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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, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
--------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
--------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
401-348-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0625 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $142,500,385 at February 25, 2000 which includes $14,090,548 held
by The Washington Trust Company under trust agreements and other instruments.
The number of shares of common stock of the registrant outstanding as February
25, 2000 was 10,933,884.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 21, 2000 for the Annual
Meeting of Shareholders to be held April 25, 2000 are incorporated by reference
into Part III of this Form 10-K.
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<PAGE>
FORM 10-K
WASHINGTON TRUST BANCORP, INC.
For the Year Ended December 31, 1999
TABLE OF CONTENTS
Description
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures
about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general national or regional economic conditions, changes in interest rates,
reductions in deposit levels necessitating increased borrowing to fund loans and
investments, changes in the size and nature of the Corporation's competition,
changes in loan default and charge-off rates, and changes in the assumptions
used in making such forward-looking statements.
<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, 1999 the
Corporation had total consolidated assets of $1.105 billion, deposits of $660.8
million and equity capital of $77.2 million.
In the third quarter of 1999, the Corporation completed its acquisition of Pier
Bank, a Rhode Island chartered community bank headquartered in South Kingstown,
Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22,
1999, the acquisition was effected by means of merger of Pier Bank with and into
The Washington Trust Company, the wholly-owned subsidiary of the Corporation.
The acquisition of Pier Bank was a tax-free reorganization accounted for as a
pooling of interests. Accordingly, the consolidated financial statements and
other financial information of the Corporation have been restated to reflect the
acquisition at the beginning of the earliest period presented. At December 31,
1998, Pier Bank had total assets of $59.4 million and total shareholders' equity
of $4.5 million.
The Washington Trust Company
The Washington Trust Company was originally chartered in 1800 as the Washington
Bank and is the oldest banking institution headquartered in its market area. Its
current corporate charter dates to 1902. See discussion under "Market Area and
Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Commercial and consumer demand deposits
Commercial loans Savings, NOW and money market deposits
Construction loans Certificates of deposit
Consumer installment loans Retirement accounts
Home equity lines of credit Cash management services
Merchant credit card services Safe deposit boxes
Automated teller machines (ATMs) Trust and investment management services
Telephone banking services
Automated teller machines (ATMs) are located throughout the Bank's market area.
The Bank is a member of various ATM networks.
Data processing for most of the Bank's deposit and loan accounts and other
applications are conducted internally, using owned equipment. Application
software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing deposits and other borrowed funds. Sources of noninterest
income include fees for management of customer investment portfolios, trusts and
estates, service charges on deposit accounts, merchant processing fees, gains
and fees from mortgage banking activities and other banking-related fees.
Noninterest expenses include the provision for loan losses, salaries and
employee benefits, occupancy, equipment, merchant processing, office supplies,
advertising and promotion and other administrative expenses.
The Bank's lending activities are conducted primarily in southern Rhode Island
and southeastern Connecticut. The Bank provides a variety of commercial and
retail lending products. The Bank generally underwrites its residential
mortgages based upon secondary market standards. Loans are originated both for
sale in the secondary market as well as for portfolio. Most secondary market
loans have been sold with servicing retained, however, in the fourth quarter of
1999, the Corporation began selling loans with servicing released. Also in 1999,
the Corporation sold its $4.6 million portfolio of credit card loans at a gain,
net of expenses and related income taxes, of $285 thousand.
The Bank provides trust and investment management services as trustee under
wills and trust agreements; as executor or administrator of estates; as a
provider of agency, custodial and management investment services to individuals
and institutions; and as a trustee for employee benefit plans. In addition, the
Bank provides a full-line of investment management and trust services, including
financial planning, estate and tax planning, to customers of Bank Rhode Island.
This alliance enables the Bank to generate fee income and also enables Bank
Rhode Island to offer professional trust services to its customers. In January
2000, the Bank opened a trust and investment management office in Providence,
Rhode Island. The market value of total trust assets amounted to $964.2 million
as of December 31, 1999.
The following is a summary of recurring sources of income, which excludes net
gains on sales of securities and the 1999 net gain on sale of the credit card
portfolio, as a percentage of total income (net interest income plus recurring
noninterest income) during the past five years:
1999 1998 1997 1996 1995
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Net interest income 71% 72% 75% 77% 78%
Trust revenue 12 11 11 10 10
Other noninterest income 17 17 14 13 12
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Total income 100% 100% 100% 100% 100%
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Market Area and Competition
The Bank's market area includes Washington County and a portion of Kent County
in southern Rhode Island, as well as a portion of New London County in
southeastern Connecticut. The Bank operates thirteen banking offices in these
Rhode Island and Connecticut counties. The locations of the banking offices are
as follows:
Westerly, RI (3 locations) Charlestown, RI Wakefield, RI
Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI
New Shoreham (Block Island), RI Mystic, CT (3 locations)
The Bank's banking offices in Charlestown and on Block Island are the only bank
facilities in those Rhode Island communities. In the first quarter of 1998, the
Bank opened a financial services branch office in New London, Connecticut, which
offers trust and investment management, commercial lending and residential
mortgage origination.
The Bank faces strong competition from branches of major Rhode Island and
regional commercial banks, local branches of certain Connecticut banks, as well
as various credit unions, savings institutions and, to some extent, finance
companies. The principal methods of competition are through interest rates,
financing terms and other customer conveniences. The Bank had 34% of total
deposits reported by all financial institutions for communities in which the
Bank operates banking offices as of June 30, 1999. The closest competitor held
23%, and the second closest competitor held 13% of total deposits in the same
communities. The Corporation believes that being the largest commercial banking
institution headquartered within the market area provides a competitive
advantage over other financial institutions. The Bank has a marketing department
that is responsible for the review of existing products and services and the
development of new products and services.
Employees
As of December 31, 1999 the Corporation had 387 employees, of which 338 were
full-time and 49 were part-time.
Supervision and Regulation
General - The business in which the Corporation and the Bank are engaged is
subject to extensive supervision, regulation, and examination by various bank
regulatory authorities and other agencies of federal and state government. The
supervisory and regulatory activities of these authorities are often intended
primarily for the protection of customers or are aimed at carrying out broad
public policy goals that may not be directly related to the financial services
provided by the Corporation and the Bank, nor intended for the protection of the
Corporation's shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Proposals to
change regulations and laws that affect the banking industry are frequently
raised at the federal and state level. The potential impact on the Corporation
of any future revisions to the supervisory or regulatory structure cannot be
determined.
The Corporation and the Bank are required by various authorities to file
extensive periodic reports of financial and other information and such other
reports that the regulatory and supervisory authorities may require. The
Corporation is also subject to the reporting and other requirements of the
Securities Exchange Act of 1934, as amended.
The Corporation is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the
activities of the Corporation are regulated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that
the Corporation obtain prior approval of the Federal Reserve Board to acquire
control over a bank. Provided that the Corporation does not become a "financial
holding company" under the recently enacted Gramm-Leach-Bliley Act (as discussed
below), the BHC Act also requires that the Corporation obtain prior approval of
the Federal Reserve Board to acquire certain nonbank entities and restricts the
activities of the Corporation to those closely related to banking. Federal law
also regulates transactions between the Corporation and the Bank, including
loans or extensions of credit.
The Bank is subject to the supervision of, and examination by, the FDIC, the
State of Rhode Island and the State of Connecticut, in which the Bank has
established branches. The Bank is also subject to various Rhode Island and
Connecticut business and banking regulations.
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among
other things, FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to
"critically undercapitalized". A depository institution is well-capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not
well-capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market. At December 31, 1999, the Bank's capital ratios placed it in the
well-capitalized category. Reference is made to Note 15 to the Corporation's
Consolidated Financial Statements for additional discussion of the Corporation's
regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund
(BIF). The FDIC adopted a risk-related premium system for the assessment period
beginning January 1, 1993. Under this new system, each institution's assessment
rate is based on its capital ratios in combination with a supervisory evaluation
of the risk the institution poses to the BIF. Banks deemed to be
well-capitalized and who pose the lowest risk to the BIF will pay the lowest
assessment rates, while undercapitalized banks, which present the highest risk,
will pay the highest rates.
FDICIA contained other significant provisions that require the federal banking
regulators to establish standards for safety and soundness for depository
institutions and their holding companies in three areas: (i) operational and
managerial; (ii) asset quality, earnings and stock valuation; and (iii)
management compensation. The legislation also required that risk-based capital
requirements contain provisions for interest rate risk, credit risk and risks of
nontraditional activities. FDICIA also imposed expanded accounting and audit
reporting requirements for depository institutions. In addition, FDICIA imposed
numerous restrictions on state-chartered banks, including those that generally
limit investments and activities to those permitted to national banks, and
contains several consumer banking law provisions.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act) - The Interstate Act permits adequately capitalized bank holding companies
to acquire banks in any state subject to certain concentration limits and other
conditions. The Interstate Act also authorizes the interstate merger of banks.
In addition, among other things, the Interstate Act permits banks to establish
new branches on an interstate basis provided that such action is specifically
authorized by the law of the host state. Both Rhode Island and Connecticut, the
two states in which the Corporation conducts banking operations, have adopted
legislation to "opt in" to interstate merger and branching provisions that
effectively eliminated state law barriers.
Gramm-Leach-Bliley Act - The general effect of the Gramm-Leach-Bliley Act, which
became law on November 12, 1999, is to establish a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms, and other financial service providers by revising and expanding the BHC
Act framework to permit a holding company system, such as the Corporation, to
engage in a full range of financial activities through a new entity known as a
financial holding company. "Financial activities" is broadly defined to include
not only banking, insurance, and securities activities, but also merchant
banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In sum, the Gramm-Leach-Bliley
Act is intended to permit bank holding companies that qualify and elect to be
treated as a financial holding company to engage in a significantly broader
range of financial activities than the activities previously permitted for bank
holding companies.
Generally, although significant implementing regulations have yet to be
published, the Gramm-Leach-Bliley Act:
o repeals historical restrictions on, and eliminates many federal
and state law barriers to, affiliations among banks, securities
firms, insurance companies, and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
o broadens the activities that may be conducted by national banks
(and derivatively state banks), banking subsidiaries of bank
holding companies, and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the FHLB
system;
o modifies the laws governing the implementation of the Community
Reinvestment Act of 1977; and
o addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order to elect to become a financial holding company and engage in the new
activities, a bank holding company, such as the Corporation, must meet certain
tests and file an election form with the Federal Reserve Board, which generally
is acted on within thirty days. To qualify, all of a bank holding company's
subsidiary banks must be well-capitalized and well-managed, as measured by
regulatory guidelines. In addition, to engage in the new activities each of the
bank holding company's banks must have been rated "satisfactory" or better in
its most recent federal Community Reinvestment Act evaluation. Furthermore, a
bank holding company that elects to be treated as a financial holding company
may face significant consequences if its banks fail to maintain the required
capital and management ratings, including entering into an agreement with the
Federal Reserve Board which imposes limitations on its operations and may even
require divestitures. Such possible ramifications may limit the ability of a
bank subsidiary to significantly expand or acquire less than well-capitalized
and well-managed institutions. At this time, the Corporation has no immediate
plans to become a financial holding company.
Dividend Restrictions - The Corporation's revenues consist of cash dividends
paid to it by the Bank. Such payments are restricted pursuant to various state
and federal regulatory limitations. Reference is made to Note 15 to the
Corporation's Consolidated Financial Statements for additional discussion of the
Corporation's ability to pay dividends.
Capital Guidelines - Regulatory guidelines have been established that require
bank holding companies and banks to maintain minimum ratios of capital to
risk-adjusted assets. Banks are required to have minimum core capital (Tier 1)
of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the
Corporation, Tier 1 capital is essentially equal to shareholders' equity
excluding the net unrealized gain (loss) on securities available for sale. Tier
2 capital consists of a portion of the allowance for loan losses (limited to
1.25% of total risk-weighted assets). As of December 31, 1999, the Corporation's
net risk-weighted assets amounted to $607.9 million, its Tier 1 capital ratio
was 12.57% and its total risk-based capital ratio was 14.24%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the
risk-based capital guidelines) divided by average assets (net of intangible
assets and excluding the effects of accounting for securities available for sale
under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies
that do not anticipate significant growth and that have well-diversified risk
(including no undue interest rate risk), excellent asset quality, high liquidity
and strong earnings. Other bank holding companies are expected to have ratios of
at least 4 - 5%, depending on their particular condition and growth plans.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profile of a given bank holding company. The Corporation's
Tier 1 leverage ratio was 7.14% as of December 31, 1999. The Federal Reserve has
not advised the Corporation of any specific minimum Tier 1 leverage capital
ratio applicable to it.
<PAGE>
Allowance for Loan Losses
The Corporation evaluates the adequacy of the allowance for loan losses based
upon the composition of the loan portfolio, historical experience, industry
statistics, prevailing economic and business conditions and industry
concentration. The Corporation utilizes a credit rating system that assesses
individual loans in the commercial, commercial mortgage and commercial
construction and development portfolios. Management applies the allowance
percentages it considers appropriate to the balances in each rating
classification. In addition, specific allowances for loans in these categories
considered impaired are determined in accordance with the Statement of Financial
Accounting Standards No. 114, "Allowance for Loan Losses". Loans in other
portfolios are not individually assessed utilizing the credit rating system
mentioned above, but may be similarly rated when information is known to
management which indicates such action is warranted. For loans in other
portfolios, management applies the allowance percentages it considers
appropriate to each portfolio. Loss allocation percentages are based on the
Corporation's historical loss experience, industry trends and the actual or
anticipated impact of economic conditions on the borrowers. As a result, the
percentage allocations are adjusted as necessary when changes in the
aforementioned factors warrant. Based on analyses performed, the allowance for
loan losses is maintained at levels considered adequate by management to provide
for loan losses inherent in the loan portfolio.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the
Corporation and the Bank.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average
Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Nonaccrual loans are included in average loan balances. Average
balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid,
average yields and costs, and net yield on interest-earning assets, is
presented under the caption "Average Balances/Net Interest Margin (Fully
Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax
exempt income is converted to a fully taxable equivalent basis using the
statutory federal income tax rate. For dividends on corporate stocks, the
70% federal dividends received deduction is also used in the calculation of
tax equivalency. Interest on nonaccrual loans is included in the analysis
of net interest earnings to the extent that such interest income has been
recognized in the Consolidated Statements of Income. See Guide 3
Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense
is presented under the caption "Volume/Rate Analysis - Interest Income and
Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The net change attributable to both volume and rate has been allocated
proportionately.
<PAGE>
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented
in the following tables:
(Dollars in thousands)
December 31, 1999 1998 1997
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Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $86,310 $118,348 $92,994
Mortgage-backed securities 189,086 145,806 124,583
Corporate bonds 33,684 27,503 2,000
Corporate stocks 21,351 28,184 22,266
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Total securities available for sale $330,431 $319,841 $241,843
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(Dollars in thousands)
December 31, 1999 1998 1997
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Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $28,231 $21,987 $23,932
Mortgage-backed securities 62,209 46,088 10,695
States and political subdivisions 25,932 27,572 17,180
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Total securities held to maturity $116,372 $95,647 $51,807
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B. Maturities of debt securities as of December 31, 1999 are presented in the
following tables. Mortgage-backed securities are included based on their
weighted average maturities, adjusted for anticipated prepayments. Yields
on tax exempt obligations are not computed on a tax equivalent basis.
<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 $10,366 $47,993 $21,897 $7,302 $87,558
Weighted average yield 6.13% 6.27% 6.48% 7.18% 6.38%
Mortgage-backed securities:
Amortized cost 26,687 84,702 52,217 28,328 191,934
Weighted average yield 6.50% 6.53% 6.76% 7.02% 6.66%
Corporate bonds:
Amortized cost 374 16,993 4,531 12,466 34,364
Weighted average yield 6.53% 6.63% 6.38% 6.64% 6.60%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $37,427 $149,688 $78,645 $48,096 $313,856
Weighted average yield 6.39% 6.46% 6.66% 6.95% 6.58%
------------------------------------------------------------------------------------------------------------
Fair value $36,824 $147,197 $77,421 $47,638 $309,080
------------------------------------------------------------------------------------------------------------
<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 $1,812 $13,310 $13,109 $ - $28,231
Weighted average yield 6.81% 6.34% 6.51% - 6.45%
Mortgage-backed securities:
Amortized cost 10,140 34,774 16,610 685 62,209
Weighted average yield 6.55% 6.54% 6.48% 6.59% 6.53%
States and political
subdivisions:
Amortized cost 2,923 8,502 14,507 - 25,932
Weighted average yield 4.60% 4.30% 4.26% - 4.31%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $14,875 $56,586 $44,226 $685 $116,372
Weighted average yield 6.18% 6.15% 5.78% 6.53% 6.02%
------------------------------------------------------------------------------------------------------------
Fair value $14,498 $54,921 $42,788 $661 $112,868
------------------------------------------------------------------------------------------------------------
</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, 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Mortgages $113,719 $87,132 $76,483 $77,482 $68,783
Construction and development 2,902 2,855 5,508 5,314 5,968
Other 115,739 113,372 129,258 110,491 97,763
-------------------------------------------------------------------------------------------------------------
Total commercial 232,360 203,359 211,249 193,287 172,514
Residential real estate:
Mortgages 212,719 191,101 188,729 177,450 173,267
Homeowner construction 12,995 15,052 8,414 6,977 4,795
-------------------------------------------------------------------------------------------------------------
Total residential real estate 225,714 206,153 197,143 184,427 178,062
-------------------------------------------------------------------------------------------------------------
Consumer 90,951 87,458 81,394 68,198 57,209
-------------------------------------------------------------------------------------------------------------
Total Loans $549,025 $496,970 $489,786 $445,912 $407,785
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 1999 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) $4,237 $4,372 $7,288 $15,897
Commercial - other 39,657 51,262 24,820 115,739
-------------------------------------------------------------------------------------------------------------
$43,894 $55,634 $32,108 $131,636
-------------------------------------------------------------------------------------------------------------
<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 $50,682 $37,060 $87,742
---------------------------------------------------------------------------
C. Risk Elements
Reference is made to the caption "Asset Quality" included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Included therein is a discussion of the Corporation's credit
review and accounting practices, as well as information relevant to
nonperforming assets at December 31, 1999.
