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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
--------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
--------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
401-348-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0625 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $197,297,339 at February 26, 1999 which includes $18,019,999 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
February 26, 1999 was 10,056,952.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 19, 1999 for the Annual
Meeting of Shareholders to be held April 27, 1999 are incorporated by reference
into Part III of this Form 10-K.
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<PAGE>
FORM 10-K
WASHINGTON TRUST BANCORP, INC.
For the Year Ended December 31, 1998
TABLE OF CONTENTS
Page
Description 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 7A Quantitative and Qualitative Disclosures
about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial
Owners and Management
Item 13 Certain Relationships and Related Transactions
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general national or regional economic conditions, changes in interest rates,
reductions in deposit levels necessitating increased borrowing to fund loans and
investments, changes in the size and nature of the Corporation's competition,
changes in loan default and charge-off rates, and changes in the assumptions
used in making such forward-looking statements.
<PAGE>
PART I
ITEM 1. BUSINESS
Washington Trust Bancorp, Inc.
Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a
publicly-owned, registered bank holding company, organized in 1984 under the
laws of the state of Rhode Island, whose subsidiaries are permitted to engage in
banking and other financial services and businesses. The Corporation conducts
its business through its wholly-owned subsidiary, The Washington Trust Company
(the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to
regulatory limits.
The Corporation was formed in 1984 under a plan of reorganization in which
outstanding common shares of The Washington Trust Company were exchanged for
common shares of Washington Trust Bancorp, Inc. At December 31, 1998 the
Corporation had total consolidated assets of $935.1 million, deposits of $575.3
million and equity capital of $73.1 million.
The Washington Trust Company
The Washington Trust Company was originally chartered in 1800 as the Washington
Bank and is the oldest banking institution headquartered in its market area. Its
current corporate charter dates to 1902. See discussion under "Market Area and
Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Commercial and consumer demand deposits
Commercial loans Savings, NOW and money market deposits
Construction loans Certificates of deposit
Consumer installment loans Retirement accounts
Home equity lines of credit Cash management services
VISA and Mastercard accounts Safe deposit boxes
Merchant credit card services Trust and investment management services
Automated teller machines (ATMs) Telephone banking services
Automated teller machines (ATMs) are located throughout the Bank's market area.
The Bank is a member of various ATM networks.
Data processing for most of the Bank's deposit and loan accounts and other
applications is conducted internally, using owned equipment. Application
software is primarily obtained through purchase or licensing agreements.
The Bank 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
$789.8 million as of December 31, 1998.
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, gains on sales of loans, 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, advertising and promotion and other
administrative expenses.
The Bank's lending activities are conducted primarily in southern Rhode Island
and southeastern Connecticut. The Bank provides a variety of commercial and
retail lending products. The Bank generally underwrites its residential
mortgages based upon secondary market standards. Loans are originated both for
sale in the secondary market as well as for portfolio. Most secondary market
loans are sold with servicing retained.
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:
1998 1997 1996 1995 1994
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Interest and fees on:
Residential real estate loans 20% 22% 27% 29% 31%
Commercial and other loans 24 27 30 33 32
Consumer loans 9 9 10 10 9
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Total loan income 53 58 67 72 72
Interest and dividends on securities 30 27 18 13 13
Trust revenue 7 7 7 7 7
Other noninterest income 10 8 8 8 8
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Gross operating income 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------
The percentage of gross income derived from interest and fees on loans was 53%
in 1998, down from a five-year high of 72% in 1995. Income derived from interest
and dividends on securities was 30% in 1998 and resulted from growth in the
portfolio due to a securities purchase program. (See the caption "Securities" in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.)
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 eleven banking offices in these
Rhode Island and Connecticut counties.
The locations of the banking offices are as follows:
Westerly, RI (3 locations) Charlestown, RI Narragansett, RI
Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI
Mystic, CT (3 locations)
The Bank's banking offices in Charlestown and on Block Island are the only bank
facilities in those Rhode Island communities. The Bank opened a financial
services branch office during the first quarter of 1998 in New London,
Connecticut, which offers trust and investment management, commercial lending
and residential mortgage origination.
The Bank faces strong competition from branches of major Rhode Island and
regional commercial banks, local branches of certain Connecticut banks, as well
as various credit unions, savings institutions and, to some extent, finance
companies. The principal methods of competition are through interest rates,
financing terms and other customer conveniences. The Bank had 32% of total
deposits reported by all financial institutions for communities in which the
Bank operates banking offices as of June 30, 1998. The closest competitor held
23%, and the second closest competitor held 15% of total deposits in the same
communities. The Corporation believes that being the largest commercial banking
institution headquartered within the market area provides a competitive
advantage over other financial institutions. The Bank has a marketing department
which is responsible for the review of existing products and services and the
development of new products and services.
Employees
As of December 31, 1998 the Corporation employed approximately 320 full-time and
51 part-time employees, an increase of 8.7% in full-time equivalent employees
over 1997. The increase in employees is primarily attributable to the
Corporation's market area expansion efforts that began in 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, the
State of Rhode Island and the State of Connecticut, in which the Bank has
established branches. The Bank is also subject to various Rhode Island and
Connecticut business and banking regulations.
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among
other things, FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to
"critically undercapitalized". A depository institution is well-capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not
well-capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market. At December 31, 1998, the Bank's capital ratios placed it in the
well-capitalized category. Reference is made to Note 15 to the Corporation's
Consolidated Financial Statements for additional discussion of the Corporation's
regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund
(BIF). The FDIC adopted a risk-related premium system for the assessment period
beginning January 1, 1993. Under this new system, each institution's assessment
rate is based on its capital ratios in combination with a supervisory evaluation
of the risk the institution poses to the BIF. Banks deemed to be
well-capitalized and who pose the lowest risk to the BIF will pay the lowest
assessment rates, while undercapitalized banks, 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. The Interstate Act also authorizes 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 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, 1998, the Corporation's net
risk-weighted assets amounted to $497.0 million, its Tier 1 capital ratio was
12.99% and its total risk-based capital ratio was 15.17%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the
risk-based capital guidelines) divided by average assets (net of intangible
assets and excluding the effects of accounting for securities available for sale
under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies
that do not anticipate significant growth and that have well-diversified risk
(including no undue interest rate risk), excellent asset quality, high liquidity
and strong earnings. Other bank holding companies are expected to have ratios of
at least 4 - 5%, depending on their particular condition and growth plans.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profile of a given bank holding company. The Corporation's
Tier 1 leverage ratio was 7.25% as of December 31, 1998. The Federal Reserve has
not advised the Corporation of any specific minimum Tier 1 leverage capital
ratio applicable to it.
Allowance for Loan Losses
The Corporation evaluates the adequacy of the allowance for loan losses based
upon the composition of the loan portfolio, historical experience, industry
statistics, prevailing economic and business conditions and industry
concentration. The Corporation utilizes a credit rating system which assesses
individual loans in the commercial, commercial mortgage and commercial
construction and development portfolios. Management applies the allowance
percentages it considers appropriate to the balances in each rating
classification. In addition, specific allowances for loans in these categories
considered impaired are determined in accordance with the Statement of Financial
Accounting Standards No. 114, "Allowance for Loan Losses". Loans in other
portfolios are not individually assessed utilizing the credit rating system
mentioned above, but may be similarly rated when information is known to
management which indicates such action is warranted. For loans in other
portfolios, management applies the allowance percentages it considers
appropriate to each portfolio. Loss allocation percentages are based on the
Corporation's historical loss experience, industry trends and the actual or
anticipated impact of economic conditions on the borrowers. As a result, the
percentage allocations are adjusted as necessary when changes in the
aforementioned factors warrant. Based on analyses performed, the allowance for
loan losses is maintained at levels considered adequate by management to provide
for loan losses inherent in the loan portfolio.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the
Corporation and the Bank.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average
Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Nonaccrual loans are included in average loan balances. Average
balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid,
average yields and costs, and net yield on interest-earning assets, is
presented under the caption "Average Balances/Net Interest Margin (Fully
Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax
exempt income is converted to a fully taxable equivalent basis 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 Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense
is presented under the caption "Volume/Rate Analysis - Interest Income and
Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The net change attributable to both volume and rate has been allocated
proportionately.
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented
in the following tables:
(Dollars in thousands)
December 31, 1998 1997 1996
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Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $115,527 $90,292 $48,756
Mortgage-backed securities 144,077 122,532 128,504
Corporate bonds 27,503 2,000 -
Corporate stocks 28,158 22,242 20,711
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Total securities available for sale $315,265 $237,066 $197,971
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<PAGE>
(Dollars in thousands)
December 31, 1998 1997 1996
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Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $21,987 $23,932 $ -
Mortgage-backed securities 46,088 10,695 12,344
States and political subdivisions 27,572 17,180 15,582
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Total securities held to maturity $95,647 $51,807 $27,926
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B. Maturities of debt securities as of December 31, 1998 are presented in the
following tables. Mortgage-backed securities are included based on their
weighted average maturities, adjusted for anticipated prepayments. Yields
on tax exempt obligations are not computed on a tax equivalent basis.
<TABLE>
<CAPTION>
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but Within 5 but Within 10 After
Securities Available for Sale or Less Years Years 10 Years Totals
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $15,941 $79,775 $15,675 $2,366 $113,757
Weighted average yield 6.38% 6.24% 6.24% 8.07% 6.30%
Mortgage-backed securities:
Amortized cost 22,917 63,069 29,429 28,491 143,906
Weighted average yield 5.84% 5.90% 6.05% 5.97% 5.94%
Corporate bonds:
Amortized cost 142 18,591 3,417 5,383 27,533
Weighted average yield 6.53% 5.99% 7.19% 5.86% 6.12%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $39,000 $161,435 $48,521 $36,240 $285,196
Weighted average yield 6.07% 6.08% 6.19% 6.09% 6.10%
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Fair value $39,118 $162,973 $48,597 $36,419 $287,107
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<PAGE>
<CAPTION>
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but Within 5 but Within 10 After
Securities Held to Maturity or Less Years Years 10 Years Totals
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $19,212 $2,775 $ - $ - $21,987
Weighted average yield 7.60% 6.64% - - 7.48%
Mortgage-backed securities:
Amortized cost 7,832 23,388 14,158 710 46,088
Weighted average yield 6.18% 6.18% 6.18% 6.18% 6.18%
States and political
subdivisions:
Amortized cost 3,528 8,192 15,852 - 27,572
Weighted average yield 4.31% 4.45% 4.26% - 4.32%
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Total debt securities:
Amortized cost $30,572 $34,355 $30,010 $710 $95,647
Weighted average yield 6.86% 5.81% 5.17% 6.18% 5.94%
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Fair value $30,750 $34,661 $30,423 $714 $96,548
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</TABLE>
C. Not applicable.
III. LOAN PORTFOLIO
A. The following table sets forth the composition of the Corporation's loan
portfolio for each of the past five years:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Mortgages $70,468 $62,264 $66,224 $58,838 $56,014
Construction and development 612 3,539 4,174 5,968 12,090
Other 111,477 127,956 109,485 96,831 103,335
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Total commercial 182,557 193,759 179,883 161,637 171,439
Residential real estate:
Mortgages 179,589 181,790 171,423 167,511 170,367
Homeowner construction 10,046 6,097 4,631 3,071 6,934
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Total residential real estate 189,635 187,887 176,054 170,582 177,301
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Consumer 77,310 74,264 63,056 54,240 45,186
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Total Loans $449,502 $455,910 $418,993 $386,459 $393,926
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
One Year One to Five After Five
Matures in: or Less Years Years Totals
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Construction and development (1) $1,606 $3,390 $5,662 $10,658
Commercial - other 37,046 51,105 23,326 111,477
-------------------------------------------------------------------------------------------------------------
$38,648 $54,480 $28,962 $122,090
-------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes homeowner construction and commercial construction and
development. Maturities of homeowner construction loans are included
based on their contractual conventional mortgage repayment terms
following the completion of construction.
</FN>
</TABLE>
Sensitivity to changes in interest rates for all such loans due after one
year is as follows:
(Dollars in thousands) Floating or
Predetermined Adjustable
Rates Rates Totals
---------------------------------------------------------------------------
Principal due after one year $42,139 $41,343 $83,482
---------------------------------------------------------------------------
C. Risk Elements
Reference is made to the caption "Asset Quality" included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Included therein is a discussion of the Corporation's credit
review and accounting practices, as well as information relevant to
nonperforming assets at December 31, 1998.
1. Nonaccrual, Past Due and Restructured Loans
a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
$5,613 $7,335 $7,542 $8,574 $10,912
---------------------------------------------------------------------------
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, 1998, 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 $520 thousand.
Interest recognized on these loans amounted to approximately $149 thousand.
There were no significant commitments to lend additional funds to borrowers
whose loans were on nonaccrual status at December 31, 1998.
b) Loans contractually past due 90 days or more and still accruing for
the dates indicated were as follows:
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
$150 $644 $1,447 $256 $24
---------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
$ - $ - $ - $ - $365
---------------------------------------------------------------------------
Restructured accruing loans include those for which concessions, such as
reduction of interest rates other than normal market rate adjustments or
deferral of principal or interest payments, have been granted due to a
borrower's financial condition. Interest on restructured loans is accrued
at the reduced rate.
2. Potential Problem Loans
Potential problem loans consist of certain accruing commercial loans that
were less than 90 days past due at December 31, 1998, 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, 1998,
potential problem loans amounted to approximately $187 thousand. The
Corporation's loan policy provides guidelines for the review of such loans
in order to facilitate collection.
Depending on future events, these potential problem loans, and others not
currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings: None
4. Loan Concentrations; The Corporation has no concentration of loans which
exceed 10% of its total loans except as disclosed by types of loan in
Section III.A.
D. Other Interest-Bearing Assets: None
<PAGE>
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>
<CAPTION>
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $8,835 $8,495 $7,785 $9,328 $9,090
Charge-offs
Commercial:
Mortgages - 233 321 796 405
Construction and development - - 15 526 9
Other 310 740 415 1,451 512
Residential:
Mortgages 14 144 146 301 159
Homeowner construction - - - - -
Consumer 294 345 376 342 251
------------------------------------------------------------------------------------------------------------
Total charge-offs 618 1,462 1,273 3,416 1,336
------------------------------------------------------------------------------------------------------------
Recoveries
Commercial:
Mortgages 51 93 31 14 22
Construction and development - 7 - - 11
Other 269 232 628 217 189
Residential:
Mortgages 9 13 10 114 21
Homeowner construction - - - - -
Consumer 70 57 114 128 74
------------------------------------------------------------------------------------------------------------
Total recoveries 399 402 783 473 317
------------------------------------------------------------------------------------------------------------
Net charge-offs 219 1,060 490 2,943 1,019
Additions charged to earnings 1,800 1,400 1,200 1,400 1,257
------------------------------------------------------------------------------------------------------------
Balance at end of year $10,416 $8,835 $8,495 $7,785 $9,328
------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .05% .24% .12% .75% .27%
------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
B. The following table presents the allocation of the allowance for loan losses:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Mortgages $1,388 $1,172 $1,189 $1,640 $1,365
% of these loans to all loans 15.7% 13.5% 15.8% 15.2% 14.2%
Construction and development 6 36 49 134 276
% of these loans to all loans .2% .8% 1.0% 1.5% 3.1%
Other 2,116 2,488 2,448 2,246 2,870
% of these loans to all loans 24.8% 28.8% 26.1% 25.1% 26.2%
Residential:
Mortgages 1,042 1,086 1,230 1,066 1,135
% of these loans to all loans 39.9% 39.5% 40.9% 43.4% 43.2%
Homeowner construction 58 36 33 20 44
% of these loans to all loans 2.2% 1.3% 1.1% .8% 1.8%
Consumer 1,051 1,019 1,085 911 862
% of these loans to all loans 17.2% 16.1% 15.1% 14.0% 11.5%
Unallocated 4,755 2,998 2,461 1,768 2,776
-------------------------------------------------------------------------------------------------------------
$10,416 $8,835 $8,495 $7,785 $9,328
100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------------------------------------------
</TABLE>
V. DEPOSITS
A. Average deposit balances outstanding and the average rates paid thereon are
presented in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $80,789 - $70,234 - $62,464 -
Savings deposits:
Regular 104,071 2.31% 92,756 2.47% 90,829 2.70%
NOW 65,933 .91% 59,558 1.04% 56,732 1.30%
Money market 23,883 2.12% 24,848 2.41% 27,004 2.24%
-----------------------------------------------------------------------------------------------------------
Total savings 193,887 1.81% 177,162 1.98% 174,565 2.18%
Time deposits 278,020 5.40% 261,665 5.48% 232,007 5.38%
-----------------------------------------------------------------------------------------------------------
Total deposits $552,696 3.35% $509,061 3.50% $469,036 3.47%
-----------------------------------------------------------------------------------------------------------
</TABLE>
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100 thousand or more
at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Over 3 Over 6
3 months through through Over 12
Time remaining until maturity or less 6 months 12 months months Totals
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$58,926 $5,299 $8,802 $5,461 $78,488
--------------------------------------------------------------------------------------------------------------
</TABLE>
E. Not applicable
VI. RETURN ON EQUITY AND ASSETS
1998 1997 1996
---------------------------------------------------------------------------
Return on average assets 1.15% 1.17% 1.44%
Return on average shareholders' equity 14.22% 14.27% 14.95%
Dividend payout ratio 39.85% 38.24% 36.55%
Average equity to average total assets 8.07% 8.22% 9.61%
VII. SHORT-TERM BORROWINGS
The following is a summary of amounts relating to short-term borrowings
which consist primarily of securities sold under repurchase agreements
generally maturing within 90 days:
(Dollars in thousands)
Years ended December 31, 1998 1997 1996
---------------------------------------------------------------------------
Balance at end of year $15,033 $20,337 $14,000
Maximum amount outstanding at any month-end 26,767 26,820 14,000
Average amount outstanding 15,085 14,773 3,260
Weighted average interest rate during the year 5.56% 5.64% 5.59%
Weighted average interest rate at end of year 5.12% 5.58% 5.68%
<PAGE>
ITEM 2. PROPERTIES
The Corporation conducts its business from its corporate headquarters and other
properties listed below all of which are considered to be in good condition and
adequate for the purposes for which they are used.
