WASHINGTON TRUST BANCORP INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
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FORM
10-K
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(Mark
One)
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x
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Annual
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended DECEMBER 31, 2008
or
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o
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Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from ____________ to
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Commission
file number: 000-13091
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WASHINGTON
TRUST BANCORP, INC.
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(Exact
name of registrant as specified in its charter)
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RHODE
ISLAND
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05-0404671
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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23
BROAD STREET
WESTERLY,
RHODE ISLAND
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02891
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: 401-348-1200
Securities
registered pursuant to Section 12(b) of the Act: NONE
Securities
registered pursuant to Section 12(g) of the Act:
COMMON
STOCK, $.0625 PAR VALUE PER SHARE
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. oYes xNo
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes xNo
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYes oNo
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Mark one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)
oYes xNo
The
aggregate market value of voting stock held by non-affiliates of the registrant
at June 30, 2008 was $215,971,363 based on a closing sales price of $19.70
per share as reported for the NASDAQ Global Select Market, which includes
$10,645,827 held by The Washington Trust Company under trust agreements and
other instruments.
The
number of shares of the registrant’s common stock, $.0625 par value per share,
outstanding as of February 25, 2009 was 15,949,541.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement dated March 11, 2009 for the Annual
Meeting of Shareholders to be held April 28, 2009 are incorporated by
reference into Part III of this Form 10-K.
FORM
10-K
WASHINGTON
TRUST BANCORP, INC.
For
the Year Ended December 31, 2008
Washington
Trust Bancorp, Inc.
Washington
Trust Bancorp, Inc. (the “Bancorp”), a publicly-owned registered bank holding
company and financial holding company, was organized in 1984 under the laws of
the state of Rhode Island. The Bancorp owns all of the outstanding
common stock of The Washington Trust Company (the “Bank”), a Rhode Island
chartered commercial bank. The Bancorp was formed in 1984 under a
plan of reorganization in which outstanding common shares of the Bank were
exchanged for common shares of the Bancorp. See additional
information under the caption “Subsidiaries”.
Through
its subsidiaries, the Bancorp offers a broad range of financial services to
individuals and businesses, including wealth management, through its offices in
Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and its Internet
website (www.washtrust.com). The Bancorp’s common stock is traded on
the NASDAQ Global SelectÒ Market under the symbol
“WASH.”
The
accounting and reporting policies of the Bancorp and its subsidiaries
(collectively, the “Corporation” or “Washington Trust”) are in accordance with
U. S. generally accepted accounting principles (“GAAP”) and conform to general
practices of the banking industry. At December 31, 2008,
Washington Trust had total assets of $3.0 billion, total deposits of
$1.8 billion and total shareholders’ equity of
$235.1 million.
Commercial
Banking
The
Corporation offers a variety of banking and related financial services,
including:
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Residential
mortgages
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Consumer
installment loans
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Merchant
credit card services
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Reverse
mortgages
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Commercial
and consumer demand deposits
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Telephone
banking services
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Commercial
loans
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Savings,
NOW and money market deposits
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Internet
banking services
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Construction
loans
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Certificates
of deposit
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Cash
management services
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Home
equity lines of credit
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Retirement
accounts
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Remote
deposit capture
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Home
equity loans
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Automated
teller machines (ATMs)
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Safe
deposit boxes
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The
Corporation’s largest source of income is net interest income, the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing deposits and other borrowed funds.
The
Corporation’s lending activities are conducted primarily in southern New England
and, to a lesser extent, other states. Washington Trust offers a
variety of commercial and retail lending products. In addition,
Washington Trust purchases loans for its portfolio from various other financial
institutions. In making commercial loans, Washington Trust may
occasionally solicit the participation of other banks and may also occasionally
participate in commercial loans originated by other banks. From time
to time, we sell the guaranteed portion of Small Business Administration (“SBA”)
loans to investors. Washington Trust generally underwrites its
residential mortgages based upon secondary market
standards. Residential mortgages are originated both for sale in the
secondary market as well as for retention in the Corporation’s loan
portfolio. Loan sales in the secondary market provide funds for
additional lending and other banking activities. The majority of
loans are sold with servicing released. We also originate residential
loans for various investors in a broker capacity, including conventional
mortgages and reverse mortgages.
Washington
Trust offers a wide range of banking services, including the acceptance of
demand, savings, NOW, money market and time deposits. Banking
services are accessible through a variety of delivery channels including branch
facilities, ATMs, telephone and Internet banking. Washington Trust
also sells various business services products including merchant credit card
processing and cash management services.
Wealth
Management Services
The
Corporation generates fee income from providing investment management, trust and
financial planning services. Washington Trust provides personal trust
services, including services as executor, trustee, administrator, custodian and
guardian. Institutional trust services are also provided, including
services as trustee for pension and profit sharing plans. Investment
management and financial planning services are provided for both personal and
institutional
clients. At December 31, 2008 and 2007, wealth management assets
under administration totaled $3.1 billion and $4.0 billion,
respectively. These assets are not included in the Consolidated
Financial Statements.
Business
Segments
Segment
reporting information is presented in Note 17 to the Consolidated Financial
Statements.
Acquisitions
The
following summarizes Washington Trust’s acquisition history:
On
August 31, 2005, the Bancorp completed the acquisition of Weston Financial
Group, Inc. (“Weston Financial”), a Registered Investment Adviser and financial
planning company located in Wellesley, Massachusetts, with broker-dealer and
insurance agency subsidiaries. Pursuant to the Stock Purchase Agreement, dated
March 18, 2005, as amended December 24, 2008, the acquisition was
effected by the Bancorp’s acquisition of all of Weston Financial’s outstanding
capital stock. (1)
On
April 16, 2002, the Bancorp completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode Island
chartered community bank. First Financial Corp. was headquartered in
Providence, Rhode Island and its subsidiary, First Bank and Trust Company,
operated banking offices in Providence, Cranston, Richmond and North Kingstown,
Rhode Island. The Richmond and North Kingstown branches were closed
and consolidated into existing Bank branches in May 2002. Pursuant to
the Agreement and Plan of Merger, dated November 12, 2001, the acquisition
was effected by means of the merger of First Financial Corp. with and into the
Bancorp and the merger of First Bank with and into the Bank. (1)
On
June 26, 2000, the Bancorp completed the acquisition of Phoenix Investment
Management Company, Inc. (“Phoenix”), an independent investment advisory firm
located in Providence, Rhode Island. Pursuant to the Agreement and
Plan of Merger, dated April 24, 2000, the acquisition was effected by means
of merger of Phoenix with and into the Bank. (2)
On
August 25, 1999, the Bancorp completed the acquisition of Pier Bank, a
Rhode Island chartered community bank headquartered in South Kingstown, Rhode
Island. Pursuant to the Agreement and Plan of Merger, dated
February 22, 1999, the acquisition was effected by means of merger of Pier
Bank with and into the Bank. (2)
_____________
| (1) | These acquisitions have been accounted for as a purchase and, accordingly, the operations of the acquired companies are included in the Consolidated Financial Statements from their dates of acquisition. |
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(2)
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These
acquisitions were accounted for as poolings of interests and, accordingly,
all financial data was restated to reflect the combined financial
condition and results of operations as if these acquisitions were in
effect for all periods presented.
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Subsidiaries
The
Bancorp’s subsidiaries include the Bank and Weston Securities Corporation
(“WSC”). The Bancorp also owns all of the outstanding common stock of
WT Capital Trust I, WT Capital Trust II and Washington Preferred Capital Trust,
special purpose finance entities formed with the sole purpose of issuing trust
preferred debt securities and investing the proceeds in junior subordinated
debentures of the Bancorp. See Note 11 to the Consolidated
Financial Statements for additional information.
The
following is a description of Bancorp’s primary operating
subsidiaries:
The
Washington Trust Company
The
Bank was originally chartered in 1800 as the Washington Bank and is the oldest
banking institution headquartered in its market area and is among the oldest
banks in the United States. Its current corporate charter dates to
1902.
The
Bank provides a broad range of financial services, including lending, deposit
and cash management services, wealth management services and merchant credit
card services. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (“FDIC”), subject to regulatory
limits.
The
Bank’s subsidiary, Weston Financial, is a Registered Investment Adviser and
financial planning company located in Wellesley, Massachusetts, with an
insurance agency subsidiary. In addition, the Bank has other passive
investment subsidiaries whose primary functions are to provide servicing on
passive investments, such as residential and consumer loans acquired from the
Bank and investment securities.
Weston
Securities Corporation
WSC
is a licensed broker-dealer that markets several of Weston Financial’s
investment programs, including mutual funds and variable
annuities. WSC acts as the principal distributor to a group of mutual
funds for which Weston Financial is the investment advisor.
Market
Area and Competition
Washington
Trust faces considerable competition in its market area for all aspects of
banking and related financial service activities. Competition from
both bank and non-bank organizations is expected to continue.
The
Bank contends with strong competition both in generating loans and attracting
deposits. The primary factors in competing are interest rates,
financing terms, fees charged, products offered, personalized customer service,
online access to accounts and convenience of branch locations, ATMs and branch
hours. Competition comes from commercial banks, credit unions, and
savings institutions, as well as other non-bank institutions. The
Bank faces strong competition from larger institutions with greater resources,
broader product lines and larger delivery systems than the Bank.
The
Bank operates ten of its seventeen branch offices in Washington County, Rhode
Island. As of June 30, 2008, based upon information reported in
the FDIC’s Deposit Market Share Report, the Bank had 47% of total deposits
reported by all financial institutions for Washington County. We have excluded
our out-of-market brokered certificates of deposit from this measurement to
provide a more representative measurement of our market
share. Out-of-market brokered certificates of deposit are utilized by
the Corporation as part of its overall funding program along with other
sources. The closest competitor held 26%, and the second closest
competitor held 8% of total deposits in Washington County. We believe
that being the largest commercial banking institution headquartered within this
market area provides a competitive advantage over other financial
institutions.
The
Bank’s remaining seven branch offices are located in Providence and Kent
Counties in Rhode Island and New London County in southeastern
Connecticut. In December 2008, Washington Trust relocated its
Washington Street branch office in Providence to a new branch office located in
the financial district of Providence. In 2009, the Bank plans to open
a de novo branch in Kent County (Warwick), subject to the approval of state
and federal regulators. The Warwick branch will bring the total
number of the Bank’s branch offices to eighteen. We continue to
expand our branch footprint and broaden our presence in Providence and Kent
Counties. Both the population and number of businesses in Providence
and Kent Counties far exceed those in Washington County.
Washington
Trust operates in a highly competitive wealth management services
marketplace. Key competitive factors include investment performance,
quality and level of service, and personal relationships. Principal
competitors in the wealth management services business are commercial banks and
trust companies, investment advisory firms, mutual fund companies, stock
brokerage firms, and other financial companies. Many of these
companies have greater resources than Washington Trust.
Employees
At
December 31, 2008, Washington Trust had 440 full-time and 43 part-time and
other employees. Washington Trust maintains a comprehensive employee
benefit program providing, among other benefits, group medical and dental
insurance, life insurance, disability insurance, a pension plan and a 401(k)
plan. Management considers relations with its employees to be
good. See Note 15 to the Consolidated Financial Statements for
additional information on certain employee benefit programs.
Supervision
and Regulation
The
business in which the Corporation is engaged is subject to extensive
supervision, regulation, and examination by various bank regulatory authorities
and other governmental agencies. State and federal banking laws have
as their principal objective either the maintenance of the safety and soundness
of financial institutions and the federal deposit
insurance
system or the protection of consumers, or classes of consumers, and depositors,
in particular, rather than the specific protection of shareholders of a bank or
its parent company.
Set
forth below is a brief description of certain laws and regulations that relate
to the regulation of Washington Trust. To the extent the following
material describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statute or regulation. A
change in applicable statutes, regulations or regulatory policy may have a
material effect on our business.
Regulation of the
Bancorp. As a registered bank holding company, the Bancorp is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the “BHCA”), and to inspection, examination and supervision by the Board of
Governors of the Federal Reserve System (the “FRB”), and the State of Rhode
Island, Department of Business Regulation, Division of Banking (the “Rhode
Island Division of Banking”).
The
FRB has the authority to issue orders to bank holding companies to cease and
desist from unsafe or unsound banking practices and violations of conditions
imposed by, or violations of agreements with, or commitments to, the
FRB. The FRB is also empowered to, among other things, assess civil
money penalties against companies or individuals who violate the BHCA or orders
or regulations thereunder, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies, and to order termination of
ownership and control of a non-banking subsidiary by a bank holding
company.
During
2005, the Bancorp elected financial holding company status pursuant to the
provisions of the Gramm-Leach-Bliley Act of 1999 (“GLBA”). As a
financial holding company, the Bancorp is authorized to engage in certain
financial activities in which a bank holding company may not
engage. “Financial activities” is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the FRB, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. Currently, the Bancorp engages in broker-dealer activities
pursuant to this authority. If a financial holding company fails to
remain well capitalized and well managed, the company and its affiliates may not
commence any new activity that is authorized particularly for financial holding
companies. If a financial holding company remains out of compliance
for 180 days or such longer period as the FRB permits, the FRB may require the
financial holding company to divest either its insured depository institution or
all of its nonbanking subsidiaries engaged in activities not permissible for a
bank holding company. If a financial holding company fails to
maintain a “satisfactory” or better record of performance under the Community
Reinvestment Act, it will be prohibited, until the rating is raised to
satisfactory or better, from engaging in new activities, or acquiring companies
other than bank holding companies, banks or savings associations, except that
the Bancorp could engage in new activities, or acquire companies engaged in
activities that are closely related to banking under the BHCA. In
addition, if the FRB finds that the Bank is not well capitalized or well
managed, the Bancorp would be required to enter into an agreement with the FRB
to comply with all applicable capital and management requirements and which may
contain additional limitations or conditions. Until corrected, the
Bancorp would not be able to engage in any new activity or acquire companies
engaged in activities that are not closely related to banking under the BHCA
without prior FRB approval. If the Bancorp fails to correct any such
condition within a prescribed period, the FRB could order the Bancorp to divest
its banking subsidiary or, in the alternative, to cease engaging in activities
other than those closely related to banking under the BHCA.
Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (“Interstate
Act”). The Interstate Act permits adequately capitalized or
well-capitalized and adequately or well-managed bank holding companies, as
determined by the FRB, to acquire banks in any state subject to certain
concentration limits and other conditions. The Interstate Act also
generally authorizes the interstate merger of banks. In addition,
among other things, the Interstate Act permits banks to establish new branches
on an interstate basis provided that the law of the host state specifically
authorizes such action. Rhode Island and Connecticut, the two states
in which the Corporation conducts branch-banking operations, have adopted
legislation to "opt in" to interstate merger and branching provisions that
effectively eliminated state law barriers. However, as a bank holding
company, we are required to obtain prior FRB approval before acquiring more than
5% of a class of voting securities, or substantially all of the assets, of a
bank holding company, bank or savings association.
Control
Acquisitions. The Change in Bank Control Act prohibits a
person or a group of persons from acquiring “control” of a bank holding company,
such as the Bancorp, unless the FRB has been notified and has not objected to
the transaction. Under a rebuttable presumption established by the
FRB, the acquisition of 10% or more of a class of voting securities of a bank
holding company with a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), would, under
the circumstances set forth in the presumption, constitute the acquisition of
control of the bank holding company. In addition, a company is
required to obtain the approval of the FRB under the BHCA before acquiring 25%
(5% in the case of an acquirer that is a bank holding company) or more of any
class of outstanding voting securities of a bank holding company, or otherwise
obtaining control or a “controlling influence” over that bank holding
company. In September 2008, the FRB released guidance on minority
investment in banks which relaxed the presumption of control for investments of
greater than 10% of a class of outstanding voting securities of a bank holding
company in certain instances discussed in the guidance.
Bank Holding Company
Dividends. The FRB and the Rhode Island Division of Banking
have authority to prohibit bank holding companies from paying dividends if such
payment is deemed to be an unsafe or unsound practice. The FRB has
indicated generally that it may be an unsafe or unsound practice for bank
holding companies to pay dividends unless the bank holding company’s net income
over the preceding year is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s capital needs,
asset quality and overall financial condition. Additionally, under
Rhode Island law, distributions of dividends cannot be made if a bank holding
company would not be able to pay its debts as they become due in the usual
course of business or the bank holding company’s total assets would be less than
the sum of its total liabilities. The Bancorp’s revenues consist
primarily of cash dividends paid to it by the Bank. As described
below, the FDIC and the Rhode Island Division of Banking may also regulate the
amount of dividends payable by the Bank. The inability of the Bank to
pay dividends may have an adverse effect on the Bancorp.
Regulation of the
Bank. The Bank is subject to the regulation, supervision and
examination by the FDIC, the Rhode Island Division of Banking and the State of
Connecticut, Department of Banking. The Bank is also subject to
various Rhode Island and Connecticut business and banking
regulations.
Regulation of the Registered
Investment Adviser and Broker-Dealer. WSC is a registered
broker-dealer and a member of the Financial Industry Regulatory Authority, Inc.
(“FINRA”) and is subject to extensive regulation, supervision, and examination
by the Securities and Exchange Commission (“SEC”), FINRA and the Commonwealth of
Massachusetts. Weston Financial is registered as an investment
advisor under the Investment Advisers Act of 1940, as amended (the “Investment
Advisers Act”), and is subject to extensive regulation, supervision, and
examination by the SEC and the Commonwealth of Massachusetts, including those
related to sales methods, trading practices, the use and safekeeping of
customers’ funds and securities, capital structure, record keeping and the
conduct of directors, officers and employees.
As
an investment advisor, Weston Financial is subject to the Investment Advisers
Act and any regulations promulgated thereunder, including fiduciary,
recordkeeping, operational and disclosure obligations. Each of the
mutual funds for which Weston Financial acts an advisor or subadvisor is
registered with the SEC under the Investment Company Act of 1940, as amended
(the “Investment Company Act”), and subject to requirements
thereunder. Shares of each mutual fund are registered with the SEC
under the Securities Act of 1933, as amended (the “Securities Act”), and are
qualified for sale (or exempt from such qualification) under the laws of each
state and the District of Columbia to the extent such shares are sold in any of
those jurisdictions. In addition, an advisor or subadvisor to a
registered investment company generally has obligations with respect to the
qualification of the registered investment company under the Internal Revenue
Code of 1986, as amended (the “Code”).
The
foregoing laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Weston
Financial from conducting its business in the event it fails to comply with such
laws and regulations. Possible sanctions that may be imposed in the
event of such noncompliance include the suspension of individual employees,
limitations on business activities for specified periods of time, revocation of
registration as an investment advisor, commodity trading advisor and/or other
registrations, and other censures and fines.
ERISA. The
Bank and Weston Financial are each also subject to the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), and related regulations, to
the extent it is a “fiduciary” under ERISA with respect to some of its
clients. ERISA and related provisions of the Code impose duties on
persons who are fiduciaries under ERISA, and prohibit certain transactions
involving the assets of each ERISA plan that is a client of the Bank or Weston
Financial, as applicable, as well as certain transactions by the fiduciaries
(and several other related parties) to such plans.
Insurance of Accounts and
FDIC Regulation. The
Bank pays deposit insurance premiums to the FDIC based on an assessment rate
established by the FDIC. In 2006, the FDIC enacted various rules to
implement the provisions of the Federal Deposit Insurance Reform Act of 2005
(the “FDIR Act”). Pursuant to the FDIR Act, in 2006 the FDIC merged
the Bank Insurance Fund with the Savings Association Insurance Fund to create a
newly named Deposit Insurance Fund (the “DIF”) that covers both banks and
savings associations. The FDIC also revised, effective
January 1, 2007, the risk-based premium system under which the FDIC
classifies institutions based on the factors described below and generally
assesses higher rates on those institutions that tend to pose greater risks to
the DIF. For most banks and savings associations, including the Bank,
FDIC rates depend upon a combination of CAMELS component ratings and financial
ratios. CAMELS ratings reflect the applicable bank regulatory
agency’s evaluation of the financial institution’s capital, asset quality,
management, earnings, liquidity and sensitivity to risk. For large
banks and savings associations that have long-term debt issuer ratings,
assessment rates will depend upon such ratings and CAMELS component
ratings. For institutions, such as the Bank, which are in the lowest
risk category, assessment rates vary initially from five to seven basis points
of deposits. Beginning January 1, 2009, the FDIC assessment
rates were raised seven basis points and vary initially from twelve to fourteen
basis points of deposits. Based on a final ruling approved by the
FDIC on February 27, 2009, further rate changes will take effect on
April 1, 2009, after which assessment rates will vary initially from twelve
to sixteen basis points of deposits with additional adjustments which could
result in total base assessment rates of seven to twenty-four basis points of
deposits. On February 27, 2009, the FDIC also issued an interim
rule that provides for a twenty basis point special assessment on June 30,
2009. The interim rule also provides that the FDIC may impose
additional assessments of up to ten basis points thereafter under certain
circumstances. The Federal Deposit Insurance Act (“FDIA”), as amended
by the FDIR Act, requires the FDIC to set a ratio of deposit insurance reserves
to estimated insured deposits, the designated reserve ratio (the “DRR”), for a
particular year within a range of 1.15% to 1.50%. For 2008, the FDIC
has set the initial DRR at 1.25%. Under the FDIR Act and the FDIC’s
revised premium assessment program, every FDIC-insured institution will pay some
level of deposit insurance assessments regardless of the level of the
DRR. In 2008, FDIC deposit insurance was temporarily increased from
$100,000 to $250,000 per depositor through December 31,
2009. The Bank’s FDIC deposit insurance costs totaled
$1.0 million in 2008. We cannot predict whether, as a result of
an adverse change in economic conditions or other reasons, the FDIC will be
required in the future to further increase deposit insurance assessments
levels.
Bank Holding Company Support
to Subsidiary Bank. Under FRB policy, a bank holding company
is expected to act as a source of financial and managerial strength to its
subsidiary bank and to commit resources to its support. This support
may be required at times when the bank holding company may not have the
resources to provide it. Similarly, under the cross-guarantee
provisions of the FDIA, the FDIC can hold any FDIC-insured depository
institution liable for any loss suffered or anticipated by the FDIC in
connection with (1) the “default” of a commonly controlled FDIC-insured
depository institution; or (2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution “in danger of
default.” The Bank is a FDIC-insured depository
institution.
Regulatory Capital
Requirements. The FRB and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, these regulatory agencies may
from time to time require that a banking organization maintain capital above the
minimum levels, whether because of its financial condition or actual or
anticipated growth.
The
FRB risk-based guidelines define a three-tier capital framework. Tier
1 capital includes common shareholders’ equity and qualifying preferred stock,
less goodwill and other adjustments. Tier 2 capital consists of
preferred stock not qualifying as Tier 1 capital, mandatory convertible debt,
limited amounts of subordinated debt, other qualifying term debt and the
allowance for loan losses up to 1.25% of risk-weighted assets. Tier 3
capital includes subordinated debt that is unsecured, fully paid, has an
original maturity of at least two years, is not redeemable before maturity
without prior approval by the FRB and includes a lock-in clause precluding
payment of either interest or principal if the payment would cause the issuing
bank’s risk-based capital ratio to fall or remain below the required
minimum.
The
sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries
represents qualifying total capital. Risk-based capital ratios are
calculated by dividing Tier 1 and total capital by risk-weighted
assets. Assets and off-balance sheet exposures are assigned to one of
four categories of risk-weights, based primarily on relative credit
risk. The minimum Tier 1 capital ratio is 4% and the minimum total
risk-based capital is 8%. At December 31, 2008, the
Corporation’s net risk-weighted assets amounted to $1.9 billion, its Tier 1
capital ratio was 11.29% and its total risk-based capital ratio was
12.54%.
The
leverage ratio is determined by dividing Tier 1 capital by adjusted average
total assets. Although the stated minimum ratio is 100 to 200 basis
points above 3%, banking organizations must maintain a ratio of at least 5% to
be classified as “well-capitalized.” The Corporation’s leverage ratio
was 7.53% as of December 31, 2008.
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among
other things, identifies five capital categories for insured depository
institutions (well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
federal banking agencies (the “Agencies”) to implement systems for “prompt
corrective action” for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes
progressively more restrictive constraints on operations, management and capital
distributions, depending on the category in which an institution is
classified. Failure to meet the capital guidelines could also subject
a banking institution to capital raising requirements. An
“undercapitalized” bank must develop a capital restoration plan and its parent
holding company must guarantee that bank’s compliance with the
plan. The liability of the parent holding company under any such
guarantee is limited to the lesser of 5% of the bank’s assets at the time it
became “undercapitalized” or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent
holding company, such guarantee would take priority over the parent’s general
unsecured creditors. In addition, FDICIA requires the Agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards.
The
Agencies have adopted substantially similar regulations that define the five
capital categories identified by FDICIA, using the total risk-based capital,
Tier 1 risk-based capital, and leverage capital ratios as the relevant capital
measures. Such regulations establish various degrees of corrective action to be
taken when an institution is considered undercapitalized. Under the
regulations, a bank generally shall be deemed to be:
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“well-capitalized”
if it has a total risk based capital ratio of 10.0% or greater, has a
Tier 1 risk based capital ratio of 6.0% or more, has a leverage ratio
of 5.0% or greater and is not subject to any written agreement, order or
capital directive or prompt corrective action
directive;
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“adequately
capitalized” if it has a total risk based capital ratio of 8.0% or
greater, a Tier 1 risk based capital ratio of 4.0% or more, and a
leverage ratio of 4.0% or greater (3.0% under certain circumstances) and
does not meet the definition of a “well-capitalized
bank;”
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“undercapitalized”
if it has a total risk based capital ratio that is less than 8.0%, a
Tier 1 risk based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain
circumstances);
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“significantly
undercapitalized” if it has a total risk based capital ratio that is less
than 6.0%, a Tier 1 risk based capital ratio that is less than 3.0%
or a leverage ratio that is less than 3.0%;
and
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“critically
undercapitalized” if it has a ratio of tangible equity to total assets
that is equal to or less than 2.0%.
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Regulators
also must take into consideration (1) concentrations of credit risk; (2)
interest rate risk (when the interest rate sensitivity of an institution’s
assets does not match the sensitivity of its liabilities or its off-balance
sheet position); and (3) risks from non-traditional activities, as well as an
institution’s ability to manage those risks, when determining the adequacy of an
institution’s capital. This evaluation will be made as a part of the
institution’s regular safety and soundness examination. In addition,
the Bancorp, and any bank with significant trading activity, must incorporate a
measure for market risk in their regulatory capital calculations. At
December 31, 2008, the Bank’s capital ratios placed it in the
well-capitalized category. Reference is made to Note 12 to the
Consolidated Financial Statements for additional discussion of the Corporation’s
regulatory capital requirements.
An
institution generally must file a written capital restoration plan which meets
specified requirements with an appropriate FDIC regional director within 45 days
of the date that the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. An institution that is required to submit a capital
restoration plan must concurrently submit a performance guaranty by each company
that controls the institution. A critically undercapitalized
institution generally is to be placed in conservatorship or receivership within
90 days unless the FDIC formally determines that forbearance from such action
would better protect the deposit insurance fund. Immediately upon
becoming undercapitalized, an institution becomes subject to the provisions of
Section 38 of the FDIA, including for example, (i) restricting the payment
of capital distributions and management fees, (ii) requiring that the FDIC
monitor the condition of the institution and its efforts to restore its capital,
(iii) requiring submission of a capital restoration plan, (iv) restricting
growth of the institution’s assets and (v) requiring prior approval of certain
expansion proposals.
The
Agencies issued a final rule entitled “Risk-Based Capital Standards: Advanced
Capital Adequacy Framework - Basel II” (“Basel II”), which became effective
on April 1, 2008 and “core banks” (“core banks” are the approximately 20
largest U.S. bank holding companies) were required to adopt a board-approved
plan to implement Basel II by October 1,
2008. Basel II will result in significant changes to the risk
based capital standards for "core banks” subject to Basel II and other
banks that elect to use such rules to calculate their risk-based capital
requirements. In connection with Basel II, the Agencies
published a joint notice of proposed rulemaking entitled "Risk-Based Capital
Guidelines; Capital Adequacy Guidelines: Standardized Framework" on
July 29, 2008 (the "Standardized Approach Proposal"). The
Standardized Approach Proposal, if adopted by the Agencies, would provide all
non-core banks with an optional framework, based upon the standardized approach
under the international Basel II Accord, for calculating their risk-based
capital requirements. The Bank does not currently expect to calculate
their capital ratios under Basel II or in accordance with the Standardized
Approach Proposal. Accordingly, the
Corporation is not yet in a position to determine the effect of such rules on
its risk capital requirements.
Transactions with
Affiliates. Under Sections 23A and 23B of the Federal
Reserve Act and Regulation W thereunder, there are various legal restrictions on
the extent to which a bank holding company and its nonbank subsidiaries may
borrow, obtain credit from or otherwise engage in “covered transactions” with
its FDIC-insured depository institution subsidiaries. Such borrowings
and other covered transactions by an insured depository institution subsidiary
(and its subsidiaries) with its nondepository institution affiliates are limited
to the following amounts:
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In
the case of one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries
cannot exceed 10% of the capital stock and surplus of the insured
depository institution.
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In
the case of all affiliates, the aggregate amount of covered transactions
of the insured depository institution and its subsidiaries cannot exceed
20% of the capital stock and surplus of the insured depository
institution.
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“Covered
transactions” are defined by statute for these purposes to include a loan or
extension of credit to an affiliate, a purchase of or investment in securities
issued by an affiliate, a purchase of assets from an affiliate unless exempted
by the FRB, the acceptance of securities issued by an affiliate as collateral
for a loan or extension of credit to any person or company, or the issuance of a
guarantee, acceptance, or letter of credit on behalf of an
affiliate. Covered transactions are also subject to certain
collateral security requirements. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind,
or furnishing of any service.