1. Nonaccrual, Past Due and Restructured Loans
a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
$3,798 $5,846 $7,644 $8,197 $9,231
---------------------------------------------------------------------------
Loans, with the exception of certain well-secured residential mortgage
loans, are placed on nonaccrual status and interest recognition is
suspended when such loans are 90 days or more overdue with respect to
principal and/or interest. Well-secured residential mortgage loans are
permitted to remain on accrual status provided that full collection of
principal and interest is assured. Loans are also placed on nonaccrual
status when, in the opinion of management, full collection of principal and
interest is doubtful. Interest previously accrued, but not collected on
such loans is reversed against current period income. Cash receipts on
nonaccrual loans are recorded as interest income or as a reduction of
principal if full collection of the loan is doubtful or if impairment of
the collateral is identified. Loans are removed from nonaccrual status when
they have been current as to principal and interest for a period of time,
the borrower had demonstrated an ability to comply with repayment terms,
and when, in management's opinion, the loans are considered to be fully
collectible.
For the year ended December 31, 1999, the gross interest income that would
have been recognized if loans on nonaccrual status had been current in
accordance with their original terms was approximately $342 thousand.
Interest recognized on these loans amounted to approximately $105 thousand.
There were no significant commitments to lend additional funds to borrowers
whose loans were on nonaccrual status at December 31, 1999.
b) Loans contractually past due 90 days or more and still accruing for
the dates indicated were as follows:
(Dollars in thousands)
December 31, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
$120 $235 $651 $1,517 $256
---------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
$446 $ - $ - $ - $ -
---------------------------------------------------------------------------
Restructured accruing loans include those for which concessions, such as
reduction of interest rates other than normal market rate adjustments or
deferral of principal or interest payments, have been granted due to a
borrower's financial condition. Interest on restructured loans is accrued
at the reduced rate.
2. Potential Problem Loans
Potential problem loans consist of certain accruing commercial loans that
were less than 90 days past due at December 31, 1999, but were identified
by management of the Bank as potential problem loans. Such loans are
characterized by weaknesses in the financial condition of borrowers or
collateral deficiencies. Based on historical experience, the credit quality
of some of these loans may improve as a result of collection efforts, while
the credit quality of other loans may deteriorate, resulting in some amount
of losses. These loans are not included in the analysis of nonaccrual, past
due and restructured loans in Section III.C.1 above. At December 31, 1999,
potential problem loans amounted to approximately $160 thousand. The
Corporation's loan policy provides guidelines for the review of such loans
in order to facilitate collection.
Depending on future events, these potential problem loans, and others not
currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings: None
4. Loan Concentrations: The Corporation has no concentration of loans that
exceed 10% of its total loans except as disclosed by types of loan in
Section III.A.
D. Other Interest-Bearing Assets: None
<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, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $10,966 $9,335 $9,009 $8,322 $9,888
Charge-offs
Commercial:
Mortgages 170 - 248 330 813
Construction and development 119 - - 15 528
Other 304 322 740 415 1,451
Residential:
Mortgages - 14 174 166 301
Homeowner construction 23 - - - -
Consumer 351 317 360 395 372
------------------------------------------------------------------------------------------------------------
Total charge-offs 967 653 1,522 1,321 3,465
------------------------------------------------------------------------------------------------------------
Recoveries
Commercial:
Mortgages 44 51 110 33 14
Construction and development - - 7 - -
Other 202 270 233 628 222
Residential:
Mortgages 135 9 13 13 115
Homeowner construction 1 - - - -
Consumer 128 75 61 116 130
------------------------------------------------------------------------------------------------------------
Total recoveries 510 405 424 790 481
------------------------------------------------------------------------------------------------------------
Net charge-offs 457 248 1,098 531 2,984
Additions charged to earnings 1,840 1,879 1,424 1,218 1,418
------------------------------------------------------------------------------------------------------------
Balance at end of year $12,349 $10,966 $9,335 $9,009 $8,322
------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .09% .05% .23% .13% .73%
------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
B. The following table presents the allocation of the allowance for loan losses:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Mortgages $1,920 $1,604 $1,368 $1,410 $1,912
% of these loans to all loans 20.7% 17.5% 15.6% 17.4% 16.9%
Construction and development 56 45 72 61 137
% of these loans to all loans .5% .6% 1.1% 1.2% 1.4%
Other 1,979 2,142 2,461 2,452 2,287
% of these loans to all loans 21.1% 22.8% 26.4% 24.8% 24.0%
Residential:
Mortgages 1,165 1,108 1,127 1,273 1,095
% of these loans to all loans 38.7% 38.5% 38.6% 39.8% 42.5%
Homeowner construction 71 87 50 50 30
% of these loans to all loans 2.4% 3.0% 1.7% 1.5% 1.2%
Consumer 1,155 1,189 1,117 1,173 961
% of these loans to all loans 16.6% 17.6% 16.6% 15.3% 14.0%
Unallocated 6,003 4,791 3,140 2,590 1,900
------------------------------------------------------------------------------------------------------------
Balance at end of year $12,349 $10,966 $9,335 $9,009 $8,322
100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------------------------------------------
</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) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $97,716 - $83,100 - $71,687 -
Savings deposits:
Regular 128,218 2.19% 112,914 2.39% 100,279 2.54%
NOW 75,167 .93% 67,617 .94% 60,713 1.05%
Money market 25,547 2.11% 23,969 2.12% 25,025 2.39%
---------------------------------------------------------------------------------------------------------
Total savings 228,932 1.77% 204,500 1.87% 186,017 2.03%
Time deposits 318,281 4.99% 309,094 5.42% 286,714 5.49%
---------------------------------------------------------------------------------------------------------
Total deposits $644,929 3.09% $596,694 3.45% $544,418 3.58%
---------------------------------------------------------------------------------------------------------
</TABLE>
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100 thousand or more
at December 31, 1999 was as follows:
<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>
$63,319 $7,951 $14,358 $14,944 $100,572
--------------------------------------------------------------------------------------------------------------
</TABLE>
E. Not applicable
VI. RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.01% 1.13% 1.15%
Operating return on average assets (1) 1.10% 1.13% 1.15%
Return on average shareholders' equity 13.45% 14.03% 13.97%
Operating return on average shareholders' equity (1) 14.74% 14.03% 13.97%
Dividend payout ratio (2) 41.90% 42.11% 40.70%
Average equity to average total assets 7.48% 8.09% 8.25%
<FN>
(1) Excludes 1999 acquisition related expenses of $1.3 million, after tax,
and 1999 net gain on sale of credit card portfolio of $285 thousand,
after tax. Also excludes 1995 change in valuation allowance component
of Pier Bank's income tax expense of $460 thousand.
(2) Represents the ratio of historical per share dividends declared by
Washington Trust Bancorp, Inc. to diluted operating earnings per share
restated for the pooling effect of Washington Trust Bancorp, Inc. and
Pier Bank.
</FN>
</TABLE>
VII. SHORT-TERM BORROWINGS
The following is a summary of amounts relating to short-term borrowings
which consist primarily of securities sold under repurchase agreements
generally maturing within 90 days:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
Balance at end of year $4,209 $15,033 $20,337
Maximum amount outstanding at any month-end 23,525 26,767 26,820
Average amount outstanding 12,324 15,085 14,773
Weighted average interest rate during the year 5.04% 5.56% 5.64%
Weighted average interest rate at end of year 4.56% 5.12% 5.58%
<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
Location Description Expiration Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
23 Broad Street, Westerly, RI Corporate headquarters Own
1200 Main Street, Wyoming (Richmond), RI Branch office Own
126 Franklin Street, Westerly, RI Branch office Own
Ocean Avenue, New Shoreham (Block Island), RI Branch office Lease / 2001 (1)
4137 Old Post Road, Charlestown, RI Branch office Own
20 Point Judith Road, Narragansett, RI Branch office Own
7625 Post Road, North Kingstown, RI Branch office Own
730 Kingstown Road, Wakefield, RI Branch office Lease / 2000 (1)
885 Boston Neck Road, Narragansett, RI Branch office Own
Olde Mistick Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003
McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2002 (1)
McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2002 (1)
A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2002 (1)
66 South Main Street, Providence, RI Trust financial services branch Lease / 2004 (1)
2 Union Plaza, New London, CT Limited financial services branch Lease / 2004 (1)
5 Ledward Avenue, Westerly, RI Operations facility Lease / 2001 (1)
2 Crosswinds Drive, Westerly, RI Operations facility Own
<FN>
(1) Lease may be extended by the Corporation beyond the indicated expiration
date
</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 former corporate customer, and Maxson's shareholders for damages
which the plaintiffs allegedly incurred as a result of an embezzlement by
Maxson's former president and treasurer. The suit alleges that the Bank wrongly
permitted this individual, while an officer of Maxson, to divert funds from
Maxson's account at the Bank for his personal benefit. The claims against the
Bank are based upon theories of breach of fiduciary duty, negligence, breach of
contract, unjust enrichment, conversion, failure to act in a commercially
reasonable manner, and constructive fraud.
The suit as originally filed sought recovery for losses alleged to be directly
related to the embezzlement of approximately $3.1 million, as well as
consequential damages amounting to approximately $2.6 million. On March 19,
1998, the plaintiffs amended their claims to seek recovery of an additional $2.6
million in losses, plus an unspecified amount of interest thereon, which were
alleged to be directly related to the embezzlement. On or about November 23,
1999, the plaintiffs further amended their claims to seek recovery of
approximately $8.0 million in total damages, plus an unspecified amount of
interest thereon.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious affirmative defenses in
this litigation. Additionally, the Bank has filed counterclaims against Maxson
and its principal shareholder as well as claims against the officer allegedly
responsible for the embezzlement. The Bank is vigorously asserting its defenses
and affirmative claims. The case is currently in discovery and is currently
scheduled for trial in late April 2000. Because of the numerous uncertainties
that surround the litigation, management and legal counsel are unable to
estimate the amount of loss, if any, that the Bank may incur with respect to
this litigation. Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all executive officers of the Corporation and the
Bank with their titles, ages, and length of service, followed by certain
biographical information.
<TABLE>
<CAPTION>
Years of
Name Title Age Service
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John C. Warren Chairman and Chief Executive Officer of the Corporation and the 54 4
Bank
John F. Treanor President and Chief Operating Officer of the Corporation and the 52 1
Bank
David V. Devault, CPA Executive Vice President, Treasurer and Chief Financial Officer
of the Corporation and the Bank 45 13
Harvey C. Perry II Senior Vice President and Secretary of the Corporation and the 50 25
Bank
Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 52 3
Vernon F. Bliven Senior Vice President - Human Resources of the Bank 50 27
Robert G. Cocks, Jr. Senior Vice President - Commercial Lending of the Bank 55 7
William D. Gibson Senior Vice President - Credit Administration of the Bank 53 1
Joseph E. LaPlume Senior Vice President and Regional Manager of the Bank 54 -
Barbara J. Perino Senior Vice President - Operations and Technology of the Bank 37 10
B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 39 7
James M. Vesey Senior Vice President - Commercial Lending of the Bank 51 1
</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. In 1999, he was elected Chairman and Chief Executive Officer of the
Corporation and the Bank.
John F. Treanor joined the Bank and the Corporation in April 1999 as President
and Chief Operating Officer. He served as Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc.
from 1994 to 1999.
David V. Devault joined the Bank in 1986 as Controller. He was elected Vice
President and Chief Financial Officer of the Corporation and the Bank in 1987.
He was elected Senior Vice President and Chief Financial Officer of the Bank in
1990. In 1997, he was also elected Treasurer of the Bank and the Corporation. In
1998 he was elected Executive Vice President, Treasurer and Chief Financial
Officer of the Bank and the Corporation.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust
Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982.
He was elected Vice President and Secretary of the Corporation and the Bank in
1984, and Senior Vice President and Secretary of the Bank in 1990.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President -
Retail Lending. Prior to joining the Bank he held the position of Executive Vice
President at Ameristone Mortgage Corporation since June 1995. From February 1993
to May 1995 he held the position of President at New England Pacific Mortgage
Company, Inc.
Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice
President in 1980, Vice President in 1986 and Senior Vice President - Human
Resources in 1993.
William D. Gibson joined the Bank in March 1999 as Senior Vice President -
Credit Administration. Prior to joining the Bank, he served as Senior Vice
President of Credit Review and Senior Vice President of Credit and Loan
Administration of Citizens Bank since October 1977.
Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and
Regional Manager. Prior to joining the Bank he served as President and Chief
Executive Officer of Pier Bank since November 1993.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She
was named Controller in 1989 and Vice President - Controller in 1992. In 1998
she was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and
was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial
Lending. Prior to joining the Bank he held the position of Senior Vice President
and Director of Business Banking at Citizens Bank since December 1995. He
previously worked for Fleet Bank for 24 years serving in a variety of positions.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock has traded on the Nasdaq National Market since
May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap
Market since June 1992, and had been listed on the Nasdaq Over-The-Counter
Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the
years ended December 31, 1999 and 1998 are presented in the following table. The
stock prices are based on the high and low sales prices during the respective
quarter. Stock price and dividend amounts for the first, second and third
quarters of 1998 have been restated to reflect a 3-for-2 stock split paid in the
form of stock dividend on August 3, 1998.
<PAGE>
1999 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $21.88 $20.38 $18.00 $19.00
Low 16.50 15.75 14.75 15.25
Cash dividend declared per share $.11 $.11 $.11 $.11
1998 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $24.17 $27.00 $28.50 $26.00
Low 20.00 20.00 20.00 18.00
Cash dividend declared per share $.10 $.10 $.10 $.10
The Corporation will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The Corporation
(including the Bank prior to 1984) has recorded consecutive quarterly dividends
for over one hundred years.
The Corporation's primary source of funds for dividends paid to shareholders is
the receipt of dividends from the Bank. A discussion of the restrictions on the
advance of funds or payment of dividends to the Corporation is included in Note
15 to the Consolidated Financial Statements.
At February 25, 2000 there were 2,112 holders of record of the Corporation's
common stock.
<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, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Results: (1)
Interest income $72,999 $67,222 $61,393 $48,613 $44,557
Interest expense 37,392 34,655 31,155 20,941 17,999
---------------------------------------------------------------------------------------------------------------
Net interest income 35,607 32,567 30,238 27,672 26,558
Provision for loan losses 1,840 1,879 1,424 1,218 1,418
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 33,767 30,688 28,814 26,454 25,140
Noninterest income 15,409 13,432 10,944 8,912 7,712
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 49,176 44,120 39,758 35,366 32,852
Noninterest expense 33,833 29,378 26,457 22,250 20,690
---------------------------------------------------------------------------------------------------------------
Income before income taxes 15,343 14,742 13,301 13,116 12,162
Income tax expense 4,754 4,235 3,884 4,457 3,748
---------------------------------------------------------------------------------------------------------------
Net income $10,589 $10,507 $9,417 $8,659 $8,414
---------------------------------------------------------------------------------------------------------------
Per share information ($): (1)
Earnings per share:
Basic .97 .98 .89 .84 .84
Basic - operating (2) 1.07 .98 .89 .84 .80
Diluted .96 .95 .86 .81 .82
Diluted - operating (2) 1.05 .95 .86 .81 .78
Cash dividends declared (3) .44 .40 .35 .31 .27
Book value 7.08 7.21 6.71 6.02 5.46
Market value - closing stock price 17.75 21.50 23.33 13.78 8.59
Performance Ratios (%):
Return on average assets 1.01 1.13 1.15 1.40 1.50
Operating return on average assets (2) 1.10 1.13 1.15 1.40 1.42
Return on average shareholders' equity 13.45 14.03 13.97 14.59 16.15
Operating return on average
shareholders' equity (2) 14.74 14.03 13.97 14.59 15.27
Dividend payout ratio (4) 41.90 42.11 40.70 38.27 34.62
Asset Quality Ratios (%):
Nonperforming loans to total loans .69 1.18 1.56 1.84 2.26
Nonperforming assets to total assets .35 .61 .99 1.34 1.98
Allowance for loan losses to nonaccrual 325.15 187.59 122.12 109.91 90.15
loans
Allowance for loan losses to total loans 2.25 2.21 1.91 2.02 2.04
Net charge-offs to average loans .09 .05 .23 .13 .73
Capital Ratios (%):
Total equity to total assets 6.99 7.80 8.28 8.60 9.72
Tier 1 leverage capital ratio 7.14 7.30 7.52 8.70 9.10
Total risk-based capital ratio 14.24 14.75 14.23 14.87 15.23
<FN>
(1) Adjusted to reflect the 3-for-2 stock splits paid on August 3, 1998,
November 19, 1997 and October 15, 1996.
(2) Excludes 1999 acquisition related expenses of $1.3 million, after tax, and
1999 net gain on sale of credit card portfolio of $285 thousand, after
tax. Also excludes 1995 change in valuation allowance component of Pier
Bank's income tax expense of $460 thousand.
(3) Represents historical per share dividends declared by Washington Trust
Bancorp, Inc.
