UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998 or
[X] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
-----------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
-----------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
(401) 348-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the 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. Yes [X] No [ ]
The number of shares of common stock of the registrant outstanding as of
October 31, 1998 was 9,995,396.
Page 1
<PAGE>
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended September 30, 1998
TABLE OF CONTENTS
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Condensed Notes to Consolidated Financial Statements 8
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information 19
Signatures 20
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $16,106 $12,925
Federal funds sold and other short-term investments 4,505 13,203
Mortgage loans held for sale 4,172 3,772
Securities:
Available for sale, at fair value 305,973 237,366
Held to maturity, at cost 58,890 51,807
- ---------------------------------------------------------------------------------------------
Total securities 364,863 289,173
Federal Home Loan Bank stock, at cost 16,444 16,444
Loans 448,056 455,910
Less allowance for loan losses 10,074 8,835
- ---------------------------------------------------------------------------------------------
Net loans 437,982 447,075
Premises and equipment, net 23,067 21,821
Accrued interest receivable 5,461 4,896
Other real estate owned, net 319 497
Other assets 4,748 4,587
- ---------------------------------------------------------------------------------------------
Total assets $877,667 $814,393
- ---------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $91,132 $75,282
Savings 205,181 185,073
Time 271,286 270,571
- ---------------------------------------------------------------------------------------------
Total deposits 567,599 530,926
Dividends payable 1,000 927
Short-term borrowings 1,544 20,337
Federal Home Loan Bank advances 227,720 187,001
Accrued expenses and other liabilities 8,319 7,998
- ---------------------------------------------------------------------------------------------
Total liabilities 806,182 747,189
- ---------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 10,004,398 shares
in 1998 and 6,601,947 shares in 1997 628 413
Paid-in capital 2,894 3,705
Retained earnings 60,626 56,360
Accumulated other comprehensive income 7,531 7,059
Treasury stock, at cost; 9,002 shares in 1998
and 14,205 shares in 1997 (194) (333)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 71,485 67,204
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $877,667 $814,393
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands,
CONSOLIDATED STATEMENTS OF INCOME except per share data)
(Unaudited)
Three Months Nine Months
--------------------------------------------
Periods ended September 30, 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $9,925 $9,954 $30,019 $28,940
Interest on securities 5,133 4,299 14,837 12,276
Dividends on corporate stock and Federal Home Loan Bank stock 494 525 1,538 1,424
Interest on federal funds sold and other short-term investments 162 128 445 259
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 15,714 14,906 46,839 42,899
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 920 895 2,592 2,615
Time deposits 3,681 3,776 11,497 10,545
Federal Home Loan Bank advances 3,341 2,812 9,744 7,982
Other 122 126 642 654
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 8,064 7,609 24,475 21,796
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 7,650 7,297 22,364 21,103
Provision for loan losses 450 400 1,350 1,000
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Net interest income after provision for loan losses 7,200 6,897 21,014 20,103
- ---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,344 1,056 3,929 3,367
Service charges on deposit accounts 714 611 2,089 1,787
Merchant processing fees 557 483 934 764
Net gains on sales of securities 232 56 624 683
Net gains on loan sales 300 209 1,043 343
Other income 254 246 761 751
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,401 2,661 9,380 7,695
- ---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 3,616 3,241 10,507 9,397
Net occupancy 607 457 1,568 1,266
Equipment 632 535 1,820 1,505
Merchant processing costs 440 370 778 625
Office supplies 181 139 517 525
Advertising and promotion 211 195 492 508
Other 1,347 1,158 4,332 3,912
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 7,034 6,095 20,014 17,738
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,567 3,463 10,380 10,060
Income tax expense 998 1,099 2,906 3,284
- ---------------------------------------------------------------------------------------------------------------------
Net income $2,569 $2,364 $7,474 $6,776
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share - basic $.26 $.24 $.75 $.69
Earnings per share - diluted $.25 $.23 $.72 $.66
Cash dividends declared per share $.10 $.09 $.30 $.26
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Nine months ended September 30, Stock Capital Earnings Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Balance at beginning of year $413 $3,705 $56,360 $7,059 $(333) $67,204
Net income 7,474 7,474
Other comprehensive income, net of tax:
Valuation adjustments for securities
available for sale 472 472
---------
Comprehensive income 7,946
Cash dividends declared (2,999) (2,999)
3-for-2 stock split in the form of a
stock dividend 209 (209) -
Shares issued and acquired for
stock option plan and dividend
reinvestment plan 6 (811) 3,144 2,339
Shares repurchased (3,005) (3,005)
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $628 $2,894 $60,626 $7,531 $(194) $71,485
- -----------------------------------------------------------------------------------------------------------------------
1997
Balance at beginning of year $273 $3,764 $50,886 $4,504 $ - $59,427
Net income 6,776 6,776
Other comprehensive income, net of tax:
Valuation adjustments for securities
available for sale 2,338 2,338
---------
Comprehensive income 9,114
Cash dividends declared (2,543) (2,543)
Shares issued and acquired for
stock option plan and dividend
reinvestment plan 2 272 432 706
Shares repurchased (1,115) (1,115)
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $275 $4,036 $55,119 $6,842 $(683) $65,589
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $7,474 $6,776
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,350 1,000