Limitations on Bank
Dividends. The Bancorp’s revenues consist primarily of cash
dividends paid to it by the Bank. The FDIC has the authority to use
its enforcement powers to prohibit a bank from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound
practice. Federal law also prohibits the payment of dividends by a
bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. Payment of dividends by a bank is
also restricted pursuant to various state regulatory
limitations. Reference is made to Note 12 to the Consolidated
Financial Statements for additional discussion of the Corporation’s ability to
pay dividends.
Customer Information Security.
The Agencies have adopted final guidelines for establishing standards for
safeguarding nonpublic personal information about customers. These
guidelines implement provisions of GLBA, which establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework. Specifically, the Information Security
Guidelines established by the GLBA require each financial institution, under the
supervision and ongoing oversight of its Board of Directors or an appropriate
committee thereof, to develop, implement and maintain a comprehensive written
information security program designed to ensure the security and confidentiality
of customer information, to protect against any anticipated threats or hazards
to the security or integrity of such information, and protect against
unauthorized access to or use of such information that could result in
substantial harm or inconvenience to any customer. The federal
banking regulators have issued guidance for banks on response programs for
unauthorized access to customer information. This guidance, among
other things, requires notice to be sent to customers whose “sensitive
information” has been compromised if unauthorized use of this information is
“reasonably possible”. A majority of states have enacted legislation
concerning breaches of data security and Congress is considering federal
legislation that would require consumer notice of data security
breaches.
Privacy. The
GLBA requires financial institutions to implement policies and procedures
regarding the disclosure of nonpublic personal information about consumers to
nonaffiliated third parties. In general, the statute requires the
financial institution to explain to consumers its policies and procedures
regarding the disclosure of such nonpublic personal information, and, except as
otherwise required by law, the financial institution is prohibited from
disclosing such information except as provided in its policies and
procedures.
USA Patriot Act of
2001 (the “Patriot Act”). The Patriot Act, designed to deny
terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, broker-dealers, mutual funds, insurance companies and businesses
of other types involved in the transfer of money. The Patriot Act,
together with the implementing regulations of various federal regulatory
agencies, has caused financial institutions, including banks, to adopt and
implement additional, or amend existing, policies and procedures with respect
to, among other things, anti-money laundering compliance, suspicious activity
and currency transaction reporting, customer identity verification and customer
risk analysis. The statute and its underlying regulations also permit
information sharing for counter-terrorist purposes between federal law
enforcement agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB (and other
federal banking agencies) to evaluate the effectiveness of an applicant and a
target institution in combating money laundering activities when considering
applications filed under Section 3 of the BHCA or the Bank Merger
Act. In 2006, final regulations under the Patriot Act were issued
requiring financial institutions, including the Bank, to take additional steps
to monitor their correspondent banking and private banking relationships as well
as their relationships with “shell Banks.” Management believes that
the Corporation is in compliance with all the requirements prescribed by the
Patriot Act and all applicable final implementing regulations.
The Community Reinvestment
Act (the “CRA”). The CRA requires lenders to identify the
communities served by the institution’s offices and other deposit taking
facilities and to make loans and investments and provide services that meet the
credit needs of these communities. Regulatory agencies examine each
of the banks and rate such institutions’ compliance with CRA as “Outstanding”,
“Satisfactory”, “Needs to Improve” or “Substantial
Noncompliance”. Failure of an institution to receive at least a
“Satisfactory” rating could inhibit an institution or its holding company from
undertaking certain activities, including engaging in activities newly permitted
as a financial holding company under GLBA and acquisitions of other financial
institutions. The FRB must take into account the record of
performance of banks in meeting the credit needs of the entire community served,
including low and moderate income neighborhoods. The Bank has
achieved a rating of “Satisfactory” on its most recent examination dated
November 2006. Rhode Island and Connecticut also have enacted
substantially similar community reinvestment requirements.
Regulation
R. The FRB approved Regulation R implementing the bank broker
push out provisions under Title II of the GLBA. GLBA provided 11
exceptions from the definition of “broker” in Section 3(a)(4) of the Exchange
Act that permit banks not registered as broker-dealers with the SEC to effect
securities transactions under certain conditions. Regulation R
implements certain of these exceptions. In 2007, the SEC also
approved Regulation R. The Bank began complying with Regulation R on
the first day of the bank’s fiscal quarter starting after September 30,
2008. The FRB and SEC have stated that they will jointly issue any
interpretations or no-action
letters/guidance regarding Regulation R and consult with
each other and the appropriate federal banking agency with respect to formal
enforcement actions pursuant to Regulation R.
Regulatory Enforcement
Authority. The enforcement powers available to the Agencies
include, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as
defined. In general, these enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. Under certain circumstances, federal and
state law requires public disclosure and reports of certain criminal offenses
and also final enforcement actions by the Agencies.
Identity Theft Red
Flags. The Agencies jointly issued final rules and guidelines
in 2007 implementing Section 114 (“Section 114”) of the Fair and Accurate Credit
Transactions Act of 2003 (“FACT Act”) and final rules implementing Section 315
(“Section 315”) of the FACT Act. Section 114 requires each financial
institution or creditor to develop and implement a written Identity Theft
Prevention Program (the “Program”) to detect, prevent, and mitigate identity
theft in connection with the opening of certain accounts or certain existing
accounts. Section 114 also requires credit and debit card issuers to
assess the validity of notifications of changes of address under certain
circumstances. The Agencies issued joint rules under Section 315 that
provide guidance regarding reasonable policies and procedures that a user of
consumer reports must employ when a consumer reporting agency sends the user a
notice of address discrepancy. The final rules and guidelines became
effective January 1, 2008 with a mandatory compliance deadline for the Bank
of November 1, 2008.
Fair Credit Reporting
Affiliate Marketing Regulations. In 2007, the Agencies
published final rules to implement the affiliate marketing provisions in Section
214 of the FACT Act, which amends the Fair Credit Reporting Act. The
final rules generally prohibit a person from using information received from an
affiliate to make a solicitation for marketing purposes to a consumer, unless
the consumer is given notice and a reasonable opportunity and a reasonable and
simple method to opt out of the making of such solicitations. These
rules became effective January 1, 2008 with a mandatory compliance deadline
for the Bank of October 1, 2008.
The Sarbanes-Oxley Act of
2002, as amended (“Sarbanes-Oxley”). Sarbanes-Oxley
implemented a broad range of corporate governance and accounting measures for
public companies (including publicly-held bank holding companies such as
Bancorp) designed to promote honesty and transparency in corporate
America. Sarbanes-Oxley’s principal provisions, many of which have
been interpreted through regulations released in 2003, provide for and include,
among other things, (1) requirements for audit committees, including
independence and financial expertise; (2) certification of financial statements
by the principal executive officer and principal financial officer of the
reporting company; (3) standards for auditors and regulation of audits; (4)
disclosure and reporting requirements for the reporting company and directors
and executive officers; and (5) a range of civil and criminal penalties for
fraud and other violations of securities laws.
Securities
and Exchange Commission Availability of Filings
Under
Sections 13 and 15(d) of the Exchange Act, periodic and current reports must be
filed or furnished with the SEC. You may read and copy any reports,
statements or other information filed by Washington Trust with the SEC at its
public reference room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Washington Trust’s filings are also
available to the public from commercial document retrieval services and at the
website maintained by the SEC at http://www.sec.gov. In addition,
Washington Trust makes available free of charge on the Investor Relations
section of its website (www.washtrust.com) its annual report on Form 10-K, its
quarterly reports on Form 10-Q, current reports on Form 8-K, and exhibits and
amendments to those reports as soon as reasonably practicable after it
electronically files such material with, or furnishes it to, the
SEC. Information on the Washington Trust website is not incorporated
by reference into this Annual Report on Form 10-K.
In
addition to the other information contained or incorporated by reference in this
Annual Report on Form 10-K, you should consider the following factors relating
to the business of the Corporation.
Interest
Rate Volatility May Reduce Our Profitability
Our
consolidated results of operations depend, to a large extent, on the level of
net interest income, which is the difference between interest income from
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. If
interest rate fluctuations cause the cost of interest-bearing liabilities
to increase faster than the yield on interest-earning assets, then our net
interest income will decrease. If the cost of interest-bearing
liabilities declines faster than the yield on interest-earning assets, then our
net interest income will increase.
We
measure our interest rate risk using simulation analyses with
particular emphasis on measuring changes in net income and net economic value in
different interest-rate environments. The simulation analyses
incorporate assumptions about balance sheet changes, such as asset and liability
growth, loan and deposit pricing and changes due to the mix and maturity of such
assets and liabilities. Other key assumptions relate to the behavior
of interest rates and spreads, prepayments of loans and the run-off of
deposits. These assumptions are inherently uncertain and, as a
result, the simulation analyses cannot precisely estimate the impact that higher
or lower rate environments will have on net income. Actual results
will differ from simulated results due to timing, magnitude and frequency of
interest rate changes, changes in cash flow patterns and market conditions, as
well as changes in management’s strategies.
While
various monitors of interest-rate risk are employed, we are unable to predict
future fluctuations in interest rates or the specific impact
thereof. The market values of most of our financial assets are
sensitive to fluctuations in market interest rates. Fixed-rate
investments, mortgage-backed securities and mortgage loans typically decline in
value as interest rates rise. Prepayments on mortgage-backed
securities may adversely affect the value of such securities and the interest
income generated by them.
Changes
in interest rates can also affect the amount of loans that we originate, as well
as the value of loans and other interest-earning assets and our ability to
realize gains on the sale of such assets and liabilities. Prevailing
interest rates also affect the extent to which our borrowers prepay their loans.
When interest rates increase, borrowers are less likely to prepay their loans,
and when interest rates decrease, borrowers are more likely to prepay
loans. Funds generated by prepayments might be reinvested at a less
favorable interest rate. Prepayments may adversely affect the value
of mortgage loans, the levels of such assets that are retained in our portfolio,
net interest income, loan servicing income and capitalized servicing
rights.
Increases
in interest rates might cause depositors to shift funds from accounts that have
a comparatively lower cost, such as regular savings accounts, to accounts with a
higher cost, such as certificates of deposit. If the cost of interest-bearing
deposits increases at a rate greater than the yields on interest-earning assets
increase, our net interest income will be negatively
affected. Changes in the asset and liability mix may also affect our
net interest income.
Our
principal sources of funding are deposits and borrowings. As a
general matter, deposits are a lower cost source of funds than borrowings
because interest rates paid for deposits are typically less than interest rates
charged for borrowings. If, as a result of general economic
conditions, market interest rates, competitive pressures or otherwise, the level
of our deposits were to decline relative to the total sources of funds, we may
have to rely more heavily on higher cost borrowings in the future.
For
additional discussion on interest rate risk, see disclosures in Item 7
under the caption "Asset / Liability Management and Interest Rate
Risk."
The Market Value of Wealth
Management Assets under Administration May Be Negatively Affected by Changes in
Economic and Market Conditions
Revenues
from wealth management services represented 27% of our total revenues for
2008. A substantial portion of these fees are dependent on the market
value of wealth management assets under administration, which are primarily
marketable securities. Changes in domestic and foreign economic
conditions, volatility in financial markets, and general trends in business and
finance, all of which are beyond our control, could adversely impact the market
value of these assets and the fee revenues derived from the management of these
assets.
We May Not Be Able to
Attract and Retain Wealth Management Clients at Current
Levels
Due
to strong competition, our wealth management division may not be able to attract
and retain clients at current levels. Competition is strong because
there are numerous well-established and successful investment management and
wealth advisory firms including commercial banks and trust companies, investment
advisory firms, mutual fund companies, stock brokerage firms, and other
financial companies. Many of our competitors have greater resources
than we have.
Our
ability to successfully attract and retain wealth management clients is
dependent upon our ability to compete with competitors’ investment products,
level of investment performance, client services and marketing and distribution
capabilities. If we are not successful, our results of operations and
financial condition may be negatively impacted.
Wealth
management revenues are primarily derived from investment management (including
mutual funds), trust fees and financial planning services. Most of
our investment management clients may withdraw funds from accounts under
management generally at their sole discretion. Financial planning
contracts must typically be renewed on an annual basis and are terminable upon
relatively short notice. The financial performance of our wealth
management business is a significant factor in our overall results of operations
and financial condition.
Our Allowance for Loan
Losses May Not Be Adequate to Cover Actual Loan Losses
We
make various assumptions and judgments about the collectibility of our loan
portfolio and provide an allowance for potential losses based on a number of
factors. If our assumptions are wrong, our allowance for loan losses
may not be sufficient to cover our losses, which would have an adverse effect on
our operating results, and may also cause us to increase the allowance in the
future. Material additions to our allowance would materially decrease
our net income. In addition to general real estate and economic
factors, the following factors could affect our ability to collect our loans and
require us to increase the allowance in the future:
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Regional
credit concentration - We are exposed to real estate and economic factors
in southern New England, because a significant portion of our loan
portfolio is concentrated among borrowers in this
market. Further, because a substantial portion of our loan
portfolio is secured by real estate in this area, including residential
mortgages, most consumer loans, commercial mortgages and other commercial
loans, the value of our collateral is also subject to regional real estate
market conditions and other factors that might affect the value of real
estate, including natural
disasters.
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Industry
concentration - A portion of our loan portfolio consists of loans to the
hospitality, tourism and recreation industries. Loans to
companies in these industries may have a somewhat higher risk of loss than
some other industries because these businesses are seasonal, with a
substantial portion of commerce concentrated in the summer
season. Accordingly, the ability of borrowers to meet their
repayment terms is more dependent on economic, climate and other
conditions and may be subject to a higher degree of volatility from year
to year.
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Volatility
in the financial markets associated with subprime mortgages, including
adverse impacts on credit quality and liquidity within the financial
markets, have been associated with a general decline in the real estate
and housing market along with significant mortgage loan related losses
reported by many other financial institutions. Global and
domestic economic conditions have been adversely affected by these
factors. No assurance can be given that these conditions will
not result in an increase in delinquencies with a negative impact on our
loan loss experience, necessitating an increase in our allowance for loan
losses.
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Federal
and state regulators periodically review our allowance for loan losses and
may require us to increase our provision for loan losses or recognize
additional charge-offs. Any increase in our allowance for loan
losses or loan charge-offs required by these regulatory agencies could
have a material adverse effect on our results of operations and financial
condition.
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For
a more detailed discussion on the allowance for loan losses, see additional
information disclosed in Item 7 under the caption “Application of Critical
Accounting Policies and Estimates.”
We Have Credit Risk Inherent
in Our Securities Portfolio
We
maintain a diversified securities portfolio, which includes mortgage-backed
securities issued by U.S. government and government sponsored agencies,
obligations of the U.S. Treasury and government-sponsored agencies, securities
issued by state and political subdivisions, trust preferred debt securities
primarily issued by financial service companies, and corporate debt
securities. We also invest in capital securities, which include
common and perpetual preferred stocks. We seek to limit credit losses
in our securities portfolios by generally purchasing only highly-rated
securities.
The
current economic environment and recent volatility of financial markets increase
the difficulty of assessing investment securities impairment and the same
influences tend to increase the risk of potential impairment of these
assets. During the year ended December 31, 2008, we recorded
charges for other-than-temporary impairment of securities of
$5.9 million. We believe we have adequately reviewed our
investment securities for impairment and that our investment securities are
carried at fair value. However, over time, the economic and market
environment may provide additional insight regarding the fair value of certain
securities, which could change our judgment regarding
impairment. This could result in realized losses relating to
other-than-temporary declines being charged against future
income. Given the current market conditions and the significant
judgments involved, there is continuing risk that further declines in fair value
may occur and additional material other-than-temporary impairments may be
charged to income in future periods, resulting in realized losses.
We May Not Be Able to
Compete Effectively Against Larger Financial Institutions in Our Increasingly
Competitive Industry
The
financial services industry in our market has experienced both significant
concentration and deregulation. This means that we compete with
larger bank and non-bank financial institutions for loans and deposits in the
communities we serve, and we may face even greater competition in the future due
to legislative, regulatory and technological changes and continued
consolidation. Many of our competitors have significantly greater
resources and lending limits than we have. Banks and other financial
services firms can merge under the umbrella of a financial holding company,
which can offer virtually any type of financial service. In addition,
technology has lowered barriers to entry and made it possible for non-banks to
offer products and services traditionally provided by banks, such as automated
transfer and automatic payment systems. Many competitors have fewer
regulatory constraints and may have lower cost structures than we
do. Additionally, due to their size, many competitors may be able to
achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services
than we can. Our long-term success depends on the ability of the Bank
to compete successfully with other financial institutions in the Bank’s service
areas.
Economic
Conditions
National
and local economic conditions have an impact on the banking and financial
services industry, including those of the Corporation. The
Corporation’s operating results depend to a large extent on providing products
and services to customers in our local market area. Unemployment
rates, real estate values, demographic changes, property tax rates, and local
and state governments have an impact on local and regional economic
conditions. An increase in unemployment, a decrease in real estate
values, an increase in property tax rates, or decrease in population could
weaken the local economies in which the Corporation operates. Weak
economic conditions could lead to credit quality concerns related to repayment
ability and collateral protection. These conditions could also affect
the Corporation’s ability to retain or grow deposits.
Current Levels of Market
Volatility Are Unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months, recently reaching unprecedented levels. In some
cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers’ underlying
financial strength. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that we will not
experience an adverse effect, which may be material, on our ability to access
capital and on our business, financial condition and results of
operations.
Operational
Risk
The
Corporation is subject to certain operational risks, including, but not limited
to, data processing system failures and errors, customer or employee fraud and
catastrophic failures resulting from terrorist acts or natural disasters. The
Corporation depends upon data processing, software, communication, and
information exchange on a variety of computing platforms and networks and over
the Internet. Despite instituted safeguards, the Corporation cannot
be certain that all of its systems are entirely free from vulnerability to
attack or other technological difficulties or failures. If information security
is breached or other technology difficulties or failures occur, information may
be lost or misappropriated, services and operations may be interrupted and the
Corporation could be exposed to claims from customers. While the Corporation
maintains a system of internal controls and procedures, any of these results
could have a material adverse effect on the Corporation's business, financial
condition, results of operations or liquidity.
Technological Development
and Changes
The
financial services industry is subject to rapid technological changes with
frequent introductions of new technology driven products and services. In
addition to improving the Corporation's ability to serve customers, the
effective use of technology increases efficiencies and helps to maintain or
reduce expenses. The Corporation's ability to keep pace with technological
changes affecting the financial industry and to introduce new products and
services based on this new technology will be important to the Corporation's
continued success.
Changes in Legislation
and/or Regulation and Accounting Principles, Policies and
Guidelines
Changes
in legislation and/or regulation governing financial holding companies and their
subsidiaries could affect our operations. The Corporation is subject
to extensive federal and state laws and regulations and is subject to
supervision, regulation and examination by various federal and state bank
regulatory agencies. The restrictions imposed by such laws and
regulations limit the manner in which the Corporation may conduct business.
There can be no assurance that any modification of these laws and regulations,
or new legislation that may be enacted in the future, will not make compliance
more difficult or expensive, or otherwise adversely affect the operations of the
Corporation. See the section entitled "Supervision and Regulation" in
Item 1 of this Annual Report on Form 10-K.
The
Corporation is subject to tax laws and regulations promulgated by the United
States government and the states in which we operate. Changes to
these laws and regulations or the interpretation of such laws and regulations by
taxing authorities could impact future tax expense and the value of deferred tax
assets.
Changes
in GAAP applicable to the Corporation could have a material impact on the
Corporation’s reported results of operations.
None.
GUIDE
3 Statistical Disclosures
The
information required by Securities Act Guide 3 “Statistical Disclosure by Bank
Holding Companies” is located on the pages noted below.
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|
Distribution
of Assets, Liabilities and Stockholder Equity;
Interest
Rates and Interest Differentials
|
31-32
|
|
II.
|
Investment
Portfolio
|
40-41,
82
|
|
III.
|
Loan
Portfolio
|
44-48,
83
|
|
IV.
|
Summary
of Loan Loss Experience
|
50-51,
85
|
|
V.
|
Deposits
|
31,
90
|
|
VI.
|
Return
on Equity and Assets
|
21
|
|
VII.
|
Short-Term
Borrowings
|
91
|
The
Corporation conducts its business from seventeen offices, including its
headquarters located at 23 Broad Street, Westerly, Rhode Island and offices
located within Washington, Providence and Kent Counties in Rhode Island and New
London County in southeastern Connecticut. In addition, Washington
Trust has a commercial lending office located in the financial district of
Providence and provides wealth management services from its main office and
offices located in Providence and Narragansett, Rhode Island and Wellesley,
Massachusetts. The Bank also has two
operations
facilities located in Westerly, Rhode Island. At December 31,
2008, nine of the Corporation’s facilities were owned, twelve were leased and
one branch office was owned on leased land. Lease expiration dates
range from five months to fourteen years with renewal options on certain leases
of two to fifteen years. All of the Corporation’s properties are
considered to be in good condition and adequate for the purpose for which they
are used.
In
addition to the locations mentioned above, the Bank has three owned offsite-ATMs
in leased spaces. The terms of two of these leases are negotiated
annually. The lease term for the third offsite-ATM expires in three
years with no renewal option.
The
Bank also operates ATMs that are branded with the Bank’s logo under contracts
with a third party vendor located in retail stores and other locations in Rhode
Island, southeastern Connecticut and southeastern Massachusetts.
For
additional information regarding premises and equipment and lease obligations
see Note 7 to the Consolidated Financial Statements.
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 such other matters will not materially affect the
consolidated financial position or results of operations of the
Corporation.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2008.
The
following is a list of all executive officers of the Bancorp and the Bank with
their titles, ages, and years of service, followed by certain biographical
information as of December 31, 2008.
|
Years
of
|
|||
|
Name
|
Title
|
Age
|
Service
|
|
John
C. Warren
|
Chairman
and Chief Executive Officer of the Bancorp and the Bank
|
63
|
13
|
|
|
|||
|
John
F. Treanor
|
President
and Chief Operating Officer of the Bancorp and the Bank
|
61
|
10
|
|
|
|||
|
Galan
G. Daukas
|
Executive
Vice President of Wealth Management of the Bancorp and the
Bank
|
45
|
3
|
|
|
|||
|
David
V. Devault
|
Executive
Vice President, Chief Financial Officer and Secretary of the
Bancorp
|
54
|
22
|
|
and
the Bank
|
|||
|
|
|||
|
Mark
K. W. Gim
|
Executive
Vice President and Treasurer of the Bancorp and the Bank
|
42
|
15
|
|
|
|||
|
Stephen
M. Bessette
|
Executive
Vice President – Retail Lending of the Bank
|
61
|
12
|
|
|
|||
|
B.
Michael Rauh, Jr.
|
Executive
Vice President –Sales, Service and Delivery of the Bank
|
49
|
17
|
|
|
|||
|
James
M. Vesey
|
Executive
Vice President and Chief Credit Officer of the Bank
|
61
|
10
|
|
|
|||
|
Dennis
L. Algiere
|
Senior
Vice President – Chief Compliance Officer and Director of
|
48
|
14
|
|
Community
Affairs of the Bank
|
|||
|
|
|||
|
Vernon
F. Bliven
|
Senior
Vice President – Human Resources of the Bank
|
59
|
36
|
|
|
|||
|
Elizabeth
B. Eckel
|
Senior
Vice President – Marketing of the Bank
|
48
|
17
|
|
|
|||
|
William
D. Gibson
|
Senior
Vice President – Risk Management of the Bank
|
62
|
10
|
|
|
|||
|
Barbara
J. Perino, CPA
|
Senior
Vice President – Operations and Technology of the Bank
|
47
|
20
|
John
C. Warren joined the Bancorp and the Bank in 1996 as President and Chief
Operating Officer. In 1997, he was elected President and Chief
Executive Officer of the Bancorp and the Bank. In 1999, he was
elected Chairman and Chief Executive Officer of the Bancorp and the
Bank.
John
F. Treanor joined the Bancorp and the Bank in 1999 as President and Chief
Operating Officer.
Galan
G. Daukas joined the Bancorp and the Bank in 2005 as Executive Vice President of
Wealth Management. Prior to joining Washington Trust, he held the
position of Chief Operating Officer of The Managers Funds, LLC from 2002 to
2005.
David
V. Devault joined the Bank in 1986 as Controller. He was promoted to
Vice President and Chief Financial Officer of the Bancorp and the Bank in 1987
and to Senior Vice President and Chief Financial Officer of the Bancorp and the
Bank in 1990. In 1997, he was also elected Treasurer of the Bancorp
and the Bank. He was named Executive Vice President, Treasurer and
Chief Financial Officer of the Bancorp and the Bank in 1998. He was
appointed to the position of Secretary of the Bank in 2002 and Secretary of the
Bancorp in 2005. In 2008, his title was changed to Executive Vice
President, Chief Financial Officer and Secretary of the Bancorp and the
Bank.
Mark
K. W. Gim joined the Bank in 1993 as Financial Planning Officer. He
was promoted to Assistant Vice President – Financial Planning of the Bank in
1995, and to Vice President – Financial Planning of the Bank in
1996. In 2000, he was promoted to Senior Vice President – Financial
Planning and Asset/Liability Management of the Bank. He was named
Executive Vice President and Treasurer of the Bancorp and the Bank in
2008.
Stephen
M. Bessette joined the Bank in 1997 as Senior Vice President – Retail
Lending. He was named Executive Vice President – Retail Lending in
2005.
B.
Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was
promoted in 1993 to Senior Vice President - Retail Banking. He was
named Senior Vice President – Corporate Sales, Planning & Delivery in
2003. In 2005, he was appointed Executive Vice President – Corporate
Sales, Planning and Delivery. In 2007, his title was changed to
Executive Vice President, Sales, Service & Delivery.
James
M. Vesey joined the Bank in 1998 as Senior Vice President – Commercial
Lending. In 2000, he was named Senior Vice President and Chief Credit
Officer. In 2007, he was appointed Executive Vice President and Chief
Credit Officer.
Dennis
L. Algiere joined the Bank in 1995 as Compliance Officer. He was
named Vice President – Compliance in 1996 and was promoted to Senior Vice
President – Compliance and Community Affairs in 2001. He was named
Senior Vice President – Chief Compliance Officer and Director of Community
Affairs in 2003.
Vernon
F. Bliven joined the Bank in 1972 and was named Assistant Vice President in
1980, Vice President in 1986 and Senior Vice President – Human Resources in
1993.
Elizabeth
B. Eckel joined the Bank in 1991 as Director of Advertising and Public
Relations. In 1995, she was named Vice President – Marketing. She was
promoted to Senior Vice President – Marketing in 2000.
William
D. Gibson joined the Bank in 1999 as Senior Vice President – Credit
Administration. In 2007, he was named Senior Vice President – Risk
Management.
Barbara
J. Perino joined the Bank in 1988 as Financial Accounting
Officer. She was named Controller in 1989 and Vice President -
Controller in 1992. In 1998, she was promoted to Senior Vice
President – Operations and Technology.
|
ITEM
5.
|
Market
for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
The
quarterly common stock price ranges and dividends paid per share for the years
ended December 31, 2008 and 2007 are presented in the following
table. The stock prices are based on the high and low sales prices
during the respective quarter.
|
2008
Quarters
|
1
|
2
|
3
|
4
|
||||||||||||
|
Stock
prices:
|
||||||||||||||||
|
High
|
$ | 26.50 | $ | 26.49 | $ | 33.34 | $ | 27.30 | ||||||||
|
Low
|
21.84 | 19.70 | 18.43 | 16.33 | ||||||||||||
|
Cash
dividend declared per share
|
$ | 0.20 | $ | 0.21 | $ | 0.21 | $ | 0.21 | ||||||||
|
2007
Quarters
|
1
|
2
|
3
|
4
|
||||||||||||
|
Stock
prices:
|
||||||||||||||||
|
High
|
$ | 28.98 | $ | 27.69 | $ | 28.42 | $ | 28.65 | ||||||||
|
Low
|
25.32 | 23.90 | 22.87 | 23.49 | ||||||||||||
|
Cash
dividend declared per share
|
$ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 |
The
Bancorp will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The
Bancorp (including the Bank prior to 1984) has recorded consecutive quarterly
dividends for over 100 years.
The
Bancorp’s primary source of funds for dividends paid to shareholders is the
receipt of dividends from the Bank. A discussion of the restrictions
on the advance of funds or payment of dividends to the Bancorp is included in
Note 12 to the Consolidated Financial Statements.
At
February 25, 2009 there were 1,999 holders of record of the Bancorp’s
common stock.
See
additional disclosures on Equity Compensation Plan Information in Part III, Item
12 “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
The
following table provides information as of and for the quarter ended
December 31, 2008 regarding shares of common stock of the Corporation that
were repurchased under the Amended and Restated Nonqualified Deferred
Compensation Plan (“Deferred Compensation Plan”), the 2006 Stock Repurchase
Plan, the Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”),
and the Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003
Plan”).
