FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from ________________ to _____________
Commission file Number 0-13091
-----------------------------------------------
WASHINGTON TRUST BANCORP, INC.
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0404671
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET, WESTERLY, RHODE ISLAND 02891
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (401) 348-1200
-------------
N/A
- ---------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's class
of common stock, as of the close of August 4, 1995.
Class Outstanding at August 4, 1995
------------------------------ --------------------------
Common stock, $.0625 par value 2,831,452 Shares
Page 1
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995
CONTENTS
--------
Page No.
PART I. ITEM 1. Financial Information --------
- --------------------------------------
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 3
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1994 6
Condensed Notes to Consolidated Financial Statements 7
PART I. ITEM 2.
- ----------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. Other Information 20
- ---------------------------
Signatures 21
- ----------
-2-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1995 1994
Cash and due from banks $ 15,912,597 $ 15,172,421
Federal funds sold 10,303,362 3,232,489
Securities available for sale, at market value;
cost $36,383,822 and $28,940,165 at June 30,
and December 31, 1994, respectively 42,962,710 33,609,315
Mortgage loans held for sale 595,581 203,750
Investment securities, at cost; market value
$51,476,258 and $49,395,262 at June 30,
1995 and December 31, 1994, respectively 52,325,974 52,496,616
Federal Home Loan Bank stock, at cost 2,995,000 2,906,800
Loans 395,419,064 393,926,200
Less reserve for possible loan losses 8,630,876 9,327,942
----------- -----------
Net loans 386,788,188 384,598,258
Premises and equipment, net 14,872,133 14,779,903
Accrued interest receivable 3,522,785 3,232,211
Other real estate owned, net 1,892,754 2,007,212
Other assets 3,982,094 3,440,988
----------- -----------
Total assets $ 536,153,178 $ 515,679,963
=========== ===========
LIABILITIES
Demand deposits $ 55,473,414 $ 53,373,386
Savings deposits 175,689,702 192,653,937
Time deposits 230,711,056 194,703,819
----------- -----------
Total deposits 461,874,172 440,731,142
Dividends payable 621,957 564,686
Federal Home Loan Bank advances 18,972,257 23,522,343
Accrued expenses and other liabilities 5,349,796 5,078,808
----------- -----------
Total liabilities 486,818,182 469,896,979
----------- -----------
SHAREHOLDERS' EQUITY
Common stock of $.0625 par value; authorized
10,000,000 shares; issued 2,880,000 shares 180,000 180,000
Paid-in capital 2,885,846 2,869,135
Retained earnings 42,959,747 40,613,979
Unrealized gain on securities available for sale, net of tax 3,947,334 2,801,490
Treasury stock, at cost; 52,925 shares at
June 30, 1995 and 56,570 shares at
December 31, 1994 (637,931) (681,620)
----------- -----------
Total shareholders' equity 49,334,996 45,782,984
----------- -----------
Total liabilities and shareholders' equity $ 536,153,178 $ 515,679,963
=========== ===========
See accompanying notes to consolidated financial statements.
- 3 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1995 1994 1995 1994
---------- --------- ---------- ----------
Interest income:
Interest and fees on loans $ 8,936,551 $7,549,389 $17,674,282 $14,795,548
Investment securities and securities
available for sale:
Interest 1,111,653 1,137,075 2,226,438 2,262,142
Dividends 193,513 176,753 384,114 370,832
Federal funds sold 192,671 42,304 293,954 92,918
---------- --------- ---------- ----------
Total interest income 10,434,388 8,905,521 20,578,788 17,521,440
---------- --------- ---------- ----------
Interest expense:
Savings deposits 961,300 1,050,681 1,955,400 2,120,822
Time deposits 2,994,511 1,887,310 5,492,846 3,805,150
Other 341,584 391,369 750,275 710,651
---------- --------- ---------- ----------
Total interest expense 4,297,395 3,329,360 8,198,521 6,636,623
---------- --------- ---------- ----------
Net interest income 6,136,993 5,576,161 12,380,267 10,884,817
Provision for loan losses 300,000 369,982 450,000 703,347
---------- --------- ---------- ----------
Net interest income after provision for loan losses 5,836,993 5,206,179 11,930,267 10,181,470
---------- --------- ---------- ----------
Noninterest income:
Trust income 847,232 800,043 1,625,055 1,601,563
Service charges on deposit accounts 486,278 412,278 956,565 795,635
Merchant processing fees 115,089 94,673 191,618 152,241
Gains on sales of securities available for sale 169,210 -- 169,210 681,558
Gains (losses) on loan sales 26,086 11,909 48,075 (31,817)
Other income 209,481 177,636 463,927 362,686
---------- --------- ---------- ----------
Total noninterest income 1,853,376 1,496,539 3,454,450 3,561,866
---------- --------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 2,569,163 2,398,778 5,160,084 4,857,999
Net occupancy 277,289 295,758 578,386 603,743
Equipment 311,235 310,861 620,680 602,897
Deposit taxes and assessments 310,849 299,567 618,966 597,923
Foreclosed property costs, net 122,420 (83,361) 175,748 25,485
Office supplies 145,327 149,320 274,930 330,360
Advertising and promotion 160,781 120,102 270,327 262,172
Credit and collection 124,917 121,396 247,360 290,797
Charitable contributions 40,000 -- 40,000 699,897
Other 912,779 813,436 1,831,997 1,564,575
---------- --------- ---------- ----------
Total noninterest expense 4,974,760 4,425,857 9,818,478 9,835,848
---------- --------- ---------- ----------
Income before income taxes 2,715,609 2,276,861 5,566,239 3,907,488
Applicable income taxes 965,000 733,000 1,977,000 1,259,000
---------- --------- ---------- ----------
Net income $ 1,750,609 $1,543,861 $ 3,589,239 $ 2,648,488
========== ========= ========== ==========
Weighted average shares outstanding - fully diluted 2,916,779 2,908,877 2,912,321 2,905,193
Weighted average shares outstanding - primary 2,898,705 2,887,017 2,886,957 2,869,595
Earnings per share - fully diluted $ .60 $ .53 $1.23 $ .91
Earnings per share - primary $ .60 $ .53 $1.24 $ .92
Cash dividends declared per share $ .22 $ .17 $ .44 $ .33
See accompanying notes to consolidated financial statements.
