhance net interest income and returns on equity. These securities were match funded with approximately $100 million in Federal Home Loan Bank of Boston advances with maturities of up to one year. The decision to match fund these purchases limits the impact on the Bank's interest rate risk profile. The Corporation also uses gap analysis to provide a general overview of the Corporation's interest rate risk profile. At December 31, 1996, the Corporation's cumulative one-year gap was a negative $66.9 million, or 10.1% of earning assets. The table on page 29 details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 1996 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities which mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. The Corporation supplements its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines which designate limits on the notional value of off-balance sheet transactions and require evaluation of risks associated with these transactions, including counterparty credit risk. During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. These contracts were purchased for a premium of $916,000, which is being amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. During 1996, the Corporation recorded income, net of premium amortization, of $180,600 on its floor contracts. (See Note 7 to the consolidated financial statements for additional information regarding the floor contracts.)
3 months 3 to 6 6 months 1 to 5 Over (In thousands) or less months to 1 year years 5 years - ---------------------------------------------- ------------- ------------- ------------- ------------- ------------- Interest-earning assets: Loans $121,466 $44,255 $85,450 $78,655 $89,911 Debt securities 50,523 29,337 55,186 49,097 21,389 Other 1,836 0 0 0 32,394 - ---------------------------------------------- ------------- ------------- ------------- ------------- ------------- Total interest-earning assets 173,825 73,592 140,636 127,752 143,694 Interest-bearing liabilities: Deposits 237,831 37,871 43,851 91,994 0 Securities sold under agreements to repurchase 14,000 0 0 0 0 Federal Home Loan Bank Advances 46,000 26,367 49,000 13,807 3,319 - ---------------------------------------------- ------------- ------------- ------------- ------------- ------------- Total interest-bearing liabilities 297,831 64,238 92,851 105,801 3,319 - ---------------------------------------------- ------------- ------------- ------------- ------------- ------------- Interest sensitivity gap per period $(124,006) $9,354 $47,785 $21,951 $140,375 - ---------------------------------------------- -------------- ------------ ------------- ------------- ------------- Cumulative interest sensitivity gap $(124,006) $(114,652) $(66,867) $(44,916) $95,459 - ---------------------------------------------- -------------- ------------- ------------- ------------- ------------
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 80.0% of total average assets in 1996. 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 1996. Net loans as a percentage of total assets fell to 59.1% at December 31, 1996, compared to 69.1% at December 31, 1995. Total securities as a percentage of total assets rose to 32.6% at December 31, 1996, up from 20.9% at December 31, 1995. For the year ended December 31, 1996, net cash provided by financing activities was $138.0 million. Approximately $131.5 million was generated by net increases in Federal Home Loan Bank advances and securities sold under agreements to repurchase. Net cash used in investing activities was $158.3 million in 1996, the majority of which was used to purchase securities under the investment program. In addition, $5.9 million was used to purchase premises and equipment, which included the expansion of the Corporation's Trust and Investment department facility and construction of a new branch office. The Corporation will continue to expend funds for purchases of premises and equipment to support its growth. Net cash provided by operating activities amounted to $10.6 million in 1996, $8.4 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.) The Bank has entered into an agreement to acquire the Mystic, Connecticut branch of First Union Bank of Connecticut and its deposits of approximately $10 million. This transaction is expected to be completed in March, 1997. CAPITAL RESOURCES Total shareholders' equity rose 12.3% during 1996 and amounted to $59.4 million at December 31, 1996. Approximately $5.3 million in capital growth resulted from earnings retention and $1.3 million from dividend reinvestment and stock option transactions. On October 15, 1996, the Corporation paid a stock split in the form of a three-for-two stock dividend. Additionally, cash dividends declared per share rose by 16.4% in 1996 for a total of $.71 per share. The ratio of total equity to total assets amounted to 8.6% at December 31, 1996, compared to 9.7% at December 31, 1995. The reduction in this ratio was due primarily to the growth in assets resulting from the investment program. Book value rose to $13.62 per share at December 31, 1996, up from the year-earlier amount of $12.37 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 As discussed under Note 14 to the Corporation's consolidated financial statements, the Bank is party to a lawsuit filed by a 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 seeks recovery from the Bank for losses directly related to the embezzlement of approximately $3.0 million, as well as consequential damages amounting to approximately $2.7 million. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has meritorious defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit, as well as to vigorously pursue its counterclaims. Because of the numerous uncertainties which surround the litigation, management is unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded. RECENT ACCOUNTING DEVELOPMENTS Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" is effective for transfers of financial assets occurring after December 31, 1996 but excludes transfers related to repurchase agreements, dollar-rolls, securities lending and similar transactions until years beginning after December 31, 1997. This Statement provides accounting and reporting standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. These standards are based on an approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The adoption of this pronouncement is not expected to have a significant effect on the Corporation's financial position or results of operations. COMPARISON OF 1995 WITH 1994 Washington Trust recorded net income of $7.7 million in 1995, a 23% increase over the $6.3 million of net income recorded in 1994. Fully diluted earnings per share amounted to $1.74 for 1995, up from $1.45 per share earned in 1994. ROA and ROE amounted to 1.44% and 15.47%, respectively in 1995. Comparable amounts for 1994 were 1.25% and 14.11%. Fully taxable equivalent net interest income rose 10.8% over the 1994 amount. The interest rate spread rose 6 basis points to 4.64% in 1995, while the net interest margin increased from 5.03% in 1994 to 5.24% in 1995. Increases in noninterest-bearing sources of funds were primarily responsible for the increase in the net interest margin. The yield on total interest-earning assets amounted to 8.65% in 1995, up from 7.94% in 1994 primarily due to higher yields on commercial loans. The Corporation's cost of funds rose 65 basis points in 1995 to 4.01% due to changes in deposit mix. The rate of interest paid on time deposits rose 95 basis points, which resulted in a shift of funds from lower yielding savings deposits to the time deposit category. Total assets rose 6.2% in 1995 to $547.7 million at December 31, 1995. Average assets amounted to $533.9 million in 1995, up 6.3% over the prior year. Asset growth occurred in the securities portfolio because of soft loan demand. The source of funds for this growth was provided by an increase in deposits of $27.1 million or 6.2% over 1994. Total loans declined by 1.9% in 1995 and amounted to $386.5 million at December 31, 1995. Strong growth in consumer loans was offset by reduced commercial and residential loan originations. Nonperforming assets declined to 1.9% of total assets at December 31, 1995, down from 2.5% of total assets at December 31,1994. The Corporation's loan loss provision amounted to $1.4 million in 1995, compared to $1.3 million in 1994. Net loan charge-offs amounted to $2.9 million in 1995, up from $1.0 million in 1994. Shareholders' equity rose by 15.6% in 1995. Approximately $1.6 million of this increase was attributable to the increase in the unrealized gain on securities available for sale. Book value per share rose to $12.37 at December 31, 1995, up from the year-earlier amount of $10.81 per share. The ratio of capital to assets was 9.7% and 8.9% at December 31, 1995 and 1994, respectively. Dividends paid per share amounted to $.61 in 1995, up 24.5% from the prior year. CONSOLIDATED BALANCE SHEETS Washington Trust Bancorp, Inc. and Subsidiary