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced
plan(s)
|
Maximum
number of shares that may yet be purchased under the
plan(s)
|
|||||||||||||
|
Deferred
Compensation Plan (1)
|
||||||||||||||||
|
Balance
at beginning of period
|
N/A | |||||||||||||||
|
10/1/2008
to 10/31/2008
|
– | – | – | N/A | ||||||||||||
|
11/1/2008
to 11/30/2008
|
– | – | – | N/A | ||||||||||||
|
12/1/2008
to 12/31/2008
|
– | – | – | N/A | ||||||||||||
|
Total
Deferred Compensation Plan
|
– | – | – | N/A | ||||||||||||
|
2006
Stock Repurchase Plan (2)
|
||||||||||||||||
|
Balance
at beginning of period
|
214,600 | |||||||||||||||
|
10/1/2008
to 10/31/2008
|
– | – | – | 214,600 | ||||||||||||
|
11/1/2008
to 11/30/2008
|
– | – | – | 214,600 | ||||||||||||
|
12/1/2008
to 12/31/2008
|
– | – | – | 214,600 | ||||||||||||
|
Total
2006 Stock Repurchase Plan
|
– | – | – | 214,600 | ||||||||||||
|
Other
(3)
|
||||||||||||||||
|
Balance
at beginning of period
|
N/A | |||||||||||||||
|
10/1/2008
to 10/31/2008
|
– | – | – | N/A | ||||||||||||
|
11/1/2008
to 11/30/2008
|
– | – | – | N/A | ||||||||||||
|
12/1/2008
to 12/31/2008
|
– | – | – | N/A | ||||||||||||
|
Total
Other
|
– | – | – | N/A | ||||||||||||
|
Total
Purchases of Equity Securities
|
– | – | – | – | ||||||||||||
|
(1)
|
The
Deferred Compensation Plan allows directors and officers to defer a
portion of their compensation. The deferred compensation is
contributed to a rabbi trust that invests the assets of the trust into
selected mutual funds as well as shares of the Bancorp’s common
stock. The plan authorizes Bancorp to acquire shares of
Bancorp’s common stock to satisfy its obligation under this
plan. All shares are purchased in the open
market. As of October 15, 2007, the Bancorp’s common stock
was no longer available as a new benchmark investment under the
plan. Further, directors and officers who currently have
selected Bancorp’s common stock as a benchmark investment (the “Bancorp
Stock Fund”) will be allowed to transfer from that fund during a
transition period that will run through March 14,
2009. After March 14, 2009, directors and officers will
not be allowed to make transfers from the Bancorp Stock Fund and any
distributions will be made in whole shares of Bancorp’s common stock to
the extent of the benchmark investment election in the Bancorp Stock
Fund.
|
|
(2)
|
The
2006 Stock Repurchase Plan was established in December 2006. A
maximum of 400,000 shares were authorized under the plan. The
Bancorp plans to hold the repurchased shares as treasury stock for general
corporate purposes.
|
|
(3)
|
Pursuant
to the Corporation’s share-based compensation plans, employees may deliver
back shares of stock previously issued in payment of the exercise price of
stock options. While required to be reported in this table,
such transactions are not reported as share repurchases in the
Corporation’s Consolidated Financial Statements. The
share-based compensation plans (the 1997 Plan and the 2003 Plan) have
expiration dates of April 29, 2017 and February 20, 2023,
respectively.
|
The
selected consolidated financial data set forth below does not purport to be
complete and should be read in conjunction with, and is qualified in its
entirety by, the more detailed information including the Consolidated Financial
Statements and related Notes, and the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” appearing
elsewhere in this Annual Report on Form 10-K.
|
Selected
Financial Data
|
(Dollars
in thousands, except per share amounts)
|
|||||||||||||||||||
|
At
or for the years ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Financial
Results:
|
||||||||||||||||||||
|
Interest
income
|
$ | 140,662 | $ | 136,434 | $ | 131,134 | $ | 115,693 | $ | 96,853 | ||||||||||
|
Interest
expense
|
75,149 | 76,490 | 69,660 | 55,037 | 42,412 | |||||||||||||||
|
Net
interest income
|
65,513 | 59,944 | 61,474 | 60,656 | 54,441 | |||||||||||||||
|
Provision
for loan losses
|
4,800 | 1,900 | 1,200 | 1,200 | 610 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
60,713 | 58,044 | 60,274 | 59,456 | 53,831 | |||||||||||||||
|
Noninterest
income:
|
||||||||||||||||||||
|
Net
realized gains on securities
|
2,224 | 455 | 443 | 389 | 248 | |||||||||||||||
|
Losses
on write-downs of investments to fair value
|
(5,937 | ) | – | – | (32 | ) | – | |||||||||||||
|
Other
noninterest income
|
44,233 | 45,054 | 41,740 | 30,589 | 26,657 | |||||||||||||||
|
Total
noninterest income
|
40,520 | 45,509 | 42,183 | 30,946 | 26,905 | |||||||||||||||
|
Noninterest
expense
|
71,742 | 68,906 | 65,335 | 56,393 | 50,373 | |||||||||||||||
|
Income
before income taxes
|
29,491 | 34,647 | 37,122 | 34,009 | 30,363 | |||||||||||||||
|
Income
tax expense
|
7,319 | 10,847 | 12,091 | 10,985 | 9,534 | |||||||||||||||
|
Net
income
|
$ | 22,172 | $ | 23,800 | $ | 25,031 | $ | 23,024 | $ | 20,829 | ||||||||||
|
Per
share information ($):
|
||||||||||||||||||||
|
Earnings
per share:
|
||||||||||||||||||||
|
Basic
|
1.59 | 1.78 | 1.86 | 1.73 | 1.57 | |||||||||||||||
|
Diluted
|
1.57 | 1.75 | 1.82 | 1.69 | 1.54 | |||||||||||||||
|
Cash
dividends declared (1)
|
0.83 | 0.80 | 0.76 | 0.72 | 0.68 | |||||||||||||||
|
Book
value
|
14.75 | 13.97 | 12.89 | 11.86 | 11.44 | |||||||||||||||
|
Tangible
book value
|
10.47 | 9.33 | 8.61 | 7.79 | 9.64 | |||||||||||||||
|
Market
value - closing stock price
|
19.75 | 25.23 | 27.89 | 26.18 | 29.31 | |||||||||||||||
|
Performance
Ratios (%):
|
||||||||||||||||||||
|
Return
on average assets
|
0.82 | 0.99 | 1.04 | 0.98 | 0.97 | |||||||||||||||
|
Return
on average shareholders’ equity
|
11.12 | 13.48 | 14.99 | 14.80 | 14.40 | |||||||||||||||
|
Average
equity to average total assets
|
7.35 | 7.33 | 6.93 | 6.62 | 6.73 | |||||||||||||||
|
Dividend
payout ratio (2)
|
52.87 | 45.71 | 41.76 | 42.60 | 44.16 | |||||||||||||||
|
Asset
Quality Ratios (%):
|
||||||||||||||||||||
|
Total
past due loans to total loans
|
0.96 | 0.45 | 0.49 | 0.27 | 0.43 | |||||||||||||||
|
Nonperforming
loans to total loans
|
0.42 | 0.27 | 0.19 | 0.17 | 0.38 | |||||||||||||||
|
Nonperforming
assets to total assets
|
0.30 | 0.17 | 0.11 | 0.10 | 0.21 | |||||||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
305.07 | 471.12 | 693.87 | 742.25 | 354.49 | |||||||||||||||
|
Allowance
for loan losses to total loans
|
1.29 | 1.29 | 1.29 | 1.28 | 1.34 | |||||||||||||||
|
Net
charge-offs (recoveries) to average loans
|
0.08 | 0.03 | 0.02 | (0.01 | ) | (0.02 | ) | |||||||||||||
|
Capital
Ratios (%):
|
||||||||||||||||||||
|
Tier
1 leverage capital ratio
|
7.53 | 6.09 | 6.01 | 5.45 | 5.35 | |||||||||||||||
|
Tier
1 risk-based capital ratio
|
11.29 | 9.10 | 9.57 | 9.06 | 9.15 | |||||||||||||||
|
Total
risk-based capital ratio
|
12.54 | 10.39 | 10.96 | 10.51 | 10.72 | |||||||||||||||
|
Tangible
equity to tangible assets
|
5.76 | 5.03 | 4.94 | 4.43 | 5.60 | |||||||||||||||
____________
|
(1)
|
Represents
historical per share dividends declared by the
Bancorp.
|
|
(2)
|
Represents
the ratio of historical per share dividends declared by the Bancorp to
diluted earnings per share.
|
|
Selected
Financial Data
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 58,190 | $ | 41,112 | $ | 71,909 | $ | 66,163 | $ | 52,081 | ||||||||||
|
Total
securities
|
866,219 | 751,778 | 703,851 | 783,941 | 890,058 | |||||||||||||||
|
FHLB
stock
|
42,008 | 31,725 | 28,727 | 34,966 | 34,373 | |||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Commercial
and other
|
880,313 | 680,266 | 587,397 | 554,734 | 507,711 | |||||||||||||||
|
Residential
real estate
|
642,052 | 599,671 | 588,671 | 582,708 | 513,695 | |||||||||||||||
|
Consumer
|
316,789 | 293,715 | 283,918 | 264,466 | 228,270 | |||||||||||||||
|
Total
loans
|
1,839,154 | 1,573,652 | 1,459,986 | 1,401,908 | 1,249,676 | |||||||||||||||
|
Less
allowance for loan losses
|
23,725 | 20,277 | 18,894 | 17,918 | 16,771 | |||||||||||||||
|
Net
loans
|
1,815,429 | 1,553,375 | 1,441,092 | 1,383,990 | 1,232,905 | |||||||||||||||
|
Investment
in bank-owned life insurance
|
43,163 | 41,363 | 39,770 | 30,360 | 29,249 | |||||||||||||||
|
Goodwill
and other intangibles
|
68,266 | 61,912 | 57,374 | 54,372 | 23,900 | |||||||||||||||
|
Other
assets
|
72,191 | 58,675 | 56,442 | 48,211 | 45,254 | |||||||||||||||
|
Total
assets
|
$ | 2,965,466 | $ | 2,539,940 | $ | 2,399,165 | $ | 2,402,003 | $ | 2,307,820 | ||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||
|
Demand
deposits
|
$ | 172,771 | $ | 175,542 | $ | 186,533 | $ | 196,102 | $ | 189,588 | ||||||||||
|
NOW
accounts
|
171,306 | 164,944 | 175,479 | 178,677 | 174,727 | |||||||||||||||
|
Money
market accounts
|
305,879 | 321,600 | 286,998 | 223,255 | 196,775 | |||||||||||||||
|
Savings
accounts
|
173,485 | 176,278 | 205,998 | 212,499 | 251,920 | |||||||||||||||
|
Time
deposits
|
967,427 | 807,841 | 822,989 | 828,725 | 644,875 | |||||||||||||||
|
Total
deposits
|
1,790,868 | 1,646,205 | 1,677,997 | 1,639,258 | 1,457,885 | |||||||||||||||
|
FHLB
advances
|
829,626 | 616,417 | 474,561 | 545,323 | 672,748 | |||||||||||||||
|
Junior
subordinated debentures
|
32,991 | 22,681 | 22,681 | 22,681 | – | |||||||||||||||
|
Other
borrowings
|
26,743 | 32,560 | 14,684 | 9,774 | 3,417 | |||||||||||||||
|
Other
liabilities
|
50,127 | 35,564 | 36,186 | 26,521 | 21,918 | |||||||||||||||
|
Shareholders'
equity
|
235,111 | 186,513 | 173,056 | 158,446 | 151,852 | |||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,965,466 | $ | 2,539,940 | $ | 2,399,165 | $ | 2,402,003 | $ | 2,307,820 | ||||||||||
|
Asset
Quality:
|
||||||||||||||||||||
|
Nonaccrual
loans
|
$ | 7,777 | $ | 4,304 | $ | 2,723 | $ | 2,414 | $ | 4,731 | ||||||||||
|
Nonaccrual
investment securities
|
633 | – | – | – | – | |||||||||||||||
|
Other
real estate owned, net
|
392 | – | – | – | 4 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 8,802 | $ | 4,304 | $ | 2,723 | $ | 2,414 | $ | 4,735 | ||||||||||
|
Wealth
Management Assets:
|
||||||||||||||||||||
|
Market
value of assets under administration
|
$ | 3,147,649 | $ | 4,014,352 | $ | 3,609,180 | $ | 3,215,763 | $ | 1,821,718 | ||||||||||
|
Selected
Quarterly Financial Data
|
(Dollars
and shares in thousands, except per share amounts)
|
|||||||||||||||||||
|
2008
|
Q1
|
Q2
|
Q3
|
Q4
|
Year
|
|||||||||||||||
|
Interest
income:
|
||||||||||||||||||||
|
Interest
and fees on loans
|
$ | 24,970 | $ | 24,406 | $ | 25,520 | $ | 26,043 | $ | 100,939 | ||||||||||
|
Income
on securities:
|
||||||||||||||||||||
|
Taxable
|
8,416 | 8,302 | 8,504 | 9,160 | 34,382 | |||||||||||||||
|
Nontaxable
|
780 | 786 | 778 | 781 | 3,125 | |||||||||||||||
|
Dividends
on corporate stock and FHLB stock
|
620 | 489 | 407 | 366 | 1,882 | |||||||||||||||
|
Other
interest income
|
140 | 50 | 128 | 16 | 334 | |||||||||||||||
|
Total
interest income
|
34,926 | 34,033 | 35,337 | 36,366 | 140,662 | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Deposits
|
11,899 | 9,248 | 9,884 | 10,164 | 41,195 | |||||||||||||||
|
FHLB
advances
|
7,299 | 7,794 | 8,011 | 7,790 | 30,894 | |||||||||||||||
|
Junior
subordinated debentures
|
338 | 509 | 524 | 508 | 1,879 | |||||||||||||||
|
Other
interest expense
|
314 | 275 | 274 | 318 | 1,181 | |||||||||||||||
|
Total
interest expense
|
19,850 | 17,826 | 18,693 | 18,780 | 75,149 | |||||||||||||||
|
Net
interest income
|
15,076 | 16,207 | 16,644 | 17,586 | 65,513 | |||||||||||||||
|
Provision
for loan losses
|
450 | 1,400 | 1,100 | 1,850 | 4,800 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
14,626 | 14,807 | 15,544 | 15,736 | 60,713 | |||||||||||||||
|
Noninterest
income:
|
||||||||||||||||||||
|
Wealth
management services:
|
||||||||||||||||||||
|
Trust
and investment advisory fees
|
5,342 | 5,321 | 5,238 | 4,415 | 20,316 | |||||||||||||||
|
Mutual
fund fees
|
1,341 | 1,445 | 1,383 | 1,036 | 5,205 | |||||||||||||||
|
Financial
planning, commissions and
|
||||||||||||||||||||
|
other
service fees
|
575 | 884 | 570 | 723 | 2,752 | |||||||||||||||
|
Wealth
management services
|
7,258 | 7,650 | 7,191 | 6,174 | 28,273 | |||||||||||||||
|
Service
charges on deposit accounts
|
1,160 | 1,208 | 1,215 | 1,198 | 4,781 | |||||||||||||||
|
Merchant
processing fees
|
1,272 | 1,914 | 2,221 | 1,493 | 6,900 | |||||||||||||||
|
Income
from bank-owned life insurance
|
447 | 453 | 452 | 448 | 1,800 | |||||||||||||||
|
Net
gains on loan sales and commissions
|
||||||||||||||||||||
|
on
loans originated for others
|
491 | 433 | 239 | 233 | 1,396 | |||||||||||||||
|
Net
realized gains on securities
|
813 | 1,096 | – | 315 | 2,224 | |||||||||||||||
|
Losses
on write-downs of investments to fair value
|
(858 | ) | (1,149 | ) | (982 | ) | (2,948 | ) | (5,937 | ) | ||||||||||
|
Net
unrealized gains (losses) on interest rate
|
||||||||||||||||||||
|
swap
contracts
|
119 | 26 | (24 | ) | (663 | ) | (542 | ) | ||||||||||||
|
Other
income
|
342 | 528 | 278 | 477 | 1,625 | |||||||||||||||
|
Total
noninterest income
|
11,044 | 12,159 | 10,590 | 6,727 | 40,520 | |||||||||||||||
|
Noninterest
expense:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
10,343 | 10,411 | 10,580 | 9,703 | 41,037 | |||||||||||||||
|
Net
occupancy
|
1,138 | 1,064 | 1,123 | 1,211 | 4,536 | |||||||||||||||
|
Equipment
|
944 | 977 | 956 | 961 | 3,838 | |||||||||||||||
|
Merchant
processing costs
|
1,068 | 1,598 | 1,857 | 1,246 | 5,769 | |||||||||||||||
|
Outsourced
services
|
636 | 742 | 700 | 781 | 2,859 | |||||||||||||||
|
Advertising
and promotion
|
386 | 467 | 376 | 500 | 1,729 | |||||||||||||||
|
Legal,
audit and professional fees
|
543 | 430 | 626 | 726 | 2,325 | |||||||||||||||
|
Amortization
of intangibles
|
326 | 326 | 320 | 309 | 1,281 | |||||||||||||||
|
Other
expenses
|
1,758 | 2,039 | 1,933 | 2,638 | 8,368 | |||||||||||||||
|
Total
noninterest expense
|
17,142 | 18,054 | 18,471 | 18,075 | 71,742 | |||||||||||||||
|
Income
before income taxes
|
8,528 | 8,912 | 7,663 | 4,388 | 29,491 | |||||||||||||||
|
Income
tax expense
|
2,712 | 2,817 | 1,623 | 167 | 7,319 | |||||||||||||||
|
Net
income
|
$ | 5,816 | $ | 6,095 | $ | 6,040 | $ | 4,221 | $ | 22,172 | ||||||||||
|
Weighted
average shares outstanding - basic
|
13,358.1 | 13,381.1 | 13,409.5 | 15,765.4 | 13,981.9 | |||||||||||||||
|
Weighted
average shares outstanding - diluted
|
13,560.6 | 13,566.7 | 13,588.3 | 15,871.6 | 14,146.3 | |||||||||||||||
|
Per
share information:
|
||||||||||||||||||||
|
Basic
earnings per share
|
$ | 0.44 | $ | 0.45 | $ | 0.45 | $ | 0.27 | $ | 1.59 | ||||||||||
|
Diluted
earnings per share
|
$ | 0.43 | $ | 0.45 | $ | 0.44 | $ | 0.27 | $ | 1.57 | ||||||||||
|
Cash
dividends declared per share
|
$ | 0.20 | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.83 | ||||||||||
-23-
|
Selected
Quarterly Financial Data
|
(Dollars
and shares in thousands, except per share amounts)
|
|||||||||||||||||||
|
|
||||||||||||||||||||
|
2007
|
Q1
|
Q2
|
Q3
|
Q4
|
Year
|
|||||||||||||||
|
Interest
income:
|
||||||||||||||||||||
|
Interest
and fees on loans
|
$ | 23,934 | $ | 24,414 | $ | 25,032 | $ | 25,340 | $ | 98,720 | ||||||||||
|
Income
on securities:
|
||||||||||||||||||||
|
Taxable
|
7,792 | 7,839 | 7,565 | 7,967 | 31,163 | |||||||||||||||
|
Nontaxable
|
668 | 759 | 781 | 775 | 2,983 | |||||||||||||||
|
Dividends
on corporate stock and FHLB stock
|
718 | 685 | 669 | 665 | 2,737 | |||||||||||||||
|
Other
interest income
|
191 | 184 | 275 | 181 | 831 | |||||||||||||||
|
Total
interest income
|
33,303 | 33,881 | 34,322 | 34,928 | 136,434 | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Deposits
|
12,977 | 13,215 | 13,140 | 13,090 | 52,422 | |||||||||||||||
|
FHLB
advances
|
4,968 | 5,112 | 5,243 | 6,318 | 21,641 | |||||||||||||||
|
Junior
subordinated debentures
|
338 | 338 | 338 | 338 | 1,352 | |||||||||||||||
|
Other
interest expense
|
150 | 289 | 291 | 345 | 1,075 | |||||||||||||||
|
Total
interest expense
|
18,433 | 18,954 | 19,012 | 20,091 | 76,490 | |||||||||||||||
|
Net
interest income
|
14,870 | 14,927 | 15,310 | 14,837 | 59,944 | |||||||||||||||
|
Provision
for loan losses
|
300 | 300 | 300 | 1,000 | 1,900 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
14,570 | 14,627 | 15,010 | 13,837 | 58,044 | |||||||||||||||
|
Noninterest
income:
|
||||||||||||||||||||
|
Wealth
management services:
|
||||||||||||||||||||
|
Trust
and investment advisory fees
|
5,038 | 5,252 | 5,336 | 5,498 | 21,124 | |||||||||||||||
|
Mutual
fund fees
|
1,262 | 1,352 | 1,386 | 1,430 | 5,430 | |||||||||||||||
|
Financial
planning, commissions and
|
||||||||||||||||||||
|
other
service fees
|
570 | 889 | 456 | 547 | 2,462 | |||||||||||||||
|
Wealth
management services
|
6,870 | 7,493 | 7,178 | 7,475 | 29,016 | |||||||||||||||
|
Service
charges on deposit accounts
|
1,125 | 1,220 | 1,214 | 1,154 | 4,713 | |||||||||||||||
|
Merchant
processing fees
|
1,204 | 1,829 | 2,252 | 1,425 | 6,710 | |||||||||||||||
|
Income
from bank-owned life insurance
|
391 | 399 | 376 | 427 | 1,593 | |||||||||||||||
|
Net
gains on loan sales and commissions
|
||||||||||||||||||||
|
on
loans originated for others
|
264 | 510 | 431 | 288 | 1,493 | |||||||||||||||
|
Net
realized gains (losses) on securities
|
1,036 | (700 | ) | – | 119 | 455 | ||||||||||||||
|
Net
unrealized gains on interest rate swap contracts
|
– | – | – | 27 | 27 | |||||||||||||||
|
Other
income
|
358 | 372 | 399 | 373 | 1,502 | |||||||||||||||
|
Total
noninterest income
|
11,248 | 11,123 | 11,850 | 11,288 | 45,509 | |||||||||||||||
|
Noninterest
expense:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
9,812 | 10,285 | 10,098 | 9,791 | 39,986 | |||||||||||||||
|
Net
occupancy
|
1,017 | 1,038 | 1,021 | 1,074 | 4,150 | |||||||||||||||
|
Equipment
|
832 | 861 | 871 | 909 | 3,473 | |||||||||||||||
|
Merchant
processing costs
|
1,019 | 1,558 | 1,916 | 1,193 | 5,686 | |||||||||||||||
|
Outsourced
services
|
519 | 535 | 556 | 570 | 2,180 | |||||||||||||||
|
Advertising
and promotion
|
429 | 572 | 466 | 557 | 2,024 | |||||||||||||||
|
Legal,
audit and professional fees
|
450 | 404 | 444 | 463 | 1,761 | |||||||||||||||
|
Amortization
of intangibles
|
368 | 348 | 341 | 326 | 1,383 | |||||||||||||||
|
Debt
prepayment penalties
|
1,067 | – | – | – | 1,067 | |||||||||||||||
|
Other
expenses
|
1,596 | 2,159 | 1,599 | 1,842 | 7,196 | |||||||||||||||
|
Total
noninterest expense
|
17,109 | 17,760 | 17,312 | 16,725 | 68,906 | |||||||||||||||
|
Income
before income taxes
|
8,709 | 7,990 | 9,548 | 8,400 | 34,647 | |||||||||||||||
|
Income
tax expense
|
2,734 | 2,508 | 2,992 | 2,613 | 10,847 | |||||||||||||||
|
Net
income
|
$ | 5,975 | $ | 5,482 | $ | 6,556 | $ | 5,787 | $ | 23,800 | ||||||||||
|
Weighted
average shares outstanding - basic
|
13,412.1 | 13,339.6 | 13,323.6 | 13,347.5 | 13,355.5 | |||||||||||||||
|
Weighted
average shares outstanding - diluted
|
13,723.0 | 13,616.4 | 13,564.1 | 13,580.7 | 13,604.1 | |||||||||||||||
|
Per
share information:
|
||||||||||||||||||||
|
Basic
earnings per share
|
$ | 0.45 | $ | 0.41 | $ | 0.49 | $ | 0.43 | $ | 1.78 | ||||||||||
|
Diluted
earnings per share
|
$ | 0.44 | $ | 0.40 | $ | 0.48 | $ | 0.43 | $ | 1.75 | ||||||||||
|
Cash
dividends declared per share
|
$ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.80 | ||||||||||
The
following analysis is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of the Corporation for the periods shown. For a full understanding of
this analysis, it should be read in conjunction with other sections of this
Annual Report on Form 10-K, including Part I, “Item 1. Business”,
Part II, “Item 6. Selected Financial Data”, and Part III,
“Item 8. Financial Statements and Supplementary Data”.
Forward-Looking
Statements
This
report contains statements that are “forward-looking statements.” We
may also make written or oral forward-looking statements in other documents we
file with the SEC, in our annual reports to shareholders, in press releases and
other written materials, and in oral statements made by our officers, directors
or employees. You can identify forward-looking statements by the use
of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,”
“outlook,” “will,” “should,” and other expressions that predict or indicate
future events and trends and which do not relate to historical
matters. You should not rely on forward-looking statements, because
they involve known and unknown risks, uncertainties and other factors, some of
which are beyond the control of the Corporation. These risks,
uncertainties and other factors may cause the actual results, performance or
achievements of the Corporation to be materially different from the anticipated
future results, performance or achievements expressed or implied by the
forward-looking statements.
Some
of the factors that might cause these differences include the following: changes
in general national, regional or international economic conditions or conditions
affecting the banking or financial services industries or financial capital
markets, volatility and disruption in national and international financial
markets, government intervention in the U.S. financial system, reductions in net
interest income resulting from interest rate volatility as well as changes in
the balance and mix of loans and deposits, reductions in the market value of
wealth management assets under administration, changes in the value of
securities and other assets, reductions in loan demand, changes in loan
collectibility, default and charge-off rates, changes in the size and nature of
the Corporation’s competition, changes in legislation or regulation and
accounting principles, policies and guidelines, and changes in the assumptions
used in making such forward-looking statements. In addition, the
factors described under “Risk Factors” in Item 1A of this Annual Report on
Form 10-K may result in these differences. You should carefully
review all of these factors, and you should be aware that there may be other
factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this
report, and we assume no obligation to update any forward-looking statements to
reflect changes in underlying assumptions or factors, new information, future
events or other changes.
Application
of Critical Accounting Policies and Estimates
Accounting
policies involving significant judgments and assumptions by management, which
have, or could have, a material impact on income and the carrying value of
certain assets, are considered critical accounting policies. The
Corporation considers the following to be its critical accounting policies:
allowance for loan losses, accounting for acquisitions and review of goodwill
and intangible assets for impairment, and other-than-temporary impairment of
investments. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
Allowance
for Loan Losses
Determining
an appropriate level of allowance for loan losses necessarily involves a high
degree of judgment. The Corporation uses a methodology to
systematically measure the amount of estimated loan loss exposure inherent in
the loan portfolio for purposes of establishing a sufficient allowance for loan
losses. The methodology includes three elements: (1) identification
of loss allocations for certain specific loans, (2) loss allocation factors for
certain loan types based on credit grade and loss experience, and (3) general
loss allocations for other environmental factors. The methodology
includes an analysis of individual loans deemed to be impaired in accordance
with GAAP (Statement of Financial Accounting Standards (“SFAS”) No. 114,
“Accounting by Creditors for Impairment of a Loan - an amendment of FASB
Statements No. 5 and 15”). Other individual commercial loans and
commercial mortgage loans are evaluated using an internal rating system and the
application of loss allocation factors. The loan rating system and
the related loss allocation factors take into consideration parameters including
the borrower’s financial condition, the borrower’s performance with respect to
loan terms, and the adequacy of collateral. We periodically reassess
and revise the loss allocation factors used in the assignment of loss exposure
to appropriately reflect our analysis of migrational loss
experience. Portfolios of more homogenous populations of loans
including residential
mortgages and consumer loans are analyzed as groups taking into account
delinquency ratios and other indicators, the
Corporation’s
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an
additional unallocated allowance is maintained based on a judgmental process
whereby management considers qualitative and quantitative assessments of other
environmental factors. For example, a significant portion of our loan
portfolio is concentrated among borrowers in southern New England and a
substantial portion of the portfolio is collateralized by real estate in this
area. A portion of the commercial loans and commercial mortgage loans
are to borrowers in the hospitality, tourism and recreation
industries. Further, economic conditions which may affect the ability
of borrowers to meet debt service requirements are considered, including
interest rates and energy costs. Results of regulatory examinations,
historical loss ranges, portfolio composition, including a trend toward somewhat
larger credit relationships, and other changes in the portfolio are also
considered.
Since
the methodology is based upon historical experience and trends as well as
management's judgment, factors may arise that result in different
estimations. Significant factors that could give rise to changes in
these estimates may include, but are not limited to, changes in economic
conditions in our market area, concentration of risk, and declines in local
property values. While management's evaluation of the allowance for
loan losses as of December 31, 2008, considers the allowance to be
adequate, under adversely different conditions or assumptions, the Corporation
would need to increase the allowance.
The
Corporation’s Audit Committee of the Board of Directors is responsible for
oversight of the loan review process. This process includes review of
the Bank’s procedures for determining the adequacy of the allowance for loan
losses, administration of its internal credit rating systems and the reporting
and monitoring of credit granting standards.
Accounting
for Acquisitions and Review of Goodwill and Identifiable Intangible Assets for
Impairment
Goodwill
is recorded as part of the Corporation’s acquisitions of businesses where the
purchase price exceeds the fair market value of the net tangible and
identifiable intangible assets. Goodwill is not amortized, but rather
is subject to ongoing periodic impairment tests at least annually or more
frequently upon the occurrence of significant adverse events in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill
was reviewed in 2008 by reviewing estimates of selected market information for
the respective segments of the Corporation.
For
acquisitions accounted for using the purchase method of accounting, assets
acquired and liabilities assumed are required to be recorded at their fair
value. Intangible assets acquired are primarily comprised of wealth
management advisory contracts and core deposit intangibles. The
values of these intangible assets were estimated using valuation techniques,
based on discounted cash flow analysis. These intangible assets are
being amortized over the period the assets are expected to contribute to the
cash flows of the Corporation, which reflect the expected pattern of
benefit. These intangible assets are amortized based upon the
projected cash flows the Corporation will receive from the customer
relationships during the estimated useful lives. These intangible
assets are subject to impairment tests in accordance with SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets”. The
carrying value of the wealth management advisory contracts and other
identifiable intangibles are reviewed for impairment on an annual basis, or
sooner, whenever events or changes in circumstances indicate that their carrying
amount may not be fully recoverable. Wealth management assets under
administration are analyzed to determine if there has been a reduction since
acquisition that could indicate possible impairment of the advisory
contracts. Impairment would be recognized if the carrying value
exceeded the sum of the undiscounted expected future cash flows from the
intangible assets. Impairment would result in a write-down to the
estimated fair value based on the anticipated discounted future cash
flows. The remaining useful life of an intangible asset that is being
amortized is also evaluated each reporting period to determine whether events
and circumstances warrant a revision to the remaining period of
amortization.