The following table sets forth certain information relating to bank premises
owned or used by the Corporation in conducting its business:
<TABLE>
<CAPTION>
Own/Lease
Expiration
Location Description Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
23 Broad Street, Westerly, RI Corporate headquarters Own
1200 Main Street, Wyoming, RI Branch office Own
126 Franklin Street, Westerly, RI Branch office Own
Ocean Avenue, New Shoreham (Block Island), RI (1) Branch office Lease / 2001
4137 Old Post Road, Charlestown, RI Branch office Own
20 Point Judith Road, Narragansett, RI Branch office Own
7625 Post Road, North Kingstown, RI Branch office Own
Olde Mystic Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003
McQuades Marketplace, Main Street, Westerly, RI (1) Supermarket branch Lease / 2001
McQuades Marketplace, 10 Clara Drive, Mystic, CT (1) Supermarket branch Lease / 2001
A & P Super Market, Route 1, Mystic, CT (1) Supermarket branch Lease / 2002
2 Union Plaza, New London, CT (1) Limited financial services branch Lease / 2004
5 Ledward Avenue, Westerly, RI (1) Operations facility Lease / 1999
2 Crosswinds Drive, Westerly, RI (2) Operations facility Lease / 2002
<FN>
(1) Lease may be extended by the Corporation beyond the indicated
expiration date
(2) Corporation executed a purchase option in January, 1999
</FN>
</TABLE>
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 duty, negligence, breach of contract,
unjust enrichment, conversion, failure to act in a commercially reasonable
manner, and constructive fraud.
The suit as originally filed sought recovery for losses alleged to be directly
related to the embezzlement of approximately $3.1 million, as well as
consequential damages amounting to approximately $2.6 million. On March 19,
1998, the plaintiffs amended their claims to seek recovery of an additional $2.6
million in losses, plus an unspecified amount of interest thereon, which are
alleged to be directly related to the embezzlement.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious affirmative defenses in
this litigation. Additionally, the Bank has filed counterclaims against Maxson
and its principal shareholder as well as claims against the officer allegedly
responsible for the embezzlement. The Bank intends to vigorously assert its
defenses and affirmative claims. The case is in discovery and management and
legal counsel are unable to estimate or assess the extent of risk of an adverse
result. 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, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all executive officers of the Corporation and the
Bank with their titles, ages, and length of service, followed by certain
biographical information.
<TABLE>
<CAPTION>
Years of
Name Title Age Service
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John C. Warren President and Chief Executive Officer of the Corporation
and the Bank 53 3
David V. Devault, CPA Executive Vice President, Treasurer and Chief Financial Officer
of the Corporation and the Bank 44 12
Harvey C. Perry II Senior Vice President and Secretary of the Corporation
and the Bank 49 24
Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 51 2
Vernon F. Bliven Senior Vice President - Human Resources of the Bank 49 26
Robert G. Cocks, Jr. Senior Vice President - Commercial Lending of the Bank 54 6
Barbara J. Perino Senior Vice President - Operations and Technology of the Bank 37 10
B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 39 7
James M. Vesey Senior Vice President - Commercial Lending of the Bank 51 -
</TABLE>
John C. Warren joined the Bank and the Corporation in 1996 as President and
Chief Operating Officer. In 1997, he was elected President and Chief Executive
Officer of the Bank and the Corporation. 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. In 1997, he was also elected Treasurer of the Bank and the Corporation. In
1998 he was elected Executive Vice President, Treasurer and Chief Financial
Officer of the Bank and the Corporation.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust
Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982.
He was elected Vice President and Secretary of the Corporation and the Bank in
1984, and Senior Vice President and Secretary of the Bank in 1990.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President -
Retail Lending. Prior to joining the Bank he held the position of Executive Vice
President at Ameristone Mortgage Corporation since June 1995. From February 1993
to May 1995 he held the position of President at New England Pacific Mortgage
Company, Inc. 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.
In 1997 he was named Senior Vice President - Commercial Lending.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She
was named Controller in 1989 and Vice President Controller in 1992. In 1998 she
was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and
was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial
Lending. Prior to joining the Bank he held the position of Senior Vice President
and Director of Business Banking at Citizens Bank since December 1995. He worked
for Fleet Bank for 24 years prior to pursuing consulting, teaching and
investment opportunities in 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock has traded on the Nasdaq National Market since
May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap
Market since June 1992, and had been listed on the Nasdaq Over-The-Counter
Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the
years ended December 31, 1998 and 1997 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 1997 and for the first, second and
third quarters of 1998 have been restated to reflect 3-for-2 stock splits paid
in the form of stock dividends on August 3, 1998 and on November 19, 1997.
1998 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $24.17 $26.67 $28.50 $26.00
Low 20.00 20.00 20.00 18.00
Cash dividend declared per share $.10 $.10 $.10 $.10
1997 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $14.33 $13.67 $14.67 $23.83
Low 12.22 11.33 12.89 14.00
Cash dividend declared per share $.08 $.08 $.09 $.09
The Corporation will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The Corporation
(including the Bank prior to 1984) has recorded consecutive quarterly dividends
for over one hundred years.
The Corporation's primary source of funds for dividends paid to shareholders is
the receipt of dividends from the Bank. A discussion of the restrictions on the
advance of funds or payment of dividends to the Corporation is included in Note
15 to the Consolidated Financial Statements.
At February 26 1999 there were 1,807 holders of record of the Corporation's
common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED OPERATING DATA AND FINANCIAL RATIOS: (Dollars in thousands)
At or for the years ended December 31, 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Interest income $62,753 $57,779 $45,806 $42,286 $36,662
Interest expense 32,606 29,477 19,667 17,015 13,589
---------------------------------------------------------------------------------------------------------------
Net interest income 30,147 28,302 26,139 25,271 23,073
Provision for loan losses 1,800 1,400 1,200 1,400 1,257
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 28,347 26,902 24,939 23,871 21,816
Noninterest income 12,469 10,212 8,320 7,203 6,922
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 40,816 37,114 33,259 31,074 28,738
Noninterest expense 26,820 24,385 20,536 19,355 19,447
---------------------------------------------------------------------------------------------------------------
Income before income taxes 13,996 12,729 12,723 11,719 9,291
Income tax expense 3,948 3,642 4,298 4,031 3,026
---------------------------------------------------------------------------------------------------------------
Net income $10,048 $9,087 $8,425 $7,688 $6,265
---------------------------------------------------------------------------------------------------------------
Per share information ($): (1)
Earnings per share:
Basic 1.01 .92 .87 .80 .66
Diluted .97 .89 .84 .78 .65
Cash dividends declared .40 .35 .31 .27 .22
Book value 7.30 6.80 6.05 5.50 4.81
Market value - closing stock price 21.50 23.33 13.78 8.59 5.93
Performance Ratios (%):
Return on average assets 1.15 1.17 1.44 1.44 1.25
Return on average shareholders' equity 14.22 14.27 14.95 15.47 14.11
Dividend payout ratio 39.85 38.24 36.55 33.96 33.02
Asset Quality Ratios (%):
Nonperforming loans to total loans 1.25 1.61 1.80 2.22 2.77
Nonperforming assets to total assets .63 .96 1.24 1.88 2.51
Allowance for loan losses to nonaccrual 185.57 120.45 112.64 90.80 85.48
loans
Allowance for loan losses to total loans 2.32 1.94 2.03 2.01 2.37
Net charge-offs to average loans .05 .24 .12 .75 .27
Capital Ratios (%):
Total equity to total assets 7.81 8.25 8.55 9.67 8.88
Tier 1 leverage capital ratio 7.25 7.47 8.62 8.99 8.45
Total risk-based capital ratio 15.17 14.39 14.93 15.34 13.82
<FN>
(1) Adjusted to reflect the 3-for-2 stock splits paid on August 3, 1998,
November 19, 1997 and October 15, 1996.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA: (Dollars in thousands)
December 31, 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $28,775 $25,500 $18,990 $28,651 $18,405
Total securities 410,912 288,873 225,897 113,876 85,718
Federal Home Loan Bank stock 16,444 16,444 11,683 2,995 2,907
Net loans 439,086 447,075 410,498 378,674 384,598
Other 39,852 36,501 27,878 23,463 24,052
---------------------------------------------------------------------------------------------------------------
Total assets $935,069 $814,393 $694,946 $547,659 $515,680
---------------------------------------------------------------------------------------------------------------
Deposits $575,323 $530,926 $476,561 $467,854 $440,731
Short-term borrowings 15,033 20,337 14,000 - -
Federal Home Loan Bank advances 262,106 187,001 138,493 20,951 23,522
Other liabilities 9,541 8,925 6,465 5,917 5,644
Shareholders' equity 73,066 67,204 59,427 52,937 45,783
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $935,069 $814,393 $694,946 $547,659 $515,680
---------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual loans $5,613 $7,335 $7,542 $8,574 $10,912
Other real estate owned, net 243 497 1,090 1,705 2,007
---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $5,856 $7,832 $8,632 $10,279 $12,919
---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
1998 Q1 Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,072 $10,022 $9,925 $9,829 $39,848
Income from securities 5,080 5,667 5,627 6,014 22,388
Interest on federal funds sold
and other short-term investments 169 115 162 71 517
- ----------------------------------------------------------------------------------------------------------------
Total interest income 15,321 15,804 15,714 15,914 62,753
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 827 845 920 922 3,514
Time deposits 3,890 3,926 3,681 3,520 15,017
Federal Home Loan Bank advances 3,072 3,331 3,341 3,467 13,211
Other 232 288 122 222 864
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 8,021 8,390 8,064 8,131 32,606
- ----------------------------------------------------------------------------------------------------------------
Net interest income 7,300 7,414 7,650 7,783 30,147
Provision for loan losses 450 450 450 450 1,800
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 6,850 6,964 7,200 7,333 28,347
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,224 1,361 1,344 1,301 5,230
Service charges on deposit accounts 633 742 714 753 2,842
Merchant processing fees 155 222 557 285 1,219
Net gains (losses) on sales of securities 41 351 232 (119) 505
Net gains on loan sales 329 414 300 389 1,432
Other income 282 225 254 480 1,241
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 2,664 3,315 3,401 3,089 12,469
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 3,419 3,472 3,616 3,560 14,067
Net occupancy 459 502 607 540 2,108
Equipment 566 622 632 676 2,496
Merchant processing costs 111 227 440 183 961
Office supplies 159 178 181 148 666
Advertising and promotion 112 169 211 186 678
Other 1,364 1,620 1,347 1,513 5,844
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 6,190 6,790 7,034 6,806 26,820
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 3,324 3,489 3,567 3,616 13,996
Income tax expense 931 977 998 1,042 3,948
- ----------------------------------------------------------------------------------------------------------------
Net income $2,393 $2,512 $2,569 $2,574 $10,048
- ----------------------------------------------------------------------------------------------------------------
Earnings per share - basic $.24 $.25 $.26 $.26 $1.01
Earnings per share - diluted $.23 $.24 $.25 $.25 $.97
Cash dividends declared per share $.10 $.10 $.10 $.10 $.40
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
1997 Q1 Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $9,274 $9,712 $9,954 $10,150 $39,090
Income from securities 4,140 4,736 4,824 4,613 18,313
Interest on federal funds sold
and other short-term investments 61 70 128 117 376
- ----------------------------------------------------------------------------------------------------------------
Total interest income 13,475 14,518 14,906 14,880 57,779
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 860 860 895 894 3,509
Time deposits 3,276 3,493 3,776 3,784 14,329
Federal Home Loan Bank advances 2,345 2,825 2,812 2,800 10,782
Other 300 228 126 203 857
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 6,781 7,406 7,609 7,681 29,477
- ----------------------------------------------------------------------------------------------------------------
Net interest income 6,694 7,112 7,297 7,199 28,302
Provision for loan losses 300 300 400 400 1,400
- ----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,394 6,812 6,897 6,799 26,902
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,088 1,223 1,056 1,103 4,470
Service charges on deposit accounts 553 623 611 641 2,428
Merchant processing fees 116 165 483 230 994
Net gains on sales of securities 254 373 56 50 733
Net gains on loan sales 72 62 209 189 532
Other income 249 256 246 304 1,055
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 2,332 2,702 2,661 2,517 10,212
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 2,953 3,203 3,241 3,244 12,641
Net occupancy 383 426 457 711 1,977
Equipment 464 506 535 621 2,126
Merchant processing costs 86 169 370 148 773
Office supplies 156 230 139 159 684
Advertising and promotion 122 190 195 169 676
Other 1,327 1,428 1,158 1,595 5,508
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,491 6,152 6,095 6,647 24,385
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 3,235 3,362 3,463 2,669 12,729
Income tax expense 1,084 1,101 1,099 358 3,642
- ----------------------------------------------------------------------------------------------------------------
Net income $2,151 $2,261 $2,364 $2,311 $9,087
- ----------------------------------------------------------------------------------------------------------------
Earnings per share - basic $.22 $.23 $.24 $.23 $.92
Earnings per share - diluted $.21 $.22 $.23 $.23 $.89
Cash dividends declared per share $.08 $.08 $.09 $.09 $.35
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Overview
Washington Trust recorded net income of $10.0 million for 1998, an increase of
10.6% over the $9.1 million of net income recorded in 1997. Diluted earnings per
share amounted to $.97 for 1998, up 9.0% from $.89 per share earned on net
income in 1997.
Washington Trust's rates of return on average assets and average equity ("ROA"
and "ROE") for 1998 were 1.15% and 14.22%, respectively. ROA and ROE for the
year ended December 31, 1997 amounted to 1.17% and 14.27%, respectively.
Total assets amounted to $935.1 million at December 31, 1998, up 14.8% from the
December 31, 1997 balance of $814.4 million. Average assets rose 12.96% during
1998 and amounted to $875.6 million, up from the comparable 1997 amount of
$775.1 million. The growth in assets was primarily attributable to purchases of
securities. The growth in assets was funded by increases in Federal Home Loan
Bank ("FHLB") advances as well as an 8.4% increase in total deposits. Total
deposits amounted to $575.3 million and $530.9 million at December 31, 1998 and
1997, respectively. FHLB advances totaled $262.1 million at December 31, 1998,
up 40.2% from the prior year balance of $187.0 million.
Total shareholders' equity amounted to $73.1 million at December 31, 1998, up
8.7% from the December 31, 1997 amount of $67.2 million. Included in
shareholders' equity at December 31, 1998 and 1997 was $7.4 million and $7.1
million, respectively, attributable to net unrealized gains on securities
available for sale, net of tax.
Book value per share as of December 31, 1998 and 1997 amounted to $7.30 and
$6.80, respectively.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $5.9 million or .63% of total assets at December 31,
1998, down from $7.8 million, or .96% of total assets at December 31, 1997. The
Corporation's loan loss provision was $1.8 million and $1.4 million in 1998 and
1997, respectively.