December 31, 1996 1995 - ------------------------------------------------------------------------------- ------------------ ------------------ ASSETS: Cash and due from banks (note 2) $17,418,414 $15,051,777 Federal funds sold 1,548,136 13,598,869 Mortgage loans held for sale 743,931 456,152 Securities: (note 3) Available for sale, at fair value 198,317,453 85,552,335 Held to maturity, at cost; fair value $28.1 million in 1996 and $29.4 million in 1995 27,925,855 28,872,991 - ------------------------------------------------------------------------------- ------------------ ------------------ Total securities 226,243,308 114,425,326 Federal Home Loan Bank stock, at cost 11,682,900 2,995,000 Loans (note 4) 418,993,414 386,458,892 Less allowance for loan losses (note 5) 8,495,138 7,784,516 - ------------------------------------------------------------------------------- ------------------ ------------------ Net loans 410,498,276 378,674,376 Premises and equipment, net (note 6) 19,040,252 14,646,157 Accrued interest receivable 4,159,875 3,539,305 Other real estate owned, net (note 8) 1,089,943 1,705,147 Other assets 2,520,723 2,567,195 - ------------------------------------------------------------------------------- ------------------ ------------------ Total assets $694,945,758 $547,659,304 - ------------------------------------------------------------------------------- ------------------ ------------------ LIABILITIES: Deposits: Demand $ 65,013,797 $ 59,470,321 Savings 170,172,153 177,891,247 Time (note 9) 241,375,331 230,492,444 - ------------------------------------------------------------------------------- ------------------ ------------------ Total deposits 476,561,281 467,854,012 Dividends payable 785,010 686,189 Securities sold under agreements to repurchase (note 10) 14,000,000 -- Federal Home Loan Bank advances (note 10) 138,493,288 20,951,266 Accrued expenses and other liabilities 5,679,523 5,231,339 - ------------------------------------------------------------------------------- ------------------ ------------------ Total liabilities 635,519,102 494,722,806 - ------------------------------------------------------------------------------- ------------------ ------------------ Commitments and contingencies (notes 7, 14 and 16) SHAREHOLDERS' EQUITY: (note 15) Common stock of $.0625 par value; authorized 10,000,000 shares; issued 4,362,631 shares in 1996 and 4,320,000 shares in 1995 272,664 180,000 Paid-in capital 3,763,799 3,070,795 Retained earnings 50,886,020 45,630,676 Unrealized gain on securities available for sale, net of tax 4,504,173 4,381,958 Treasury stock, at cost; 40,695 shares in 1995 -- (326,931) - ------------------------------------------------------------------------------- ------------------ ------------------ Total shareholders' equity 59,426,656 52,936,498 - ------------------------------------------------------------------------------- ------------------ ------------------ Total liabilities and shareholders' equity $694,945,758 $547,659,304 - ------------------------------------------------------------------------------- ------------------ ------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1996 1995 1994 - --------------------------------------------------------- --------------------- -------------------- -------------------- Interest Income: Interest and fees on loans (note 4) $36,106,347 $35,703,570 $31,116,418 Income from securities: Interest 8,072,366 4,803,214 4,543,584 Dividends 1,418,544 924,190 745,925 Interest on federal funds sold and securities purchased under agreements to resell 208,707 855,206 255,761 - --------------------------------------------------------- --------------------- -------------------- -------------------- Total interest income 45,805,964 42,286,180 36,661,688 - --------------------------------------------------------- --------------------- -------------------- -------------------- Interest expense: Savings deposits 3,796,925 3,946,019 4,334,637 Time deposits 12,478,184 11,770,096 7,917,428 Other 3,391,432 1,299,149 1,336,517 - --------------------------------------------------------- --------------------- -------------------- -------------------- Total interest expense 19,666,541 17,015,264 13,588,582 - --------------------------------------------------------- --------------------- -------------------- -------------------- Net interest income 26,139,423 25,270,916 23,073,106 Provision for loan losses (note 5) 1,200,000 1,400,000 1,256,912 - --------------------------------------------------------- --------------------- -------------------- -------------------- Net interest income after provision for loan losses 24,939,423 23,870,916 21,816,194 - --------------------------------------------------------- --------------------- -------------------- -------------------- Noninterest income: Trust income 3,756,774 3,255,494 3,284,435 Service charges on deposit accounts 2,168,048 1,950,899 1,610,550 Merchant processing fees 816,871 730,449 622,013 Net gains on sales of securities (note 3) 367,518 495,817 684,590 Net gains (losses) on loan sales 220,259 (135,851) (15,998) Other income 990,317 906,029 736,576 - --------------------------------------------------------- --------------------- -------------------- -------------------- Total noninterest income 8,319,787 7,202,837 6,922,166 - --------------------------------------------------------- --------------------- -------------------- -------------------- Noninterest expense: Salaries and employee benefits (note 11) 11,171,497 10,223,160 9,929,943 Net occupancy 1,300,799 1,221,927 1,206,031 Equipment 1,536,897 1,291,663 1,188,352 Deposit taxes and assessments 274,000 769,583 1,279,417 Merchant processing costs 637,090 528,685 429,784 Office supplies 533,912 461,501 605,645 Advertising and promotion 610,867 538,413 505,351 Credit and collection 392,957 437,619 512,715 Other (notes 8 and 12) 4,077,853 3,882,235 3,790,482 - --------------------------------------------------------- --------------------- -------------------- -------------------- Total noninterest expense 20,535,872 19,354,786 19,447,720 - --------------------------------------------------------- --------------------- -------------------- -------------------- Income before income taxes 12,723,338 11,718,967 9,290,640 Income tax expense (note 13) 4,298,000 4,031,000 3,026,000 - --------------------------------------------------------- --------------------- -------------------- -------------------- Net income $8,425,338 $7,687,967 $6,264,640 - --------------------------------------------------------- --------------------- -------------------- -------------------- Weighted average shares outstanding - primary 4,482,839 4,365,302 4,308,540 Weighted average shares outstanding - fully diluted 4,508,434 4,407,975 4,309,163 Earnings per share - primary $1.88 $1.76 $1.45 Earnings per share - fully diluted $1.87 $1.74 $1.45 Cash dividends declared per share $.71 $.61 $.49
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------- --------------- ----------------- -------------- COMMON STOCK Balance at beginning of year $180,000 $180,000 $120,000 Issuance of common stock for stock option plan and other purposes 1,881 -- -- 3-for-2 stock split in the form of a 50% stock dividend 90,783 -- 60,000 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- Balance at end of year 272,664 180,000 180,000 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- PAID-IN CAPITAL Balance at beginning of year 3,070,795 2,929,135 2,822,908 Issuance of common stock for dividend reinvestment plan, stock option plan and other purposes 693,004 141,660 106,227 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- Balance at end of year 3,763,799 3,070,795 2,929,135 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- RETAINED EARNINGS Balance at beginning of year 45,630,676 40,553,979 36,418,073 Net income 8,425,338 7,687,967 6,264,640 Cash dividends declared (3,079,211) (2,611,270) (2,068,734) 3-for-2 stock split in the form of a 50% stock dividend (90,783) -- (60,000) - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- Balance at end of year 50,886,020 45,630,676 40,553,979 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAX Balance at beginning of year 4,381,958 2,801,490 -- Adoption of SFAS No. 115 -- -- 4,910,522 Change in unrealized gain on securities available for sale, net of tax 122,215 1,580,468 (2,109,032) - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- Balance at end of year 4,504,173 4,381,958 2,801,490 - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- TREASURY STOCK Balance at beginning of year (326,931) (681,620) (898,056) Issuance of common stock for dividend reinvestment plan, stock option plan and other purposes 567,431 354,689 216,436 Purchase of treasury stock (240,500) -- -- - ------------------------------------------------------------------------------- ---------------- ---------------- ---------------- Balance at end of year -- (326,931) (681,620) - ------------------------------------------------------------------------------- ---------------- ----------------- ---------------- TOTAL SHAREHOLDERS' EQUITY $59,426,656 $52,936,498 $45,782,984 - ------------------------------------------------------------------------------- ---------------- ---------------- ----------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------- ------------------- -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $8,425,338 $7,687,967 $6,264,640 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,200,000 1,400,000 1,256,912 Provision for valuation of other real estate owned 302,502 172,041 137,389 Depreciation of premises and equipment 1,447,592 1,331,474 1,313,158 Amortization of net deferred loan fees and costs (149,903) (540,535) (819,142) Deferred income tax expense (benefit) 157,000 763,000 (360,000) Net gains on sales of securities (367,518) (495,817) (684,590) Net (gains) losses on sales of other real estate owned (350,551) 15,095 (465,292) Net (gains) losses on loan sales (220,259) 135,851 15,998 Proceeds from sales of loans 18,331,410 15,967,587 13,867,186 Loans originated for sale (18,398,930) (16,219,298) (10,377,435) Increase in accrued interest receivable (620,570) (307,094) (361,300) Decrease (increase) in other assets 46,472 (923,547) (624,046) Increase in accrued expenses and other liabilities 529,754 133,229 499,002 Other, net 286,712 (294,672) 174,088 - ------------------------------------------------------------------- ------------------- -------------------- ------------------- Net cash provided by operating activities 10,619,049 8,825,281 9,836,568 - ------------------------------------------------------------------- ------------------- -------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Purchases (168,325,237) (38,362,395) (4,719,443) Proceeds from sales 35,682,831 16,469,090 9,666,129 Maturities and principal repayments 20,221,928 10,164,849 1,000,000 Securities held to maturity: Purchases (4,475,251) (22,331,055) (8,399,712) Maturities and principal repayments 5,356,919 8,770,271 8,355,132 Purchases of Federal Home Loan Bank stock (8,687,900) (88,200) (934,000) Loan originations (over) under principal collected on loans (33,167,909) 5,152,024 (36,344,321) Proceeds from sales of other real estate owned 992,972 310,084 1,263,385 Purchases of premises and equipment (5,872,180) (1,222,588) (1,754,963) - ------------------------------------------------------------------- -------------------- -------------------- -------------------- Net cash used in investing activities (158,273,827) (21,137,920) (31,867,793) - ------------------------------------------------------------------- -------------------- -------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 8,707,269 27,122,870 17,356,522 Net increase in securities sold under agreements to repurchase 14,000,000 -- -- Proceeds from Federal Home Loan Bank advances 226,240,431 17,564,839 15,051,500 Repayment of Federal Home Loan Bank advances (108,698,409) (20,135,916) (12,029,157) Purchase of treasury stock (240,500) -- -- Proceeds from issuance of common stock 942,281 496,349 322,663 Cash dividends paid (2,980,390) (2,489,767) (1,915,521) - ------------------------------------------------------------------- ------------------- -------------------- ------------------- Net cash provided by financing activities 137,970,682 22,558,375 18,786,007 - ------------------------------------------------------------------- ------------------- -------------------- ------------------- Net (decrease) increase in cash and cash equivalents (9,684,096) 10,245,736 (3,245,218) Cash and cash equivalents at beginning of year 28,650,646 18,404,910 21,650,128 - ------------------------------------------------------------------- ------------------- -------------------- ------------------- Cash and cash equivalents at end of year $18,966,550 $28,650,646 $18,404,910 - ------------------------------------------------------------------- ------------------- -------------------- ------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned $1,279,107 $666,158 $1,290,381 Loans charged off 1,273,148 3,416,067 1,336,260 Loans made to facilitate the sale of OREO 914,800 854,750 1,709,931 Transfer of securities from the held-to-maturity to the available-for-sale category -- 37,131,457 -- Change in unrealized gain on securities available for sale, net of tax 122,215 1,580,468 2,801,490 Stock issued in settlement of directors' retirement plan 320,035 -- -- Supplemental Disclosures: Interest payments $8,194,655 $7,365,825 $7,384,172 Income tax payments 4,006,589 3,018,250 2,942,787
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Washington Trust Bancorp, Inc. and Subsidiary (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation 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. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The activities of the Corporation and the Bank are subject to the regulatory supervision of the Federal Reserve Board and the FDIC, respectively. Both companies are subject to various Rhode Island business and banking regulations. Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate which is particularly susceptible to change is the determination of the allowance for loan losses. 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 ("FHLBB"). As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. The Bank may redeem FHLBB stock in excess of the minimum required. In addition, the FHLBB may require members to redeem stock in excess of the requirement. FHLBB 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 Effective January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights". This Statement requires that the rights to service mortgage loans for others be recognized as an asset, including rights acquired through both purchases and originations. 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 amortized over the period of estimated net servicing income and are periodically evaluated for impairment based on their fair value. 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. Loan Accounting Policy 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 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. 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 the recognition of additions to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. 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, including real estate substantively repossessed, is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for known specific and potential market declines and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs. Transfers and Servicing of Assets and Extinguishments of Liabilities Effective January 1, 1997, the Corporation will adopt SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125", requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until years beginning after December 31, 1997. Earlier or retrospective application of this Statement is not permitted. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on an approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this pronouncement is not expected to have a significant effect on the Corporation's financial position or results of operations. Interest Rate Risk Management Agreements The Corporation uses financial instruments as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into 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. Deposit Taxes and Assessments Deposit taxes and assessments consist of amounts assessed to members of the Bank Insurance Fund by the FDIC and deposit taxes imposed by the State of Rhode Island. These amounts are calculated based on levels of bank deposits using rates established by the respective regulatory authorities. Pension Costs Pension costs are funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act and are accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions". Stock-Based Compensation On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The Statement establishes financial accounting and reporting standards for stock-based compensation plans. SFAS No. 123 encourages, but does not require, a fair value based method of accounting for stock-based compensation plans. The statement allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. For those entities electing to use the intrinsic value based method, SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. The Corporation continues to account for stock-based compensation costs under APB Opinion No. 25. 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 Earnings per share is determined by dividing net income by the average number of common shares and common stock equivalents outstanding, net of shares assumed to be repurchased using the treasury stock method. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold on an overnight basis. (2) CASH AND DUE FROM BANKS The Bank is required to maintain certain average reserve balances with the Federal Reserve. Such reserve balances amounted to $7,796,523 and $7,512,422 at December 31, 1996 and 1995, respectively. (3) SECURITIES Securities are summarized as follows:
Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- SECURITIES AVAILABLE FOR SALE U.S. Treasury obligations and obligations of U.S. government agencies $48,713,596 $500,789 $(112,008) $49,102,377 Mortgage-backed securities 129,231,582 144,284 (872,248) 128,503,618 Corporate stocks 12,865,332 7,919,184 (73,058) 20,711,458 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities available for sale 190,810,510 8,564,257 (1,057,314) 198,317,453 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- SECURITIES HELD TO MATURITY Mortgage-backed securities 12,343,916 185,324 -- 12,529,240 States and political subdivisions 15,581,939 47,515 (44,267) 15,585,187 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities held to maturity 27,925,855 232,839 (44,267) 28,114,427 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities $218,736,365 $8,797,096 $(1,101,581) $226,431,880 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Amortized Unrealized Unrealized Fair December 31, 1995 Cost Gains Losses Value - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- SECURITIES AVAILABLE FOR SALE U.S. Treasury obligations and obligations of U.S. government agencies $37,346,696 $549,035 $(18,203) $37,877,528 Mortgage-backed securities 30,024,608 189,634 (187,345) 30,026,897 Corporate stocks 10,877,771 6,783,369 (13,230) 17,647,910 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities available for sale 78,249,075 7,522,038 (218,778) 85,552,335 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- SECURITIES HELD TO MATURITY Mortgage-backed securities 13,947,011 497,755 -- 14,444,766 States and political subdivisions 14,925,980 77,329 (15,256) 14,988,053 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities held to maturity 28,872,991 575,084 (15,256) 29,432,819 - ------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total securities $107,122,066 $8,097,122 $(234,034) $114,985,154 - ------------------------------------------------- ----------------- ---------------- ----------------- -----------------