The
Corporation makes certain estimates and assumptions that affect the
determination of the expected future cash flows from the advisory contracts and
other identifiable intangibles. These estimates and assumptions
include account attrition, market appreciation for wealth management assets
under administration and anticipated fee rates, projected costs and other
factors. Significant changes in these estimates and assumptions could
cause a different valuation for the intangible assets. Changes in the
original assumptions could change the amount of the intangible recognized and
the resulting amortization. Subsequent changes in assumptions could
result in recognition of impairment of the intangible assets.
These
assumptions used in the impairment tests of goodwill and intangible assets are
susceptible to change based on changes in economic conditions and other
factors. Any change in the estimates which the Corporation uses to
determine the carrying value of the Corporation’s goodwill and identifiable
intangible assets, or which otherwise
adversely
affects their value or estimated lives could adversely affect the Corporation’s
results of operations. See Note 8 to the Consolidated Financial Statements for
additional information.
Other-Than-Temporary
Impairment of Investments
The
Corporation records an investment impairment charge at the point it believes an
investment security has experienced a decline in value that is
other-than-temporary. In determining whether an other-than-temporary
impairment has occurred, the Corporation considers whether it has the ability
and intent to hold the investment until a market price recovery and considers
whether evidence indicating the cost of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this assessment
includes the reasons for impairment, the severity and duration of the
impairment, changes in the value subsequent to the reporting date, forecasted
performance of the issuer, changes in the dividend or interest payment practices
of the issuer, changes in the credit rating of the issuer or the specific
security, and the general market condition in the geographic area or industry
the issuer operates in. With respect to holdings of collateralized
debt obligations representing pooled trust preferred debt securities, estimates
of cash flows are evaluated upon consideration of information including, but not
limited to, past events, current conditions, and reasonable and supporting
forecasts for the respective holding. Such information generally
includes the remaining payment terms of the security, prepayments speeds, the
financial condition of the issuer(s), expected defaults, and the value of any
underlying collateral.
If
necessary, the investment is written down to its current fair value through a
charge to earnings at the time the impairment is deemed to have
occurred. Future adverse changes in market conditions, continued poor
operating results of the issuer or other factors could result in further losses
that may not be reflected in an investment’s current carrying value, possibly
requiring an additional impairment charge in the future.
Overview
Washington
Trust offers a comprehensive product line of financial services to individuals
and businesses including commercial, residential and consumer lending, retail
and commercial deposit products, and wealth management services through its
offices in Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and
its Internet website (www.washtrust.com).
Our
largest source of operating income is net interest income, the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings. In addition, we generate noninterest income
from a number of sources including wealth management services, deposit services,
merchant credit card processing, bank-owned life insurance, loan sales,
commissions on loans originated for others and sales of investment
securities. Our principal noninterest expenses include salaries and
employee benefits, occupancy and facility-related costs, merchant processing
costs, technology and other administrative expenses.
Our
financial results are affected by interest rate volatility, changes in economic
and market conditions, competitive conditions within our market area and changes
in legislation, regulation and/or accounting principles. During the
latter part of 2008, market and economic conditions were severely impacted when
credit conditions rapidly deteriorated and financial markets experienced
widespread illiquidity and elevated levels of volatility. Concerns
about future economic growth, lower consumer confidence, rapid contraction of
credit availability and lower corporate earnings continued to challenge the
economy. The rate of unemployment continued to increase, reaching its
highest level in several years. Corporate and related counterparty
credit spreads widened and heightened concerns about numerous financial services
companies adversely impacted the financial markets. As a result of
these unparalleled market conditions, federal government agencies including the
U.S. Treasury Department and the FRB initiated several intervention actions in
the U.S. financial services industry.
The
deteriorating economy somewhat negatively impacted the credit quality of our
loans, particularly in our commercial portfolio. During 2008, we
increased the allowance for loan losses in response to this condition as well as
growth in the portfolio. The condition of the financial markets
described above also contributed to declines in the values of holdings in our
investment securities portfolio. During 2008 we recognized impairment
charges on securities amounting to $5.9 million.
Composition
of Earnings
Net
income for the year ended December 31, 2008 amounted to $22.2 million,
or $1.57 per diluted share, compared to $23.8 million, or $1.75 per diluted
share, for 2007. The rates of return on average equity and average
assets for
2008
were 11.12% and 0.82%, respectively. Comparable amounts for 2007 were
13.48% and 0.99%, respectively. The $1.6 million, or 6.8%,
decrease in net income in 2008 was attributable to several factors as described
below.
Net
interest income increased by $5.6 million, or 9.3%, in 2008, reflecting
higher interest-earning asset levels and lower deposit costs. The net
interest margin (fully taxable equivalent net interest income as a percentage of
average interest-earning assets) declined 12 basis points in 2008 primarily
due to compression of asset yields and funding costs resulting from the
450 basis point aggregate impact of Federal Reserve rate cutting actions
from October 2007 through December 2008.
The
loan loss provision charged to earnings in 2008 was $4.8 million, an
increase of $2.9 million from 2007. The higher loan loss
provision was largely due to growth in the loan portfolio as well as our ongoing
evaluation of credit quality and general economic conditions. Asset
quality remained manageable during the year with net charge-offs of only 0.08%
of average total loans in 2008, compared to a ratio of 0.03% in
2007. The ratio of the allowance for loan losses to total loans
amounted to 1.29% at December 31, 2008 and 2007.
Noninterest
income amounted to $40.5 million in 2008, down $5.0 million, or 11.0%,
from 2007. This decline in noninterest income was largely due to the
recognition of losses on write-downs of investments securities to fair value of
$5.9 million ($3.8 million after tax, or 27 cents per diluted
share). Wealth management revenues, the largest source of noninterest
income, declined by $743 thousand, or 2.6%, in 2008. Wealth
management revenues are largely dependent on the value of the assets under
administration and are closely tied to the performance of the financial
markets. Assets under administration were down $866.7 million,
or 21.6%, from December 31, 2007. Wealth management assets under
administration and related revenues were adversely affected by declining values
in the financial markets.
Noninterest
expenses totaled $71.7 million for 2008, up by $2.8 million, or 4.1%,
from 2007. Noninterest expenses for 2007 included $1.1 million
in debt prepayment charges recorded as a result of prepayments of higher cost
Federal Home Loan Bank of Boston (“FHLB”) advances in the first quarter of
2007. There were no debt prepayment penalty charges recognized in
2008. Excluding the 2007 debt prepayment charge, noninterest expenses
rose by $3.9 million, or 5.8%. Approximately 40% of the 2008
increase, on this basis, represents costs attributable to our wealth management
business, an increase in FDIC deposit insurance costs and operating expenses
related to a de novo branch opened in June 2007.
Income
tax expense amounted to $7.3 million in 2008, a decrease of
$3.5 million from 2007. Income tax benefits of
$1.4 million, or 10 cents per diluted share were recognized in 2008
resulting from a change in state corporate income tax legislation and the
resolution of certain state tax positions. Excluding these income tax
benefits, the Corporation’s effective income tax rate for 2008 was 29.3%, as
compared to 31.3% in 2007.
Sources
and Uses of Funds
Our
sources of funds include deposits, brokered certificates of deposit, FHLB
borrowings, other borrowings and proceeds from the sales, maturities and
payments of loans and investment securities. Washington Trust uses
funds to originate and purchase loans, purchase investment securities, conduct
operations, expand the branch network and pay dividends to
shareholders.
In
April 2008, the Bancorp sponsored the creation of Washington Preferred Capital
Trust (“Washington Preferred”). Washington Preferred is a Delaware
statutory trust created for the sole purpose of issuing trust preferred
securities and investing the proceeds in junior subordinated debentures of the
Bancorp. The Bancorp issued $10.3 million in junior subordinated
deferrable interest notes, which bear a rate equal to the three-month LIBOR rate
plus 3.50%, to Washington Preferred. See Note 11 to the
Consolidated Financial Statements for additional information on junior
subordinated debentures.
In
October 2008, Washington Trust issued $50.0 million of its Common Stock in
a private placement with select institutional investors. Net proceeds
were $46.9 million after deducting offering-related fees and
expenses. On October 20, 2008, the Corporation filed a
registration statement with the SEC to register these shares for
resale. Washington Trust will use the net proceeds for general
corporate purposes and to support strategic growth initiatives in its commercial
and wealth management business.
Total
assets amounted to $3.0 billion at December 31, 2008, up by
$425.5 million, or 16.8%, from the end of 2007. Led by growth in
commercial loans, total loans increased $265.5 million, or 16.9%, in 2008
and amounted to $1.8 billion, or 62% of total assets, at December 31,
2008. Commercial loans increased by $200.0 million, or 29.4%,
over the prior year and amounted to $880.3 million, or 48% of total loans,
at the end of 2008.
The
securities available for sale portfolio is managed to generate interest income,
to implement interest rate risk management strategies and to provide a readily
available source of liquidity for balance sheet management. The fair
value of securities available for sale totaled $866.2 million at
December 31, 2008, or 29% of total assets. The carrying value of
the securities portfolio increased by 15.2% in 2008, largely due to purchases of
mortgage-backed securities issued by U.S. government agencies and U.S.
government-sponsored enterprises.
Management’s
preferred strategy for funding asset growth is to grow low cost deposits (demand
deposit, NOW savings accounts). Asset growth in excess of low cost
deposits is typically funded through higher cost deposits (certificates of
deposit and money market accounts), brokered certificates of deposit, FHLB
borrowings, and securities portfolio cash flow.
Deposit
gathering continues to be very competitive and the current environment has
impacted the Corporation’s ability to generate growth in lower costing
deposits. Total deposits, which included brokered certificates of
deposit, amounted to $1.8 billion at December 31, 2008, up by
$144.7 million, or 8.8%, from the balance at December 31,
2007. Deposit growth in 2008 was concentrated in time
deposits. At December 31, 2008, Washington Trust had
$188.0 million in out-of-market brokered certificates of deposit and
$829.6 million in FHLB advances compared to $129.8 million and
$616.4 million, respectively, at December 31, 2007.
Opportunities
and Risks
A
significant portion of the Corporation’s commercial banking and wealth
management business is conducted in the Rhode Island and greater southern New
England area. Management recognizes that substantial competition
exists in this marketplace and views this as a key business risk. A
substantial portion of the banking industry market share in this region is held
by much larger financial institutions with greater resources and larger delivery
systems than the Bank. Market competition also includes the expanded
commercial banking presence of credit unions and savings banks. While
these competitive forces will continue to present risk, we have been successful
in growing our commercial banking base and wealth management business, and
management believes that the breadth of our product line and our size provide
opportunities to compete effectively in our marketplace.
Significant
challenges also exist with respect to credit risk, interest rate risk, the
condition of the financial markets and related impact on wealth management
assets, and operational risk.
Credit
risk is the risk of loss due to the inability of borrower customers to repay
loans or lines of credit. Credit risk on loans is reviewed below
under the heading “Asset Quality”. Credit risk also exists with
respect to debt instrument investment securities. This risk is
reviewed below under the heading “Investment Securities.”
Interest
rate risk exists because the repricing frequency and magnitude of interest
earning assets and interest bearing liabilities are not
identical. This risk is reviewed in more detail below under the
heading “Asset/Liability Management and Interest Rate Risk.”
Wealth
management service revenues, which represented approximately 27% of total
revenues in 2008, are substantially dependent on the market value of wealth
management assets under administration. These values may be
negatively affected by changes in economic conditions and volatility in the
financial markets.
Operational
risk is the risk of loss resulting from data processing system failures and
errors, inadequate or failed internal processes, customer or employee fraud and
catastrophic failures resulting from terrorist acts or natural
disasters. Operational risk is discussed above under Item 1A., “Risk
Factors.”
For
additional factors that could adversely impact Washington Trust’s future results
of operations and financial condition, see the section labeled “Risk Factors” in
Item 1A of this Annual Report on Form 10-K.
Results
of Operations
Comparison
of 2008 with 2007
Segment
Reporting
Washington
Trust manages its operations through two business segments, Commercial Banking
and Wealth Management Services. The Commercial Banking segment
includes commercial, commercial real estate, residential and consumer lending
activities; mortgage banking, secondary market and loan servicing activities;
deposit generation; merchant credit card services; cash management activities;
and direct banking activities, which include the operation of ATMs, telephone
and internet banking services and customer support and sales. Wealth
Management Services includes asset management services provided for individuals
and institutions; personal trust services, including services as executor,
trustee, administrator, custodian and guardian; corporate trust services,
including services as trustee for pension and profit sharing plans; and other
financial planning and advisory services. All other activity, such as
the investment securities portfolio, wholesale funding activities and
administrative units, are not related to the segments and are considered
Corporate. See Note 17 to the Consolidated Financial Statements
for additional disclosure related to business segments.
The
Commercial Banking segment reported net income of $19.2 million in 2008, up
by $2.1 million, or 12.2%, from 2007, primarily due to higher net interest
income. Net interest income was up by $8.7 million, or 16.2%,
driven by growth in average loan balances and lower deposit
costs. This increase in net interest income was partially offset by a
$2.9 million increase in the loan loss provision and $2.9 million
increase in Commercial Banking noninterest expenses in 2008. Higher
noninterest expenses reflected increases in FDIC deposit insurance costs and
operating expenses related to a de novo branch opened in June 2007.
The
Wealth Management Services segment reported net income of $4.9 million in
2008, a decrease of $796 thousand, or 13.9%, from net income in
2007. Noninterest income derived from the Wealth Management Services
segment was $28.3 million in 2008, down by $743 thousand, or 2.6%,
from 2007. Lower noninterest income resulted from declines in wealth
management assets under administration due to lower valuations in the financial
markets. In 2008, noninterest expenses for the Wealth Management
Services segment amounted to $20.1 million, up by $451 thousand, or
2.3%, from 2007. This increase was attributable to higher outsourced
services expenses for wealth management platform and product support
costs.
Net
Interest Income
Net
interest income is the difference between interest earned on loans and
securities and interest paid on deposits and other borrowings, and continues to
be the primary source of Washington Trust’s operating
income. Included in interest income are loan prepayment fees and
certain other fees, such as late charges. Net interest income is
affected by the level of interest rates, changes in interest rates and by
changes in the amount and composition of interest-earning assets and
interest-bearing liabilities.
Net
interest income for 2008 totaled $65.5 million, up $5.6 million, or
9.3%, from the amount reported for 2007. The increase in net interest
income reflected growth in interest-earning assets and lower deposit
costs.
The
following discussion presents net interest income on a fully taxable equivalent
(“FTE”) basis by adjusting income and yields on tax-exempt loans and securities
to be comparable to taxable loans and securities.
FTE
net interest income for 2008 amounted to $67.4 million, up
$5.6 million, or 9.0%, from 2007. The net interest margin for
2008 amounted to 2.64%, compared to 2.76% for 2007. The 12 basis
point decline in the net interest margin was primarily attributable to lower
yields on variable rate commercial and consumer loans resulting from Federal
Reserve actions to reduce short-term interest rates, with less commensurate
reduction in deposit and other funding rates.
Average
interest-earning assets increased by $307.5 million, or 13.7%, in 2008,
including the reinvestment of the $46.7 million in net proceeds received
from the issuance of Common Stock in October 2008. The increase in
average interest-earning assets was largely due to growth in the loan
portfolio. Average loan balances grew $198.0 million, or 13.2%,
primarily due to growth in the commercial loan category. The yield on
total loans decreased 63 basis points in 2008, reflecting declines in
short-term interest rates. The contribution of loan prepayment and
other fees to the yield on total loans was 3 basis points and 4 basis
points in 2008 and 2007, respectively. Total average securities
increased by $109.5 million, or 14.7%, in 2008, largely due to purchases of
mortgage-backed securities issued by U.S. government agencies and
government-sponsored enterprises during a
period
of substantial spread widening for these and many other classes of investment
securities. The FTE rate of return on securities decreased
45 basis points in 2008, largely due to a decline in dividend yield earned
on the Corporation’s investment in FHLB stock.
In
2008, average interest-bearing liabilities increased by $284.4 million, or
14.1%, while cost of funds decreased 52 basis points. The
increase in average interest- bearing liabilities was largely due to increases
in FHLB advances. The balance of average FHLB advances increased
$248.6 million in 2008, while the average rate paid on FHLB advances
decreased 23 basis points. In addition, the increase in average
interest-bearing liabilities included a $39.9 million increase in time
deposits. Time deposits include out-of-market brokered certificates
of deposit, which are utilized by the Corporation as part of its overall funding
program along with FHLB advances and other sources. Average
out-of-market brokered certificates of deposit increased $10.0 million, or
6.7%, in 2008. See additional discussion on brokered certificates of
deposit in the “Financial Condition” section under the caption
“Deposits”. See Note 11 to the Consolidated Financial Statements
for additional discussion on junior subordinated debentures issued in the second
quarter of 2008.
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 FTE basis using the statutory federal income
tax rate. For dividends on corporate stocks, the 70% federal
dividends received deduction is also used in the calculation of tax
equivalency. Unrealized gains (losses) on available for sale
securities are excluded from the average balance and yield
calculations. 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,
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Residential
real estate loans
|
$ | 613,367 | $ | 33,954 | 5.54 | $ | 589,619 | $ | 31,540 | 5.35 | $ | 590,245 | $ | 30,237 | 5.12 | |||||||||||||||||||||
|
Commercial
and other loans
|
782,825 | 50,589 | 6.46 | 626,309 | 47,713 | 7.62 | 564,310 | 43,409 | 7.69 | |||||||||||||||||||||||||||
|
Consumer
loans
|
301,653 | 16,584 | 5.50 | 283,873 | 19,634 | 6.92 | 274,764 | 18,748 | 6.82 | |||||||||||||||||||||||||||
|
Total
loans
|
1,697,845 | 101,127 | 5.96 | 1,499,801 | 98,887 | 6.59 | 1,429,319 | 92,394 | 6.46 | |||||||||||||||||||||||||||
|
Cash,
federal funds sold and
other
short-term investments
|
21,515 | 334 | 1.55 | 16,759 | 831 | 4.96 | 14,548 | 721 | 4.96 | |||||||||||||||||||||||||||
|
Taxable
debt securities
|
700,546 | 34,382 | 4.91 | 605,443 | 31,163 | 5.15 | 712,870 | 33,763 | 4.74 | |||||||||||||||||||||||||||
|
Nontaxable
debt securities
|
81,046 | 4,583 | 5.65 | 77,601 | 4,368 | 5.63 | 42,977 | 2,486 | 5.79 | |||||||||||||||||||||||||||
|
Corporate
stocks and FHLB stock
|
48,708 | 2,085 | 4.28 | 42,544 | 3,047 | 7.16 | 48,643 | 3,205 | 6.59 | |||||||||||||||||||||||||||
|
Total
securities
|
851,815 | 41,384 | 4.86 | 742,347 | 39,409 | 5.31 | 819,038 | 40,175 | 4.91 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
2,549,660 | 142,511 | 5.59 | 2,242,148 | 138,296 | 6.17 | 2,248,357 | 132,569 | 5.90 | |||||||||||||||||||||||||||
|
Noninterest-earning
assets
|
163,730 | 165,561 | 159,115 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,713,390 | $ | 2,407,709 | $ | 2,407,472 | ||||||||||||||||||||||||||||||
|
Liabilities
and
|
||||||||||||||||||||||||||||||||||||
|
shareholders’
equity:
|
||||||||||||||||||||||||||||||||||||
|
NOW
accounts
|
$ | 165,479 | $ | 306 | 0.18 | $ | 166,580 | $ | 285 | 0.17 | $ | 173,137 | $ | 302 | 0.17 | |||||||||||||||||||||
|
Money
market accounts
|
310,445 | 6,730 | 2.17 | 303,138 | 11,846 | 3.91 | 262,613 | 9,063 | 3.45 | |||||||||||||||||||||||||||
|
Savings
accounts
|
173,840 | 1,059 | 0.61 | 194,342 | 2,619 | 1.35 | 198,040 | 1,464 | 0.74 | |||||||||||||||||||||||||||
|
Time
deposits
|
861,814 | 33,100 | 3.84 | 821,951 | 37,672 | 4.58 | 856,979 | 36,153 | 4.22 | |||||||||||||||||||||||||||
|
FHLB
advances
|
737,830 | 30,894 | 4.19 | 489,229 | 21,641 | 4.42 | 509,611 | 20,916 | 4.10 | |||||||||||||||||||||||||||
|
Junior
subordinated debentures
|
30,259 | 1,879 | 6.21 | 22,681 | 1,352 | 5.96 | 22,681 | 1,352 | 5.96 | |||||||||||||||||||||||||||
|
Other
|
26,678 | 1,181 | 4.43 | 23,990 | 1,075 | 4.48 | 8,627 | 410 | 4.76 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
2,306,345 | 75,149 | 3.26 | 2,021,911 | 76,490 | 3.78 | 2,031,688 | 69,660 | 3.43 | |||||||||||||||||||||||||||
|
Demand
deposits
|
177,032 | 177,342 | 185,322 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
30,618 | 31,886 | 23,517 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
199,395 | 176,570 | 166,945 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
shareholders’
equity
|
$ | 2,713,390 | $ | 2,407,709 | $ | 2,407,472 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 67,362 | $ | 61,806 | $ | 62,909 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
2.33 | 2.39 | 2.47 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
2.64 | 2.76 | 2.80 | |||||||||||||||||||||||||||||||||
Interest
income amounts presented in the preceding table include the following
adjustments for taxable equivalency for the years indicated:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Commercial
and other loans
|
$ | 188 | $ | 167 | $ | 204 | ||||||
|
Nontaxable
debt securities
|
1,458 | 1,385 | 868 | |||||||||
|
Corporate
stocks and FHLB stock
|
203 | 310 | 363 | |||||||||
|
Total
|
$ | 1,849 | $ | 1,862 | $ | 1,435 | ||||||
Volume/Rate
Analysis - Interest Income and Expense (Fully Taxable Equivalent
Basis)
The
following table presents certain information on a FTE basis regarding changes in
our interest income and interest expense for the periods
indicated. The net change attributable to both volume and rate has
been allocated proportionately.
| 2008/2007 | 2007/2006 | |||||||||||||||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Net
Change
|
Volume
|
Rate
|
Net
Change
|
||||||||||||||||||
|
Interest
on interest-earning assets:
|
||||||||||||||||||||||||
|
Residential
real estate loans
|
$ | 1,284 | $ | 1,130 | $ | 2,414 | $ | (33 | ) | $ | 1,336 | $ | 1,303 | |||||||||||
|
Commercial
and other loans
|
10,817 | (7,941 | ) | 2,876 | 4,704 | (400 | ) | 4,304 | ||||||||||||||||
|
Consumer
loans
|
1,172 | (4,222 | ) | (3,050 | ) | 615 | 271 | 886 | ||||||||||||||||
|
Cash,
federal funds sold and
|
||||||||||||||||||||||||
|
other
short-term investments
|
189 | (686 | ) | (497 | ) | 109 | 1 | 110 | ||||||||||||||||
|
Taxable
debt securities
|
4,724 | (1,505 | ) | 3,219 | (5,366 | ) | 2,766 | (2,600 | ) | |||||||||||||||
|
Nontaxable
debt securities
|
198 | 17 | 215 | 1,953 | (71 | ) | 1,882 | |||||||||||||||||
|
Corporate
stocks and FHLB stock
|
393 | (1,355 | ) | (962 | ) | (421 | ) | 263 | (158 | ) | ||||||||||||||
|
Total
interest income
|
18,777 | (14,562 | ) | 4,215 | 1,561 | 4,166 | 5,727 | |||||||||||||||||
|
Interest
on interest-bearing liabilities:
|
||||||||||||||||||||||||
|
NOW
accounts
|
(1 | ) | 22 | 21 | (17 | ) | – | (17 | ) | |||||||||||||||
|
Money
market accounts
|
279 | (5,395 | ) | (5,116 | ) | 1,493 | 1,290 | 2,783 | ||||||||||||||||
|
Savings
accounts
|
(252 | ) | (1,308 | ) | (1,560 | ) | (27 | ) | 1,182 | 1,155 | ||||||||||||||
|
Time
deposits
|
1,753 | (6,325 | ) | (4,572 | ) | (1,507 | ) | 3,026 | 1,519 | |||||||||||||||
|
FHLB
advances
|
10,435 | (1,182 | ) | 9,253 | (859 | ) | 1,584 | 725 | ||||||||||||||||
|
Junior
subordinated debentures
|
468 | 59 | 527 | – | – | – | ||||||||||||||||||
|
Other
|
119 | (13 | ) | 106 | 689 | (24 | ) | 665 | ||||||||||||||||
|
Total
interest expense
|
12,801 | (14,142 | ) | (1,341 | ) | (228 | ) | 7,058 | 6,830 | |||||||||||||||
|
Net
interest income
|
$ | 5,976 | $ | (420 | ) | $ | 5,556 | $ | 1,789 | $ | (2,892 | ) | $ | (1,103 | ) | |||||||||
Provision
and Allowance for Loan Losses
The
allowance for loan losses is management’s best estimate of inherent risk of loss
in the loan portfolio as of the balance sheet date. The allowance for
loan losses was $23.7 million, or 1.29% of total loans, at
December 31, 2008, compared to $20.3 million, or 1.29% of total loans,
at December 31, 2007. For the year 2008, the Corporation’s
provision for loan losses charged to earnings amounted to $4.8 million,
compared to $1.9 million for 2007. The increase in the provision
was based on management’s assessment of various factors affecting the loan
portfolio, including, among others, growth in the loan portfolio, our ongoing
evaluation of credit quality, with particular emphasis on the commercial
portfolio, and general economic conditions. Net charge-offs amounted
to $1.4 million in 2008, compared to $517 thousand in
2007. Commercial loan net charge-offs amounted to $1.1 million
and $329 thousand in 2008 and 2007, respectively. See additional
discussion under the caption “Asset Quality” for further information on the
Allowance for Loan Losses.
Noninterest
Income
Noninterest
income is an important source of revenue for Washington
Trust. Washington Trust’s primary sources of noninterest income are
revenues from wealth management services, service charges on deposit accounts,
merchant
credit
card processing fees, and net gains on loan sales and commissions on loans
originated for others. Also included in noninterest income are
earnings generated from bank-owned life insurance
(“BOLI”). Noninterest income amounted to $40.5 million, down
$5.0 million, or 11.0%, from 2007. This decline in noninterest
income was largely due to the recognition of $5.9 million in write-downs on
certain investment securities deemed to be other-than-temporarily impaired in
2008. See additional disclosure on impairment charges recognized in
2008 under the caption “Securities.” Also included in noninterest
income were net realized gains on securities of $2.2 million and
$455 thousand in 2008 and 2007, respectively.
The
following table presents a noninterest income comparison for the years ended
December 31, 2008 and 2007:
|
(Dollars
in thousands)
|
2008
|
2007
|
$
Change
|
%
Change
|
||||||||||||
|
Noninterest
income:
|
||||||||||||||||
|
Wealth
management services:
|
||||||||||||||||
|
Trust
and investment advisory fees
|
$ | 20,316 | $ | 21,124 | $ | (808 | ) | (3.8 | )% | |||||||
|
Mutual
fund fees
|
5,205 | 5,430 | (225 | ) | (4.1 | ) | ||||||||||
|
Financial
planning, commissions and other service fees
|
2,752 | 2,462 | 290 | 11.8 | ||||||||||||
|
Wealth
management services
|
28,273 | 29,016 | (743 | ) | (2.6 | ) | ||||||||||
|
Service
charges on deposit accounts
|
4,781 | 4,713 | 68 | 1.4 | ||||||||||||
|
Merchant
processing fees
|
6,900 | 6,710 | 190 | 2.8 | ||||||||||||
|
Income
from BOLI
|
1,800 | 1,593 | 207 | 13.0 | ||||||||||||
|
Net
gains on loan sales and commissions
|
||||||||||||||||
|
on
loans originated for others
|
1,396 | 1,493 | (97 | ) | (6.5 | ) | ||||||||||
|
Net
unrealized gains (losses) on interest rate swap contracts
|
(542 | ) | 27 | (569 | ) | (2107.4 | ) | |||||||||
|
Other
income
|
1,625 | 1,502 | 123 | 8.2 | ||||||||||||
|
Subtotal
|
44,233 | 45,054 | (821 | ) | (1.8 | ) | ||||||||||
|
Net
realized gains on securities
|
2,224 | 455 | 1,769 | 388.8 | ||||||||||||
|
Losses
on write-downs of investments to fair value
|
(5,937 | ) | – | (5,937 | ) | – | ||||||||||
|
Total
noninterest income
|
$ | 40,520 | $ | 45,509 | $ | (4,989 | ) | (11.0 | )% | |||||||
Revenue
from wealth management services decreased $743 thousand, or 2.6%, in
2008. Wealth management revenues are largely dependent on the value
of wealth management assets under administration and are closely tied to the
performance of the financial markets. Assets under administration
totaled $3.1 billion at December 31, 2008, down $866.7 million,
or 21.6%, from December 31, 2007. The decline in assets under
administration was primarily due to lower valuations in the financial
markets. The following table presents the changes in wealth
management assets under administration for the year ended December 31,
2008:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Wealth
Management Assets Under Administration:
|
||||||||
|
Balance
at the beginning of period
|
$ | 4,014,352 | $ | 3,609,180 | ||||
|
Net
investment (depreciation) appreciation and income
|
(980,909 | ) | 272,398 | |||||
|
Net
customer cash flows
|
114,206 | 132,774 | ||||||
|
Balance
at the end of period
|
$ | 3,147,649 | $ | 4,014,352 | ||||
Service
charges on deposit accounts totaled $4.8 million and $4.7 million, in
2008 and 2007, respectively. This revenue source reflects a very
competitive retail-banking environment.