(4) Represents the ratio of historical per share dividends declared by
Washington Trust Bancorp, Inc. to diluted operating earnings per share
restated for the pooling effect of Washington Trust Bancorp, Inc. and
Pier Bank.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA: (Dollars in thousands)
December 31, 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $44,260 $34,477 $31,937 $23,041 $30,973
Total securities 446,803 415,488 293,949 229,970 116,534
Federal Home Loan Bank stock 17,627 16,583 16,444 11,683 2,995
Net loans 536,676 486,004 480,451 436,903 399,463
Other 59,298 41,793 37,801 30,242 25,896
-----------------------------------------------------------------------------------------------------------------
Total assets $1,104,664 $994,345 $860,582 $731,839 $575,861
-----------------------------------------------------------------------------------------------------------------
Deposits $660,753 $627,763 $572,803 $509,797 $492,819
Short-term borrowings 4,209 15,033 20,337 14,000 -
Federal Home Loan Bank advances 352,548 264,106 187,001 138,493 20,951
Other liabilities 9,907 9,870 9,168 6,577 6,100
Shareholders' equity 77,247 77,573 71,273 62,972 55,991
-----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,104,664 $994,345 $860,582 $731,839 $575,861
-----------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual loans $3,798 $5,846 $7,644 $8,197 $9,231
Other real estate owned, net 49 243 888 1,574 2,196
-----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,847 $6,089 $8,532 $9,771 $11,427
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
1999 Q1 (1) Q2 (1) Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,809 $11,079 $11,418 $11,522 $44,828
Income from securities 6,643 6,725 7,005 7,283 27,656
Interest on federal funds sold
and other short-term investments 160 127 130 98 515
- ----------------------------------------------------------------------------------------------------------------
Total interest income 17,612 17,931 18,553 18,903 72,999
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 947 1,003 1,053 1,040 4,043
Time deposits 3,888 3,945 3,987 4,051 15,871
Federal Home Loan Bank advances 3,845 4,027 4,257 4,726 16,855
Other 220 254 119 30 623
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 8,900 9,229 9,416 9,847 37,392
- ----------------------------------------------------------------------------------------------------------------
Net interest income 8,712 8,702 9,137 9,056 35,607
Provision for loan losses 482 458 450 450 1,840
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,230 8,244 8,687 8,606 33,767
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,419 1,475 1,488 1,515 5,897
Service charges on deposit accounts 758 794 777 840 3,169
Merchant processing fees 249 393 599 294 1,535
Mortgage banking activities 498 378 295 205 1,376
Net gains (losses) on sales of securities 262 122 (4) 298 678
Net gain on sale of credit card portfolio - - 438 - 438
Other income 360 674 644 638 2,316
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 3,546 3,836 4,237 3,790 15,409
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,138 4,284 4,336 4,455 17,213
Net occupancy 566 597 625 589 2,377
Equipment 717 761 768 751 2,997
Merchant processing costs 159 299 536 319 1,313
Office supplies 168 166 162 224 720
Advertising and promotion 192 328 203 260 983
Acquisition related expenses - - 1,552 - 1,552
Other 1,886 1,548 1,494 1,750 6,678
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 7,826 7,983 9,676 8,348 33,833
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 3,950 4,097 3,248 4,048 15,343
Income tax expense 1,206 1,243 1,229 1,076 4,754
- ----------------------------------------------------------------------------------------------------------------
Net income $2,744 $2,854 $2,019 $2,972 $10,589
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.25 $.26 $.19 $.27 $.97
Diluted earnings per share $.25 $.26 $.18 $.27 $.96
Cash dividends declared per share (2) $.11 $.11 $.11 $.11 $.44
<FN>
(1) Amounts have been restated as a result of the acquisition of Pier Bank in
the third quarter of 1999 and differ from those reported in previously
filed Forms 10-Q.
(2) Represents historical per share dividends declared by Washington Trust
Bancorp, Inc.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
1998 (1) Q1 Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,981 $10,986 $10,971 $10,931 $43,869
Income from securities 5,163 5,744 5,707 6,093 22,707
Interest on federal funds sold
and other short-term investments 205 148 198 95 646
- ----------------------------------------------------------------------------------------------------------------
Total interest income 16,349 16,878 16,876 17,119 67,222
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 896 919 1,004 1,015 3,834
Time deposits 4,290 4,354 4,136 3,964 16,744
Federal Home Loan Bank advances 3,072 3,331 3,341 3,469 13,213
Other 232 288 122 222 864
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 8,490 8,892 8,603 8,670 34,655
- ----------------------------------------------------------------------------------------------------------------
Net interest income 7,859 7,986 8,273 8,449 32,567
Provision for loan losses 462 465 473 479 1,879
- ----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,397 7,521 7,800 7,970 30,688
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,224 1,361 1,344 1,301 5,230
Service charges on deposit accounts 658 771 746 780 2,955
Merchant processing fees 155 223 557 286 1,221
Mortgage banking activities 538 614 460 606 2,218
Net gains (losses) on sales of securities 41 351 232 (120) 504
Other income 293 240 272 499 1,304
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 2,909 3,560 3,611 3,352 13,432
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 3,759 3,817 3,948 3,951 15,475
Net occupancy 493 548 659 595 2,295
Equipment 605 662 670 718 2,655
Merchant processing costs 111 227 440 227 1,005
Office supplies 176 202 207 175 760
Advertising and promotion 148 194 238 214 794
Other 1,511 1,770 1,495 1,618 6,394
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 6,803 7,420 7,657 7,498 29,378
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 3,503 3,661 3,754 3,824 14,742
Income tax expense 1,002 1,048 1,076 1,109 4,235
- ----------------------------------------------------------------------------------------------------------------
Net income $2,501 $2,613 $2,678 $2,715 $10,507
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.23 $.25 $.25 $.25 $.98
Diluted earnings per share $.23 $.23 $.24 $.25 $.95
Cash dividends declared per share (2) $.10 $.10 $.10 $.10 $.40
<FN>
(1) Amounts have been restated as a result of the acquisition of Pier Bank in
the third quarter of 1999 and differ from those reported in Form 10-K for
the year ended December 31, 1998.
(2) Represents historical per share dividends declared by Washington Trust
Bancorp, Inc.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Overview
Washington Trust recorded net income of $10.6 million, or $.96 per diluted
share, for 1999. In the third quarter of 1999, the Corporation completed the
acquisition of Pier Bank. At December 31, 1998, Pier Bank had total assets of
$59.4 million and shareholders' equity of $4.5 million. The acquisition was
accounted for under the pooling of interests method and, accordingly, the
consolidated financial statements and other financial information of the
Corporation have been restated to reflect the acquisition at the beginning of
the earliest period presented. 1999 results included one-time acquisition
related expenses of $1.3 million, net of tax, resulting from the acquisition of
Pier Bank. Also in 1999, the Corporation sold its $4.6 million portfolio of
credit card loans at a gain, net of expenses and related income taxes, of $285
thousand. Results excluding these non-recurring items are referred to herein as
operating.
Operating earnings for the year ended December 31, 1999 amounted to $11.6
million, an increase of 10.4% from $10.5 million reported for 1998. Diluted
earnings per share, on an operating basis, amounted to $1.05 for 1999, up from
$.95 per share in 1998. The Corporation's rates of return on average assets and
average equity, on an operating basis, for 1999 were 1.10% and 14.74%,
respectively. Comparable amounts for the year ended December 31, 1998 were 1.13%
and 14.03%, respectively.
Total assets amounted to $1.105 billion at December 31, 1999, up 11.1% from the
December 31, 1998 balance of $994.3 million. Average assets rose 13.7% during
1999 and amounted to $1.052 billion. The growth in assets was primarily
attributable to growth in the loan portfolio, as well as purchases of
securities. Increases in Federal Home Loan Bank ("FHLB") advances as well as a
5.3% increase in total deposits funded the growth in assets. Total deposits
amounted to $660.8 million and $627.8 million at December 31, 1999 and 1998,
respectively. FHLB advances totaled $352.5 million at December 31, 1999, up
33.5% from the prior year balance of $264.1 million.
Total shareholders' equity amounted to $77.2 million at December 31, 1999,
compared to $77.6 million at December 31, 1998. The decrease was attributable to
a decline in the value of the available for sale securities portfolio. Included
in shareholders' equity at December 31, 1999 was a net unrealized loss on
securities available for sale, net of tax, of $191 thousand compared to a net
unrealized gain of $7.4 million at December 31, 1998.
Book value per share as of December 31, 1999 and 1998 amounted to $7.08 and
$7.21, respectively.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $3.8 million or .35% of total assets at December 31,
1999, down from $6.1 million or .61% of total assets at December 31, 1998. The
Corporation's loan loss provision was $1.8 million and $1.9 million in 1999 and
1998, respectively.
For the year ended December 31, 1999, net interest income (the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings) amounted to $35.6 million, up 9.3% over the 1998 amount.
The net interest margin for the year ended December 31, 1999 amounted to 3.71%,
compared to 3.85% in 1998. Other noninterest income (noninterest income
excluding net gains on sales of securities and net gain on the sale of the
credit card portfolio) amounted to $14.3 million for the year ended December 31,
1999, up 10.6% from $12.9 million in 1998. The increase was primarily due to
increases in other income and growth in revenues for trust services. Included in
other income was $677 thousand of earnings on bank-owned life insurance ("BOLI")
which was purchased during the second quarter of 1999. Further discussion of
BOLI is provided under the caption "Noninterest Income".
Total operating noninterest expense amounted to $32.3 million, up 9.9% over the
comparable 1998 amount. The increase was primarily attributable to higher
salaries and benefits expense and increases in equipment costs. Equipment costs
rose 12.9% over the prior year period due primarily to depreciation expense
associated with 1998 investments in technology. Included in other noninterest
expense for the twelve months ended December 31, 1999 and 1998 were
contributions of appreciated equity securities to the Corporation's charitable
foundation amounting to $270 thousand and $323 thousand, respectively. These
transactions resulted in realized securities gains of $262 thousand and $313
thousand, respectively, for the same periods.
Acquisition of Pier Bank
On August 25, 1999, following receipt of all required regulatory and shareholder
approvals, the Corporation completed the acquisition of Pier Bank, a Rhode
Island chartered community bank headquartered in South Kingstown, Rhode Island.
Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the
acquisition was effected by means of the merger of Pier Bank with and into The
Washington Trust Company, the wholly-owned subsidiary of the Corporation. Under
the terms of the agreement, the Corporation exchanged .468 shares of its common
stock for each share of common stock held by a Pier Bank shareholder, with cash
in lieu of fractional share interests. The conversion of customer deposit and
loan accounts took place on September 24, 1999. The acquisition of Pier Bank was
a tax-free reorganization accounted for as a pooling of interests. Accordingly,
the financial information for all periods presented has been restated to present
the combined financial condition and results of operations as if the combination
had been in effect for all periods presented. Expenses directly attributable to
the merger amounted to $1.6 million ($1.3 million, net of tax) and were charged
to earnings at the date of combination. Acquisition expenses consisted of
professional fees, data processing/integration costs, write-down of assets and
severance obligations.
Expansion
In April 1999, the Corporation announced its intention to open a trust and
investment management office in Providence, Rhode Island. The Corporation has
leased a facility for this office and commenced operations in February 2000.
Net Interest Income
Net interest income is the primary source of Washington Trust's operating
income. The level of net interest income is affected by the volume of average
interest-earning assets and interest-bearing liabilities, market interest rates
and other factors. The following discussion presents net interest income on a
fully taxable equivalent (FTE) basis by adjusting income and yields on
tax-exempt loans and securities to be comparable to taxable loans and
securities.
FTE net interest income increased $3.1 million or 9.4% from 1998 to 1999, due
primarily to the growth in interest-earning assets and lower cost of funds. The
net interest margin (FTE net interest income as a percentage of average
interest-earning assets) for 1999 and 1998 were 3.71% and 3.85%, respectively.
The interest rate spread declined 7 basis points to 3.19% in 1999. Earning asset
yields fell 34 basis points during 1999, while the cost of interest-bearing
liabilities declined 27 basis points, thereby narrowing the net interest spread.
Growth in the securities portfolio as well as interest expense associated with
the increases in Federal Home Loan Bank ("FHLB") advances, were primarily
responsible for the decrease in the net interest margin.
FTE interest income totaled $74.1 million in 1999, up from $68.2 million in
1998. The yield on interest-earning assets was 7.49% in 1999, down from 7.83% in
1998. Average interest-earning assets amounted to $989.4 million or 13.6% over
the comparable 1998 amount. The growth in average interest-earning assets was
primarily due to growth in the securities portfolio. Total average securities
rose $86.7 million or 22.8% in 1999, mainly due to purchases of taxable debt
securities. The FTE rate of return on securities was 6.24% in 1999, down from
6.37% in 1998. The decrease in yield reflects lower marginal rates on investment
purchases during 1999 relative to the prior year.
Average loans amounted to $522.8 million in 1999, up $31.8 million from 1998.
The FTE rate of return on total loans was 8.60% in 1999, down from 8.96% in
1998, due primarily to lower yields on new loan originations. The yields on
commercial loans amounted to 9.37% and 9.66% in 1999 and 1998, respectively. The
decrease in yields on commercial loans was mainly due to refinancing activity
and commercial loan originations with lower yields. Average commercial loans
amounted to $219.4 million in 1999, up 5.6% from the $207.8 million prior year
level. The yield on residential real estate loans amounted to 7.79% in 1999,
compared to 8.20% in 1998. Average residential mortgages rose 7.4% in 1999 and
amounted to $214.1 million. Average consumer loans increased 6.4% in 1999 to
$89.3 million. The yield on consumer loans amounted to 8.63% in 1999, down from
9.05% in 1998.
As a result of higher levels of FHLB advances and increases in savings and time
deposits, average interest-bearing liabilities increased 14.7% to $869.2 million
at December 31, 1999, and interest expense increased 7.9% and totaled $37.4
million in 1999. The rate paid on interest-bearing liabilities declined 27 basis
points to 4.30% in 1999 primarily due to lower interest rates. Average FHLB
advances increased by $81.3 million or 35.6% from 1998 and amounted to $309.6
million in 1999. The advances were used primarily to match fund the purchase of
securities. The average rate paid on FHLB advances for 1999 was 5.44%, a
decrease of 35 basis points from the prior year.
Average savings deposits increased by $24.4 million or 11.9% from 1998 and fell
10 basis points in the rate paid. Average time deposits grew $9.2 million or
3.0% in 1999 with a decrease of 43 basis points in the rate paid. In addition,
average demand deposits, an interest-free source of funding, increased by 17.6%
from 1998 and amounted to $97.7 million in 1999.
<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 using the
statutory federal income tax rate. For dividends on corporate stocks, the 70%
federal dividends received deduction is also used in the calculation of tax
equivalency. Nonaccrual and renegotiated loans, as well as interest earned on
these loans (to the extent recognized in the Consolidated Statements of Income)
are included in amounts presented for loans.
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Residential real estate loans $214,124 16,687 7.79 $199,347 16,347 8.20 $191,053 15,814 8.28
Commercial and other loans 219,394 20,564 9.37 207,787 20,072 9.66 204,599 19,742 9.65
Consumer loans 89,291 7,707 8.63 83,882 7,587 9.05 73,932 6,918 9.36
------------------------------------------------------------------------------------------------------------------
Total loans 522,809 44,958 8.60 491,016 44,006 8.96 469,584 42,474 9.05
Federal funds sold and other
short term investments 10,539 515 4.89 11,940 646 5.41 9,067 492 5.42
Taxable debt securities 399,058 24,432 6.12 315,177 19,706 6.25 243,956 16,594 6.80
Nontaxable debt securities 26,945 1,786 6.63 22,533 1,435 6.37 15,789 1,048 6.64
Corporate stocks and FHLB 30,041 2,394 7.97 30,265 2,409 7.96 27,993 2,343 8.37
stock
------------------------------------------------------------------------------------------------------------------
Total securities 466,583 29,127 6.24 379,915 24,196 6.37 296,805 20,477 6.90
------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 989,392 74,085 7.49 870,931 68,202 7.83 766,389 62,951 8.21
------------------------------------------------------------------------------------------------------------------
Cash and due from banks 18,432 16,860 17,328
Allowance for loan losses (11,767) (10,194) (9,209)
Premises and equipment, net 24,122 23,676 21,793
Other 32,098 24,576 20,962
------------------------------------------------------------------------------------------------------------------
Total assets $1,052,277 $925,849 $817,263
------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $228,932 4,043 1.77 $204,500 3,834 1.87 $186,017 3,778 2.03
Time deposits 318,281 15,871 4.99 309,094 16,744 5.42 286,714 15,738 5.49
FHLB advances 309,594 16,855 5.44 228,295 13,213 5.79 182,781 10,782 5.90
Other 12,383 623 5.03 15,626 864 5.53 15,250 857 5.62
------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 869,190 37,392 4.30 757,515 34,655 4.57 670,762 31,155 4.64
------------------------------------------------------------------------------------------------------------------
Demand deposits 97,716 83,100 71,687
Other liabilities 6,305 7,942 6,245
Shareholders' equity 79,066 77,292 68,569
------------------------------------------------------------------------------------------------------------------
Total liabilities and
Shareholders' equity $1,052,277 $925,849 $817,263
------------------------------------------------------------------------------------------------------------------
Net interest income $36,693 $33,547 $31,796
------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.19 3.26 3.57
Net interest margin 3.71 3.85 4.15
------------------------------------------------------------------------------------------------------------------
<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, 1999 1998 1997
- --------------------------------------------------------------------------------
Commercial and other loans $130 $137 $159
Taxable debt securities (1) - - 614
Nontaxable debt securities 605 485 372
Corporate stocks and FHLB stock 351 358 413
(1) Represents adjustment for U.S. Treasury and government agency obligations
that are exempt from state income taxes only.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
1999/1998 1998/1997 1997/1996
-------------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change
-------------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $1,176 (835) 341 $681 (148) 533 $671 (131) 540
Commercial and other loans 1,099 (606) 493 308 21 329 2,450 (276) 2,174
Consumer loans 476 (358) 118 906 (236) 670 1,209 (229) 980
Federal funds sold and
other short term investments (35) (96) (131) 155 (1) 154 198 8 206
Taxable debt securities 5,145 (420) 4,725 4,539 (1,427) 3,112 8,827 (41) 8,786
Nontaxable debt securities 290 62 352 431 (44) 387 - 15 15
Corporate stocks and FHLB
stock (18) 3 (15) 184 (118) 66 1,112 (659) 453
-------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 8,133 (2,250) 5,883 7,204 (1,953) 5,251 14,467 (1,313) 13,154
-------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 440 (231) 209 359 (303) 56 88 (331) (243)
Time deposits 487 (1,360) (873) 1,215 (209) 1,006 1,947 261 2,208
FHLB advances 4,466 (824) 3,642 2,638 (207) 2,431 7,620 (26) 7,594
Other (168) (73) (241) 20 (13) 7 651 3 654
-------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 5,225 (2,488) 2,737 4,232 (732) 3,500 10,306 (93) 10,213
-------------------------------------------------------------------------------------------------------------------
Net interest income $2,908 238 3,146 $2,972 (1,221) 1,751 $4,161 (1,220) 2,941
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
Noninterest income is an important source of revenue for the Corporation. For
the year ended December 31, 1999, recurring noninterest income, which excludes
net gains on sales of securities and the net gain on the sale of the credit card
portfolio, accounted for 29% of total revenues (net interest income plus
recurring noninterest income). Washington Trust's primary sources of recurring
noninterest income are trust revenues, mortgage banking activities, servicing of
deposit accounts, mortgage servicing fees, and merchant credit card processing
fees. Also included in noninterest income are earnings generated from BOLI
purchased in 1999.
Revenue from trust-related services, such as management of customer investment
portfolios, trusts and estates, continues to be the largest component of
noninterest income. Trust revenue represented 41.3% of noninterest income and
amounted to $5.9 million in 1999, up by 12.8% from the $5.2 million reported in
1998. This increase in trust revenue is primarily attributable to the increase
in assets under management, which amounted to $964.2 million at December 31,
1999, up 22.1% from $789.8 million in 1998.