In November 1995, the Financial Accounting Standards Board ("FASB") issued a special report which allowed enterprises to reassess the appropriateness of their securities classifications between the "held-to-maturity" and "available-for-sale" categories. In accordance with this report, the Corporation reassessed its securities classifications, resulting in the transfer of debt securities held to maturity with an amortized cost of $37,131,457 and an unrealized loss of $706,937 to the available-for-sale category. There were no other sales or transfers from the held-to-maturity portfolio during 1996, 1995 and 1994. The contractual maturities and weighted average yields of debt securities are summarized below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments:
Weighted Amortized Fair Average December 31, 1996 Cost Value Yield - ----------------------------------------- -------------------- -------------------- ------------------ SECURITIES AVAILABLE FOR SALE Due in 1 year or less $26,118,231 $26,026,634 6.46% After 1 but within 5 years 83,123,711 82,868,699 6.62% After 5 but within 10 years 32,328,443 32,301,117 6.79% After 10 years 36,374,793 36,409,545 6.75% - ----------------------------------------- -------------------- -------------------- ------------------ 177,945,178 177,605,995 6.65% - ----------------------------------------- -------------------- -------------------- ------------------ SECURITIES HELD TO MATURITY Due in 1 year or less 3,282,021 3,315,110 6.16% After 1 but within 5 years 18,704,891 18,786,147 5.23% After 5 but within 10 years 4,383,566 4,439,374 7.24% After 10 years 1,555,377 1,573,796 7.09% - ----------------------------------------- -------------------- -------------------- ------------------ 27,925,855 28,114,427 5.76% - ----------------------------------------- -------------------- -------------------- ------------------ Total $205,871,033 $205,720,422 6.53% - ----------------------------------------- -------------------- -------------------- ------------------
At December 31, 1996, the Corporation owned securities with an aggregate carrying value of $24.8 million which are callable at the discretion of the issuers. Primarily all of these securities are U.S. Treasury and government agency obligations, included in the available-for-sale category. Final maturities of these securities range from three to seven years with call features ranging from three months to two years. The following is a summary of amounts relating to sales of securities available for sale:
Years ended December 31, 1996 1995 1994 - -------------------------------------------- ------------------ ------------------- ------------------ Proceeds from sales $35,682,831 $16,469,090 $9,666,129 - -------------------------------------------- ------------------ ------------------- ------------------ Realized gains $626,044 $1,028,726 $713,534 Realized losses (258,526) (532,909) (28,944) - -------------------------------------------- ------------------ ------------------- ------------------ Net realized gains $367,518 $495,817 $684,590 - -------------------------------------------- ------------------ ------------------- ------------------
Included in proceeds from sales of securities in 1994 are proceeds of $699,896 which represent the donation of corporate stocks to a charitable trust established by the Corporation. The gain on this transaction is included in gains on sales of securities and amounted to $676,058, the excess of the fair market value of the donated securities over their historical cost. See Note 12 for a discussion regarding the contribution expense related to this transaction. Included in proceeds from sales of securities are $7.5 million, $3.5 million and $7.5 million in 1996, 1995 and 1994, respectively, from dispositions of auction rate preferred stocks with no gain or loss. Purchases of auction rate preferred stocks available for sale amounted to $500,000, $10.0 million and $3.5 million in 1996, 1995 and 1994, respectively. These are preferred stock instruments whose dividend rate is reset by auction every 49 days to a market rate, resulting in a market value of par. At each auction, the holder can elect not to participate in the auction and therefore liquidate its investment at par (cost). Securities available for sale with a fair value of $41,964,967 and $4,576,325 were pledged to secure public deposits and for other purposes at December 31, 1996 and 1995, respectively. (4) LOANS The following is a summary of loans:
December 31, 1996 1995 - ----------------------------------------------------- ------------------------- -------------------------- Residential real estate: Mortgages $171,422,970 $167,510,929 Homeowner construction 4,631,288 3,071,177 - ---------------------------------------------------------------------------------------------------------- Total residential real estate 176,054,258 170,582,106 Commercial and other: Mortgages (1) 66,223,610 58,837,483 Construction and development (2) 4,173,630 5,968,404 Other (3) 109,485,405 96,830,889 - ---------------------------------------------------------------------------------------------------------- Total commercial and other 179,882,645 161,636,776 Consumer 63,056,511 54,240,010 - ---------------------------------------------------------------------------------------------------------- Total loans $418,993,414 $386,458,892 - ---------------------------------------------------------------------------------------------------------- (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, 1996 and 1995 was $7,542,400 and $8,573,656, respectively. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $843,000 in 1996 and $1,056,000 in 1995. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $495,000 in 1996 and $458,000 in 1995. Included in nonaccrual loans at December 31, 1996 and 1995 are loans amounting to $1.9 million and $2.4 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:
December 31, 1996 1995 - ---------------------------------------------------------- ------------------ ------------------- Impaired loans requiring an allowance $4,523,000 $4,854,000 Impaired loans not requiring an allowance 572,000 1,001,000 - ---------------------------------------------------------- ------------------ ------------------- Total recorded investment in impaired loans $5,095,000 $5,855,000 - ---------------------------------------------------------- ------------------ ------------------- Years ended December 31, 1996 1995 - ---------------------------------------------------------- ------------------ ------------------- Average recorded investment in impaired loans $3,674,000 $6,412,000 - ---------------------------------------------------------- ------------------ ------------------- Interest income recognized on impaired loans $267,000 $414,000 - ---------------------------------------------------------- ------------------ -------------------
Mortgage Servicing Activities At December 31, 1996 and 1995, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $101,260,742 and $95,078,817, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. As discussed in Note 1, the Corporation adopted SFAS No. 122 as of January 1, 1996. As a result of the adoption of this pronouncement, mortgage servicing rights amounting to $153,600 were capitalized during 1996 and are included in net gains on loan sales. The related amortization of those rights of $8,264 and the establishment of a valuation allowance in the amount of $18,936 were recorded as offsets to other income in 1996. As of December 31, 1996, the fair value of capitalized mortgage servicing rights amounted to $126,400. Loans to Related Parties At December 31, 1996, 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 1996 was as follows: Balance at December 31, 1995 $2,991,971 Additions 1,575,068 Reductions (1,895,997) - ------------------------------------------------- --------------------------- Balance at December 31, 1996 $2,671,042 - ------------------------------------------------- --------------------------- (5) ALLOWANCE FOR LOAN LOSSES The following is an analysis of the allowance for loan losses:
Years ended December 31, 1996 1995 1994 - --------------------------------------------------- ------------------ ------------------- ------------------ Balance at beginning of year $7,784,516 $9,327,942 $9,089,775 Provision charged to expense 1,200,000 1,400,000 1,256,912 Recoveries of loans previously charged off 783,770 472,641 317,515 Loans charged off (1,273,148) (3,416,067) (1,336,260) - --------------------------------------------------- ------------------ ------------------- ------------------ Balance at end of year $8,495,138 $7,784,516 $9,327,942 - --------------------------------------------------- ------------------ ------------------- ------------------