Merchant
processing fees amounted to $6.9 million and $6.7 million in 2008 and
2007, respectively. Merchant processing fees represents charges to
merchants for credit card transactions processed. This revenue source
was impacted by strong competition from bank and non-bank market
participants. See discussion on the corresponding increase in
merchant processing costs under the caption “Noninterest Expense.”
Income
from BOLI amounted to $1.8 million and $1.6 million for 2008 and 2007,
respectively. BOLI represents life insurance on the lives of certain
employees who have consented to allowing the Bank to be the beneficiary of such
policies. The Corporation expects to benefit from the BOLI contracts
as a result of the tax-free growth in cash surrender value and death benefits
that are expected to be generated over time. The BOLI investment
provides a
means
to mitigate increasing employee benefit costs. See additional
discussion under the caption “Financial Condition” for further information on
the investment in BOLI.
We
originate residential mortgage loans for sale in the secondary market and also
originate loans for various investors in a broker capacity, including
conventional mortgages and reverse mortgages. This revenue source is
subject to market volatility and dependent on mortgage origination volume, which
is sensitive to rates and the condition of housing markets. In the
first quarter of 2008, Washington Trust sold $17.9 million in residential
portfolio loans for interest rate risk and balance sheet management purposes,
which resulted in a gain on sale of $80 thousand. We do not have
a practice of selling loans from portfolio and except for this we have not sold
any packages of loans from our portfolio in many years. In addition,
from time to time we sell the guaranteed portion of Small Business
Administration (“SBA”) loans to investors. Net gains on loan sales
and commissions on loans originated for others amounted to $1.4 million in
2008, down by 6.5% from 2007, primarily due to declines in sales of SBA
loans.
Included
in noninterest income in 2008 were net unrealized losses on interest rate swap
contracts of $542 thousand. This amount includes
$638 thousand of unrealized losses attributable to an interest rate swap
contract executed in April 2008 with Lehman Brothers Special Financing, Inc. to
hedge the interest rate risk associated with variable rate junior subordinated
debentures. Under the terms of this swap, Washington Trust agreed to
pay a fixed rate and receive a variable rate based on LIBOR. At
inception, this hedging transaction was deemed to be highly effective and,
therefore, changes in the value of this interest rate swap contract were
recognized in the accumulated other comprehensive income component of
shareholders’ equity. In September 2008, Lehman Brothers Holdings
Inc., the parent guarantor of the swap counterparty, filed for bankruptcy
protection, followed in October 2008 by the swap counterparty
itself. Due to the change in the creditworthiness of the swap
counterparty, the hedging relationship was deemed to be not highly effective,
with the result that subsequent changes in the valuation are recognized in
earnings. The valuation decline was attributable to a decline in the
swap yield curve during the fourth quarter of 2008, which reduced market fixed
rates for terms similar to this swap contract. The bankruptcy filings
by the Lehman entities constituted events of default under the interest rate
swap contract, entitling Washington Trust to immediately suspend performance and
to terminate the transaction. Washington Trust continues to monitor
its rights and obligations under the interest rate swap transaction in the
context of the Lehman bankruptcy proceedings and may seek to terminate or
replace the transaction, or have it assigned to a third-party creditworthy
counterparty. Unrealized gains on other interest rate swap
transactions not affected by this matter amounted to $96 thousand in 2008
and $27 thousand in 2007. See additional discussion in
Note 13 to the Consolidated Financial Statements.
Other
income consists of mortgage servicing fees, non-customers ATM fees, safe deposit
rents, wire transfer fees, fees on letters of credit and other
fees. Other income increased $123 thousand, or 8.2%, in 2008
primarily due to nonrecurring income of $114 thousand.
In
2008 and 2007, net realized gains on securities totaled $2.2 million and
$455 thousand, respectively. These amounts included
$315 thousand and $397 thousand of gains recognized in 2008 and 2007,
respectively, resulting from the annual charitable contribution of appreciated
equity securities to our charitable foundation. In 2008, Washington
Trust recognized net realized gains of $1.7 million on the sale of equity
securities and $232 thousand on the sale of commercial debt
securities. In 2007, net realized gains of $314 thousand were
recognized from certain debt and equity securities that were called prior to
their maturity by the issuers and net realized losses of $256 thousand
resulted from sales of debt and equity securities.
In
2008, losses on write-downs of investment securities to fair value of
$5.9 million ($3.8 million after tax, or 27 cents per diluted
share) were charged to earnings for securities deemed to be
other-than-temporarily impaired. See additional discussion in the
“Financial Condition” section under the caption “Securities.”
Noninterest
Expense
Noninterest
expense totaled $71.7 million, up $2.8 million, or 4.1%, from
2007. Noninterest expenses for 2007 included $1.1 million in
debt prepayment charges recorded as a result of prepayments of higher cost FHLB
advances in the first quarter of 2007. There were no debt prepayment
penalty charges recognized in 2008. Excluding the 2007 debt
prepayment charge, noninterest expenses rose by $3.9 million, or 5.8%, in
2008. Additional discussion and further changes in the components of
noninterest expenses are disclosed below.
The
following table presents a noninterest expense comparison for the years ended
December 31, 2008 and 2007:
|
(Dollars
in thousands)
|
2008
|
2007
|
$
Change
|
%
Change
|
||||||||||||
|
Noninterest
expense:
|
||||||||||||||||
|
Salaries
and employee benefits
|
$ | 41,037 | $ | 39,986 | $ | 1,051 | 2.6 | % | ||||||||
|
Net
occupancy
|
4,536 | 4,150 | 386 | 9.3 | ||||||||||||
|
Equipment
|
3,838 | 3,473 | 365 | 10.5 | ||||||||||||
|
Merchant
processing costs
|
5,769 | 5,686 | 83 | 1.5 | ||||||||||||
|
Outsourced
services
|
2,859 | 2,180 | 679 | 31.1 | ||||||||||||
|
Advertising
and promotion
|
1,729 | 2,024 | (295 | ) | (14.6 | ) | ||||||||||
|
Legal,
audit and professional fees
|
2,325 | 1,761 | 564 | 32.0 | ||||||||||||
|
Amortization
of intangibles
|
1,281 | 1,383 | (102 | ) | (7.4 | ) | ||||||||||
|
Debt
prepayment penalties
|
– | 1,067 | (1,067 | ) | (100.0 | ) | ||||||||||
|
Other
|
8,368 | 7,196 | 1,172 | 16.3 | ||||||||||||
|
Total
noninterest expense
|
$ | 71,742 | $ | 68,906 | $ | 2,836 | 4.1 | % | ||||||||
Salaries
and employee benefits expense, the largest component of total noninterest
expense, increased by $1.1 million, or 2.6%, in 2008. This
increase was largely due to increases in salaries and wages.
Net
occupancy expense increased by $386 thousand, or 9.3%, in
2008. The increase reflects higher utility costs, higher rental
expense for premises leased by the Bank, and includes occupancy costs associated
with the de novo branch opened in June 2007. Equipment expense
increased by $365 thousand, or 10.5%, in 2008, primarily due to additional
investments in technology and other equipment.
Merchant
processing costs totaled $5.8 million and $5.7 million in 2008 and
2007, respectively. Merchant processing costs represent third-party
costs incurred that are directly attributable to handling merchant credit card
transactions. See discussion on the corresponding increase in
merchant processing fees under the caption “Noninterest Income.”
Outsourced
services increased by $679 thousand, or 31.1%, in 2008 due largely to
higher third party vendor costs. Approximately 68% of this increase
was attributable to higher outsourced services expenses for our wealth
management business and included wealth management platform and product support
costs.
Advertising
and promotion expense decreased by $295 thousand, or 14.6%, in 2008
reflecting management’s discretion over this category.
Legal,
audit and professional fees increased by $564 thousand, or 32.0%, from
2007, which included higher recruitment costs of $209 thousand primarily
associated with executive management positions, $45 thousand in legal fees
associated with the second quarter 2008 issuance of junior subordinated
debentures (see Note 11), legal costs associated with product development
and maintenance and various consulting matters.
Amortization
of intangibles amounted to $1.3 million in 2008 and $1.4 million in
2007. See Note 8 to the Consolidated Financial Statements for
additional information on intangible assets.
Debt
prepayment penalties expense, resulting from the first quarter 2007 prepayment
of $26.5 million in higher cost FHLB advances, amounted to
$1.1 million in 2007. There were no prepayment penalty charges
recognized in 2008.
Other
noninterest expense increased by $1.2 million, or 16.3%, in
2008. This was largely due to increases of $831 thousand in FDIC
deposit insurance costs and $108 thousand in credit and collection
costs.
Income
Taxes
On
July 3, 2008, the Commonwealth of Massachusetts enacted a law that included
reducing the tax rate on net income applicable to financial institutions and
requiring combined income tax reporting. The rate will be reduced
from the current rate of 10.5% to 10.0% for 2010, 9.5% for 2011 and 9.0% for
2012 and thereafter. Previously, certain Washington Trust
subsidiaries were subject to Massachusetts income tax on a separate return
basis. Under the new legislation, effective January 1, 2009,
Washington Trust, as a consolidated tax group, will be subject to income tax in
the Commonwealth of Massachusetts. Washington Trust has analyzed the
impact of this law and, as a
-35-
result
of revaluing its net deferred tax asset, recognized an income tax benefit of
$841 thousand in the third quarter of 2008. In addition, the
Corporation recognized an income tax benefit of $556 thousand in the fourth
quarter of 2008 resulting primarily from the resolution of certain state tax
positions (see Note 9).
Income
tax expense amounted to $7.3 million and $10.8 million in 2008 and
2007, respectively. The Corporation’s effective tax rate was 24.8% in
2008, compared to a rate of 31.3% in 2007. Excluding the income tax
benefits described in the preceding paragraph, the Corporation’s effective tax
rate was 29.3% in 2008. This rate differed from the federal rate of
35.0% due to the benefits of tax-exempt income, the dividends received deduction
and income from BOLI.
The
Corporation’s net deferred tax asset amounted to $18.8 million at
December 31, 2008, compared to $7.7 million at December 31,
2007. The Corporation has determined that a valuation allowance is
not required for any of the deferred tax assets since it is more likely than not
that these assets will be realized primarily through future reversals of
existing taxable temporary differences or carryback to taxable income in prior
years. See Note 9 to the Consolidated Financial Statements for
additional information regarding income taxes.
Comparison
of 2007 with 2006
Net
income for the year ended December 31, 2007 amounted to $23.8 million,
or $1.75 per diluted share, compared to $25.0 million, or $1.82 per diluted
share, for 2006. The rates of return on average equity and average
assets for 2007 were 13.48% and 0.99%, respectively. Comparable
amounts for 2006 were 14.99% and 1.04%, respectively.
The
$1.2 million, or 4.9%, decrease in net income was attributable to several
factors that affected the results of operations for 2007. Net
interest income declined by $1.5 million, or 2.5%, largely due to a
4 basis point decline in the fully taxable equivalent net interest
margin. The provision for loan losses was increased from
$1.2 million in 2006 to $1.9 million in 2007. Revenues from
wealth management services rose by $2.6 million, or 10.0%, primarily
attributable to an increase in wealth management assets under
administration. A $1.1 million debt prepayment charge was
recorded in noninterest expense as a result of prepayments of higher cost FHLB
advances. There were no debt prepayment penalty charges in
2006. All other noninterest expenses, excluding the debt prepayment
charge, rose by $2.5 million, or 3.8%. The effective income tax
rate declined from 32.6% in 2006 to 31.3% in 2007, primarily due to a higher
proportion of income from tax-exempt securities.
Net
interest income for 2007 totaled $59.9 million, down by $1.5 million,
or 2.5%, from the amount reported for 2006. The decline in net
interest income was due to the fact that rates paid on deposits and borrowings
have risen faster than earning asset yields and a higher rate of growth was
experienced in higher cost deposit categories. In addition, the
average balance of total interest-earning assets have declined somewhat in 2007
compared to 2006.
FTE
net interest income for 2007 amounted to $61.8 million, down by
$1.1 million, or 1.8%, from the $62.9 million reported for
2006. The net interest margin for 2007 amounted to 2.76%, compared to
2.80% for 2006. The decline in net interest margin was attributable
to more rapid increases in rates paid on deposits and FHLB advances than asset
yields; and to a shift in the mix of deposits away from lower cost transactional
and savings accounts and into higher cost premium money market accounts and
in-market certificates of deposit.
Average
interest-earning assets decreased by $6.2 million, or 0.3%, in
2007. This was mainly due to a decline in average securities, offset
in part by growth in the loan portfolio. Average loan balances grew
by $70.5 million, or 4.9%, mainly due to internal growth in the commercial
loan portfolio. The yield on total loans increased 13 basis
points in 2007. The contribution of loan prepayment and other fees to
the yield on total loans was 4 basis points and 5 basis points in 2007
and 2006, respectively. The increase in the yield on total loans was
primarily due to higher marginal yields on loans as compared to the prior year
and higher yields on new loan originations. Total average securities
declined by $76.7 million, or 9.4%, in 2007. During the majority
of 2007, the relatively flat yield curve made reinvestment of maturing balances
unattractive relative to funding costs. The 40 basis point
increase in the total yield on securities in 2007 resulted primarily from the
sale or runoff of lower yielding securities.
In
2007, average interest-bearing liabilities decreased by $9.8 million, or
0.5%, while cost of funds increased 35 basis points. The
Corporation experienced a shift in deposit mix with increases in higher cost
premium money market accounts and in-market certificates of deposit and
decreases in demand deposits and lower cost NOW and savings
accounts. The balance of average FHLB advances decreased by
$20.4 million in 2007, while the average rate paid on FHLB advances
increased by 32 basis points. In addition, the decline in
average interest-bearing
-36-
liabilities
included the effect of a managed reduction in brokered certificates of deposit,
which are utilized by the Corporation as part of its overall funding program
along with FHLB advances and other sources. Average brokered
certificates of deposit decreased by $54.3 million, or 26.6%, in
2007.
For
the year 2007, the Corporation’s provision for loan losses charged to earnings
amounted to $1.9 million, compared to $1.2 million for
2006. The increase in the provision was based on management’s
assessment of various factors affecting the loan portfolio, including, among
others, growth in the loan portfolio, ongoing evaluation of credit quality, with
particular emphasis on the commercial portfolio, and general economic
conditions. The allowance for loan losses was $20.3 million, or
1.29% of total loans, at December 31, 2007, compared to $18.9 million,
or 1.29% of total loans, at December 31, 2006.
Noninterest
income was 43% of total revenues (net interest income plus noninterest income)
in 2007. Noninterest income amounted to $45.5 million for 2007,
up by $3.3 million, or 7.9%, from 2006. This increase was
largely attributable to higher revenues from wealth management
services.
The
following table presents a noninterest income comparison for the years ended
December 31, 2007 and 2006:
|
(Dollars
in thousands)
|
2007
|
2006
|
$
Change
|
%
Change
|
||||||||||||
|
Noninterest
income:
|
||||||||||||||||
|
Wealth
management services:
|
||||||||||||||||
|
Trust
and investment advisory fees
|
$ | 21,124 | $ | 19,099 | $ | 2,025 | 10.6 | % | ||||||||
|
Mutual
fund fees
|
5,430 | 4,665 | 765 | 16.4 | ||||||||||||
|
Financial
planning, commissions and other service fees
|
2,462 | 2,616 | (154 | ) | (5.9 | ) | ||||||||||
|
Wealth
management services
|
29,016 | 26,380 | 2,636 | 10.0 | ||||||||||||
|
Service
charges on deposit accounts
|
4,713 | 4,915 | (202 | ) | (4.1 | ) | ||||||||||
|
Merchant
processing fees
|
6,710 | 6,208 | 502 | 8.1 | ||||||||||||
|
Income
from BOLI
|
1,593 | 1,410 | 183 | 13.0 | ||||||||||||
|
Net
gains on loan sales and commissions
|
||||||||||||||||
|
on
loans originated for others
|
1,493 | 1,423 | 70 | 4.9 | ||||||||||||
|
Net
unrealized gains on interest rate swap contracts
|
27 | - | 27 | - | ||||||||||||
|
Other
income
|
1,502 | 1,404 | 98 | 7.0 | ||||||||||||
|
Subtotal
|
45,054 | 41,740 | 3,314 | 7.9 | ||||||||||||
|
Net
realized gains on securities
|
455 | 443 | 12 | 2.7 | ||||||||||||
|
Total
noninterest income
|
$ | 45,509 | $ | 42,183 | $ | 3,326 | 7.9 | % | ||||||||
Revenue
from wealth management services increased by $2.6 million, or 10.0%, in
2007. Revenue from wealth management services is largely dependent on
the value of wealth management assets under administration and is closely tied
to the performance of the financial markets. Assets under
administration totaled $4.0 billion at December 31, 2007, up
$405 million, or 11.2%, from December 31, 2006. This
increase was due to successful business development efforts and customer cash
flows.
Service
charges on deposit accounts decreased by $202 thousand, or 4.1%, in
2007. The decrease was attributable to changes in customer behavior
and to a gradual shift of balances to products with lower fee
terms.
Merchant
processing fees increased by $502 thousand, or 8.1%, in 2007 primarily due
to increases in the volume of transactions processed for existing and new
customers.
Income
from BOLI amounted to $1.6 million and $1.4 million for 2007 and 2006,
respectively. BOLI represents life insurance on the lives of certain
employees who have consented to allowing the Bank to be the beneficiary of such
policies. The BOLI investment provides a means to mitigate increasing
employee benefit costs. During the second quarter of 2006, Washington
Trust purchased an additional $8 million in BOLI.
Net
gains on loan sales and commissions on loans originated for others amounted to
$1.5 million in 2007, up by 4.9% from 2006. Increases in
residential mortgage origination and sales activity were offset in part by
declines in sales of SBA loans.
Other
income consists of mortgage servicing fees, non-customers ATM fees, safe deposit
rents, wire transfer fees, fees on letters of credit and other
fees. Other income increased by $98 thousand, or 7.0%, in
2007.
In
2007 and 2006, net realized gains on sales of securities totaled
$455 thousand and $443 thousand, respectively. These
amounts included $397 thousand and $381 thousand of gains recognized
in 2007 and 2006, respectively, resulting from the annual charitable
contribution of appreciated equity securities to our charitable
foundation. Net realized gains of $314 thousand were recognized
in 2007 from certain debt and equity securities that were called prior to their
maturity by the issuers. In addition, sales of debt and equity
securities in 2007 resulted in net realized losses of
$256 thousand. In the second half of 2006, balance repositioning
transactions were conducted in response to the flat to inverted yield curve
shape in effect during most of that period. These transactions
included sales of mortgage-backed securities and other debt securities resulting
in realized losses of $3.5 million. In addition, during 2006
equity securities were sold with a realized gain of
$3.5 million.
For
the year ended December 31, 2007, noninterest expenses totaled
$68.9 million, up by $3.6 million, or 5.5%, from
2006. Included in this increase was $1.1 million in debt
prepayment penalties that were incurred in the first quarter of 2007 as a result
of the prepayment of higher cost FHLB advances. Excluding the debt
prepayment penalty expense, noninterest expenses for 2007 increased by
$2.5 million, or 3.8%, over 2006. Additional discussion and
further changes in the components of noninterest expenses are disclosed
below.
The
following table presents a noninterest expense comparison for the years ended
December 31, 2007 and 2006:
|
(Dollars
in thousands)
|
2007
|
2006
|
$
Change
|
%
Change
|
||||||||||||
|
Noninterest
expense:
|
||||||||||||||||
|
Salaries
and employee benefits
|
$ | 39,986 | $ | 38,698 | $ | 1,288 | 3.3 | % | ||||||||
|
Net
occupancy
|
4,150 | 3,888 | 262 | 6.7 | ||||||||||||
|
Equipment
|
3,473 | 3,370 | 103 | 3.1 | ||||||||||||
|
Merchant
processing costs
|
5,686 | 5,257 | 429 | 8.2 | ||||||||||||
|
Outsourced
services
|
2,180 | 2,009 | 171 | 8.5 | ||||||||||||
|
Advertising
and promotion
|
2,024 | 1,894 | 130 | 6.9 | ||||||||||||
|
Legal,
audit and professional fees
|
1,761 | 1,637 | 124 | 7.6 | ||||||||||||
|
Amortization
of intangibles
|
1,383 | 1,593 | (210 | ) | (13.2 | ) | ||||||||||
|
Debt
prepayment penalties
|
1,067 | – | 1,067 | 100.0 | ||||||||||||
|
Other
|
7,196 | 6,989 | 207 | 3.0 | ||||||||||||
|
Total
noninterest expense
|
$ | 68,906 | $ | 65,335 | $ | 3,571 | 5.5 | % | ||||||||
Salaries
and employee benefits expense, the largest component of total noninterest
expense, increased by $1.3 million, or 3.3%, in 2007. This
increase was largely due to increases in salaries and wages.
Net
occupancy expense in 2007 increased by $262 thousand, or
6.7%. The increase reflected higher rental expense for premises
leased by the Bank. Equipment expense increased by 3.1% in 2007,
primarily due to additional investments in technology and other
equipment.
Merchant
processing costs increased by $429 thousand, or 8.2%, in 2007 due largely
to increased volume of transactions processed for existing and new
customers.
Outsourced
services increased by $171 thousand, or 8.5%, in 2007 due to higher third
party vendor costs. As a result of stronger marketing and promotion
efforts, advertising and promotion expense increased $130 thousand, or
6.9%, in 2007. Legal, audit and professional fees increased 7.6% from
2006, primarily due to increased consulting costs.
Amortization
of intangibles amounted to $1.4 million in 2007 and $1.6 million in
2006.
Debt
prepayment penalties expense, resulting from the first quarter 2007 prepayment
of $26.5 million in higher cost FHLB advances, amounted to
$1.1 million in 2007.
Other
noninterest expense increased by $207 thousand, or 3.0%, in
2007. This includes an increase of $109 thousand in credit and
collection costs.
-38-
Income
tax expense amounted to $10.8 million and $12.1 million in 2007 and
2006, respectively. The Corporation’s effective tax rate was 31.3% in
2007, compared to a rate of 32.6% in 2006. These rates differed from
the federal rate of 35.0% due to the benefits of tax-exempt income, the
dividends received deduction and income from BOLI. In 2007, the
decrease in the effective tax rate was primarily due to higher average balances
in nontaxable state and municipal debt obligations.
Financial
Condition
Summary
Total
assets were $3.0 billion at December 31, 2008, up by
$425.5 million from December 31, 2007. Total loans
increased by $265.5 million, or 16.9%, in 2008, led by growth in commercial
loans. The securities portfolio increased by $114.4 million, or
15.2%, in 2008, largely due to an increase in mortgage-backed
securities. Total liabilities increased $376.9 million in 2008,
with an increase of $114.7 million in total deposits and an increase of
$213.2 million in FHLB advances. The Corporation issued
$10.3 million in junior subordinated debenture in 2008, which supplemented
the total risk-based capital position. Shareholders’ equity totaled
$235.1 million at December 31, 2008, compared to $186.5 million
at the end of 2007. In October 2008, the Corporation issued
$50.0 million of its Common Stock. Net proceeds were
$46.9 million after deducting offering-related fees and
expenses.
Effective
January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”) and, as a result, has classified certain
financial assets and liabilities as Level 1, 2 or 3 within the fair value
hierarchy set forth in SFAS No. 157. Effective
September 30, 2008, Washington Trust adopted FASB Staff Position
No. 157-3, which was issued on October 10, 2008 to clarify the
application of SFAS No. 157 in a market that is not active. Fair
values determined by Level 1 inputs utilize quoted prices for identical assets
or liabilities in active markets. Fair values determined by Level 2
inputs utilize quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
inactive markets, and model-derived valuations in which all significant input
assumptions are observable in active markets. Fair values determined
by Level 3 inputs utilize valuation techniques in which one or more significant
input assumptions are unobservable in the markets and which reflect the
Corporation’s market assumptions.
As
noted in Note 14 to the Consolidated Financial Statements, a majority of
our fair value measurements utilize Level 2 inputs. Our Level 2
financial instruments consist primarily of available for sale debt
securities. These debt securities were initially valued at their
transaction price and subsequently valued based on matrix pricing with market
data inputs such as reportable trades, benchmark yields, broker/dealer quotes,
bids, offers, issuers spreads, credit ratings and other industry and economic
events. Such inputs are observable in the market or can be derived
principally from or corroborated by observable market data. When
necessary, we validate our valuation techniques by reviewing the underlying
basis for the models used by pricing sources and obtaining market values from
other pricing sources. As of December 31, 2008, our Level 3
financial instruments consist primarily of two available for sale pooled trust
preferred securities, which were not actively traded. To determine
their fair values, Washington Trust utilized valuations received from third
parties whose results were based on discounted cash flow
methodologies. The valuations and related methodologies were reviewed
by management for reasonableness. Our fair values assumed liquidation
in an orderly market and not under distressed circumstances. If
Washington Trust was required to sell these securities in an unorderly fashion,
actual proceeds received could potentially be significantly less than their fair
values.
Securities
Washington
Trust’s securities portfolio is managed to generate interest income, to
implement interest rate risk management strategies, and to provide a readily
available source of liquidity for balance sheet management. Securities are
designated as either available for sale or held to maturity at the time of
purchase. Securities available for sale may be sold in response to
changes in market conditions, prepayment risk, rate fluctuations, liquidity, or
capital requirements. Securities available for sale are reported at
fair value, with any unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders’ equity, net of tax, until
realized. Securities designated as held to maturity are classified as
such because the Corporation has the intent and ability to hold them until
maturity. Securities held to maturity are reported at amortized
cost. At December 31, 2008, the Corporation’s portfolio
consisted largely of mortgage-backed securities. All of the
Corporation’s mortgage-backed securities are issued by U.S. government agencies
or U.S. government-sponsored enterprises. See Note 4 to the
Consolidated Financial Statements for additional information.
Washington
Trust may acquire, hold and transact in various types of investment securities
in accordance with applicable federal regulations, state statutes and guidelines
specified in Washington Trust’s internal investment
policy. Permissible bank investments include federal funds, banker’s
acceptances, commercial paper, reverse repurchase agreements, interest-bearing
deposits of federally insured banks, U.S. Treasury and government-sponsored
agency debt obligations, including mortgage-backed securities and collateralized
mortgage obligations, municipal securities, corporate debt, trust preferred
securities, mutual funds, auction rate preferred stock, common and preferred
equity securities, and FHLB stock.
Investment
activity is monitored by an Investment Committee, the members of which also sit
on the Corporation’s Asset/Liability Committee (“ALCO”). Asset and
liability management objectives are the primary influence on the Corporation’s
investment activities. However, the Corporation also recognizes that
there are certain specific risks inherent in investment portfolio
activity. The securities portfolio is managed in accordance with
regulatory guidelines and established internal corporate investment policies
that provide limitations on specific risk factors such as market risk, credit
risk and concentration, liquidity risk and operational risk to help monitor
risks associated with investing in securities.
In
2007, the Corporation intended to elect early adoption of SFAS No. 159,
“The Fair Value Option for Financial Assets and Liabilities” (“SFAS
No. 159”) and sold twelve held to maturity securities with an amortized
cost of $61.9 million on April 13, 2007. The Corporation
intended to account for these transactions under the transition provisions of
SFAS No. 159. Subsequent to the Corporation’s original decision
to early adopt SFAS No. 159, clarifications of the interpretation of the
application of SFAS No. 159 by applicable regulatory and industry bodies,
including the AICPA’s Center for Audit Quality, led us to conclude that the
application of SFAS No. 159 to these transactions might be inconsistent
with the intent and spirit of the statement. Consequently, the
Corporation subsequently decided not to early-adopt SFAS No. 159 and
realized securities losses of $1.7 million were recognized in the second
quarter of 2007. In addition, the remaining held to maturity
portfolio was reclassified to the available for sale category as of the
April 13, 2007 sale date of the securities. The Corporation will
not be able to classify securities in the held to maturity category for a period
of two years from the April 13, 2007 sales date as a result of this
action.
Purchases
of investment securities during 2008 totaled $310.2 million and were
comprised of $296.2 million of mortgage-backed securities issued by U.S.
government agencies and U.S. government-sponsored enterprises,
$13.0 million in corporate bonds, and $1.0 million in municipal
securities.
The
carrying amounts of securities as of the dates indicated are presented in the
following tables:
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Amount
|
%
|
|
Amount
|
%
|
Amount
|
%
|
|
|||||||||||||||||
|
Securities
Available for Sale:
|
||||||||||||||||||||||||
|
U.S.
Treasury obligations and obligations
|
||||||||||||||||||||||||
|
of
U.S. government-sponsored enterprises
|
$ | 64,377 | 7 | % | $ | 139,599 | 18 | % | $ | 157,285 | 30 | % | ||||||||||||
|
Mortgage-backed
securities issued by U.S. government
|
||||||||||||||||||||||||
|
agencies
and U.S. government-sponsored enterprises
|
683,619 | 80 | % | 469,388 | 62 | % | 293,787 | 56 | % | |||||||||||||||
|
States
and political subdivisions
|
81,213 | 9 | % | 80,894 | 11 | % | – | – | % | |||||||||||||||
|
Trust
preferred securities:
|
||||||||||||||||||||||||
|
Individual
name issuers
|
16,793 | 2 | % | 27,695 | 4 | % | 30,574 | 6 | % | |||||||||||||||
|
Collateralized
debt obligations
|
1,940 | – | % | 6,759 | 1 | % | – | – | % | |||||||||||||||
|
Corporate
bonds
|
13,576 | 2 | % | 14,101 | 2 | % | 25,034 | 5 | % | |||||||||||||||
|
Common
stocks
|
992 | – | % | 6,781 | 1 | % | 9,513 | 1 | % | |||||||||||||||
|
Perpetual
preferred stocks
|
3,709 | – | % | 6,561 | 1 | % | 10,203 | 2 | % | |||||||||||||||
|
Total
securities available for sale
|
$ | 866,219 | 100 | % | $ | 751,778 | 100 | % | $ | 526,396 | 100 | % | ||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||
|
Securities
Held to Maturity:
|
||||||||||||||||||||||||
|
U.S.