For the year ended December 31, 1998, net interest income (the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings) amounted to $30.1 million, up by 6.5% over the 1997
amount. The net interest margin for the year ended December 31, 1998 amounted to
3.78%, compared to 4.07% in 1997. Other noninterest income (noninterest income
excluding net gains on sales of securities available for sale) amounted to $12.0
million for the year ended December 31, 1998, up 26.2% from $9.5 million in
1997. The increase resulted primarily from increases in net gains on loan sales,
higher revenues for trust services and increases in service charges on deposits.
Total noninterest expense amounted to $26.8 million in 1998, up by 10.0% from
the 1997 amount of $24.4 million. The increase was primarily attributable to
higher salaries and benefits expense and increases in other expenses resulting
from the Corporation's expansion of its market area. (See additional discussion
of the expansion of the Corporation's market area under the caption "Branch
Expansion".) Equipment and net occupancy costs rose 17.4% and 6.6%,
respectively, over the 1997 amounts due primarily to rental expense and
depreciation of premises and equipment incurred in connection with the
Corporation's market area expansion efforts.
Branch 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 January 1999, this facility was purchased by the Corporation. In
October 1998, the Corporation announced an agreement to provide trust and
investment management services to customers of Bank Rhode Island and PierBank,
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.
During 1997, the Corporation expanded its market area and opened five additional
branch offices, increasing the total number of branch offices to eleven. In
February 1997, the Corporation opened a new branch in North Kingstown, Rhode
Island. This branch is a full service banking office, offering deposit and loan
services for businesses and consumers, as well as trust and investment services.
The Corporation also acquired a branch of a Connecticut bank, including its
deposits of approximately $8.2 million, in March 1997. This branch, located in
Mystic, Connecticut, was the Corporation's first branch office located in
Connecticut. During the second quarter of 1997, the Corporation opened two
branches in local supermarkets, one of which is located in Mystic, Connecticut,
the other in Westerly, Rhode Island. An additional supermarket branch located in
Mystic, Connecticut was opened by the Corporation in November 1997. The
supermarket branches are full service banking offices offering extended service
hours.
Net Interest Income
Net interest income is the primary source of Washington Trust's operating
income. The level of net interest income is affected by the volume of average
interest-earning assets and interest-bearing liabilities, market interest rates
and other factors. The following discussion presents net interest income on a
fully taxable equivalent (FTE) basis by adjusting income and yields on
tax-exempt loans and securities to be comparable to taxable loans and
securities.
FTE net interest income increased by $1.5 million or 4.9% from 1998 to 1997, due
primarily to the growth in interest-earning assets. The interest rate spread
declined by 31 basis points to 3.18% in 1998, while the net interest margin (FTE
net interest income as a percentage of average interest-earning assets) fell
from 4.07% in 1997 to 3.78% in 1998. Earning asset yields fell 39 basis points
during 1998, while the cost of interest-bearing liabilities declined 8 basis
points, thereby narrowing the net interest spread. Growth in the securities
portfolio as well as interest expense associated with the increases in FHLB
advances, were primarily responsible for the decrease in the net interest
margin.
FTE interest income totaled $63.7 million in 1998, up from $59.1 million in
1997. The yield on interest-earning assets was 7.73% in 1998, down from 8.12% in
1997. Average interest-earning assets increased by $95.5 million or 13.1% in
1998, most of which was attributable to increases in securities. Total average
securities rose by $82.8 million or 28.5% in 1998, mainly due to purchases of
taxable debt securities. The securities purchased were funded with Federal Home
Loan Bank advances. The FTE rate of return on securities was 6.37% in 1998, down
from 6.86% in 1997. The decrease in yield reflects lower marginal rates on
investment purchases during 1998 relative to the prior year.
Average loans amounted to $451.0 million in 1998, up $12.7 million from 1997.
The FTE rate of return on total loans was 8.86% in 1998, down slightly from
8.95% in 1997, due primarily to lower yields on new loan originations. The yield
on residential real estate loans amounted to 8.06% in 1998, compared to 8.20%
for 1997. Average residential mortgages rose 3.8% in 1998 and amounted to $187.6
million. The yields on commercial loans amounted to 9.62% and 9.55% in 1998 and
1997, respectively. The increase in yields on commercial loans was mainly due to
the recognition of interest income relating to payoffs of nonaccrual loans.
Average commercial loans amounted to $188.4 million in 1998, down slightly from
prior year levels. Average consumer loans grew 9.6% in 1998 to $75.0 million.
The yield on consumer loans amounted to 8.98% in 1998, down from 9.31% in 1997.
As a result of higher levels of FHLB advances and increases in savings and time
deposits, average interest-bearing liabilities amounted to $715.8 million, up by
12.4% from 1997, and interest expense amounted to $32.6 million, up 10.6% from
1997. The rate paid on interest-bearing liabilities declined 8 basis points to
4.55% in 1998 primarily due to lower interest rates. Average Federal Home Loan
Bank advances increased by $45.5 million or 24.9% from 1997 and amounted to
$228.2 million in 1998. The advances were used primarily to match fund the
purchase of securities. The average rate paid on Federal Home Loan Bank advances
for 1998 was 5.79%, a decrease of 11 basis points from the prior year.
Average savings deposits increased by $16.7 million or 9.4% from 1997 and fell
17 basis points in the rate paid. Average time deposits grew $16.4 million or
6.3% in 1998 with an decrease of 8 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 15.0% from 1997 and
amounted to $80.8 million in 1998.
<PAGE>
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 December 31, 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Residential real estate loans $187,627 15,120 8.06 $180,545 14,796 8.20 $174,964 14,391 8.23
Commercial and other loans 188,394 18,125 9.62 189,929 18,133 9.55 166,566 16,271 9.77
Consumer loans 75,027 6,740 8.98 67,855 6,317 9.31 57,188 5,535 9.68
-----------------------------------------------------------------------------------------------------------------
Total loans 451,048 39,985 8.86 438,329 39,246 8.95 398,718 36,197 9.08
Federal funds sold and other
short term investments 10,025 517 5.15 6,921 376 5.44 3,927 209 5.32
Taxable debt securities 310,331 19,391 6.25 239,612 16,141 6.74 111,553 7,661 6.87
Nontaxable debt securities 22,533 1,434 6.37 15,789 1,042 6.60 15,794 1,033 6.54
Corporate stocks and FHLB stock 30,196 2,405 7.97 27,976 2,343 8.37 18,075 1,889 10.45
-----------------------------------------------------------------------------------------------------------------
Total securities 373,085 23,747 6.37 290,298 19,902 6.86 149,349 10,792 7.23
-----------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 824,133 63,732 7.73 728,627 59,148 8.12 548,067 46,989 8.57
-----------------------------------------------------------------------------------------------------------------
Cash and due from banks 15,206 15,673 15,627
Allowance for loan losses (9,677) (8,715) (8,291)
Premises and equipment, net 22,688 20,791 15,850
Other 23,245 18,759 14,759
-----------------------------------------------------------------------------------------------------------------
Total assets $875,595 $775,135 $586,012
-----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $193,887 3,514 1.81 $177,162 3,509 1.98 $174,565 3,797 2.18
Time deposits 278,020 15,017 5.40 261,665 14,329 5.48 232,007 12,478 5.38
FHLB advances 228,248 13,211 5.79 182,781 10,782 5.90 53,604 3,189 5.95
Other 15,626 864 5.53 15,250 857 5.62 3,650 203 5.56
-----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 715,781 32,606 4.55 636,858 29,477 4.63 463,826 19,667 4.24
-----------------------------------------------------------------------------------------------------------------
Demand deposits 80,789 70,234 62,464
Other liabilities 8,287 4,365 3,381
Shareholders' equity 70,738 63,678 56,341
-----------------------------------------------------------------------------------------------------------------
Total liabilities and
Shareholders' equity 875,595 $775,135 $586,012
-----------------------------------------------------------------------------------------------------------------
Net interest income $31,126 $29,671 $27,322
-----------------------------------------------------------------------------------------------------------------
Interest rate spread 3.18 3.49 4.33
Net interest margin 3.78 4.07 4.99
-----------------------------------------------------------------------------------------------------------------
<PAGE>
<FN>
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency for the years indicated:
(Dollars in thousands)
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Commercial and other loans $136 $156 $91
Taxable debt securities (1) - 434 254
Nontaxable debt securities 485 366 368
Corporate stocks and FHLB stock 358 413 470
(1) Represents adjustment for U.S. Treasury and government agency obligations
which are exempt from state income taxes only.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
1998/1997 1997/1996 1996/1995
-----------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars 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 real estate loans $464 (141) 323 $458 (53) 405 $(24) (174) (198)
Commercial and other loans (19) 11 (8) 2,238 (376) 1,862 (145) 130 (15)
Consumer loans 650 (227) 423 1,000 (218) 782 806 (187) 619
Federal funds sold and
other short term investments 161 (20) 141 162 5 167 (581) (65) (646)
Taxable debt securities 4,584 (1,334) 3,250 8,591 (111) 8,480 2,913 208 3,121
Nontaxable debt securities 431 (38) 393 - 9 9 304 (14) 290
Corporate stocks and FHLB
stock 126 (55) 71 699 (245) 454 1,009 (321) 688
-----------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 6,397 (1,804) 4,593 13,148 (989) 12,159 4,282 (423) 3,859
-----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 316 (311) 6 56 (344) (288) (90) (59) (149)
Time deposits 886 (198) 688 1,620 231 1,851 417 291 708
FHLB advances 2,635 (207) 2,428 7,620 (27) 7,593 1,965 (50) 1,915
Other 21 (13) 7 654 - 654 180 (2) 178
-----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,858 (729) 3,129 9,950 (140) 9,810 2,472 180 2,652
----------------------------------------------------------------------------------------------------------------
Net interest income $2,539 (1,075) 1,464 $3,198 (849) 2,349 $1,810 (603) 1,207
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
Noninterest income is an important source of revenue for the Corporation. For
the year ended December 31, 1998, noninterest income, excluding net gains on
sales of securities, accounted for 15.9% 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 credit card activity.
Revenue from trust-related services continues to be the largest component of
noninterest income. Trust revenue represented 41.9% of noninterest income and
amounted to $5.2 million in 1998, up by 17.0% from the $4.5 million reported in
1997. This increase in trust revenue is primarily attributable to the increase
in assets under management, which amounted to $789.8 million at December 31,
1998, up from $643.6 million in 1997.
Service charges on deposit accounts rose 17.1% to $2.8 million in 1998. 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 $1.4 million for the year ended December 31,
1998, up from net gains of $532 thousand during 1997, due to increased loan
sales in 1998. Gains on loan sales include the capitalization of mortgage
servicing rights of $551 thousand and $216 thousand in 1998 and 1997,
respectively.
The Corporation retains servicing rights on substantially all residential
mortgage loans sold. Mortgage servicing fee income amounted to $148 thousand for
the year ended December 31, 1998, down from the prior year amount of $338
thousand. The decrease is mainly due to additions to the mortgage servicing
rights valuation allowance and amortization of capitalized mortgage servicing
rights. Servicing income, excluding valuation adjustments and amortization, as a
percentage of average loans serviced was 33 basis points in 1998, down from 36
basis points in the prior year. The balance of serviced loans at December 31,
1998 amounted to $174.7 million, compared to $119.5 million at December 31,
1997.
Noninterest Expense
Total noninterest expense rose 10.0% to $26.8 million in 1998. This increase was
primarily attributable to higher salaries and to increases in occupancy,
equipment and other costs associated with Washington Trust's branch expansion
efforts.
Occupancy costs totaled $2.1 million in 1998, up 6.6% from the 1997 amount of
$2.0 million. Depreciation expense associated with equipment purchases in 1998
amounted to $1.7 million, up 19.8% over the comparable 1997 amount.
Net foreclosed property costs and expenses were down in 1998 due to the decline
in the number of foreclosed properties and the decline in the level of
nonperforming loans. (See discussion under "Asset Quality" for additional
information.) Foreclosed property costs in 1998 fell 82.7% from the prior year.
Income Taxes
Income tax expense amounted to $3.9 million and $3.6 million in 1998 and 1997,
respectively. The Corporation's effective tax rate was 28.2% in 1998, compared
to a rate of 28.6% in 1997. 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 results of the tax planning strategies designed to reduce income
taxes.
The Corporation had a net deferred tax liability amounting to $1.6 million and
$2.0 million at December 31, 1998 and 1997, 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 12 to the Consolidated Financial
Statements for additional information regarding income taxes.)
Financial Condition
Securities
Securities are designated as either available for sale or held to maturity at
the time of purchase. Securities available for sale may be sold in response to
changes in market conditions, prepayment risk, rate fluctuations, liquidity, or
capital requirements. Securities available for sale are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax, until realized.
Securities designated as held to maturity are part of the Corporation's
portfolio of long-term interest-earning assets. These securities are classified
as long-term because the Corporation has the intent and ability to hold them
until maturity. Securities held to maturity are reported at amortized cost.
Securities Available for Sale
The amortized cost of securities available for sale at December 31, 1998
amounted to $303.0 million, an increase of $77.7 million over the 1997 amount.
This increase is primarily attributable to purchases of securities.
At December 31, 1998, the net unrealized gains on securities available for sale
amounted to $12.2 million, an increase of $500 thousand over the comparable 1997
amount. This increase is attributable to the decline in interest rates occurring
in 1998, as well as the year to date increase in portfolio balances. (See Note 3
to the Consolidated Financial Statements for detail of unrealized gains and
losses associated with securities available for sale.)
Securities Held to Maturity
The amortized cost of securities held to maturity increased by $43.8 million, to
$95.6 million at December 31, 1998. This increase is primarily attributable to
purchases of mortgage-backed securities. The net unrealized gain on securities
held to maturity amounted to $901 thousand at December 31, 1998, up by $122
thousand from December 31, 1997.
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 of December 31, 1998, the
Corporation's investment in FHLB stock remained unchanged from the prior year
amount of $16.4 million.
Loans
Total loans amounted to $449.5 million at December 31, 1998, down slightly by
$6.4 million, or 1.4%, from the December 31, 1997 amount 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.
Total residential real estate loans increased by $1.7 million, or 0.9%, in 1998.
Total commercial loans decreased by $11.2 million, or 5.8%, in 1998. Consumer
loans were up by $3.0 million, or 4.1%, in 1998, with the largest increase
occurring in the home equity line of credit portfolio. The Corporation has
benefited from marketing efforts dedicated to the home equity line of credit
product.
At December 31, 1998, credit card loans amounted to $5.4 million, or 1.2% of
total loans, compared to $5.2 million, or 1.1% of total loans, at December 31,
1997.
Deposits
Total deposits at December 31, 1998 amounted to $575.3 million, up 8.4% from the
prior year balance of $530.9 million. The increase in deposits is attributable
to the additional branch offices opened throughout 1997, as well as growth in
time deposits in denominations of $100 thousand or more which increased by $19.2
million in 1998. All categories of deposits increased over prior year levels.
Time deposits rose by 2.7% to $277.8 million, savings deposits (regular savings,
NOW and money market accounts) rose by 13.5% to $210.1 and total demand deposits
rose by 16.1% to $87.4 million.
Borrowings
Washington Trust uses advances from the Federal Home Loan Bank of Boston as well
as other short-term borrowings as part of its overall funding strategy. The
additional FHLB advances and short-term borrowings were used to meet short-term
liquidity needs, to fund loan growth and to purchase securities. Total advances
amounted to $262.1 million at December 31, 1998, up from $187.0 million one year
earlier. (See Note 10 to the Consolidated Financial Statements for additional
information about borrowings.)
<PAGE>
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned.
Nonperforming assets declined to .63% of total assets at December 31, 1998,
compared to .96% of total assets at December 31, 1997. Nonaccrual loans as a
percentage of total loans fell from 1.61% at the end of 1997 to 1.25% at
December 31, 1998. Approximately $3.2 million, or 56.9% of total nonaccrual
loans, were less than 90 days past due at December 31, 1998
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 1998 1997
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $1,417 $1,290
Commercial and other:
Mortgages 1,522 1,977
Construction and development - -
Other 2,141 3,616
Consumer 533 452
---------------------------------------------------------------------------
Total nonaccrual loans 5,613 7,335
Other real estate owned, net 243 497
---------------------------------------------------------------------------
Total nonperforming assets $5,856 $7,832
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans 1.25% 1.61%
Nonperforming assets as a percentage of total assets .63% .96%
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.