Included in the allowance for loan losses at December 31, 1996 and 1995 was an allowance for impaired loans amounting to $867,000 and $953,000, respectively. (6) PREMISES AND EQUIPMENT The following is a summary of premises and equipment:
December 31, 1996 1995 - -------------------------------------------- ------------------- -------------------- Land and improvements $1,877,782 $1,561,936 Premises and improvements 18,164,916 15,294,192 Furniture, fixtures and equipment 12,498,299 9,954,675 - ------------------------------------------- -------------------- -------------------- 32,540,997 26,810,803 Less accumulated depreciation 13,500,745 12,164,646 - ------------------------------------------- -------------------- -------------------- Total premises and equipment, net $19,040,252 $14,646,157 - ------------------------------------------- -------------------- --------------------
(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:
December 31, 1996 1995 - ----------------------------------------------------------------------------- ------------------- ------------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial and other loans $24,612,289 $24,014,537 Home equity lines 13,982,345 12,538,507 Credit card lines 17,008,538 12,201,670 Homeowner construction loans 2,536,231 2,993,240 Construction and development loans 3,226,673 944,736 Standby letters of credit 1,742,951 2,603,072 Loans sold with recourse 928,092 1,188,336 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate floor contracts 50,000,000 50,000,000 Interest rate swaps -- 10,000,000
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Loans Sold With Recourse The Corporation has retained credit risk on certain residential mortgage loans sold with recourse. In the event of default by the mortgagor, the Corporation could become obligated to repurchase the loan. Such repurchases have been negligible and have not resulted in any significant losses to the Corporation. Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors 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 which mature in February 2000. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The Corporation receives payment under contracts with a total notional value of $30.0 million when the prime rate falls below 9.0% and on the remaining $20.0 million when 3-month LIBOR at the quarterly resetting dates is below 6.1875%. The prime rate and 3-month LIBOR applicable to the outstanding floor contracts at December 31, 1996 were 8.25% and 5.5%, respectively. At December 31, 1996, the fair value, or the value to the Corporation of terminating the contracts, was $1,174,000. The remaining unamortized premium for these contracts, included in other assets, amounted to $580,133 at December 31, 1996. 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 An analysis of the composition of OREO follows:
December 31, 1996 1995 - ------------------------------------------------ -------------------- -------------------- Commercial real estate $658,664 $671,340 Residential real estate 142,373 706,655 Land 494,372 737,158 - ------------------------------------------------ -------------------- -------------------- 1,295,409 2,115,153 Valuation allowance (205,466) (410,006) - ------------------------------------------------ -------------------- -------------------- Other real estate owned, net $1,089,943 $1,705,147 - ------------------------------------------------ -------------------- --------------------
An analysis of the activity relating to other real estate owned follows:
Years ended December 31, 1996 1995 - ------------------------------------------------ -------------------- -------------------- Balance at beginning of year $2,115,153 $2,577,757 Net transfers from loans 1,279,107 666,158 Sales (2,134,654) (1,512,508) Other, net 35,803 383,746 - ------------------------------------------------ -------------------- -------------------- 1,295,409 2,115,153 Valuation allowance (205,466) (410,006) - ------------------------------------------------ -------------------- -------------------- Other real estate owned, net $1,089,943 $1,705,147 - ------------------------------------------------ -------------------- --------------------
The following is an analysis of activity relating to the OREO valuation allowance:
Years ended December 31, 1996 1995 1994 - ------------------------------------------------- ------------------- ------------------ ------------------ Balance at beginning of year $410,006 $570,545 $1,155,700 Provision charged to expense 302,502 172,041 137,389 Sales (457,434) (301,294) (716,214) Selling expenses incurred (49,608) (31,286) (55,763) Other, net -- -- 49,433 - ------------------------------------------------- ------------------ ------------------- ------------------- Balance at end of year $205,466 $410,006 $570,545 - ------------------------------------------------- ------------------ ------------------- -------------------
Net realized gains (losses) on dispositions of properties amounted to $350,551, ($15,095) and $465,292 in 1996, 1995 and 1994, 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, 1996 were as follows: Years ending December 31, Amount - -------------------------------- ----------- ---------------------- 1997 $149,381,244 1998 76,682,249 1999 5,224,134 2000 7,502,984 2001 2,584,720 2002 and thereafter -- - -------------------------------- ----------- ---------------------- Balance at end of year $241,375,331 - -------------------------------- ----------- ---------------------- The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $39,781,568 and $28,948,924 at December 31, 1996 and 1995, respectively. (10) BORROWINGS Securities Sold Under Agreements to Repurchase Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are included in securities available for sale, although the securities are delivered to the counterparty during the period in which the agreements are outstanding. The following is a summary of amounts relating to repurchase agreements:
Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------ ---------------- ----------------- ----------------- Maximum amount outstanding at any month-end $14,000,000 $-- $3,745,000 - ------------------------------------------------------------ ---------------- ----------------- ----------------- Average amount outstanding $2,881,914 $-- $995,392 - ------------------------------------------------------------ ---------------- ----------------- -----------------
Federal Home Loan Bank Advances The following table presents scheduled maturities and interest rates of Federal Home Loan Bank advances outstanding at December 31, 1996: Years ending Weighted December 31, Average Rate Amount - ------------------------------ ---------------------- ---------------------- 1997 5.71% $121,414,876 1998 5.99% 9,837,925 1999 6.47% 3,365,885 2000 6.56% 395,966 2001 6.66% 428,655 2002 and thereafter 6.56% 3,049,981 - ------------------------------ ---------------------- ---------------------- Balance at end of year $138,493,288 - ------------------------------ ---------------------- ---------------------- In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $11.0 million at December 31, 1996. Under agreement with the FHLBB, 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 FHLBB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 1996. (11) EMPLOYEE BENEFITS Pension Plan The Corporation's noncontributory defined benefit pension plan covers substantially all full-time employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The following table presents the Plan's funded status:
October 1, 1996 1995 - ---------------------------------------------------------------------------------------- ----------------- ---------------- Vested accumulated benefit obligation $(7,190,842) $(7,106,888) Nonvested accumulated benefit obligation (566,582) (203,609) Effect of future compensation increases (1,914,908) (2,130,483) - ---------------------------------------------------------------------------------------- ----------------- ---------------- Projected benefit obligation (9,672,332) (9,440,980) Plan assets at fair value (1) 11,494,475 10,158,452 - ---------------------------------------------------------------------------------------- ----------------- --------------- Plan assets in excess of projected benefit obligation $1,822,143 $717,472 - ---------------------------------------------------------------------------------------- ----------------- ---------------- (1) Primarily listed stocks and fixed income securities The assumptions used in determining the projected benefit obligation were as follows: Discount rate 7.50% 7.00% Rate of increase in compensation levels 5.00% 5.00%
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows:
October 1, 1996 1995 - -------------------------------------------------------------------------- ------------------- ----------------- Unrecognized net gain $1,539,384 $583,799 Unrecognized prior service cost (383,793) (395,836) Unrecognized net transition asset being amortized over 21 years 66,588 72,570 Prepaid pension cost 599,964 456,939 - -------------------------------------------------------------------------- ------------------- ----------------- Plan assets in excess of projected benefit obligation $1,822,143 $717,472 - -------------------------------------------------------------------------- ------------------- -----------------
The assumptions used and the components of net pension cost for the years ended December 31, 1996, 1995 and 1994 include the following:
Years ended December 31, 1996 1995 1994 - ----------------------------------------------------------------- --------------- --------------- --------------- Assumptions used: Discount rate 7.00% 8.00% 6.75% Rate of increase in compensation levels 5.00% 6.00% 5.00% Expected long term rate of return on plan assets 8.00% 8.75% 7.75% Net pension cost: Service cost; benefits earned during this period $406,481 $344,855 $328,194 Interest cost on projected benefit obligation 679,262 653,828 519,478 Actual return on plan assets (1,165,356) (1,693,630) (126,374) Net amortization and deferral 447,316 1,002,748 (450,023) - ----------------------------------------------------------------- --------------- --------------- --------------- Net periodic pension cost $367,703 $307,801 $271,275 - ----------------------------------------------------------------- --------------- --------------- ---------------
Supplemental Pension Plan Effective November 1, 1994, the Corporation established a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The projected benefit obligation for this plan amounted to $698,330 and $556,780 at December 31, 1996 and 1995, respectively. The expense of this plan amounted to $120,208 and $78,320 in 1996 and 1995, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's regular pension plan. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued pension liability related to this plan amounted to $210,882 and $97,445 at December 31, 1996 and 1995, respectively. Savings and Profit Sharing Plan The Corporation has a qualified savings and profit sharing plan. The plan provides a specified match of employee contributions for substantially all full-time employees. In addition, full-time employees, excluding those key employees participating in the Short-Term Incentive Plan, are eligible for an annual benefit pursuant to a formula based on return on equity. Total employer matching contributions under this plan amounted to $198,303, $185,710 and $173,675 in 1996, 1995 and 1994, respectively. The amount of the profit sharing benefit was $244,952, $239,295 and $241,807 for 1996, 1995 and 1994, 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 $596,649, $501,143 and $480,646 in 1996, 1995 and 1994, respectively. Directors' Retainer Continuation Plan The Corporation has a nonqualified plan which provides retirement benefits to non-officer directors. On October 1, 1996, the provisions of the plan were terminated for active directors and the accrued benefit was settled through the issuance of common stock (Note 15). A gain of approximately $18,000 was recognized on the settlement. The benefits provided under this plan continue for retired directors. The plan pays the regular quarterly retainer in effect at the time of departure for as many quarters as the director served with the Corporation or the Bank. Prior service cost is amortized over the expected remaining service period of each director. Current cost is recognized based on the present value of expected future benefits. The expense of this plan is included in other noninterest expense and amounted to $63,290, $100,923 and $89,517 for 1996, 1995 and 1994, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $260,666 and $532,671 at December 31, 1996 and 1995, respectively. (12) OTHER NONINTEREST EXPENSE Included in other noninterest expense is charitable contribution expense of $192,000, $120,000 and $699,896 in 1996, 1995 and 1994, respectively. The 1994 expense consists of the fair value of securities donated to a charitable trust established by the Corporation, recorded in accordance with SFAS No. 116, "Accounting for Contributions Received and Contributions Made". This statement requires contributions to be measured at the fair value of the asset given. A corresponding gain was recorded in the amount of the excess of the fair value over the historical cost of the donated assets (Note 3). (13) INCOME TAXES The components of income tax expense were as follows:
Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------- ---------------- ----------------- ---------------- Current expense: Federal $3,322,000 $2,760,000 $2,858,000 State 819,000 508,000 528,000 - -------------------------------------------------------------- ---------------- ----------------- ---------------- Total current expense 4,141,000 3,268,000 3,386,000 - -------------------------------------------------------------- ---------------- ----------------- ---------------- Deferred expense (benefit): Federal 181,000 762,000 (271,000) State (24,000) 169,000 (89,000) Change in valuation allowance for deferred tax assets -- (168,000) -- - -------------------------------------------------------------- ---------------- ------------------ --------------- Total deferred expense (benefit) 157,000 763,000 (360,000) - -------------------------------------------------------------- ---------------- ----------------- ----------------- Total income tax expense $4,298,000 $4,031,000 $3,026,000 - -------------------------------------------------------------- ---------------- ----------------- ----------------
Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows:
Years ended December 31, 1996 1995 1994 - --------------------------------------------------------------- ----------------- ----------------- ---------------- Tax expense at Federal statutory rate $4,326,000 $3,984,000 $3,159,000 Increase (decrease) in taxes resulting from: Tax-exempt income (237,000) (187,000) (155,000) Dividends received deduction (282,000) (168,000) (134,000) State tax, net of Federal income tax benefit 553,000 446,000 289,000 Appreciated value of donated assets -- -- (230,000) Effect of change in state tax rate (43,000) -- -- Change in valuation allowance for deferred tax assets -- (168,000) -- Other (19,000) 124,000 97,000 - -------------------------------------------------------------- ----------------- ---------------- ---------------- Total income tax expense $4,298,000 $4,031,000 $3,026,000 - -------------------------------------------------------------- ---------------- ----------------- ----------------
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1996 and 1995 are as follows:
December 31, 1996 1995 - ------------------------------------------------------------ -------------------- -------------------- Gross deferred tax assets: Allowance for loan losses $3,285,000 $2,951,000 Other real estate owned 110,000 208,000 Deferred loan origination fees 486,000 590,000 Interest on nonaccrual loans 413,000 372,000 Other 652,000 646,000 - ------------------------------------------------------------ -------------------- -------------------- Gross deferred tax assets 4,946,000 4,767,000 Gross deferred tax liabilities: Securities available for sale (3,003,000) (2,921,000) Premises and equipment (1,206,000) (1,103,000) Deferred loan origination costs (620,000) (529,000) Other (375,000) (233,000) - ------------------------------------------------------------ -------------------- --------------------- Gross deferred tax liabilities (5,204,000) (4,786,000) - ------------------------------------------------------------ -------------------- --------------------- Net deferred tax liability $(258,000) $(19,000) - ------------------------------------------------------------ -------------------- ---------------------
In addition to future taxable income, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. Since there is no carryback provision for state purposes, management believes the existing net deductible temporary differences will reverse during periods in which the Corporation generates net taxable income. (14) LITIGATION On January 28, 1997, a suit was filed against the Bank by a 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 and conversion. The suit seeks recovery for losses directly related to the embezzlement of approximately $3 million, as well as consequential damages amounting to approximately $2.7 million. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has meritorious defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit, as well as to vigorously pursue its counterclaims. Management and legal counsel are unable to form an opinion regarding the outcome of this matter. 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 Split In September 1996, the Corporation's Board of Directors approved a 3-for-2 stock split on shares of common stock. The stock split, in the form of a stock dividend, was paid on October 15, 1996 to shareholders of record on October 1, 1996. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect the stock split. Stock Repurchase Plan In June 1996, the Corporation's Board of Directors approved a program to repurchase up to 87,000, or approximately 2%, of its outstanding common shares. The Corporation plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. During the year ended December 31, 1996, 9,750 shares were repurchased under this program at a total cost of $240,500. Rights On August 15, 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 $80 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 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 $25.6 million as of December 31, 1996. Stock Option Plan The 1988 Amended and Restated Stock Option Plan provides for the granting of options to directors, officers and key employees. Up to 900,000 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options are designated either as non-qualified or as incentive options and may be granted with stock appreciation rights (SARs). The exercise price of an option may not be less than the fair market value on the date of grant. The option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Options may be granted at any time until December 31, 1997. As of December 31, 1996, no options have been granted with SARs. Options granted under the plan vest over a three year period and expire at the end of ten years. The following table presents changes in options outstanding during 1996, 1995 and 1994:
Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Number Weighted Number Weighted Number Weighted of Average of Average of Average Shares Exercise price Shares Exercise Shares Exercise price price - -------------------------------------------------------------------------------------------------------------------- Options outstanding, January 1 533,437 $11.5303 535,367 $10.8897 466,660 $10.3856 Granted 65,488 $21.6414 59,258 $16.9389 76,197 $13.9537 Exercised (105,734) $11.3977 (58,858) $11.1845 (7,490) $10.6569 Cancelled -- -- (2,330) $10.6140 -- -- - -------------------------------------------------------------------------------------------------------------------- Options outstanding, December 31 493,191 $12.9014 533,437 $11.5303 535,367 $10.8897 - -------------------------------------------------------------------------------------------------------------------- Options exercisable, December 31 400,006 $11.5162 433,709 $10.8562 421,726 $10.7818 - --------------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 1996 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 - ------------------------------------------------------------------------------------------------------------------------- $6.1107 to $9.2773 137,494 5.8 years $8.1302 137,494 $8.1302 $11.0553 to $12.1107 161,551 1.1 years $11.5113 161,551 $11.5113 $12.2220 to $15.1667 77,515 7.5 years $14.0759 56,858 $14.0652 $17.1667 to $22.00 116,631 8.9 years $19.6707 44,103 $18.8038 - ------------------------------------------------------------------------------------------------------------------------- Total 493,191 5.3 years $12.9014 400,006 $11.5162 - ------------------------------------------------------------------------------------------------------------------------
As discussed in Note 1, the Corporation adopted SFAS No. 123 on January 1, 1996, but continues to account for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25. Accordingly, no compensation cost for this plan has been recognized in the Consolidated Statements of Income for 1996. 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 1996 and 1995:
Years ended December 31, 1996 1995 - ---------------------------------------- -------------------- --------------- ------------------ ------------------ Net income As reported $8,425,338 $7,687,967 Pro forma $8,306,330 $7,625,364 Primary earnings per share As reported $1.88 $1.76 Pro forma $1.85 $1.75 Fully diluted earnings per share As reported $1.87 $1.74 Pro forma $1.84 $1.73 Weighted average fair value $3.1955 $3.8805 Expected life 6.6 years 6.3 years Risk-free interest rate 6.5% 6.6% Expected volatility 15.6% 17.2% Expected dividend yield 4.0% 4.0% The pro forma effect on net income and earnings per share for 1996 and 1995 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, 270,000 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan. As of December 31, 1996, a total of 918,326 common stock shares were reserved for issuance under the 1988 Amended and Restated Stock Option 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, 1996, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1996, 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 institution's category. The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 1996 and 1995, as well as the corresponding minimum regulatory amounts and ratios:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1996: Total Capital (to Risk-Weighted Assets): Consolidated $59,931,341 14.93% $32,102,160 8.00% $40,127,700 10.00% Bank $58,029,753 14.46% $32,102,160 8.00% $40,127,700 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $54,872,428 13.67% $16,051,080 4.00% $24,076,620 6.00% Bank $52,970,840 13.20% $16,051,080 4.00% $24,076,620 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $54,872,428 8.62% $25,469,256 4.00% $31,836,571 5.00% Bank $52,970,840 8.32% $25,469,256 4.00% $31,836,571 5.00% As of December 31, 1995: Total Capital (to Risk-Weighted Assets): Consolidated $52,908,465 15.34% $27,590,640 8.00% $34,488,300 10.00% Bank $51,949,482 15.06% $27,590,640 8.00% $34,488,300 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $48,554,540 14.08% $13,795,320 4.00% $20,692,980 6.00% Bank $47,595,557 13.80% $13,795,320 4.00% $20,692,980 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $48,554,540 8.99% $21,607,005 4.00% $27,008,756 5.00% Bank $47,595,557 8.81% $21,605,722 4.00% $27,007,152 5.00% (1) Leverage ratio
(16) 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 FHLBB membership and is therefore valued at par, which equals cost. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market. Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 1996 and 1995 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, 1996 and 1995. 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:
December 31, 1996 1995 - ------------------------------------------------------- --------------------------------- ------------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - ------------------------------------------------------- ---------------- ----------------- ---------------- ----------------- Financial Assets On-balance sheet: Cash and cash equivalents $18,966,550 $18,966,550 $28,650,646 $28,650,646 Mortgage loans held for sale 743,931 743,931 456,152 456,152 Securities available for sale 198,317,453 198,317,453 85,552,335 85,552,335 Securities held to maturity 27,925,855 28,114,427 28,872,991 29,432,819 Federal Home Loan Bank stock 11,682,900 11,682,900 2,995,000 2,995,000 Loans, net of allowance for loan losses 410,498,276 414,838,777 378,674,376 384,781,786 Accrued interest receivable 4,159,875 4,159,875 3,539,305 3,539,305 Off-balance sheet financial instruments relating to assets: Interest rate floor contracts 580,133 1,174,000 763,333 2,522,000 Financial Liabilities On-balance sheet: Noninterest bearing demand deposits $65,013,797 $65,013,797 $59,470,321 $59,470,321 Non-term savings accounts 170,172,153 170,172,153 177,891,247 177,891,247 Certificates of deposit 241,375,331 242,219,939 230,492,444 231,511,307 Securities sold under agreements to repurchase 14,000,000 14,000,000 -- -- Federal Home Loan Bank advances 138,493,288 138,536,476 20,951,266 21,055,045 Accrued interest payable 2,143,569 2,143,569 1,743,937 1,743,937 Off-balance sheet financial instruments relating to liabilities: Interest rate swap agreements -- -- -- (15,000) Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods which are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material.
(17) 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. STATEMENTS OF INCOME
Years ended December 31, 1996 1995 1994 - ----------------------------------------------------- -------------------- -------------------- ------------------- Dividends from bank subsidiary $3,000,000 $2,832,000 $1,776,000 Equity in undistributed earnings of subsidiary 5,425,338 4,855,967 4,488,640 - ----------------------------------------------------- -------------------- -------------------- ------------------- Net income $8,425,338 $7,687,967 $6,264,640 - ----------------------------------------------------- -------------------- -------------------- -------------------
BALANCE SHEETS
December 31, 1996 1995 - -------------------------------------------------------------------------- ------------------ -------------------- Assets: Cash on deposit with bank subsidiary $1,936,597 $805,171 Investment in bank subsidiary at equity value 57,525,069 51,977,516 Dividend receivable from bank subsidiary 750,000 840,000 - -------------------------------------------------------------------------- ------------------ -------------------- Total assets $60,211,666 $53,622,687 - -------------------------------------------------------------------------- ------------------ -------------------- Liabilities: Dividends payable $785,010 $686,189 - -------------------------------------------------------------------------- ------------------ -------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 10,000,000 shares; issued 4,362,631 shares in 1996 and 4,320,000 shares in 1995 272,664 180,000 Paid-in capital 3,763,799 3,070,795 Retained earnings 50,886,020 45,630,676 Unrealized gain on securities available for sale, net of tax 4,504,173 4,381,958 Treasury stock, at cost; 40,695 shares in 1995 -- (326,931) - -------------------------------------------------------------------------- ------------------ --------------------- Total shareholders' equity 59,426,656 52,936,498 - -------------------------------------------------------------------------- ------------------ -------------------- Total liabilities and shareholders' equity $60,211,666 $53,622,687 - -------------------------------------------------------------------------- ------------------ --------------------