Treasury obligations and obligations
|
||||||||||||||||||||||||
|
of
U.S. government-sponsored enterprises
|
$ | – | – | % | $ | – | – | % | $ | 42,000 | 24 | % | ||||||||||||
|
Mortgage-backed
securities issued by
|
||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
– | – | % | – | – | % | 69,340 | 39 | % | |||||||||||||||
|
States
and political subdivisions
|
– | – | % | – | – | % | 66,115 | 37 | % | |||||||||||||||
|
Total
securities held to maturity
|
$ | – | – | % | $ | – | – | % | $ | 177,455 | 100 | % | ||||||||||||
At
December 31, 2008 and 2007, the securities portfolio included
$3.2 million of net pretax unrealized losses and $1.2 million of net
pretax unrealized gains, respectively. At December 31, 2008, the
net unrealized losses on the investment securities portfolio included gross
unrealized losses of $23.1 million. Approximately 75% of the
gross unrealized losses on the investment securities portfolio were concentrated
in variable rate trust preferred securities issued by financial services
companies. These trust preferred securities holdings consist of seven
individual name issuers in the financial industry, including, where applicable,
the impact of mergers and acquisitions of issuers subsequent to original
purchase, and two pooled trust preferred securities in the form of
collateralized debt obligations. All of these trust preferred
securities holdings have investment grade credit ratings at December 31,
2008. Subsequent to December 31, 2008, one credit rating agency
has downgraded to below investment grade four of our trust preferred security
holdings, with total unrealized losses of $4.0 million at December 31,
2008. The ratings of these four securities by other credit rating
agencies remain at investment grade as of the filing date of this
report. Management has considered this information in its assessment
of other-than-temporary impairment as of December 31, 2008. The
pooled trust preferred holdings consist of trust preferred obligations of
banking industry companies and, to a lesser extent, insurance industry
companies. For both of its pooled trust preferred holdings,
Washington Trust’s investment is senior to one or more subordinated tranches
that have first loss exposure. One of the pooled trust preferred
securities held by the Corporation continues to accrue and make payments as
expected. The other pooled trust preferred security began deferring
interest payments until future periods and based on the financial condition and
operating outlook of the issuers, was deemed to be other-than-temporarily
impaired at December 31, 2008, with a resulting charge to earnings of
$1.9 million.
Further
deterioration in credit quality of the companies backing the securities, further
deterioration in the condition of the financial services industry, a
continuation of the current imbalances in liquidity that exist in the
marketplace, a continuation or worsening of the current economic recession, or
additional declines in real estate values may further affect the fair value of
these securities and increase the potential that certain unrealized losses be
designated as other than temporary in future periods and the Corporation may
incur additional write-downs.
The
following tables provide supplemental information on the trust preferred
securities as well as other information concerning the securities
portfolio:
|
(Dollars
in thousands)
|
Number
|
|||||||||||||||||||||||
|
of
|
Credit
|
Amortized
|
Unrealized
|
Fair
|
||||||||||||||||||||
|
At
December 31, 2008
|
Issuers
|
Rating
(1)
|
Cost
(2)
|
Gains
|
Losses
|
Value
|
||||||||||||||||||
|
Trust
preferred securities
|
||||||||||||||||||||||||
|
Individual
name issuers (3):
|
2
|
Aa
|
$ | 15,421 | $ | – | $ | (7,484 | ) | $ | 7,937 | |||||||||||||
|
4
|
A
|
13,195 | – | (4,880 | ) | 8,315 | ||||||||||||||||||
|
1
|
Baa
|
1,909 | – | (1,368 | ) | 541 | ||||||||||||||||||
|
Total
individual name issuers
|
7
|
30,525 | – | (13,732 | ) | 16,793 | ||||||||||||||||||
|
Collateralized
debt obligations (CDO):
|
||||||||||||||||||||||||
|
Pool
issue 1 (4)
|
Baa
|
5,000 | – | (3,693 | ) | 1,307 | ||||||||||||||||||
|
Pool
issue 2 (5)
|
Baa
|
633 | – | – | 633 | |||||||||||||||||||
|
Total
collateralized debt obligations
|
5,633 | – | (3,693 | ) | 1,940 | |||||||||||||||||||
|
Total
trust preferred securities
|
$ | 36,158 | $ | – | $ | (17,425 | ) | $ | 18,733 | |||||||||||||||
|
Corporate
bonds:
|
1
|
Aaa
|
$ | 2,784 | $ | 167 | $ | – | $ | 2,951 | ||||||||||||||
|
2
|
A
|
10,189 | 436 | – | 10,625 | |||||||||||||||||||
|
Total
corporate bonds
|
3
|
$ | 12,973 | $ | 603 | $ | – | $ | 13,576 | |||||||||||||||
|
(1)
|
Source:
Moody’s, as of December 31, 2008. Moody’s ratings remain at
investment grade as of the filing date of this
report.
|
|
(2)
|
Net
of other-than-temporary impairment write-downs recognized in
earnings.
|
|
(3)
|
Consists
of various series of trust preferred securities issued by seven corporate
financial institutions.
|
|
(4)
|
As
of December 31, 2008, 3 of the 38 pooled institutions have invoked
their original contractual right to defer interest
payments. The tranche held by Washington Trust continues to
accrue and make payments as
expected.
|
|
(5)
|
As
of December 31, 2008, 5 of the 73 pooled institutions have invoked
their original contractual right to defer interest
payments. The tranche held by Washington Trust began deferring
interest payments until future periods and, based on the financial
condition and operating outlook of the pooled institutions, was deemed to
be other-than-temporarily impaired at December 31, 2008 resulting in
the recognition of $1.859 million of impairment
charges. This investment security was also placed on nonaccrual
status as of December 31,
2008.
|
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Fair
|
||||||||||||||
|
At
December 31, 2008
|
Cost
(1)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Common
and perpetual preferred stocks
|
||||||||||||||||
|
Common
stocks
|
$ | 942 | $ | 50 | $ | – | $ | 992 | ||||||||
|
Perpetual
preferred stocks:
|
||||||||||||||||
|
Federal
National Mortgage Association (“Fannie Mae”)
|
24 | – | – | 24 | ||||||||||||
|
Federal
Home Loan Mortgage Corporation (“Freddie Mac”)
|
6 | – | – | 6 | ||||||||||||
|
Other -
financials
|
3,469 | – | (662 | ) | 2,807 | |||||||||||
|
Other -
utilities
|
1,000 | 2 | (130 | ) | 872 | |||||||||||
|
Total
perpetual preferred stocks
|
4,499 | 2 | (792 | ) | 3,709 | |||||||||||
|
Total
common and perpetual preferred stocks
|
$ | 5,441 | $ | 52 | $ | (792 | ) | $ | 4,701 | |||||||
|
(1)
|
Net
of other-than-temporary impairment write-downs recognized in
earnings.
|
In
October 2008, the SEC’s Office of the Chief Accountant, after consultation and
concurrence with the FASB, concluded that the assessment of other-than-temporary
impairment of perpetual preferred securities for filings made after
October 14, 2008 can be made using an impairment model (including an
anticipated recovery period) similar to a debt security provided there has been
no evidence of a deterioration in credit of the issuer, as evidenced by, among
other factors, a downgrade to a below “investment grade” credit
rating. Washington Trust complied with this guidance in its
evaluation of other-than-temporary impairment of perpetual preferred
stocks.
Losses
on write-downs of investments to fair value were charged to earnings for
securities deemed to be other-than-temporarily impaired in the amounts shown in
the following table:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Trust
preferred securities
|
||||||||||||
|
Collateralized
debt obligations
|
$ | 1,859 | $ | – | $ | – | ||||||
|
Common
and perpetual preferred stocks
|
||||||||||||
|
Fannie
Mae and Freddie Mac perpetual preferred stocks
|
$ | 1,470 | – | – | ||||||||
|
Other
perpetual preferred stocks
|
2,173 | – | – | |||||||||
|
Other
common stocks
|
435 | – | – | |||||||||
|
Losses
on write-downs of investments to fair value
|
$ | 5,937 | $ | – | $ | – | ||||||
See
Note 4 to the Consolidated Financial Statements for additional discussion
on securities.
Federal
Home Loan Bank Stock
The
Corporation is required to maintain a level of investment in FHLB stock based on
the level of its FHLB advances. As of December 31, 2008 and
2007, the Corporation’s investment in FHLB stock totaled $42.0 million and
$31.7 million, respectively. No market exists for shares of the
FHLB. FHLB stock may be redeemed at par value five years following
termination of FHLB membership, subject to limitations which may be imposed by
the FHLB or its regulator, the Federal Housing Finance Board, to maintain
capital adequacy of the FHLB. While the Corporation currently has no
intentions to terminate its FHLB membership, the ability to redeem its
investment in FHLB stock would be subject to the conditions imposed by the
FHLB.
The
FHLB has advised its members that it is focusing on preserving capital in
response to ongoing market volatility and, accordingly, it will not pay a
quarterly dividend in the first quarter of 2009 and the payment of any dividend
in 2009 is unlikely; further, a moratorium has been placed on excess stock
repurchases. The FHLB also announced that the estimated fair value of
private-label mortgage-backed securities it owned at September 30, 2008 was
approximately $1.3 billion less than the $4.6 billion carrying value
of the securities. If this unrealized loss were deemed to be an
other-than-temporary loss in the future, it could exceed the FHLB’s current
level of retained earnings and possibly put into question whether the fair value
of FHLB stock owned by the Corporation was less than par value. The
FHLB has stated that it expects and intends to hold its private-label
mortgage-backed securities to maturity. The Corporation will continue
to monitor its investment in FHLB stock.
Loans
Washington
Trust’s loan portfolio amounted to $1.8 billion at December 31, 2008,
up $265.5 million, or 16.9%, in 2008, primarily due to growth in the
commercial loan portfolio. Commercial loans rose by
$200.0 million, or 29.4%, in 2008.
The
following table sets forth the composition of the Corporation’s loan portfolio
for each of the past five years:
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgages
|
$ | 407,904 | 22 | % | $ | 278,821 | 18 | % | $ | 282,019 | 19 | % | $ | 291,292 | 21 | % | $ | 266,670 | 21 | % | ||||||||||||||||||||
|
Construction
& development
|
49,599 | 3 | % | 60,361 | 4 | % | 32,233 | 2 | % | 37,190 | 3 | % | 29,263 | 2 | % | |||||||||||||||||||||||||
|
Other (1)
|
422,810 | 23 | % | 341,084 | 21 | % | 273,145 | 19 | % | 226,252 | 16 | % | 211,778 | 18 | % | |||||||||||||||||||||||||
|
Total
commercial
|
880,313 | 48 | % | 680,266 | 43 | % | 587,397 | 40 | % | 554,734 | 40 | % | 507,711 | 41 | % | |||||||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgages
|
626,663 | 34 | % | 588,628 | 37 | % | 577,522 | 40 | % | 565,680 | 40 | % | 494,720 | 40 | % | |||||||||||||||||||||||||
|
Homeowner
construction
|
15,389 | 1 | % | 11,043 | 1 | % | 11,149 | – | % | 17,028 | 2 | % | 18,975 | 1 | % | |||||||||||||||||||||||||
|
Total
residential real estate
|
642,052 | 35 | % | 599,671 | 38 | % | 588,671 | 40 | % | 582,708 | 42 | % | 513,695 | 41 | % | |||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Home
equity lines
|
170,662 | 9 | % | 144,429 | 9 | % | 145,676 | 10 | % | 161,100 | 11 | % | 155,001 | 12 | % | |||||||||||||||||||||||||
|
Home
equity loans
|
89,297 | 5 | % | 99,827 | 6 | % | 93,947 | 6 | % | 72,288 | 5 | % | 54,297 | 4 | % | |||||||||||||||||||||||||
|
Other (2)
|
56,830 | 3 | % | 49,459 | 4 | % | 44,295 | 4 | % | 31,078 | 2 | % | 18,972 | 2 | % | |||||||||||||||||||||||||
|
Total
consumer loans
|
316,789 | 17 | % | 293,715 | 19 | % | 283,918 | 20 | % | 264,466 | 18 | % | 228,270 | 18 | % | |||||||||||||||||||||||||
|
Total
loans
|
$ | 1,839,154 | 100 | % | $ | 1,573,652 | 100 | % | $ | 1,459,986 | 100 | % | $ | 1,401,908 | 100 | % | $ | 1,249,676 | 100 | % | ||||||||||||||||||||
|
(1)
|
Loans
to businesses and individuals, a substantial portion of which are fully or
partially collateralized by real
estate.
|
|
(2)
|
Other
consumer loans include personal installment loans and loans to individuals
secured by general aviation aircraft and
automobiles.
|
An
analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 2008
follows:
|
(Dollars
in thousands)
|
|||||||||||||||||
|
1
Year
|
1
to 5
|
After
5
|
|||||||||||||||
|
Matures
in:
|
or
Less
|
Years
|
Years
|
Totals
|
|||||||||||||
|
Construction
and development (1)
|
$ | 15,209 | $ | 21,489 | $ | 28,290 | $ | 64,988 | |||||||||
|
Commercial
- other
|
162,124 | 158,055 | 102,631 | 422,810 | |||||||||||||
| $ | 177,333 | $ | 179,544 | $ | 130,921 | $ | 487,798 | ||||||||||
|
(1)
|
Includes
homeowner construction and commercial construction and
development. Maturities of homeowner construction loans are
included based on their contractual conventional mortgage repayment terms
following the completion of
construction.
|
Sensitivity
to changes in interest rates for Real Estate Construction and Other Commercial
loans due after one year is as follows:
|
(Dollars
in thousands)
|
Floating
or
|
|||||||||||
|
Predetermined
|
Adjustable
|
|||||||||||
|
Rates
|
Rates
|
Totals
|
||||||||||
|
Principal
due after one year
|
$ | 221,847 | $ | 88,618 | $ | 310,465 | ||||||
Commercial
Loans
During
2008, total commercial loans increased by 29.4%. Commercial loans
fall into two major categories, commercial real estate and other commercial
loans (commercial and industrial). Commercial real estate loans
consist of commercial mortgages and construction and development
loans. Commercial mortgages are loans secured by income producing
property.
Commercial Real Estate
Loans
Commercial
real estate loans amounted to $457.5 million at December 31, 2008, up
by $118.3 million, or 34.9%, in 2008. The growth in this
category was achieved through self-originated loans and, to a lesser extent,
participations with other financial institutions.
The
following table presents a geographic summary of commercial real estate loans by
property location.
|
(Dollars
in thousands)
|
December 31,
2008
|
|||||||
|
Amount
|
%
of Total
|
|||||||
|
Rhode
Island, Connecticut, Massachusetts
|
$ | 405,040 | 88.5 | % | ||||
|
New
York, New Jersey, Pennsylvania
|
37,448 | 8.2 | % | |||||
|
New
Hampshire, Maine
|
13,384 | 2.9 | % | |||||
|
Other
|
1,631 | 0.4 | % | |||||
|
Total
|
$ | 457,503 | 100.0 | % | ||||
Other Commercial
Loans
Other
commercial loans amounted to $422.8 million at December 31, 2008, up
by $81.7 million, or 24.0%, from the balance at the end of
2007. Other commercial loans are largely collateralized and in many
cases the collateral consists of real estate occupied by the business as well as
other business assets. Growth in this category was primarily
attributable to originations in our general market area of southern
New England. In 2008, much of this business was generated from former
customers of larger financial institutions.
Residential
Real Estate Loans
In
2008, residential real estate loans increased by $42.4 million, or 7.1%,
which included loans purchased from other financial institutions of
$39.3 million. In addition, in the first quarter of 2008
Washington Trust sold $17.9 million in residential portfolio loans for
interest rate risk and balance sheet management purposes, which resulted in a
gain on sale of $80 thousand. We do not have a practice of
selling loans from portfolio and except for this we have not sold any packages
of loans from our portfolio in many years. We originate residential
mortgage loans within our general market area of southern New England for
portfolio and for sale in the secondary market. The majority of loans
sold are sold with servicing released. From time to time we purchase
one to four family residential mortgages originated in other states as well as
southern New England from other financial institutions. All
residential mortgage loans purchased from other financial institutions have been
individually underwritten using standards similar to those employed for our
self-originated loans.
The
following is a geographic summary of residential mortgages by property
location.
|
(Dollars
in thousands)
|
December 31,
2008
|
|||||||
|
Amount
|
%
of Total
|
|||||||
|
Rhode
Island, Connecticut, Massachusetts
|
$ | 566,857 | 88.3 | % | ||||
|
New
York, Virginia, New Jersey, Maryland, Pennsylvania, District of
Columbia
|
28,252 | 4.4 | % | |||||
|
Ohio,
Michigan
|
19,940 | 3.1 | % | |||||
|
California,
Washington, Oregon
|
12,678 | 2.0 | % | |||||
|
Colorado,
Texas, New Mexico, Utah
|
8,623 | 1.3 | % | |||||
|
Georgia
|
2,539 | 0.4 | % | |||||
|
New
Hampshire, Vermont
|
2,055 | 0.3 | % | |||||
|
Other
|
1,108 | 0.2 | % | |||||
|
Total
|
$ | 642,052 | 100.0 | % | ||||
Consumer
Loans
Consumer
loans increased by 7.9% in 2008, primarily due to increases in home equity
lines. Our consumer portfolio is predominantly home equity lines and home equity
loans. All home equity lines and home equity loans were originated by
Washington Trust in its general market area. Consumer loans also
include personal installment loans and loans to individuals secured by general
aviation aircraft and automobiles.
Asset
Quality
The
Board of Directors of the Bank monitors credit risk management through two
committees, the Finance Committee and the Audit Committee. The
Finance Committee reviews and approves large exposure credit requests, monitors
asset quality on a regular basis and has approval authority for credit granting
policies. The Audit Committee oversees management’s system and
procedures to monitor the credit quality of the loan portfolio, conduct a loan
review program, maintain the integrity of the loan rating system and determine
the adequacy of the allowance for loan losses. The Bank’s practice is
to identify problem credits early and take charge-offs as promptly as
practicable. In
addition, management continuously reassesses its underwriting standards in
response to changes in credit risk posed by changes in economic
conditions.
The
level of nonperforming assets and loan delinquencies increased during
2008. In addition, net loan charge-offs increased from $517 thousand
in 2007 to $1.4 million in 2008, comprised largely of commercial
loans. Despite this increase, the level of net charge-offs as a
percentage of average loans for 2008 was relatively low at
0.08%. Management believes this declining credit quality trend is
primarily related to a general weakening in national and regional economic
conditions and this trend is likely to continue in 2009.
Nonperforming
Assets
Nonperforming
assets include nonaccrual loans, nonaccrual investment securities and property
acquired through foreclosure or repossession.
The
following table presents nonperforming assets and additional asset quality data
for the dates indicated:
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||||||
|
Commercial
mortgages
|
$ | 1,942 | $ | 1,094 | $ | 981 | $ | 394 | $ | 2,357 | ||||||||||
|
Commercial
construction and development
|
– | – | – | – | 390 | |||||||||||||||
|
Other
commercial
|
3,845 | 1,781 | 831 | 624 | 730 | |||||||||||||||
|
Residential
real estate
|
1,754 | 1,158 | 721 | 1,147 | 1,027 | |||||||||||||||
|
Consumer
|
236 | 271 | 190 | 249 | 227 | |||||||||||||||
|
Total
nonaccrual loans
|
7,777 | 4,304 | 2,723 | 2,414 | 4,731 | |||||||||||||||
|
Nonaccrual
investment securities
|
633 | – | – | – | – | |||||||||||||||
|
Property
acquired through foreclosure
|
||||||||||||||||||||
|
or
repossession, net
|
392 | – | – | – | 4 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 8,802 | $ | 4,304 | $ | 2,723 | $ | 2,414 | $ | 4,735 | ||||||||||
|
Nonperforming
assets to total assets
|
0.30 | % | 0.17 | % | 0.11 | % | 0.10 | % | 0.21 | % | ||||||||||
|
Nonperforming
loans to total loans
|
0.42 | % | 0.27 | % | 0.19 | % | 0.17 | % | 0.38 | % | ||||||||||
|
Total
past due loans to total loans
|
0.96 | % | 0.45 | % | 0.49 | % | 0.27 | % | 0.43 | % | ||||||||||
|
Accruing
troubled debt restructured loans
|
$ | 870 | $ | 1,717 | $ | – | $ | – | $ | – | ||||||||||
|
Accruing
loans 90 days or more past due
|
$ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
Impaired
loans consist of all nonaccrual commercial loans and loans restructured in a
troubled debt restructuring. At December 31, 2008, impaired
loans amounted to $6.7 million, compared to $4.6 million at
December 31, 2007. See Note 5 to the Consolidated Financial
Statements for additional disclosure on impaired loans.
Included
in nonaccrual investment securities at December 31, 2008 was one pooled
trust preferred security. Based on the financial condition and
operating outlook of the issuers, this security was deemed to be
other-than-temporarily impaired and placed on nonaccrual status in the fourth
quarter of 2008. See additional information herein under the caption
“Securities.”
Nonaccrual
Loans
Loans,
with the exception of certain well-secured residential mortgage loans that are
in the process of collection, 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 or sooner if considered appropriate by
management. Well-secured residential mortgage loans are permitted to
remain on accrual status provided that full collection of principal and interest
is assured and the loan is in the process of collection. Loans are
also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously
accrued, but uncollected, is reversed against current period
income. Subsequent cash receipts on nonaccrual loans are recognized
as interest income, or recorded as a reduction of principal if full collection
of the loan is doubtful or if impairment of the collateral is
identified. 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.
Interest
income that would have been recognized if loans on nonaccrual status had been
current in accordance with their original terms was approximately
$583 thousand, $341 thousand and $218 thousand in 2008, 2007 and
2006, respectively. Interest income attributable to these loans
included in the Consolidated Statements of Income amounted to approximately
$469 thousand, $318 thousand and $192 thousand in 2008, 2007 and
2006, respectively.
There
were no significant commitments to lend additional funds to borrowers whose
loans were on nonaccrual status at December 31, 2008.
The
following table presents additional detail on nonaccrual loans as of the dates
indicated:
|
(Dollars
in thousands)
|
||||||||
|
December 31,
|
2008
|
2007
|
||||||
|
Nonaccrual
loans 90 days or more past due
|
$ | 6,284 | $ | 2,490 | ||||
|
Nonaccrual
loans less than 90 days past due
|
1,493 | 1,814 | ||||||
|
Total
nonaccrual loans
|
$ | 7,777 | $ | 4,304 | ||||
$2.9 million
of the $3.5 million increase in nonaccrual loans in 2008 occurred in the
other commercial loan category. These are primarily loans to small
business and generally secured by real estate as well as other business
assets.
Restructured
Loans
Loans
are considered restructured when the Corporation has granted concessions to a
borrower due to the borrower’s financial condition that it otherwise would not
have considered. These concessions include modifications of the terms
of the debt such as reduction of the stated interest rate other than normal
market rate adjustments, extension of maturity dates, or reduction of principal
balance or accrued interest. The decision to restructure a loan,
versus aggressively enforcing the collection of the loan, may benefit the
Corporation by increasing the ultimate probability of collection. At
December 31, 2008, there were no significant commitments to lend additional
funds to borrowers whose loans had been restructured.
The
following table sets forth information on troubled debt restructured loans as of
the dates indicated:
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Accruing
troubled debt restructured loans:
|
||||||||||||||||||||
|
Commercial
mortgages
|
$ | – | $ | 1,717 | $ | – | $ | – | $ | – | ||||||||||
|
Commercial
construction and development
|
– | – | – | – | – | |||||||||||||||
|
Other
commercial
|
– | – | – | – | – | |||||||||||||||
|
Residential
real estate
|
263 | – | – | – | – | |||||||||||||||
|
Consumer
|
607 | – | – | – | – | |||||||||||||||
|
Accruing
troubled debt restructured loans
|
870 | 1,717 | – | – | – | |||||||||||||||
|
Nonaccrual
troubled debt restructured loans
|
– | – | – | – | – | |||||||||||||||
|
Total
troubled debt restructured loans
|
$ | 870 | $ | 1,717 | $ | – | $ | – | $ | – | ||||||||||
Past
Due Loans
The
following tables present past due loans by category as of the dates
indicated:
|
(Dollars
in thousands)
|
||||||||||||||||
|
December 31,
|
2008
|
2007
|
||||||||||||||
|
Amount
|
% | (1) |
Amount
|
% | (1) | |||||||||||
|
Loans
30 – 59 days past due:
|
||||||||||||||||
|
Commercial
categories
|
$ | 5,490 | $ | 1,450 | ||||||||||||
|
Residential
real estate
|
3,113 | 1,620 | ||||||||||||||
|
Consumer
loans
|
76 | 73 | ||||||||||||||
|
Loans
30 – 59 days past due
|
$ | 8,679 | $ | 3,143 | ||||||||||||
|
Loans
60 – 89 days past due:
|
||||||||||||||||
|
Commercial
categories
|
$ | 791 | 1,313 | |||||||||||||
|
Residential
real estate
|
1,452 | 39 | ||||||||||||||
|
Consumer
loans
|
401 | 38 | ||||||||||||||
|
Loans
60 – 89 days past due
|
$ | 2,644 | $ | 1,390 | ||||||||||||
|
Loans
90 days or more past due:
|
||||||||||||||||
|
Commercial
categories
|
$ | 5,234 | 1,963 | |||||||||||||
|
Residential
real estate
|
973 | 441 | ||||||||||||||
|
Consumer
loans
|
77 | 86 | ||||||||||||||
|
Loans
90 days or more past due
|
$ | 6,284 | $ | 2,490 | ||||||||||||
|
Total
past due loans:
|
||||||||||||||||
|
Commercial
categories
|
$ | 11,515 | 1.31 | % | $ | 4,726 | 0.69 | % | ||||||||
|
Residential
real estate
|
5,538 | 0.86 | % | 2,100 | 0.35 | % | ||||||||||
|
Consumer
loans
|
554 | 0.17 | % | 197 | 0.07 | % | ||||||||||
|
Total
past due loans
|
$ | 17,607 | 0.96 | % | $ | 7,023 | 0.45 | % | ||||||||
|
(1)
|
Percentage
of past due loans to the total loans outstanding within the respective
category.
|
Total
30 day+ delinquencies amounted to $17.6 million, or 0.96% of total
loans, at December 31, 2008, up $10.6 million from the balance at
December 31, 2007, with the largest increase in the commercial loan
portfolio. The increase in total 30 day+ delinquencies is
generally attributable to weakening economic conditions.
Commercial
loan delinquencies amounted to $11.5 million, or 1.31% of total commercial
loans, at December 31, 2008. The largest single delinquent
commercial loan relationship amounted to $3.4 million, secured by a
hotel. This loan was classified in commercial real estate and was
considered a Potential Problem Loan as of December 31, 2008.
Washington
Trust has never offered a subprime residential loan
program. Residential mortgage loan delinquencies amounted to
$5.5 million, or 0.86% of residential mortgage loans, at December 31,
2008 compared to $2.1 million, or 0.35%, at December 31,
2007. Consumer loan delinquencies were $554 thousand, or 0.17%
of total consumer loans, at December 31, 2008, compared to
$197 thousand, or 0.07%, at the end of 2007. Total 90
day+ delinquencies in the residential mortgage and consumer loan categories
amounted to $973 thousand (five loans) and $77 thousand (two loans),
respectively, at December 31, 2008.
Potential
Problem Loans
The
Corporation classifies certain loans as “substandard,” “doubtful,” or “loss”
based on criteria consistent with guidelines provided by banking
regulators. Potential problem loans consist of classified accruing
commercial loans that were less than 90 days past due at December 31,
2008. Such loans are characterized by weaknesses in the financial
condition of borrowers or collateral deficiencies. Based on
historical experience, the credit quality of some of these loans may improve as
a result of collection efforts, while the credit quality of other loans may
deteriorate, resulting in some amount of losses. These loans are not
included in the analysis of nonaccrual or restructured loans
above. At December 31, 2008, potential problem loans amounted to
approximately $9.3 million, compared to $8.1 million at
December 31, 2007. Approximately 91% of the potential problem
loans at December 31, 2008 consisted of six commercial lending
relationships, which have been classified based on our evaluation of the
financial condition of the borrowers. The Corporation’s loan policy
provides guidelines for the review of such loans in order to facilitate
collection.
Depending
on future events, these potential problem loans, and others not currently
identified, could be classified as nonperforming in the future.
Allowance
for Loan Losses
The
Corporation uses a methodology to systematically measure the amount of estimated
loan loss exposure inherent in the loan portfolio for purposes of establishing a
sufficient allowance for loan losses. See additional discussion
regarding the allowance for loan losses under the caption “Critical Accounting
Policies and Estimates”. During 2008, there were no significant
changes to the allowance assessment methodology.
The
allowance for loan losses is management’s best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is
increased by provisions charged to earnings and by recoveries of amounts
previously charged off, and is reduced by charge-offs on loans.
