Five Year Summary of Selected Consolidated Financial Data
Washington Trust Bancorp, Inc. and Subsidiary
1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------
Financial Condition:
Cash and cash equivalents $18,404,910 $21,650,128 $21,817,649 $16,683,667 $11,895,946
Securities available for sale 36,516,115 36,236,543 35,685,289 - -
Investment securities 52,496,616 52,497,832 39,106,642 36,098,289 30,226,065
Net loans 381,297,565 343,853,432 317,896,010 354,537,211 365,283,880
Other real estate owned, net 5,307,905 7,831,146 13,455,489 11,648,806 3,674,103
Other 21,656,852 25,259,743 29,737,861 22,088,321 23,135,500
----------------------------------------------------------------------------------------------------------------------
Total assets $515,679,963 $487,328,824 $457,698,940 $441,056,294 $434,215,494
======================================================================================================================
Deposits $440,731,142 $423,374,620 $404,660,005 $399,717,920 $398,690,078
Other borrowings 23,522,343 20,500,000 14,000,000 5,000,000 -
Other liabilities 5,643,494 4,991,279 4,089,140 3,298,951 3,742,326
Shareholders' equity 45,782,984 38,462,925 34,949,795 33,039,423 31,783,090
----------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $515,679,963 $487,328,824 $457,698,940 $441,056,294 $434,215,494
======================================================================================================================
Income Statement Summary:
Interest income $36,661,688 $34,927,863 $35,868,747 $41,028,507 $43,940,267
Interest expense 13,588,582 14,178,779 16,800,218 23,556,762 26,313,795
----------------------------------------------------------------------------------------------------------------------
Net interest income 23,073,106 20,749,084 19,068,529 17,471,745 17,626,472
Provision for loan losses 1,000,000 2,500,000 4,000,000 5,200,000 8,500,000
----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 22,073,106 18,249,084 15,068,529 12,271,745 9,126,472
Noninterest income 6,237,576 6,083,500 5,577,685 4,685,934 4,214,916
Gains on sales of securities 684,590 345,674 196,606 1,495,453 406,085
----------------------------------------------------------------------------------------------------------------------
28,995,272 24,678,258 20,842,820 18,453,132 13,747,473
Noninterest expense 19,704,632 17,946,727 16,088,464 14,881,100 13,600,952
----------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of
accounting change 9,290,640 6,731,531 4,754,356 3,572,032 146,521
Applicable income taxes 3,026,000 2,255,000 1,604,000 1,095,000 (310,000)
----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of accounting change 6,264,640 4,476,531 3,150,356 2,477,032 456,521
Cumulative effect of change in accounting
for income taxes (1) - 305,000 - - -
----------------------------------------------------------------------------------------------------------------------
Net income $6,264,640 $4,781,531 $3,150,356 $2,477,032 $456,521
======================================================================================================================
Per share information: (2)
Earnings per share (3) $2.18 $1.69 $1.14 $ .90 $ .17
Cash dividends declared $ .73 $ .59 $ .53 $ .53 $ .88
Book value $16.22 $13.71 $12.58 $11.99 $11.65
Market value (4) $20.00 $16.50 $11.67 $7.83 $7.33
Ratios:
Return on average assets 1.25% 1.01% .70% .56% .11%
Return on average
shareholders' equity 14.11% 12.92% 9.15% 7.58% 1.32%
Dividend payout ratio 33.02% 34.30% 46.85% 58.97% 525.95%
Total equity to total assets 8.88% 7.89% 7.64% 7.49% 7.32%
Net charge-offs to average loans .22% .35% .89% 1.95% .89%
<FN>
(1) See Note 13 to the Consolidated Financial Statements for explanation of accounting change
(2) Adjusted to reflect the 3-for-2 stock split paid in the form of a stock dividend on August 31, 1994
(3) Fully diluted, including $.11 per share accounting change in 1993
(4) Closing bid price
Management's Analysis of Financial Statements
Washington Trust Bancorp, Inc. and Subsidiary
Results of Operations
Washington Trust Bancorp, Inc. and subsidiary ("Washington Trust" or "the
Corporation") recorded net income of $6.3 million for 1994, an increase of 40%
over the $4.5 million of net income excluding an accounting change for income
taxes recorded in 1993. Fully diluted earnings per share amounted to $2.18 per
share for 1994, up from $1.58 per share earned on net income excluding the
accounting change recorded in 1993. Net income in 1993 included a benefit of
$305,000, or $.11 per share, recorded in the first quarter as a result of the
cumulative effect of a change in accounting for income taxes.
Washington Trust's rates of return on average assets and average equity ("ROA"
and "ROE") for 1994 were 1.25% and 14.11%, respectively. ROA and ROE for the
year ended December 31, 1993, excluding the effect of the accounting change,
amounted to .95% and 12.10%, respectively. Equivalent amounts for 1993
including the effect of the accounting change were 1.01% and 12.92%,
respectively. Included in the 1994 ROE calculation is average equity
attributable to the implementation of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), of approximately $3.7 million. Had the Corporation
adopted SFAS No. 115 in 1993, ROE in 1993 including the accounting change would
have approximated 11.33%.
The 1994 increase in earnings was primarily attributable to an increase in net
interest income, a reduction in the provision for loan losses, a reduction in
the level of nonperforming assets and an increase in noninterest income.
Net interest income rose 11.2% in 1994, primarily due to growth in average
interest-earning assets and improvement in the net interest margin. The spread
between rates paid on deposits and yields on loans and investments rose to 4.66%
in 1994, up from 4.55% in the prior year. The resulting increase in net
interest income was $2.3 million in 1994.
Nonperforming assets as a percentage of total assets was reduced to 2.4% at
December 31, 1994, down from 3.9% of total assets at the end of 1993. The
provision for loan losses amounted to $1.0 million in 1994, down from $2.5
million in 1993.
Noninterest income, excluding securities transactions and loan sales, rose 11.7%
in 1994. All categories of noninterest income were up, primarily as a result of
increased volume. Gains on sales of securities available for sale amounted to
$684,590 in 1994. These gains were taken in the first quarter of 1994 in
connection with a nonrecurring charitable contribution expense of approximately
$700,000 for the establishment of a charitable trust.
Noninterest expense, excluding the nonrecurring charitable contribution expense
discussed above, rose 5.9% in 1994. Salaries and employee benefits, the largest
component of noninterest expense, rose 14.3% due to increased staffing levels
and normal salary adjustments. Foreclosed property costs declined 73.3% due to
fewer number of properties owned and a reduction in the amount of write-downs
taken on properties.
The Corporation's efficiency ratio is defined as the ratio of noninterest
expense, excluding nonrecurring expenses, as a percentage of fully taxable
equivalent ("FTE") net interest income and noninterest income excluding
securities transactions and loan sales. In 1994, the efficiency ratio amounted
to 63.7%, down from the comparable 1993 amount of 66.7%.
Financial Condition
Total assets rose 5.8% to $515.7 million at December 31, 1994, up from $487.3
million at the end of the prior year. Average assets rose to $502.3 million in
1994, compared to $473.7 million in 1993, an increase of 6.0%. The most
substantial change in the Corporation's financial condition during 1994 was a
$37.6 million, or 10.7%, increase in portfolio loans. Net loans as a percentage
of total assets amounted to 73.9% at December 31, 1994 compared to 70.6% one
year earlier.
The largest source of funding for the loan growth was an increase in total
deposits. Other sources of funding included advances from the Federal Home Loan
Bank, the liquidation of securities available for sale, and the liquidation of
mortgage loans held for sale.
Securities Available for Sale
The Corporation adopted SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities", effective January 1, 1994. Securities designated at the
time of purchase as available for sale may be sold in response to changes in
market conditions, prepayment risk, rate fluctuations, liquidity, or capital
requirements. SFAS No. 115 requires that securities available for sale be
reported at fair value, with any unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity, net of
tax, until realized. The effect of adopting this pronouncement was an $8.2
million increase in the carrying value of these securities and a corresponding
increase in shareholders' equity (net of tax) of $4.9 million as of January 1,
1994.
During the year ended December 31, 1994, the net appreciation in the unrealized
gains on these securities fell to $4.7 million. The decline in market value of
U.S. Treasury obligations resulted from a 250 basis point rise in the Federal
Funds and discount rates that occurred in 1994. The net unrealized gain at
December 31, 1993 of $1.1 million was reduced to a net unrealized loss at
December 31, 1994 of $526,000. The market value of the portfolio of corporate
stocks declined considerably during the first quarter of 1994, reflecting
general equity market conditions affected by interest rates. This factor, along
with the realization of approximately $685,000 in gains, contributed to the $1.9
million decline in the market value of these securities in 1994. These gains
were taken in connection with a nonrecurring charitable contribution expense for
the establishment of a charitable trust in the first quarter of 1994. (See Note
3 to the Consolidated Financial Statements for detail of unrealized gains and
losses associated with securities available for sale.)
The Corporation's investment in U.S. Treasury obligations amounted to 67.2% of
total securities available for sale at December 31, 1994. Because of the credit
quality inherent in these instruments and their high liquidity, these securities
can also be pledged as collateral for borrowings and other purposes.
Corporate stocks were carried at market value during 1994 and at cost during
1993. The cost basis of these securities declined by $3.3 million during 1994
due primarily to the liquidation of auction rate preferred stocks. The balance
of auction rate preferred stocks in the portfolio at December 31, 1994 was
$500,000, down from the prior year amount of $4.5 million.
Investment Securities
Securities designated as investment securities are held as 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. Investment securities amounted to 10.2% of total
assets at December 31, 1994.
Included in the investment portfolio at December 31, 1994 are mortgage-backed
securities issued by the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association amounting to $21.7 million, or 41.3% of total
investment securities. At the end of 1993, mortgage-backed securities totalled
$25.4 million, or 48.4% of total investments. At December 31, 1994,
approximately 91% of the mortgage-backed securities holdings consisted of
mortgage pass-through securities.
U.S. Treasury obligations and obligations of U.S. government-sponsored agencies
amounted to $20.4 million, or 38.9% of total investment securities at December
31, 1994. Obligations of states and political subdivisions amounted to $10.4
million at December 31, 1994, up from $7.7 million a year earlier.
Included in investment securities are structured notes with a carrying value of
$15.0 million and a market value of $13.4 million at December 31, 1994. The
carrying value and market value of structured notes at December 31, 1993 was
$15.0 million and $14.9 million, respectively.
Structured notes are defined as debt issues whose coupon, redemption amount
and/or stated maturity adjust with changes in interest rates or other external
indices. All of the structured notes held by the Corporation are obligations of
U.S. government-sponsored agencies. Approximately 80% of the carrying value of
the Corporation's structured notes at December 31, 1994 are classified as such
because they have interest rates which reset periodically based on various
external market indices.
The market value of the investment portfolio has been affected by the rise in
interest rates that occurred in 1994. At December 31, 1994, net unrealized
losses in the portfolio totalled $3.1 million, compared to a net unrealized gain
position of $836,000 at December 31, 1993.
Loans
Total loans amounted to $390.1 million at December 31, 1994, up 10.7% from the
prior year amount of $352.5 million. The Corporation experienced strong growth
in residential mortgages, commercial mortgages and installment loans in 1994.
All of the loan growth took place within the Corporation's regional market area.
Residential mortgage loans rose 11.1% in 1994 and accounted for 43.5% of total
loans at December 31, 1994. Most of the growth was attributable to adjustable
rate mortgages as borrowers opted to take advantage of the initial lower rates
associated with this product. The rate of residential mortgage originations
declined substantially during the latter part of 1994 due to higher interest
rates. The mix between fixed rate mortgages and adjustable rate mortgages was
61% and 39%, respectively, of total residential mortgages at December 31, 1994,
compared to 64% and 36%, respectively, one year earlier. Installment loans rose
32.7% during 1994 and amounted to $45.0 million at December 31, 1994. The
growth in installment loans was primarily a result of a strong marketing
campaign for home equity loans. Commercial mortgages rose 14% during 1994, due
primarily to new business relationships with customers in the Corporation's
market area.
Deposits
Total deposits at December 31, 1994 were $440.7 million, up $17.4 million, or
4.1%, from the prior year. In response to rising interest rates in 1994,
depositors have reacted by shifting deposits into longer term accounts.
Accordingly, time deposits rose 9.0% during 1994 to $194.7 million at December
31, 1994. Savings deposits (regular savings, NOW and money market accounts)
declined by $8.2 million. The decrease in savings deposits is largely
attributable to a $10.2 million reduction in money market deposits formerly held
by fiduciary accounts managed by the trust department of the subsidiary bank.
These deposits were eliminated in response to a change in Federal deposit
insurance regulations which became effective at the end of 1993 and affected all
banks. Demand deposit growth has steadily increased in the last two years.
Total demand deposits rose 21.5% during 1994 while average demand deposit
balances were up 23.1% over the prior year.