- 4 -
Washington Trust Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Six months ended June 30, 1995 1994
- ---------------------------------------------------------------------------------
Common Stock
Balance at end of period $ 180,000 $ 120,000
- ---------------------------------------------------------------------------------
Paid-in Capital
Balance at beginning of year 2,869,135 2,822,908
Issuance of common stock for dividend
reinvestment and stock option plans 16,711 77,083
- ---------------------------------------------------------------------------------
Balance at end of period 2,885,846 2,899,991
- ---------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 40,613,979 36,418,073
Net income 3,589,239 2,648,488
Cash dividends declared (1,243,471) (938,241)
- ---------------------------------------------------------------------------------
Balance at end of period 42,959,747 38,128,320
- ---------------------------------------------------------------------------------
Unrealized Gain on Securities Available for Sale
Balance at beginning of year 2,801,490 --
Adoption of SFAS No. 115 -- 4,910,522
Change in unrealized gain on securities
available for sale, net of tax 1,145,844 (1,643,210)
- ---------------------------------------------------------------------------------
Balance at end of period 3,947,334 3,267,312
- ---------------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (681,620) (898,056)
Issuance of common stock for dividend
reinvestment and stock option plans 43,689 156,238
- ---------------------------------------------------------------------------------
Balance at end of period (637,931) (741,818)
- ---------------------------------------------------------------------------------
Total Shareholders' Equity $49,334,996 $43,673,805
=================================================================================
See accompanying notes to consolidated financial statements.
-5-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30,
-------------------------
1995 1994
---------- ----------
Cash flows from operating activities:
Net income $ 3,589,239 2,648,488
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 450,000 703,347
Provision for valuation of other real estate owned 54,695 132,514
Depreciation of premises and equipment 661,663 670,804
Amortization of net deferred loan fees and costs (365,005) (375,092)
Gains on sales of securities available for sale (169,210) (681,558)
Losses (gains) on sales of other real estate owned 36,818 (281,877)
Losses (gains) on loan sales (48,075) 31,817
Proceeds from sales of loans 5,230,692 10,763,471
Loans originated for sale (5,512,449) (7,257,770)
Increase in accrued interest receivable (290,574) (247,265)
Increase in other assets (1,305,000) (485,846)
Increase (decrease) in accrued expenses
and other liabilities 270,988 (783,082)
Other, net 47,131 102,649
---------- ----------
Net cash provided by operating activities 2,650,913 4,940,600
---------- ----------
Cash flows from investing activities:
Securities available for sale:
Purchases (14,500,000) --
Proceeds from sales of equity securities 2,202,384 5,449,897
Maturities 5,000,000 --
Investment securities:
Purchases (1,828,306) (1,454,486)
Maturities and principal repayments 1,974,527 3,106,866
Investment in Federal Home Loan Bank stock (88,200) (934,000)
Loan originations in excess of principal
collected on loans (2,343,073) (20,496,405)
Proceeds from sales and other reductions
of other real estate owned 34,523 561,201
Purchases of premises and equipment (758,863) (838,127)
---------- ----------
Net cash used in investing activities (10,307,008) (14,605,054)
---------- ----------
Cash flows from financing activities:
Net increase in deposits 21,143,030 349,962
Proceeds from Federal Home Loan Bank advances 12,564,839 11,051,500
Payments of Federal Home Loan Bank advances (17,114,925) (5,509,474)
Proceeds from issuance of commmon stock from treasury 60,400 233,321
Cash dividends paid (1,186,200) (879,966)
---------- ----------
Net cash provided by financing activities 15,467,144 5,245,343
---------- ----------
Net increase (decrease) in cash and cash equivalents 7,811,049 (4,419,111)
Cash and cash equivalents at beginning of period 18,404,910 21,650,128
---------- ----------
Cash and cash equivalents at end of period $ 26,215,959 17,231,017
========== ==========
Noncash Investing Activities:
Transfers from loans to other real estate owned $ 233,328 728,613
Loans charged off 1,333,053 779,788
Loans made to facilitate the sale of OREO 221,750 1,089,048
Change in unrealized gain on securities
available for sale, net of tax 1,145,844 3,267,312
Supplemental Disclosures:
Interest payments $ 3,710,718 5,900,026
Income tax payments 2,078,250 1,802,787
See accompanying notes to consolidated financial statements.