At
December 31, 2008, the allowance for loan losses was $23.7 million, or
1.29% of the total loan portfolio, which compares to an allowance of
$20.3 million or 1.29% of the total loan portfolio at December 31,
2007. While the level of nonaccrual loans as a percentage of total
loans has increased from 0.27% of total loans at December 31, 2007 to 0.42% of
total loans at the end of 2008 and the level of delinquencies as described above
under the caption “Past Due Loans” increased in 2008, the weighted average risk
ratings of the commercial portfolio improved during 2008. For
substantially all of the performing (non-impaired) commercial portfolio, the
estimate of loss allocation is a function of individual loan risk
ratings. The status of nonaccrual loans, delinquent loans and
performing loans were all taken into consideration in the assessment of the
adequacy of the allowance for loans losses. See Note 1 to the
Consolidated Financial Statements under the heading “Allowance for Loan Losses”
for a discussion of the internal loan risk rating system.
The
following table reflects the activity in the allowance for loan losses for the
dates presented:
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance
at beginning of year
|
$ | 20,277 | $ | 18,894 | $ | 17,918 | $ | 16,771 | $ | 15,914 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
185 | 26 | – | 85 | 215 | |||||||||||||||
|
Construction
and development
|
– | – | – | – | – | |||||||||||||||
|
Other
|
1,044 | 506 | 295 | 198 | 257 | |||||||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
104 | – | – | – | – | |||||||||||||||
|
Homeowner
construction
|
– | – | – | – | – | |||||||||||||||
|
Consumer
|
260 | 246 | 133 | 86 | 95 | |||||||||||||||
|
Total
charge-offs
|
1,593 | 778 | 428 | 369 | 567 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
68 | – | – | 71 | 36 | |||||||||||||||
|
Construction
and development
|
– | – | – | – | 34 | |||||||||||||||
|
Other
|
48 | 203 | 171 | 389 | 569 | |||||||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
– | – | – | – | – | |||||||||||||||
|
Homeowner
construction
|
– | – | – | – | – | |||||||||||||||
|
Consumer
|
125 | 58 | 33 | 106 | 175 | |||||||||||||||
|
Total
recoveries
|
241 | 261 | 204 | 566 | 814 | |||||||||||||||
|
Net
charge-offs (recoveries)
|
1,352 | 517 | 224 | (197 | ) | (247 | ) | |||||||||||||
|
Reclassification
of allowance
|
||||||||||||||||||||
|
on
off-balance sheet exposures
|
– | – | – | (250 | ) | – | ||||||||||||||
|
Provision
charged to earnings
|
4,800 | 1,900 | 1,200 | 1,200 | 610 | |||||||||||||||
|
Balance
at end of year
|
$ | 23,725 | $ | 20,277 | $ | 18,894 | $ | 17,918 | $ | 16,771 | ||||||||||
|
Net
charge-offs (recoveries) to average loans
|
.08 | % | .03 | % | .02 | % | (.01 | )% | (.02 | )% | ||||||||||
The
increase in the 2008 provision for loan losses was based on management’s
assessment of various factors affecting the loan portfolio, including, among
others, $200.0 million, or 29.4%, of growth in the commercial loan
portfolio, which has a higher loan loss allocation than the residential and
consumer loan portfolios; our ongoing evaluation of credit quality, with
particular emphasis on the commercial portfolio; and general economic
conditions. The evaluation of credit quality and the determination of
the appropriate amount of allowance for loan losses, which is described under
the caption “Critical Accounting Policies and Estimates – Allowance for Loan
Losses”, reflects the impact of the increase in total nonaccrual loans, past due
loans and potential problem loans in 2008.
Net
charge-offs amounted to $1.4 million in 2008, compared to net charge-offs
of $517 thousand in 2007. Commercial loan net charge-offs
amounted to $1.1 million and $329 thousand in 2008 and 2007,
respectively.
The
Corporation will continue to assess the adequacy of its allowance for loan
losses in accordance with its established policies.
In
2005, the Corporation reclassified to other liabilities that portion of the
allowance for loan losses related to off-balance sheet credit risk.
The
following table presents the allocation of the allowance for loan
losses:
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
December
31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
$ | 4,904 | $ | 5,218 | $ | 4,408 | $ | 4,467 | $ | 4,385 | ||||||||||
|
%
of these loans to all loans
|
22.2 | % | 17.7 | % | 19.3 | % | 20.8 | % | 21.3 | % | ||||||||||
|
Construction
and development
|
784 | 1,445 | 589 | 713 | 729 | |||||||||||||||
|
%
of these loans to all loans
|
2.7 | % | 3.8 | % | 2.2 | % | 2.7 | % | 2.3 | % | ||||||||||
|
Other
|
6,889 | 4,229 | 4,200 | 3,263 | 3,633 | |||||||||||||||
|
%
of these loans to all loans
|
23.0 | % | 21.7 | % | 18.7 | % | 16.1 | % | 16.9 | % | ||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
2,111 | 1,681 | 1,619 | 1,642 | 1,447 | |||||||||||||||
|
%
of these loans to all loans
|
34.1 | % | 37.4 | % | 39.6 | % | 40.3 | % | 39.7 | % | ||||||||||
|
Homeowner
construction
|
84 | 55 | 56 | 43 | 47 | |||||||||||||||
|
%
of these loans to all loans
|
0.8 | % | 0.7 | % | 0.8 | % | 1.2 | % | 1.5 | % | ||||||||||
|
Consumer
|
2,231 | 2,027 | 1,882 | 1,585 | 1,323 | |||||||||||||||
|
%
of these loans to all loans
|
17.2 | % | 18.7 | % | 19.4 | % | 18.9 | % | 18.3 | % | ||||||||||
|
Unallocated
|
6,722 | 5,622 | 6,140 | 6,205 | 5,207 | |||||||||||||||
|
Balance
at end of year
|
$ | 23,725 | $ | 20,277 | $ | 18,894 | $ | 17,918 | $ | 16,771 | ||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
As
more fully described in Note 1 to the Consolidated Financial Statements
under the heading “Allowance for Loan Losses”, the estimation of loan loss
exposure inherent in the loan portfolio includes, among other procedures, (1)
identification of loss allocations for certain specific loans, (2) loss
allocation factors for certain loan types based on credit grade and loss
experience, and (3) general loss allocations for other environmental factors,
which is classified as “unallocated”. We periodically reassess and
revise the loss allocation factors used in the assignment of loss exposure to
appropriately reflect our analysis of migrational loss
experience. Revisions to loss allocation factors are not
retroactively applied. In addition, the Interagency Policy Statement
on Allowance for Loan and Lease Losses, which was revised by banking regulators
in December 2006, also contributed to our reassessment of the loan loss
allocation methodology. The general loss allocation for other
environmental factors is maintained based on a judgmental process whereby
management considers qualitative and quantitative assessments of other factors
including regional credit concentration, industry concentration, results of
regulatory examinations, historical loss ranges, portfolio composition, economic
conditions such as interest rates and energy costs, weighted average length of
time since loan origination (which, based on our historical experience has been
an indicator of lower loss probability) and other changes in the
portfolio.
Investment
in Bank-Owned Life Insurance (“BOLI”)
BOLI
amounted to $43.2 million and $41.4 million at December 31, 2008
and 2007, respectively. BOLI provides a means to mitigate increasing
employee benefit costs. The Corporation expects to benefit from the
BOLI contracts as a result of the tax-free growth in cash surrender value and
death benefits that are expected to be generated over time. The
purchase of the life insurance policy results in an interest sensitive asset on
the Consolidated Balance Sheet that provides monthly tax-free income to the
Corporation. The largest risk to the BOLI program is credit risk of
the insurance carriers. To mitigate this risk, annual financial
condition reviews are completed on all carriers. BOLI is invested in
the “general account” of quality insurance companies. All such
general account carriers were rated “A+” or better by A.M. Best and “Aa” or
better by Moody’s at December 31, 2008. BOLI is included in the
Consolidated Balance Sheets at its cash surrender value. Increases in
BOLI’s cash surrender value are reported as a component of noninterest income in
the Consolidated Statements of Income.
Sources
of Funds
Our
principal sources of funding are deposits and borrowings. In general,
deposits are a lower cost source of funds than borrowings because interest rates
paid for deposits are typically less than interest rates charged for
borrowings.
-51-
Deposits
Washington
Trust offers a wide variety of deposit products to consumer and business
customers. Deposits provide an important source of funding for the
Bank as well as an ongoing stream of fee revenue.
Total
deposits amounted to $1.8 billion at December 31, 2008, up by
$144.7 million, or 8.8%, from the balance at December 31,
2007. Excluding out-of-market brokered certificates of deposit,
in-market deposits were up by $86.5 million, or 5.7%, in
2008. Deposit growth in 2008 was largely concentrated in in-market
time deposits. Deposit gathering continues to be extremely
competitive.
Demand
deposits amounted to $172.8 million at December 31, 2008, down by
$2.8 million, or 1.6%, from December 31, 2007.
NOW
account balances increased by $6.4 million, or 3.9%, in 2008 and totaled
$171.3 million at December 31, 2008.
Money
market account balances totaled $305.9 million at December 31, 2008,
down by $15.7 million, or 4.9%, from December 31, 2007.
During
2008, savings deposits declined $2.8 million, or 1.6%, and amounted to
$173.5 million at December 31, 2008.
Time
deposits (including brokered certificates of deposit) amounted to
$967.4 million, up by $159.6 million, or 19.8%, during
2008. Beginning in the third quarter of 2008, Washington Trust became
a member of the Certificate of Deposit Account Registry Service (“CDARS”)
network. Washington Trust uses CDARS to place customer funds into
certificates of deposit issued by other banks that are members of the CDARS
network. This occurs in increments less than FDIC insurance limits to
ensure that customers are eligible for full FDIC insurance. We
receive a reciprocal amount of deposits from other network members who do the
same with their customer deposits. CDARS deposits are considered to
be brokered deposits for banking regulatory purposes. We consider
these reciprocal CDARS deposit balances to be in-market deposits as
distinguished from traditional out-of-market brokered
deposits. Excluding out-of-market brokered certificates of deposit,
in-market time deposits grew by $86.5 million, or 5.7%, in
2008. Included in this amount are CDARS reciprocal time deposits of
$86.2 million at December 31, 2008. In addition, the
Corporation utilizes out-of-market brokered time deposits as part of its overall
funding program along with other sources. Out-of-market brokered time
deposits amounted to $188.0 million at December 31, 2008, up by
$58.2 million, or 44.8%, from December 31, 2007.
Borrowings
FHLB
Advances
The
Corporation utilizes advances from the FHLB as well as other borrowings as part
of its overall funding strategy. FHLB advances were used to meet
short-term liquidity needs, to purchase securities and to purchase loans from
other institutions. FHLB advances increased $213.2 million
during the year and amounted to $829.6 million at December 31,
2008. Included in the December 31, 2008 balance are
$18.0 million of callable advances with call dates ranging from January
2009 through March 2009.
Junior
Subordinated Debentures
Junior
subordinated debentures amounted to $33.0 million and $22.7 million at
December 31, 2008 and 2007, respectively.
In
April 2008, the Bancorp sponsored the creation of Washington Preferred, a
Delaware statutory trust created for the sole purpose of issuing trust preferred
securities and investing the proceeds in junior subordinated debentures of the
Bancorp. The Bancorp issued $10.3 million in junior subordinated
deferrable interest notes, which bear a rate equal to the three-month LIBOR rate
plus 3.50%, to Washington Preferred. See Note 11 to the
Consolidated Financial Statements for additional information on junior
subordinated debentures.
Other
Borrowings
Other
borrowings primarily consist of securities sold under repurchase agreements,
deferred acquisition obligations, and Treasury, Tax and Loan demand note
balance. Other borrowings amounted to $26.7 million at
December 31,
2008,
down $5.8 million from the balance at December 31, 2007 mainly due to
payments of deferred acquisition obligations.
The
Stock Purchase Agreement, as amended, for the 2005 acquisition of Weston
Financial provides for the payment of contingent purchase price amounts based on
operating results in each of the years in the three-year earn-out period ending
December 31, 2008. Contingent payments are added to goodwill and
recorded as deferred acquisition liabilities at the time the payments are
determinable beyond a reasonable doubt. Deferred acquisition
obligations amounted to $2.5 million at December 31, 2008 compared to
$9.9 million at December 31, 2007. In 2008 the Corporation
recognized a liability of $7.6 million, representing amounts earned under
the terms of the acquisition agreement. In the first quarter of 2008
the Corporation paid approximately $8.1 million, which represented the 2007
earn-out payment. Also in the fourth quarter of 2008, the Corporation
paid approximately $7.1 million, in settlement of a portion of the 2008
earn-out liability. The balance of the 2008 earn-out liability will
be paid in the first quarter of 2009.
See
Note 11 to the Consolidated Financial Statements for additional information
on borrowings.
Liquidity
and Capital Resources
Liquidity
is the ability of a financial institution to meet maturing liability obligations
and customer loan demand. Washington Trust’s primary source of
liquidity is deposits, which funded approximately 62% of total average assets in
2008. While the generally preferred funding strategy is to attract
and retain low cost deposits, the ability to do so is affected by competitive
interest rates and terms in the marketplace. Other sources of funding
include discretionary use of purchased liabilities (e.g., FHLB term advances and
other borrowings), cash flows from the Corporation’s securities portfolios and
loan repayments. Securities designated as available for sale may also
be sold in response to short-term or long-term liquidity needs although
management has no intention to do so at this time.
Washington
Trust has a detailed liquidity funding policy and a contingency funding plan
that provide for the prompt and comprehensive response to unexpected demands for
liquidity. Management employs stress testing methodology to estimate
needs for contingent funding that could result from unexpected outflows of funds
in excess of “business as usual” cash flows. In management’s
estimation, risks are concentrated in two major categories (1) runoff of
in-market deposit balances; and (2) unexpected drawdown of loan
commitments. Of the two categories, potential runoff of deposit
balances would have the most significant impact on contingent
liquidity. Our stress test scenarios, therefore, emphasize attempts
to quantify deposits at risk over selected time horizons. In addition
to these unexpected outflow risks, several other “business as usual” factors
enter into the calculation of the adequacy of contingent liquidity including (1)
payment proceeds from loans and investment securities; (2) maturing debt
obligations; and (3) maturing time deposits. Washington Trust has
established collateralized borrowing capacity with the Federal Reserve Bank of
Boston and also maintains additional collateralized borrowing capacity with the
FHLB in excess of levels used in the ordinary course of business.
The
ALCO establishes and monitors internal liquidity measures to manage liquidity
exposure. Liquidity remained well within target ranges established by
the ALCO during 2008. Based on its assessment of the liquidity
considerations described above, management believes the Corporation’s sources of
funding will meet anticipated funding needs.
For
2008, net cash provided by financing activities amounted to $406.8 million
due primarily to net increases in FHLB advances and deposits. In
addition, Washington Trust issued $10.0 million in junior subordinated
debentures in 2008. Net cash used in investing activities totaled
$418.8 million in 2008 and was used primarily to fund loan growth and to
purchase securities and loans. Also, the Corporation paid
$15.2 million in deferred acquisition obligations and received
$18.0 million in proceeds on the sale of certain residential mortgage loans
from it portfolio in 2008. Net cash provided by operating activities
amounted to $29.1 million in 2008, $22.2 million of which was
generated by net income. See the Consolidated Statements of Cash
Flows for further information about sources and uses of cash.
Total
shareholders’ equity amounted to $235.1 million at December 31, 2008,
compared to $186.5 million at December 31, 2007. In October
2008, Washington Trust issued $50.0 million of is Common Stock in a private
placement with select institutional investors. Net proceeds were
$46.9 million after deducting offering-related fees and
expenses. On October 20, 2008, the Corporation filed a
registration statement with the SEC to register these
shares
for resale. Washington Trust will use the net proceeds for general
corporate purposes and to support strategic growth initiatives in its commercial
and wealth management business.
At
December 31, 2008, a $7.6 million charge to the accumulated other
comprehensive loss component of shareholder’s equity was
recorded. This charge represented the periodic recognition of the
change in value of qualified pension plan assets in comparison to the change in
pension liabilities. This 2008 charge reflected declines in the value
of marketable security pension assets. The Corporation expects to
contribute $2.0 million to the qualified pension plan in
2009. In addition, the Corporation expects to contribute
$435 thousand in benefit payments to the non-qualified retirement plans in
2009. The decline in the value of plan assets may cause the
Corporation to make higher levels of contributions in future
years. See Note 15 to the Consolidated Financial Statements for
disclosure on pension liabilities.
The
Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to
400,000 shares. No shares were repurchased in 2008. As of
December 31, 2008, a cumulative total of 185,400 shares have been
repurchased under this plan at a total cost of $4.8 million.
The
ratio of total equity to total assets amounted to 7.9% at December 31,
2008, compared to 7.3% at December 31, 2007. Book value per
share at December 31, 2008 amounted to $14.75, a 5.6% increase from the
year-earlier amount of $13.97 per share. Tangible book value
increased from $9.33 per share at the end of 2007 to $10.47 per share at
December 31, 2008.
The
Bancorp and the Bank are subject to various regulatory capital
requirements. The Bancorp and the Bank are categorized as
“well-capitalized” under the regulatory framework for prompt corrective
action. See Note 12 to the Consolidated Financial Statements for
additional discussion of capital requirements.
While
the Corporation believes its current and anticipated capital levels are adequate
to support its business plan, the capital and credit markets have been
experiencing volatility and disruption for more than 12 months, recently
reaching unprecedented levels. In some cases, the markets have
produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers’ underlying financial
strength. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience an
adverse effect, which may be material, on our ability to access capital and on
our business, financial condition and results of operations.
Contractual
Obligations and Commitments
The
Corporation has entered into numerous contractual obligations and
commitments. The following table summarizes our contractual cash
obligations and other commitments at December 31, 2008.
|
(Dollars
in thousands)
|
Payments
Due by Period
|
|||||||||||||||||||
|
Total
|
Less
Than
1
Year (1)
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||||||||
|
FHLB
advances (2)
|
$ | 829,626 | $ | 286,232 | $ | 240,197 | $ | 195,844 | $ | 107,353 | ||||||||||
|
Junior
subordinated debentures
|
32,991 | – | – | – | 32,991 | |||||||||||||||
|
Operating
lease obligations
|
4,974 | 1,247 | 1,970 | 705 | 1,052 | |||||||||||||||
|
Software
licensing arrangements
|
2,037 | 1,104 | 933 | – | – | |||||||||||||||
|
Treasury,
tax and loan demand note
|
4,382 | 4,382 | – | – | – | |||||||||||||||
|
Deferred
acquisition obligations
|
2,506 | 2,506 | – | – | – | |||||||||||||||
|
Other
borrowings
|
19,855 | 30 | 68 | 19,579 | 178 | |||||||||||||||
|
Total
contractual obligations
|
$ | 896,371 | $ | 296,501 | $ | 243,168 | $ | 216,128 | $ | 141,574 | ||||||||||
|
(1)
|
Maturities
or contractual obligations are considered by management in the
administration of liquidity and are routinely refinanced in the ordinary
course of business.
|
|
(2)
|
All
FHLB advances are shown in the period corresponding to their scheduled
maturity. Some FHLB advances are callable at earlier
dates. See Note 11 to the Consolidated Financial
Statements for additional
information.
|
|
(Dollars
in thousands)
|
Amount
of Commitment Expiration – Per Period
|
|||||||||||||||||||
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||||||
|
Other
Commitments:
|
||||||||||||||||||||
|
Commercial
loans
|
$ | 206,515 | $ | 144,051 | $ | 48,486 | $ | 2,839 | $ | 11,139 | ||||||||||
|
Home
equity lines
|
178,371 | 1,804 | 6,397 | – | 170,170 | |||||||||||||||
|
Other
loans
|
22,979 | 22,075 | 840 | 64 | – | |||||||||||||||
|
Standby
letters of credit
|
7,679 | 940 | 100 | 6,639 | – | |||||||||||||||
|
Forward
loan commitments to:
|
||||||||||||||||||||
|
Originate
loans
|
25,662 | 25,662 | – | – | – | |||||||||||||||
|
Sell
loans
|
28,192 | 28,192 | – | – | – | |||||||||||||||
|
Customer
related derivative contracts:
|
||||||||||||||||||||
|
Interest
rate swaps with customers
|
13,981 | – | – | 10,178 | 3,803 | |||||||||||||||
|
Mirror
swaps with counterparties
|
13,981 | – | – | 10,178 | 3,803 | |||||||||||||||
|
Interest
rate risk management contract:
|
||||||||||||||||||||
|
Interest
rate swap
|
10,000 | – | – | 10,000 | – | |||||||||||||||
|
Total
commitments
|
$ | 507,360 | $ | 222,724 | $ | 55,823 | $ | 39,898 | $ | 188,915 | ||||||||||
Off-Balance
Sheet Arrangements
In
the normal course of business, Washington Trust engages in a variety of
financial transactions that, in accordance with GAAP, are not recorded in the
financial statements, or are recorded in amounts that differ from the notional
amounts. Such transactions are used to meet the financing needs of
its customers and to manage the exposure to fluctuations in interest
rates. These financial transactions include commitments to extend
credit, standby letters of credit, financial guarantees, interest rate swaps and
floors, and commitments to originate and commitments to sell fixed rate mortgage
loans. These transactions involve, to varying degrees, elements of
credit, interest rate and liquidity risk. The Corporation uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
Net
unrealized losses on interest rate swap contracts amounted to $542 thousand
in 2008. This amount included $638 thousand of unrealized losses
attributable to an interest rate swap contract executed in April 2008 with
Lehman Brothers Special Financing, Inc. to hedge the interest rate risk
associated with variable rate junior subordinated debentures. Under
the terms of this swap, Washington Trust agreed to pay a fixed rate and receive
a variable rate based on LIBOR. At inception, this hedging
transaction was deemed to be highly effective and, therefore, valuation changes
for this derivative were recognized in the accumulated other comprehensive
income component of shareholders’ equity. In September 2008, Lehman
Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for
bankruptcy protection, followed in October 2008 by the swap counterparty
itself. Due to the change in the creditworthiness of the derivative
counterparty, the hedging relationship was deemed to be not highly effective,
with the result that subsequent changes in the derivative valuation are
recognized in earnings. The valuation decline in the fourth quarter
of 2008 was attributable to a decline in the swap yield curve during the
quarter, which reduced market fixed rates for terms similar to this swap
contract. The bankruptcy filings by the Lehman entities constituted
events of default under the interest rate swap contract, entitling Washington
Trust to immediately suspend performance and to terminate the
transaction. Washington Trust continues to monitor its rights and
obligations under the interest rate swap transaction in the context of the
Lehman bankruptcy proceedings and may seek to terminate or replace the
transaction, or have it assigned to a third-party creditworthy
counterparty. Unrealized gains on other interest rate swap
transactions not affected by this matter amounted to $96 thousand in 2008
and $27 thousand in 2007
For
additional information on financial instruments with off-balance sheet risk and
derivative financial instruments see Note 13 to the Consolidated Financial
Statements.
Recently
Issued Accounting Pronouncements
See
Note 2 to the Consolidated Financial Statements for details of recently
issued accounting pronouncements and their expected impact on the Corporation’s
financial statements.
Asset/Liability
Management and Interest Rate Risk
Interest
rate risk is the primary market risk category associated with the Corporation’s
operations. The ALCO is responsible for establishing policy
guidelines on liquidity and acceptable exposure to interest rate
risk. Interest rate risk is the risk of loss to future earnings due
to changes in interest rates. The objective of the ALCO is to manage
assets and funding sources to produce results that are consistent with
Washington Trust’s liquidity, capital adequacy, growth, risk and profitability
goals.
The
ALCO manages the Corporation’s interest rate risk using income simulation to
measure interest rate risk inherent in the Corporation’s on-balance sheet and
off-balance sheet financial instruments at a given point in time by showing the
effect of interest rate shifts on net interest income over a 12-month horizon,
the month 13 to month 24 horizon and a 60-month horizon. The
simulations assume that the size and general composition of the Corporation’s
balance sheet remain static over the simulation horizons, with the exception of
certain deposit mix shifts from low-cost core savings to higher-cost time
deposits in selected interest rate scenarios. Additionally, the
simulations take into account the specific repricing, maturity, call options,
and prepayment characteristics of differing financial instruments that may vary
under different interest rate scenarios. The characteristics of
financial instrument classes are reviewed periodically by the ALCO to ensure
their accuracy and consistency.
The
ALCO reviews simulation results to determine whether the Corporation’s exposure
to a decline in net interest income remains within established tolerance levels
over the simulation horizons and to develop appropriate strategies to manage
this exposure. As of December 31, 2008 and December 31,
2007, net interest income simulations indicated that exposure to changing
interest rates over the simulation horizons remained within tolerance levels
established by the Corporation. The Corporation defines maximum
unfavorable net interest income exposure to be a change of no more than 5% in
net interest income over the first 12 months, no more than 10% over the second
12 months, and no more than 10% over the full 60-month simulation
horizon. All changes are measured in comparison to the projected net
interest income that would result from an “unchanged” rate scenario where both
interest rates and the composition of the Corporation’s balance sheet remain
stable for a 60-month period. In addition to measuring the change in
net interest income as compared to an unchanged interest rate scenario, the ALCO
also measures the trend of both net interest income and net interest margin over
a 60-month horizon to ensure the stability and adequacy of this source of
earnings in different interest rate scenarios.
The
ALCO reviews a variety of interest rate shift scenario results to evaluate
interest risk exposure, including scenarios showing the effect of steepening or
flattening changes in the yield curve shape as well as parallel changes in
interest rates. Because income simulations assume that the
Corporation’s balance sheet will remain static over the simulation horizon, the
results do not reflect adjustments in strategy that the ALCO could implement in
response to rate shifts.
The
following table sets forth the estimated change in net interest income from an
unchanged interest rate scenario over the periods indicated for parallel changes
in market interest rates using the Corporation’s on and off-balance sheet
financial instruments as of December 31, 2008 and 2007. Interest
rates are assumed to shift by a parallel 100 or 200 basis points upward or 100
basis points downward over the periods indicated, except for core savings
deposits, which are assumed to shift by lesser amounts due to their relative
historical insensitivity to market interest rate movements. Further,
deposits are assumed to have certain minimum rate levels below which they will
not fall. It should be noted that the rate scenarios shown do not
necessarily reflect the ALCO’s view of the “most likely” change in interest
rates over the periods indicated.
|
December
31,
|
2008
|
2007
|
||||||||||||||
|
Months
|
Months
|
Months
|
Months
|
|||||||||||||
|
1
- 12
|
13
- 24
|
1
- 12
|
13
- 24
|
|||||||||||||
|
100
basis point rate decrease
|
-1.13 | % | 0.30 | % | -1.77 | % | -2.24 | % | ||||||||
|
100
basis point rate increase
|
0.61 | % | -1.09 | % | -1.41 | % | -3.62 | % | ||||||||
|
200
basis point rate increase
|
1.98 | % | -1.09 | % | -1.13 | % | -6.11 | % | ||||||||
The
ALCO estimates that the moderately negative exposure of net interest income to
falling rates as compared to an unchanged rate scenario results from a more
rapid decline in earning asset yields compared to rates paid on
deposits. If rates were to fall and remain low for a sustained
period, certain core savings and time deposit rates could decline more slowly
and by a lesser amount than other market rates. Asset yields would
likely decline more rapidly than
deposit
costs as current asset holdings mature or reprice, since cash flow from
mortgage-related prepayments and redemption of callable securities would
increase as market rates fall.
The
moderately positive exposure of net interest income to rising rates in Year 1 as
compared to an unchanged rate scenario results from a more rapid projected
relative rate of increase in asset yields than funding costs over the first 12
months of the simulation horizon. For simulation purposes, deposit
rate changes are anticipated to lag other market rates in both timing and
magnitude. The ALCO’s estimate of interest rate risk exposure to
rising rate environments, including those involving changes to the shape of the
yield curve, incorporates certain assumptions regarding a shift in deposit
balances from low-cost core savings categories to higher-cost deposit
categories, which has characterized a shift in funding mix during past rising
interest rate cycles.
The
slightly negative exposure of net interest income to rising rates in Year 2 as
compared to an unchanged rate scenario is primarily attributable to a projected
increase in deposit funding costs and projected shifts in retail deposit
mix. Relatively rate-sensitive money market and time deposits form a
larger percentage of total deposits than other lower-cost deposit categories,
such as low-rate savings accounts and transactional deposits. The
ALCO modeling process assumes that a portion of lower-cost core deposit balances
would shift into higher cost deposit categories if interest rates were to
increase, which reflects historical trends in past rising rate
cycles. Although asset yields would also increase in a rising
interest rate environment, the cumulative impact of funding cost increases for
rate-sensitive higher cost deposit categories suggests that by Year 2 of rising
interest rate scenarios, the growth in the Corporation’s cost of funds could
reduce the rate of improvement in net interest margin compared to Year 1 of the
parallel rising rate scenarios presented above.
While
the ALCO reviews simulation assumptions and back-tests simulation results to
ensure that they are reasonable and current, income simulation may not always
prove to be an accurate indicator of interest rate risk or future net interest
margin. Over time, the repricing, maturity and prepayment
characteristics of financial instruments and the composition of the
Corporation’s balance sheet may change to a different degree than
estimated. Simulation modeling assumes a static balance sheet, with
the exception of certain modeled deposit mix shifts from low-cost core savings
deposits to higher-cost money market and time deposits in rising rate scenarios
as noted above. The static balance sheet assumption does not
necessarily reflect the Corporation’s expectation for future balance sheet
growth, which is a function of the business environment and customer
behavior. Another significant simulation assumption is the
sensitivity of core savings deposits to fluctuations in interest
rates. Income simulation results assume that changes in both core
savings deposit rates and balances are related to changes in short-term interest
rates. The assumed relationship between short-term interest rate
changes and core deposit rate and balance changes used in income simulation may
differ from the ALCO’s estimates. Lastly, mortgage-backed securities
and mortgage loans involve a level of risk that unforeseen changes in prepayment
speeds may cause related cash flows to vary significantly in differing rate
environments. Such changes could affect the level of reinvestment
risk associated with cash flow from these instruments, as well as their market
value. Changes in prepayment speeds could also increase or decrease
the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income.