Federal Home Loan Bank Advances
Washington Trust utilizes advances from the Federal Home Loan Bank of Boston
("FHLB") as part of its overall funding strategy. Advances may be utilized for
short-term liquidity and longer-term financing. Total advances amounted to
$23.5 million at December 31, 1994, up from $20.5 million one year earlier.
Asset Quality
Nonperforming Assets
Washington Trust's level of nonperforming assets improved by 35.2% during 1994.
This decline in nonperforming assets is attributable to sales of foreclosed
properties and to continued efforts by the Corporation to reduce the level of
nonperforming loans. Nonperforming assets include nonaccrual loans, accruing
loans 90 days or more past due with respect to principal and/or interest, and
other real estate owned. Nonperforming assets amounted to 2.4% of total assets
at December 31, 1994, down from 3.9% of total assets at December 31, 1993.
Nonperforming loans as a percent of total loans fell from 3.2% at the end of
1993 to 1.8% at December 31, 1994.
The following table presents nonperforming assets and related ratios (dollars in
thousands):
December 31, 1994 1993
--------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $ 3,390 $ 4,687
Nonaccrual loans less than 90 days past due 3,729 6,684
Accruing loans 90 days or more past due 24 22
--------------------------------------------------------------------------
Total nonperforming loans 7,143 11,393
--------------------------------------------------------------------------
Other real estate owned:
In-substance foreclosures 3,898 5,055
Properties acquired through foreclosure 2,578 4,568
Valuation allowance (1,168) (1,792)
--------------------------------------------------------------------------
Other real estate owned, net 5,308 7,831
--------------------------------------------------------------------------
Total nonperforming assets $12,451 $19,224
==========================================================================
Nonperforming loans as a percentage of total loans 1.8% 3.2%
Nonperforming assets as a percentage of total assets 2.4% 3.9%
Reserve for possible loan losses to nonperforming loans 123.7% 76.0%
Reserve for possible loan losses to total loans 2.3% 2.5%
==========================================================================
Risk Elements
Washington Trust assesses the quality of its loans by performing ongoing reviews
of the loans in its portfolio to determine potential loss exposure and to assess
delinquency trends. During this review, management gives consideration to such
factors as overall borrower relationship, delinquency trends, credit and
collateral quality, prior loss experience, current and expected economic
conditions, and other pertinent factors. As a result of this process charge-
offs and other potential problem loans are identified and loan loss reserves are
established.
Loan Portfolio Analysis
Nonperforming loans are defined as nonaccrual loans and accruing loans more than
90 days past due with respect to principal and/or interest. An analysis of
nonperforming loans by type follows (dollars in thousands):
As a % of
Balance loan type
December 31, 1994 1993 % change 1994 1993
------------------------------------------------------------------------------
Residential real estate mortgages $3,029 $4,775 (36.6)% 1.8% 3.1%
Commercial and other:
Mortgages 421 1,319 (68.1) .8 2.7
Construction and development 509 -- 100.0 4.3 --
Other 2,652 4,677 (43.3) 2.6 4.6
Installment 532 622 (14.5) 1.2 1.8
------------------------------------------------------------------------------
Total nonperforming loans $7,143 $11,393 (37.3)% 1.8% 3.2%
==============================================================================
The provision for loan losses charged to earnings for 1994 amounted to $1.0
million, down from $2.5 million recorded in 1993. Net loan charge-offs amounted
to $821,356, compared to net charge-offs of $1.2 million in 1993.
Loans, with the exception of credit card 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. Interest previously accrued, but
uncollected, is reversed against current period income. 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. At December 31, 1994, nonperforming loans amounted to
approximately $7.1 million. Approximately $3.7 million, or 52.2% of these
nonperforming loans were less than 90 days past due.
Nonaccrual loans are returned to accrual status when the obligation has
performed in accordance with the contract terms for a reasonable period of time
and the ultimate collectibility of the contractual principal and interest is no
longer doubtful. During 1994, approximately $3.0 million of loans classified as
nonaccrual at December 31, 1993 were returned to accruing status.
Residential real estate loans include fixed rate mortgages, adjustable rate
mortgages and residential construction loans that are generally well
collateralized. The Corporation's loss experience on residential loans
historically has been favorable. This was true in 1994 as net charge-offs on
residential mortgages amounted to approximately $157,000. Nonaccrual
residential real estate loans amounted to $3.0 million at December 31, 1994,
down 36.6% from the prior year. Approximately 51.8% of nonaccrual residential
real estate loans were less than 90 days past due at December 31, 1994.
Nonaccrual residential real estate loans represented 1.8% of total residential
real estate loans at December 31, 1994. Adjustable rate mortgages represent
approximately 53% of total nonaccrual residential real estate loans, and 39% of
total residential loans. The Corporation considers the risk of a rising
interest rate environment in the ARM underwriting process. It is possible,
however, that ARM delinquencies may increase due to the interest rate increases
which began in 1994.
Commercial mortgages consist primarily of loans secured by commercial properties
which generate revenue for debt service. Nonaccrual commercial mortgages
amounted to $421,000 at December 31, 1994, down 68.1% from the prior year.
Nonaccrual commercial mortgages accounted for less than 1% of total commercial
mortgages. Net charge-offs on commercial mortgages amounted to $307,000 in
1994, compared to net recoveries of $8,000 in 1993.
Construction and development loans totalled 3.1% of total loans at December 31,
1994, up slightly from the prior year. These loans are made for the purpose of
constructing residential properties for sale and for commercial development.
Funds are generally advanced as the project progresses. The distinctive risks
associated with this type of loan are that additional funds may need to be
advanced due to problems in estimating construction costs, delays in completion
of the project, and inaccurate value estimates upon completion. The maturities
of these loans are generally short term and principal is due at completion of
the project. There were no charge-offs of construction and development loans
during 1994 and 1993. Recoveries relating to these loans amounted to $7,000 and
$21,000 during 1994 and 1993, respectively.
Other commercial loans consist of loans to businesses and individuals, either
unsecured or secured, with varied repayment terms. These businesses operate in
diversified industry groups including manufacturing, tourism and other service
industries. A substantial portion of secured loans in this category are
collateralized by real estate. These loans represented 26.1% of total loans at
December 31, 1994. Nonaccrual loans in this category declined 43.3% from 1993,
but totalled 37.1% of total nonperforming loans at December 31, 1994. Net
charge-offs on other commercial loans amounted to $187,000 for 1994, down from
$678,000 for 1993.
Included in the installment loan category are fixed rate loans to individuals
for the purchase of automobiles and boats, fixed rate home equity loans,
variable rate home equity lines and credit card loans. These loans generally
have relatively short repayment periods, favorable delinquency experience and
generate higher yields than other loan categories. Washington Trust experienced
strong growth in installment loans during 1994, primarily as a result of growth
in home equity loans.
Restructured Loans
Loans are considered restructured when the lender has granted concessions to a
borrower due to the borrower's financial condition. 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.
Nonaccrual loans which have been restructured are classified as nonaccrual until
such time as the borrower has demonstrated his ability to comply with the
modified terms. Restructured loans that are performing in accordance with their
modified terms are included in accruing loans.
At December 31, 1994, restructured loans amounted to $525,809. 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 composed of properties acquired through
foreclosure and other legal means, and in-substance foreclosures ("ISFs"). A
loan is considered to be an in-substance foreclosure when the borrower has
little or no equity in the property, proceeds for repayment of the loan are
dependent upon the sale of the collateral, and the borrower has effectively
abandoned control of the property or is unable to rebuild equity in the
property. 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 $5.3 million at December 31, 1994, down from the
corresponding 1993 amount of $7.8 million. Sales of foreclosed properties and
payments on ISFs were greater than the rate of foreclosures in 1994. During
1994, sales of foreclosed properties and payments on in-substance foreclosures
amounted to $3.9 million. Washington Trust has provided financing to facilitate
the sales of many of these properties. Financing is generally provided at
market rates with credit terms similar to those available to other borrowers.
Washington Trust has been successful in reducing the balance of OREO properties
in 1994. The most significant reductions were made to commercial properties.
The balance of commercial OREO properties was reduced from $2.4 million at
December 31, 1993 to $752,000 at December 31, 1994.
ISFs totalled $3.9 million at December 31, 1994, or approximately 60.2% of total
OREO. Foreclosure proceedings are generally initiated on ISF properties, but
may be delayed depending upon a borrower's legal circumstances.
In January 1995, the Corporation will implement Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS No. 114). The effect of the implementation of this pronouncement will be
a $3.8 million balance sheet reclassification of ISFs from OREO to loans and a
reclassification of $492,000 from the OREO valuation allowance to the reserve
for possible loan losses.
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)
The following table presents average balance and interest rate information. Tax
exempt income is converted to a fully taxable equivalent basis by assuming a 34%
federal income tax rate adjusted for applicable state income taxes net of the
related federal tax benefit. For dividends on corporate stocks, the 70% federal
dividends received deduction is also used in the calculation of tax equivalency.
Nonaccrual and renegotiated loans, as well as interest earned on these loans (to
the extent recognized in the Consolidated Statements of Income), are included in
amounts presented for loans.
Years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Residential real estate loans $169,971 13,473 7.93% $156,462 13,721 8.77% $162,321 15,471 9.53%
Commercial and other loans (1) 162,918 13,963 8.57 152,950 12,584 8.23 151,526 12,984 8.57
Installment loans 38,336 3,768 9.83 32,116 3,355 10.45 33,379 3,736 11.19
-----------------------------------------------------------------------------------------------------------------------------
Total loans 371,225 31,204 8.41 341,528 29,660 8.68 347,226 32,191 9.27
Federal funds sold 6,531 256 3.92 11,385 322 2.82 9,223 292 3.17
Taxable debt securities 69,041 4,181 6.06 61,093 3,860 6.32 38,426 2,489 6.48
Nontaxable debt securities (1) 8,812 562 6.38 6,631 439 6.62 5,368 413 7.69
Corporate stocks (1) 7,905 949 12.00 14,347 1,222 8.51 10,745 991 9.22
-----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 463,514 37,152 8.02% 434,984 35,503 8.16% 410,988 36,376 8.85%
-----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 14,032 14,023 12,508
Reserve for possible loan losses (8,863) (8,426) (7,466)
Premises and equipment, net 14,524 14,836 15,136
Accrued interest receivable 2,905 2,666 2,971
Other real estate owned, net 7,282 11,312 10,715
Other 8,887 4,273 3,293
-----------------------------------------------------------------------------------------------------------------------------
Total assets $502,281 $473,668 $448,145
=============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings deposits $196,786 4,335 2.20% $197,970 4,964 2.51% $182,310 5,813 3.19%
Time deposits 183,950 7,917 4.30 176,148 8,112 4.60 183,443 10,277 5.60
Other 23,707 1,337 5.64 18,892 1,103 5.84 12,082 710 5.87
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 404,443 13,589 3.36% 393,010 14,179 3.61% 377,835 16,800 4.45%
-----------------------------------------------------------------------------------------------------------------------------
Demand deposits 49,369 40,097 32,872
Other liabilities 4,081 3,555 3,018
Shareholders' equity 44,388 37,006 34,420
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $502,281 $473,668 $448,145
=============================================================================================================================
Net interest income $23,563 $21,324 $19,576
=============================================================================================================================
Interest rate spread 4.66% 4.55% 4.40%
Net interest margin 5.08% 4.90% 4.76%
<FN>
(1) Interest amounts presented on a fully taxable equivalent basis (see page 29 for additional information)
Interest income amounts presented in the table on page 28 include the following
adjustments for taxable equivalency for the years indicated (in thousands):
Years ended December 31, 1994 1993 1992
---------------------------------------------------------------
Commercial and other loans $ 88 $ 95 $110
Nontaxable debt securities 200 156 135
Corporate stocks 203 324 262
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
1994/1993 1993/1992 1992/1991
----------------------- ------------------------ ------------------------
Net Net Net
(In thousands) Volume Rate Change Volume Rate Change Volume Rate Change
--------------------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
Residential real estate loans $1,131 (1,379) (248) $ (545) (1,205) (1,750) $ (588) (1,581) (2,169)
Commercial and other loans 841 538 1,379 121 (521) (400) (1,137) (1,637) (2,774)
Installment loans 620 (207) 413 (138) (243) (381) (524) (325) (849)
Federal funds sold (165) 99 (66) 64 (34) 30 68 (218) (150)
Taxable debt securities 493 (172) 321 1,441 (70) 1,371 1,075 (339) 736
Nontaxable debt securities 139 (16) 123 89 (63) 26 66 (60) 6
Corporate stocks (666) 393 (273) 311 (80) 231 515 (554) (39)
--------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,393 (744) 1,649 1,343 (2,216) (873) (525) (4,714) (5,239)
--------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits (29) (600) (629) 469 (1,318) (849) 1,338 (3,285) (1,947)
Time deposits 350 (545) (195) (395) (1,770) (2,165) (2,590) (2,887) (5,477)
Other 273 (39) 234 398 (5) 393 668 (1) 667
--------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 594 (1,184) (590) 472 (3,093) (2,621) (584) (6,173) (6,757)
--------------------------------------------------------------------------------------------------------------------------
Net interest income $1,799 440 2,239 $ 871 877 1,748 $ 59 1,459 1,518
==========================================================================================================================
Net Interest Income
Net interest income is the amount by which interest and fees on interest-earning
assets exceeds the interest cost of deposits and other borrowed funds. Net
interest income is the primary source of Washington Trust's operating income.