-6-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(1) BASIS OF PRESENTATION
- -------------------------
The accounting and reporting policies of Washington Trust Bancorp, Inc. (the
"Corporation") are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. In the opinion of
management, the accompanying consolidated financial statements present fairly
the Corporation's financial position as of June 30, 1995 and December 31, 1994
and the results of operations and cash flows for the interim periods presented.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, The Washington Trust Company. All significant
intercompany balances and transactions have been eliminated. Certain amounts in
the 1994 consolidated financial statements have been reclassified to conform to
the current reporting format.
The unaudited consolidated financial statements of Washington Trust Bancorp,
Inc. presented herein have been prepared pursuant to the rules of the Securities
and Exchange Commission for quarterly reports on Form 10-Q and do not include
all of the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1994, included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994.
(2) IMPAIRED LOANS
- ------------------
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". 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. However,
impairment must be measured based on the fair value of the collateral if it is
determined that foreclosure is probable. SFAS No. 114 also narrows the
definition of in-substance foreclosures to include only those loans for which
the Corporation has taken possession of the collateral, but has not completed
legal foreclosure proceedings. Accordingly, loans classified as in-substance
foreclosure are treated as impaired loans rather than other real estate owned
(OREO) under these pronouncements.
Upon adoption of SFAS No. 114 and No. 118, the Corporation reclassified in-
substance foreclosed loans of $3,792,728 from OREO to loans, and a related
valuation reserve of $492,035 from OREO to the reserve for loan losses.
These amounts are reclassified in the accompanying December 31, 1994
consolidated balance sheet.
Impaired loans consist of all nonaccrual commercial loans. When a loan is
placed on nonaccrual status and identified as impaired, interest previously
-7-
accrued, but not collected is reversed against current period income, and
further recognition of accrued interest is suspended. Subsequent cash receipts
on impaired 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.
At June 30, 1995, the recorded investment in impaired loans was $7,181,000,
including $5,215,000 which had a related allowance amounting to $970,000. The
balance of impaired loans which did not require an allowance was $1,966,000.
During the six months ended June 30, 1995, the average recorded investment in
impaired loans was $7,120,000. Also during this period, interest income
recognized on impaired loans amounted to approximately $136,000. Interest
income on impaired loans is recognized on a cash basis only.
(3) SECURITIES AVAILABLE FOR SALE
- ---------------------------------
Securities available for sale are those which the Corporation 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.
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Market
June 30, 1995 Cost Gains Losses Value
-------------- ---------- ---------- ---------- -----------
U.S. Treasury obligations
and obligations of U.S.
government-sponsored agencies $26,036,310 403,170 (108,065) $26,331,415
Corporate stocks 10,347,512 6,291,850 (8,067) 16,631,295
----------- ---------- --------- ----------
$36,383,822 6,695,020 (116,132) $42,962,710
=========== ========== ========= ===========
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
----------------- ---------- ---------- --------- -----------
U.S. Treasury obligations $25,059,480 181,660 (707,920) $24,533,220
Corporate stocks 3,880,685 5,215,167 (19,757) 9,076,095
----------- ---------- --------- ----------
$28,940,165 5,396,827 (727,677) $33,609,315
=========== ========== ========= ===========
Included in corporate stocks at June 30, 1995 and December 31, 1994 were
$7.0 million and $500,000, respectively, of auction rate preferred stocks.
These are preferred stock instruments whose dividend rate is reset by auction
every 49 days to a market rate which results in a market value of par.
U.S. Treasury obligations with a carrying value of $3,011,580 and $2,999,133
were pledged to secure public deposits and for other purposes at June 30, 1995
and December 31, 1994, respectively.
For the six months ended June 30, 1995, proceeds from sales of corporate stocks
and gains realized on these sales amounted to $2,202,384 and $169,210,
respectively. No losses were realized on these sales. Realized gains from
sales of corporate stocks were determined using the average cost method.
-8-
(4) INVESTMENT SECURITIES
- -------------------------
Those debt securities that the Corporation has the ability and intent to hold
until maturity are classified as investment securities. Debt securities held in
the investment portfolio are carried at cost, adjusted for amortization of
premium and accretion of discount.