Service charges on deposit accounts rose 7.2% to $3.2 million in 1999. Changes
in the fee structures of various deposit products during the year, as well as
growth in the Corporation's total deposit base, were contributing factors in
this increase.
Revenue from mortgage banking activities associated with the originations of
loans for the secondary market totaled $1.4 million in 1999, down from $2.2
million in 1998, due to decreased loan sales resulting from lower mortgage
refinancing activity. Mortgage banking activities include the capitalization of
mortgage servicing rights of $313 thousand and $553 thousand in 1999 and 1998,
respectively.
Most secondary market loans have been sold with servicing retained, however, in
the fourth quarter of 1999, the Corporation began selling substantially all
residential mortgage loans with servicing released. Mortgage servicing fee
income amounted to $426 thousand for the year ended December 31, 1999, up from
the prior year amount of $165 thousand. Due to increases in interest rates, a
lower amount of valuation adjustments on mortgage servicing rights was required
in 1999 than in 1998. Servicing income, excluding valuation adjustments and
amortization, as a percentage of average loans serviced was 30 basis points in
1999, down from 34 basis points in the prior year. The balance of serviced loans
at December 31, 1999 amounted to $193.9 million, compared to $174.7 million at
December 31, 1998.
In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI
as a financing tool for employee benefits. The Corporation expects to benefit
from the BOLI contracts as a result of the tax-free growth in cash surrender
value and death benefits that are expected to be generated over time. Included
in other income was $677 thousand of earnings on BOLI for the year ended
December 31, 1999. (See additional discussion on BOLI under the caption
"Financial Condition".)
Noninterest Expense
Total noninterest expense, excluding one-time acquisition related expenses, rose
9.9% to $32.3 million in 1999. This increase was primarily attributable to
higher salary and benefit expenses along with increases in equipment costs due
to depreciation and maintenance expenses incurred in connection with 1998
investments in technology. Equipment costs totaled $3.0 million in 1999, up
12.9% from the 1998 amount of $2.7 million.
Income Taxes
Income tax expense amounted to $4.8 million and $4.2 million in 1999 and 1998,
respectively. The Corporation's effective tax rate was 31.0% in 1999, compared
to a rate of 28.7% in 1998. These rates differed from the federal rate of 35.0%
due to the benefits of tax-exempt income and the dividends received deduction as
well as the results of the tax planning strategies designed to reduce income
taxes.
The Corporation had a net deferred tax asset amounting to $3.6 million at
December 31, 1999 compared to a net deferred tax liability of $1.1 million at
December 31, 1998. In addition to future taxable income and the reversal of
deferred tax liabilities, a primary source of recovery of deferred tax assets is
taxes paid in prior years available for carryback. (See Note 12 to the
Consolidated Financial Statements for additional information regarding income
taxes.)
<PAGE>
Financial Condition
Securities
Securities are designated as either available for sale or held to maturity at
the time of purchase. Securities available for sale may be sold in response to
changes in market conditions, prepayment risk, rate fluctuations, liquidity, or
capital requirements. Securities available for sale are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax, until realized.
Securities designated as held to maturity are part of the Corporation's
portfolio of long-term interest-earning assets. These securities are classified
as long-term because the Corporation has the intent and ability to hold them
until maturity. Securities held to maturity are reported at amortized cost.
Securities Available for Sale
The amortized cost of securities available for sale at December 31, 1999
amounted to $329.7 million, an increase of $22.1 million over the 1998 amount.
This increase was due primarily to purchases of debt securities.
At December 31, 1999, the net unrealized gains on securities available for sale
amounted to $742 thousand, a decrease of $11.5 million from the comparable 1998
amount. This decrease was attributable to the effect of increases in interest
rates that occurred throughout 1999. (See Note 3 to the Consolidated Financial
Statements for detail of unrealized gains and losses associated with securities
available for sale.)
Securities Held to Maturity
The amortized cost of securities held to maturity increased $20.7 million, to
$116.4 million at December 31, 1999. This increase is primarily attributable to
purchases of mortgage-backed securities. The net unrealized losses on securities
held to maturity amounted to $3.5 million at December 31, 1999, compared to $900
thousand in net unrealized gains at December 31, 1998. The decline was primarily
due to the effects of increases in interest rates that occurred throughout 1999.
Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in FHLB stock that
currently is based on the level of its FHLB advances. As of December 31, 1999
and 1998, the Corporation's investment in FHLB stock totaled $17.6 million and
$16.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to
issue new capitalization requirements to be implemented by May 2002.
Loans
Total loans amounted to $549.0 million at December 31, 1999, up $52.1 million,
or 10.5%, from the December 31, 1998 amount of $497.0 million. The increase in
total loans was led by growth in the commercial and commercial real estate
portfolios.
Total commercial loans increased $29.0 million, or 14.3%, in 1999, with the
largest increase occurring in the commercial mortgage portfolio. Total
residential real estate loans increased $19.6 million, or 9.5%, in 1999. During
the third quarter of 1999, the Corporation sold its $4.6 million portfolio of
credit card loans at a gain, net of expenses and related income taxes, of $285
thousand. At December 31, 1998, credit card loans amounted to $5.4 million, or
1.1% of loans. Excluding the effect of the sale, consumer loans were up $8.9
million, or 10.8%, in 1999. The Corporation will continue to provide merchant
credit card processing services.
Other Assets
Other assets totaled $28.2 million at December 31, 1999, up $22.2 million from
$6.0 million at December 31, 1998. The increase was primarily due to the
purchase of BOLI during the second quarter of 1999. The Corporation purchased
$18.0 million of BOLI as a financing tool for employee benefits. The Corporation
expects to benefit from the BOLI contracts as a result of the tax-free growth in
cash surrender value and death benefits that are expected to be generated over
time. The purchase of the life insurance policy results in an interest sensitive
asset on the Corporation's consolidated balance sheet that provides monthly
tax-free income to the Corporation. The largest risk to the BOLI program is
credit risk of the insurance carriers. To mitigate this risk, annual financial
condition reviews are completed on all carriers. BOLI is included in other
assets on the Corporation's consolidated balance sheets at its cash surrender
value. Increases in BOLI's cash surrender value are reported as other income in
the Corporation's consolidated statements of income.
Deposits
Total deposits at December 31, 1999 amounted to $660.8 million, up 5.3% from the
prior year balance of $627.8 million. The increase in deposits is attributable
to growth in all categories of deposits in 1999. Demand deposits rose 9.5% to
$102.4 million. Savings deposits increased $12.3 million offsetting a decrease
of $3.7 million in retail certificates of deposit. Time deposits totaled $323.0
million at December 31, 1999, compared to $311.2 million at December 31, 1998.
The $11.7 million increase in time deposits was attributable to the addition of
$9.8 million in brokered certificates of deposit as well as growth in time
deposits in denominations of $100 thousand or more which increased by $17.3
million in 1999.
Borrowings
Washington Trust uses advances from the Federal Home Loan Bank of Boston as well
as other short-term borrowings as part of its overall funding strategy. The
additional FHLB advances and short-term borrowings were used to meet short-term
liquidity needs, to fund loan growth and to purchase securities. Total advances
amounted to $352.5 million at December 31, 1999, up from $264.1 million one year
earlier. (See Note 10 to the Consolidated Financial Statements for additional
information about borrowings.)
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned.
Nonperforming assets declined to .35% of total assets at December 31, 1999
compared to .61% of total assets at December 31, 1998. Nonaccrual loans as a
percentage of total loans fell from 1.18% at the end of 1998 to .69% at December
31, 1999. Approximately $1.9 million, or 49.9% of total nonaccrual loans, were
less than 90 days past due at December 31, 1999.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 1999 1998
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $1,015 $1,437
Commercial and other:
Mortgages 702 1,577
Construction and development 95 119
Other 1,242 2,159
Consumer 744 554
---------------------------------------------------------------------------
Total nonaccrual loans 3,798 5,846
Other real estate owned, net 49 243
---------------------------------------------------------------------------
Total nonperforming assets $3,847 $6,089
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .69% 1.18%
Nonperforming assets as a percentage of total assets .35% .61%
<PAGE>
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans,
are placed on nonaccrual status and interest recognition is suspended when such
loans are 90 days or more past due with respect to principal and/or interest.
Well-secured residential mortgage loans are permitted to remain on accrual
status provided that full collection of principal and interest is assured. Loans
are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued,
but uncollected, is reversed against current period income. Subsequent cash
receipts on nonaccrual loans are recognized as interest income, or recorded as a
reduction of principal if full collection of the loan is doubtful or if
impairment of the collateral is identified.
Nonaccrual loans are returned to accrual status when the obligation has
performed in accordance with the contract terms for a reasonable period of time
and the ultimate collectibility of the contractual principal and interest is no
longer doubtful.
Included in accruing loans 90 days or more past due at December 31, 1999 are
residential mortgages amounting to $109 thousand which are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
(Dollars in thousands)
December 31, 1999 1998
---------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,902 $2,654
Nonaccrual loans less than 90 days past due 1,896 3,192
---------------------------------------------------------------------------
Total nonaccrual loans $3,798 $5,846
---------------------------------------------------------------------------
Accruing loans 90 days or more past due,
primarily all residential mortgages (1) $120 $235
---------------------------------------------------------------------------
(1) Not included in nonperforming assets
Restructured Loans
Loans are considered restructured when the Corporation has granted concessions
to a borrower due to the borrower's financial condition that it otherwise would
not have considered. These concessions include modifications of the terms of the
debt such as reduction of the stated interest rate other than normal market rate
adjustments, extension of maturity dates, or reduction of principal balance or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit the Corporation by increasing
the ultimate probability of collection. Included in nonaccrual loans at December
31, 1999 and 1998, are loans whose terms have been restructured amounting to
$142 thousand and $1.1 million, respectively. There were no commitments to lend
additional funds to borrowers whose loans had been restructured.
Other Real Estate Owned
Other real estate owned ("OREO") is comprised of properties acquired through
foreclosure and other legal means, and loans determined to be substantively
repossessed. A loan is considered to be substantively repossessed when the
Corporation has taken possession of the collateral, but has not completed legal
foreclosure proceedings. OREO is carried at the lower of cost or fair value
minus estimated costs to sell. A valuation allowance is maintained for potential
declines in market value, known declines in market value, and estimated selling
costs.
The balance of OREO amounted to $49 thousand at December 31, 1999, down from the
prior year amount of $243 thousand. Decreases in OREO resulted from sales of
foreclosed properties and repossessed assets that exceeded the level of
foreclosures and repossessions. During 1999, proceeds from sales of foreclosed
properties and repossessed assets amounted to $513 thousand. Washington Trust
has provided financing to facilitate the sales of some of these properties.
Financing is generally provided at market rates with credit terms similar to
those available to other borrowers.
<PAGE>
Allowance for Loan Losses
The allowance for loan losses represents the amount available for credit losses
inherent in the loan portfolio. Washington Trust assesses the quality of its
loans by performing ongoing reviews of its portfolio to determine potential loss
exposure and to assess delinquency trends. During this review, management gives
consideration to such factors as overall borrower relationship, delinquency
trends, credit and collateral quality, prior loss experience, prevailing
economic and business conditions, industry concentrations, the size and
characteristics of the loan portfolio and other pertinent factors. Based on this
review, the management believes that its year-end allowance for loan losses is
adequate.
Loans are charged off once the probability of loss has been established, through
the review of the factors mentioned above.
The determination of the adequacy of the allowance is necessarily judgmental and
involves consideration of various factors and assumptions. Management believes
that an allocation of the allowance is not necessarily indicative of the
specific amount of future charge-offs or the specific loan categories in which
these charge-offs may ultimately occur. The unallocated component of the
allowance for loan losses represents management's evaluation of the loan
portfolio, including its size and complexity, with consideration given to the
Corporation's expanded market area and industry concentrations. Also, management
realizes that there are losses that have been incurred within the portfolio that
have not yet been specifically identified. The allowance for loan losses
amounted to $12.3 million, or 2.25% of total loans at December 31, 1999,
compared to $11.0 million or 2.21% at December 31, 1998.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 1999 1998
-------------------------------------------------------------------------
Beginning balance $10,966 $9,335
Charge-offs, net of recoveries:
Residential:
Real estate 135 (5)
Construction (22) -
Commercial:
Mortgages (126) 51
Construction and development (119) -
Other (102) (52)
Consumer (223) (242)
-------------------------------------------------------------------------
Net charge-offs (457) (248)
Provision for loan losses 1,840 1,879
-------------------------------------------------------------------------
Ending balance $12,349 $10,966
-------------------------------------------------------------------------
Allowance for loan losses to nonaccrual loans 325.15% 187.59%
Allowance for loan losses to total loans 2.25% 2.21%
-------------------------------------------------------------------------
The provision for loan losses amounted to $1.8 million in 1999, down from $1.9
million in 1998. The provision amount is determined by management to maintain
the allowance at a level that is deemed appropriate.
Capital Resources
Total shareholders' equity decreased $326 thousand during 1999 and amounted to
$77.2 million at December 31, 1999. The overall decline was mainly attributable
to reductions in net unrealized gains on securities of $7.6 million. Capital
growth resulted from $6.0 million of earnings retention and $1.3 million from
stock option exercises. Cash dividends declared per share amounted to $.44 and
$.40 in 1999 and 1998, respectively.
The ratio of total equity to total assets amounted to 7.0% at December 31, 1999,
compared to 7.8% at December 31, 1998. The reduction in this ratio was due
primarily to the growth in assets resulting from growth in the loan portfolio,
purchases of securities and the purchase of bank-owned life insurance as a
financing tool for employee benefits. Book value per share at December 31, 1999
amounted to $7.08, down slightly from the year-earlier amount of $7.21 per
share.
The Corporation and the Bank are subject to various regulatory capital
requirements. The Corporation and the Bank are categorized as well-capitalized
under the regulatory framework for prompt corrective action. (See Note 15 to the
Consolidated Financial Statements for additional discussion of capital
requirements.)
Litigation
The Bank is party to a lawsuit filed by a former corporate customer and the
customer's shareholders for damages which the plaintiffs allegedly incurred as a
result of an embezzlement by an officer of the customer. The suit as originally
filed sought recovery from the Bank for losses directly related to the
embezzlement of approximately $3.1 million, as well as consequential damages
amounting to approximately $2.6 million. On March 19, 1998, the customer amended
its claims to seek recovery of an additional $2.6 million in losses, plus an
unspecified amount of interest thereon, which were alleged to be directly
related to the embezzlement. On or about November 23, 1999, the customer further
amended its claim to now seek recovery of approximately $8 million in total
damages, plus an unspecified amount of interest thereon. Management believes,
based on its review with counsel of the development of this matter to date that
the Bank has asserted meritorious affirmative defenses in this litigation.
Additionally, the Bank has filed counterclaims against the customer and its
principal shareholder, as well as claims against the officer allegedly
responsible for the embezzlement. The Bank is vigorously asserting its defenses
and affirmative claims. The case is currently in discovery and is currently
scheduled for trial in late April 2000. Because of the numerous uncertainties
that surround the litigation, management and legal counsel are unable to
estimate the amount of loss, if any, that the Bank may incur with respect to
this litigation. Consequently, no loss provision for this lawsuit has been
recorded.
Year 2000
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
During 1999, the Corporation completed a detailed assessment of all its
information technology (IT) and non-information technology (non-IT) systems with
respect to the century date change (the transition from the year 1999 to 2000),
with special emphasis on mission-critical systems. IT and non-IT hardware and
software were inventoried and those not Year 2000 ready were identified,
remediated and tested. While the Corporation's assessment of Year 2000 issues is
ongoing and subject to on-going regulatory mandated verification and review
through March 31, 2000, the Corporation has not yet experienced any effects from
Year 2000 issues.
The Corporation expects that the total costs associated with the project will
amount to approximately $525 thousand. The Corporation has accounted for most of
these costs as expense items. In some cases, acquired hardware and software
items were capitalized and amortized in accordance with the Corporation's
existing accounting policy. Total costs incurred through December 31, 1999
amounted to approximately $500 thousand. These costs consisted primarily of
system testing and modification, internal staffing and consulting, and were
primarily recorded in noninterest expenses. The remaining project costs will be
incurred in the first half of 2000. The costs of the project are based on
management's best estimates, which are derived utilizing numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors.
There can be no guarantee that the systems of other companies, or outside
vendors, on which the Corporation's systems rely, have been fully remedied.
Therefore, the Corporation could possibly experience a negative impact to the
extent other entities not affiliated with the Corporation are not Year 2000
compliant.
The Corporation's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
These procedures were expanded to include specific procedures for potential Year
2000 issues, and contingency plans to protect against Year 2000-related
interruptions. These plans include backup procedures and identification of
alternative suppliers.
Recent Accounting Developments
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires a corporation to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
This Statement defines conditions and criteria to be used in designating a
derivative as a specific type of hedging instrument. SFAS No. 133 also explains
the accounting for changes in the fair value of a derivative, which depends on
the intended use and the resulting designation. Under this Statement, a
corporation is required to establish at the inception of the hedge the method to
be used for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the corporation's approach to managing risk. In
June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 and is not to
be applied retroactively to the financial statements of prior periods. The
Corporation has not yet determined what the effect of the adoption of this
pronouncement will have on the financial position and earnings of the
Corporation.
Comparison of 1998 with 1997
Washington Trust recorded net income of $10.5 million in 1998, an 11.6% increase
over the $9.4 million of net income recorded in 1997. Diluted earnings per share
amounted to $.95 for 1998, up from $.86 per share earned in 1997. ROA and ROE
amounted to 1.13% and 14.03%, respectively in 1998. Comparable amounts for 1997
were 1.15% and 13.97%.
Fully taxable equivalent net interest income rose 5.5% over the 1997 amount. The
interest rate spread declined 31 basis points to 3.26% in 1998, while the net
interest margin fell from 4.15% in 1997 to 3.85% in 1998. Growth in the
securities portfolios in combination with lower marginal rates on investment
purchases during 1998 relative to the prior year were primarily responsible for
the decrease in the interest rate spread and the net interest margin. The yield
on total interest-earning assets amounted to 7.83% in 1998, down from 8.21% in
1997. The Corporation's cost of funds remained flat in 1998 at 4.57% due to
lower interest rates paid on higher deposit and borrowed funds balances.