The level of net interest income is affected by the volume of average interest-
earning assets and interest-bearing liabilities, market interest rates and other
factors. The following discussion presents net interest income on a fully
taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt
loans and investments to be comparable to taxable loans and investments.
FTE net interest income increased by $2.2 million, or 10.5%, from 1993 to 1994.
The increase was due to continued growth in interest-earning assets and a
widening spread between yields earned on assets and rates paid on deposits.
The interest rate spread widened by 11 basis points to 4.66% in 1994, while the
net interest margin (FTE net interest income as a percentage of average
interest-earning assets) increased from 4.90% in 1993 to 5.08% in 1994. Despite
the overall increase in rates in 1994, both asset yields and rates paid on
deposits and other interest-bearing liabilities were lower in 1994 than in 1993.
Lower rates on interest-earning assets were offset by strong growth in average
earning assets as well as a more favorable mix of interest-earning assets.
FTE interest income totalled $37.2 million in 1994, up 4.6% from the 1993 amount
of $35.5 million. The FTE yield on interest-earning assets was 8.02% in 1994,
down from 8.16% in 1993. Average interest-earning assets increased by $28.5
million, or 6.6%, in 1994. Despite the lower yield on the loan portfolio, loan
growth changed the mix of interest-earning assets and contributed to the
increase in net interest income. Average total loans, generally the
Corporation's highest yielding asset category, increased by 8.7% in 1994.
The FTE rate of return on total loans was 8.41% in 1994, down from 8.68% in
1993. The decrease primarily resulted from the effect of fixed rate mortgage
refinancings. The yield on the residential mortgage portfolio fell to 7.93% in
1994, down 84 basis points from 1993. Continued refinancings at lower interest
rates through the first half of 1994 led to a decrease in rates earned on the
fixed rate residential mortgage portfolio. The average adjustable rate mortgage
("ARM") portfolio grew by $19.0 million, or 44.1%, in 1994, contributing to the
decline in rates earned on the residential mortgage portfolio because such loans
have a lower interest yield at origination than fixed rate mortgages. The
reduction in rates earned on the residential mortgage portfolio was offset by
higher rates earned on commercial loans, which have benefitted from the increase
in interest rates, and by substantial growth in the consumer loan portfolio,
which generated the highest aggregate loan yield.
Average interest-bearing liabilities rose by $11.4 million, or 2.9%, during
1994, but declining rates paid on these liabilities reduced interest expense by
4.2% from the prior year. The average rate paid on interest-bearing liabilities
fell from 3.61% in 1993 to 3.36% in 1994. The mix in interest-bearing
liabilities changed during the year as well. Average time deposits grew 4.4% in
1994, while average savings deposits were virtually unchanged from the prior
year. However, savings deposits declined by $8.2 million from December 31, 1993
to the end of 1994 as rates paid on time deposits increased relative to savings
deposits.
Included in other interest-bearing liabilities are term advances from the
Federal Home Loan Bank averaging $22.3 million in 1994, up from an average of
$18.6 million in 1993. The average rate paid on these advances was 5.74% and
5.87% in 1994 and 1993, respectively. These advances were used for general
corporate funding purposes.
Average demand deposits, an interest-free source of funding, increased by $9.2
million, or 23.1%, from 1993 to 1994. This contributed to the increase in net
interest margin in 1994.
Interest Rate Sensitivity and Liquidity
The Corporation's Asset/Liability Committee ("ALCO") is responsible for
establishing policy guidelines on acceptable exposure to interest rate risk.
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 to manage liquidity and exposure to changes in
interest rates.
Interest rate "gap" analysis is one of the tools used by the ALCO to evaluate
the Corporation's interest rate sensitivity at a specific point in time. Gap
analysis measures the relative amounts of interest-earning assets and interest-
bearing liabilities that reprice within a given period. When an institution's
interest-earning assets exceed its interest-bearing liabilities maturing or
repricing within the same period (commonly referred to as a "positive gap"), the
institution can expect asset yields to increase faster than liability costs in a
rising rate environment, thereby increasing its net interest margin.
Conversely, in a rising rate environment an institution with a "negative gap"
would expect its rates paid on liabilities to rise faster than its yield on
assets, thereby reducing its net interest margin.
At December 31, 1994, the Corporation's cumulative one-year gap was a negative
$33.7 million, or 7% of earning assets. The following table details the amounts
of interest-earning assets and interest-bearing liabilities at December 31, 1994
that are expected to mature or reprice in each of the time periods presented.
To the extent applicable, amounts of assets and liabilities which mature or
reprice within a particular period were determined in accordance with their
contractual terms. Fixed rate mortgages, mortgage-backed securities and
installment loans have been allocated based on expected amortization and
prepayment rates using standard industry assumptions. Savings, NOW and money
market deposit accounts, which have no contractual term, and are subject to
immediate repricing, are presented in the under three-month category.
Gap analysis, however, does not take into account the differing impact and
timing of rate fluctuations on assets and liabilities. Certain assets and
liabilities that have similar repricing or maturity periods may react
differently to changes in interest rates. During 1994, rates paid on Washington
Trust's retail deposits did not increase as quickly as rates earned on assets.
This led to an increase in the net interest margin during 1994, despite the
Corporation's negative gap position at December 31, 1993. This increase
reflects some of the limitations of gap analysis. Consequently, the ALCO uses
other measurement techniques to supplement gap analysis in its assessment of
interest rate risk. The ALCO reviews interest income simulations to evaluate
the potential effect of future upward or downward changes in interest rates on
net interest income. These simulations incorporate maturity and repricing data
for earning assets and liabilities as well as other relevant assumptions which
affect outstanding balances under various interest rate scenarios.
In 1994, the Corporation supplemented its interest rate risk management
strategies with off-balance sheet transactions. Interest rate swap agreements
with a notional principal amount of $10 million were used to convert a 23-month
fixed rate deposit product to a variable rate. The effect of this swap on net
interest income for 1994 was not material. Washington Trust may utilize
additional interest rate exchange agreements as a component of its overall
asset/liability management strategy.
3 months 3 to 6 6 months 1 to 5 over
(In thousands) or less months to 1 year years 5 years
-------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 116,444 $ 41,115 $ 89,129 $ 61,329 $ 82,321
Debt securities 16,738 3,216 8,577 33,727 23,846
Other assets 4,294 -- -- -- 2,907
-------------------------------------------------------------------------------------
Total interest-earning assets 137,476 44,331 97,706 95,056 109,074
-------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits (232,955) (25,413) (36,828) (92,291) --
Interest rate swap agreements (10,000) -- -- 10,000 --
Federal Home Loan Bank advances (4,000) (1,000) (3,000) (14,000) (1,522)
-------------------------------------------------------------------------------------
Total interest-bearing liabilities (246,955) (26,413) (39,828) (96,291) (1,522)
-------------------------------------------------------------------------------------
Interest sensitivity gap per period $(109,479) $ 17,918 $ 57,878 $ (1,235) $107,552
=====================================================================================
Cumulative interest sensitivity gap $(109,479) $(91,561) $(33,683) $(34,918) $ 72,634
=====================================================================================
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand. Washington Trust monitors its liquidity
to ensure that anticipated funding needs will be met. Washington Trust's
primary source of liquidity is customer deposits. Customer deposits (time,
savings, and demand deposits) funded approximately 85.6% of total average assets
in 1994. Other sources of funding include loan repayments and discretionary use
of purchased liabilities. These purchased liabilities include federal funds
purchased, securities sold under agreements to repurchase and Federal Home Loan
Bank term advances. In addition, investment securities designated as available
for sale may be sold in response to liquidity needs.
The ALCO establishes and monitors internal liquidity measurements to manage
liquidity exposure. Net loans as a percentage of total assets rose to 73.9% at
December 31, 1994, compared to 70.6% at December 31, 1993. Investment
securities and securities available for sale as a percentage of total assets
fell to 17.3% at December 31, 1994, down from 18.2% at December 31, 1993.
For the year ended December 31, 1994, net cash provided by financing activities
was $18.8 million. Approximately $17.4 million was generated by increases in
deposits, and $3.0 million from net advances from the FHLB. Net cash used in
investing activities was $31.8 million in 1994, the majority of which was used
to fund loan demand. (See the Consolidated Statements of Cash Flows for further
information about sources and uses of cash.)
Capital Resources
Shareholders' equity in the Corporation consists primarily of retained earnings,
as well as common stock and related paid-in capital. The ratio of total equity
to total assets amounted to 8.9% at December 31, 1994, compared to 7.9% at
December 31, 1993. Book value rose to $16.22 per share at December 31, 1994, up
from the year-earlier amount of $13.71 per share.
Total shareholders' equity increased by $7.3 million, or 19.0%, during 1994.
Approximately $2.8 million of this increase is attributable to the unrealized
gain on securities available for sale resulting from the adoption of SFAS No.
115. In addition, approximately $4.2 million in capital growth resulted from
earnings retention.
The Corporation increased cash dividends declared per share by 24% in 1994 in
recognition of continued improvements in earnings and a strong capital position.
Cash dividends per share amounted to $.73 in 1994 versus $.59 in 1993. In July
1994, the Corporation declared a 3-for-2 stock split on shares of common stock,
effected in the form of a stock dividend which was paid in August 1994. All per
share data included in the consolidated financial statements, the related notes,
and this discussion have been restated to reflect the stock split.
Regulatory guidelines require bank holding companies and state chartered banks
to maintain minimum ratios of capital to risk-adjusted assets. These guidelines
were established to more accurately assess the credit risk inherent in the
assets and off-balance sheet activities of financial institutions. Each balance
sheet asset and each off-balance sheet asset is assigned a "risk-weight" in
determining the ratio 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 Washington Trust, Tier 1
capital is essentially equal to shareholders' equity excluding the unrealized
gain on securities available for sale. Tier 2 capital consists of a portion of
the reserve for possible loan losses (limited to 1.25% of total risk-weighted
assets).
As a supplement to the risk-based capital measure, regulatory guidelines
restrict the extent to which banking organizations can leverage their capital
base. 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). The minimum leverage ratio is 3% for banking organizations that do not
anticipate significant growth and that have well-diversified risk (including no
undue interest rate risk), excellent asset quality, high liquidity, and good
earnings. Other banking organizations are expected to have ratios of at least
4-5%, depending on their particular financial condition and growth plans.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profile of a given banking organization. The
Corporation's Tier 1 leverage ratio as of December 31, 1994 was 8.45%. The
Federal Reserve has not advised the Corporation of any specific minimum Tier 1
leverage capital ratio applicable to it. See Note 16 to the Corporation's
Consolidated Financial Statements for additional discussion of the Corporation's
ability to pay dividends.
The following table presents information concerning the Corporation's compliance
with regulatory requirements at December 31, 1994 and 1993:
(Dollars in thousands) 1994 1993
-------------------------------------------------------------------------------------------
Risk-based capital: (1)
Tier 1 capital (shareholders' equity) $42,981 $38,463
Tier 2 capital (eligible portion of reserve for possible loan losses) 4,337 4,112
-------------------------------------------------------------------------------------------
Total risk-based capital $47,318 $42,575
===========================================================================================
Assets: (1)
Net risk-weighted assets $342,472 $324,408
Average quarterly assets $508,540 $490,899
===========================================================================================
Risk-based capital ratios:
Tier 1 (minimum 4.0%) 12.55% 11.86%
Total (Tier 1 plus Tier 2, minimum 8.0%) 13.82% 13.12%
Tier 1 leverage ratio (minimum 3.0%) 8.45% 7.84%
===========================================================================================
<FN>
(1) 1994 amounts exclude the effects of accounting for securities available for sale under
SFAS No. 115.
Noninterest Income
Noninterest income is an important source of revenue for the Corporation. For
the year ended December 31, 1994, noninterest income, excluding securities sales
and loan sales, accounted for 14.6% of gross income. The Corporation generates
recurring noninterest income by charging for banking related services such as
management of customer investment portfolios, trusts and estates, assessing fees
for servicing deposit accounts, servicing residential mortgages sold in the
secondary market, and processing merchant bankcard activity.
Income from trust-related services continues to be the largest component of
noninterest income. Trust income represented 47% of noninterest income and
amounted to $3.3 million in 1994, up 11.2% from the $3.0 million reported in
1993. This increase is primarily due to an increase in the number of accounts
under management.