The amortized cost and market values of investment securities are summarized
as follows:
Carrying Unrealized Unrealized Market
June 30, 1995 Value Gains Losses Value
-------------- ---------- ---------- ---------- -----------
U.S. Treasury obligations
and obligations of U.S.
government-sponsored agencies $20,410,941 23,085 (804,390) $19,629,636
Mortgage-backed securities 20,961,349 176,322 (204,970) 20,932,701
States and political subdivisions 10,953,684 30,743 (70,506) 10,913,921
----------- ---------- --------- -----------
$52,325,974 230,150 (1,079,866) $51,476,258
=========== ========== ========= ===========
Carrying Unrealized Unrealized Market
December 31, 1994 Value Gains Losses Value
----------------- ---------- ---------- ---------- -----------
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
----------- ---------- --------- -----------
$52,496,616 9,385 (3,110,739) $49,395,262
=========== ========== ========= ===========
Investment securities with a carrying value of $1,399,565 and $999,828 were
pledged to secure public deposits and for other purposes at June 30, 1995 and
December 31, 1994, respectively.
There were no sales or transfers of investment securities during the six months
ended June 30, 1995.
-9-
(5) LOAN PORTFOLIO
- ------------------
The following is a summary of loans:
June 30, December 31,
1995 1994
----------- -----------
Residential real estate:
Mortgages $171,926,238 $170,366,731
Homeowner construction 3,256,739 6,933,793
----------- -----------
Total residential real estate 175,182,977 177,300,524
----------- -----------
Commercial:
Mortgages 58,683,531 56,014,628
Construction and development 11,161,301 12,089,966
Other 100,870,996 103,334,837
----------- -----------
Total commercial 170,715,828 171,439,431
----------- -----------
Installment 49,520,259 45,186,245
----------- -----------
$395,419,064 $393,926,200
=========== ===========
Amounts presented for December 31, 1994 have been restated as a result of the
implementation of SFAS No. 114 and No. 118. See Note 2 to the Consolidated
Financial Statements for additional discussion.
(6) RESERVE FOR POSSIBLE LOAN LOSSES
- ------------------------------------
The following is an analysis of the reserve for possible loan losses:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Balance at beginning of period $8,742,225 $9,219,536 $9,327,942 $9,089,775
Provision charged to expense 300,000 369,982 450,000 703,347
Recoveries 114,430 69,917 185,987 133,085
Loans charged off (525,779) (513,016) (1,333,053) (779,788)
--------- --------- --------- ---------
Balance at end of period $8,630,876 $9,146,419 $8,630,876 $9,146,419
========= ========= ========= =========
Prior period amounts presented have been restated as a result of the
implementation of SFAS No. 114 and No. 118. See Note 2 to the Consolidated
Financial Statements for additional discussion.
(7) NONACCRUAL LOAN POLICY
- --------------------------
Loans, with the exception of credit card loans and certain residential mortgage
loans, are placed on nonaccrual status and interest recognition is suspended
when such loans are 90 days or more overdue with respect to principal and/or
-10-
interest. Interest previously accrued, but not collected on such loans is
reversed against current period income. 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 the repayment terms, and
when, in management's option, the loans are considered to be fully collectible.
Effective January 1, 1995, residential mortgages are placed on nonaccrual status
when they are 90 days or more overdue, unless in management's judgment the value
of the underlying collateral is sufficient to preclude any loss of principal and
interest. Previously, all residential mortgages were placed on nonaccrual
status when they became 90 days past due. The effect of this change on the
results of operations was insignificant.
(8) INTEREST RATE RISK MANAGEMENT POLICY
- ----------------------------------------
The Corporation uses interest rate swaps and interest rate floor contracts 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. A floor is a purchased contract that entitles the
Corporation to receive payment from a counterparty if a rate index falls below a
contractual rate. The amount of the payment is the difference between the
contractual floor rate and the rate index multiplied by the notional principal
amount of the contract. If the contractual rate does not fall below the floor
rate, no payment is received. The credit risk associated with these types of
transactions is risk of default by the counterparty. To minimize this risk, the
Corporation enters into interest rate contracts only with creditworthy
counterparties. The notional amounts of these agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the
Corporation's potential loss exposure.
Interest rate risk contracts outstanding at June 30, 1995 are summarized in the
following table:
Notional
Description amount Terms
- ----------- ----------- -----
Interest rate swaps $10,000,000 Pay 3-month LIBOR; resetting quarterly
Receive 6.1% fixed
Expiration date: May, 1996
Floor contracts $30,000,000 Receive payment if prime rate falls below 9%
Expiration date: February, 2000
Floor contract $20,000,000 Receive payment if 3-month LIBOR falls
below 6.1875%; resetting quarterly
Expiration date: February, 2000
The purpose of the swap agreements is to convert the fixed rate paid on certain
time deposits to a quarterly-resetting rate. The purpose of the floor contracts
is to offset the risk of future reductions in interest earned on certain
floating rate loans. Amounts paid or received related to outstanding contracts
that are used to manage interest rate risk and the amortization of the cost of
-11-
the floor contracts are recognized in earnings as an adjustment to the related
interest income or expense over the life of the contracts.
At June 30, 1995, the weighted average rate paid by the Corporation on the swap
agreements was 6.13%. At June 30, 1995, the prime rate and 3-month LIBOR
applicable to the outstanding floor contracts was 9.0% and 6.06%, respectively.