Depreciation of premises and equipment 1,831 1,478
Amortization of premium in excess of accretion of discount on
debt securities 831 650
Net gains on sales of securities (624) (683)
Net gains on loan sales (1,043) (343)
Proceeds from sales of loans 63,345 16,999
Loans originated for sale (62,797) (16,825)
Increase in accrued interest receivable (566) (1,121)
Increase in other assets (161) (904)
Increase in accrued expenses and other liabilities 78 1,985
Other, net (202) (178)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,516 8,834
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities: Securities available for sale:
Purchases (173,292) (111,826)
Proceeds from sales 62,817 49,677
Maturities and principal repayments 42,377 25,459
Securities held to maturity:
Purchases (12,162) (23,756)
Maturities and principal repayments 5,077 1,957
Purchases of Federal Home Loan Bank stock - (4,761)
Loan originations under (over) principal collected on loans 7,726 (32,709)
Purchase of loans - (324)
Proceeds from sales of other real estate owned 504 565
Purchases of premises and equipment (3,087) (3,869)
Purchase of deposits, net of premium paid - 7,014
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (70,040) (92,573)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 36,674 47,401
Net decrease in other short-term borrowings (18,793) (3,445)
Proceeds from Federal Home Loan Bank advances 439,300 351,100
Repayment of Federal Home Loan Bank advances (398,581) (301,501)
Repurchase of common stock (3,005) (1,115)
Proceeds from issuance of common stock 2,339 706
Cash dividends paid (2,927) (2,452)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 55,007 90,694
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,517) 6,955
Cash and cash equivalents at beginning of year 26,128 18,990
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $20,611 $25,945
- -------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Nine months ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $311 $635
Loans charged off 427 960
Loans made to facilitate the sale of other real estate owned - 374
Increase in net unrealized gain on securities available for sale 472 2,338
Supplemental Disclosures:
Interest payments $24,731 $21,299
Income tax payments 1,783 2,002
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accounting and reporting policies of Washington Trust Bancorp, Inc. (the
"Corporation") are in accordance with generally accepted accounting principles
and conform to general practices of the banking industry. In the opinion of
management, the accompanying consolidated financial statements present fairly
the Corporation's financial position as of September 30, 1998 and December 31,
1997 and the results of operations and cash flows for the interim periods
presented. The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, The Washington Trust Company. All
significant intercompany balances and transactions have been eliminated.
The unaudited consolidated financial statements of the Corporation presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997,
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997.
All share and per share amounts have been adjusted to reflect a 3-for-2 split of
the Corporation's common stock effected on August 3, 1998.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
SFAS No. 130 established standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. The Corporation has adopted SFAS No. 130 effective for the
quarter ended March 31, 1998.
(2) Securities Available for Sale
<TABLE>
<CAPTION>
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $120,870 $2,581 $(95) $123,356
Mortgage-backed securities 141,337 867 (426) 141,778
Corporate bonds 18,465 317 (88) 18,694
Corporate stocks 12,920 9,285 (60) 22,145
- ---------------------------------------------------------------------------------------------------------------------
Total 293,592 13,050 (669) 305,973
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 89,632 1,000 (40) 90,592
Mortgage-backed securities 121,728 865 (61) 122,532
Corporate bonds 1,985 15 - 2,000
Corporate stocks 12,319 9,976 (53) 22,242
- ---------------------------------------------------------------------------------------------------------------------
Total $225,664 $11,856 $(154) $237,366
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities available for sale with a fair value of $14,212 and $29,127 were
pledged to secure Treasury Tax and Loan deposits, short-term borrowings and
public deposits at September 30, 1998 and December 31, 1997, respectively. For
the nine months ended September 30, 1998, proceeds from sales of securities
available for sale amounted to $62,817, while net realized gains on these sales
amounted to $624.
<PAGE>
(3) Securities Held to Maturity
<TABLE>
<CAPTION>
The amortized cost and fair value of securities held to maturity are summarized
as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $22,975 $226 $ - $23,201
Mortgage-backed securities 9,044 359 - 9,403
States and political subdivisions 26,871 551 - 27,422
- ---------------------------------------------------------------------------------------------------------------------
Total 58,890 1,136 - 60,026
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 23,932 245 (4) 24,173
Mortgage-backed securities 10,695 377 - 11,072
States and political subdivisions 17,180 161 - 17,341
- ---------------------------------------------------------------------------------------------------------------------
Total $51,807 $783 $(4) $52,586
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales or transfers of securities held to maturity during the nine
months ended September 30, 1998.
(4) Loan Portfolio The following is a summary of loans:
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Commercial:
Mortgages $69,186 $62,264
Construction and development 460 3,539
Other (1) 115,341 127,956
- --------------------------------------------------------------------------------
Total commercial 184,987 193,759
Residential real estate:
Mortgages 178,744 181,790
Homeowner construction 7,990 6,097
- --------------------------------------------------------------------------------
Total residential real estate 186,734 187,887
Consumer (2) 76,335 74,264
- --------------------------------------------------------------------------------
Total loans $448,056 $455,910
- --------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate. (2) Includes credit card loans
totaling $4.9 million and $5.2 million at September 30, 1998 and December 31,
1997, respectively.