Service charges on deposit accounts rose 11.4% to $1.6 million in 1994. The
increase reflects growth in the Corporation's total deposit base, as well as
changes in the fee structures of various deposit products during the year.
Net gains on securities available for sale totalled $684,590 in 1994, up from
$345,674 reported in 1993. These gains were taken in the first quarter of 1994
in connection with a nonrecurring contribution expense of approximately $700,000
for the establishment of a charitable trust. (See Note 3 to the Consolidated
Financial Statements for additional information regarding this transaction.)
Losses on loan sales totalled $15,998 for the year ended December 31, 1994,
down from gains of $484,960 reported during 1993. The decrease is attributable
to substantial reductions in originations and sales of fixed rate mortgages in
1994, as well as from interest rate increases during 1994. Fixed rate mortgages
originated for sale amounted to $10.4 million in 1994, down 56.7% from the prior
year. (See the Consolidated Statements of Cash Flows for additional
information.)
The Corporation retains servicing rights on all residential mortgage loans sold.
The balance of serviced loans at December 31, 1994 amounted to $91.8 million,
compared to $91.3 million at December 31, 1993.
% Change
---------------------------
(Dollars in thousands) 1994 1993 1992 1994 vs 1993 1993 vs 1992
-------------------------------------------------------------------------------------------
Trust income $3,284 $2,952 $2,678 11.2% 10.2%
Service charges on deposit accounts 1,611 1,446 1,229 11.4 17.7
Merchant processing fees 622 522 437 19.2 19.5
Gains on sales of securities 685 346 197 98.0 75.6
Gains (losses) on loan sales (16) 485 484 (103.3) .2
Fees, service charges and other 394 391 409 .8 (4.4)
Mortgage servicing fees 342 287 340 19.2 (15.6)
-------------------------------------------------------------------------------------------
Total noninterest income $6,922 $6,429 $5,774 7.7% 11.3%
===========================================================================================
Noninterest Expense
Total noninterest expense rose 9.8% to $19.7 million in 1994. Salaries and
employee benefits accounted for the majority of the increase, rising by 14.3%
due to increased staffing levels, normal salary adjustments and higher profit
sharing and incentive plan costs.
Foreclosed property costs totalled $240,975 in 1994, down from $901,320 in 1993.
The decrease of 73.3% is primarily due to a decline in the number of properties
owned and a reduction in the amount of write-downs recorded to adjust the
carrying values of the properties owned to their fair value. The provision for
valuation of other real estate owned amounted to $407,530 in 1994, down from the
prior year amount of $1,042,428.
Charitable contributions amounted to $699,896 in 1994, up from $6,894 in 1993.
This nonrecurring expense is associated with the donation of equity securities
for the establishment of a charitable trust in the first quarter of 1994. This
transaction had little effect on net income in 1994 as the expense was
substantially offset by a related gain on the disposition of the donated
securities. (See Note 3 to the Consolidated Financial Statements for additional
information relating to this transaction.)
% Change
--------------------------
(Dollars in thousands) 1994 1993 1992 1994 vs 1993 1993 vs 1992
------------------------------------------------------------------------------------------
Salaries $ 8,343 $ 7,597 $ 6,630 9.8% 14.6%
Employee benefits 1,587 1,089 1,007 45.7 8.1
Depreciation - occupancy 539 540 524 (0.2) 3.1
Other occupancy costs 667 648 490 2.9 32.2
Depreciation - equipment 774 906 786 (14.6) 15.3
Other equipment costs 414 424 432 (2.4) (1.9)
Deposit taxes and assessments 1,279 1,217 1,150 5.1 5.8
Foreclosed property costs 241 901 1,054 (73.3) (14.5)
Office supplies 606 517 482 17.2 7.3
Advertising and promotion 505 476 443 6.1 7.4
Credit and collection 513 582 453 (11.9) 28.5
Postage 363 331 328 9.7 .9
Charitable contributions 700 7 10 1,000.0 (30.0)
Other 3,174 2,711 2,299 17.1 17.9
------------------------------------------------------------------------------------------
Total noninterest expense $19,705 $17,946 $16,088 9.8% 11.5%
==========================================================================================
Income Taxes
Income tax expense amounted to $3.0 million and $2.3 million in 1994 and 1993,
respectively. The Corporation's effective tax rate was 32.6% in 1994, down from
the 1993 rate of 33.5%. These rates differed from the federal rate of 34.0% due
to the benefits of tax-exempt income and the dividends received deduction as
well as the expense resulting from state income taxes.
The Corporation adopted SFAS No. 109, "Accounting for Income Taxes", as of
January 1, 1993. SFAS No. 109 required a change from the deferred method of
determining income tax expense to the asset and liability method. Deferred tax
assets and liabilities are established for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The cumulative
effect of the January 1, 1993 adoption of SFAS No. 109 was a $305,000 increase
in earnings.
The Corporation had a net deferred tax asset amounting to $1.8 million at
December 31, 1994, down from $3.3 million at December 31, 1993. The reduction
in the amount of the deferred tax asset is attributable to the implementation of
SFAS No. 115, which requires that securities available for sale be recorded at
their market value. The deferred tax asset was increased in 1994 by
approximately $1.2 million as a result of a required change in the method of
calculating the allowable tax deduction for loan losses. A significant portion
of the Corporation's deferred tax asset is expected to be realized for tax
purposes within a five year period.
Recent Accounting Developments
Loan Impairment
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which is effective for
fiscal years beginning after December 15, 1994. This pronouncement establishes
accounting standards for measuring impairment on loans for which it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires impairment to be
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. This pronouncement also narrows the definition of in-substance
foreclosures. Accordingly, many of the loans currently classified as in-
substance foreclosures will be treated as impaired loans rather than OREO under
these new guidelines. The January 1, 1995 adoption of SFAS No. 114 will result
in an increase in net loans of $3,301,000, and a corresponding decrease in OREO.
The adoption of this pronouncement will not have a significant effect on the
Corporation's results of operations.
Comparison of 1993 with 1992
Washington Trust recorded net income, before the accounting change for income
taxes of $4,476,531, or $1.59 per share in 1993, compared to $3,150,356, or
$1.14 per share earned in 1992. Increased net interest income, improved levels
of nonperforming assets, and a resultant decrease in the Corporation's provision
for loan losses all had a positive impact on 1993 earnings. Net income in 1993
included a benefit of $305,000 or $.11 per share recorded as a result of a
change in accounting for income taxes.
Net interest income rose 8.8% in 1993, primarily due to a favorable interest
rate environment. Rates paid on deposits continued to decline more rapidly than
those earned on loans and investments, resulting in a $1.7 million increase in
net interest income in 1993. The net interest margin amounted to 4.90% in 1993,
up from 4.76% in 1992. The interest rate spread rose 15 basis points to 4.55%
for the year ended December 31, 1993.
Total loans increased by $27.3 million in 1993 and amounted to $352.5 million at
December 31, 1993. Commercial loan demand was soft during 1993, but demand for
fixed rate residential mortgage refinancings was strong due to low interest
rates. The majority of the fixed rate mortgages originated in 1993 were sold in
the secondary market. Adjustable rate residential mortgages increased $22.0
million, or 65.8%, as borrowers opted for the attractive rates that this product
offered.
Nonperforming assets totalled 3.9% of total assets at December 31, 1993, down
from the 1992 amount of 5.7%. The Corporation's loan loss provision amounted to
$2.5 million in 1993, down from $4.0 million in 1992. Net loan charge-offs
amounted to $1.2 million in 1993, down from $3.1 million in 1992.
Shareholders' equity rose 10.1% in 1993 to $38.5 million. The ratio of capital
to assets was 7.9% and 7.6% at December 31, 1993 and 1992, respectively.
Dividends paid per share amounted to $.59 in 1993, up 10% from the prior year.
Consolidated Balance Sheets
Washington Trust Bancorp, Inc. and Subsidiary
December 31, 1994 1993
--------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks (note 2) $ 15,172,421 $ 14,978,427
Federal funds sold 3,232,489 6,671,701
Securities available for sale, at market value in 1994
(cost $31,846,965) and at lower of cost or market in
1993 (market value $44,420,747); (note 3) 36,516,115 36,236,543
Mortgage loans held for sale 203,750 3,709,499
Investment securities, at cost; market value $49,395,262
in 1994 and $53,333,595 in 1993 (note 4) 52,496,616 52,497,832
Loans (notes 5 and 14) 390,133,472 352,510,695
Less reserve for possible loan losses (note 6) 8,835,907 8,657,263
--------------------------------------------------------------------------------------------------
Net loans 381,297,565 343,853,432
Premises and equipment, net (note 7) 14,779,903 14,354,731
Accrued interest receivable 3,232,211 2,870,911
Net deferred tax asset (note 13) 1,797,340 3,305,000
Other real estate owned, net (note 9) 5,307,905 7,831,146
Other assets 1,643,648 1,019,602
--------------------------------------------------------------------------------------------------
Total assets $515,679,963 $487,328,824
==================================================================================================
Liabilities:
Deposits:
Demand $ 53,373,386 $ 43,924,560
Savings 192,653,937 200,846,347
Time (note 10) 194,703,819 178,603,713
--------------------------------------------------------------------------------------------------
Total deposits 440,731,142 423,374,620
Dividends payable 564,686 411,473
Federal Home Loan Bank advances (note 11) 23,522,343 20,500,000
Accrued expenses and other liabilities 5,078,808 4,579,806
--------------------------------------------------------------------------------------------------
Total liabilities 469,896,979 448,865,899
--------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 8 and 15)
Shareholders' Equity: (note 16)
Common stock of $.0625 par value; authorized 10,000,000
shares in 1994 and 3,000,000 shares in 1993; issued
2,880,000 shares 180,000 120,000
Paid-in capital 2,869,135 2,822,908
Retained earnings 40,613,979 36,418,073
Unrealized gain on securities available for sale, net of tax 2,801,490 --
Treasury stock, at cost; 56,570 shares in 1994
and 74,505 shares in 1993 (681,620) (898,056)
--------------------------------------------------------------------------------------------------
Total shareholders' equity 45,782,984 38,462,925
--------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $515,679,963 $487,328,824
==================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans (note 5) $ 31,116,418 $ 29,565,118 $ 32,080,668
Income from investment securities and securities
available for sale:
Interest 4,543,584 4,143,297 2,767,561
Dividends 745,925 897,869 728,260
Interest on federal funds sold 255,761 321,579 292,258
-------------------------------------------------------------------------------------------------------
Total interest income 36,661,688 34,927,863 35,868,747
-------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,334,637 4,964,023 5,810,111
Time deposits 7,917,428 8,111,506 10,280,550
Other 1,336,517 1,103,250 709,557
-------------------------------------------------------------------------------------------------------
Total interest expense 13,588,582 14,178,779 16,800,218
-------------------------------------------------------------------------------------------------------
Net interest income 23,073,106 20,749,084 19,068,529
Provision for loan losses (note 6) 1,000,000 2,500,000 4,000,000
-------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 22,073,106 18,249,084 15,068,529
-------------------------------------------------------------------------------------------------------
Noninterest income:
Trust income 3,284,435 2,952,216 2,678,082
Service charges on deposit accounts 1,610,550 1,446,269 1,228,610
Merchant processing fees 622,013 521,545 436,511
Gains on sales of securities (notes 3 and 4) 684,590 345,674 196,606
Gains (losses) on loan sales (15,998) 484,960 484,187
Other income 736,576 678,510 750,295
-------------------------------------------------------------------------------------------------------
Total noninterest income 6,922,166 6,429,174 5,774,291
-------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits (note 12) 9,929,943 8,686,310 7,636,843
Net occupancy 1,206,031 1,187,937 1,013,706
Equipment 1,188,352 1,330,052 1,218,225
Deposit taxes and assessments 1,279,417 1,216,740 1,149,683
Foreclosed property costs (note 9) 240,975 901,320 1,053,768
Office supplies 605,645 516,788 481,678
Advertising and promotion 505,351 476,305 442,980
Credit and collection 512,715 581,831 453,460
Charitable contributions (note 3) 699,896 6,894 10,300
Other 3,536,307 3,042,550 2,627,821
-------------------------------------------------------------------------------------------------------
Total noninterest expense 19,704,632 17,946,727 16,088,464
-------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 9,290,640 6,731,531 4,754,356
Applicable income taxes (note 13) 3,026,000 2,255,000 1,604,000
-------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 6,264,640 4,476,531 3,150,356
Cumulative effect of change in accounting for income taxes -- 305,000 --
-------------------------------------------------------------------------------------------------------
Net income $ 6,264,640 $ 4,781,531 $ 3,150,356
=======================================================================================================
Weighted average shares outstanding - primary 2,872,360 2,811,846 2,769,003
Weighted average shares outstanding - fully diluted 2,872,775 2,825,759 2,770,961
Earnings per share - primary:
Income before cumulative effect of accounting change $2.18 $1.59 $1.14
Cumulative effect of change in accounting for income taxes -- .11 --
----- ----- -----
Net income $2.18 $1.70 $1.14
===== ===== =====
Earnings per share - fully diluted:
Income before cumulative effect of accounting change $2.18 $1.58 $1.14
Cumulative effect of change in accounting for income taxes -- .11 --
----- ----- -----
Net income $2.18 $1.69 $1.14
===== ===== =====
Cash dividends declared per share $ .73 $ .59 $ .53
<FN>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Washington Trust Bancorp, Inc. and Subsidiary
Years Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,264,640 $ 4,781,531 $ 3,150,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,000,000 2,500,000 4,000,000
Provision for valuation of other real estate owned 407,530 1,042,428 579,170
Depreciation of premises and equipment 1,313,158 1,446,367 1,310,635
Amortization of net deferred loan fees and costs (819,142) (599,670) (303,548)
Cumulative effect of change in accounting principle -- (305,000) --
Deferred income tax benefit (360,000) (881,000) (833,000)