The Corporation has not terminated any interest rate contracts and there are no
unamortized deferred gains or losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - Quarters Ended June 30, 1995 and 1994
- -------------------------------------------------------------
Net income for the three months ended June 30, 1995 amounted to $1,750,609, up
13.4% over the $1,543,861 of net income recorded in the same quarter of 1994.
Earnings per share for the quarter ended June 30, 1995 amounted to $.60, 13.2%
higher than the $.53 per share earned in the quarter ended June 30, 1994.
Net interest income for the three months ended June 30, 1995 increased $561,000,
or 10.1%, over the prior year quarter. This increase resulted primarily from
higher average loans outstanding as well as higher rates reflective of the
increases in the prime rate that occurred during 1994. (See additional
discussion under the caption "Net Interest Income".)
The provision for loan losses amounted to $300,000 for the second quarter of
1995, down from $369,982 for the second quarter of 1994, but up from the
$150,000 provision recorded in the first quarter of 1995.
Total noninterest income for the three months ended June 30, 1995 amounted to
$1.9 million, compared to $1.5 million for the three months ended June 30, 1994.
The 1995 amount includes gains on sales of securities available for sale of
$169,210. There were no sales of securities in the second quarter of 1994. All
other categories of noninterest income increased over the prior year quarter due
to fee increases and higher transaction volume. Noninterest income excluding
securities gains and gains on loan sales rose 11.7% over the prior year.
Total noninterest expense for the quarter ended June 30, 1995 amounted to
$5.0 million, up 12.4% over the 1994 amount of $4.4 million. Salaries and
employee benefits rose 7.1% in 1995 over the prior year quarter. The increase
is primarily attributable to normal salary adjustments and increased staffing
levels. Net foreclosed property costs amounted to $122,420 for the three months
ended June 30, 1995, an increase of approximately $206,000 over the comparable
1994 period. This increase is due to gains on sales of properties amounting to
approximately $289,000 realized in the second quarter of 1994, resulting in net
foreclosed property income for the 1994 quarter.
Results of Operations - Six Months Ended June 30, 1995 and 1994
- ---------------------------------------------------------------
Net income for the six months ended June 30, 1995 amounted to $3,589,239, 35.5%
higher than the $2,648,488 net income recorded in the first six months of 1994.
Earnings per share for the six months ended June 30, 1995 amounted to $1.23
compared to $.91 per share on net income for the comparable 1994 period.
-12-
The increase in net income in 1995 is primarily attributable to the increase in
net interest income of approximately $1.5 million. This increase reflects
higher average loans outstanding in 1995 due to strong loan growth in 1994. The
prime rate increases which occurred in 1994 also contributed to the increase in
net interest income in 1995. (See additional discussion under the caption "Net
Interest Income".)
For the six months ended June 30, 1995 and 1994, the provision for loan losses
was $450,000 and $703,347, respectively.
Total noninterest income for the six months ended June 30, 1995 amounted to $3.5
million, compared to $3.6 million for the same 1994 period. The 1994 amount
included gains on sales of securities available for sale of $681,558. These
securities gains were taken in connection with a nonrecurring contribution
expense of approximately $700,000 recorded in the first quarter of 1994 for the
establishment of a charitable trust. Noninterest income excluding securities
gains as well as gains and losses on loan sales rose 11.2% over the prior year
due to fee increases and higher transaction volume.
Included in salaries and benefits in the first quarter of 1994 is the effect of
the adoption of SFAS No. 112, "Employers' Accounting for Postemployment
Benefits". The effect of the adoption was not material to the Corporation's
financial position or results of operations. Excluding the effect of the
adoption of SFAS No. 112, salaries and employee benefits rose 8.9% in 1995 over
the prior year. This increase is primarily attributable to normal salary
adjustments and increased staffing levels.
Net foreclosed property costs amounted to $175,748 and $25,485 for the six
months ended June 30, 1995 and 1994, respectively. The increase is due to a
higher amount of net gains realized on sales of other real estate owned in the
1994 period.
Financial Condition and Liquidity
- ---------------------------------
Total assets amounted to $536.2 million at June 30, 1995, 4.0% higher than the
December 31, 1994 amount of $515.7 million. Average assets totalled $524.3
million for the six months ended June 30, 1995, up 6.2% over the comparable 1994
period.
Securities Available for Sale - During the six months ended June 30, 1995, the
net unrealized gain on corporate stocks increased approximately $1.1 million,
reflecting an improvement in general equity market conditions. In addition,
there was a net increase in the market value of U.S. Treasury obligations
amounting to $821,365 that has occurred since December 31, 1994. This
turnaround was primarily attributable to the decline in short and medium-term
interest rates that has occurred thus far in 1995. Approximately 82% of the
Corporation's U.S. Treasury portfolio available for sale matures within 3 years.