<PAGE>
Included in accruing loans 90 days or more past due at December 31, 1998 are
residential mortgages amounting to $116 thousand which are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
(Dollars in thousands)
December 31, 1998 1997
---------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,421 $4,089
Nonaccrual loans less than 90 days past due 3,192 3,246
---------------------------------------------------------------------------
Total nonaccrual loans $5,613 $7,335
---------------------------------------------------------------------------
Accruing loans 90 days or more past due,
primarily all residential mortgages (1) $150 $644
---------------------------------------------------------------------------
(1) Not included in nonperforming assets
Restructured Loans
Loans are considered restructured when the Corporation has granted concessions
to a borrower due to the borrower's financial condition that it otherwise would
not have considered. These concessions include modifications of the terms of the
debt such as reduction of the stated interest rate other than normal market rate
adjustments, extension of maturity dates, or reduction of principal balance or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit the Corporation by increasing
the ultimate probability of collection. Included in nonaccrual loans at December
31, 1998, are loans amounting to $1.1 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 $243 thousand at December 31, 1998, down from
the prior year amount of $497 thousand, as sales of foreclosed properties
exceeded the level of foreclosures. During 1998, proceeds from sales of
foreclosed properties amounted to $1.0 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
The allowance for loan losses represents the amount available for credit losses
inherent in the loan portfolio. Washington Trust assesses the quality of its
loans by performing ongoing reviews of its portfolio to determine potential loss
exposure and to assess delinquency trends. During this review, management gives
consideration to such factors as overall borrower relationship, delinquency
trends, credit and collateral quality, prior loss experience, prevailing
economic and business conditions, industry concentrations, the size and
characteristics of the loan portfolio and other pertinent factors. Based on this
review, the management believes that its year-end allowance for loan losses is
adequate.
Loans are charged off once the probability of loss has been established, through
the review of the factors mentioned above.
The determination of the adequacy of the allowance is necessarily judgmental and
involves consideration of various factors and assumptions. Management believes
that an allocation of the allowance is not necessarily indicative of the
specific amount of future charge-offs or the specific loan categories in which
these charge-offs may ultimately occur. The unallocated component of the
allowance for loan losses represents management's evaluation of the loan
portfolio, including its size and complexity, with consideration given to the
Corporation's expanded market area and industry concentrations. Also, management
realizes that there are losses that have been incurred within the portfolio that
have not yet been specifically identified. The allowance for loan losses
amounted to $10.4 million, or 2.32% of total loans at December 31, 1998,
compared to $8.8 million or 1.94% at December 31, 1997.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 1998 1997
-------------------------------------------------------------------------
Beginning balance $8,835 $8,495
Charge-offs, net of recoveries:
Residential real estate (5) (131)
Commercial:
Mortgages 51 (140)
Construction and development - 7
Other (41) (508)
Consumer (224) (288)
-------------------------------------------------------------------------
Net charge-offs (219) (1,060)
Provision for loan losses 1,800 1,400
-------------------------------------------------------------------------
Ending balance $10,416 $8,835
-------------------------------------------------------------------------
Allowance for loan losses to nonaccrual loans 185.58% 120.45%
Allowance for loan losses to total loans 2.32% 1.94%
-------------------------------------------------------------------------
The provision for loan losses amounted to $1.8 million in 1998, up from $1.4
million in 1997. The provision amount is determined by management to maintain
the allowance at a level which is deemed appropriate.
Capital Resources
Total shareholders' equity rose 8.7% during 1998 and amounted to $73.1 million
at December 31, 1998. Capital growth resulted from $6.0 million of earnings
retention and $2.5 million from stock option exercises. On August 3, 1998, the
Corporation paid a stock split in the form of a three-for-two stock dividend.
Additionally, cash dividends declared per share rose by 14.3% in 1998 for a
total of $.40 per share.
The ratio of total equity to total assets amounted to 7.8% at December 31, 1998,
compared to 8.3% at December 31, 1997. The reduction in this ratio was due
primarily to the growth in assets resulting from purchases of securities. Book
value rose to $7.30 per share at December 31, 1998, up from the year-earlier
amount of $6.80 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 as originally
filed sought recovery from the Bank for losses directly related to the
embezzlement of approximately $3.1 million, as well as consequential damages
amounting to approximately $2.6 million. On March 19, 1998, the customer amended
its claims to seek recovery of an additional $2.6 million in losses, plus an
unspecified amount of interest thereon, which are alleged to be directly related
to the embezzlement. Management believes, based on its review with counsel of
the development of this matter to date, that the Bank has asserted meritorious
affirmative defenses in this litigation. Additionally, the Bank has filed
counterclaims against the customer and its principal shareholder, as well as
claims against the officer allegedly responsible for the embezzlement. The Bank
intends to vigorously assert its defenses and affirmative claims. Because of the
numerous uncertainties which surround the litigation, management and legal
counsel are unable to estimate the amount of loss, if any, that the Bank may
incur with respect to this litigation. Consequently, no loss provision for this
lawsuit has been recorded.
Year 2000
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
The following "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.
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 Plan calls for validation and testing of
mission critical IT systems to be completed by March 31, 1999. Although this
process is on-going and dynamic, the Corporation expects to complete its
preparations for year 2000 by June 30, 1999. 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. 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. Total costs incurred for the year ended December 31,
1998 amounted to approximately $200 thousand. These costs consisted primarily of
system testing and modification, internal staffing and consulting, and were
primarily recorded in noninterest expenses. Most of the remaining project costs
will be incurred in the first half of 1999. 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.
Recent Accounting Developments
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires a corporation to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
This Statement defines conditions and criteria to be used in designating a
derivative as a specific type of hedging instrument. SFAS No. 133 also explains
the accounting for changes in the fair value of a derivative which depends on
the intended use and the resulting designation. Under this Statement, a
corporation is required to establish at the inception of the hedge the method to
be used for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the corporation's approach to managing risk.
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.
Comparison of 1997 with 1996
Washington Trust recorded net income of $9.1 million in 1997, a 7.9% increase
over the $8.4. million of net income recorded in 1996. Diluted earnings per
share amounted to $.89 for 1997, up from $.84 per share earned in 1996. ROA and
ROE amounted to 1.17% and 14.27%, respectively in 1997. Comparable amounts for
1996 were 1.44% and 14.95%.
Fully taxable equivalent net interest income rose 8.6% over the 1996 amount. The
interest rate spread declined 84 basis points to 3.49% in 1997, while the net
interest margin fell from 4.99% in 1996 to 4.07% in 1997. 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. The yield on total interest-earning assets amounted to 8.12% in 1997,
down from 8.57% in 1996. The Corporation's cost of funds rose 39 basis points in
1997 to 4.63% due to changes in deposit mix as well as increases in volume. The
rate of interest paid on time deposits rose 10 basis points, which resulted in a
shift of funds from lower yielding savings deposits to the time deposit
category.
Total assets rose $119.4 million or 17.2% during 1997 to $814.4 million at
December 31, 1997. Average assets amounted to $775.1 million in 1997, up 32.3%
over the prior year. Asset growth was primarily attributable to an increase of
$39.1 million in securities available for sale. Total securities available for
sale amounted to $237.1 million at the end of 1997. Total loans increased by
8.8% in 1997 and amounted to $455.9 million at December 31, 1997. All categories
of loans, except for commercial construction and development, exhibited
increases over 1996 levels.
Nonperforming assets declined to .96% of total assets at December 31, 1997, down
from 1.24% of total assets at December 31,1996. The Corporation's loan loss
provision amounted to $1.4 million in 1997, compared to $1.2 million in 1996.
Net loan charge-offs amounted to $1.1 million in 1997, up from $490 million in
1996.
Shareholders' equity rose by 13.1% in 1997. Approximately $5.6 million of this
increase was attributable to earnings retention and $1.2 million from stock
option exercises. Book value per share rose to $6.80 at December 31, 1997, up
from the year-earlier amount of $6.05 per share. The ratio of capital to assets
was 8.2% and 8.6% at December 31, 1997 and 1996, respectively. Dividends paid
per share amounted to $.35 in 1997, up 12.8% from the prior year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's Asset/Liability Committee ("ALCO") is responsible for
establishing policy guidelines on liquidity and acceptable exposure to interest
rate risk. The objective of the ALCO is to manage assets and funding sources to
produce results which are consistent with Washington Trust's liquidity, capital
adequacy, growth, risk and profitability goals. The ALCO establishes and
monitors guidelines for proper origination and matching of assets and funding
sources, and determines asset/liability origination and pricing strategies to
meet its goals. The ALCO meets regularly to review the economic environment and
the volume, mix and maturity of assets and liabilities, and implements
appropriate changes in strategy that will manage the Corporation's exposure to
interest rate risk and liquidity risk.
The ALCO manages the Corporation's interest rate risk using income simulation to
measure interest rate risk inherent in the Corporation's on-balance sheet and
off-balance sheet financial instruments at a given point in time by showing the
effect of interest rate shifts on net interest income over a 60-month period.
The ALCO uses both parallel and non-parallel rate shifts of up to 200 basis
points and Monte Carlo rate simulations based on the historical volatility of
interest rates to perform income simulations. The simulations assume that the
composition of the Corporation's balance sheet remains constant over the
60-month simulation horizon, and take into account the specific repricing,
maturity, call options, and prepayment characteristics of differing financial
instruments which may vary under different interest rate scenarios. Prepayment
estimates for the Corporation's loans are based on historical experience. Call
options and prepayment characteristics for securities are calculated using
industry-standard pricing and prepayment estimates. Non-contractual savings
deposits are classified as short-term (three months or less) for both maturity
and repricing purposes. The characteristics of financial instrument classes are
reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure
of net interest income to changes in interest rates remains within established
tolerance levels over a 24-month horizon, and to develop appropriate strategies
to manage this exposure. In addition, the ALCO reviews 60-month horizon results
to assess longer-term risk inherent in the balance sheet, although no 60-month
horizon tolerance levels are specified. As of December 31, 1998 and December 31,
1997, net interest income simulation indicated exposure to changing interest
rates over a 24-month horizon to a degree that remained within tolerance levels
established by the Corporation. The Corporation defines maximum unfavorable net
interest income exposure to be a change of no more than 5% in net interest
income over the first 12 months and no more than 10% over the second 12 months
of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have
on net interest income for a 24-month period using the Corporation's on and
off-balance sheet financial instruments as of December 31, 1998. Interest rates
are assumed to shift by a parallel 200 basis points over a 12-month period,
except for core savings deposits, which are assumed to shift by only 100 basis
points due to their historical insensitivity to rate changes. Further, core
savings are assumed to have certain minimum rate levels below which they will
not fall. It should be noted that the rate scenario used does not necessarily
reflect the ALCO's view of the "most likely" change in interest rates over the
next 24 months. Furthermore, since a static balance sheet is assumed, the
results do not reflect the anticipated future net interest income of the
Corporation for the same period. The following table presents these 24 month net
interest income simulation results:
<TABLE>
<CAPTION>
(Dollars in thousands)
Flat Falling Rising
Rates Rates Rates
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Fixed rate mortgage-backed securities $10,465 $9,753 $10,733
Adjustable rate mortgage-backed securities 11,440 9,024 14,033
Callable securities 11,313 10,139 12,196
Other securities 16,157 14,937 17,377
Fixed rate mortgages 19,106 17,753 19,981
Adjustable rate mortgages 8,510 7,280 9,554
Other fixed rate loans 23,254 22,603 23,905
Other adjustable rate loans 22,558 19,542 25,575
Interest rate floor contracts (net of premium amortization) 508 1,379 29
----------------------------------------------------------------------------------------------------------
Total interest income 123,311 112,410 133,383
----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 7,146 5,387 9,865
Time deposits 25,257 19,837 30,676
Short-term borrowings 1,511 1,056 1,965
Federal Home Loan Bank advances 28,400 24,186 32,432
----------------------------------------------------------------------------------------------------------
Total interest expense 62,314 50,466 74,938
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 1998 $60,997 $61,944 $58,445
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 1997 $60,684 $60,104 $60,842
----------------------------------------------------------------------------------------------------------
</TABLE>
The ALCO estimates that the negative exposure of net interest income to rising
rates results from a gradual balance sheet shift toward longer term fixed rate
assets and away from variable rate assets during 1998. The shift reflects
increased customer demand for fixed rate loans as interest rates declined
throughout the year. In the event of an increase in interest rates, funding
costs should rise more rapidly than asset yields over the near term, reducing
interest income. Conversely, net interest income should increase as rates fall
because shorter-term liabilities would decrease in cost over the near term,
while yields on fixed rate assets decline more slowly. While the ALCO reviews
simulation assumptions to ensure that they are reasonable and current, income
simulation may not always prove to be an accurate indicator of interest rate
risk since the repricing, maturity and prepayment characteristics of financial
instruments, especially core savings deposits, may change to a different degree
than estimated. In addition, since income simulations assume that the
Corporation's balance sheet will remain static over the 60-month simulation
horizon, the results do not reflect adjustments in strategy that the ALCO could
implement in response to rate shifts.
The Corporation also monitors the potential change in market value of its
available for sale debt securities in parallel rate shifts of up to 200 basis
points. The purpose is to determine market value exposure which may not be
captured by income simulation, but which might result in changes to the
Corporation's capital position. Results are calculated using industry-standard
analytical techniques and securities data. The Corporation uses the results to
manage the effect of market value changes on the Corporation's capital position.
The following table summarizes the potential change in market value of the
Corporation's available for sale debt securities as of December 31, 1998 and
1997 resulting from immediate 200 basis point parallel rate shifts:
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Falling Rising
Rates Rates
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Security Type:
U.S. Treasury and government-sponsored agency securities (noncallable) $1,530 $(1,428)
U.S. government-sponsored agency securities (callable) 1,228 (3,340)
Corporate securities 1,367 (1,410)
Fixed rate mortgage-backed securities 463 (2,719)
Adjustable rate mortgage-backed securities 1,026 (774)
Fixed rate collateralized mortgage obligations 117 (795)
Adjustable rate collateralized mortgage obligations (173) (675)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 1998 $5,558 $(11,141)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 1997 $4,331 $(6,931)
---------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation also monitors the potential change in market value of its
available for sale debt securities using "value at risk" analysis. "Value at
risk" analysis measures the theoretical maximum market value loss over a given
time period based on recent historical price activity of different classes of
securities. The anticipated maximum market value reduction for the bank's
available for sale securities portfolio at December 31, 1998, including both
debt and equity securities, was 5.4%, assuming a one-year time horizon and a 5%
probability of occurrence for "value at risk" analysis.
At December 31, 1998, gap analysis showed that the Corporation's cumulative
one-year gap was a negative $176.5 million, or 19.8% of earning assets. The
following table details the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 1998 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 consumer installment loans have been
allocated based on expected amortization and prepayment rates using standard
industry assumptions. Savings, NOW and money market deposit accounts, which have
no contractual term and are subject to immediate repricing, are presented in the
under three-month category. Management believes that gap analysis has
significant shortcomings as a measure of interest rate risk, as it does not
address the effect of changes in interest rates nor the magnitude of resulting
changes in net interest income. For this reason, the ALCO does not use gap
analysis to establish interest rate risk targets or assess interest rate risk
exposure.
<PAGE>
The following table summarizes the Corporation's gap analysis as of December 31,
1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
3 Months 3 to 6 6 Months 1 to 5 Over
or Less Months to 1 Year Years 5 Years
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $120,249 $45,162 $68,641 $133,911 $87,482
Debt securities 96,554 42,998 54,368 134,497 54,337
Other 16,041 0 0 0 39,602
----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 232,844 88,160 123,009 268,408 181,421
Interest-bearing liabilities:
Deposits 322,822 35,706 77,677 51,652 83
Short-term borrowings 15,033 0 0 0 0
Federal Home Loan Bank advances 74,000 49,312 46,000 67,682 25,112
----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 411,855 85,018 123,677 119,334 25,195
----------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(179,011) $3,142 $(668) $149,074 $156,226
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(179,011) $(175,869) $(176,537) $(27,462) $128,674
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap - 1997 $(161,524) $(179,448) $(163,226) $(30,535) $115,454
----------------------------------------------------------------------------------------------------------------
</TABLE>
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 periodic evaluation of risks associated with these
transactions, including counterparty credit risk.
