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
<PAGE>
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.
<TABLE>
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:
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
- --------------------------------------- ------------ ------------ ------------ ------------ ------------
</TABLE>
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
- ------------------------------------------------------------------
<TABLE>
A. The carrying amounts of securities held to maturity as of the dates
indicated are presented in the following table:
<CAPTION>
December 31, 1996 1995 1994
---------------------------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C>
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
---------------------------------------- --------------------- --------------------- --------------------
</TABLE>
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.
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
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
------------------------------------------- -------------------- -------------------- --------------------
</TABLE>
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.
<TABLE>
<CAPTION>
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
------------------------ ------------------------ ----------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------------------ ------------------------ ----------------------- -------------
</TABLE>
<TABLE>
<CAPTION>
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
------------------------ ------------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------------------ ------------------------- ------------------------- -------------
</TABLE>
C. Not applicable.
III. LOAN PORTFOLIO
- --------------------
<TABLE>
A. The following table sets forth the composition of the Corporation's loan
portfolio for each of the past five years:
<CAPTION>
December 31, 1996 1995 1994 1993 1992
---------------------------------- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
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
----------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
<TABLE>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 1996 follows:
<CAPTION>
One Year One to five After five
Matures in: or Less Years Years Total
---------------------------------------- ----------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
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
--------------------------------------- ----------------- ---------------- ----------------- ----------------
<FN>
(*) 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.
</FN>
</TABLE>
<TABLE>
Sensitivity to changes in interest rates for all such loans due after one
year is as follows:
<CAPTION>
Floating or
Predetermined Adjustable
Rates Rates Totals
------------------- ------------------------------ -----------
<S> <C> <C> <C>
Principal due after one year $18,143,168 $56,221,971 $74,365,139
------------------ ------------------------- ------------------
</TABLE>
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.
<TABLE>
a) Nonaccrual loans as of the dates indicated were as follows:
<CAPTION>
December 31, 1996 1995 1994 1993 1992
----------------- ------------------ ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$7,542,400 $8,573,656 $10,911,999 $16,221,963 $21,306,840
------------------ ----------------- ------------------ ----------------- -----------------
</TABLE>
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.
<TABLE>
b) Loans contractually past due 90 days or more and still accruing for the
dates indicated were as follows:
<CAPTION>
December 31, 1996 1995 1994 1993 1992
----------------- ------------------ ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$1,446,967 $256,276 $24,124 $22,455 $42,648
------------------ ----------------- ------------------ ----------------- -----------------
</TABLE>
<TABLE>
c) Restructured accruing loans for the dates indicated were as follows:
<CAPTION>
December 31, 1996 1995 1994 1993 1992
----------------- ------------------ ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ -- $ -- $364,824 $ -- $1,476,000
------------------ ----------------- ------------------ ----------------- -----------------
</TABLE>
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.
<TABLE>
Analysis of the Allowance for Loan Losses
<CAPTION>
December 31, 1996 1995 1994 1993 1992
------------------------------------- -------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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%
-------------- -------------- -------------- --------------- ---------------
</TABLE>
<TABLE>
B. The following table presents the allocation of the allowance for loan losses.
<CAPTION>
December 31, 1996 1995 1994 1993 1992
---------------------------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
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%
------------ ------------ ------------ ------------ -------------
</TABLE>
V. DEPOSITS
- ------------
<TABLE>
A. Average deposit balances outstanding and the average rates paid thereon are
presented in the following table:
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
--------------- ------------ --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
--------------- --------------- ---------------
</TABLE>
B. Not Applicable
C. Not Applicable
<TABLE>
D. The maturity schedule of time deposits in amounts of $100,000 or more at
December 31, 1996 was as follows:
<CAPTION>
Over 3 Over 6
3 months through through Over 12
or less 6 months 12 months months Total
--------------- ---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Time remaining
until maturity: $24,057,153 4,022,435 4,974,986 6,726,994 $39,781,568
--------------- --------------- ---------------- ----------------- --------------------
</TABLE>
E. Not applicable
VI. RETURN ON EQUITY AND ASSETS
- --------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
The following is a summary of amounts relating to short-term borrowings:
<CAPTION>
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
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%
---------------- ----------------- -----------------
</TABLE>
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.
<TABLE>
<CAPTION>
1996 QUARTERS 1 2 3 4
- ----------------------------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
<CAPTION>
1995 QUARTERS 1 2 3 4
- ----------------------------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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
EXHIBIT 11
<TABLE>
Washington Trust Bancorp, Inc.
Computation of Primary and Fully Diluted Earnings Per Share
For the Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
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
--------------- --------------- ---------------
</TABLE>
EXHIBIT 13
Washington Trust Bancorp, Inc.