Investment Securities - The carrying value of investment securities amounted to
$52.3 million at June 30, 1995, down slightly from $52.5 million at December 31,
1994. The net unrealized loss on investment securities amounted to
approximately $850,000 at June 30, 1995, compared to $3.1 million at
December 31, 1994, representing an improvement of $2.3 million during this six-
month period. This improvement was attributable to the decline in short and
medium-term interest rates during the first half of 1995. The Corporation has
-13-
the ability and intent to hold investment securities to maturity and therefore
does not expect to realize these losses.
Loans - Total loans amounted to $395.4 million at June 30, 1995, up only
slightly from the December 31, 1994 balance of $393.9 million. While
residential real estate and commercial loans showed small decreases, installment
loans increased $4.3 million, or 9.6%, over the year-end 1994 amount. This
increase was due to the increase in both home equity loans and other consumer
installment loans. Although overall demand for commercial loans was weak in the
first half of 1995, commercial mortgage loans rose 4.8% from the balance at
December 31, 1994.
Deposits and Other Borrowings - Total deposits amounted to $461.9 million at
June 30, 1995, up 4.8% from $440.7 million at December 31, 1994. Depositors
have reacted to rising time deposit interest rates by shifting deposits into
longer-term accounts. Accordingly, time deposits at June 30, 1995 were up by
$36.0 million, or 18.5%, over the 1994 year-end amount. Conversely, savings
deposits were reduced by $17.0 million, or 8.8%, from the December 31, 1994
amount. Time deposits comprised 50.0% of total deposits at June 30, 1995,
compared to 44.2% of total deposits at December 31, 1994.
The Corporation utilizes Federal Home Loan Bank (FHLB) advances as a funding
source. FHLB advances amounted to $19.0 million at June 30, 1995, with
maturities generally less than five years. There were no other short-term
borrowings outstanding at June 30, 1995.
For the six months ended June 30, 1995, net cash provided by operations amounted
to $2.7 million, the majority of which was generated by net income. Net cash
used in investing activities amounted to $10.3 million and was primarily used to
purchase securities available for sale. The funding for cash used in investing
activities was generated from a net increase in deposits of $21.1 million during
the period. These funds were also used in part to fund a net reduction in
Federal Home Loan Bank advances outstanding of $4.6 million.
Capital Resources
- -----------------
Total equity capital amounted to $49.3 million or 9.2% of total assets at
June 30, 1995. This compares to $45.8 million or 8.9% at December 31, 1994.
The $3.6 million increase in total equity from year-end is primarily
attributable to an increase in unrealized gains on securities available for sale
of $1.1 million and $2.3 million resulting from earnings retention.
The Corporation's total risk-adjusted capital ratio amounted to 14.14% at June
30, 1995. Banks are required to maintain a minimum capital to risk-adjusted
asset ratio of 8%. The Corporation's leverage ratio amounted to 8.59% at
June 30, 1995, well above the regulatory requirement of 3% for banking
organizations with strong earnings, liquidity and asset quality who do not
anticipate significant growth and who have well-diversified risk.
Dividends payable at June 30, 1995 amounted to $621,957, representing $.22 per
share payable on July 17, 1995, an increase of 29.4% over the $.17 per share
paid in the second quarter of 1994.
The source of funds for dividends paid by the Corporation is dividends received
from its subsidiary bank. The subsidiary bank is a regulated enterprise, and as
such its ability to pay dividends to the parent is subject to regulatory review
and restriction.
-14-
Asset Quality
- -------------
Nonperforming assets are summarized in the following table:
(Dollars in thousands) 06/30/95 12/31/94
-------- --------
Nonaccrual loans 90 days or more past due $ 6,939 $ 7,183
Nonaccrual loans less than 90 days past due 3,142 3,729
-------- --------
Total nonperforming loans 10,081 10,912
-------- --------
Other real estate owned:
Properties acquired through foreclosure 2,464 2,578
Valuation allowance (571) (571)
-------- --------
Total other real estate owned 1,893 2,007
-------- --------
Total nonperforming assets $11,974 $12,919
======== ========
Nonperforming loans as a % of total loans 2.6% 2.8%
Nonperforming assets as a % of total assets 2.2% 2.5%
Reserve for loan losses to nonperforming loans 85.6% 85.5%
The following is an analysis of nonperforming loans by loan category:
(In thousands) 06/30/95 12/31/94
-------- --------
Residential mortgages $2,320 $3,681
Commercial:
Mortgages 1,545 1,700
Construction and development 685 689
Other (1) 4,951 4,191
Installment 580 651
-------- --------
Total nonperforming loans $10,081 $10,912
======== ========
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
Not included in the analysis of nonperforming assets at June 30, 1995 above are
approximately $170,000 of loans greater than 90 days past due, and still
accruing. These loans consist primarily of residential mortgages which are
considered well-collateralized and therefore are deemed to have no loss
exposure.
As discussed in Note 2 to the Consolidated Financial Statements, the Corporation
implemented SFAS No. 114 and No. 118 as of January 1, 1995. Amounts for periods
prior to the adoption have been restated. The effect of the implementation of
these pronouncements was a reclassification of loans previously accounted for as
in-substance foreclosures to loans in the amount of $3.8 million. Additionally,
$492,000 of related OREO valuation reserve was reclassified to the reserve for
possible loan losses.