Noninterest income was $13.4 million and $10.9 million for the year ended
December 31, 1998 and 1997, respectively. The $2.5 million increase resulted
primarily from increases in income from mortgage banking activities, higher
revenues for trust services and increases in service charges on deposits.
Noninterest expenses amounted to $29.4 million for 1998 compared to $26.5
million for 1997, an increase of 11.0%. The increase was primarily attributable
to higher salaries and benefits expense.
Total assets rose $133.8 million or 15.5% during 1998 to $994.3 million at
December 31, 1998. Average assets amounted to $925.8 million in 1998, up 13.3%
over the prior year. Asset growth was primarily attributable to an increase of
$121.5 million in total securities. Securities available for sale amounted to
$319.8 million at the end of 1998, a 32.3% increase over the prior year.
Securities held to maturity increased 84.6% in 1998 to $95.6 million. As a
result of higher levels of FHLB advances and increases in savings and time
deposits, average interest-bearing liabilities amounted to $757.5 million at
December 31, 1998, up 12.9% from December 31, 1997.
Nonperforming assets declined to .61% of total assets at December 31, 1998, down
from .99% at December 31,1997. The Corporation's loan loss provision amounted to
$1.9 million in 1998, compared to $1.4 million in 1997. Net loan charge-offs
amounted to $248 thousand in 1998, down from $1.1 million in 1997. The allowance
for loan losses represented 2.21% of total loans at December 31, 1998 compared
to 1.91% at December 31, 1997.
Shareholders' equity rose by 8.8% in 1998. Approximately $6.4 million of this
increase was attributable to earnings retention and $2.6 million from stock
option exercises. Book value per share increased to $7.21 at December 31, 1998,
up from the year-earlier amount of $6.71 per share. The ratio of capital to
assets was 7.8% and 8.3% at December 31, 1998 and 1997, respectively. Dividends
paid per share amounted to $.40 in 1998, up 14.3% from the prior year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's Asset/Liability Committee ("ALCO") is responsible for
establishing policy guidelines on liquidity and acceptable exposure to interest
rate risk. The objective of the ALCO is to manage assets and funding sources to
produce results which are consistent with Washington Trust's liquidity, capital
adequacy, growth, risk and profitability goals. The ALCO establishes and
monitors guidelines for proper origination and matching of assets and funding
sources, and determines asset/liability origination and pricing strategies to
meet its goals. The ALCO meets regularly to review the economic environment and
the volume, mix and maturity of assets and liabilities, and implements
appropriate changes in strategy that will manage the Corporation's exposure to
interest rate risk and liquidity risk.
The ALCO manages the Corporation's interest rate risk using income simulation to
measure interest rate risk inherent in the Corporation's on-balance sheet and
off-balance sheet financial instruments at a given point in time by showing the
effect of interest rate shifts on net interest income over a 60-month period.
The ALCO uses both parallel and non-parallel rate shifts of up to 300 basis
points and Monte Carlo rate simulations based on the historical volatility of
interest rates to perform income simulations. The simulations assume that the
composition of the Corporation's balance sheet remains constant over the
60-month simulation horizon, and take into account the specific repricing,
maturity, call options, and prepayment characteristics of differing financial
instruments that may vary under different interest rate scenarios. Prepayment
estimates for the Corporation's loans are based on historical experience. Call
options and prepayment characteristics for securities are calculated using
industry-standard pricing and prepayment estimates. Non-contractual savings
deposits are classified as short-term (three months or less) for both maturity
and repricing purposes. The characteristics of financial instrument classes are
reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure
of net interest income to changes in interest rates remains within established
tolerance levels over a 24-month horizon, and to develop appropriate strategies
to manage this exposure. In addition, the ALCO reviews 60-month horizon results
to assess longer-term risk inherent in the balance sheet, although no 60-month
horizon tolerance levels are specified. As of December 31, 1999 and December 31,
1998, net interest income simulation indicated exposure to changing interest
rates over a 24-month horizon to a degree that remained within tolerance levels
established by the Corporation. The Corporation defines maximum unfavorable net
interest income exposure to be a change of no more than 5% in net interest
income over the first 12 months and no more than 10% over the second 12 months
of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have
on net interest income for a 24-month period using the Corporation's on and
off-balance sheet financial instruments as of December 31, 1999. Interest rates
are assumed to shift by a parallel 200 basis points over a 12-month period,
except for core savings deposits, which are assumed to shift by only 100 basis
points due to their historical insensitivity to rate changes. Further, core
savings are assumed to have certain minimum rate levels below that they will not
fall. It should be noted that the rate scenario used does not necessarily
reflect the ALCO's view of the "most likely" change in interest rates over the
next 24 months. Furthermore, since a static balance sheet is assumed, the
results do not reflect the anticipated future net interest income of the
Corporation for the same period. The following table presents these 24-month net
interest income simulation results:
<TABLE>
<CAPTION>
(Dollars in thousands)
Flat Falling Rising
Rates Rates Rates
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Fixed rate mortgage-backed securities $16,708 $15,904 $17,005
Adjustable rate mortgage-backed securities 17,753 14,809 19,876
Callable securities 9,770 9,743 9,860
Other securities 19,191 18,678 19,705
Fixed rate mortgages 21,826 20,707 22,584
Adjustable rate mortgages 12,505 11,455 13,370
Other fixed rate loans 33,529 32,093 34,962
Other adjustable rate loans 25,276 21,962 58,590
Interest rate floor contracts (net of premium amortization) (125) 260 (125)
----------------------------------------------------------------------------------------------------------
Total interest income 156,443 144,409 167,029
----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 8,142 6,116 11,185
Time deposits 31,904 25,746 38,069
Short-term borrowings 444 321 567
Federal Home Loan Bank advances 43,915 38,779 49,050
----------------------------------------------------------------------------------------------------------
Total interest expense 84,405 70,962 98,871
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 1999 $72,038 $73,447 $68,158
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 1998 (1) $60,997 $61,944 $58,445
----------------------------------------------------------------------------------------------------------
<FN>
(1) Represents Washington Trust Bancorp, Inc. historical results as
previously reported in the Corporation's 1998 Annual Report on
Form 10-K.
</FN>
</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 1999. The shift reflects
increased customer demand for fixed rate loans as interest rates declined
throughout the year. In the event of an increase in interest rates, funding
costs may rise more rapidly than asset yields over the near term, reducing
interest income. Conversely, net interest income may increase as rates fall
because shorter-term liabilities would decrease in cost over the near term,
while yields on fixed rate assets decline more slowly. While the ALCO reviews
simulation assumptions to ensure that they are reasonable and current, income
simulation may not always prove to be an accurate indicator of interest rate
risk since the repricing, maturity and prepayment characteristics of financial
instruments, especially core savings deposits, may change to a different degree
than estimated. In addition, since income simulations assume that the
Corporation's balance sheet will remain static over the 60-month simulation
horizon, the results do not reflect adjustments in strategy that the ALCO could
implement in response to rate shifts.
The Corporation also monitors the potential change in market value of its
available for sale debt securities in parallel rate shifts of up to 200 basis
points. The purpose is to determine market value exposure which may not be
captured by income simulation, but which might result in changes to the
Corporation's capital position. Results are calculated using industry-standard
analytical techniques and securities data. The Corporation uses the results to
manage the effect of market value changes on the Corporation's capital position.
The following table summarizes the potential change in market value of the
Corporation's available for sale debt securities as of December 31, 1999 and
1998 resulting from immediate 200 basis point parallel rate shifts:
<TABLE>
<CAPTION>
(Dollars in thousands)
Falling Rising
Rates Rates
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Security Type:
U.S. Treasury and government-sponsored agency securities (noncallable) $956 $(895)
U.S. government-sponsored agency securities (callable) 744 (2,049)
Corporate securities 1,202 (1,206)
Fixed rate mortgage-backed securities 3,187 (4,292)
Adjustable rate mortgage-backed securities 1,016 (2,041)
Fixed rate collateralized mortgage obligations 180 (583)
Adjustable rate collateralized mortgage obligations 510 (3,083)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 1999 $7,795 $(14,149)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 1998 (1) $5,558 $(11,141)
---------------------------------------------------------------------------------------------------------
<FN>
(1) Represents Washington Trust Bancorp, Inc. historical results as
previously reported in the Corporation's 1998 Annual Report on
Form 10-K.
</FN>
</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, 1999, including both
debt and equity securities, was 5.2%, assuming a one-year time horizon and a 5%
probability of occurrence for "value at risk" analysis.
At December 31, 1999, gap analysis showed that the Corporation's cumulative
one-year gap was a negative $176.5 million, or 19.8% of earning assets. The
following table details the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 1999 that are expected to mature or
reprice in each of the time periods presented. To the extent applicable, amounts
of assets and liabilities that mature or reprice within a particular period were
determined in accordance with their contractual terms. Fixed rate mortgages,
mortgage-backed securities and consumer installment loans have been allocated
based on expected amortization and prepayment rates using standard industry
assumptions. Savings, NOW and money market deposit accounts, which have no
contractual term and are subject to immediate repricing, are presented in the
under three-month category. Management believes that gap analysis has
substantial limitations as a measure of interest rate risk, as it does not
address the effect of changes in interest rates nor the magnitude of resulting
changes in net interest income. For this reason, the ALCO does not use gap
analysis to establish interest rate risk targets or assess interest rate risk
exposure.
<PAGE>
The following table summarizes the Corporation's gap analysis as of December 31,
1999:
<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 $142,144 $46,415 $78,618 $183,639 $99,855
Debt securities 96,762 25,446 59,553 166,751 76,940
Other 20,471 0 0 0 35,978
------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 259,377 71,861 138,171 350,390 212,773
Interest-bearing liabilities:
Deposits 346,752 48,973 98,352 64,242 49
Short-term borrowings 4,209 0 0 0 0
Federal Home Loan Bank advances 69,000 77,340 69,000 105,675 31,533
------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 419,961 126,313 167,352 169,917 31,582
------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(160,584) $(54,452) $(29,181) $180,473 $181,191
------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(160,584) $(215,036) $(244,217) $(63,744) $117,447
------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap - 1998 (1) $(179,011) $(175,869) $(176,537) $(27,462) $128,674
------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents Washington Trust Bancorp, Inc. historical amounts as previously
reported in the Corporation's 1998 Annual Report on Form 10-K.
</FN>
</TABLE>
On occasion, the Corporation has supplemented its interest rate risk management
strategies with off-balance sheet transactions. Such transactions are intended
to hedge specifically identified risks inherent in the Corporation's balance
sheet, and not to produce speculative profits. The Corporation has written
policy guidelines that designate limits on the notional value of off-balance
sheet transactions and require periodic evaluation of risks associated with
these transactions, including counterparty credit risk.
During 1995, the Corporation entered into interest rate floor contracts with a
notional principal amount of $50 million and a five-year term maturing in
February 2000. During 1998, the Corporation entered into additional floor
contracts with a notional principal amount of $20 million and a five-year term
maturing in March 2003. These contracts are intended to function as a hedge
against reductions in interest income realized from prime-based loans. These
contracts were purchased for a total premium of $1.2 million, which is amortized
over the life of the contracts. The Corporation receives payment for these
contracts if certain interest rates fall below specified levels. During 1999,
the Corporation recorded income, net of premium amortization, of $300 thousand
on its floor contracts. (See Note 7 to the Consolidated Financial Statements for
additional information regarding the floor contracts.)
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand. Washington Trust's primary source of
liquidity is customer deposits. Customer deposits (time, savings and demand
deposits) funded approximately 61.3% of total average assets in 1999. Other
sources of funding include discretionary use of purchased liabilities (i.e.,
Federal Home Loan Bank term advances, securities sold under agreements to
repurchase and federal funds purchased), cash flows from the Corporation's
securities portfolios and loan repayments. In addition, securities designated as
available for sale may be sold in response to short-term or long-term liquidity
needs.
The ALCO establishes and monitors internal liquidity measures to manage
liquidity exposure. Liquidity remained well within target ranges established by
the ALCO during 1999. Net loans as a percentage of total assets amounted to
48.6% at December 31, 1999, compared to 48.9% at December 31, 1998. Total
securities as a percentage of total assets amounted to 40.5% at December 31,
1999, down from 41.8% at December 31, 1998. These changes resulted primarily
from the 11.1% increase in total assets in 1999.
For the year ended December 31, 1999, net cash provided by financing activities
was $107.5 million. Proceeds from FHLB advances totaled $550.8 million, while
repayments of FHLB advances totaled $462.4 million in 1999. Additionally, $33.0
million was generated from overall growth in deposits. Net cash used in
investing activities was $121.3 million in 1999, the majority of which was used
to purchase securities. While the Corporation does not have any significant
capital commitments, it expects to continue to expend funds to upgrade and
expand equipment and premises to support its operations. Net cash provided by
operating activities amounted to $23.6 million in 1999, $10.6 million of which
was generated by net income. (See the Consolidated Statements of Cash Flows for
further information about sources and uses of cash.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
[firm logo here][KPMG]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust
Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Trust
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ending December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Providence, Rhode Island
January 17, 2000
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $26,960 $20,575
Federal funds sold and other short-term investments 17,300 13,902
Mortgage loans held for sale 1,647 5,863
Securities:
Available for sale, at fair value 330,431 319,841
Held to maturity, at cost; fair value $112,868
in 1999 and $96,547 in 1998 116,372 95,647
- -------------------------------------------------------------------------------------------------------------------
Total securities 446,803 415,488
Federal Home Loan Bank stock, at cost 17,627 16,583
Loans 549,025 496,970
Less allowance for loan losses 12,349 10,966
- -------------------------------------------------------------------------------------------------------------------
Net loans 536,676 486,004
Premises and equipment, net 23,409 24,021
Accrued interest receivable 6,010 5,913
Other assets 28,232 5,996
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,104,664 $994,345
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $102,384 $93,478
Savings 235,395 223,047
Time 322,974 311,238
- -------------------------------------------------------------------------------------------------------------------
Total deposits 660,753 627,763
Dividends payable 1,202 1,005
Short-term borrowings 4,209 15,033
Federal Home Loan Bank advances 352,548 264,106
Accrued expenses and other liabilities 8,705 8,865
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,027,417 916,772
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 1999 and 1998; issued
10,914,763 shares in 1999 and 10,779,630 shares in 1998 682 674
Paid-in capital 9,990 9,050
Retained earnings 66,766 60,803
Accumulated other comprehensive (loss) income (191) 7,400
Treasury stock, at cost; 27,799 shares in 1998 - (354)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 77,247 77,573
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,104,664 $994,345
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands,
CONSOLIDATED STATEMENTS OF INCOME except per share amounts)
Years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $44,828 $43,869 $42,315
Interest on securities 25,613 20,656 16,656
Dividends on corporate stock and Federal Home Loan Bank stock 2,043 2,051 1,930
Interest on federal funds sold and other short-term investments 515 646 492
- --------------------------------------------------------------------------------------------------------------------
Total interest income 72,999 67,222 61,393
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,043 3,834 3,778
Time deposits 15,871 16,744 15,738
Federal Home Loan Bank advances 16,855 13,213 10,782
Other 623 864 857
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 37,392 34,655 31,155
- --------------------------------------------------------------------------------------------------------------------
Net interest income 35,607 32,567 30,238
Provision for loan losses 1,840 1,879 1,424
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 33,767 30,688 28,814
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust revenue 5,897 5,230 4,470
Service charges on deposit accounts 3,169 2,955 2,542
Merchant processing fees 1,535 1,221 994
Mortgage banking activities 1,376 2,218 1,106
Net gains on sales of securities 678 504 733
Net gain on sale of credit card portfolio 438 - -
Other income 2,316 1,304 1,099
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 15,409 13,432 10,944
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 17,213 15,475 13,711
Net occupancy 2,377 2,295 2,111
Equipment 2,997 2,655 2,263
Merchant processing costs 1,313 1,005 809
Office supplies 720 760 755
Advertising and promotion 983 794 809
Acquisition related expenses 1,552 - -
Other 6,678 6,394 5,999
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 33,833 29,378 26,457
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,343 14,742 13,301
Income tax expense 4,754 4,235 3,884
- --------------------------------------------------------------------------------------------------------------------
Net income $10,589 $10,507 $9,417
- --------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.97 $.98 $.89
Diluted earnings per share $.96 $.95 $.86
Cash dividends declared per share (1) $.44 $.40 $.35
<FN>
(1) Represents historical per share dividends declared by Washington Trust
Bancorp, Inc.