(5) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three Months Nine Months
------------------------------------------------
Periods ended September 30, 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of period $9,712 $8,411 $8,835 $8,495
Provision charged to expense 450 400 1,350 1,000
Recoveries 140 144 111 288
Loans charged off (228) (132) (427) (960)
- --------------------------------------------------------------------------------
Balance at end of period $10,074 $8,823 $10,074 $8,823
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheet of Washington Trust
Bancorp, Inc. and subsidiary (the "Corporation") as of September 30, 1998, and
the related consolidated statements of income for the three-month and nine-month
periods ended September 30, 1998 and 1997, and changes in shareholders' equity
and cash flows for the nine-month periods ended September 30, 1998 and 1997.
These consolidated financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK, LLP
Providence, Rhode Island
October 13, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This form 10-Q contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Corporation's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general national or regional economic conditions, changes in interest
rates, reductions in deposit levels necessitating increased borrowing to fund
loans and investments, changes in the size and nature of the Corporation's
competition, changes in loan default and charge off rates, and changes in the
assumptions used in making such forward-looking statements.
Results of Operations
Net income for the three months ended September 30, 1998 amounted to $2.6
million, up 8.7% over the $2.4 million of net income recorded in the third
quarter of 1997. Diluted earnings per share for the quarter ended September 30,
1998 amounted to $.25, up from $.23 per share on net income earned in the
comparable 1997 quarter. Net income for the nine months ended September 30, 1998
amounted to $7.5 million, an increase of 10.3% from the $6.8 million reported
for the comparable 1997 period. Diluted earnings per share for the nine months
ended September 30, 1998 amounted to $.72, up 9.1% from the $.66 per share in
the same 1997 period.
Net interest income for the third quarter of 1998 increased by 4.8% over the
prior year third quarter, to $7.7 million. Net interest income for the nine
months ended September 30, 1998 increased by 6.0% over the prior year period, to
$22.4 million. This increase was mainly attributable to net interest income
generated under an investment securities program. (See additional discussion
under the caption "Net Interest Income").
The provision for loan losses for the three months ended September 30, 1998
amounted to $450 thousand, up from $400 thousand for the third quarter of 1997.
For the nine months ended September 30, 1998 and 1997, the provision for loan
losses amounted to $1.4 million and $1.0 million, respectively. The allowance
for loan losses as a percentage of nonaccrual loans at September 30, 1998 and
December 31, 1997 was 162.72% and 120.45%, respectively.
Income tax expense for the third quarter of 1998 amounted to $998 thousand, down
from $1.1 million for the third quarter of 1997. For the nine months ended
September 30, 1998 and 1997, income tax expense amounted to $2.9 million and
$3.3 million, respectively. The Corporation's effective tax rate was 28.0% for
the nine months ended September 30, 1998, down from 32.6% for the comparable
1997 period. The decline in the effective tax rate was due to tax planning
strategies designed to reduce income taxes which were implemented in the fourth
quarter of 1997.
Other noninterest income (noninterest income excluding net gains on sales of
securities) amounted to $3.2 million for the third quarter of 1998, up 21.7%
from the corresponding 1997 period. Other noninterest income amounted to $8.8
million for the nine months ended September 30, 1998, up 24.9% from the
corresponding 1997 period. This increase was primarily due to increases in net
gains on loan sales, higher revenues for trust services as well as increases in
service charges earned on deposit accounts. Net gains on loan sales amounted to
$1.0 million and $343 thousand for the nine months ended September 30, 1998 and
1997, respectively. The increase in net gains on loan sales is attributable to
heavy refinancing activity resulting from lower interest rates. For the three
months ended September 30, 1998 and 1997, net gains on sales of securities
amounted to approximately $232 thousand and $56 thousand, respectively. For the
nine months ended September 30, 1998 and 1997, net gains on sales of securities
amounted to $624 thousand and $683 thousand, respectively.
Total noninterest expense for the quarter ended September 30, 1998 amounted to
$7.0 million, an increase of 15.4% from the comparable 1997 period. Total
noninterest expense for the nine months ended September 30, 1998 amounted to
$20.0 million, an increase of 12.8% over the comparable 1997 period. These
increases were primarily attributable to higher salaries and benefits expense
and increases in other expenses resulting from the Corporation's expansion of
its market area, and to a lessor extent to costs associated with Year 2000
issues. (See additional discussion of the expansion of the Corporation's market
area under the caption "Expansion". Equipment and net occupancy costs for the
nine months ended September 30, 1998 rose 23.9% and 20.9%, respectively, over
the prior year period due primarily to rental expense and depreciation of
premises and equipment incurred in connection with the Corporation's market area
expansion efforts.)
Included in other noninterest expense were contributions to the Corporation's
charitable foundation amounting to $323 thousand and $227 thousand for the nine
months ended September 30, 1998 and 1997, respectively. This donation resulted
in realized securities gains of $313 thousand and $208 thousand, respectively,
for the same periods.
Net Interest Income
(The accompanying schedule entitled "Average Balances / Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" is the basis of and should be read in
conjunction with this discussion.)