1996 Annual Report to Shareholders
(Portions Incorporated by Reference)
<TABLE>
Five Year Summary of Selected Consolidated Financial Data
<CAPTION>
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
<FN>
(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
</FN>
</TABLE>
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.
<TABLE>
<CAPTION>
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)
- ------------------- ----------- ---------- ---------- ------------ ---------- ---------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
<FN>
(1) Interest amounts are presented on a fully taxable equivalent basis (see page 22 for additional information).
</FN>
</TABLE>
<TABLE>
Interest income amounts presented in the table on page 21 include the following
adjustments for taxable equivalency for the years indicated (in thousands):
<CAPTION>
Years ended December 31, 1996 1995 1994
- ----------------------------------- ------------- ---------------- -----------------
<S> <C> <C> <C>
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
<FN>
(1) Represents adjustment for U.S. Treasury and government agency obligations
which are exempt from state income taxes only.
</FN>
</TABLE>
<TABLE>
VOLUME/RATE ANALYSIS - INTEREST INCOME AND EXPENSE (FULLY TAXABLE EQUIVALENT BASIS)
<CAPTION>
1996/1995 1995/1994 1994/1993
- ------------------- -------- ------------- -------- -------- ------------- -------- ------- -------------- -------
Net Net Net
(In thousands) Volume Rate Change Volume Rate Change Volume Rate Change
- ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
</TABLE>
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.
<TABLE>
<CAPTION>
% Change
----------------------------------
(Dollars in thousands) 1996 1995 1994 1996 vs. 1995 1995 vs. 1994
- ------------------------------------------ ------------ ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
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%
- ------------------------------------------ ------------ ----------- ----------- ------------------- ----------------
</TABLE>
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%.
<TABLE>
<CAPTION>
% Change
----------------------------------
(Dollars in thousands) 1996 1995 1994 1996 vs. 1995 1995 vs. 1994
- ------------------------------------------ ------------ ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
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)%
- ------------------------------------------ ------------ ----------- ----------- ----------------- ----------------
</TABLE>
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.
<TABLE>
The following table presents nonperforming assets and related ratios (dollars in
thousands):
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------ ------------------ -------------------
<S> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------ ------------------ -------------------
<S> <C> <C>
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
- ------------------------------------------------------------ ------------------ -------------------
</TABLE>
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.
<TABLE>
The following table reflects the activity in the allowance for loan losses
(dollars in thousands):
<CAPTION>
Years ended December 31, 1996 1995
- ------------------------------------------------------------ ------------------- -------------------
<S> <C> <C>
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%
- ------------------------------------------------------------ ------------------- -------------------
</TABLE>
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.)
<TABLE>
<CAPTION>
3 months 3 to 6 6 months 1 to 5 Over
(In thousands) or less months to 1 year years 5 years
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------- -------------- ------------- ------------- ------------- ------------
</TABLE>
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.
<TABLE>
CONSOLIDATED BALANCE SHEETS
Washington Trust Bancorp, Inc. and Subsidiary
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------- ------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Washington Trust Bancorp, Inc. and Subsidiary
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Washington Trust Bancorp, Inc. and Subsidiary
<CAPTION>
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------- --------------- ----------------- --------------
COMMON STOCK
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Washington Trust Bancorp, Inc. and Subsidiary
<CAPTION>
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C>
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
</TABLE>
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
<TABLE>
Securities are summarized as follows:
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- ------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
December 31, 1996 Cost Value Yield
- ----------------------------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C>
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%
- ----------------------------------------- -------------------- -------------------- ------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- -------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
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
- -------------------------------------------- ------------------ ------------------- ------------------
</TABLE>
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
<TABLE>
The following is a summary of loans:
<CAPTION>
December 31, 1996 1995
- ----------------------------------------------------- ------------------------- --------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
<FN>
(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
</FN>
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
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
- ---------------------------------------------------------- ------------------ -------------------
<CAPTION>
Years ended December 31, 1996 1995
- ---------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
Average recorded investment in impaired loans $3,674,000 $6,412,000
- ---------------------------------------------------------- ------------------ -------------------
Interest income recognized on impaired loans $267,000 $414,000
- ---------------------------------------------------------- ------------------ -------------------
</TABLE>
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
<TABLE>
The following is an analysis of the allowance for loan losses:
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
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
- --------------------------------------------------- ------------------ ------------------- ------------------
</TABLE>
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
<TABLE>
The following is a summary of premises and equipment:
<CAPTION>
December 31, 1996 1995
- -------------------------------------------- ------------------- --------------------
<S> <C> <C>
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
- ------------------------------------------- -------------------- --------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ----------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------ -------------------- --------------------
<S> <C> <C>
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
- ------------------------------------------------ -------------------- --------------------
</TABLE>
<TABLE>
An analysis of the activity relating to other real estate owned follows:
<CAPTION>
Years ended December 31, 1996 1995
- ------------------------------------------------ -------------------- --------------------
<S> <C> <C>
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
- ------------------------------------------------ -------------------- --------------------
</TABLE>
<TABLE>
The following is an analysis of activity relating to the OREO valuation
allowance:
<CAPTION>
Years ended December 31, 1996 1995 1994
- ------------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
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
- ------------------------------------------------- ------------------ ------------------- -------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
Maximum amount outstanding at any month-end $14,000,000 $-- $3,745,000
- ------------------------------------------------------------ ---------------- ----------------- -----------------
Average amount outstanding $2,881,914 $-- $995,392
- ------------------------------------------------------------ ---------------- ----------------- -----------------
</TABLE>
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.