</FN>
</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 (Loss) Income Stock Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $674 $9,050 $60,803 $7,400 $(354) $77,573
Net income 10,589 10,589
Other comprehensive loss, net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (7,591) (7,591)
--------
Comprehensive income 2,998
Cash dividends declared (4,626) (4,626)
Shares issued 8 1,318 12 1,338
Shares retired (378) 378 -
Shares repurchased (36) (36)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $682 $9,990 $66,766 $(191) $ - $77,247
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $460 $9,839 $54,586 $7,074 $(687) $71,272
Net income 10,507 10,507
Other comprehensive income, net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 326 326
---------
Comprehensive income 10,833
Cash dividends declared (4,083) (4,083)
Stock split in form of stock dividend 207 (207) -
Shares issued 7 (789) 3,338 2,556
Shares repurchased (3,005) (3,005)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $674 $9,050 $60,803 $7,400 $(354) $77,573
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $314 $9,073 $49,431 $4,507 $(354) $62,971
Net income 9,417 9,417
Other comprehensive income, net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 2,567 2,567
---------
Comprehensive income 11,984
Cash dividends declared (3,475) (3,475)
Stock dividend 4 645 (649) -
Stock split in form of stock dividend 138 (138) -
Shares issued 4 121 1,256 1,381
Shares repurchased (1,589) (1,589)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $460 $9,839 $54,586 $7,074 $(687) $71,272
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Disclosure of Reclassification Amount:
Years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------- -------------------- ----------------- ---------------
<S> <C> <C> <C>
Net unrealized holding (losses) gains arising during the period $(10,826) $1,024 $4,950
Less: Income tax effect 3,682 (381) (1,937)
Reclassification adjustment for net gains included in
net income (678) (504) (733)
Income tax effect on reclassification adjustment 231 187 287
- ---------------------------------------------------------------- -------------------- ---------------- ----------------
Net unrealized (losses) gains on securities $(7,591) $326 $2,567
- ---------------------------------------------------------------- -------------------- ---------------- ----------------
</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, 1999 1998 1997
- -------------------------------------------------------------------- ----------------- ---------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,589 $10,507 $9,417
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,840 1,879 1,424
Depreciation of premises and equipment 2,983 2,617 2,200
Amortization of premium in excess of accretion of
discount on debt securities 461 1,001 961
Deferred income tax (benefit) expense (796) (323) 81
Net gains on sales of securities (678) (504) (733)
Net gains on loan sales (695) (1,436) (547)
Net gain on sale of credit card portfolio (438) - -
Proceeds from sale of credit card portfolio 5,192 - -
Proceeds from sales of loans 47,627 89,533 32,375
Loans originated for sale (42,785) (90,940) (32,532)
Increase in accrued interest receivable (97) (741) (785)
(Increase) decrease in other assets (1,355) 374 (1,510)
Increase in accrued expenses and other liabilities 1,476 626 784
Other, net 242 7 45
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash provided by operating activities 23,566 12,600 11,180
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Cash flows from investing activities: Securities available for sale:
Purchases (168,644) (232,273) (146,388)
Proceeds from sales 81,398 95,666 63,600
Maturities and principal repayments 65,379 58,621 47,011
Securities held to maturity:
Purchases (54,948) (52,582) (29,060)
Maturities and principal repayments 34,212 8,727 5,166
Purchases of Federal Home Loan Bank stock (1,044) (139) (4,761)
Principal collected on loans under loan originations (57,622) (7,289) (47,170)
Purchase of loans - - (324)
Proceeds from sales of other real estate owned 513 1,381 1,072
Purchases of premises and equipment (2,508) (3,850) (5,181)
Purchase of deposits, net of premium paid - - 7,014
Purchase of bank-owned life insurance (18,000) - -
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash used in investing activities (121,264) (131,738) (109,021)
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------- ----------------- ---------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 32,990 54,960 54,805
Net (decrease) increase in short-term borrowings (10,824) (5,305) 6,337
Proceeds from Federal Home Loan Bank advances 550,837 611,300 468,600
Repayment of Federal Home Loan Bank advances (462,395) (534,195) (420,092)
Purchase of treasury stock (36) (3,005) (1,589)
Proceeds from issuance of common stock 1,338 2,556 1,381
Cash dividends paid (4,429) (4,005) (3,333)
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net cash provided by financing activities 107,481 122,306 106,109
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Net increase in cash and cash equivalents 9,783 3,168 8,268
Cash and cash equivalents at beginning of year 34,477 31,309 23,041
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Cash and cash equivalents at end of year $44,260 $34,477 $31,309
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $576 $789 $993
Loans charged off 967 653 1,521
Loans made to facilitate the sale of other real estate owned 180 61 633
(Decrease) increase in unrealized gain on securities
available for sale, net of tax (7,591) 326 2,567
Supplemental Disclosures:
Interest payments $36,687 $34,758 $30,583
Income tax payments 4,363 2,324 4,040
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned,
registered bank holding company, organized under the laws of the State of Rhode
Island. The Corporation provides a complete product line of financial services
through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"),
a Rhode Island chartered commercial bank. The Bank was originally chartered in
1800 and provides a variety of financial services including commercial,
residential and consumer lending, retail and commercial deposit products and
trust services through its branch offices in Rhode Island and Connecticut. The
deposits of the Bank are insured by the Federal Deposit Insurance Corporation
("FDIC"), subject to regulatory limits.
The activities of the Corporation and the Bank are subject to the regulatory
supervision of the Federal Reserve Board and the FDIC, respectively. Both
companies are subject to various Rhode Island and Connecticut business and
banking regulations.
On August 25, 1999, the Corporation completed its acquisition of Pier Bank. At
December 31, 1998, Pier Bank had total assets of $59.4 million and total
shareholders' equity of $4.5 million. The acquisition of Pier Bank was accounted
as a pooling of interests and, accordingly, the financial information for all
periods presented has been restated to present the combined financial condition
and results of operations as if the combination had been in effect for all
periods presented.
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year
classification.
The accounting and reporting policies of the Corporation conform to generally
accepted accounting principles and to general practices of the banking industry.
The Corporation has one reportable operating segment. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates. A material estimate that is particularly susceptible to change
is the determination of the allowance for loan losses.
Securities
Securities Available for Sale
The Corporation designates securities that it intends to use as part of its
asset/liability strategy or that may be sold as a result of changes in market
conditions, changes in prepayment risk, rate fluctuations, liquidity or capital
requirements as available for sale. The determination to classify such
securities as available for sale is made at the time of purchase.
Securities available for sale are reported at fair value, with any unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of tax, until realized. Any decline in fair value
below the amortized cost basis of an individual security deemed to be other than
temporary is recognized as a realized loss in the accounting period in which the
determination is made. The fair value of the security at the time of the
write-down becomes the new cost basis of the security.
Realized gains or losses from sales of equity securities are determined using
the average cost method, while other realized gains and losses are determined
using the specific identification method.
Securities Held to Maturity
The determination to classify debt securities in the held-to-maturity category
is made at the time of purchase and is based on management's intent and ability
to hold the securities until maturity. Debt securities in the held-to-maturity
portfolio are stated at cost, adjusted for amortization of premium and accretion
of discount (calculated on a method that approximates the interest method).
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB"). As a
requirement of membership, the Bank must own a minimum amount of FHLB stock,
calculated periodically based primarily on its level of borrowings from the
FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In
addition, the FHLB may require members to redeem stock in excess of the
requirement. FHLB stock is redeemable at par, which equals cost. Since no market
exists for these shares, they are valued at par.
Mortgage Banking Activities
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost, net of
unamortized deferred loan origination fees and costs, or market. Unrealized
losses, if any, are charged to current period earnings.
Mortgage Servicing Rights
Rights to service mortgage loans for others are recognized as an asset,
including rights acquired through both purchases and originations. The total
cost of originated mortgage loans that are sold with servicing rights retained
is allocated between the mortgage servicing rights and the loans without the
mortgage servicing rights based on their relative fair values. Capitalized
mortgage servicing rights are included in other assets and are amortized as an
offset to other income over the period of estimated net servicing income. They
are periodically evaluated for impairment based on their fair value. Impairment
is measured on an aggregated basis according to interest rate band and period of
origination. The fair value is estimated based on the present value of expected
cash flows, incorporating assumptions for discount rate, prepayment speed and
servicing cost. Any impairment is recognized as a charge to earnings through a
valuation allowance.
Portfolio Loans
Loans held in portfolio are stated at the principal amount outstanding, net of
unamortized deferred loan origination fees and costs. Interest income is accrued
on a level yield basis based on principal amounts outstanding. Deferred loan
origination fees and costs are amortized as an adjustment to yield over the life
of the related loans.
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans,
are placed on nonaccrual status and interest recognition is suspended when such
loans are 90 days or more overdue with respect to principal and/or interest.
Well-secured residential mortgage loans are permitted to remain on accrual
status provided that full collection of principal and interest is assured.
Loans are also placed on nonaccrual status when, in the opinion of management,
full collection of principal and interest is doubtful. Interest previously
accrued but not collected on such loans is reversed against current period
income. Subsequent cash receipts on nonaccrual loans are applied to the
outstanding principal balance of the loan or recognized as interest income
depending on management's assessment of the ultimate collectibility of the loan.
Loans are removed from nonaccrual status when they have been current as to
principal and interest for a period of time, the borrower has demonstrated an
ability to comply with repayment terms, and when, in management's opinion, the
loans are considered to be fully collectible.
Impaired Loans
A loan is impaired when it is probable that the creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Corporation considers all nonaccrual commercial loans to be
impaired. Impairment is measured on a discounted cash flow method, or at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. Impairment is measured based on the fair value of
the collateral if it is determined that foreclosure is probable.
Restructured Loans
Restructured loans include those for which concessions such as reduction of
interest rates other than normal market rate adjustments, or deferral of
principal or interest payments have been granted due to a borrower's financial
condition. Subsequent cash receipts on restructured loans are applied to the
outstanding principal balance of the loan, or recognized as interest income
depending on management's assessment of the ultimate collectibility of the loan.
Allowance for Loan Losses
The Corporation continually evaluates the allowance for loan losses by
performing ongoing reviews of certain individual loans, the size and composition
of the loan portfolio, net charge-off experience, current and expected economic
conditions, industry concentrations and other pertinent factors. The allowance
for loan losses is maintained at levels considered adequate by management to
provide for losses inherent in the loan portfolio. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses. Such agencies may require additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the straight-line
method over the estimated useful lives of assets. Expenditures for major
additions and improvements are capitalized while the costs of current
maintenance and repairs are charged to operating expenses.
Other Real Estate Owned (OREO)
Other real estate owned consists of property acquired through foreclosure and
loans determined to be substantively repossessed. Real estate loans that are
substantively repossessed include only those loans for which the Corporation has
taken possession of the collateral, but has not completed legal foreclosure
proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell
at the date of acquisition or classification to OREO status. Fair value of such
assets is determined based on independent appraisals and other relevant factors.
Any write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for known
specific and potential market declines and for estimated selling expenses.
Increases to the valuation allowance, expenses associated with ownership of
these properties, and gains and losses from their sale are included in
foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities
The Corporation accounts and reports for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. This approach
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. After a transfer of financial assets, the Corporation
recognizes all financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and liabilities
that have been extinguished. This financial components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the Corporation
accounts for a transfer as a secured borrowing with a pledge of collateral.
<PAGE>
Interest Rate Risk Management Agreements
The Corporation uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap and
floor agreements are entered into as hedges against future interest rate
fluctuations on specifically identified assets or liabilities. The Corporation
does not enter into agreements for trading or speculative purposes. Therefore,
these agreements are not marked to market.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements. Premiums
paid for interest rate floor agreements are amortized as an adjustment to
interest income over the term of the agreements. Unamortized premiums are
included in other assets. Gains or losses resulting from the termination of
interest rate swap and floor agreements on qualifying hedges of existing assets
or liabilities are deferred and amortized over the remaining lives of the
related assets/liabilities as an adjustment to the yield. Unamortized deferred
gains/losses on terminated interest rate swap and floor agreements are included
in the underlying assets/liabilities hedged.
Pension Costs
The Corporation accounts for pension benefits using the net periodic benefit
cost method, which recognizes the compensation cost of an employee's pension
benefit over that employee's approximate service period.
Stock-Based Compensation
The Corporation measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net
income and earnings per share computed using the fair value based method of
accounting for these plans as required by SFAS No. 123.
Income Taxes
Income tax expense is determined based on the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Share
Diluted EPS is computed by dividing net income by the average number of common
shares and common stock equivalents outstanding. Common stock equivalents arise
from the assumed exercise of outstanding stock options, if dilutive. The
computation of basic EPS excludes common stock equivalents from the denominator.
Comprehensive Income
Comprehensive income is defined as all changes in equity, except for those
resulting from investments by and distribution to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income.
<PAGE>
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight basis.
(2) Cash and Due from Banks
The Bank is required to maintain certain average reserve balances with the
Federal Reserve. Such reserve balances amounted to $6.0 million and $3.8 million
at December 31, 1999 and 1998, respectively.
(3) Securities
Securities are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 1999 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 $87,558 $347 $(1,595) $86,310
Mortgage-backed securities 191,934 70 (2,918) 189,086
Corporate bonds 34,364 31 (711) 33,684
Corporate stocks 15,833 6,582 (1,064) 21,351
----------------------------------------------------------------------------------------------------------
Total securities available for sale 329,689 7,030 (6,288) 330,431
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 28,231 - (895) 27,336
Mortgage-backed securities 62,209 54 (2,189) 60,074
States and political subdivisions 25,932 23 (497) 25,458
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 116,372 77 (3,581) 112,868
----------------------------------------------------------------------------------------------------------
Total securities $446,061 $7,107 $(9,869) $443,299
----------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 1998 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 $116,561 $1,799 $(12) $118,348
Mortgage-backed securities 145,637 677 (508) 145,806
Corporate bonds 27,533 179 (209) 27,503
Corporate stocks 17,864 10,414 (94) 28,184
----------------------------------------------------------------------------------------------------------
Total securities available for sale 307,595 13,069 (823) 319,841
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 21,987 133 (1) 22,119
Mortgage-backed securities 46,088 335 (97) 46,326
States and political subdivisions 27,572 531 (1) 28,102
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 95,647 999 (99) 96,547
----------------------------------------------------------------------------------------------------------
Total securities $403,242 $14,068 $(922) $416,388
----------------------------------------------------------------------------------------------------------
</TABLE>
Included in corporate stocks at December 31, 1999 are preferred stocks, which
are callable at the discretion of the issuer, with an amortized cost of $8.2
million and a fair value of $7.7 million. Call features on these stocks range
from five months to eight years.
The contractual maturities and weighted average yields of debt securities are
summarized below. Weighted average yields are computed on a fully taxable basis.
Mortgage-backed securities are included based on weighted average maturities,
adjusted for anticipated prepayments.
<TABLE>
<CAPTION>
(Dollars in thousands) Weighted
Amortized Fair Average
December 31, 1999 Cost Value Yield
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities Available for Sale:
Due in 1 year or less $37,427 $36,824 6.39%
After 1 but within 5 years 149,688 147,197 6.46%
After 5 but within 10 years 78,645 77,421 6.66%
After 10 years 48,096 47,638 6.95%
----------------------------------------------------------------------------------------------------------
Total debt securities available for sale 313,856 309,080 6.58%
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 14,875 14,498 6.18%
After 1 but within 5 years 56,586 54,921 6.15%
After 5 but within 10 years 44,226 42,788 5.78%
After 10 years 685 661 6.53%
----------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 116,372 112,868 6.02%
----------------------------------------------------------------------------------------------------------
Total debt securities $430,228 $421,948 6.42%
----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, the Corporation owned debt securities with an aggregate
carrying value of $56.3 million that are callable at the discretion of the
issuers. The majority of these securities are U.S. Treasury and
government-sponsored agency obligations, included in both the available-for-sale
and held-to-maturity categories. Final maturities of these securities range from
twenty-one months to twenty-nine years with call features ranging from one month
to seven years.
The following is a summary of amounts relating to sales of securities available
for sale:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------
Proceeds from sales $81,398 $95,666 $63,600
-------------------------------------------------------------------------
Realized gains $2,213 $1,161 $1,252
Realized losses (1,535) (657) (519)
-------------------------------------------------------------------------
Net realized gains $678 $504 $733
-------------------------------------------------------------------------
Securities available for sale with a fair value of $47.2 million and $27.8
million were pledged to secure public deposits and for other purposes at
December 31, 1999 and 1998, respectively.
(4) Loans
The following is a summary of loans:
(Dollars in thousands)
December 31, 1999 1998
-------------------------------------------------------------------------
Commercial and other:
Mortgages (1) $113,719 $87,132
Construction and development (2) 2,902 2,855
Other (3) 115,739 113,372
-------------------------------------------------------------------------
Total commercial and other 232,360 203,359
Residential real estate:
Mortgages 212,719 191,101
Homeowner construction 12,995 15,052
-------------------------------------------------------------------------
Total residential real estate 225,714 206,153
Consumer 90,951 87,458
-------------------------------------------------------------------------
Total loans $549,025 $496,970
-------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and
for land development
(3) Loans to businesses and individuals, a substantial portion of which
are fully or partially collateralized by real estate
Concentrations of Credit Risk
The Corporation's lending activities are primarily conducted in southern Rhode
Island and southeastern Connecticut. The Corporation grants single family and
multi-family residential loans, commercial real estate loans, commercial loans,
and a variety of consumer loans. In addition, loans are granted for the
construction of residential homes, commercial real estate properties, and for
land development. The ability of single family residential and consumer
borrowers to honor their repayment commitments is generally dependent on the
level of overall economic activity within the market area and real estate
values. The ability of commercial borrowers to honor their repayment commitments
is dependent on the general economy as well as the health of the real estate
economic sector in the Corporation's market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 1999 and 1998 was
$3.8 million and $5.8 million, respectively. Interest income that would have
been recognized had these loans been performing at originally contracted rates
was approximately $342 thousand in 1999 and $550 thousand in 1998. Interest
income attributable to these loans included in the Consolidated Statements of
Income amounted to approximately $105 thousand in 1999 and $149 thousand in
1998. Included in nonaccrual loans at December 31, 1999 and 1998 are loans
amounting to $142 thousand and $1.1 million, respectively, whose terms have been
restructured.
Impaired Loans
Impaired loans consist of all nonaccrual commercial loans. The following is a
summary of impaired loans:
(Dollars in thousands)
December 31, 1999 1998
-------------------------------------------------------------------------
Impaired loans requiring an allowance $2,039 $3,684
Impaired loans not requiring an allowance - 171
-------------------------------------------------------------------------
Total recorded investment in impaired loans $2,039 $3,855
-------------------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 1999 1998
-------------------------------------------------------------------------
Average recorded investment in impaired loans $3,418 $5,223
-------------------------------------------------------------------------
Interest income recognized on impaired loans $351 $448
-------------------------------------------------------------------------
<PAGE>
Mortgage Servicing Activities
At December 31, 1999 and 1998, mortgage loans sold to others and serviced by the
Corporation on a fee basis under various agreements amounted to $193.9 million
and $174.7 million, respectively. Loans serviced for others are not included in
the Consolidated Balance Sheets.
The following is a summary of capitalized mortgage servicing rights:
(Dollars in thousands)
December 31, 1999 1998
-------------------------------------------------------------------------
Balance at beginning of year $808 $334
Additions 313 553
Amortization (125) (79)
-------------------------------------------------------------------------
Balance at end of year $996 $808
-------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment.
As of December 31, 1999 and 1998, the balance of the valuation allowance
amounted to $320 thousand and $296 thousand, respectively.
Loans to Related Parties
The Corporation has made loans in the ordinary course of business to certain
directors and executive officers including their immediate families and their
affiliated companies. Such loans were made under normal interest rate and
collateralization terms. Activity related to these loans in 1999 and 1998 was as
follows:
(Dollars in thousands)
December 31, 1999 1998
-------------------------------------------------------------------------
Balance at beginning of year $2,455 $2,756
Additions 1,406 1,064
Reductions (1,582) (1,365)
-------------------------------------------------------------------------
Balance at end of year $2,279 $2,455
-------------------------------------------------------------------------
(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------
Balance at beginning of year $10,966 $9,335 $9,009
Provision charged to expense 1,840 1,879 1,424
Recoveries of loans previously charged off 510 405 424
Loans charged off (967) (653) (1,522)
-------------------------------------------------------------------------
Balance at end of year $12,349 $10,966 $9,335
-------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 1999, 1998 and 1997
was an allowance for impaired loans amounting to $475 thousand, $803 thousand
and $921 thousand, respectively.