During 1995, the Corporation entered into interest rate floor contracts with a
notional principal amount of $50 million and a five-year term maturing in
February 2000. During 1998, the Corporation entered into additional floor
contracts with a notional principal amount of $20 million and a five-year term
maturing in March 2003. These contracts are intended to function as a hedge
against reductions in interest income realized from prime-based loans. These
contracts were purchased for a total premium of $1.2 million, which is being
amortized over the life of the contracts. The Corporation receives payment for
these contracts if certain interest rates fall below specified levels. During
1998, the Corporation recorded income, net of premium amortization, of $67
thousand on its floor contracts. (See Note 7 to the Consolidated Financial
Statements for additional information regarding the floor contracts.)
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand. Washington Trust's primary source of
liquidity is customer deposits. Customer deposits (time, savings and demand
deposits) funded approximately 63.1% of total average assets in 1998. 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 1998. Net loans as a percentage of total assets fell to 46.7% at
December 31, 1998, compared to 54.9% at December 31, 1997. Total securities as a
percentage of total assets rose to 44.0% at December 31, 1998, up from 35.5% at
December 31, 1997. These changes resulted primarily from a combination of slower
loan growth and planned investment growth.
For the year ended December 31, 1998, net cash provided by financing activities
was $109.8 million. Proceeds from FHLB advances totaled $609.3 million, while
repayments of FHLB advances totaled $534.2 million in 1998. Additionally, $44.4
million in deposits were generated primarily from branch expansion and growth of
larger time deposits. Net cash used in investing activities was $118.3 million
in 1998, the majority of which was used to purchase securities. In addition,
approximately $3.7 million was used for additions to premises and equipment.
While the Corporation does not have any significant capital commitments, it
expects to continue to expend funds to upgrade and expand equipment and premises
to support its operations. Net cash provided by operating activities amounted to
$11.9 million in 1998, $10.0 million of which was generated by net income. (See
the Consolidated Statements of Cash Flows for further information about sources
and uses of cash.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Page
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
[firm logo here][KPMG]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust
Bancorp, Inc. and Subsidiary (the "Corporation") as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Trust
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ending December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Providence, Rhode Island
January 21, 1999
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $18,475 $12,925
Federal funds sold and other short-term investments 10,300 12,575
Mortgage loans held for sale 5,944 3,772
Securities:
Available for sale, at fair value 315,265 237,066
Held to maturity, at cost; fair value $96,548
in 1998 and $52,586 in 1997 95,647 51,807
- -------------------------------------------------------------------------------------------------------------------
Total securities 410,912 288,873
Federal Home Loan Bank stock, at cost 16,444 16,444
Loans 449,502 455,910
Less allowance for loan losses 10,416 8,835
- -------------------------------------------------------------------------------------------------------------------
Net loans 439,086 447,075
Premises and equipment, net 22,985 21,821
Accrued interest receivable 5,540 4,896
Other real estate owned, net 243 497
Other assets 5,140 5,515
- -------------------------------------------------------------------------------------------------------------------
Total assets $935,069 $814,393
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $87,383 $75,282
Savings 210,093 185,073
Time 277,847 270,571
- -------------------------------------------------------------------------------------------------------------------
Total deposits 575,323 530,926
Dividends payable 1,005 927
Short-term borrowings 15,033 20,337
Federal Home Loan Bank advances 262,106 187,001
Accrued expenses and other liabilities 8,536 7,998
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 862,003 747,189
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 1998 and 1997; issued
10,010,962 shares in 1998 and 9,902,921 shares in 1997 626 413
Paid-in capital 2,855 3,705
Retained earnings 62,196 56,360
Accumulated other comprehensive income 7,389 7,059
Treasury stock, at cost; 14,205 shares in 1997 - (333)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,066 67,204
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $935,069 $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
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $39,848 $39,090 $36,106
Interest on securities 20,340 16,383 8,072
Dividends on corporate stock and Federal Home Loan Bank stock 2,048 1,930 1,419
Interest on federal funds sold and other short-term investments 517 376 209
- --------------------------------------------------------------------------------------------------------------------
Total interest income 62,753 57,779 45,806
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 3,514 3,509 3,797
Time deposits 15,017 14,329 12,478
Federal Home Loan Bank advances 13,211 10,782 3,189
Other 864 857 203
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 32,606 29,477 19,667
- --------------------------------------------------------------------------------------------------------------------
Net interest income 30,147 28,302 26,139
Provision for loan losses 1,800 1,400 1,200
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 28,347 26,902 24,939
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 5,230 4,470 3,757
Service charges on deposit accounts 2,842 2,428 2,168
Merchant processing fees 1,219 994 817
Net gains on sales of securities 505 733 368
Net gains on loan sales 1,432 532 220
Other income 1,241 1,055 990
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 12,469 10,212 8,320
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 14,067 12,641 11,172
Net occupancy 2,108 1,977 1,300
Equipment 2,496 2,126 1,537
Merchant processing costs 961 773 637
Office supplies 666 684 534
Advertising and promotion 678 676 611
Other 5,844 5,508 4,745
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 26,820 24,385 20,536
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,996 12,729 12,723
Income tax expense 3,948 3,642 4,298
- --------------------------------------------------------------------------------------------------------------------
Net income $10,048 $9,087 $8,425
- --------------------------------------------------------------------------------------------------------------------
Per share information:
Earnings per share - basic $1.01 $.92 $.87
Earnings per share - diluted $.97 $.89 $.84
Cash dividends declared per share $.40 $.35 $.31
</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 CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $413 $3,705 $56,360 $7,059 $(333) $67,204
Net income 10,048 10,048
Other comprehensive income, net of tax:
Net unrealized gains on securities, net
of reclassification adjustment 330 330
--------
Comprehensive income 10,378
Cash dividends declared (4,005) (4,005)
Stock split in form of stock dividend 207 (207) -
Shares issued 6 (850) 3,338 2,494
Shares repurchased (3,005) (3,005)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $626 $2,855 $62,196 $7,389 $ - $73,066
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 273 3,764 50,886 4,504 - 59,427
Net income 9,087 9,087
Other comprehensive income, net of tax:
Net unrealized gains on securities, net
of reclassification adjustment 2,555 2,555
--------
Comprehensive income 11,642
Cash dividends declared (3,475) (3,475)
Stock split in form of stock dividend 138 (138) -
Shares issued 2 (59) 1,256 1,199
Shares repurchased (1,589) (1,589)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $413 $3,705 $56,360 $7,059 $(333) $67,204
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 180 3,071 45,631 4,382 (327) 52,937
Net income 8,425 8,425
Other comprehensive income, net of tax:
Net unrealized gains on securities, net
of reclassification adjustment 122 122
--------
Comprehensive income 8,547
Cash dividends declared (3,079) (3,079)
Stock split in form of stock dividend 91 (91) -
Shares issued 2 693 567 1,262
Shares repurchased (240) (240)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $273 $3,764 $50,886 $4,504 $ - $59,427
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Disclosure of Reclassification Amount:
Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------- -------------- ------------------- -------------------
<S> <C> <C> <C>
Net unrealized holding gains arising during the period $1,030 $4,928 $571
Less: Income tax effect (382) (1,927) (229)
Reclassification adjustment for net gains included
in net income, net of tax (318) (446) (220)
- ---------------------------------------------------------------- ------------- -------------------- -------------------
Net unrealized gains on securities $330 $2,555 $122
- ---------------------------------------------------------------- ------------- -------------------- -------------------
</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 CASH FLOWS
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------- ----------------- ---------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,048 $9,087 $8,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,800 1,400 1,200
Depreciation of premises and equipment 2,507 2,103 1,448
Amortization of premium in excess of accretion of
discount on debt securities 1,006 957 292
Deferred income tax expense (330) - 157
Net gains on sales of securities (504) (733) (368)
Net gains on loan sales (1,432) (532) (220)
Proceeds from sales of loans 89,533 32,115 18,331
Loans originated for sale (90,940) (32,532) (18,399)
Increase in accrued interest receivable (644) (736) (621)
Decrease (increase) in other assets 375 (1,469) 70
Increase in accrued expenses and other liabilities 538 652 530
Other, net (98) 40 (203)
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash provided by operating activities 11,859 10,352 10,642
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Cash flows from investing activities:
Securities available for sale:
Purchases (229,553) (144,043) (168,325)
Proceeds from sales 95,416 63,600 35,683
Maturities and principal repayments 55,950 45,352 20,222
Securities held to maturity:
Purchases (52,581) (29,060) (4,475)
Maturities and principal repayments 8,727 5,166 5,356
Purchases of Federal Home Loan Bank stock - (4,761) (8,688)
Principal collected on loans over (under) loan originations 6,374 (39,973) (33,168)
Purchase of loans - (324) -
Proceeds from sales of other real estate owned 1,006 1,032 993
Purchases of premises and equipment (3,683) (5,122) (5,872)
Purchase of deposits, net of premium paid - 7,014 -
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash used in investing activities (118,344) (101,119) (158,274)
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 44,397 46,155 8,707
Net (decrease) increase in short-term borrowings (5,304) 6,337 14,000
Proceeds from Federal Home Loan Bank advances 609,300 468,600 226,240
Repayment of Federal Home Loan Bank advances (534,195) (420,092) (108,698)
Purchase of treasury stock (3,005) (1,589) (240)
Proceeds from issuance of common stock 2,494 1,199 942
Cash dividends paid (3,927) (3,333) (2,980)
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash provided by financing activities 109,760 97,277 137,971
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,275 6,510 (9,661)
Cash and cash equivalents at beginning of year 25,500 18,990 28,651
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Cash and cash equivalents at end of year $28,775 $25,500 $18,990
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $789 $809 $1,279
Loans charged off 619 1,462 1,273
Loans made to facilitate the sale of other real estate owned 61 412 915
Change in net unrealized gain on securities
available for sale, net of tax 330 2,555 122
Stock issued in settlement of directors' retirement plan - - 320
Supplemental Disclosures:
Interest payments $32,709 $28,906 $19,267
Income tax payments 2,067 4,002 4,007
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned,
registered bank holding company, organized under the laws of the State of Rhode
Island. The Corporation provides a complete product line of financial services
through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"),
a Rhode Island chartered commercial bank. The Bank was originally chartered in
1800 and provides a variety of financial services including commercial,
residential and consumer lending, retail and commercial deposit products and
trust services through its branch offices in Rhode Island and Connecticut. The
deposits of the Bank are insured by the Federal Deposit Insurance Corporation
("FDIC"), subject to regulatory limits.
The activities of the Corporation and the Bank are subject to the regulatory
supervision of the Federal Reserve Board and the FDIC, respectively. Both
companies are subject to various Rhode Island and Connecticut business and
banking regulations.
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year
classification.
The accounting and reporting policies of the Corporation conform to generally
accepted accounting principles and to general practices of the banking industry.
The Corporation has one reportable operating segment. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates. A material estimate 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 ("FHLB"). As a
requirement of membership, the Bank must own a minimum amount of FHLB stock,
calculated periodically based primarily on its level of borrowings from the
FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In
addition, the FHLB may require members to redeem stock in excess of the
requirement. FHLB stock is redeemable at par, which equals cost. Since no market
exists for these shares, they are valued at par.
Mortgage Banking Activities
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost, net of
unamortized deferred loan origination fees and costs, or market. Unrealized
losses, if any, are charged to current period earnings.
Mortgage Servicing Rights
Rights to service mortgage loans for others are recognized as an asset,
including rights acquired through both purchases and originations. The total
cost of originated mortgage loans that are sold with servicing rights retained
is allocated between the mortgage servicing rights and the loans without the
mortgage servicing rights based on their relative fair values. Capitalized
mortgage servicing rights are included in other assets and are amortized as an
offset to other income over the period of estimated net servicing income. They
are periodically evaluated for impairment based on their fair value. Impairment
is measured on an aggregated basis according to interest rate band and period of
origination. The fair value is estimated based on the present value of expected
cash flows, incorporating assumptions for discount rate, prepayment speed and
servicing cost. Any impairment is recognized as a charge to earnings through a
valuation allowance.
Portfolio Loans
Loans held in portfolio are stated at the principal amount outstanding, net of
unamortized deferred loan origination fees and costs. Interest income is accrued
on a level yield basis based on principal amounts outstanding. Deferred loan
origination fees and costs are amortized as an adjustment to yield over the life
of the related loans.
Nonaccrual Loans
Loans, with the exception of 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. 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.
<PAGE>
Allowance for Loan Losses
The Corporation continually evaluates the allowance for loan losses by
performing ongoing reviews of certain individual loans, the size and composition
of the loan portfolio, net charge-off experience, current and expected economic
conditions, industry concentrations and other pertinent factors. The allowance
for loan losses is maintained at levels considered adequate by management to
provide for losses inherent in the loan portfolio. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses. Such agencies may require additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the straight-line
method over the estimated useful lives of assets. Expenditures for major
additions and improvements are capitalized while the costs of current
maintenance and repairs are charged to operating expenses.
Other Real Estate Owned (OREO)
Other real estate owned consists of property acquired through foreclosure and
loans determined to be substantively repossessed. Real estate loans that are
substantively repossessed include only those loans for which the Corporation has
taken possession of the collateral, but has not completed legal foreclosure
proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell
at the date of acquisition or classification to OREO status. Fair value of such
assets is determined based on independent appraisals and other relevant factors.
Any write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for known
specific and potential market declines and for estimated selling expenses.
Increases to the valuation allowance, expenses associated with ownership of
these properties, and gains and losses from their sale are included in
foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement 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. SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS Statement No. 125" deferred certain
provisions of SFAS No. 125 due to logistical issues concerning implementation.
The adoption of SFAS No. 125 and SFAS No. 127 did not have an effect on the
Corporation's financial statements.
Interest Rate Risk Management Agreements
The Corporation uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap and
floor agreements are entered into as hedges against future interest rate
fluctuations on specifically identified assets or liabilities. The Corporation
does not enter into agreements for trading or speculative purposes.
Therefore, these agreements are not marked to market.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements. Premiums
paid for interest rate floor agreements are amortized as an adjustment to
interest income over the term of the agreements. Unamortized premiums are
included in other assets. Gains or losses resulting from the termination of
interest rate swap and floor agreements on qualifying hedges of existing assets
or liabilities are deferred and amortized over the remaining lives of the
related assets/liabilities as an adjustment to the yield. Unamortized deferred
gains/losses on terminated interest rate swap and floor agreements are included
in the underlying assets/liabilities hedged.
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
Costs associated with defined benefit plans are accounted for in accordance with
SFAS No. 87, "Employers' Accounting for Pensions". Effective January 1, 1998,
the Corporation adopted 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
requires restatement of disclosures for earlier periods.
Stock-Based Compensation
The Corporation measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net
income and earnings per share computed using the fair value based method of
accounting for these plans as required by SFAS No. 123.
Income Taxes
Income tax expense is determined based on the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Share
Earnings per Share (EPS) is determined and disclosed in accordance with SFAS No.
128. Diluted EPS is computed by dividing net income by the average number of
common shares and common stock equivalents outstanding. Common stock equivalents
arise from the assumed exercise of outstanding stock options, if dilutive. The
computation of basic EPS excludes common stock equivalents from the denominator.
Reporting Comprehensive Income
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This
Statement establishes standards for reporting and display of comprehensive
income, which is defined as all changes in equity, except for those resulting
from investments by and distribution to shareholders. SFAS No. 130 classifies
net income as a component of comprehensive income, with all other components
referred to in the aggregate as other comprehensive income. This Statement also
requires that comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of this pronouncement also requires reclassification of prior year financial
statements for comparative purposes. The disclosure of the reclassification
amount reported in the Consolidated Statements of Changes in Shareholders'
Equity is shown net of tax. The tax effect on the reclassification adjustment
for net gains included in net income amounted to $187, $287 and $148 for 1998,
1997 and 1996, respectively.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight basis.
(2) Cash and Due From Banks
The Bank is required to maintain certain average reserve balances with the
Federal Reserve. Such reserve balances amounted to $3,784 and $5,641 at December
31, 1998 and 1997, respectively.