<TABLE>
The following table presents the Plan's funded status:
<CAPTION>
October 1, 1996 1995
- ---------------------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------- ----------------- ----------------
<FN>
(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%
</FN>
</TABLE>
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:
<TABLE>
<CAPTION>
October 1, 1996 1995
- -------------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
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
- -------------------------------------------------------------------------- ------------------- -----------------
</TABLE>
<TABLE>
The assumptions used and the components of net pension cost for the years ended
December 31, 1996, 1995 and 1994 include the following:
<CAPTION>
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------- --------------- --------------- ---------------
</TABLE>
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
<TABLE>
The components of income tax expense were as follows:
<CAPTION>
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
<TABLE>
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:
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
<TABLE>
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:
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
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)
- ------------------------------------------------------------ -------------------- ---------------------
</TABLE>
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.
<TABLE>
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:
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 1996 were as follows:
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
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:
<CAPTION>
Years ended December 31, 1996 1995
- ---------------------------------------- -------------------- --------------- ------------------ ------------------
<S> <C> <C>
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%
<FN>
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.
</FN>
</TABLE>
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.
<TABLE>
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:
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
<FN>
(1) Leverage ratio
</FN>
</TABLE>
(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.
<TABLE>
The following table presents the fair values of the Corporation's financial
instruments:
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------- --------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
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)
<FN>
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.
</FN>
</TABLE>
(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.
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------- -------------------- -------------------- -------------------
</TABLE>
<TABLE>
BALANCE SHEETS
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------- ------------------ --------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------- ------------------ --------------------
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
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
<TABLE>
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
Washington Trust Bancorp, Inc. and Subsidiary
<CAPTION>
1996 Q1 Q2 Q3 Q4 YEAR
- ------------------------------------------ --------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
1995 Q1 Q2 Q3 Q4 Year
- ------------------------------------------ --------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
EXHIBIT 21
Subsidiaries of the Registrant
Name of Subsidiary State of Incorporation
The Washington Trust Company of Westerly Rhode Island
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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,418,414
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,548,136
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 198,317,453
<INVESTMENTS-CARRYING> 27,925,855
<INVESTMENTS-MARKET> 28,114,427
<LOANS> 418,993,414
<ALLOWANCE> 8,495,138
<TOTAL-ASSETS> 694,945,758
<DEPOSITS> 476,561,281
<SHORT-TERM> 14,000,000
<LIABILITIES-OTHER> 6,464,533
<LONG-TERM> 138,493,288
0
0
<COMMON> 272,664
<OTHER-SE> 59,153,992
<TOTAL-LIABILITIES-AND-EQUITY> 694,945,758
<INTEREST-LOAN> 36,106,347
<INTEREST-INVEST> 9,490,910
<INTEREST-OTHER> 208,707
<INTEREST-TOTAL> 45,805,964
<INTEREST-DEPOSIT> 16,275,109
<INTEREST-EXPENSE> 19,666,541
<INTEREST-INCOME-NET> 26,139,423
<LOAN-LOSSES> 1,200,000
<SECURITIES-GAINS> 367,518
<EXPENSE-OTHER> 20,535,872
<INCOME-PRETAX> 12,723,338
<INCOME-PRE-EXTRAORDINARY> 12,723,338
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,425,338
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.87
<YIELD-ACTUAL> 8.57
<LOANS-NON> 7,542,400
<LOANS-PAST> 1,446,967
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,200,000<F1>
<ALLOWANCE-OPEN> 7,784,516
<CHARGE-OFFS> 1,273,148
<RECOVERIES> 783,770
<ALLOWANCE-CLOSE> 8,495,138
<ALLOWANCE-DOMESTIC> 8,495,138
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,461,559
<FN>
<F1>
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.
</FN>
</TABLE>