FTE net interest income for the nine months ended September 30, 1998 amounted to
$23.1 million, up 3.7% over the same 1997 period due primarily to the growth in
interest-earning assets described below. The interest rate spread and the net
interest margin for the nine months ended September 30, 1998 (3.18% and 3.78%,
respectively) have decreased from the comparable percentages for the same period
in 1997 (3.55% and 4.12%, respectively). These profitability ratios have
declined as a result of changes in interest rates and changes in the mix of
interest-earning assets. For the nine months ended September 30, 1998, average
interest-earning assets amounted to $814.3 million, an increase of $94.3
million, or 13.1%, over the comparable 1997 amount. The growth in average
interest-earning assets was due mainly to increases in average taxable debt
securities of $62.5 million and total average loans of $19.7 million. The
increase in average taxable debt securities resulted primarily from an
investment securities purchase program. The objective of the program is to
increase net interest income and improve returns on shareholders' equity, while
incurring limited interest rate risk. The securities purchased under this
program were funded with Federal Home Loan Bank (FHLB) advances with similar
interest rate repricing characteristics and growth in deposits. The average
yield on taxable debt securities for the nine months ended September 30, 1998
was 6.29%, compared to the prior year yield of 6.86%. The FTE rate of return on
average interest-earning assets was 7.79% for the nine months ended September
30, 1998, down from 8.16% for the same 1997 period primarily due to growth in
taxable debt securities and reduction in yields on taxable debt securities.
The average yield on total loans amounted to 8.88% for the nine months ended
September 30, 1998, down from 8.96% in the comparable 1997 period due primarily
to lower yields on new loan originations. Average total loans for the nine
months ended September 30, 1998 rose 4.6% over the prior year average and
amounted to $452.4 million. While all categories of loans are up on average over
the prior year, total loans have declined $7.9 million since December 31, 1997.
The decrease in total loans is attributable to heavy mortgage refinancing
activity, spurred by a low interest rate environment, as well as aggressive
competition for commercial and consumer loans. (See Note 4 to the Consolidated
Financial Statements for additional detail on the loan portfolio.)
The average yield on residential real estate loans amounted to 8.12% for the
nine months ended September 30, 1998, down slightly from the prior year period
yield of 8.15%. Average total consumer loans increased 12.4% over the prior year
and amounted to $74.8 million. The increase in consumer loan balances is
primarily attributable to demand for home equity lines. The average yield on
consumer loans was 9.08% for the nine months ended September 30, 1998, down from
9.32% for the comparable 1997 period. This decline in yield is primarily
attributable to pricing on the home equity line portfolio. The average yield on
the home equity line portfolio was 8.84% and 9.64%, respectively for the nine
months ended September 30, 1998 and 1997. The average yield on commercial loans
amounted to 9.54%, down slightly from the prior year yield of 9.59%.
The Corporation's cost of funds on interest-bearing liabilities amounted to
4.61% for the nine months ended September 30, 1998, unchanged from the
comparable 1997 period. FHLB advances have the highest overall cost of funds
rate of the bank's interest-bearing liabilities. Average total FHLB advances for
the nine months ended September 30, 1998 amounted to $222.1 million, up 22.4%
from the $181.5 million average balance for the same 1997 period. The additional
advances were used primarily to purchase securities under the investment
program. The average rate paid on FHLB advances for the nine months ended
September 30, 1998 was 5.85%, compared to the prior year rate of 5.86%. Average
total time deposits rose 8.7% from the prior year amount, to $280.4 million. The
rate paid on time deposits amounted to 5.47%, up slightly from the prior year
rate. Average total savings deposits for the nine months ended September 30,
1998 increased 11.6% from the comparable 1997 amount to $102.0 million. The rate
paid on these deposits was 2.31% for the first nine months of 1998, down 17
basis points from the same 1997 period. For the nine months ended September 30,
1998, average total demand deposits, an interest-free funding source, were up by
$11.1 million, or 16.0%, from the same prior year period.
The Corporation supplements its interest rate risk management strategies with
off-balance sheet transactions. In March 1998, the Corporation entered into a
five year interest rate floor contract with a notional amount of $20 million.
The purpose of the floor contract is to offset the risk of future reductions in
interest earned on certain floating rate loans. This floor contract entitles the
Corporation to receive payment from a counterparty if the three-month LIBOR rate
falls below 5.50%. The amount of the payment is the difference between the
contractual floor rate and the three-month LIBOR rate multiplied by the notional
principal amount of the contract. If the contractual rate does not fall below
the floor rate, no payment is received. The credit risk associated with this
type of transaction is risk of default by the counterparty. To minimize this
risk, the Corporation enters into interest rate contracts only with creditworthy
counterparties. The notional amount of the agreement does not represent the
amount exchanged by the parties and, therefore, is not a measure of the
Corporation's potential loss exposure.
<PAGE>
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
The following table sets forth average balance and interest rate information.