Gains on sales of investment securities -- -- (197,214)
Losses (gains) on sales of securities available for sale (684,590) (345,674) 608
Gains on sales of other real estate owned (478,519) (674,331) (131,958)
Losses (gains) on loan sales 15,998 (484,960) (484,187)
Proceeds from sales of loans 13,867,186 29,396,915 --
Loans originated for sale (10,377,435) (23,981,881) --
Decrease (increase) in accrued interest receivable (361,300) (9,414) 901,201
Decrease (increase) in other assets (624,046) 49,001 723,134
Increase in accrued expenses and
other liabilities 499,002 861,108 419,747
Other, net 121,778 22,998 70,816
-------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,784,260 12,818,418 9,205,760
-------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (5,653,443) (7,655,294) (10,936,945)
Proceeds from sales of equity securities 9,666,129 7,387,344 7,508,250
Maturities 1,000,000 -- --
Investment securities:
Purchases (8,399,712) (26,043,737) (48,617,219)
Maturities and principal repayments 8,355,132 12,611,066 25,353,427
Proceeds from sales of equity securities -- -- 7,332,350
Loan originations in excess of principal
collected on loans (37,685,414) (26,244,158) (44,356,538)
Proceeds from sales and other reductions
of other real estate owned 2,656,786 3,726,763 3,161,646
Proceeds from sales of loans -- -- 44,516,903
Purchases of premises and equipment (1,754,963) (755,168) (1,106,195)
-------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,815,485) (36,973,184) (17,144,321)
-------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 17,356,522 18,714,615 4,942,085
Proceeds from Federal Home Loan Bank advances 15,051,500 10,000,000 11,500,000
Repayment of Federal Home Loan Bank advances (12,029,157) (3,500,000) (2,500,000)
Proceeds from issuance of commmon stock from treasury 322,663 371,803 236,053
Cash dividends paid (1,915,521) (1,599,173) (1,105,595)
-------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,786,007 23,987,245 13,072,543
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,245,218) (167,521) 5,133,982
Cash and cash equivalents at beginning of year 21,650,128 21,817,649 16,683,667
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $18,404,910 $21,650,128 $21,817,649
=======================================================================================================
Noncash Investing Activities:
Net transfers from loans to other real estate owned $ 1,770,354 $ 1,440,156 $ 9,959,742
Loans charged off 1,114,208 1,512,221 3,416,989
Loans made to facilitate the sale of other real
estate owned 1,709,931 3,053,750 4,542,550
Change in unrealized gain on securities available
for sale, net of tax 2,801,490 -- --
Supplemental Disclosures:
Interest payments $ 7,384,172 $ 8,154,492 $ 8,959,552
Income tax payments 2,942,787 2,844,278 1,964,111
<FN>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1994 1993 1992
--------------------------------------------------------------------------------------------------------
Common Stock
Balance at beginning of year $ 120,000 $ 120,000 $ 120,000
3-for-2 stock split in the form of a 50% stock dividend 60,000 -- --
--------------------------------------------------------------------------------------------------------
Balance at end of year 180,000 120,000 120,000
--------------------------------------------------------------------------------------------------------
Paid-in Capital
Balance at beginning of year 2,822,908 2,784,205 2,824,307
Issuance of common stock for dividend reinvestment
and stock option plans 106,227 38,703 (40,102)
3-for-2 stock split in the form of a 50% stock dividend (60,000) -- --
--------------------------------------------------------------------------------------------------------
Balance at end of year 2,869,135 2,822,908 2,784,205
--------------------------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 36,418,073 33,276,746 31,602,427
Net income 6,264,640 4,781,531 3,150,356
Cash dividends declared (2,068,734) (1,640,204) (1,476,037)
--------------------------------------------------------------------------------------------------------
Balance at end of year 40,613,979 36,418,073 33,276,746
--------------------------------------------------------------------------------------------------------
Unrealized Gain on Securities Available for Sale
Balance at beginning of year -- -- --
Adoption of SFAS No. 115 4,910,522 -- --
Change in unrealized gain on securities available
for sale, net of tax (2,109,032) -- --
--------------------------------------------------------------------------------------------------------
Balance at end of year 2,801,490 -- --
--------------------------------------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (898,056) (1,231,156) (1,507,311)
Issuance of common stock for dividend reinvestment
and stock option plans 216,436 333,100 276,155
--------------------------------------------------------------------------------------------------------
Balance at end of year (681,620) (898,056) (1,231,156)
--------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 45,782,984 $ 38,462,925 $ 34,949,795
========================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Washington Trust Bancorp, Inc. and
subsidiary (the Corporation) include the accounts of Washington Trust Bancorp,
Inc. and its wholly-owned subsidiary, The Washington Trust Company, a Rhode
Island chartered bank. All significant intercompany transactions have been
eliminated. The consolidated financial statements are presented on the accrual
basis of accounting except for certain fees earned in a fiduciary capacity which
are reported on a cash basis and which do not differ materially from amounts
determined on the accrual basis.
Certain amounts in the 1993 and 1992 consolidated financial statements have been
reclassified to conform to the current reporting format.
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.
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). The Statement requires that securities
available for sale be reported at fair value, with any unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity, net of tax, until realized. 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.
Prior to adoption of SFAS No. 115, securities available for sale were carried at
the lower of aggregate cost, adjusted for amortization of premium or accretion
of discount in the case of debt securities, or market value. The resulting net
unrealized loss, if any, was charged to current period earnings. Any unrealized
loss on an individual security deemed to be other than temporary was recognized
as a realized loss in the accounting period in which the determination was made.
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.
Investment Securities
The determination to classify debt securities in the investment 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 held in the investment portfolio
are stated at cost, adjusted for amortization of premium and accretion of
discount (calculated on a method that approximates the interest method).
Loan Accounting Policy
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.
Loans
Loans are stated at the principal amount outstanding, net of unamortized
deferred loan origination fees and costs. Interest income is accrued on various
methods which approximate a level yield related to principal amounts
outstanding. Deferred loan fees and costs are amortized as an adjustment to
yield over the life of the related loans.
Nonaccrual Loans
Loans, with the exception of credit card loans, 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. 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.
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.
Reserve for Possible Loan Losses
The reserve for possible loan losses is available for future credit losses
inherent in the loan portfolio. The level of the reserve 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 reserve and recoveries of amounts previously charged off are
added to the reserve. Loss provisions charged to earnings are added to the
reserve to bring it to the desired level.
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
includes loans determined to be "in-substance" foreclosures (ISFs). A loan is
considered to be an ISF when the borrower has little or no equity in the
underlying collateral property, proceeds for repayment of the loan are dependent
upon the sale of the collateral, and the borrower has effectively abandoned
control of the property or it is doubtful that the borrower will be able to
rebuild equity in the property.
OREO is stated at the lower of cost or fair value at the date of acquisition or
classification to ISF 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 or classification to ISF status is charged to the
reserve for possible loan losses. A valuation allowance is maintained for
potential declines in market value, known specific declines in market value, and
estimated selling costs. 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.
Interest Rate Swap Agreements
Interest rate swap agreements are agreements to exchange interest payments (e.g.
fixed-rate for variable-rate payments) computed on contractual amounts.
Interest rate swap agreements are entered into as hedges against future interest
rate fluctuations on specifically identified assets or liabilities. The
Corporation does not trade in speculative swaps. Therefore, these instruments
are not marked to market.
Amounts paid or received related to outstanding contracts that are used to
manage interest rate risk are recognized in earnings as an adjustment to the
related interest income or expense over the life of the swap agreements. Gains
or losses resulting from the termination of interest rate swap 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
agreements are included in the underlying assets/liabilities hedged.
Deposit Taxes and Assessments
Deposit taxes and assessments consist of amounts assessed to members of the Bank
Insurance Fund (BIF) by the Federal Deposit Insurance Corporation (FDIC) and
deposit taxes imposed by the State of Rhode Island. These amounts are
calculated based on levels of bank deposits using rates established by the
respective regulatory authorities.
Pension Costs
Annual charges to earnings for the Corporation's defined benefit plans are
recognized based upon actuarial calculations and other methods.
Advertising and Promotion Costs
Advertising and promotion costs, including advertising production and
communication costs, are reported as an expense in the period in which they are
incurred.
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.
The Corporation adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109) on January 1, 1993. The cumulative
effect of adoption of SFAS No. 109 was reported in the 1993 Consolidated
Statements of Income. Prior to adoption of SFAS No. 109, the Corporation
accounted for income taxes under Accounting Principles Board Opinion No. 11,
whereby deferred taxes are provided for income and expense items which are
recognized in different time periods for financial reporting and tax return
purposes.
Earnings Per Share
Earnings per share is determined by dividing net income by the average number of
common shares and common stock equivalents outstanding, net of shares assumed to
be repurchased using the treasury stock method. Common stock equivalents arise
from the assumed exercise of outstanding stock options, if dilutive.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are sold on an overnight basis.
In 1993 the Corporation adopted the policy of originating certain mortgage loans
specifically for sale in the secondary market. Accordingly, originations and
sales of such loans in 1993 and 1994 are classified as operating activities in
the Consolidated Statements of Cash Flows.
(2) Cash and Due From Banks
The Corporation's bank subsidiary is required to maintain certain average
reserve balances with the Federal Reserve. Such reserve balances amounted to
$6,856,533 and $6,249,989 at December 31, 1994 and 1993, respectively.
(3) Securities Available For Sale
As discussed in Note 1, the Corporation adopted SFAS No. 115 as of January 1,
1994. The effect of adopting this pronouncement was an increase in the carrying
value of securities available for sale of $8,184,204. Prior year amounts have
not been restated.
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------------------------
December 31, 1994
U.S. Treasury obligations $25,059,480 $ 181,660 $ (707,920) $24,533,220
Corporate stocks 3,880,685 5,215,167 (19,757) 9,075,095
Federal Home Loan Bank stock 2,906,800 -- -- 2,906,800
------------------------------------------------------------------------------------
Total $31,846,965 $5,396,827 $ (727,677) $36,516,115
====================================================================================
December 31, 1993
U.S. Treasury obligations $25,120,650 $1,097,084 $ (12,053) $26,205,681
Corporate debt securities 1,000,000 -- (2,500) 997,500
------------------------------------------------------------------------------------
Total debt securities 26,120,650 1,097,084 (14,553) 27,203,181
Corporate stocks 8,143,093 7,161,080 (59,407) 15,244,766
Federal Home Loan Bank stock 1,972,800 -- -- 1,972,800
------------------------------------------------------------------------------------
Total $36,236,543 $8,258,164 $ (73,960) $44,420,747
====================================================================================
The contractual maturities and weighted average yields of debt securities are
summarized below.
Weighted
Amortized Market Average
Debt Securities Available for Sale (1) Cost Value Yield
-----------------------------------------------------------------------------
December 31, 1994
Due in 1 year or less $ 6,001,105 $ 5,980,350 5.54%
After 1 but within 5 years 18,568,315 17,881,150 6.11%
After 5 but within 10 years -- -- --
After 10 years 490,060 671,720 13.14%
-----------------------------------------------------------------------------
Total $25,059,480 $24,533,220 6.11%
=============================================================================
<FN>
(1) Debt securities designated as available for sale may be sold prior to
their contractual maturity.
The following is a summary of amounts relating to sales of corporate stocks:
Years ended December 31, 1994 1993 1992
---------------------------------------------------------------------------
Proceeds from sales $9,666,129 $7,387,344 $7,508,250
===========================================================================
Realized gains $ 713,534 $ 345,844 $ --
===========================================================================
Realized losses $ 28,944 $ 170 $ 608
===========================================================================
Included in proceeds from sales of corporate stocks in 1994 are proceeds of
$699,896 which represent the donation of corporate stocks to a charitable trust
established by the Corporation. The gain on this transaction is included in
gains on sales of securities available for sale and amounted to $676,058, the
excess of the fair market value of the donated securities over their historical
cost. The Corporation also recorded a contribution expense of $699,896 in
accordance with Statement of Financial Accounting Standards No. 116, "Accounting
for Contributions Received and Contributions Made". This statement requires
contributions to be measured at the fair value of the asset given. Prior to
1994, contribution expense was recorded in the amount of the historical cost of
donated stocks, with no gain or loss recognized.