-15-
The balance of other real estate owned is comprised of the following types of
properties (in thousands):
06/30/95 12/31/94
-------- --------
Commercial real estate $ 752 $ 752
Residential real estate 406 457
Construction and development 302 401
Land 1,004 968
------ ------
2,464 2,578
Valuation allowance (571) (571)
------ ------
Total other real estate owned $1,893 $2,007
====== ======
An analysis of the activity relating to other real estate owned for the six
months ended June 30, 1995 follows (in thousands):
Balance at beginning of year $ 2,578
Transfers from loans, net 233
Sales and other reductions (347)
-------
2,464
Valuation allowance (571)
-------
Balance at end of period $ 1,893
=======
During the six months ended June 30, 1995, the Corporation sold property with a
carrying value of approximately $312,000.
The following is an analysis of the OREO valuation allowance for the six months
ended June 30, 1995 (in thousands):
Balance at beginning of period $ 571
Provision charged to expense 55
Sales and other reductions (55)
-----
Balance at end of period $ 571
=====
-16-
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 the applicable 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 Condensed Statements of Income), are included in amounts presented
for loans.
Six months ended June 30, 1995 1994
---------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------
Interest-earning assets:
Residential real estate $177,740 7,384 8.31% $166,806 6,513 7.81%
Commercial and other 171,387 8,013 9.35% 165,405 6,584 7.96%
Installment loans 46,362 2,321 10.01% 35,716 1,739 9.74%
---------------------------------------------------------------------------------------------------------
Total loans 395,489 17,718 8.96% 367,927 14,836 8.06%
Federal funds sold 10,105 294 5.82% 5,962 93 3.12%
Taxable securities 73,741 2,607 7.07% 77,654 2,576 6.64%
Nontaxable securities 10,205 337 6.60% 8,141 254 6.23%
---------------------------------------------------------------------------------------------------------
Total interest-earning assets 489,540 20,956 8.56% 459,684 17,759 7.73%
Non interest-earning assets 34,805 38,692
---------------------------------------------------------------------------------------------------------
Total assets $524,345 $493,573
=========================================================================================================
Interest-bearing liabilities:
Savings deposits $178,325 1,955 2.19% $195,450 2,121 2.17%
Time deposits 217,556 5,493 5.05% 180,015 3,805 4.23%
FHLB advances 24,105 736 6.10% 23,692 658 5.56%
Other 496 15 5.86% 2,583 53 4.05%
---------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 420,482 8,199 3.90% 401,740 6,637 3.30%
Non interest-bearing liabilities 55,860 48,073
---------------------------------------------------------------------------------------------------------
Total liabilities 476,342 449,813
Total shareholders' equity 48,003 43,760
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $524,345 $493,573
=========================================================================================================
Net interest income / interest rate spread $12,757 4.66% $11,122 4.43%
=========================================================================================================
Net interest margin 5.21% 4.84%
=========================================================================================================
<FN>
Interest income amounts presented in the table above include the following adjustments for taxable equivalency
(in thousands):
June 30, 1995 June 30, 1994
------------------ ------------------
Commercial and other loans $ 44 $ 41
Nontaxable debt securities 222 90
Corporate stocks 111 107
-17-
Net Interest Income
- -------------------
(The accompanying schedule on page 17 should be read in conjunction with this
discussion.)
Fully taxable equivalent (FTE) net interest income for the six months ended
June 30, 1995 amounted to $12.8 million, up 14.7% over the corresponding 1994
period. Increases in asset yields, combined with a slower rate of increase in
rates paid on liabilities, were responsible for the majority of the improvement
over the prior year. Increased average loan balances in the first half of 1995
versus the first half of 1994 also contributed to higher net interest income.
This improvement was reflected in improved net interest spreads and margins.
The FTE interest rate spread (the average rate of return on interest-earning
assets less the average cost of interest-bearing funds) amounted to 4.66% for
the first six months of 1995, up from 4.43% for the first six months of 1994.
The net interest margin (net interest income as a percentage of average
interest-earning assets) amounted to 5.21% and 4.84% for the six months ended
June 30, 1995 and 1994, respectively.
The FTE yield on total loans amounted to 8.96% for the six months ended June 30,
1995, compared to 8.06% for the comparable 1994 period. While yields increased
for all loan categories, the commercial loan portfolio saw the largest
improvement due to prime rate increases in 1994. Yields on residential real
estate and installment loans also increased, although less substantially. The
prime rate was subsequently reduced by 25 basis points in July, 1995.
Strong loan originations during the second half of 1994 contributed to higher
net interest income in 1995. However, rising interest rates during the past
year and increased competition slowed loan demand in 1995. Total average loans
amounted to $395.5 million for the six months ended June 30, 1995, compared to
$367.9 million for the comparable 1994 period.
The yields on taxable and nontaxable securities were up over the prior year, due
primarily to short and medium-term rate increases that occurred during 1994.