(3) Securities
Securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
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<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $113,757 $1,782 $(12) $115,527
Mortgage-backed securities 143,906 666 (495) 144,077
Corporate bonds 27,533 179 (209) 27,503
Corporate stocks 17,842 10,408 (92) 28,158
----------------------------------------------------------------------------------------------------------
Total securities available for sale 303,038 13,035 (808) 315,265
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 21,987 133 (1) 22,119
Mortgage-backed securities 46,088 335 (96) 46,327
States and political subdivisions 27,572 531 (1) 28,102
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 95,647 999 (98) 96,548
----------------------------------------------------------------------------------------------------------
Total securities $398,685 $14,034 $(906) $411,813
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<PAGE>
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $89,332 $1,000 $(40) $90,292
Mortgage-backed securities 121,728 865 (61) 122,532
Corporate bonds 1,985 15 - 2,000
Corporate stocks 12,294 10,001 (53) 22,242
----------------------------------------------------------------------------------------------------------
Total securities available for sale 225,339 11,881 (154) 237,066
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
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 securities held to maturity 51,807 783 (4) 52,586
----------------------------------------------------------------------------------------------------------
Total securities $277,171 $12,639 $(158) $289,652
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</TABLE>
Included in corporate stocks at December 31, 1998 are preferred stocks, which
are callable at the discretion of the issuer, with an amortized cost of $7,929
and a fair value of $8,410. Call features on these stocks range from one month
to nine years.
The contractual maturities and weighted average yields of debt securities are
summarized below. Weighted average yields are computed on a fully taxable basis.
Mortgage-backed securities are included based on weighted average maturities,
adjusted for anticipated prepayments.
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
December 31, 1998 Cost Value Yield
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<S> <C> <C> <C>
Securities Available for Sale:
Due in 1 year or less $39,000 $39,118 6.07%
After 1 but within 5 years 161,435 162,973 6.08%
After 5 but within 10 years 48,521 48,597 6.19%
After 10 years 36,240 36,419 6.09%
----------------------------------------------------------------------------------------------------------
Total debt securities available for sale 285,196 287,107 6.10%
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 30,572 30,750 6.86%
After 1 but within 5 years 34,355 34,661 5.81%
After 5 but within 10 years 30,010 30,423 5.17%
After 10 years 710 714 6.18%
----------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 95,647 96,548 5.94%
----------------------------------------------------------------------------------------------------------
Total debt securities $380,843 $383,655 6.06%
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</TABLE>
At December 31, 1998, the Corporation owned debt securities with an aggregate
carrying value of $52,250 which are callable at the discretion of the issuers.
The majority of these securities are U.S. Treasury and government-sponsored
agency obligations, included in the available-for-sale category. Final
maturities of these securities range from two to thirty years with call features
ranging from one month to eight years.
The following is a summary of amounts relating to sales of securities available
for sale:
Years ended December 31, 1998 1997 1996
-------------------------------------------------------------------------
Proceeds from sales $95,416 $63,600 $35,683
-------------------------------------------------------------------------
Realized gains $1,161 $1,252 $626
Realized losses (656) (519) (258)
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Net realized gains $505 $733 $368
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Securities available for sale with a fair value of $27,800 and $29,127 were
pledged to secure public deposits and for other purposes at December 31, 1998
and 1997 respectively.
(4) Loans
The following is a summary of loans:
December 31, 1998 1997
-------------------------------------------------------------------------
Commercial and other:
Mortgages (1) $70,468 $62,264
Construction and development (2) 612 3,539
Other (3) 111,477 127,956
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Total commercial and other 182,557 193,759
Residential real estate:
Mortgages 179,589 181,790
Homeowner construction 10,046 6,097
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Total residential real estate 189,635 187,887
Consumer 77,310 74,264
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Total loans $449,502 $455,910
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(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and
for land development
(3) Loans to businesses and individuals, a substantial portion of which
are fully or partially collateralized by real estate
Concentrations of Credit Risk
The Corporation's lending activities are primarily conducted in southern Rhode
Island and southeastern Connecticut. The Corporation grants single family and
multi-family residential loans, commercial real estate loans, commercial loans,
and a variety of consumer loans. In addition, loans are granted for the
construction of residential homes, commercial real estate properties, and for
land development. The ability of single family residential and consumer
borrowers to honor their repayment commitments is generally dependent on the
level of overall economic activity within the market area and real estate
values. The ability of commercial borrowers to honor their repayment commitments
is dependent on the general economy as well as the health of the real estate
economic sector in the Corporation's market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 1998 and 1997 was
$5,613 and $7,335, respectively. Interest income that would have been recognized
had these loans been performing at originally contracted rates was approximately
$520 in 1998 and $800 in 1997. Interest income attributable to these loans
included in the Consolidated Statements of Income amounted to approximately $149
in 1998 and $552 in 1997. Included in nonaccrual loans at December 31, 1998 and
1997 are loans amounting to $1,122 and $1,041, respectively, whose terms have
been restructured.
Impaired Loans
Impaired loans consist of all nonaccrual commercial loans. The following is a
summary of impaired loans:
December 31, 1998 1997
-------------------------------------------------------------------------
Impaired loans requiring an allowance $3,702 $5,131
Impaired loans not requiring an allowance 98 363
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Total recorded investment in impaired loans $3,800 $5,494
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Years ended December 31, 1998 1997
-------------------------------------------------------------------------
Average recorded investment in impaired loans $5,091 $5,436
-------------------------------------------------------------------------
Interest income recognized on impaired loans $443 $399
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Mortgage Servicing Activities
At December 31, 1998 and 1997, mortgage loans sold to others and serviced by the
Corporation on a fee basis under various agreements amounted to $174,730 and
$119,471, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.
The following is a summary of capitalized mortgage servicing rights:
December 31, 1998 1997
-------------------------------------------------------------------------
Balance at beginning of year $334 $145
Additions 551 215
Amortization (79) (26)
-------------------------------------------------------------------------
Balance at end of year $806 $334
-------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment.
As of December 31, 1998 and 1997, the balance of the valuation allowance
amounted to $296 and $41, respectively.
Loans to Related Parties
The Corporation has made loans in the ordinary course of business to certain
directors and executive officers including their immediate families and their
affiliated companies. Such loans were made under normal interest rate and
collateralization terms.
Activity related to these loans in 1998 and 1997 was as follows:
December 31, 1998 1997
-------------------------------------------------------------------------
Balance at beginning of year $1,898 $2,671
Additions 521 716
Reductions (806) (1,489)
-------------------------------------------------------------------------
Balance at end of year $1,613 $1,898
-------------------------------------------------------------------------
(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
Years ended December 31, 1998 1997 1996
-------------------------------------------------------------------------
Balance at beginning of year $8,835 $8,495 $7,785
Provision charged to expense 1,800 1,400 1,200
Recoveries of loans previously charged off 399 402 783
Loans charged off (618) (1,462) (1,273)
-------------------------------------------------------------------------
Balance at end of year $10,416 $8,835 $8,495
-------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 1998, 1997 and 1996
was an allowance for impaired loans amounting to $803, $916 and $867,
respectively.
(6) Premises and Equipment
The following is a summary of premises and equipment:
December 31, 1998 1997
-------------------------------------------------------------------------
Land and improvements $1,934 $1,884
Premises and improvements 22,507 21,122
Furniture, fixtures and equipment 16,630 14,394
-------------------------------------------------------------------------
41,071 37,400
Less accumulated depreciation 18,086 15,579
-------------------------------------------------------------------------
Total premises and equipment, net $22,985 $21,821
-------------------------------------------------------------------------
(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, 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $26,144 $20,444
Home equity lines 25,296 20,526
Credit card lines 17,962 17,959
Other loans 10,110 8,506
Standby letters of credit 1,061 1,175
Financial instruments whose notional amounts exceed the amount of credit risk:
Interest rate floor contracts 70,000 50,000
</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.
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.
In March 1998, the Corporation entered into a five year interest rate floor
contract with a notional amount of $20 million which matures in February 2003.
The floor contract entitles the Corporation to receive payment from a
counterparty if the three-month LIBOR rate falls below 5.50%. During 1995, the
Corporation entered into interest rate floor contracts with a total notional
amount of $50 million which mature in February 2000. The Corporation receives
payment under contracts with a total notional value of $30 million when the
prime rate falls below 9.0% and on the remaining $20 million when 3-month LIBOR
at quarterly resetting dates is below 6.1875%. The purpose of the floor
contracts is to offset the risk of future reductions in interest earned on
certain floating rate loans. The prime rate and 3-month LIBOR applicable to the
outstanding floor contracts at December 31, 1998 were 7.75% and 5.0656%,
respectively. At December 31, 1998, the fair value, or the value to the
Corporation of terminating the contracts, was $1,404. The remaining unamortized
premium for these contracts, included in other assets, amounted to $469 at
December 31, 1998.
The Corporation has not terminated any interest rate swap agreements or floor
contracts and there are no unamortized deferred gains or losses.
(8) Other Real Estate Owned An analysis of the composition of OREO follows:
December 31, 1998 1997
------------------------------------------------------------------------
Residential real estate $204 $492
Commercial real estate 27 -
Land 81 81
------------------------------------------------------------------------
312 573
Valuation allowance (69) (76)
------------------------------------------------------------------------
Other real estate owned, net $243 $497
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
Years ended December 31, 1998 1997
------------------------------------------------------------------------
Balance at beginning of year $573 $1,295
Net transfers from loans 789 809
Sales (1,066) (1,553)
Other 16 22
------------------------------------------------------------------------
312 573
Valuation allowance (69) (76)
------------------------------------------------------------------------
Other real estate owned, net $243 $497
------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation
allowance:
Years ended December 31, 1998 1997 1996
------------------------------------------------------------------------
Balance at beginning of year $76 $205 $410
Provision charged to expense 14 42 303
Sales (1) (131) (458)
Selling expenses incurred (20) (40) (50)
------------------------------------------------------------------------
Balance at end of year $69 $76 $205
------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $59, $69 and $351
in 1998, 1997 and 1996, 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, 1998 were
as follows:
Years ending December 31: 1999 $226,112
2000 43,589
2001 4,626
2002 2,042
2003 1,395
2004 and thereafter 83
------------------------------------------------------------------------
Balance at December 31, 1998 $277,847
------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100
or more was $78,488 and $59,270 at December 31, 1998 and 1997, respectively.
(10) Borrowings
Short-Term Borrowings
Short-term borrowings consist primarily of securities sold under repurchase
agreements which generally mature within 90 days. The securities underlying the
agreements are held in safekeeping by the counterparty in the name of the
Corporation and are repurchased when the agreement matures. Accordingly, these
underlying securities are included in securities available for sale and the
obligation to repurchase such securities are reflected as a liability. The
following is a summary of amounts relating to short-term borrowings:
Years ended December 31, 1998 1997 1996
--------------------------------------------------------------------------
Maximum amount outstanding at any month-end $26,767 $26,820 $14,000
--------------------------------------------------------------------------
Average amount outstanding $15,085 $14,773 $3,260
--------------------------------------------------------------------------
Federal Home Loan Bank Advances
The following table presents scheduled maturities and weighted average interest
rates paid on Federal Home Loan Bank advances outstanding at December 31, 1998:
Weighted
Average Rate Amount
---------------------------------------------------------------------------
Years ending December 31: 1999 5.42% $169,787
2000 5.03% 25,844
2001 5.60% 21,806
2002 5.67% 7,784
2003 5.12% 12,128
2004 and thereafter 4.55% 24,757
---------------------------------------------------------------------------
Balance at December 31, 1998 $262,106
---------------------------------------------------------------------------
Included in the outstanding amounts disclosed above, are callable advances
totaling $25,000. Call features on these advances range from one to five years.
In addition to the outstanding advances, the Bank also has access to an unused
line of credit amounting to $13,927 at December 31, 1998. Under agreement with
the FHLB, the Bank is required to maintain qualified collateral, free and clear
of liens, pledges, or encumbrances that, based on certain percentages of book
and market values, has a value equal to the aggregate amount of the line of
credit and outstanding advances. Qualified collateral may consist of residential
mortgage loans, U.S. government or agency securities, and amounts maintained on
deposit at the FHLB. The Bank maintains qualified collateral in excess of the
amount required to collateralize the line of credit and outstanding advances at
December 31, 1998.
(11) Employee Benefits
Defined Benefit Pension Plans
The Corporation's noncontributory tax-qualified defined benefit pension plan
covers substantially all full-time employees. Benefits are based on an
employee's years of service and highest 3-year compensation. The plan is funded
on a current basis, in compliance with the requirements of the Employee
Retirement Income Security Act. The prepaid benefit costs relating to the
defined benefit pension plan amounted to $938 and $807 at December 31, 1998 and
1997, respectively.
The Corporation has a nonqualified retirement plan to provide supplemental
retirement benefits to certain employees, as defined in the plan. The accrued
pension liability related to this plan amounted to $323 and $270 at December 31,
1998 and 1997, respectively. The actuarial assumptions used for this
supplemental plan are the same as those used for the Corporation's tax-qualified
pension plan. The accumulated benefit obligation for this plan amounted to $777
and $678 at December 31, 1998 and 1997, respectively.
The following is a reconciliation of the benefit obligation, fair value of plan
assets and funded status of the Corporation's defined benefit pension plans:
Years ended December 31, 1998 1997
-------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $12,390 $10,370
Service cost 502 376
Interest cost 915 791
Actuarial gain 1,299 1,352
Benefits paid (627) (500)
-------------------------------------------------------------------------
Benefit obligation at end of year $14,479 $12,390
-------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $14,392 $11,494
Actual return on plan assets 2,006 2,824
Employer contribution 578 574
Benefits paid (627) (500)
-------------------------------------------------------------------------
Fair value of plan assets at end of year $16,349 $14,392
-------------------------------------------------------------------------
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:
Years ended December 31, 1998 1997
-------------------------------------------------------------------------
Funded status $1,870 $2,002
Unrecognized transition asset (55) (61)
Unrecognized prior service cost 522 597
Unrecognized net actuarial (gain) loss (1,722) (2,001)
-------------------------------------------------------------------------
Prepaid benefit cost $615 $537
-------------------------------------------------------------------------
As of December 31, 1998 1997
-------------------------------------------------------------------------
Assumptions Used:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.50% 8.00%
Rate of compensation increase 5.00% 5.00%
The components of net pension cost include the following:
Years ended December 31, 1998 1997 1996
-------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $502 $376 $435
Interest cost 915 791 720
Expected return on plan assets (992) (826) (743)
Amortization of transition asset (6) (6) (6)
Amortization of prior service cost 75 75 73
Recognized net actuarial loss 6 13 9
-------------------------------------------------------------------------
Net periodic benefit cost $500 $423 $488
-------------------------------------------------------------------------
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 $231, $223 and $198 in 1998,
1997 and 1996, respectively. The amount of the profit sharing benefit was $306,
$286 and $245 for 1998, 1997 and 1996, respectively.
<PAGE>
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 $688,
$640 and $597 in 1998, 1997 and 1996, 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). The benefits provided under this plan
continue for retired directors. The expense of this plan is included in other
noninterest expense and amounted to $25, $36 and $63 for 1998, 1997 and 1996,
respectively. Accrued and unpaid benefits under this plan are an unfunded
obligation of the Bank. The accrued liability related to this plan amounted to
$256 and $263 at December 31, 1998 and 1997, respectively.
(12) Income Taxes
The components of income tax expense were as follows:
Years ended December 31, 1998 1997 1996
------------------------------------------------------------------------
Current expense:
Federal $4,276 $3,405 $3,322
State 2 237 819
------------------------------------------------------------------------
Total current expense 4,278 3,642 4,141
------------------------------------------------------------------------
Deferred expense (benefit):
Federal (330) 445 181
State - (445) (24)
------------------------------------------------------------------------
Total deferred expense (330) - 157
------------------------------------------------------------------------
Total income tax expense $3,948 $3,642 $4,298
------------------------------------------------------------------------
Total income tax expense varied from the amount determined by applying the
Federal income tax rate to income before income taxes. The reasons for the
differences were as follows:
Years ended December 31, 1998 1997 1996
---------------------------------------------------------------------------
Tax expense at Federal statutory rate $4,798 $4,328 $4,326
Increase (decrease) in taxes resulting from:
Tax-exempt income (401) (282) (237)
Dividends received deduction (261) (253) (282)
State tax, net of Federal income tax benefit (1) (137) 553
Effect of change in state tax rate - - (43)
Other (187) (14) (19)
---------------------------------------------------------------------------
Total income tax expense $3,948 $3,642 $4,298
---------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1998 and
1997 are as follows:
December 31, 1998 1997
------------------------------------------------------------------------
Gross deferred tax assets:
Allowance for loan losses $3,441 $2,890
Deferred loan origination fees 312 249
Interest on nonaccrual loans 198 270
Other 903 838
------------------------------------------------------------------------
Gross deferred tax assets 4,854 4,247
------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale (4,157) (3,987)
Premises and equipment (1,114) (1,093)
Deferred loan origination costs (686) (643)
Pension (308) (264)
Other (218) (210)
------------------------------------------------------------------------
Gross deferred tax liabilities (6,483) (6,197)
------------------------------------------------------------------------
Net deferred tax liability $(1,629) $(1,950)
------------------------------------------------------------------------
In addition to future taxable income, a primary source of recovery of deferred
tax assets is taxes paid in prior years available for carryback.