Income is presented on a fully taxable equivalent basis (FTE). 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>
Nine months ended September 30, 1998 1997
- ------------------------------------------ ------------------------------------ ----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------- ------------- ------------ ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Residential real estate loans $187,220 $11,396 8.12% $178,411 $10,909 8.15%
Commercial and other loans 190,414 13,629 9.54% 187,757 13,501 9.59%
Consumer loans 74,766 5,093 9.08% 66,515 4,651 9.32%
- -------------------------------------------------------------------------------------------------------------------
Total loans 452,400 30,118 8.88% 432,683 29,061 8.96%
Federal funds sold and other
short-term investments 10,803 445 5.50% 6,394 259 5.41%
Taxable debt securities 299,791 14,151 6.29% 237,340 12,207 6.86%
Nontaxable debt securities 21,310 1,037 6.49% 15,647 779 6.64%
Corporate stocks and FHLB stock 29,966 1,805 8.03% 27,944 1,743 8.32%
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 814,270 47,556 7.79% 720,008 44,049 8.16%
Non interest-earning assets 50,834 46,088
- -------------------------------------------------------------------------------------------------------------------
Total assets $865,204 $766,096
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits $101,956 $1,764 2.31% $91,320 $1,698 2.48%
NOW account deposits 64,563 454 .94% 59,121 464 1.05%
Money market deposits 23,466 374 2.12% 25,017 453 2.41%
Time deposits 280,393 11,497 5.47% 257,893 10,545 5.45%
FHLB advances 222,127 9,744 5.85% 181,546 7,982 5.86%
Other 15,108 642 5.66% 15,621 654 5.59%
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 707,613 24,475 4.61% 630,518 21,796 4.61%
Demand deposits 80,175 69,108
Non interest-bearing liabilities 7,421 5,176
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 795,209 704,802
Total shareholders' equity 69,995 61,294
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $865,204 $766,096
- -------------------------------------------------------------------------------------------------------------------
Net interest income /
interest rate spread $23,081 3.18% $22,253 3.55%
- -------------------------------------------------------------------------------------------------------------------
Net interest margin 3.78% 4.12%
- -------------------------------------------------------------------------------------------------------------------
<FN>
Interest income amounts presented in the table above include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Nine months ended September 30, 1998 1997
- --------------------------------------------------------------------------------
Commercial and other loans $99 $121
Taxable debt securities - 434
Nontaxable debt securities 351 276
Corporate stocks 267 319
</FN>
</TABLE>
<PAGE>
Financial Condition and Liquidity
Total assets amounted to $877.7 million at September 30, 1998, an increase of
$63.3 million, or 7.8%, from the December 31, 1997 amount of $814.4 million.
Average assets totaled $865.2 million for the nine months ended September 30,
1998, up by 12.9% over the comparable 1997 period.
Securities Available for Sale - The carrying value of securities available for
sale at September 30, 1998 amounted to $306.0 million, an increase of 28.9% over
the December 31, 1997 amount of $237.4 million. This increase was primarily
attributable to purchases of securities under the Corporation's investment
program. The net unrealized gain on securities available for sale amounted to
$12.4 million, up 5.8% from the December 31, 1997 balance of $11.7 million. This
increase was attributable to the decline in interest rates occurring in 1998, as
well as the year to date increase in portfolio balances.
Securities Held to Maturity - The carrying value of securities held to maturity
totaled $58.9 million at September 30, 1998, up from $51.8 million at December
31, 1997. This increase is due to purchases of securities of states and
political subdivisions. The net unrealized gain on securities held to maturity
totaled approximately $1.1 million at September 30, 1998, up from $779 thousand
at December 31, 1997.
Loans - Total loans amounted to $448.1 million at September 30, 1998, down from
the December 31, 1997 balance of $455.9 million. The decrease in total loans can
be attributed to heavy mortgage refinancing activity, spurred by a low interest
rate environment, as well as aggressive competition for commercial and consumer
loans. Commercial loans totaled $185.0 million at September 30, 1998, a decline
of $8.8 million or 4.5% from December 31, 1997 balance. Residential real estate
loans amounted to $186.7 million at September 30, 1998, down from the December
31, 1997 balance of $187.9 million. Total consumer loan balances rose $2.1
million to $76.3 million during the first nine months of 1998.
Deposits - Total deposits amounted to $567.6 million at September 30, 1998, up
by 6.9% from the December 31, 1997 total of $530.9 million. Savings and demand
deposits increased by $20.1 million and $15.9 million, respectively, during this
period due to normal seasonal deposit inflow. Time deposits amounted to $271.3
million at September 30, 1998, compared to $270.6 million at December 31, 1997.
Borrowings - The Corporation utilizes FHLB advances as a funding source. FHLB
advances amounted to $227.7 million at September 30, 1998, up by $40.7 million
from the December 31, 1997 amount. The additional FHLB advances were used to
purchase securities under the investment program. Short-term borrowings
outstanding at September 30, 1998 amounted to $1.5 million, down $18.8 million
from the balance at December 31, 1997.
For the nine months ended September 30, 1998, net cash provided by operations
amounted to $9.5 million, the majority of which was generated by net income. A
lower interest rate environment resulted in increased volume of mortgage loans
originated for sale into the secondary market. Loans originated for sale in the
first nine months of 1998 amounted to $62.8 million, significantly higher than
the $16.8 million originated in the corresponding 1997 period. Proceeds from
sales of loans in the nine months ended September 30, 1998 amounted to $63.3
million, up from $17.0 million in the comparable 1997 period. Net cash used in
investing activities amounted to $70.0 million and was primarily used to
purchase securities available for sale. Net cash provided by financing
activities of $55.0 million was generated mainly by a net increase in FHLB
advances of $40.7 million, and by an increase in deposits of $36.7 million. (See
Consolidated Statements of Cash Flows for additional information.)