The average balance of securities were down 2.2% from the prior year due in part
to increased loan demand during 1994.
Rates paid on interest-bearing liabilities also rose from 1994 levels. The
overall cost of funds on interest-bearing liabilities rose to 3.90% for the six
months ended June 30, 1995, up from 3.30% for the comparable 1994 period. Rates
paid on time deposits and borrowed funds increased 82 basis points and 54 basis
points, respectively, while rates paid on savings deposits rose only slightly.
This differential in rates has caused a shift of balances out of savings
deposits into higher-priced time deposits. Average time deposits for the six
months ended June 30, 1995 rose $37.5 million from the 1994 amount, while
average savings deposits fell by $17.1 million over the same period. If this
trend continues, the overall cost of funds is expected to increase.
For the quarter ended June 30, 1995, the Corporation's FTE interest rate spread
amounted to 4.54%, up slightly from 4.50% during the 1994 quarter. The net
interest margin increased to 5.11% for the second quarter of 1995, up from 4.93%
for the prior year quarter. The FTE rate of return on interest-earning assets
amounted to 8.59% for the quarter ended June 30, 1995, up 78 basis points from
the prior year quarter primarily due to the higher rates earned on adjustable
rate residential mortgages and commercial loans. Rates earned on these
periodically repricing loans increased as interest rates rose during late 1994
and the first half of 1995.
-18-
Although the net interest margin for the second quarter of 1995 was up from the
prior year, it was down from the first quarter 1995 level of 5.31%. The
decrease is primarily attributable to a shift in deposits from the savings
category to higher cost time deposits, higher deposit rates in general, and weak
loan demand.
The Corporation's cost of funds for the quarter ended June 30, 1995 was 4.05%,
up from 3.31% during the same 1994 quarter. The rate paid on time deposits
amounted to 5.26%, up 105 basis points from the prior year quarter as a result
of the general increase in interest rates during that period. Rates paid on
savings deposits were largely unchanged over the same period and amounted to
2.20% for the second quarter of 1995 compared to 2.16% for the second quarter of
1994.
Average Federal Home Loan Bank (FHLB) advances for the second quarter of 1995
amounted to $21.9 million, down from $26.3 million for the first quarter of 1995
and $25.3 million for the second quarter of 1994. This net reduction was a
result of increased liquidity created by the seasonal deposit inflow that
generally occurs in the second and third quarters of each year and soft loan
demand. The average rates of interest paid on FHLB advances were 6.16% and
5.54% for the three months ended June 30, 1995 and 1994, respectively.
The Corporation supplements its interest rate risk management strategies with
off-balance sheet transactions. At June 30, 1995 the notional principal
amount of interest rate contracts amounted to $60 million and included $10
million in interest rate swaps and $50 million in interest rate floor
contracts which were purchased during the first quarter of 1995. The effect
of these interest rate contracts on net interest income for the quarter ended
June 30, 1995 was not material. (See Note 8 to the Consolidated Financial
Statements for additional discussion.)
Recent Accounting Developments
- ------------------------------
In May 1995, the Financial Accounting Standards Board issued Statement No. 122,
"Accounting for Mortgage Servicing Rights" (SFAS No. 122). This statement
requires that the rights to service mortgage loans for others be recognized as
an asset, including rights acquired through both purchases and originations.
SFAS No. 122 also requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of the rights. The statement is
effective for fiscal years ending after December 15, 1995. The adoption of this
pronouncement is not expected to have a material impact on the Corporation's
financial condition or results of operations.
-19-
PART II
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
- ------ -----------------
None
Item 2. Changes in Securities
- ------ ---------------------
None
Item 3. Defaults upon Senior Securities
- ------ -------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
(a) The Annual Meeting of Shareholders was held April 25, 1995.
(c) Matters voted upon were as follows:
* A proposal to elect Katherine W. Hoxsie, Brendan P.
O'Donnell, Joseph H. Potter, and Anthony J. Rose, Jr. as
directors of the Corporation for three year terms expiring
at the 1998 Annual Meeting of Shareholders passed as
follows:
Votes Votes
In Favor Against Abstentions
--------- ------- -----------
Katherine W. Hoxsie 2,410,572 0 8,475
Brendan P. O'Donnell 2,404,357 0 11,017
Joseph H. Potter 2,406,052 0 9,322
Anthony J. Rose, Jr. 2,408,598 0 6,780
* A proposal to approve the selection of KPMG Peat Marwick LLP
as independent auditors of the Corporation for the year
ending December 31, 1995 was passed by a vote of 2,363,676
shares in favor; 51,812 shares against; with no abstentions.
Item 5. Other Information
- ------ -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
EX-27 Financial Data Schedule
-20-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
------------------------------
(Registrant)
August 11, 1995 By: Joseph J. Kirby
--------------------------------
Joseph J. Kirby
President (principal executive officer)
August 11, 1995 By: David V. Devault
--------------------------------
David V. Devault
Vice President and Chief Financial Officer
(principal financial officer)
-21-