Included in proceeds from sales of corporate stocks available for sale are $7.5
million and $7.0 million in 1994 and 1993, respectively, from dispositions of
dutch auction preferred stocks with no gain or loss. Purchases of dutch auction
preferred stocks available for sale amounted to $3.5 million and $5.0 million in
1994 and 1993, respectively. These are preferred stock instruments whose
dividend rate is reset by auction every 49 days to a market rate, resulting in a
market value of par. At each auction, the holder can elect not to participate
in the auction and therefore liquidate its investment at par (cost). There were
no sales of debt securities available for sale during 1994, 1993 and 1992.
Securities available for sale with a book value of $2,999,133 and $2,997,163
were pledged to secure public deposits and for other purposes at December 31,
1994 and 1993, respectively.
(4) Investment Securities
Investment securities are summarized as follows:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
December 31, 1994
U.S. Treasury obligations
and obligations of U.S.
government-sponsored agencies $20,413,017 $ -- $(1,714,040) $18,698,977
Mortgage-backed securities 21,696,508 -- (1,160,590) 20,535,918
States and political
subdivisions 10,387,091 9,385 (236,109) 10,160,367
-------------------------------------------------------------------------------------
Total $52,496,616 $ 9,385 $(3,110,739) $49,395,262
=====================================================================================
December 31, 1993
U.S. Treasury obligations
and obligations of U.S.
government-sponsored agencies $19,419,860 $ 26,765 $ (131,194) $19,315,431
Mortgage-backed securities 25,401,432 880,196 (33,684) 26,247,944
States and political
subdivisions 7,676,540 99,539 (5,859) 7,770,220
-------------------------------------------------------------------------------------
Total $52,497,832 $1,006,500 $ (170,737) $53,333,595
=====================================================================================
Mortgage-backed securities included in the investment securities portfolio are
issued by both the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. These securities represent participating
interests in pools of long-term residential mortgage loans. Included in
mortgage-backed securities are Federal Home Loan Mortgage Corporation
participation certificates backed by mortgage loans originated by the bank
subsidiary amounting to $15,084,526 and $17,273,190 at December 31, 1994 and
1993, respectively.
Investment securities with a carrying value of $999,828 and $999,636 were
pledged to secure public deposits and for other purposes at December 31, 1994
and 1993, respectively.
The contractual maturities and weighted average yields of debt securities are
summarized below.
Weighted
Amortized Market Average
Debt Securities Held for Investment (1) Cost Value Yield
------------------------------------------------------------------------------
December 31, 1994
Due in 1 year or less $ 8,029,516 $ 7,878,497 4.87%
After 1 but within 5 years 28,697,847 26,756,480 5.39%
After 5 but within 10 years 7,234,247 6,680,304 7.13%
After 10 years 8,535,006 8,079,981 7.35%
------------------------------------------------------------------------------
Total $52,496,616 $49,395,262 5.87%
==============================================================================
<FN>
(1) Mortgage-backed securities are included based on their weighted average
maturities, adjusted for anticipated future prepayments.
On September 30, 1992, the Corporation adopted the policy of designating
securities as either available for sale or held for investment. There were no
sales of securities held for investment subsequent to the adoption of this
policy. During the nine month period ended September 30, 1992, proceeds from
sales of equity securities from the investment portfolio amounted to $7,332,350.
There were no sales of debt securities from the investment portfolio in 1992.
Gross realized gains and losses on sales of investment securities in 1992
amounted to $208,464 and $11,250, respectively.
Included in proceeds from sales of investment securities in 1992 is $6.5 million
from dispositions of dutch auction preferred stocks with no gain or loss.
Purchases of dutch auction preferred stocks for the investment portfolio
amounted to $13.0 million in 1992.
(5) Loans
The following is a summary of loans:
December 31, 1994 1993
----------------------------------------------------------------------------------
Residential real estate:
Mortgages $169,715,217 $152,758,727
Homeowner construction 6,933,793 6,120,171
----------------------------------------------------------------------------------
Total residential real estate 176,649,010 158,878,898
Commercial and other:
Mortgages (1) 54,735,825 48,011,836
Construction and development (2) 11,909,730 10,051,008
Other (3) 101,796,053 101,636,280
----------------------------------------------------------------------------------
Total commercial and other 168,441,608 159,699,124
Installment 45,042,854 33,932,673
----------------------------------------------------------------------------------
Total loans $390,133,472 $352,510,695
==================================================================================
<FN>
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and for
land development
(3) Loans to businesses and individuals, a substantial portion of which are
fully or partially collateralized by real estate
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, multi-family properties, commercial real
estate properties, and for land development. The ability and willingness of the
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 and willingness 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
market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 1994 and 1993 was
$7,119,271 and $11,370,726, respectively. Interest income that would have been
recognized had these loans been performing at originally contracted rates was
approximately $628,000 in 1994, $1,021,000 in 1993, and $1,290,000 in 1992.
Interest income attributable to these loans included in the Consolidated
Statements of Income amounted to approximately $287,000 in 1994, $597,000 in
1993 and $709,000 in 1992.
Troubled Debt Restructurings
During 1994, $528,999 of loans were restructured. Restructured loans which are
performing in accordance with their new terms and, therefore, not included in
nonaccrual loans, amounted to $365,000 at December 31, 1994. Interest income
that would have been recognized had these loans been performing at originally
contracted rates was approximately $34,000 in 1994. Interest income
attributable to these loans included in the Consolidated Statements of Income
amounted to $26,000 in 1994. At December 31, 1994, there were no commitments to
lend additional funds to borrowers whose loans had been restructured. There
were no accruing restructured loans at December 31, 1993.
Mortgage Servicing Activities
Mortgage loans sold to others and serviced by the Corporation on a fee basis
under various agreements amounted to $91,767,691 and $91,341,476 at December 31,
1994 and 1993, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.
Impaired Loans
Effective January 1, 1995, the Corporation will adopt Statements of Financial
Accounting Standards Nos. 114 and 118, "Accounting by Creditors for Impairment
of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" (SFAS No. 114 and No. 118). These statements
establish accounting standards for measuring impairment on loans for which it is
probable that the creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. SFAS No. 114 requires
impairment to be 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. This statement also narrows the definition of in-
substance foreclosures. Accordingly, loans currently classified as ISFs will be
treated as impaired loans rather than OREO under these new guidelines. The
January 1, 1995 adoption of SFAS No. 114 and No. 118 will result in an increase
in gross loans of approximately $3,793,000. The adoption of these
pronouncements will not have a significant effect on the Corporation's results
of operations.
(6) Reserve for Possible Loan Losses
The following is an analysis of the reserve for possible loan losses:
Years ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------
Balance at beginning of year $8,657,263 $7,342,276 $6,474,272
Provision charged to expense 1,000,000 2,500,000 4,000,000
Recoveries of loans previously charged off 292,852 327,208 284,993
Loans charged off (1,114,208) (1,512,221) (3,416,989)
-------------------------------------------------------------------------------------
Balance at end of year $8,835,907 $8,657,263 $7,342,276
=====================================================================================
Management believes that the reserve for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the reserve may be necessary based on changes in economic
conditions, particularly in the northeastern United States. In addition,
various regulatory agencies may periodically review the Corporation's reserve
for possible loan losses. Such agencies may require the recognition of
additions to the reserve based on their judgments about information available to
them at the time of their examination.
As stated in Note 5, the Corporation is required to adopt SFAS No. 114 and SFAS
No. 118. The adoption of these statements on January 1, 1995 will result in an
increase in the reserve for possible loan losses of approximately $492,000 and a
corresponding decrease in the OREO valuation allowance. This increase in the
reserve for possible loan losses is associated with loans previously accounted
for as ISFs.
(7) Premises and Equipment
The following is a summary of premises and equipment:
December 31, 1994 1993
----------------------------------------------------------------------------
Land and improvements $ 1,530,736 $ 1,530,736
Premises and improvements 15,120,987 15,050,701
Furniture, fixtures, and equipment 8,977,727 7,748,246
----------------------------------------------------------------------------
25,629,450 24,329,683
Less accumulated depreciation 10,849,547 9,974,952
----------------------------------------------------------------------------
Total premises and equipment, net $14,779,903 $14,354,731
============================================================================
(8) 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. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The contractual and notional
amounts of financial instruments with off-balance sheet risk are as follows:
December 31, 1994 1993
------------------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit:
Commercial and other loans $18,607,837 $19,837,556
Revolving, open-end loans secured by
residential properties; home equity lines 11,000,699 8,791,330
Credit card lines 10,975,795 9,845,871
Homeowner construction loans 2,602,710 3,257,811
Construction and development loans 1,274,763 1,329,486
Loans sold with recourse 1,505,466 2,104,375
Standby letters of credit 521,800 848,253
Financial instruments whose notional amounts
exceed the amount of credit risk:
Interest rate swap agreements 10,000,000 --
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each borrower's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained is based
on management's credit evaluation of the borrower.
Loans Sold With Recourse
The Corporation has retained credit risk on certain residential mortgage loans
sold with recourse. In the event of default by the mortgagor, the Corporation
could become obligated to repurchase the loan. Such repurchases have been
insignificant and have not resulted in any losses to the Corporation.
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 Swap Agreements
The Corporation uses interest rate swaps as part of its interest rate risk
management strategy. Swaps are agreements in which the Corporation and another
party agree to exchange interest payments on a notional principal amount. The
credit risk associated with swap transactions is the risk of default by the
counterparty. To minimize this risk, the Corporation enters into swap
agreements only with creditworthy counterparties. The notional amounts of
swap transactions do not represent amounts exchanged by the parties and, thus,
are not a measure of the Corporation's potential loss exposure.
During 1994, the Corporation entered into interest rate swap agreements with a
total notional amount of $10 million which mature in May 1996. Under the
agreements, the Corporation pays a quarterly-resetting rate equal to 3-month
London Interbank Offered Rate (LIBOR) on the notional balance while receiving an
average fixed rate of 6.1% over the life of the agreements. At December 31,
1994, the weighted average rate paid by the Corporation on the swap agreements
was 5.94%. The purpose of the swap agreements is to convert the fixed rate paid
on certain time deposits to a quarterly-resetting rate. The Corporation has not
terminated any interest rate swap agreements and there are no unamortized
deferred gains or losses. At December 31, 1994, the fair value, or the cost to
terminate the agreements, was $256,000.
(9) Other Real Estate Owned
An analysis of the composition of OREO, including in-substance foreclosures,
follows:
December 31, 1994 1993
---------------------------------------------------------------------------
Property acquired through foreclosure:
Commercial real estate $ 751,857 $ 2,354,325
Residential real estate 457,210 382,209
Construction and development 401,302 715,599
Land 967,388 1,115,988
---------------------------------------------------------------------------
Total property acquired through foreclosure 2,577,757 4,568,121
---------------------------------------------------------------------------
In-substance foreclosures:
Commercial real estate 1,327,845 1,670,646
Residential real estate 2,042,727 1,443,285
Construction and development -- 989,617
Land 293,200 625,777
Other 234,200 325,672
---------------------------------------------------------------------------
Total in-substance foreclosures 3,897,972 5,054,997
---------------------------------------------------------------------------
Valuation allowance (1,167,824) (1,791,972)
---------------------------------------------------------------------------
Other real estate owned, net $ 5,307,905 $ 7,831,146
===========================================================================
In the fourth quarter of 1992, the Corporation adopted Statement of Position
(SOP) 92-3, "Accounting for Foreclosed Assets". This statement requires that
other real estate owned be carried at the lower of cost or fair value minus
estimated costs to sell. A valuation allowance is maintained for known specific
and potential market declines and for estimated selling expenses. The valuation
allowance is reduced by selling expenses incurred and increased by charges to
earnings. Realized gains and losses on dispositions are recognized in earnings.
Prior to the adoption of SOP 92-3, the Corporation provided for estimated
selling expenses and known specific market declines as a reduction of the cost
basis of OREO, rather than through the valuation allowance. Adoption of SOP 92-
3 resulted in increases of $798,541 to the OREO cost basis and the valuation
allowance in 1992. Prior to the adoption of SOP 92-3, realized gains and losses
on dispositions of properties were credited or charged to the valuation
allowance.