Expansion
During the first quarter of 1998, the Corporation opened a financial services
branch office in New London, Connecticut. Financial services provided at the
office include trust and investment management, commercial lending and
residential mortgage origination. The office does not currently accept deposits
nor perform other retail banking services, but may offer them in the future. The
Corporation has also opened an operations center located in Westerly, Rhode
Island. Operations functions previously performed at the Corporation's
headquarters were relocated to this leased facility during the second quarter of
1998. In October 1998, the Corporation announced an agreement to provide trust
and investment management services to customers of Bank Rhode Island and Pier
Bank, two Rhode Island financial institutions. Under the agreement, the
Corporation will provide a full-line of investment management and trust
services, including financial planning, estate and tax planning. The alliances
enable the Corporation to generate fee income and also enable Bank Rhode Island
and Pier Bank to offer professional trust services to their customers.
Nonperforming Assets
Nonperforming assets are summarized in the following table:
September 30, December 31,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $3,258 $4,089
Nonaccrual loans less than 90 days past due 2,933 3,246
- --------------------------------------------------------------------------------
Total nonaccrual loans 6,191 7,335
Other real estate owned 319 497
- --------------------------------------------------------------------------------
Total nonperforming assets $6,510 $7,832
- --------------------------------------------------------------------------------
Nonaccrual loans as a % of total loans 1.38% 1.61%
Nonperforming assets as a % of total assets .74% .96%
Allowance for loan losses to nonaccrual loans 162.72% 120.45%
Not included in the analysis of nonperforming assets at September 30, 1998 and
December 31, 1997 above are approximately $155 thousand and $644 thousand,
respectively, of loans greater than 90 days past due and still accruing. These
loans consist primarily of residential mortgages which are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
Impaired loans consist of all nonaccrual commercial loans. At September 30,
1998, the recorded investment in impaired loans was $4.3 million, including $4.1
million which had a related allowance amounting to $867 thousand. The balance of
impaired loans which did not require an allowance at September 30, 1998 was $168
thousand. During the nine months ended September 30, 1998, the average recorded
investment in impaired loans was $5.5 million. Also during this period, interest
income recognized on impaired loans amounted to approximately $284 thousand.
Interest income on impaired loans is recognized on a cash basis only.
The following is an analysis of nonaccrual loans by loan category:
September 30, December 31,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Residential mortgages $1,309 $1,290
Commercial:
Mortgages 1,475 1,977
Other (1) 2,806 3,616
Consumer 601 452
- --------------------------------------------------------------------------------
Total nonaccrual loans $6,191 $7,335
- --------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
Capital Resources
Total equity capital amounted to $71.5 million, or 8.1% of total assets at
September 30, 1998. This compares to $67.2 million, or 8.3% at December 31,
1997. The reduction in this ratio is due primarily to the growth in assets
resulting from the investment program. Total equity increased by approximately
$4.3 million from December 31, 1997. This increase was principally attributable
to a $4.7 million increase in earnings retention. (See the Consolidated
Statements of Changes in Shareholders' Equity for additional information.)
At September 30, 1998, the Corporation's Tier 1 capital ratio was 13.30% and the
total risk-adjusted capital ratio was 15.43%. These ratios were all above the
ratios required to be categorized as well-capitalized.
Dividends payable at September 30, 1998 totaled approximately $1.0 million,
representing $.10 per share paid on October 15, 1998, an increase of 11.1% over
the $.09 per share declared in the fourth quarter of 1997. The source of funds
for dividends paid by the Corporation is dividends received from its subsidiary
bank. The subsidiary bank is a regulated enterprise, and as such its ability to
pay dividends to the parent is subject to regulatory review and restriction.
On June 18, 1998, the Corporation's board of directors voted to approve a
3-for-2 stock split of the Corporation's common stock. The stock split, in the
form of a stock dividend, was paid on August 3, 1998 to shareholders of record
as of July 17, 1998. The intent of the stock split was to increase the stock's
liquidity and place it in a trading range that is more attractive to investors
interested in the Corporation. Cash payments were made in lieu of issuing
fractional shares. The cash payment for fractional shares was based on the
closing price of the common stock as reported by NASDAQ on the record date.
Book value per share as of September 30, 1998 and 1997 amounted to $7.15 and
$6.64, respectively.
Year 2000
The Corporation has developed a Year 2000 Project Plan (the "Plan") to address
the computer-related issues concerning the Century Date Change (the transition
from the year 1999 to 2000). The Corporation's information technology (IT) and
non-information technology (non IT) systems have been included in the Plan. The
Corporation uses internal computer systems, data communications systems and
telecommunications systems as well as outside service providers (including
hardware and software) to support and account for loans, deposits, fiduciary
services and other purposes. Substantially all of the application software used
by the Corporation is provided by outside vendors, under license or through
outside service bureaus. The Corporation has distinguished between
mission-critical and other, less critical, systems in assessing the needs of the
Plan.
The Plan includes five phases: awareness, assessment, renovation, validation and
testing, and contingency planning. The Corporation has substantially completed
the assessment phase of its computer systems, and has identified those areas
that are considered mission critical. The Plan calls for validation and testing
with respect to all internal mission critical systems to be completed by
December 31, 1998, and outsourced mission critical systems by March 31, 1999.