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 1995 1994 - --------------------------------------------------------------------- ---------------- ----------------- ---------------- Cash flow from operating activities: Net income $8,425,338 $7,687,967 $6,264,640 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (5,425,338) (4,855,967) (4,488,640) Decrease (increase) in dividend receivable 90,000 (288,000) (210,000) Decrease (increase) in recoverable income taxes -- 9,489 (9,489) - --------------------------------------------------------------------- ---------------- ----------------- ----------------- Net cash provided by operating activities 3,090,000 2,553,489 1,556,511 - --------------------------------------------------------------------- ---------------- ----------------- ---------------- Cash flows from financing activities: Purchase of treasury stock (240,500) -- -- Proceeds from issuance of common stock 1,262,316 496,349 322,663 Cash dividends paid (2,980,390) (2,489,767) (1,915,521) - --------------------------------------------------------------------- ----------------- ----------------- ---------------- Net cash used in financing activities (1,958,574) (1,993,418) (1,592,858) - --------------------------------------------------------------------- ----------------- ----------------- ---------------- Net increase (decrease) in cash 1,131,426 560,071 (36,347) Cash at beginning of year 805,171 245,100 281,447 - --------------------------------------------------------------------- ---------------- ----------------- ---------------- Cash at end of year $1,936,597 $805,171 $245,100 - --------------------------------------------------------------------- ---------------- ----------------- ----------------
INDEPENDENT AUDITORS' REPORT {firm logo here} KPMG Peat Marwick LLP The Board of Directors and Shareholders Washington Trust Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary (the Corporation) as of December 31, 1996 and 1995 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, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Providence, Rhode Island January 14, 1997 SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION Washington Trust Bancorp, Inc. and Subsidiary
1996 Q1 Q2 Q3 Q4 YEAR - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Interest income: Interest and fees on loans $ 8,836,844 $ 8,977,336 $ 9,149,276 $ 9,142,891 $36,106,347 Income from securities 1,856,900 1,867,411 2,643,168 3,123,431 9,490,910 Interest on federal funds sold and securities purchased under agreements to resell 84,772 55,308 39,944 28,683 208,707 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total interest income 10,778,516 10,900,055 11,832,388 12,295,005 45,805,964 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Interest expense: Savings deposits 967,362 947,991 965,344 916,228 3,796,925 Time deposits 3,077,333 3,099,747 3,117,174 3,183,930 12,478,184 Other 342,867 507,596 960,264 1,580,705 3,391,432 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total interest expense 4,387,562 4,555,334 5,042,782 5,680,863 19,666,541 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net interest income 6,390,954 6,344,721 6,789,606 6,614,142 26,139,423 Provision for loan losses 300,000 300,000 300,000 300,000 1,200,000 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net interest income after provision for loan losses 6,090,954 6,044,721 6,489,606 6,314,142 24,939,423 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Noninterest income: Trust income 875,987 1,016,433 904,135 960,219 3,756,774 Service charges on deposit accounts 492,837 553,990 552,778 568,443 2,168,048 Merchant processing fees 94,338 143,635 405,383 173,515 816,871 Net gains (losses) on sales of securities 197,590 (49,253) 117,689 101,492 367,518 Net gains on loan sales 28,995 46,046 65,693 79,525 220,259 Other income 208,123 284,817 256,450 240,927 990,317 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total noninterest income 1,897,870 1,995,668 2,302,128 2,124,121 8,319,787 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Noninterest expense: Salaries and employee benefits 2,704,354 2,777,604 2,879,537 2,810,002 11,171,497 Net occupancy 328,225 306,815 309,651 356,108 1,300,799 Equipment 364,767 371,845 387,690 412,595 1,536,897 Deposit taxes and assessments 65,180 71,820 68,500 68,500 274,000 Merchant processing costs 67,445 146,208 297,768 125,669 637,090 Office supplies 141,661 101,928 136,227 154,096 533,912 Other 1,177,969 1,289,419 1,193,834 1,420,455 5,081,677 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total noninterest expense 4,849,601 5,065,639 5,273,207 5,347,425 20,535,872 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Income before income taxes 3,139,223 2,974,750 3,518,527 3,090,838 12,723,338 Income tax expense 1,130,000 948,000 1,198,000 1,022,000 4,298,000 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net income $2,009,223 $2,026,750 $2,320,527 $2,068,838 $8,425,338 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Fully diluted earnings per share $.46 $.45 $.51 $.46 $1.87 Cash dividends declared per share $.17 $.18 $.18 $.18 $.71 1995 Q1 Q2 Q3 Q4 Year - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Interest income: Interest and fees on loans $8,737,731 $8,936,551 $9,008,831 $9,020,457 $35,703,570 Income from securities 1,305,386 1,305,166 1,484,315 1,632,537 5,727,404 Interest on federal funds sold and securities purchased under agreements to resell 101,283 192,671 281,664 279,588 855,206 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total interest income 10,144,400 10,434,388 10,774,810 10,932,582 42,286,180 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Interest expense: Savings deposits 994,100 961,300 993,927 996,692 3,946,019 Time deposits 2,498,335 2,994,511 3,123,944 3,153,306 11,770,096 Other 408,691 341,584 274,886 273,988 1,299,149 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total interest expense 3,901,126 4,297,395 4,392,757 4,423,986 17,015,264 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net interest income 6,243,274 6,136,993 6,382,053 6,508,596 25,270,916 Provision for loan losses 150,000 300,000 275,000 675,000 1,400,000 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net interest income after provision for loan losses 6,093,274 5,836,993 6,107,053 5,833,596 23,870,916 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Noninterest income: Trust income 777,823 847,232 808,735 821,704 3,255,494 Service charges on deposit accounts 470,287 486,278 491,763 502,571 1,950,899 Merchant processing fees 76,529 115,089 367,015 171,816 730,449 Net gains on sales of securities -- 169,210 111,198 215,409 495,817 Net gains (losses) on loan sales 21,989 26,086 (193,143) 9,217 (135,851) Other income 254,446 209,481 214,744 227,358 906,029 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total noninterest income 1,601,074 1,853,376 1,800,312 1,948,075 7,202,837 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Noninterest expense: Salaries and employee benefits 2,590,921 2,569,163 2,588,549 2,474,527 10,223,160 Net occupancy 301,097 277,289 324,673 318,868 1,221,927 Equipment 309,445 311,235 315,748 355,235 1,291,663 Deposit taxes and assessments 308,117 310,849 40,036 110,581 769,583 Merchant processing costs 42,348 111,510 258,218 116,609 528,685 Office supplies 129,603 145,327 85,802 100,769 461,501 Other 1,162,187 1,249,387 1,182,518 1,264,175 4,858,267 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Total noninterest expense 4,843,718 4,974,760 4,795,544 4,740,764 19,354,786 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Income before income taxes 2,850,630 2,715,609 3,111,821 3,040,907 11,718,967 Income tax expense 1,012,000 965,000 1,079,000 975,000 4,031,000 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Net income $1,838,630 $1,750,609 $2,032,821 $2,065,907 $7,687,967 - ------------------------------------------ --------------- --------------- --------------- --------------- ---------------- Fully diluted earnings per share $.43 $.40 $.46 $.47 $1.74 Cash dividends declared per share $.14 $.15 $.16 $.16 $.61
EX-21 4 EXHIBIT 21 Subsidiaries of the Registrant Name of Subsidiary State of Incorporation The Washington Trust Company of Westerly Rhode Island EX-23 5 EXHIBIT 23 Accountants' Consent The Board of Directors Washington Trust Bancorp, Inc.: We consent to incorporation by reference in the Registration Statement Nos. 33-23048 and 333-13167 on Form S-8 and in the Registration Statement Nos. 33-28065 and 333-13821 on Form S-3 of Washington Trust Bancorp, Inc. of our report dated January 14, 1997, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995 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, 1996, which report has been incorporated by reference in the December 31, 1996 annual report on Form 10-K of Washington Trust Bancorp, Inc. KPMG Peat Marwick LLP Providence, Rhode Island March 24, 1997 EX-27 6
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST BANCORP, INC. AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 17,418,414 0 1,548,136 0 198,317,453 27,925,855 28,114,427 418,993,414 8,495,138 694,945,758 476,561,281 14,000,000 6,464,533 138,493,288 0 0 272,664 59,153,992 694,945,758 36,106,347 9,490,910 208,707 45,805,964 16,275,109 19,666,541 26,139,423 1,200,000 367,518 20,535,872 12,723,338 12,723,338 0 0 8,425,338 1.88 1.87 8.57 7,542,400 1,446,967 0 5,200,000 7,784,516 1,273,148 783,770 8,495,138 8,495,138 0 2,461,559 See discussion of potential problem loans required by Guide 3, section III.C.2 under the caption Guide 3 Statistical Disclosures in the Corporation's Form 10-K.
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