An analysis of the activity relating to other real estate owned, including in-
substance foreclosures, follows:
Years ended December 31, 1994 1993
----------------------------------------------------------------------------
Balance at beginning of year $ 9,623,118 $15,633,419
Net transfers from loans 1,770,354 1,440,156
Sales and other reductions (5,013,648) (7,526,597)
Other, net 95,905 76,140
----------------------------------------------------------------------------
6,475,729 9,623,118
Valuation allowance (1,167,824) (1,791,972)
----------------------------------------------------------------------------
Balance at end of year $ 5,307,905 $ 7,831,146
============================================================================
The following is an analysis of activity relating to the OREO valuation
allowance:
Years ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------
Balance at beginning of year $1,791,972 $2,177,930 $505,268
Provision charged to expense 407,530 1,042,428 579,170
Net gains (losses) on dispositions -- -- 462,852
Specific write-downs -- -- (189,600)
Adoption of SOP 92-3 -- -- 798,541
Sales and other reductions (725,464) (1,274,911) (86,398)
Selling expenses incurred (55,763) (114,712) (19,287)
Other, net (250,451) (38,763) 127,384
-------------------------------------------------------------------------------
Balance at end of year $1,167,824 $1,791,972 $2,177,930
===============================================================================
Provisions charged to earnings for potential declines in market value, specific
write-downs and estimated costs to sell amounted to $407,530, $1,042,428, and
$579,170 in 1994, 1993, and 1992, respectively. Net realized gains on
dispositions of properties amounted to $478,519, $674,331, and $131,958 in 1994,
1993, and 1992, respectively. These amounts are included in foreclosed property
costs on the Consolidated Statements of Income.
The January 1, 1995 adoption of SFAS No. 114 (discussed in Note 5) will result
in a decrease in net OREO of $3,301,000 and a corresponding increase in net
loans.
(10) Time Certificates of Deposit
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $24,562,617 and $21,719,195 at December 31, 1994 and 1993,
respectively.
(11) Federal Home Loan Bank Advances
The following table presents scheduled maturities and interest rates of Federal
Home Loan Bank advances outstanding at December 31, 1994:
Years ending Weighted
December 31, Average Rate Amount
--------------------------------------------------
1995 5.68% 8,042,080
1996 5.55% 3,544,297
1997 6.64% 7,047,482
1998 5.54% 2,550,147
1999 6.04% 1,054,196
2000 and thereafter 6.31% 1,284,141
--------------------------------------------------
$23,522,343
==================================================
The Corporation's subsidiary bank is a member of the Federal Home Loan Bank of
Boston ("FHLBB"). In addition to the outstanding advances, the subsidiary bank
also has access to an unused line of credit equal to 2% of assets at December
31, 1994. Under agreement with the FHLBB, the subsidiary bank is required to
maintain qualified collateral, free and clear of liens, pledges, or encumbrances
that, based on certain percentages of book and market values, has a value equal
to the aggregate amount of the line of credit and outstanding advances.
Qualified collateral may consist of residential mortgage loans, U.S. government
or agency securities, and amounts maintained on deposit at the FHLBB. The
subsidiary bank maintains qualified collateral in excess of the amount required
to collateralize the line of credit and outstanding advances at December 31,
1994.
(12) Employee Benefits
Pension Plan
The Corporation's noncontributory defined benefit pension plan covers
substantially all full-time employees. Benefits are based on an employee's
years of service and highest 3-year compensation. The plan is funded on a
current basis, in compliance with the requirements of the Employee Retirement
Income Security Act.
The following table presents the funded status of the plan and amounts
presented in the consolidated financial statements:
October 1, 1994 1993
-----------------------------------------------------------------------------------------
Plan funded status:
Vested accumulated benefit obligation $(5,828,000) $(5,892,300)
Nonvested accumulated benefit obligation (97,400) (104,400)
Effect of future compensation increases (2,042,500) (1,502,700)
-----------------------------------------------------------------------------------------
Projected benefit obligation (7,967,900) (7,499,400)
Plan assets (primarily listed stocks and fixed income
securities), at fair value 8,244,400 8,221,100
-----------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 276,500 721,700
Unrecognized net gain (376,300) (740,200)
Unrecognized prior service cost 426,300 456,800
Unrecognized net transition asset being amortized
over 21 years (78,500) (84,600)
-----------------------------------------------------------------------------------------
Prepaid pension cost $ 248,000 $ 353,700
=========================================================================================
<FN>
Assumptions used in determining the actuarial present value of the projected benefit
obligation were as follows:
Discount rate 8.00% 6.75%
Rate of increase in compensation levels 6.00% 5.00%
Years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------
Net pension cost:
Service cost; benefits earned during the period $328,200 $303,200 $ 283,700
Interest cost on projected benefit obligation 519,400 521,100 486,500
Actual return on plan assets (126,300) (350,700) (705,400)
Net amortization and deferral (450,000) (238,800) 153,500
-----------------------------------------------------------------------------------------
Net periodic pension cost $271,300 $234,800 $ 218,300
=========================================================================================
<FN>
Assumptions used in determining net periodic pension expense were as follows:
Discount rate 6.75% 7.50% 7.50%
Rate of increase in compensation levels 5.00% 6.00% 6.00%
Expected long term rate of return on
plan assets 7.75% 8.50% 8.50%
Supplemental Pension Plan
Effective November 1, 1994, the Corporation established a nonqualified
retirement plan to provide supplemental retirement benefits to certain
employees, as defined in the plan. Accrued and unpaid benefits under this plan
are an unfunded obligation of the subsidiary bank. At December 31, 1994, the
projected benefit obligation for this plan amounted to $386,200. The expense of
this plan amounted to $19,125 in 1994. The actuarial assumptions used for this
supplemental plan are the same as those used for the Corporation's regular
pension plan.
Savings and Profit Sharing Plan
The Corporation has a qualified savings and profit sharing plan. The plan
provides a specified match of employee contributions for substantially all full-
time employees. In addition, full-time employees, excluding those key employees
participating in the Short-Term Incentive Plan, are eligible for an annual
benefit pursuant to a formula based on return on equity. Total employer
matching contributions under this plan amounted to $173,700, $165,300, and
$81,900 in 1994, 1993, and 1992, respectively. The amount of the profit sharing
benefit was $241,800 and $110,800 for 1994 and 1993, respectively. There was no
profit sharing distribution during 1992.
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
$480,600, $462,500 and $85,700 in 1994, 1993, and 1992, respectively.
Postemployment Benefits
The Corporation adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits", on January 1, 1994. This
statement establishes standards of accounting for the expected cost of providing
benefits to former or inactive employees after employment but before retirement.
It requires employers to accrue for these benefits during the period in which
the employee renders service. The Corporation provides disability-related
benefits to certain employees. The implementation of SFAS No. 112 as of January
1, 1994 did not have a material effect on the Corporation's financial condition
or results of operations.
Directors' Retainer Continuation Plan
The Corporation has a nonqualified plan which provides retirement benefits to
non-officer directors. The plan pays the regular quarterly retainer in effect
at the time of departure for as many quarters as the director served with the
Corporation or a subsidiary. The benefit commences upon departure and is
reduced for departure occurring before age 65. Accrued and unpaid benefits
under this plan are an unfunded obligation of the subsidiary bank. Prior
service cost is being amortized over the expected remaining service period of
each director. Current cost is being recognized based on the present value of
expected future benefits. The expense of this plan is included in other
noninterest expense and amounted to $89,500, $77,800 and $78,800 for 1994, 1993,
and 1992, respectively.
(13) Income Taxes
As discussed in Note 1, the Corporation adopted SFAS No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes was
an increase of $305,000 in consolidated net income. Financial statements for
1992 have not been restated to apply the provisions of SFAS No. 109.
The components of income tax expense were as follows:
Years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------
Current expense:
Federal $2,858,000 $2,614,000 $2,047,000
State 528,000 522,000 390,000
-----------------------------------------------------------------------------------------
Total current expense 3,386,000 3,136,000 2,437,000
-----------------------------------------------------------------------------------------
Deferred expense (benefit):
Federal (271,000) (715,000) (834,000)
State (89,000) (186,000) 1,000
Change in valuation allowance for
deferred tax assets -- 20,000 --
-----------------------------------------------------------------------------------------
Total deferred tax benefit (360,000) (881,000) (833,000)
-----------------------------------------------------------------------------------------
Total income tax expense $3,026,000 $2,255,000 $1,604,000
=========================================================================================
Total income tax expense varied from the amount determined by applying the
Federal income tax rate to income before income taxes. The reasons for the
differences were as follows:
Years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------
Tax expense at Federal statutory rate $3,159,000 $2,289,000 $1,617,000
Increase (decrease) in taxes resulting from:
Tax-exempt income (155,000) (134,000) (148,000)
Dividends received deduction (134,000) (179,000) (150,000)
State tax, net of Federal income tax benefit 289,000 222,000 258,000
Appreciated value of donated assets (230,000) (30,000) (24,000)
Change in valuation allowance for
deferred tax assets -- 20,000 --
Other 97,000 67,000 51,000
-----------------------------------------------------------------------------------------
Total income tax expense $3,026,000 $2,255,000 $1,604,000
=========================================================================================
For the year ended December 31, 1992, deferred income taxes resulted from timing
differences in the recognition of certain revenue and deductions for tax and
financial statement purposes. The sources of these differences and the tax
expense (benefit) of each were as follows:
Year ended December 31, 1992
------------------------------------------------------------------------
Provision for loan losses $(172,000)
Depreciation (6,000)
Write-downs of foreclosed property (157,000)
Deferred compensation and employee benefits (66,000)
Deferred loan fees and costs (242,000)
Cash basis recognition of income and expense (197,000)
Other, net 7,000
------------------------------------------------------------------------
Total deferred tax benefit $(833,000)
========================================================================
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1994 and
1993 are as follows:
December 31, 1994 1993
------------------------------------------------------------------------------
Gross deferred tax assets:
Reserve for possible loan losses $3,471,000 $2,313,000
Other real estate owned 338,000 417,000
Deferred loan origination fees 920,000 1,394,000
Interest on nonperforming loans 455,000 430,000
Other 531,000 480,000
------------------------------------------------------------------------------
Gross deferred tax assets 5,715,000 5,034,000
Valuation allowance (168,000) (168,000)
------------------------------------------------------------------------------
Gross deferred tax assets, net of
valuation allowance 5,547,000 4,866,000
------------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale 1,867,660 --
Premises and equipment 1,020,000 955,000
Deferred loan origination costs 525,000 460,000
Other 337,000 146,000
------------------------------------------------------------------------------
Gross deferred tax liabilities 3,749,660 1,561,000
------------------------------------------------------------------------------
Net deferred tax asset $1,797,340 $3,305,000
==============================================================================
In addition to future taxable income, a primary source of recovery of deferred
tax assets is taxes paid in prior years available for carryback. A valuation
allowance has been established for a portion of the deferred tax asset that
relates to state income taxes on temporary differences for which no carryback is
allowed.
(14) Loans to Related Parties
At December 31, 1994, 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. A substantial portion of the
increase in 1994 resulted from the adoption of a broader definition of related
parties by the Corporation. Activity related to these loans in 1994 was as
follows:
Balance at December 31, 1993 $2,335,132
Additions 1,527,586
Reductions (812,317)
----------------------------------------------------------------------------
Balance at December 31, 1994 $3,050,401
============================================================================
(15) Litigation
The Corporation is involved in various 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 these matters will not materially affect the
consolidated financial position or results of operations of the Corporation.
(16) Shareholders' Equity
Stock Split
On July 1, 1994, the Corporation's board of directors voted to approve a 3-for-2
stock split on shares of common stock. The stock split, in the form of a stock
dividend, was paid on August 31, 1994 to shareholders of record as of August 1,
1994. The par value of the common stock remained unchanged at $.0625 per share.
Cash payments were made in lieu of issuing fractional shares. All share and per
share amounts in the consolidated financial statements and related notes have
been restated to reflect the stock split.
Stock Option Plan
The 1988 Amended and Restated Stock Option Plan provides for the granting of
options to directors, officers, and key employees. Up to 600,000 shares of the
Corporation's common stock may be used from authorized but unissued shares,
treasury stock, or shares available from expired options. Options are
designated either as non-qualified or as incentive options and may be granted
with stock appreciation rights (SARs). The exercise price of an option may not
be less than the fair market value on the date of grant. The option price is
payable in cash, by the delivery of shares of the Corporation's common stock
already owned by the grantee, or a combination thereof. Options may be granted
at any time until December 31, 1997. As of December 31, 1994, no options have
been granted with SARs.
All options granted prior to 1993 are exercisable. Options granted in 1994 and
1993 become vested over a three year period. The following table presents
changes in options outstanding during 1994 and 1993:
$21.750 $13.916 $11.666
to to to
Exercise price per share $16.583 $13.250 $11.000 $9.166
-------------------------------------------------------------------------------
Outstanding at December 31, 1991 217,350 -- -- 7,500
Granted during 1992 -- -- 55,018 --
Cancelled during 1992 (15,150) -- (2,102) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1992 202,200 -- 52,916 7,500
Granted during 1993 -- 48,823 -- --
Exercised during 1993 -- -- (341) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1993 202,200 48,823 52,575 7,500
Granted during 1994 50,794 -- -- --
Exercised during 1994 (3,750) -- (1,243) --
-------------------------------------------------------------------------------
Outstanding at December 31, 1994 249,244 48,823 51,332 7,500
===============================================================================
Dividend Reinvestment
Under the Dividend Reinvestment and Stock Purchase Plan, 180,000 shares of
common stock were originally reserved to be issued for dividends reinvested and
cash payments to the plan.