The Plan also calls for the Corporation to complete these procedures for
non-mission critical IT systems as well as embedded microcontrollers in non IT
systems by the third quarter of 1999. Although the evaluation process is
on-going and dynamic, management believes that the Corporation is currently on
schedule in accordance with the Plan. The Corporation's evaluation is subject to
on-going verification and review by its internal audit staff.
The Corporation expects that the total costs associated with the project will
amount to approximately $500 thousand. Included in noninterest expense for the
nine-month period ending September 30, 1998 are costs totaling approximately
$121 thousand, consisting primarily of system testing and modification, internal
staffing and consulting. Approximately $88 thousand of the remaining project
costs are expected to be incurred during the fourth quarter of 1998, the
majority of which will be included in noninterest expense. Most of the remaining
project costs will be incurred throughout 1999. The Corporation plans to account
for most of these costs as expense items. In some cases, acquired hardware and
software items will be capitalized and amortized in accordance with the
Corporation's existing accounting policy. The costs of the project and the date
on which the Corporation plans to complete Year 2000 testing are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors.
There can be no guarantee that the systems of other companies, or outside
vendors on which the Corporation's systems rely, will be remedied on a timely
basis. Therefore, the Corporation could possibly experience a negative impact to
the extent other entities not affiliated with the Corporation are not Year 2000
compliant.
The Corporation is in the process of evaluating the risk of customer failure to
prepare for the Century Date Change, any associated effect on the ability of
customers to repay outstanding loans, and impact on the adequacy of the level of
the allowance for loan losses. Because these efforts are now on-going, the
Corporation is unable to assess the likelihood of any material adverse effect at
this time.
The Corporation's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
These procedures will be expanded to include specific procedures for potential
Year 2000 issues, and contingency plans to protect against Year 2000-related
interruptions. These plans will include development of backup procedures and
identification of alternative suppliers. Contingency plans are expected to be
complete by June 30, 1999.
While the Corporation believes that it is taking reasonable steps with respect
to the Year 2000 issue, if the phases of the Plan are not completed on time, the
costs associated with becoming Year 2000 compliant exceed the Corporation's
estimates, third party providers are not Year 2000 compliant on a timely basis,
or customers with material loan obligations are unable to meet their repayment
obligations due to Year 2000 problems, the Year 2000 issue could have a material
impact on the Corporation's financial results. In addition, the Corporation's
efforts to address the Year 2000 issue are being monitored by its federal
banking regulators. Failure to be Year 2000 compliant on a timely basis could
subject the Corporation to formal supervisory or enforcement actions.
The preceding "Year 2000" discussion contains forward-looking statements which
represent the Corporation's beliefs or expectations regarding future events.
When used in the Year 2000 discussion, the words "believes," "expects,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, the
Corporation's expectations as to when it will complete the phases of the Plan,
its estimated costs, and its belief that its statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources, the ability to identify and remediate all date
sensitive lines of computer code, and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
Recent Accounting Developments
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information", is effective for financial
statements of public business enterprises for periods beginning after December
15, 1997. This Statement provides reporting standards for financial and
descriptive information on reportable operating segments. An operating segment
is defined as a component of an enterprise for which separate financial
information is available and reviewed regularly by the chief operating decision
maker in order to make decisions about resources to be allocated to the segment
and also to evaluate the segment's performance. SFAS No. 131 requires a
corporation to disclose certain balance sheet and income statement information
by operating segment, as well as provide a reconciliation of operating segment
information to the corporation's consolidated balances. The adoption of this
pronouncement may result in additional disclosures in the Corporation's
financial statements.
Effective January 1, 1998, the Corporation will adopt SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
SFAS Nos. 87, 88 and 106". SFAS No. 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures required by SFAS Nos. 87, 88 and 106. The adoption of this
pronouncement also requires restatement of disclosures for earlier periods.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 requires a corporation to
recognize all derivatives as either assets or liabilities in the balance sheet
and to measure those instruments at fair value. This Statement defines
conditions and criteria to be used in designating a derivative as a specific
type of hedging instrument. SFAS No. 133 also explains the accounting for
changes in the fair value of a derivative which depends on the intended use and
the resulting designation. Under this Statement, a corporation is required to
establish at the inception of the hedge the method to be used for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the corporation's approach to managing risk. SFAS No. 133 is
effective for all fiscal quarters beginning after June 15, 1999 and is not to be
applied retroactively to financial statements of prior periods. The Corporation
has not yet determined what the effect of the adoption of this pronouncement
will have on the financial position and earnings of the Corporation.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65", is effective for the first fiscal
quarter beginning after December 15, 1998. This Statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities", to require that after the
securitization of a mortgage loan held for sale, any retained mortgage-backed
securities should be classified in accordance with the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". This
Statement also requires that a mortgage banking enterprise classify as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process. The adoption of this pronouncement is not expected
to have a material impact on the Corporation's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's objective is to manage assets and funding sources to produce
results which are consistent with its liquidity, capital adequacy, growth, risk
and profitability goals.