(6) Premises and Equipment
The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 1999 1998
-------------------------------------------------------------------------
Land and improvements $2,245 $2,104
Premises and improvements 24,624 23,341
Furniture, fixtures and equipment 18,307 17,489
-------------------------------------------------------------------------
45,176 42,934
Less accumulated depreciation 21,767 18,913
-------------------------------------------------------------------------
Total premises and equipment, net $23,409 $24,021
-------------------------------------------------------------------------
(7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial
Instruments
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage the Corporation's exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, financial guarantees and interest rate swaps and floors.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the Consolidated Balance Sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The contractual and notional
amounts of financial instruments with off-balance sheet risk are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $38,380 $28,161
Home equity lines 38,428 28,683
Credit card lines (portfolio was sold in the third quarter of 1999) - 17,968
Other loans 15,479 14,542
Standby letters of credit 500 1,472
Financial instruments whose notional amounts exceed the amount of credit risk:
Interest rate floor contracts 70,000 70,000
</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.
During 1995, the Corporation entered into interest rate floor contracts with a
total notional amount of $50 million that mature in February 2000. The
Corporation receives payment under the 1995 contracts with a total notional
value of $30 million when the prime rate falls below 9.0% and on the remaining
$20 million when 3-month LIBOR at quarterly resetting dates is below 6.1875%. In
March 1998, the Corporation entered into a five-year interest rate floor
contract with a notional amount of $20 million that matures in February 2003.
The 1998 floor contract entitles the Corporation to receive payment from
counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the
floor contracts is to offset the risk of future reductions in interest earned on
certain floating rate loans. The prime rate and 3-month LIBOR applicable to the
outstanding floor contracts at December 31, 1999 were 8.50% and 6.0425%,
respectively. At December 31, 1999, the fair value, or the value to the
Corporation of terminating the contracts, was $111 thousand. The remaining
unamortized premium for these contracts, included in other assets, amounted to
$224 thousand at December 31, 1999.
The Corporation has not terminated any interest rate swap agreements or floor
contracts and there are no unamortized deferred gains or losses.
<PAGE>
(8) Other Real Estate Owned
Other real estate owned is included in other assets on the Corporation's
consolidated balance sheets. An analysis of the composition of OREO follows:
(Dollars in thousands)
December 31, 1999 1998
------------------------------------------------------------------------
Residential real estate $43 $204
Commercial real estate 55 27
Repossessed assets 45 -
Land - 81
------------------------------------------------------------------------
143 312
Valuation allowance (94) (69)
------------------------------------------------------------------------
Other real estate owned, net $49 $243
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 1999 1998
------------------------------------------------------------------------
Balance at beginning of year $312 $964
Net transfers from loans 576 789
Sales (745) (1,457)
Other - 16
------------------------------------------------------------------------
143 312
Valuation allowance (94) (69)
------------------------------------------------------------------------
Other real estate owned, net $49 $243
------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation
allowance:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
------------------------------------------------------------------------
Balance at beginning of year $69 $76 $205
Provision charged to expense 99 14 42
Sales (53) (1) (131)
Selling expenses incurred (21) (20) (40)
------------------------------------------------------------------------
Balance at end of year $94 $69 $76
------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $39 thousand, $50
thousand, and $74 thousand in 1999, 1998 and 1997, respectively. These amounts
are included in other noninterest expense in the Consolidated Statements of
Income.
(9) Time Certificates of Deposit
Scheduled maturities of time certificates of deposit at December 31, 1999 were
as follows:
(Dollars in thousands)
Years ending December 31: 2000 $258,793
2001 45,573
2002 8,675
2003 6,737
2004 3,147
2005 and thereafter 49
------------------------------------------------------------------------
Balance at December 31, 1999 $322,974
------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100
thousand or more was $100.6 million and $83.3 million at December 31, 1999 and
1998, respectively.
(10) Borrowings
Short-Term Borrowings
The following is a summary of short-term borrowings:
(Dollars in thousands)
December 31, 1999 1998
------------------------------------------------------------------------
Securities sold under repurchase agreements $ - $13,472
Other borrowings 4,209 1,561
------------------------------------------------------------------------
Short-term borrowings $4,209 $15,033
------------------------------------------------------------------------
Securities sold under repurchase agreements generally mature within 90 days. The
securities underlying the agreements are held in safekeeping by the counterparty
in the name of the Corporation and are repurchased when the agreement matures.
Accordingly, these underlying securities are included in securities available
for sale and the obligation to repurchase such securities are reflected as a
liability. The following is a summary of amounts relating to securities sold
under repurchase agreements:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
------------------------------------------------------------------------
Maximum amount outstanding at any month-end $23,525 $26,767 $26,820
Average amount outstanding $10,316 $13,323 $12,808
Weighted average rate 5.05% 5.56% 5.69%
<PAGE>
Federal Home Loan Bank Advances
The following table presents scheduled maturities and weighted average interest
rates paid on Federal Home Loan Bank advances outstanding at December 31, 1999:
(Dollars in thousands) Weighted
Average Rate Amount
-------------------------------------------------------------------------
Years ending December 31: 2000 5.57% $213,660
2001 5.69% 47,571
2002 5.71% 21,215
2003 5.42% 19,993
2004 5.87% 10,353
2005 and thereafter 5.62% 39,756
-------------------------------------------------------------------------
Balance at December 31, 1999 $352,548
-------------------------------------------------------------------------
Included in the outstanding amounts disclosed are callable advances totaling
$35.5 million. Call features on these advances range from one to five years. In
addition to the outstanding advances, the Bank also has access to an unused line
of credit amounting to $13.9 million at December 31, 1999. Under agreement with
the FHLB, the Bank is required to maintain qualified collateral, free and clear
of liens, pledges, or encumbrances that, based on certain percentages of book
and market values, has a value equal to the aggregate amount of the line of
credit and outstanding advances. Qualified collateral may consist of residential
mortgage loans, U.S. government or agency securities, and amounts maintained on
deposit at the FHLB. The Bank maintains qualified collateral in excess of the
amount required to collateralize the line of credit and outstanding advances at
December 31, 1999.
(11) Employee Benefits
Defined Benefit Pension Plans
The Corporation's noncontributory tax-qualified defined benefit pension plan
covers substantially all employees. Benefits are based on an employee's years of
service and highest 3-year compensation. The plan is funded on a current basis,
in compliance with the requirements of the Employee Retirement Income Security
Act. The prepaid benefit costs relating to the defined benefit pension plan
amounted to $448 thousand and $938 thousand at October 1, 1999 and 1998,
respectively.
The Corporation has a nonqualified retirement plan to provide supplemental
retirement benefits to certain employees, as defined in the plan. The accrued
pension liability related to this plan amounted to $400 thousand and $323
thousand at October 1, 1999 and 1998, respectively. The actuarial assumptions
used for this supplemental plan are the same as those used for the Corporation's
tax-qualified pension plan. The projected benefit obligation for this plan
amounted to $1.1 million and $777 thousand at October 1, 1999 and 1998,
respectively.
<PAGE>
The following is a reconciliation of the benefit obligation, fair value of plan
assets and funded status of the Corporation's defined benefit pension plans:
(Dollars in thousands)
Years ended October 1, 1999 1998
-------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of plan year $14,479 $12,390
Service cost 652 502
Interest cost 1,001 915
Amendments 174 -
Actuarial (gain) loss (1,801) 1,299
Benefits paid (682) (627)
-------------------------------------------------------------------------
Benefit obligation at end of plan year $13,823 $14,479
-------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of plan year $16,349 $14,392
Actual return on plan assets 2,053 2,006
Employer contribution 60 578
Benefits paid (682) (627)
-------------------------------------------------------------------------
Fair value of plan assets at end of plan year $17,780 $16,349
-------------------------------------------------------------------------
Certain changes in the items shown are not recognized as they occur, but are
amortized systematically over subsequent periods. Unrecognized amounts to be
amortized and the amounts included in the Consolidated Balance Sheets are as
follows:
(Dollars in thousands)
October 1, 1999 1998
-------------------------------------------------------------------------
Funded status $3,957 $1,870
Unrecognized transition asset (49) (55)
Unrecognized prior service cost 620 522
Unrecognized net actuarial gain (4,480) (1,722)
-------------------------------------------------------------------------
Prepaid benefit cost $48 $615
-------------------------------------------------------------------------
October 1, 1999 1998
-------------------------------------------------------------------------
Assumptions Used:
Discount rate 7.50% 6.75%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
<PAGE>
The components of net pension cost include the following:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $652 $502 $376
Interest cost 1,002 915 791
Expected return on plan assets (1,106) (992) (826)
Amortization of transition asset (6) (6) (6)
Amortization of prior service cost 75 75 75
Recognized net actuarial loss 11 6 13
-------------------------------------------------------------------------
Net periodic benefit cost $628 $500 $423
-------------------------------------------------------------------------
401(k) Plan
The Corporation's 401(k) Plan provides a specified match of employee
contributions for substantially all employees. Total employer matching
contributions under this plan amounted to $275 thousand, $256 thousand and $232
thousand in 1999, 1998 and 1997, respectively.
Profit Sharing Plan
The Corporation has a nonqualified profit sharing plan that rewards employees,
excluding those key employees participating in the Short-Term Incentive Plan,
for their contributions to the Corporation's success. The annual profit sharing
benefit is determined by a formula tied to return on equity and is subject to
approval by the Corporation's Board of Directors each year. The amount of the
profit sharing benefit was $333 thousand, $322 thousand and $294 thousand for
1999, 1998 and 1997, respectively.
Short-Term Incentive Plan
The Corporation's nonqualified Short-Term Incentive Plan rewards key employees
for their contributions to the Corporation's success. This plan provides for
annual payments up to a maximum percentage of each participant's base salary,
which percentages vary among participants. Payment amounts are based on the
achievement of target levels of return on equity and/or the achievement of
individual objectives. Participants in this plan are not eligible to receive
benefits provided under the profit sharing component of the Savings and Profit
Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $969
thousand, $688 thousand and $640 thousand in 1999, 1998 and 1997, respectively.
Directors' Retainer Continuation Plan
The Corporation previously offered a nonqualified plan that provided retirement
benefits to non-officer directors. In 1996, the provisions of the plan were
terminated for active directors and the related accrued benefit was settled. The
benefits provided under this plan continue for retired directors. The expense of
this plan is included in other noninterest expense and amounted to $24 thousand,
$25 thousand and $36 thousand for 1999, 1998 and 1997, respectively. Accrued and
unpaid benefits under this plan are an unfunded obligation of the Bank. The
accrued liability related to this plan amounted to $248 thousand and $256
thousand at December 31, 1999 and 1998, respectively.
Deferred Compensation Plan
The Plan for Deferral of Director' Fees adopted by the Corporation effective
March 31, 1988 was amended, restated and renamed the Nonqualified Deferred
Compensation Plan effective January 1, 1999. The Nonqualified Deferred
Compensation Plan provides supplemental retirement and tax benefits to directors
and certain officers. The plan is funded primarily through pre-tax contributions
made by the participants. The Corporation has recorded the assets and
liabilities for the deferred compensation plan at the lower of cost or market in
the consolidated balance sheets. The participants in the plan bear the risk of
market fluctuations of the underlying assets. The accrued liability related to
this plan amounted to $953 thousand at December 31, 1999 and is included in
other liabilities on the accompanying consolidated balance sheets. The
corresponding invested assets are reported in other assets.
(12) Income Taxes
The components of income tax expense were as follows:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
------------------------------------------------------------------------
Current expense:
Federal $5,507 $4,564 $3,576
State 43 50 286
------------------------------------------------------------------------
Total current expense 5,550 4,614 3,862
------------------------------------------------------------------------
Deferred expense (benefit):
Federal (796) (371) 462
State - (8) (440)
------------------------------------------------------------------------
Total deferred expense (796) (379) 22
------------------------------------------------------------------------
Total income tax expense $4,754 $4,235 $3,884
------------------------------------------------------------------------
Total income tax expense varied from the amount determined by applying the
Federal income tax rate to income before income taxes. The reasons for the
differences were as follows:
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
------------------------------------------------------------------------
Tax expense at Federal statutory rate $5,226 $5,052 $4,522
Increase (decrease) in taxes resulting from:
Tax-exempt income (422) (401) (282)
Acquisition related expenses 268 - -
Dividends received deduction (246) (261) (253)
Bank owned life insurance (237) - -
State tax, net of Federal income tax benefit 28 26 (102)
Other 137 (181) (1)
------------------------------------------------------------------------
Total income tax expense $4,754 $4,235 $3,884
------------------------------------------------------------------------
<PAGE>
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1999 and
1998 are as follows:
(Dollars in thousands)
December 31, 1999 1998
------------------------------------------------------------------------
Gross deferred tax assets:
Allowance for loan losses $4,214 $3,592
Deferred loan origination fees 366 363
Net operating loss carryover 287 310
Other 1,271 1,102
------------------------------------------------------------------------
Gross deferred tax assets 6,138 5,367
------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale (252) (4,164)
Premises and equipment (1,115) (1,119)
Deferred loan origination costs (811) (687)
Pension (146) (308)
Other (235) (218)
------------------------------------------------------------------------
Gross deferred tax liabilities (2,559) (6,496)
------------------------------------------------------------------------
Net deferred tax asset (liability) $3,579 $(1,129)
------------------------------------------------------------------------
In addition to future taxable income and the reversal of deferred tax
liabilities, a primary source of recovery of deferred tax assets is taxes paid
in prior years available for carryback.
(13) Operating Leases
At December 31, 1999, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $339 thousand, $391 thousand and $164 thousand
for 1999, 1998 and 1997, respectively. The minimum annual lease payments under
the terms of these leases, exclusive of renewal provisions, are as follows:
(Dollars in thousands)
Years ending December 31: 2000 $373
2001 319
2002 198
2003 121
2004 41
------------------------------------------------------------------------
$1,052
------------------------------------------------------------------------
(14) Litigation
On January 28, 1997, a suit was filed against the Bank by a former corporate
customer and the customer's shareholders for damages which the plaintiffs
allegedly incurred as a result of an embezzlement by the customer's former
president and treasurer. The suit alleges that the Bank wrongly permitted this
individual, while an officer of the customer, to divert funds from the
customer's account at the Bank for his personal benefit. The claims against the
Bank are based upon theories of breach of fiduciary duties, negligence, breach
of contract, unjust enrichment, conversion, failure to act in a commercially
reasonable manner, and constituted fraud.
The suit as originally filed sought recovery for losses directly related to the
embezzlement of approximately $3.1 million, as well as consequential damages
amounting to approximately $2.6 million. On March 19, 1998, the plaintiffs
amended their claims to seek recovery of an additional $2.6 million in losses,
plus an unspecified amount of interest thereon, which were alleged to be
directly related to the embezzlement. On or about November 23, 1999, the
plaintiffs further amended their claims to seek recovery of approximately $8.0
million in total damages, plus an unspecified amount of interest thereon.
Management believes, based on its review with counsel of the development of this
matter to date that the Bank has asserted meritorious affirmative defenses in
this litigation. Additionally, the Bank has filed counterclaims against the
customer and its principal shareholder, as well as claims against the officer
allegedly responsible for the embezzlement. The Bank is vigorously asserting its
defenses and affirmative claims. The case is in discovery and is currently
scheduled for trial in late April 2000. Because of the numerous uncertainties
that surround the litigation, management and legal counsel are unable to
estimate the amount of loss, if any, that the Bank may incur with respect to
this litigation. Consequently, no loss provision for this lawsuit has been
recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
(15) Shareholders' Equity
Stock Splits
A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3,
1998 to shareholders of record on July 17, 1998. A 3-for-2 stock split on shares
of common stock was also paid on November 19, 1997 to shareholders of record on
November 5, 1997. The par value of the common stock remained unchanged at $.0625
per share. Cash payments were made in lieu of issuing fractional shares. All
share and per share amounts in the consolidated financial statements and related
notes have been restated to reflect these stock splits.
Stock Repurchase Plan
In December 1997, the Corporation's Board of Directors approved a program to
repurchase up to 225,000, or approximately 2.3%, of its outstanding common
shares. This plan replaces the June 1996 authorization to repurchase 195,750
shares. The Corporation planned to hold the repurchased shares as treasury stock
to be used for general corporate purposes. Approximately 139,274 shares were
repurchased in 1998 at a total cost of $3.0 million. In April 1999, the
Corporation's Board of Directors approved the termination of the Corporation's
stock repurchase plan.
Rights
On August 1996, the Corporation declared a dividend of one common share purchase
right (a "Right") for each share of common stock payable on September 3, 1996 to
shareholders of record on that date. Such Rights also apply to new issuances of
shares after that date. Each Right entitles the registered holder to purchase
from the Corporation one share of its common stock at a price of $35.56 per
share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the
earlier of 10 days after a person or group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the outstanding common shares or
announces a tender offer to do so. The Rights, which expire on August 31, 2006,
may be redeemed by the Corporation at any time prior to the acquisition by an
Acquiring Person of beneficial ownership of 15% or more of the common stock at a
price of $.001 per Right. In the event that any party becomes an Acquiring
Person, each holder of a Right, other than Rights owned by the Acquiring Person,
will have the right to receive upon exercise that number of common shares having
a market value of two times the purchase price of the Right. In the event that,
at any time after any party becomes an Acquiring Person, the Corporation is
acquired in a merger or other business combination transaction or 50% or more of
its assets or earning power are sold, each holder of a Right will have the right
to purchase that number of shares of the acquiring company having a market value
of two times the purchase price of the Right.
Dividends
The primary source of funds for dividends paid by the Corporation is dividends
received from the Bank. The Corporation and the Bank are regulated enterprises
and their abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist regarding
dividends, loans, and advances from the Bank to the Corporation. Generally the
Bank has the ability to pay dividends to the parent subject to minimum
regulatory capital requirements. Under the most restrictive of these
requirements, the Bank could have declared aggregate additional dividends of
$31.5 million as of December 31, 1999.