As of December 31, 1994, a total of 679,375 common stock shares were reserved
for issuance under the Stock Option Plan and the Dividend Reinvestment and Stock
Purchase Plan.
Dividends
The source of funds for dividends paid by the Corporation is dividends received
from its subsidiary bank. The Corporation and its subsidiary 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 subsidiary bank to the
Corporation. Generally the subsidiary bank has the ability to pay dividends to
the parent subject to minimum regulatory capital requirements and subject to
"Guaranty Fund" requirements of the State of Rhode Island. Under the most
restrictive of these requirements, the subsidiary bank could have declared
aggregate additional dividends of $19.7 million as of December 31, 1994.
(17) Fair Value of Financial Instruments
Statement of Financial Accounting Standards 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 significant 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 Investments
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 investment securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. No market exists for shares of the
Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon
termination of FHLBB membership and is therefore valued at par, which equals
cost.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated using the quoted
market prices for sales of similar loans on the secondary market.
Loans
Fair values are estimated for categories of loans with similar financial
characteristics. Loans are segregated by type and are then further segmented
into fixed rate and adjustable rate interest terms to determine their fair
value. The fair value of fixed rate commercial and consumer loans is calculated
by discounting scheduled cash flows through the estimated maturity of the loan
using interest rates offered at December 31, 1994 and 1993 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, 1994 and
1993. 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.
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 value of interest rate swap agreements is determined based on dealer
quotes. The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties.
The following table presents the fair values of the Corporation's financial
instruments:
December 31, 1994 1993
----------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 18,404,910 $ 18,404,910 $ 21,650,128 $ 21,650,128
Securities available for sale 36,516,115 36,516,115 36,236,543 44,420,747
Mortgage loans held for sale 203,750 203,750 3,709,499 3,715,708
Investment securities 52,496,616 49,395,262 52,497,832 53,333,595
Loans, net of reserve for possible
loan losses 381,297,565 379,008,738 343,853,432 355,979,418
Accrued interest receivable 3,232,211 3,232,211 2,870,911 2,870,911
Financial liabilities:
Noninterest bearing demand deposits $ 53,373,386 $ 53,373,386 $ 43,924,560 $ 43,924,560
Non-term savings accounts 192,653,937 192,653,937 200,846,347 200,846,347
Certificates of deposit 194,703,819 193,611,981 178,603,713 180,232,100
Federal Home Loan Bank advances 23,522,343 22,542,346 20,500,000 20,859,510
Accrued interest payable 1,278,552 1,278,552 1,111,184 1,111,184
<FN>
Off-Balance Sheet Instruments:
The notional amount of interest rate swap agreements at December 31, 1994 was
$10.0 million. The fair value, or the cost to the Corporation of terminating
the swap agreements, was approximately $256,000 at December 31, 1994. There
were no interest rate swap agreements outstanding at December 31, 1993.
Other off-balance sheet instruments, consisting largely of loan commitments,
contain provisions for fees, conditions and term periods which are consistent
with customary market practices. Accordingly, the fair value amounts
(considered to be the discounted present value of the remaining contractual fees
over the unexpired commitment period) would not be material.
(18) Parent Company Financial Statements
The following are condensed parent company only financial statements of
Washington Trust Bancorp, Inc. reflecting the investment in the bank subsidiary
on the equity basis of accounting. The Statements of Changes in Shareholders'
Equity for the parent company only are identical to the Consolidated Statements
of Changes in Shareholders' Equity and are therefore not presented.
Statements of Income
Years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------
Dividends from bank subsidiary $1,776,000 $1,368,000 $1,200,000
Equity in undistributed earnings of subsidiary 4,488,640 3,413,531 1,950,356
-----------------------------------------------------------------------------------------
Net income $6,264,640 $4,781,531 $3,150,356
=========================================================================================
Balance Sheets
December 31, 1994 1993
--------------------------------------------------------------------------------------
Assets:
Cash on deposit with bank subsidiary $ 245,100 $ 281,447
Investment in bank subsidiary at equity value 45,541,081 38,250,951
Dividend receivable from bank subsidiary 552,000 342,000
Recoverable income taxes 9,489 --
--------------------------------------------------------------------------------------
Total assets $46,347,670 $38,874,398
======================================================================================
Liabilities:
Dividends payable $ 564,686 $ 411,473
--------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
10,000,000 shares in 1994 and 3,000,000 shares
in 1993; issued 2,880,000 shares 180,000 120,000
Paid-in capital 2,869,135 2,822,908
Retained earnings 40,613,979 36,418,073
Unrealized gain on securities available for sale, net of tax 2,801,490 --
Treasury stock, at cost; 56,570 shares
in 1994 and 74,505 shares in 1993 (681,620) (898,056)
--------------------------------------------------------------------------------------
Total shareholders' equity 45,782,984 38,462,925
--------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $46,347,670 $38,874,398
======================================================================================
Statements of Cash Flows
Years ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $6,264,640 $4,781,531 $3,150,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity effect of undistributed earnings
of subsidiary (4,488,640) (3,413,531) (1,950,356)
Increase in dividend receivable (210,000) (42,000) (300,000)
Increase in recoverable income taxes (9,489) -- --
-----------------------------------------------------------------------------------------
Net cash provided by operating activities 1,556,511 1,326,000 900,000
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock from treasury 322,663 371,803 236,053
Cash dividends paid (1,915,521) (1,599,173) (1,105,595)
-----------------------------------------------------------------------------------------
Net cash used in financing activities (1,592,858) (1,227,370) (869,542)
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash (36,347) 98,630 30,458
Cash at beginning of year 281,447 182,817 152,359
-----------------------------------------------------------------------------------------
Cash at end of year $ 245,100 $ 281,447 $ 182,817
=========================================================================================
Independent Auditors' Report
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets
of Washington Trust Bancorp, Inc. and Subsidiary (the
Corporation) as of December 31, 1994 and 1993 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, 1994. These consolidated financial
statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Washington Trust Bancorp, Inc. and
Subsidiary at December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in notes 1 and 3 to the financial statements,
the Corporation adopted a new method of accounting for
certain investments in debt and equity securities effective
January 1, 1994. As discussed in notes 1 and 13 to the
financial statements, the Corporation adopted a new method of
accounting for income taxes effective January 1, 1993.
KPMG Peat Marwick, LLP
Providence, Rhode Island
January 19, 1995
Summary of Unaudited Quarterly Financial Information
Washington Trust Bancorp, Inc. and Subsidiary
1994 Q1 Q2 Q3 Q4 Year
---------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $7,246,159 $7,549,389 $7,948,985 $8,371,885 $31,116,418
Income from investment securities and
securities available for sale 1,319,146 1,313,828 1,308,567 1,347,968 5,289,509
Interest on federal funds sold 50,614 42,304 99,412 63,431 255,761
---------------------------------------------------------------------------------------------------------------
Total interest income 8,615,919 8,905,521 9,356,964 9,783,284 36,661,688
---------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,070,141 1,050,681 1,104,627 1,109,188 4,334,637
Time deposits 1,917,840 1,887,310 1,974,678 2,137,600 7,917,428
Other 319,282 391,369 325,417 300,449 1,336,517
---------------------------------------------------------------------------------------------------------------
Total interest expense 3,307,263 3,329,360 3,404,722 3,547,237 13,588,582
---------------------------------------------------------------------------------------------------------------
Net interest income 5,308,656 5,576,161 5,952,242 6,236,047 23,073,106
Provision for loan losses 300,000 300,000 200,000 200,000 1,000,000
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,008,656 5,276,161 5,752,242 6,036,047 22,073,106
---------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust income 801,520 800,043 880,659 802,213 3,284,435
Service charges on deposit accounts 383,357 412,278 408,265 406,650 1,610,550
Merchant processing fees 57,568 94,673 326,115 143,657 622,013
Gains on sales of securities 681,558 -- -- 3,032 684,590
Gains (losses) on loan sales (43,726) 11,909 13,276 2,543 (15,998)
Other income 185,050 177,636 193,424 180,466 736,576
---------------------------------------------------------------------------------------------------------------
Total noninterest income 2,065,327 1,496,539 1,821,739 1,538,561 6,922,166
---------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 2,459,221 2,398,778 2,557,631 2,514,313 9,929,943
Net occupancy 307,985 295,758 313,090 289,198 1,206,031
Equipment 292,036 310,861 300,599 284,856 1,188,352
Deposit taxes and assessments 298,356 299,567 295,726 385,768 1,279,417
Foreclosed property costs, net 142,211 (13,379) 132,808 (20,665) 240,975
Office supplies 181,040 149,320 177,227 98,058 605,645
Other 1,762,507 1,054,934 1,182,666 1,254,162 5,254,269
---------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,443,356 4,495,839 4,959,747 4,805,690 19,704,632
---------------------------------------------------------------------------------------------------------------
Income before income taxes 1,630,627 2,276,861 2,614,234 2,768,918 9,290,640
Applicable income taxes 526,000 733,000 844,000 923,000 3,026,000
---------------------------------------------------------------------------------------------------------------
Net income $1,104,627 $1,543,861 $1,770,234 $1,845,918 $ 6,264,640
===============================================================================================================
Fully diluted earnings per share $ .39 $ .53 $ .61 $ .64 $2.18
Cash dividends declared per share $ .16 $ .17 $ .20 $ .20 $ .73
1993 Q1 Q2 Q3 Q4 Year
---------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $7,377,871 $7,279,792 $7,497,066 $7,410,389 $29,565,118
Income from investment securities and
securities available for sale 1,174,731 1,181,934 1,304,507 1,379,994 5,041,166
Interest on federal funds sold 59,175 64,335 117,045 81,024 321,579
---------------------------------------------------------------------------------------------------------------
Total interest income 8,611,777 8,526,061 8,918,618 8,871,407 34,927,863
---------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,279,003 1,328,257 1,201,234 1,155,529 4,964,023
Time deposits 2,105,547 1,982,487 2,040,109 1,983,363 8,111,506
Other 238,270 289,275 287,044 288,661 1,103,250
---------------------------------------------------------------------------------------------------------------
Total interest expense 3,622,820 3,600,019 3,528,387 3,427,553 14,178,779
---------------------------------------------------------------------------------------------------------------
Net interest income 4,988,957 4,926,042 5,390,231 5,443,854 20,749,084
Provision for loan losses 800,000 600,000 600,000 500,000 2,500,000
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,188,957 4,326,042 4,790,231 4,943,854 18,249,084
---------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust income 713,883 758,794 722,648 756,891 2,952,216
Service charges on deposit accounts 328,010 369,831 355,101 393,327 1,446,269
Merchant processing fees 53,128 77,359 274,576 116,482 521,545
Gains (losses) on sales of securities -- 147,599 198,245 (170) 345,674
Gains on loan sales 190,253 72,918 167,612 54,177 484,960
Other income 189,611 156,242 162,134 170,523 678,510
---------------------------------------------------------------------------------------------------------------
Total noninterest income 1,474,885 1,582,743 1,880,316 1,491,230 6,429,174
---------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,975,721 2,165,042 2,363,261 2,182,286 8,686,310
Net occupancy 266,686 347,320 287,690 286,241 1,187,937
Equipment 313,139 308,556 302,300 406,057 1,330,052
Deposit taxes and assessments 316,832 317,662 290,782 291,464 1,216,740
Foreclosed property costs, net 384,646 115,273 51,961 349,440 901,320
Office supplies 129,540 133,538 120,956 132,754 516,788
Other 827,618 974,326 1,237,724 1,067,912 4,107,580
---------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,214,182 4,361,717 4,654,674 4,716,154 17,946,727
---------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of
accounting change 1,449,660 1,547,068 2,015,873 1,718,930 6,731,531
Applicable income taxes 485,800 518,200 701,000 550,000 2,255,000
---------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 963,860 1,028,868 1,314,873 1,168,930 4,476,531
Cumulative effect of change in
accounting for income taxes 305,000 -- -- -- 305,000
---------------------------------------------------------------------------------------------------------------
Net income $1,268,860 $1,028,868 $1,314,873 $1,168,930 $ 4,781,531
===============================================================================================================
Fully diluted earnings per share:
Income before cumulative effect of
accounting change $ .34 $ .37 $ .47 $ .41 $1.58
Cumulative effect of change in accounting
for income taxes .11 -- -- -- .11
----- ----- ----- ----- -----
Net income $ .45 $ .37 $ .47 $ .41 $1.69
===== ===== ===== ===== =====
Cash dividends declared per share $ .15 $ .15 $ .15 $ .14 $ .59