(13) Operating Leases
At December 31, 1998, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $334, $131 and $47 for 1998, 1997 and 1996,
respectively. The minimum annual lease payments under the terms of these leases,
exclusive of renewal provisions, are as follows:
Years ending December 31: 1999 $236
2000 244
2001 247
2002 120
2003 71
Thereafter 42
------------------------------------------------------------------------
$960
------------------------------------------------------------------------
At December 31, 1998, the Corporation was committed to exercise a purchase
option under a lease relating to certain real estate. This purchase was
consummated in January 1999 for $1,077. The lease payments relating to this
property has been excluded from the minimum annual lease payments disclosed
above.
(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, conversion, failure to act in a commercially reasonable manner, and
constituted fraud.
The suit as originally filed sought recovery for losses directly related to the
embezzlement of approximately $3,100, as well as consequential damages amounting
to approximately $2,600. On March 19, 1998, the plaintiffs amended their claims
to seek recovery of an additional $2,600 in losses, plus an unspecified amount
of interest thereon, which are alleged to be directly related to the
embezzlement. Management believes, based on its review with counsel of the
development of this matter to date, that the Bank has asserted meritorious
affirmative defenses in this litigation. Additionally, the Bank has filed
counterclaims against the customer and its principal shareholder, as well as
claims against the officer allegedly responsible for the embezzlement. The Bank
intends to vigorously assert its defenses and affirmative claims. The case is in
discovery and management and legal counsel are unable to estimate or assess the
extent of risk of an adverse result. Consequently, no loss provision for this
lawsuit has been recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
(15) Shareholders' Equity
Stock Splits
A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3,
1998 to shareholders of record on July 17, 1998. A 3-for-2 stock split on shares
of common stock was also paid on November 19, 1997 to shareholders of record on
November 5, 1997. The par value of the common stock remained unchanged at $.0625
per share. Cash payments were made in lieu of issuing fractional shares. All
share and per share amounts in the consolidated financial statements and related
notes have been restated to reflect these stock splits.
Stock Repurchase Plan
In December 1997, the Corporation's Board of Directors approved a program to
repurchase up to 225,000, or approximately 2.3%, of its outstanding common
shares. This plan replaces the June 1996 authorization to repurchase 195,750
shares. The Corporation plans to hold the repurchased shares as treasury stock
to be used for general corporate purposes. During the year ended December 31,
1998, approximately 139,274 shares were repurchased under the December 1997 plan
at a total cost of $3,005. As of December 31, 1997, there were no shares
repurchased under the December 1997 plan.
Rights
On August 1996, the Corporation declared a dividend of one common share purchase
right (a "Right") for each share of common stock payable on September 3, 1996 to
shareholders of record on that date. Such Rights also apply to new issuances of
shares after that date. Each Right entitles the registered holder to purchase
from the Corporation one share of its common stock at a price of $35.56 per
share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the
earlier of 10 days after a person or group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the outstanding common shares or
announces a tender offer to do so. The Rights, which expire on August 31, 2006,
may be redeemed by the Corporation at any time prior to the acquisition by an
Acquiring Person of beneficial ownership of 15% or more of the common stock at a
price of $.001 per Right. In the event that any party becomes an Acquiring
Person, each holder of a Right, other than Rights owned by the Acquiring Person,
will have the right to receive upon exercise that number of common shares having
a market value of two times the purchase price of the Right. In the event that,
at any time after any party becomes an Acquiring Person, the Corporation is
acquired in a merger or other business combination transaction or 50% or more of
its assets or earning power are sold, each holder of a Right will have the right
to purchase that number of shares of the acquiring company having a market value
of two times the purchase price of the Right.
Dividends
The primary source of funds for dividends paid by the Corporation is dividends
received from the Bank. The Corporation and the Bank are regulated enterprises
and their abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist regarding
dividends, loans, and advances from the Bank to the Corporation. Generally the
Bank has the ability to pay dividends to the parent subject to minimum
regulatory capital requirements. Under the most restrictive of these
requirements, the Bank could have declared aggregate additional dividends of
$26,795 as of December 31, 1998.
Stock Option Plans
The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the
granting of options and other equity incentives to key employees, directors,
advisors, and consultants. Up to 1,012,500 shares of the Corporation's common
stock may be used from authorized but unissued shares, treasury stock, or shares
available from expired awards. As of December 31, 1998, only options have been
granted under the 1997 Plan and the exercise price of each option is the fair
market value on the date of the grant. Options are designated either as
non-qualified or as incentive options. In general, the option price is payable
in cash, by the delivery of shares of the Corporation's common stock already
owned by the grantee, or a combination thereof. Awards may be granted at any
time until April 29, 2007.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for
the granting of options to directors, officers and key employees. The 1988 Plan
permitted options to be granted at any time until December 31, 1997. The 1988
Plan provided for shares of the Corporation's common stock to be used from
authorized but unissued shares, treasury stock, or shares available from expired
options. Options were designated either as non-qualified or as incentive
options. The exercise price of options granted was equal to the fair market
value on the date of grant. In general, the option price is payable in cash, by
the delivery of shares of the Corporation's common stock already owned by the
grantee, or a combination thereof. The 1988 Plan permitted options to be granted
with stock appreciation rights (SARs), however, no options under the 1988 Plan
were granted with SARs.
Options granted under the plans vest according to various terms at the end of
ten years. The following table presents changes in options outstanding during
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,128,584 $7.73 1,106,077 $5.73 1,200,335 $5.12
Granted 24,435 $21.33 239,404 $14.67 147,363 $9.62
Exercised (292,618) $5.22 (210,829) $5.05 (237,913) $5.07
Cancelled (9,072) $15.87 (6,068) $10.24 (3,708) $6.38
- ------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 851,329 $8.90 1,128,584 $7.73 1,106,077 $5.73
- ------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 682,249 $7.32 857,987 $6.04 898,098 $5.12
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 1998 were as follows:
<TABLE>
<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
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.72 to $5.58 255,312 4.0 years $3.90 255,312 $3.90
$6.44 to $9.78 348,915 6.4 years $7.99 321,099 $7.86
$11.56 to $12.17 120,605 8.3 years $11.65 69,829 $11.72
$18.25 to $21.33 126,497 9.0 years $18.85 36,009 $18.27
- -----------------------------------------------------------------------------------------------------------------
Total 851,329 6.3 years $8.90 682,249 $7.32
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Note 1, the Corporation accounts for its stock option plan using
the intrinsic value based method prescribed by APB Opinion No. 25, and in
addition, is required to disclose pro forma net income and earnings per share
using the fair value based method prescribed by SFAS No. 123. Accordingly, no
compensation cost for these plans has been recognized in the Consolidated
Statements of Income for 1998, 1997 and 1996.
In determining the pro forma disclosures required by SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table presents pro forma net
income and earnings per share assuming the stock option plan was accounted for
using the fair value method prescribed by SFAS No. 123, the weighted average
assumptions used and the grant date fair value of options granted in 1998, 1997
and 1996:
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Net income As reported $10,048 $9,087 $8,425
Pro forma $9,696 $8,783 $8,306
Earnings per share - basic As reported $1.01 $.92 $.87
Pro forma $.97 $.89 $.85
Earnings per share - diluted As reported $.97 $.89 $.84
Pro forma $.94 $.86 $.83
Weighted average fair value $5.40 $4.31 $2.59
Expected life 8.6 years 8.4 years 6.3 years
Risk-free interest rate 6.04% 6.3% 6.6%
Expected volatility 25.9% 21.2% 17.2%
Expected dividend yield 4.0% 4.25% 4.0%
The pro forma effect on net income and earnings per share for 1998, 1997 and
1996 is not representative of the pro forma effect on net income and earnings
per share for future years because it does not reflect compensation cost for
options granted prior to January 1, 1995.
Dividend Reinvestment
Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan,
607,500 shares of common stock were originally reserved to be issued for
dividends reinvested and cash payments to the plan.
Reserved Shares
As of December 31, 1998, a total of 2,603,797 common stock shares were reserved
for issuance under the 1988 Amended and Restated Stock Option Plan, the 1997
Equity Incentive Plan and the Amended and Restated Dividend Reinvestment and
Stock Purchase Plan.
Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal Reserve Board and the FDIC,
respectively. These requirements were established to more accurately assess the
credit risk inherent in the assets and off-balance sheet activities of financial
institutions. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 1998, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital
amounts and ratios at December 31, 1998 and 1997, as well as the corresponding
minimum regulatory amounts and ratios:
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Consolidated $75,417 15.17% $39,759 8.00% $49,699 10.00%
Bank $73,275 14.74% $39,759 8.00% $49,699 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $64,568 12.99% $19,879 4.00% $29,820 6.00%
Bank $62,426 12.56% $19,879 4.00% $29,820 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $64,568 7.25% $35,631 4.00% $44,539 5.00%
Bank $64,426 7.00% $35,631 4.00% $44,539 5.00%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Consolidated $64,573 14.39% $35,901 8.00% $44,876 10.00%
Bank $62,812 14.00% $35,901 8.00% $44,876 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $58,924 13.13% $17,950 4.00% $26,925 6.00%
Bank $57,163 12.74% $17,950 4.00% $26,925 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $58,924 7.47% $31,570 4.00% $39,462 5.00%
Bank $57,163 7.24% $31,570 4.00% $39,462 5.00%
<FN>
(1) Leverage ratio
</FN>
</TABLE>
<PAGE>
(16) Earnings per Share
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $10,048 $10,048 $9,087 $9,087 $8,425 $8,425
Share amounts, in thousands:
Average outstanding 9,974.1 9,974.1 9,861.8 9,861.8 9,735.5 9,735.5
Common stock equivalents - 380.2 - 382.5 - 348.2
---------------------------------------------------------------------------------------------------------
Weighted average outstanding 9,974.1 10,354.3 9,861.8 10,244.3 9,735.5 10,083.7
---------------------------------------------------------------------------------------------------------
Earnings per share $1.01 $.97 $.92 $.89 $.87 $.84
---------------------------------------------------------------------------------------------------------
</TABLE>
(17) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Corporation disclose estimated fair values of its financial
instruments. Fair value estimates are made as of a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any pricing adjustments that could result from
the sale of the Corporation's entire holding of a particular financial
instrument. Because no quoted market exists for a portion of the financial
instruments, fair value estimates are based on subjective judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. Changes in
assumptions could significantly affect the estimates of fair value. Fair value
estimates, methods, and assumptions are set forth as follows:
Cash and Securities
The carrying amount of short-term instruments such as cash and federal funds
sold is used as an estimate of fair value.
The fair value of securities available for sale and held to maturity is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. No market exists for shares of the
Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon
termination of FHLB membership and is therefore valued at par, which equals
cost.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated using the quoted
market prices for sales of similar loans on the secondary market.
Loans
Fair values are estimated for categories of loans with similar financial
characteristics. Loans are segregated by type and are then further segmented
into fixed rate and adjustable rate interest terms to determine their fair
value. The fair value of fixed rate commercial and consumer loans is calculated
by discounting scheduled cash flows through the estimated maturity of the loan
using interest rates offered at December 31, 1998 and 1997 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, 1998 and
1997. The discounted values of cash flows using the rates currently offered for
deposits of similar remaining maturities were used to estimate the fair value of
certificates of deposit.
Securities Sold Under Agreements to Repurchase
The carrying amount of securities sold under repurchase agreements approximates
fair value.
Federal Home Loan Bank Advances
Rates currently available to the Corporation for advances with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Off-Balance Sheet Instruments
The fair values of interest rate swap agreements and floor contracts generally
reflect the estimated amounts that the Corporation would receive or pay to
terminate the contracts. The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
The following table presents the fair values of the Corporation's financial
instruments:
<TABLE>
<CAPTION>
December 31, 1998 1997
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
On-balance sheet:
Cash and cash equivalents $28,775 $28,775 $25,500 $25,500
Mortgage loans held for sale 5,944 5,999 3,772 3,828
Securities available for sale 315,265 315,265 237,066 237,066
Securities held to maturity 95,647 96,548 51,807 52,586
Federal Home Loan Bank stock 16,444 16,444 16,444 16,444
Loans, net of allowance for loan losses 439,086 453,354 447,075 456,626
Accrued interest receivable 5,540 5,540 4,896 4,896
Off-balance sheet financial instruments
relating to assets:
Interest rate floor contracts 469 1,404 395 663
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $87,383 $87,383 $75,282 $75,282
Non-term savings accounts 210,093 210,093 185,073 185,073
Certificates of deposit 277,847 279,709 270,571 271,629
Short term borrowings 15,033 15,033 20,337 20,337
Federal Home Loan Bank advances 262,106 266,523 187,001 187,173
Accrued interest payable 2,612 2,612 2,715 2,715
</TABLE>
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 and therefore are not disclosed.
(18) Parent Company Financial Statements
The following are parent company only financial statements of Washington Trust
Bancorp, Inc. reflecting the investment in the bank subsidiary on the equity
basis of accounting. The Statements of Changes in Shareholders' Equity for the
parent company only are identical to the Consolidated Statements of Changes in
Shareholders' Equity and are therefore not presented.
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
Years ended December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiary $6,480 $3,750 $3,000
Other expense - 40 -
----------------------------------------------------------------------------------------------
Net income before income taxes and
undistributed earnings of subsidiary 6,480 3,710 3,000
Income tax benefit - 14 -
----------------------------------------------------------------------------------------------
Income before undistributed earnings
of subsidiary 6,480 3,724 3,000
Equity in undistributed earnings of subsidiary 3,568 5,363 5,425
----------------------------------------------------------------------------------------------
Net income $10,048 $9,087 $8,425
----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $1,947 $1,388
Investment in bank subsidiary at equity value 70,924 65,443
Dividend receivable from bank subsidiary 1,200 1,200
Due from bank subsidiary - 100
----------------------------------------------------------------------------------------------
Total assets $74,071 $68,131
----------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,005 $927
----------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 1998 and 1997; issued
10,010,962 shares in 1998 and 9,902,921 shares in 1997 626 413
Paid-in capital 2,855 3,705
Retained earnings 62,196 56,360
Net unrealized gain on securities available for sale 7,389 7,059
Treasury stock, at cost - (333)
---------------------------------------------------------------------------------------------
Total shareholders' equity 73,066 67,204
---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $74,071 $68,131
---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $10,048 $9,087 $8,425
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary (3,568) (5,363) (5,425)
(Increase) decrease in dividend receivable - (450) 90
Decrease (increase) in due from bank subsidiary 100 (100) -
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,580 3,174 3,090
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for investments in and advances
to subsidiaries (1,583) - -
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,583) - -
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (3,005) (1,589) (240)
Proceeds from issuance of common stock 2,494 1,199 1,262
Cash dividends paid (3,927) (3,333) (2,980)
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,438) (3,723) (1,958)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 559 (549) 1,132
Cash at beginning of year 1,388 1,937 805
---------------------------------------------------------------------------------------------------------
Cash at end of year $1,947 $1,388 $1,937
---------------------------------------------------------------------------------------------------------
</TABLE>
(18) Subsequent Event
On February 23, 1999, the Corporation announced that it had signed a definitive
agreement to acquire PierBank, a Rhode Island-chartered community bank with
assets of $59.4 million, which is headquartered in South Kingstown, Rhode
Island. Under the terms of the agreement, Washington Trust Bancorp, Inc. will
exchange shares of its common stock for shares of PierBank common stock. Each
PierBank share will initially be valued at approximately $8.60, for a total
transaction value of $13.7 million. The actual number and value of Washington
Trust Bancorp, Inc. common shares to be issued to PierBank shareholders will be
based on an exchange formula using the average closing price of Washington Trust
Bancorp's common stock during the 15 trading days prior to receiving final
regulatory approval. Based on the initial exchange ratio, Washington Trust
Bancorp will exchange .4517 shares of its common stock for each share of common
stock held by a PierBank shareholder. In accordance with the agreement, PierBank
granted Washington Trust Bancorp, Inc. an option to acquire under certain terms
and conditions up to 319,810 shares at $7.48 per share. The option was granted
as an inducement to Washington Trust Bancorp Inc.'s willingness to enter into
the agreement. The purchase, which is expected to be completed in the second
half of 1999, is subject to approval by PierBank's shareholders as well as State
and Federal banking regulators. The transaction is expected to be a tax-free
reorganization and accounted for as a pooling of interests.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information regarding directors is presented under the caption "Nominee
and Director Information" in the Corporation's Proxy Statement dated March 19,
1999 prepared for the Annual Meeting of Shareholders to be held April 27, 1999
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, 1999
prepared for the Annual Meeting of Shareholders to be held April 27, 1999, 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, 1999 prepared for the Annual Meeting of
Shareholders to be held April 27, 1999, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Nominee and
Director Information" in the Corporation's Proxy Statement dated March 19, 1999
prepared for the Annual Meeting of Shareholders to be held April 27, 1999, 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, 1999 prepared for the Annual Meeting of Shareholders
to be held April 27, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Registrant required in response to
this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by
Article 9 of Regulation S-K and all other schedules to the consolidated
financial statements of the Registrant have been omitted because the
required information is either not required, not applicable, or is
included in the consolidated financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
(c) Exhibit Index.