Stock Option Plans
The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the
granting of options and other equity incentives to key employees, directors,
advisors, and consultants. Up to 1,012,500 shares of the Corporation's common
stock may be used from authorized but unissued shares, treasury stock, or shares
available from expired awards. Options are designated either as non-qualified or
as incentive options. The exercise price of each option may not be less than the
fair market value on the date of the grant. In general, the option price is
payable in cash, by the delivery of shares of the Corporation's common stock
already owned by the grantee, or a combination thereof. Awards may be granted at
any time until April 29, 2007.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for
the granting of options to directors, officers and key employees. The 1988 Plan
permitted options to be granted at any time until December 31, 1997. The 1988
Plan provided for shares of the Corporation's common stock to be used from
authorized but unissued shares, treasury stock, or shares available from expired
options. Options were designated either as non-qualified or as incentive
options. The exercise price of options granted was equal to the fair market
value on the date of grant. In general, the option price is payable in cash, by
the delivery of shares of the Corporation's common stock already owned by the
grantee, or a combination thereof.
The 1997 Plan and the 1988 Plan permit options to be granted with stock
appreciation rights ("SARs"), however, no options have been granted with SARs.
<PAGE>
Options granted under the plans vest according to various terms at the end of
ten years. The following table presents changes in options outstanding during
1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 851,329 $8.90 1,128,584 $7.73 1,106,077 $5.73
Granted 160,104 $17.64 24,435 $21.33 239,404 $14.67
Exercised (194,430) $4.95 (292,618) $5.22 (210,829) $5.05
Cancelled (10,323) $16.04 (9,072) $15.87 (6,068) $10.24
- ------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 806,680 $11.49 851,329 $8.90 1,128,584 $7.73
- ------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 613,367 $9.73 682,249 $7.32 857,987 $6.04
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 1999 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>
$2.13 to $4.27 89,609 2.5 years $3.47 89,609 $3.47
$4.28 to $6.40 27,171 4.4 years $5.57 27,171 $5.57
$6.41 to $8.53 170,784 3.2 years $7.02 170,784 $7.02
$8.54 to $10.67 125,624 4.9 years $9.60 125,624 $9.60
$10.68 to $12.80 114,723 7.2 years $11.65 90,486 $11.68
$14.93 to $17.07 18,172 9.3 years $16.17 4,542 $16.17
$17.08 to $19.20 212,530 8.6 years $17.84 81,118 $17.98
$19.21 to $21.33 48,067 8.8 years $20.43 24,033 $21.33
- -----------------------------------------------------------------------------------------------------------------
Total 806,680 5.9 years $11.49 613,367 $9.73
- -----------------------------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997.
In determining the pro forma disclosures required by SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table presents pro forma net
income and earnings per share assuming the stock option plan was accounted for
using the fair value method prescribed by SFAS No. 123, the weighted average
assumptions used and the grant date fair value of options granted in 1999, 1998
and 1997:
(Dollars in thousands, except per share amounts)
Years ended December 31, 1999 1998 1997
--------------------------------------------------------------------------
Net income As reported $10,589 $10,507 $9,417
Pro forma $10,020 $10,167 $9,112
Basic earnings per share As reported $.97 $.98 $.89
Pro forma $.92 $.95 $.86
Diluted earnings per share As reported $.96 $.95 $.86
Pro forma $.90 $.92 $.83
Weighted average fair value $5.36 $5.40 $4.31
Expected life 9.0 years 8.6 years 8.4 years
Risk-free interest rate 5.91% 6.04% 6.3%
Expected volatility 32.8% 25.9% 21.2%
Expected dividend yield 3.9% 4.0% 4.25%
The pro forma effect on net income and earnings per share for 1999, 1998 and
1997 is not representative of the pro forma effect on net income and earnings
per share for future years because it does not reflect compensation cost for
options granted prior to January 1, 1995.
Dividend Reinvestment
Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan,
607,500 shares of common stock were originally reserved to be issued for
dividends reinvested and cash payments to the plan.
Reserved Shares
As of December 31, 1999, a total of 2,419,741 common stock shares were reserved
for issuance under the 1988 Amended and Restated Stock Option Plan, the 1997
Equity Incentive Plan and the Amended and Restated Dividend Reinvestment and
Stock Purchase Plan.
Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal Reserve Board and the FDIC,
respectively. These requirements were established to more accurately assess the
credit risk inherent in the assets and off-balance sheet activities of financial
institutions. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 1999, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital
amounts and ratios at December 31, 1999 and 1998, as well as the corresponding
minimum regulatory amounts and ratios:
<TABLE>
<CAPTION>
(Dollars in thousands) 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, 1999:
Total Capital (to Risk-Weighted Assets):
Consolidated $86,584 14.24% $48,635 8.00% $60,793 10.00%
Bank $84,550 13.91% $48,635 8.00% $60,793 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $76,443 12.57% $24,317 4.00% $36,476 6.00%
Bank $74,409 12.24% $24,317 4.00% $36,476 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $76,443 7.14% $42,834 4.00% $53,542 5.00%
Bank $74,409 6.95% $42,834 4.00% $53,542 5.00%
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Consolidated $80,407 14.75% $43,616 9.00% $54,520 10.00%
Bank $78,625 14.36% $43,616 8.00% $54,520 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $69,008 12.66% $21,808 4.00% $32,712 6.00%
Bank $66,866 12.26% $21,808 4.00% $32,712 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $69,008 7.30% $37,837 4.00% $47,297 5.00%
Bank $66,866 7.07% $37,840 4.00% $47,301 5.00%
<FN>
(1) Leverage ratio
</FN>
</TABLE>
<PAGE>
(16) Earnings per Share
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $10,589 $10,589 $10,507 $10,507 $9,417 $9,417
Share amounts, in thousands:
Average outstanding 10,863.6 10,863.6 10,715.1 10,715.1 10,562.3 10,562.3
Common stock equivalents - 218.7 - 380.1 - 415.9
---------------------------------------------------------------------------------------------------------
Weighted average outstanding 10,863.6 11,082.3 10,715.1 11,095.2 10,562.3 10,978.2
---------------------------------------------------------------------------------------------------------
Earnings per share $.97 $.96 $.98 $.95 $.89 $.86
---------------------------------------------------------------------------------------------------------
</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, 1999 and 1998 that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity is
based on the Corporation's historical repayment experience. For residential
mortgages, fair value is estimated by using quoted market prices for sales of
similar loans on the secondary market, adjusted for servicing costs. The fair
value of floating rate commercial and consumer loans approximates carrying
value. The fair value of nonaccrual loans is calculated by discounting estimated
cash flows, using a rate commensurate with the risk associated with the loan
type or by other methods that give consideration to the value of the underlying
collateral.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
accounts is equal to the amount payable on demand as of December 31, 1999 and
1998. The discounted values of cash flows using the rates currently offered for
deposits of similar remaining maturities were used to estimate the fair value of
certificates of deposit.
Securities Sold Under Agreements to Repurchase
The carrying amount of securities sold under repurchase agreements approximates
fair value.
Federal Home Loan Bank Advances
Rates currently available to the Corporation for advances with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Off-Balance Sheet Instruments
The fair values of interest rate swap agreements and floor contracts generally
reflect the estimated amounts that the Corporation would receive or pay to
terminate the contracts. The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
<PAGE>
The following table presents the fair values of the Corporation's financial
instruments:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1999 1998
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
On-balance sheet:
Cash and cash equivalents $44,260 $44,260 $34,477 $34,477
Mortgage loans held for sale 1,647 1,647 5,863 5,863
Securities available for sale 330,431 330,431 319,841 319,841
Securities held to maturity 116,372 112,868 95,647 96,547
Federal Home Loan Bank stock 17,627 17,627 16,583 16,583
Loans, net of allowance for loan losses 536,676 537,019 486,004 501,598
Accrued interest receivable 6,010 6,010 5,913 5,913
Off-balance sheet financial instruments
relating to assets:
Interest rate floor contracts 224 111 469 1,404
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $102,384 $102,384 $93,478 $93,478
Non-term savings accounts 235,395 235,395 223,047 223,047
Certificates of deposit 322,974 324,184 311,238 313,341
Short term borrowings 4,209 4,209 15,033 15,033
Federal Home Loan Bank advances 352,548 347,568 264,106 268,523
Accrued interest payable 3,322 3,322 2,617 2,617
</TABLE>
Other off-balance sheet financial instruments, consisting largely of loan
commitments and letters of credit, contain provisions for fees, conditions and
term periods that are consistent with customary market practices. Accordingly,
the fair value amounts (considered to be the discounted present value of the
remaining contractual fees over the unexpired commitment period) would not be
material and therefore are not disclosed.
(18) Parent Company Financial Statements
The following are parent company only financial statements of Washington Trust
Bancorp, Inc. reflecting the investment in the bank subsidiary on the equity
basis of accounting. The Statements of Changes in Shareholders' Equity for the
parent company only are identical to the Consolidated Statements of Changes in
Shareholders' Equity and are therefore not presented.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Balance Sheets
December 31, 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $2,397 $1,947
Investment in bank subsidiary at equity value 75,212 75,431
Dividend receivable from bank subsidiary 840 1,200
Due from bank subsidiary - -
---------------------------------------------------------------------------------------------------------
Total assets $78,449 $78,578
---------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,202 $1,005
---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 1999 and 1998; issued
10,914,763 shares in 1999 and 10,770,630 shares in 1998 682 674
Paid-in capital 9,990 9,050
Retained earnings 66,766 60,803
Net unrealized (loss) gain on securities available for sale (191) 7,400
Treasury stock, at cost - (354)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 77,247 77,573
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $78,449 $78,578
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Statements of Income
Years ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiary $4,080 $6,480 $3,750
Other expense - - 40
----------------------------------------------------------------------------------------------------------
Net income before income taxes and
undistributed earnings of subsidiary 4,080 6,480 3,710
Income tax benefit - - 14
----------------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiary 4,080 6,480 3,724
Equity in undistributed earnings of subsidiary 6,509 4,027 5,693
----------------------------------------------------------------------------------------------------------
Net income $10,589 $10,507 $9,417
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Statements of Cash Flows
Years ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $10,589 $10,507 $9,417
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary (6,509) (4,027) (5,693)
Decrease (increase) in dividend receivable 360 - (450)
Decrease (increase) in due from bank subsidiary - 100 (100)
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,440 6,580 3,174
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for investments in and advances
to subsidiaries (863) (1,567) (182)
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (863) (1,567) (182)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (36) (3,005) (1,589)
Proceeds from issuance of common stock 1,338 2,556 1,381
Cash dividends paid (4,429) (4,005) (3,333)
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,127) (4,454) (3,541)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 450 559 (549)
Cash at beginning of year 1,947 1,388 1,937
---------------------------------------------------------------------------------------------------------
Cash at end of year $2,397 $1,947 $1,388
---------------------------------------------------------------------------------------------------------
</TABLE>
(19) Acquisition Related Expenses
Expenses directly attributable to the 1999 acquisition of Pier Bank amounted to
$1.6 million ($1.3 million, net of tax) and were charged to earnings at the date
of combination. Acquisition related expenses consisted of professional fees,
data processing/integration costs, write-down of assets and severance
obligations.
<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 21,
2000 prepared for the Annual Meeting of Shareholders to be held April 25, 2000
and incorporated herein by reference.
Required information regarding executive officers of the Corporation is included
in Part I under the caption "Executive Officers of the Registrant".
Information required with respect to compliance with Section 16(a) of the
Exchange Act appears under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Corporation's Proxy Statement dated March 21, 2000
prepared for the Annual Meeting of Shareholders to be held April 25, 2000, which
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Compensation of
Directors and Executive Officers - Executive Compensation" in the Corporation's
Proxy Statement dated March 21, 2000 prepared for the Annual Meeting of
Shareholders to be held April 27, 1999, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Nominee and
Director Information" in the Corporation's Proxy Statement dated March 21, 2000
prepared for the Annual Meeting of Shareholders to be held April 25, 2000, which
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
caption "Indebtedness and Other Transactions" in the Corporation's Proxy
Statement dated March 21, 2000 prepared for the Annual Meeting of Shareholders
to be held April 25, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Registrant required in response to
this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by
Article 9 of Regulation S-K and all other schedules to the consolidated
financial statements of the Registrant have been omitted because the
required information is either not required, not applicable, or is
included in the consolidated financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December
31, 1999.
(c) Exhibit Index.
Exhibit Number
--------------------
3.a Restated Articles of Incorporation of the Registrant
- Filed as Exhibit 3(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994. (1)
3.b Amendment to Restated Articles of Incorporation -
Filed as Exhibit 3.i to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1997. (1)
3.c Amended and Restated By-Laws of the Corporation -
Filed as Exhibit 3.c to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997 (1)
4 Rights Agreement between the Registrant and The
Washington Trust Company dated as of August 15, 1996
(including Form of Right Certificate attached thereto
as Exhibit A) - Filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A (File
No. 000-13091) filed with the Commission on August
16, 1996. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan
- Filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994. (1) (2)
10.b Short Term Incentive Plan Description - Filed as
Exhibit 10.b to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1997. (1) (2)
10.c Amended and Restated Nonqualified Deferred
Compensation Plan - Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (File
No. 333-72277) filed with the Commission on February
12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed
as Exhibit 10.4 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1994. (1) (2)
10.e Vote of the Board of Directors of the Corporation
which constitutes the 1996 Directors' Stock Plan
- Filed as Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No.
333-13167) filed with the Commission on October 1,
1996. (1) (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed
as Exhibit 10.a to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
1997. (1) (2)
10.g Change in Control Agreements with Executive Officers
- Filed as Exhibit 10.b to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1997. (1) (2)
10.h Change in Control Agreements with Executive Officers
- Filed as Exhibit 10.h to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1998. (2)
10.i Change in Control Agreements with Executive Officers
- Filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1999. (2)
10.j Change in Control Agreements with Executive Officers
- Filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1999. (2)
10.k Change in Control Agreements with Executive Officers
- Filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1999. (2)
21 Subsidiaries of the Registrant - Filed as Exhibit 21
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996. (1)
23 Consent of Independent Auditors - Filed herewith.
27 Financial Data Schedules, Article 9 - Filed herewith.
--------------------
(1) Not filed herewith. In accordance with Rule 12b-32
promulgated pursuant to the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously
filed with the Commission, which are incorporated by
reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
-----------------------------------------------
(Registrant)
Date: March 3, 2000 By John C. Warren
-------------------- ----------------------------------------------
John C. Warren
Chairman, Chief Executive Officer and Director
(principal executive officer)
Date: March 3, 2000 By David V. Devault
-------------------- ----------------------------------------------
David V. Devault
Executive Vice President, Treasurer and Chief
Financial Officer (principal financial and
principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 3, 2000 Alcino G. Almeida
-------------------- ----------------------------------
Alcino G. Almeida, Director
Date: March 3, 2000 Gary P. Bennett
-------------------- ----------------------------------
Gary P. Bennett, Director
Date: March 3, 2000 Steven J. Crandall
-------------------- ----------------------------------
Steven J. Crandall, Director
Date: March 3, 2000 Richard A. Grills
-------------------- ----------------------------------
Richard A. Grills, Director
Date: March 3, 2000 Larry J. Hirsch
-------------------- ----------------------------------
Larry J. Hirsch, Director
Date: March 3, 2000 Katherine W. Hoxsie
-------------------- ----------------------------------
Katherine W. Hoxsie, Director
Date: March 3, 2000 Mary E. Kennard
-------------------- ----------------------------------
Mary E. Kennard, Director
Date: March 3, 2000 Joseph J. Kirby
-------------------- ----------------------------------
Joseph J. Kirby, Director
Date: March 3, 2000 James W. McCormick, Jr.
-------------------- ----------------------------------
James W. McCormick, Jr., Director
Date:
-------------------- ----------------------------------
Brendan P. O'Donnell, Director
Date: March 3, 2000 Victor J. Orsinger II
-------------------- ----------------------------------
Victor J. Orsinger II, Director
Date: March 3, 2000 Anthony J. Rose, Jr.
-------------------- ----------------------------------
Anthony J. Rose, Jr., Director
Date: March 3, 2000 James P. Sullivan
-------------------- ----------------------------------
James P. Sullivan, Director
Date: March 3, 2000 Neil H. Thorp
-------------------- ----------------------------------
Neil H. Thorp, Director
Date: March 3, 2000 John C. Warren
-------------------- ----------------------------------
John C. Warren, Director
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Washington Trust Bancorp, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-72277, 333-48315, 333-13167 and 33-23048) on Forms S-8 and in the
registration statements (Nos. 333-13821 and 33-28065) on Forms S-3 of Washington
Trust Bancorp, Inc. and subsidiary of our report dated January 17, 2000,
relating to the consolidated balance sheets of Washington Trust Bancorp, Inc.
and subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three year period ended December 31, 1999, which report appears
in the December 31, 1999 annual report on Form 10-K of Washington Trust Bancorp,
Inc.
KPMG LLP
Providence, Rhode Island
March 21, 2000
<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, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,960
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 330,431
<INVESTMENTS-CARRYING> 116,372
<INVESTMENTS-MARKET> 112,868
<LOANS> 549,025
<ALLOWANCE> 12,349
<TOTAL-ASSETS> 1,104,664
<DEPOSITS> 660,753
<SHORT-TERM> 4,209
<LIABILITIES-OTHER> 362,455
<LONG-TERM> 0
0
0
<COMMON> 682
<OTHER-SE> 76,565
<TOTAL-LIABILITIES-AND-EQUITY> 1,104,664
<INTEREST-LOAN> 44,828
<INTEREST-INVEST> 27,656
<INTEREST-OTHER> 515
<INTEREST-TOTAL> 72,999
<INTEREST-DEPOSIT> 19,914
<INTEREST-EXPENSE> 37,392
<INTEREST-INCOME-NET> 35,607
<LOAN-LOSSES> 1,840
<SECURITIES-GAINS> 678
<EXPENSE-OTHER> 33,833
<INCOME-PRETAX> 15,343
<INCOME-PRE-EXTRAORDINARY> 15,343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,589
<EPS-BASIC> .97
<EPS-DILUTED> .96
<YIELD-ACTUAL> 3.71
<LOANS-NON> 3,798
<LOANS-PAST> 120
<LOANS-TROUBLED> 446
<LOANS-PROBLEM> 160
<ALLOWANCE-OPEN> 10,966
<CHARGE-OFFS> 967
<RECOVERIES> 510
<ALLOWANCE-CLOSE> 12,349
<ALLOWANCE-DOMESTIC> 12,349
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,003
</TABLE>