The Corporation manages interest rate risk using income simulation to measure
interest rate risk inherent in its on-balance sheet and off-balance sheet
financial instruments at a given point in time by showing the effect of interest
rate shifts on net interest income over a 24 month period. The simulation
results are reviewed to determine whether the negative exposure of net interest
income to changes in interest rates remains within established tolerance levels
over a 24-month horizon, and to develop appropriate strategies to manage this
exposure. As of September 30, 1998, the Corporation's estimated exposure as a
percentage of net interest income for the next 12 month period and the
subsequent 12 month period thereafter (months 13 - 24), respectively, is as
follows:
Months 1 - 12 Months 13 - 24
-------------------------------------- ---------------- ----------------
200 basis point increase in rates -0.6% -2.8%
200 basis point decrease in rates +0.2% -3.3%
Since this simulation assumes the Corporation's balance sheet will remain static
over the 24-month simulation horizon, the results do not reflect adjustments in
strategy that the Corporation could implement in response to rate shifts, and
should therefore not be relied upon as a projection of net interest income.
For a complete discussion of interest rate sensitivity and liquidity, including
simulation assumptions, see the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997.
The Corporation also monitors the potential change in market value of its
available for sale debt securities using both parallel rate shifts of up to 200
basis points and "value at risk" analysis. The purpose is to determine market
value exposure which may not be captured by income simulation, but which might
result in changes to the Corporation's capital position. Results are calculated
using industry-standard modeling analytics and securities data. The Corporation
uses the results to manage the effect of market value changes on the
Corporation's capital position. As of September 30, 1998, an immediate 200 basis
point rise in rates would result in a 3.7% decline in the value of the
Corporation's available for sale debt securities. Conversely, a 200 basis point
fall in rates would result in a 2.1% increase in the value of the Corporation's
available for sale debt securities. "Value at risk" analysis measures the
theoretical maximum market value loss over a given time period based on recent
historical price activity of different classes of securities. The anticipated
maximum market value reduction for the bank's available for sale securities
portfolio at September 30, 1998, including both debt and equity securities, was
5.0%, assuming a one-year time horizon and a 5% probability of occurrence for
"value at risk" analysis.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
No material changes since the filing of the Registrant's Form 10-Q
for the quarter ended March 31, 1998.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
November 13, 1998 By: John C. Warren
-----------------------
John C. Warren
President and Chief Executive Officer
(principal executive officer)
November 13, 1998 By: David V. Devault
-------------------------
David V. Devault
Vice President, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Washington Trust Bancorp, Inc.
Computation of Per Share Earnings
For the Periods Ended September 30, 1998 and 1997
Three months ended September 30, 1998 1997
- ---------------------------------------------- ---------------------------------- ------------------------------
(In thousands, except per share amounts) Basic Diluted Basic Diluted
----------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net income $2,569 $2,569 $2,364 $2,364
Share amounts: (1)
Average outstanding 9,966.9 9,966.9 9,886.7 9,886.7
Common stock equivalents - 388.4 - 347.3
- --------------------------------------------- ----------------- ---------------- ---------------- --------------
Weighted average outstanding 9,966.9 10,355.3 9,886.7 10,234.0
- --------------------------------------------- ----------------- ---------------- ---------------- --------------
Earnings per share $.26 $.25 $.24 $.23
- --------------------------------------------- ----------------- ---------------- ---------------- --------------
<CAPTION>
Nine months ended September 30, 1998 1997
- --------------------------------------------- ---------------------------------- -------------------------------
(In thousands, except per share amounts) Basic Diluted Basic Diluted
----------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net income $7,474 $7,474 $6,776 $6,776
Share amounts: (1)
Average outstanding 9,966.9 9,966.9 9,860.5 9,860.5
Common stock equivalents - 394.7 - 362.8
- ----------------------------------------------- ---------------- ----------------- ---------------- --------------
Weighted average outstanding 9,966.9 10,361.6 9,860.5 10,223.3
- ----------------------------------------------- ---------------- ----------------- ---------------- --------------
Earnings per share $.75 $.72 $.69 $.66
- ----------------------------------------------- ---------------- ----------------- ---------------- --------------
<FN>
(1) Share amounts have been adjusted to reflect the three-for-two stock split
paid August 3, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST BANCORP, INC. AS
OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,106
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,505
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 305,973
<INVESTMENTS-CARRYING> 58,890
<INVESTMENTS-MARKET> 60,026
<LOANS> 448,056
<ALLOWANCE> 10,074
<TOTAL-ASSETS> 877,667
<DEPOSITS> 567,599
<SHORT-TERM> 1,544
<LIABILITIES-OTHER> 237,039
<LONG-TERM> 0
0
0
<COMMON> 628
<OTHER-SE> 70,857
<TOTAL-LIABILITIES-AND-EQUITY> 877,667
<INTEREST-LOAN> 30,019
<INTEREST-INVEST> 16,375
<INTEREST-OTHER> 445
<INTEREST-TOTAL> 46,839
<INTEREST-DEPOSIT> 14,089
<INTEREST-EXPENSE> 24,475
<INTEREST-INCOME-NET> 22,364
<LOAN-LOSSES> 1,350
<SECURITIES-GAINS> 624
<EXPENSE-OTHER> 20,014
<INCOME-PRETAX> 10,380
<INCOME-PRE-EXTRAORDINARY> 10,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,474
<EPS-PRIMARY> .75
<EPS-DILUTED> .72
<YIELD-ACTUAL> 4.12
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,835
<CHARGE-OFFS> 427
<RECOVERIES> 111
<ALLOWANCE-CLOSE> 10,074
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