Exhibit Number
--------------------
3.a Restated Articles of Incorporation of the Registrant
- Filed as Exhibit 3.(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994.
(1)
3.b Amendment to Restated Articles of Incorporation -
Filed as Exhibit 3.i to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1997. (1)
3.c Amended and Restated By-Laws of the Corporation -
Filed as Exhibit 3.c to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December ,31 1997.
(1)
4 Rights Agreement between the Registrant and The
Washington Trust Company dated as of August 15, 1996
(including Form of Right Certificate attached thereto
as Exhibit A) - Filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A (File
No. 000-13091) filed with the Commission on August
16, 1996. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan
- Filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994.
(1) (2)
10.b Short Term Incentive Plan Description - Filed as
Exhibit 10.b to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1997. (1) (2)
10.c Amended and Restated Nonqualified Deferred
Compensation Plan - Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8
(File No. 333-72277) filed with the Commission on
February 12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed
as Exhibit 10.4 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1994.
(1) (2)
10.e Vote of the Board of Directors of the Corporation
which constitutes the 1996 Directors' Stock Plan
- Filed as Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8
(File No. 333-13167) filed with the Commission on
October 1, 1996. (1) (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed
as Exhibit 10.a to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
1997. (1) (2)
10.g Change in Control Agreements with Executive Officers
- Filed as Exhibit 10.b to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1997. (1) (2)
10.h Change in Control Agreements with Executive Officers
- Filed herewith. (2)
21 Subsidiaries of the Registrant - Filed as Exhibit
21 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996. (1)
23 Consent of Independent Auditors - Filed herewith.
27 Financial Data Schedules - Filed herewith.
--------------------
(1) Not filed herewith. In accordance with Rule 12b-32
promulgated pursuant to the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously
filed with the Commission, which are incorporated by
reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
-----------------------------------------------
(Registrant)
Date: February 18, 1999 By John C. Warren
- ------------------------ -----------------------------------------------
John C. Warren
President, Chief Executive Officer and Director
(principal executive officer)
Date: February 18, 1999 By David V. Devault
- ------------------------ -----------------------------------------------
David V. Devault
Executive Vice President,
Treasurer and Chief Financial Officer
(principal financial and principal
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: February 18, 1999 Alcino G. Almeida
---------------------------- ----------------------------------
Alcino G. Almeida, Director
Date: February , 1999
---------------------------- ----------------------------------
Gary P. Bennett, Director
Date: February 18, 1999 Steven J. Crandall
---------------------------- ----------------------------------
Steven J. Crandall, Director
Date: February 18, 1999 Richard A. Grills
---------------------------- ----------------------------------
Richard A. Grills, Director
Date: February 18, 1999 Larry J. Hirsch
---------------------------- ----------------------------------
Larry J. Hirsch, Director
Date: February 18, 1999 Katherine W. Hoxsie
---------------------------- ----------------------------------
Katherine W. Hoxsie, Director
Date: February , 1999
---------------------------- ----------------------------------
Mary E. Kennard, Director
Date: February 18, 1999 Joseph J. Kirby
---------------------------- ----------------------------------
Joseph J. Kirby, Director
Date: February 18, 1999 James W. McCormick, Jr.
---------------------------- ----------------------------------
James W. McCormick, Jr., Director
Date: February , 1999
---------------------------- ----------------------------------
Brendan P. O'Donnell, Director
Date: February 18, 1999 Victor J. Orsinger
---------------------------- ----------------------------------
Victor J. Orsinger II, Director
Date: February 18, 1999 Anthony J. Rose, Jr.
---------------------------- ----------------------------------
Anthony J. Rose, Jr., Director
Date: February 18, 1999 James P. Sullivan
---------------------------- ----------------------------------
James P. Sullivan, Director
Date: February 18, 1999 Neil H. Thorp
---------------------------- ----------------------------------
Neil H. Thorp, Director
Date: February 18, 1999 John C. Warren
---------------------------- ----------------------------------
John C. Warren, Director
EXHIBIT 10.h
Change in Control Agreements with Executive Officers
WASHINGTON TRUST BANCORP, INC.
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
The Registrant has entered into a Change of Control Agreement with certain of
its executive officers. The form of Agreement attached contains blanks where the
term of the Agreement and the multiple of the executive's base amount provided
under the Agreement vary for certain executives. The executive officers who have
entered into the Agreement, the term of the Agreement and the multiple of the
executive's base amount provided under the Agreement for each executive are
listed in the following chart:
Number Times
Term of Agreement Base Amount
Executive Officer (Sections 3, 4 and 13) (Section 5 a)
- --------------------------------------------------------------------------------
Barbara J. Perino
Senior Vice President - Operations
And Technology, of the Bank 1 year 1 time
James M. Vesey
Senior Vice President -
Commercial Lending, of the Bank 1 year 1 time
<PAGE>
February 5, 1999
[Name and Address of Executive]
Dear __________:
Washington Trust Bancorp, Inc. ( the "Corporation") considers it
essential to the best interests of its shareholders to foster the continued
employment of key management personnel employed by its wholly-owned subsidiary,
The Washington Trust Company (the "Bank"). In this connection, the Board of
Directors of the Corporation (the "Board") recognizes that the possibility of a
change in control exists and that such possibility, and the uncertainty and
question which it necessarily raises among management, may result in the
departure or distraction of management personnel to the detriment of the
Corporation and its shareholders in this period when their undivided attention
and commitment to the best interests of the Corporation and its shareholders are
particularly important.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Corporation and the Bank's management.
1. Defined Terms. Certain laws, rules and regulations referenced
in this agreement are attached hereto as Appendices and are hereby incorporated
herein by reference.
2. Change in Control. For purposes of this Agreement, the term "Change
in Control" shall mean:
a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the then
outstanding shares of common stock of the Corporation (the "Outstanding
Corporation Common Stock"); provided, however, that any acquisition by the
Corporation or its subsidiaries, or any employee benefit plan (or related trust)
of the Corporation or its subsidiaries of 20% or more of Outstanding Corporation
Common Stock shall not constitute a Change in Control; and provided, further,
that any acquisition by a corporation with respect to which, following such
acquisition, more than 50% of the then outstanding shares of common stock of
such corporation, is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial owners
of the Outstanding Corporation Common Stock immediately prior to such
acquisition in substantially the same proportion as their ownership, immediately
prior to such acquisition, of the Outstanding Corporation Common Stock, shall
not constitute a Change in Control; or
b) Individuals who, as of the date of this Agreement, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date of this Agreement whose election, or nomination for
election by the Corporation's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office is in connection with either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a person other than the Board; or
c) Consummation by the Corporation of (i) a reorganization, merger or
consolidation, in each case, with respect to which all or substantially all of
the individuals and entities who were the beneficial owners of the Outstanding
Corporation Common Stock immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 40% of the then outstanding
shares of common stock of the corporation resulting from such a reorganization,
merger or consolidation; (ii) a reorganization, merger or consolidation, in each
case, (A) with respect to which all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Corporation Common
Stock immediately prior to such reorganization, merger or consolidation,
following such reorganization, merger or consolidation, beneficially own,
directly or indirectly, more than 40% but less than 50% of the then outstanding
shares of common stock of the corporation resulting from such a reorganization,
merger or consolidation, (B) at least a majority of the directors then
constituting the Incumbent Board do not approve the transaction and do not
designate the transaction as not constituting a Change in Control, and (C)
following the transaction members of the then Incumbent Board do not continue to
comprise at least a majority of the Board; or (iii) the sale or other
disposition of all or substantially all of the assets of the Corporation,
excluding a sale or other disposition of assets to a subsidiary of the
Corporation; or
d) Consummation by the Bank of (i) a reorganization, merger or
consolidation, in each case, with respect to which, following such
reorganization, merger or consolidation, the Corporation does not beneficially
own, directly or indirectly, more than 50% of the then outstanding shares of
common stock of the corporation or bank resulting from such a reorganization,
merger or consolidation or (ii) the sale or other disposition of all or
substantially all of the assets of the Bank, excluding a sale or other
disposition of assets to the Corporation or a subsidiary of the Corporation.
3. Continuing Employment. You agree that you shall remain in the employ
of the Corporation and the Bank for a term of _____ year following any Change in
Control of the Company, unless there is an Event of Termination, as defined
below, or you die or become unable to perform your duties by reason of
disability.
4. Event of Termination. For purposes of this Agreement, the term
"Event of Termination" shall mean:
a) The involuntary termination of your employment with the
Corporation and/or the Bank, other than for cause. The term
"for cause" shall mean on account of (i) conviction of a crime
involving moral turpitude, (ii) willful and inexcusable
failure to perform the duties of your position with the
Corporation and/or the Bank, and (iii) conduct that is clearly
and patently detrimental to the best interests of the
Corporation and/or the Bank. In any proceeding, judicial or
otherwise, the Corporation and/or the Bank shall have the
burden proving by clear and convincing evidence that a
termination of your employment following a change in control
was for cause. Termination of employment due to your death or
disability shall not be deemed a termination for cause;
b) A reduction in your salary, title, benefits, staff,
perquisites, or duties unless you agree in writing, but only
if such event occurs within _____ year after a Change in
Control.
5. Entitlements Upon an Event of Termination
a) Unless otherwise provided herein, within 30 days after an
Event of Termination, the Bank shall pay you that amount that
equals _____ time your base amount as of the date of the Event
of Termination;
b) Your entitlements under this Agreement and under any other
plans or agreements of the Corporation and/or the Bank that
constitute "parachute payments" shall never exceed that amount
that is 2.99 times your "base amount." For purposes of this
Agreement, the term "parachute payment" shall have the meaning
ascribed to it by Section 280G(b)(2)(A) of the Internal
Revenue Code of 1986, as amended and in effect on the date
hereof (the "Code"), including the flush language, but without
regard to clause (ii) thereof, and the term "base amount"
shall have the meaning ascribed to it by Section 280G(b)(3) of
the Code;
c) In the event that your entitlements to parachute payments
under this or any other agreement or plan of the Corporation
and/or the Bank exceed 2.99 times your base amount, you agree
that your total benefits shall be reduced to 2.99 times your
base amount in such manner as you shall designate to the Bank
in writing. In default of such designation, such benefits
shall be reduced in proportion to their relative present
values as determined by the Bank's certified public
accountants using the discount rate prescribed by Section
280G(d)(4) of the Code;
d) The Bank shall pay all legal fees and expenses that you incur
seeking to obtain or enforce any right or benefit provided by
this Agreement;
e) You shall not be required to mitigate the amount of any
payment provided for in this Section 5 by seeking other
employment or otherwise, nor shall the amount of any payment
or benefit provided for in this Agreement be reduced by any
compensation you may earn as a result of employment by another
employer or by reason of retirement benefits after the date of
this Agreement or otherwise.
6. Successors; Binding Agreement.
a) The Corporation and the Bank will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation and/or the
Bank to assume expressly and perform this Agreement. Failure of the Corporation
and/or the Bank to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to compensation from the Bank in the same amount and on the
same terms as you would be entitled to hereunder following an Event of
Termination, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the date on which
you become entitled to such compensation from the Bank. As used in the
agreement, "Corporation" and "Bank" shall mean the Corporation and the Bank,
respectively, as hereinbefore defined and any successor to its respective
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
b) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees, and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, unless
otherwise provided herein, such amount shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there
is no such designee, to your estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified/registered mail, return receipt requested, postage prepaid, addressed
to the respective addresses set forth on the first page of this Agreement,
provided that all notices to the Corporation and/or the Bank shall be directed
to the attention of the Board with a copy to the Secretary of the Corporation
and/or the Bank, or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of a change of
address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification, or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach of the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions as the same or at any prior or
subsequent time. No agreements or representations, oral, or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Rhode Island.
9. Not Employment Agreement. No provision of this Agreement shall be
deemed to provide for a continuing right to employment with the Corporation or
the Bank.
10. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12. Arbitration. Any controversy or claim arising out of or relating to
this contract, or the breach thereof, shall be settled by arbitration
administered by the American Arbitration Association in accordance with its
applicable rules and judgment and the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
13. Term of Agreement. This Agreement shall remain in effect so long as
you are employed by the Corporation and/or the Bank unless terminated in writing
upon 30 days notice by either party; provided, however, following a Change in
Control, that the Corporation and the Bank shall have no right to terminate this
agreement for ____ year.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return the enclosed copy of this letter which will then
constitute our agreement on this subject.
Sincerely,
WASHINGTON TRUST BANCORP, INC.
THE WASHINGTON TRUST COMPANY
By:_________________________________________
John C. Warren
President & CEO
AGREED to this ____ day of _________, 1999.
- -----------------------------
[Name of Executive]
<PAGE>
APPENDIX 1
List of Appendices
Copies of the following laws, rules and regulations referenced in the
agreement to which this Appendix is a part are attached hereto and incorporated
therein by reference:
Appendix 1A -- Section 13d(3) and Section 14(d)(2) of the Exchange Act
Appendix 1B -- Rule 13d-3 promulgated under the Exchange Act
Appendix 1C -- Rule 14a-11 of Regulation 14A promulgated under the Exchange Act
Appendix 1D -- Section 280G of the Code
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Washington Trust Bancorp, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-72277, 333-48315, 333-13167 and 33-23048) on Forms S-8 and in the
registration statements (Nos. 333-13821 and 33-28065) on Forms S-3 of Washington
Trust Bancorp, Inc. and Subsidiary of our report dated January 21, 1999,
relating to the consolidated balance sheets of Washington Trust Bancorp, Inc.
and Subsidiary as of December 31, 1998 and 1997, 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, 1998, which report appears
in the December 31, 1998 annual report on Form 10-K of Washington Trust Bancorp,
Inc.
KPMG LLP
Providence, Rhode Island
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST
BANCORP, INC. AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,475
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 315,265
<INVESTMENTS-CARRYING> 95,647
<INVESTMENTS-MARKET> 96,548
<LOANS> 449,502
<ALLOWANCE> 10,416
<TOTAL-ASSETS> 935,069
<DEPOSITS> 575,323
<SHORT-TERM> 15,033
<LIABILITIES-OTHER> 271,647
<LONG-TERM> 0
0
0
<COMMON> 626
<OTHER-SE> 72,440
<TOTAL-LIABILITIES-AND-EQUITY> 935,069
<INTEREST-LOAN> 39,848
<INTEREST-INVEST> 22,388
<INTEREST-OTHER> 517
<INTEREST-TOTAL> 62,753
<INTEREST-DEPOSIT> 18,531
<INTEREST-EXPENSE> 32,606
<INTEREST-INCOME-NET> 30,147
<LOAN-LOSSES> 1,800
<SECURITIES-GAINS> 505
<EXPENSE-OTHER> 26,820
<INCOME-PRETAX> 13,996
<INCOME-PRE-EXTRAORDINARY> 13,996
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,048
<EPS-PRIMARY> 1.01
<EPS-DILUTED> .97
<YIELD-ACTUAL> 3.78
<LOANS-NON> 5,613
<LOANS-PAST> 150
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 187
<ALLOWANCE-OPEN> 8,835
<CHARGE-OFFS> 618
<RECOVERIES> 399
<ALLOWANCE-CLOSE> 10,416
<ALLOWANCE-DOMESTIC> 10,416
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,755
</TABLE>