The
Corporation also monitors the potential change in market value of its available
for sale debt securities in changing interest rate environments. The
purpose is to determine market value exposure that may not be captured by income
simulation, but which might result in changes to the Corporation’s capital
position. Results are calculated using industry-standard analytical
techniques and securities data. Available for sale equity securities
are excluded from this analysis because the market value of such securities
cannot be directly correlated with changes in interest rates. The
following table summarizes the potential change in market value of the
Corporation’s available for sale debt securities as of December 31, 2008
and 2007 resulting from immediate parallel rate shifts:
|
(Dollars
in thousands)
|
Down
100
|
Up
200
|
||||||
|
Basis
|
Basis
|
|||||||
|
Security
Type
|
Points
|
Points
|
||||||
|
U.S.
Treasury and U.S. government-sponsored enterprise securities
(noncallable)
|
$ | 1,965 | $ | (3,646 | ) | |||
|
U.S.
government-sponsored enterprise securities (callable)
|
3 | (6 | ) | |||||
|
States
and political subdivisions
|
5,579 | (11,829 | ) | |||||
|
Mortgage-backed
securities issued by U.S. government sponsored agencies
|
||||||||
|
and
U.S. government sponsored enterprises
|
6,792 | (33,282 | ) | |||||
|
Trust
preferred debt and other corporate securities
|
285 | 749 | ||||||
|
Total
change in market value as of December 31, 2008
|
$ | 14,624 | $ | (48,014 | ) | |||
|
Total
change in market value as of December 31, 2007
|
$ | 15,459 | $ | (46,812 | ) | |||
See
Note 13 to the Consolidated Financial Statements for more information
regarding the nature and business purpose of financial instruments with
off-balance sheet risk and derivative financial instruments.
Information
regarding quantitative and qualitative disclosures about market risk appears
under Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” under the caption “Asset/Liability Management and
Interest Rate Risk”.
ITEM
8. Financial Statements and Supplementary Data
The
financial statements and supplementary data are contained herein.
|
Description
|
Page
|
|
Management’s
Annual Report on Internal Control Over Financial Reporting
|
59
|
|
Reports
of Independent Registered Public Accounting Firm
|
60
|
|
Consolidated
Balance Sheets December 31, 2008 and 2007
|
62
|
|
Consolidated
Statements of Income For the Years Ended December 31, 2008, 2007 and
2006
|
63
|
|
Consolidated
Statements of Changes in Shareholders’ Equity For the Years Ended December
31, 2008, 2007 and 2006
|
64
|
|
Consolidated
Statements of Cash Flows For the Years Ended December 31, 2008, 2007 and
2006
|
66
|
|
Notes
to Consolidated Financial Statements
|
68
|
Management’s
Annual Report on Internal Control Over Financial Reporting
The
management of Washington Trust Bancorp, Inc. and subsidiaries (the
“Corporation”) is responsible for establishing and maintaining adequate internal
control over financial reporting for the Corporation. The Corporation’s internal
control system was designed to provide reasonable assurance to management and
the Board of Directors regarding the preparation and fair presentation of
published financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The
Corporation’s management assessed the effectiveness of the Corporation’s
internal control over financial reporting as of December 31,
2008. In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated
Framework. Based on our assessment, we believe that, as of
December 31, 2008, the Corporation’s internal control over financial
reporting is effective based on those criteria.
The
Corporation’s independent registered public accounting firm has issued an
attestation report on the effectiveness of the Corporation’s internal control
over financial reporting. This report appears on the following page
of this Annual Report on Form 10-K.
|
/s/ John C. Warren
|
/s/ David V. Devault
|
|
John
C. Warren
Chairman
and
Chief
Executive Officer
|
David
V. Devault
Executive
Vice President, Chief Financial Officer
and
Secretary
|
Report
of Independent Registered Public Accounting Firm
[Graphic
Omitted]
The
Board of Directors and Shareholders
Washington
Trust Bancorp, Inc:
We
have audited Washington Trust Bancorp, Inc. and Subsidiaries’ (the
“Corporation’s”) internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Corporation’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our opinion, the Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Corporation as of December 31, 2008 and 2007, 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, 2008, and our report
dated February 27, 2009 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG
LLP
Providence,
Rhode Island
February
27, 2009
Report
of Independent Registered Public Accounting Firm
[Graphic
Omitted]
The
Board of Directors and Shareholders
Washington
Trust Bancorp, Inc.:
We
have audited the accompanying consolidated balance sheets of Washington Trust
Bancorp, Inc. and Subsidiaries (the “Corporation”) as of December 31, 2008
and 2007, 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, 2008. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Corporation’s internal control
over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 27,
2009 expressed an unqualified opinion on the effectiveness of the Corporation’s
internal control over financial reporting.
/s/
KPMG LLP
Providence,
Rhode Island
February 27,
2009
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
||
|
|
||
|
December
31,
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Cash
and noninterest-bearing balances due from banks
|
$ | 11,644 | $ | 30,817 | ||||
|
Interest-bearing
balances due from banks
|
41,780 | 1,973 | ||||||
|
Federal
funds sold and securities purchased under resale
agreements
|
2,942 | 7,600 | ||||||
|
Other
short-term investments
|
1,824 | 722 | ||||||
|
Mortgage
loans held for sale
|
2,543 | 1,981 | ||||||
|
Securities
available for sale, at fair value;
|
||||||||
|
amortized
cost $869,433 in 2008 and $750,583 in 2007
|
866,219 | 751,778 | ||||||
|
Federal
Home Loan Bank stock, at cost
|
42,008 | 31,725 | ||||||
|
Loans:
|
||||||||
|
Commercial
and other
|
880,313 | 680,266 | ||||||
|
Residential
real estate
|
642,052 | 599,671 | ||||||
|
Consumer
|
316,789 | 293,715 | ||||||
|
Total
loans
|
1,839,154 | 1,573,652 | ||||||
|
Less
allowance for loan losses
|
23,725 | 20,277 | ||||||
|
Net
loans
|
1,815,429 | 1,553,375 | ||||||
|
Premises
and equipment, net
|
25,102 | 25,420 | ||||||
|
Accrued
interest receivable
|
11,036 | 11,427 | ||||||
|
Investment
in bank-owned life insurance
|
43,163 | 41,363 | ||||||
|
Goodwill
|
58,114 | 50,479 | ||||||
|
Identifiable
intangible assets, net
|
10,152 | 11,433 | ||||||
|
Other
assets
|
33,510 | 19,847 | ||||||
|
Total
assets
|
$ | 2,965,466 | $ | 2,539,940 | ||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Demand
deposits
|
$ | 172,771 | $ | 175,542 | ||||
|
NOW
accounts
|
171,306 | 164,944 | ||||||
|
Money
market accounts
|
305,879 | 321,600 | ||||||
|
Savings
accounts
|
173,485 | 176,278 | ||||||
|
Time
deposits
|
967,427 | 807,841 | ||||||
|
Total
deposits
|
1,790,868 | 1,646,205 | ||||||
|
Dividends
payable
|
3,351 | 2,677 | ||||||
|
Federal
Home Loan Bank advances
|
829,626 | 616,417 | ||||||
|
Junior
subordinated debentures
|
32,991 | 22,681 | ||||||
|
Other
borrowings
|
26,743 | 32,560 | ||||||
|
Accrued
expenses and other liabilities
|
46,776 | 32,887 | ||||||
|
Total
liabilities
|
2,730,355 | 2,353,427 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
stock of $.0625 par value; authorized 30,000,000 shares;
|
||||||||
|
issued
16,018,868 shares in 2008 and 13,492,110 shares in 2007
|
1,001 | 843 | ||||||
|
Paid-in
capital
|
82,095 | 34,874 | ||||||
|
Retained
earnings
|
164,679 | 154,647 | ||||||
|
Accumulated
other comprehensive loss
|
(10,458 | ) | (239 | ) | ||||
|
Treasury
stock, at cost; 84,191 shares in 2008 and 137,652 shares in
2007
|
(2,206 | ) | (3,612 | ) | ||||
|
Total
shareholders’ equity
|
235,111 | 186,513 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,965,466 | $ | 2,539,940 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
and shares in thousands,
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
except
per share amounts)
|
|
|
|
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income:
|
|||||||||||||
|
Interest
and fees on loans
|
$ | 100,939 | $ | 98,720 | $ | 92,190 | |||||||
|
Interest
on securities:
|
|||||||||||||
|
Taxable
|
34,382 | 31,163 | 33,763 | ||||||||||
|
Nontaxable
|
3,125 | 2,983 | 1,618 | ||||||||||
|
Dividends
on corporate stock and Federal Home Loan Bank stock
|
1,882 | 2,737 | 2,842 | ||||||||||
|
Other
interest income
|
334 | 831 | 721 | ||||||||||
|
Total
interest income
|
140,662 | 136,434 | 131,134 | ||||||||||
|
Interest
expense:
|
|||||||||||||
|
Deposits
|
41,195 | 52,422 | 46,982 | ||||||||||
|
Federal
Home Loan Bank advances
|
30,894 | 21,641 | 20,916 | ||||||||||
|
Junior
subordinated debentures
|
1,879 | 1,352 | 1,352 | ||||||||||
|
Other
interest expense
|
1,181 | 1,075 | 410 | ||||||||||
|
Total
interest expense
|
75,149 | 76,490 | 69,660 | ||||||||||
|
Net
interest income
|
65,513 | 59,944 | 61,474 | ||||||||||
|
Provision
for loan losses
|
4,800 | 1,900 | 1,200 | ||||||||||
|
Net
interest income after provision for loan losses
|
60,713 | 58,044 | 60,274 | ||||||||||
|
Noninterest
income:
|
|||||||||||||
|
Wealth
management services:
|
|||||||||||||
|
Trust
and investment advisory fees
|
20,316 | 21,124 | 19,099 | ||||||||||
|
Mutual
fund fees
|
5,205 | 5,430 | 4,665 | ||||||||||
|
Financial
planning, commissions and other service fees
|
2,752 | 2,462 | 2,616 | ||||||||||
|
Wealth
management services
|
28,273 | 29,016 | 26,380 | ||||||||||
|
Service
charges on deposit accounts
|
4,781 | 4,713 | 4,915 | ||||||||||
|
Merchant
processing fees
|
6,900 | 6,710 | 6,208 | ||||||||||
|
Income
from bank-owned life insurance
|
1,800 | 1,593 | 1,410 | ||||||||||
|
Net
gains on loan sales and commissions on loans originated for
others
|
1,396 | 1,493 | 1,423 | ||||||||||
|
Net
realized gains on securities
|
2,224 | 455 | 443 | ||||||||||
|
Losses
on write-downs of investments to fair value
|
(5,937 | ) | – | – | |||||||||
|
Net
unrealized gains (losses) on interest rate swaps
|
(542 | ) | 27 | – | |||||||||
|
Other
income
|
1,625 | 1,502 | 1,404 | ||||||||||
|
Total
noninterest income
|
40,520 | 45,509 | 42,183 | ||||||||||
|
Noninterest
expense:
|
|||||||||||||
|
Salaries
and employee benefits
|
41,037 | 39,986 | 38,698 | ||||||||||
|
Net
occupancy
|
4,536 | 4,150 | 3,888 | ||||||||||
|
Equipment
|
3,838 | 3,473 | 3,370 | ||||||||||
|
Merchant
processing costs
|
5,769 | 5,686 | 5,257 | ||||||||||
|
Outsourced
services
|
2,859 | 2,180 | 2,009 | ||||||||||
|
Advertising
and promotion
|
1,729 | 2,024 | 1,894 | ||||||||||
|
Legal,
audit and professional fees
|
2,325 | 1,761 | 1,637 | ||||||||||
|
Amortization
of intangibles
|
1,281 | 1,383 | 1,593 | ||||||||||
|
Debt
prepayment penalties
|
– | 1,067 | – | ||||||||||
|
Other
expenses
|
8,368 | 7,196 | 6,989 | ||||||||||
|
Total
noninterest expense
|
71,742 | 68,906 | 65,335 | ||||||||||
|
Income
before income taxes
|
29,491 | 34,647 | 37,122 | ||||||||||
|
Income
tax expense
|
7,319 | 10,847 | 12,091 | ||||||||||
|
Net
income
|
$ | 22,172 | $ | 23,800 | $ | 25,031 | |||||||
|
Weighted
average shares outstanding - basic
|
13,981.9 | 13,355.5 | 13,424.1 | ||||||||||
|
Weighted
average shares outstanding - diluted
|
14,146.3 | 13,604.1 | 13,723.2 | ||||||||||
|
Per
share information:
|
Basic
earnings per share
|
$ | 1.59 | $ | 1.78 | $ | 1.86 | ||||||
|
Diluted
earnings per share
|
$ | 1.57 | $ | 1.75 | $ | 1.82 | |||||||
|
Cash
dividends declared per share
|
$ | 0.83 | $ | 0.80 | $ | 0.76 | |||||||
The accompanying notes are an integral part of these consolidated
financial statements.
-63-
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
and shares in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Common
|
Other
|
|||||||||||||||||||||||||||
|
Shares
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|||||||||||||||||||||||
|
(Dollars
and shares in thousands)
|
Outstanding
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance
at January 1, 2006
|
13,362 | $ | 836 | $ | 32,778 | $ | 126,735 | $ | (1,653 | ) | $ | (250 | ) | $ | 158,446 | |||||||||||||
|
Net
income for 2006
|
25,031 | 25,031 | ||||||||||||||||||||||||||
|
Unrealized
gains on securities, net
|
||||||||||||||||||||||||||||
|
of
$843 income tax expense
|
1,432 | 1,432 | ||||||||||||||||||||||||||
|
Reclassification
adjustments for net
|
||||||||||||||||||||||||||||
|
realized
gains included in net income,
|
||||||||||||||||||||||||||||
|
net
of $322 income tax expense
|
(121 | ) | (121 | ) | ||||||||||||||||||||||||
|
Minimum
pension liability adjustment,
|
||||||||||||||||||||||||||||
|
net
of $33 income tax expense
|
61 | 61 | ||||||||||||||||||||||||||
|
Comprehensive
income
|
26,403 | |||||||||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158,
|
||||||||||||||||||||||||||||
|
net
of $1,741 income tax benefit
|
(3,234 | ) | (3,234 | ) | ||||||||||||||||||||||||
|
Cash
dividends declared
|
(10,218 | ) | (10,218 | ) | ||||||||||||||||||||||||
|
Share-based
compensation
|
694 | 694 | ||||||||||||||||||||||||||
|
Deferred
compensation plan
|
(5 | ) | 7 | (144 | ) | (137 | ) | |||||||||||||||||||||
|
Exercise
of stock options and related tax benefit
|
77 | 5 | 1,200 | 91 | 1,296 | |||||||||||||||||||||||
|
Shares
issued – dividend reinvestment plan
|
46 | 2 | 1,214 | 1,216 | ||||||||||||||||||||||||
|
Shares
repurchased
|
(50 | ) | (1,410 | ) | (1,410 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2006
|
13,430 | $ | 843 | $ | 35,893 | $ | 141,548 | $ | (3,515 | ) | $ | (1,713 | ) | $ | 173,056 | |||||||||||||
|
Net
income for 2007
|
23,800 | 23,800 | ||||||||||||||||||||||||||
|
Unrealized
gains on securities, net
|
||||||||||||||||||||||||||||
|
of
$427 income tax expense
|
793 | 793 | ||||||||||||||||||||||||||
|
Reclassification
adjustments for net
|
||||||||||||||||||||||||||||
|
realized
gains included in net income,
|
||||||||||||||||||||||||||||
|
net
of $190 income tax expense
|
(265 | ) | (265 | ) | ||||||||||||||||||||||||
|
Defined
benefit plan obligation adjustment,
|
||||||||||||||||||||||||||||
|
net
of $1,330 income tax expense
|
2,469 | 2,469 | ||||||||||||||||||||||||||
|
Reclassification
adjustments for net periodic
|
||||||||||||||||||||||||||||
|
pension
cost, net of $149 income tax expense
|
279 | 279 | ||||||||||||||||||||||||||
|
Comprehensive
income
|
27,076 | |||||||||||||||||||||||||||
|
Cash
dividends declared
|
(10,701 | ) | (10,701 | ) | ||||||||||||||||||||||||
|
Share-based
compensation
|
508 | 508 | ||||||||||||||||||||||||||
|
Deferred
compensation plan
|
(14 | ) | (4 | ) | (354 | ) | (358 | ) | ||||||||||||||||||||
|
Exercise
of stock options, issuance of other
|
||||||||||||||||||||||||||||
|
other
compensation-related equity instruments
|
||||||||||||||||||||||||||||
|
and
related tax benefit
|
123 | (1,523 | ) | 3,302 | 1,779 | |||||||||||||||||||||||
|
Shares
repurchased
|
(185 | ) | (4,847 | ) | (4,847 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2007
|
13,354 | $ | 843 | $ | 34,874 | $ | 154,647 | $ | (239 | ) | $ | (3,612 | ) | $ | 186,513 | |||||||||||||
The accompanying notes are an integral part of these consolidated
financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
and shares in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
|
||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Common
|
Other
|
|||||||||||||||||||||||||||
|
Shares
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|||||||||||||||||||||||
|
(Dollars
and shares in thousands)
|
Outstanding
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance
at January 1, 2008
|
13,354 | $ | 843 | $ | 34,874 | $ | 154,647 | $ | (239 | ) | $ | (3,612 | ) | $ | 186,513 | |||||||||||||
|
Net
income for 2008
|
22,172 | 22,172 | ||||||||||||||||||||||||||
|
Unrealized
losses on securities, net
|
||||||||||||||||||||||||||||
|
of
$2,899 income tax benefit
|
(5,222 | ) | (5,222 | ) | ||||||||||||||||||||||||
|
Reclassification
adjustments for net
|
||||||||||||||||||||||||||||
|
realized
losses included in net income,
|
||||||||||||||||||||||||||||
|
net
of $1,335 income tax benefit
|
2,377 | 2,377 | ||||||||||||||||||||||||||
|
Defined
benefit plan obligation adjustment,
|
||||||||||||||||||||||||||||
|
net
of $4,230 income tax benefit
|
(7,615 | ) | (7,615 | ) | ||||||||||||||||||||||||
|
Reclassification
adjustments for net periodic
|
||||||||||||||||||||||||||||
|
pension
cost, net of $91 income tax expense
|
169 | 169 | ||||||||||||||||||||||||||
|
Unrealized
gains on cash flow hedges, net
|
||||||||||||||||||||||||||||
|
of
$2 income tax expense
|
4 | 4 | ||||||||||||||||||||||||||
|
Reclassification
adjustments for net realized
|
||||||||||||||||||||||||||||
|
gains
on cash flow hedges included in net
|
||||||||||||||||||||||||||||
|
income,
net of $14 income tax expense
|
26 | 26 | ||||||||||||||||||||||||||
|
Comprehensive
income
|
11,911 | |||||||||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158,
|
||||||||||||||||||||||||||||
|
net
of $229 income tax benefit
|
(468 | ) | 42 | (426 | ) | |||||||||||||||||||||||
|
Cash
dividends declared
|
(11,672 | ) | (11,672 | ) | ||||||||||||||||||||||||
|
Share-based
compensation
|
630 | 630 | ||||||||||||||||||||||||||
|
Deferred
compensation plan
|
2 | (7 | ) | 43 | 36 | |||||||||||||||||||||||
|
Exercise
of stock options, issuance of other
|
||||||||||||||||||||||||||||
|
other
compensation-related equity instruments
|
||||||||||||||||||||||||||||
|
and
related tax benefit
|
41 | (687 | ) | 1,068 | 381 | |||||||||||||||||||||||
|
Shares
issued
|
2,500 | 156 | 46,718 | 46,874 | ||||||||||||||||||||||||
|
Shares
issued – dividend reinvestment plan
|
38 | 2 | 567 | 295 | 864 | |||||||||||||||||||||||
|
Balance
at December 31, 2008
|
15,935 | $ | 1,001 | $ | 82,095 | $ | 164,679 | $ | (10,458 | ) | $ | (2,206 | ) | $ | 235,111 | |||||||||||||
The accompanying notes are an integral part of these consolidated
financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
|||||||||||||
|
Net
income
|
$ | 22,172 | $ | 23,800 | $ | 25,031 | |||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||||
|
Provision
for loan losses
|
4,800 | 1,900 | 1,200 | ||||||||||
|
Depreciation
of premises and equipment
|
3,043 | 2,951 | 2,995 | ||||||||||
|
Net
amortization of premium and discount
|
691 | 631 | 1,252 | ||||||||||
|
Net
amortization of intangibles
|
1,281 | 1,383 | 1,593 | ||||||||||
|
Non–cash
charitable contribution
|
397 | 520 | 513 | ||||||||||
|
Share–based
compensation
|
630 | 508 | 694 | ||||||||||
|
Deferred
income tax benefit
|
(5,308 | ) | (2,311 | ) | (1,969 | ) | |||||||
|
Earnings
from bank-owned life insurance
|
(1,800 | ) | (1,593 | ) | (1,410 | ) | |||||||
|
Net
gains on loan sales
|
(1,396 | ) | (1,493 | ) | (1,423 | ) | |||||||
|
Net
realized gains on securities
|
(2,224 | ) | (455 | ) | (443 | ) | |||||||
|
Losses
on write-downs of investments to fair value
|
5,937 | - | - | ||||||||||
|
Net
unrealized losses (gains) on interest rate swap contracts
|
542 | (27 | ) | - | |||||||||
|
Proceeds
from sales of loans
|
56,905 | 59,013 | 44,398 | ||||||||||
|
Loans
originated for sale
|
(56,588 | ) | (57,926 | ) | (45,082 | ) | |||||||
|
Decrease
(increase) in accrued interest receivable, excluding purchased
interest
|
649 | 43 | (513 | ) | |||||||||
|
(Increase)
decrease in other assets
|
(4,477 | ) | 1,472 | (2,175 | ) | ||||||||
|
Increase
in accrued expenses and other liabilities
|
3,797 | 1,502 | 4,689 | ||||||||||
|
Other,
net
|
20 | 55 | (256 | ) | |||||||||
|
Net
cash provided by operating activities
|
29,071 | 29,973 | 29,094 | ||||||||||
|
Cash
flows from investing activities:
|
|||||||||||||
|
Purchases
of:
|
Mortgage-backed
securities available for sale
|
(296,187 | ) | (258,737 | ) | (39,279 | ) | ||||||
|
Other
investment securities available for sale
|
(13,996 | ) | (39,290 | ) | (77,111 | ) | |||||||
|
Mortgage-backed
securities held to maturity
|
– | – | – | ||||||||||
|
Other
investment securities held to maturity
|
– | (12,882 | ) | (38,358 | ) | ||||||||
|
Proceeds
from sales of:
|
Mortgage-backed
securities available for sale
|
14,000 | 47,938 | 94,118 | |||||||||
|
Other
investment securities available for sale
|
67,321 | 43,015 | 12,235 | ||||||||||
|
Mortgage-backed
securities held to maturity
|
– | 38,501 | – | ||||||||||
|
Other
investment securities held to maturity
|
– | 21,698 | – | ||||||||||
|
Maturities
and principal payments of:
|
Mortgage-backed
securities available for sale
|
89,500 | 65,443 | 86,778 | |||||||||
|
Other
investment securities available for sale
|
15,680 | 22,967 | 16,999 | ||||||||||
|
Mortgage-backed
securities held to maturity
|
– | 3,191 | 16,019 | ||||||||||
|
Other
investment securities held to maturity
|
– | 20,490 | 9,360 | ||||||||||
|
(Purchase)
remittance of Federal Home Loan Bank stock
|
(10,283 | ) | (2,998 | ) | 6,239 | ||||||||
|
Net
increase in loans
|
(229,703 | ) | (23,054 | ) | (25,047 | ) | |||||||
|
Proceeds
from sale of loans
|
18,047 | – | – | ||||||||||
|
Purchases
of loans, including purchased interest
|
(54,931 | ) | (90,988 | ) | (33,238 | ) | |||||||
|
Proceeds
from the sale of property acquired through foreclosure or
repossession
|
– | – | 380 | ||||||||||
|
Proceeds
from sale of premises and equipment, net of selling costs
|
1,433 | – | – | ||||||||||
|
Purchases
of premises and equipment
|
(4,183 | ) | (4,122 | ) | (3,578 | ) | |||||||
|
Purchases
of bank-owned life insurance
|
– | – | (8,000 | ) | |||||||||
|
Equity
investment in capital trusts
|
(310 | ) | – | – | |||||||||
|
Payment
of deferred acquisition obligation
|
(15,159 | ) | (6,720 | ) | – | ||||||||
|
Net
cash (used in) provided by investing activities
|
(418,771 | ) | (175,548 | ) | 17,517 | ||||||||
The accompanying notes are an integral part of these consolidated
financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
increase (decrease) in deposits
|
144,663 | (31,792 | ) | 38,740 | ||||||||
|
Net
increase in other borrowings
|
1,707 | 18,675 | 315 | |||||||||
|
Proceeds
from Federal Home Loan Bank advances
|
1,112,856 | 803,513 | 516,162 | |||||||||
|
Repayment
of Federal Home Loan Bank advances
|
(899,621 | ) | (661,617 | ) | (586,868 | ) | ||||||
|
Issuance
(purchase) of treasury stock, including net deferred compensation plan
activity
|
36 | (5,200 | ) | (1,547 | ) | |||||||
|
Proceeds
from the issuance of common stock under dividend reinvestment
plan
|
864 | – | 1,216 | |||||||||
|
Proceeds
from the issuance of common stock
|
46,874 | – | – | |||||||||
|
Net
proceeds from the exercise of stock options and issuance of
other
|
||||||||||||
|
compensation-related
equity instruments
|
182 | 1,052 | 803 | |||||||||
|
Tax
benefit from stock option exercises and issuance of other
|
||||||||||||
|
compensation-related
equity instruments
|
199 | 727 | 384 | |||||||||
|
Proceeds
from the issuance of junior subordinated debentures, net of debt issuance
costs
|
10,016 | – | – | |||||||||
|
Cash
dividends paid
|
(10,998 | ) | (10,580 | ) | (10,070 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
406,778 | 114,778 | (40,865 | ) | ||||||||
|
Net
increase (decrease) increase in cash and cash equivalents
|
17,078 | (30,797 | ) | 5,746 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
41,112 | 71,909 | 66,163 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 58,190 | $ | 41,112 | $ | 71,909 | ||||||
|
Noncash
Investing and Financing Activities:
|
||||||||||||
|
Loans
charged off
|
$ | 1,593 | $ | 778 | $ | 428 | ||||||
|
Net
transfers from loans to property acquired through foreclosure or
repossession
|
392 | – | 385 | |||||||||
|
Deferred
acquisition obligation incurred
|
7,635 | 5,921 | 4,595 | |||||||||
|
Held
to maturity securities transferred to available for sale
|
– | 162,997 | – | |||||||||
|
Supplemental
Disclosures:
|
||||||||||||
|
Interest
payments
|
75,661 | 76,264 | 68,946 | |||||||||
|
Income
tax payments
|
13,587 | 11,440 | 14,054 | |||||||||
The accompanying notes are an integral part of these consolidated
financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
December
31, 2008 and 2007
|
General
Washington
Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding
company and financial holding company. The Bancorp owns all of the
outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode
Island chartered commercial bank founded in 1800. Through its
subsidiaries, the Bancorp offers a complete product line of financial services
including commercial, residential and consumer lending, retail and commercial
deposit products, and wealth management services through its offices in Rhode
Island, Massachusetts and southeastern Connecticut.
(1)
Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of the Bancorp and its
subsidiaries (collectively, the “Corporation” or “Washington
Trust”). All significant intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to
conform to the current year classification.
The
accounting and reporting policies of the Corporation conform to accounting
principles generally accepted in the United States of America (“GAAP”) and to
general practices of the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to change are the determination of the allowance for loan losses and
the review of goodwill, other intangible assets and investments for
impairment. The current economic environment has increased the degree
of uncertainty inherent in such estimates and assumptions.
Short-term
Investments
Short-term
investments consist of highly liquid investments with a maturity date of three
months or less when purchased and are considered to be cash
equivalents. The Corporation’s short-term investments may be
comprised of overnight federal funds sold, securities purchased under resale
agreements and money market mutual funds.
Securities
Investments
in debt securities that management has the positive intent and ability to hold
to maturity are classified as held to maturity and carried at amortized
cost. Management determines the appropriate classification of
securities at the time of purchase. As more fully described in
Note 4, the Corporation will not classify securities in the held to
maturity category until April 2009.
Investments
not classified as held to maturity are classified as available for
sale. Securities available for sale consist of debt and equity
securities that are available for sale to respond to changes in market interest
rates, liquidity needs, changes in funding sources and other similar
factors. These assets are specifically identified and are carried at
fair value. Changes in fair value of available for sale securities,
net of applicable income taxes, are reported as a separate component of
shareholders’ equity. Washington Trust does not have a trading
portfolio.
The
Corporation reviews its investment portfolio quarterly for any declines in fair
value that are deemed other-than-temporary. A decline in the fair
value of any available-for-sale or held-to-maturity security below cost that is
deemed to be other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security. In estimating
other-than-temporary impairment losses, management considers, among other
factors, the length of time and extent to which the fair value has been less
than cost, the financial condition and near term prospects of the issuer, and
the intent and ability of the Corporation to hold the security for a period of
time sufficient to allow for any anticipated recovery in fair
value.
In
January 2009, the FASB issued FASB Staff Position Emerging Issues Task Force
99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP
No. 99-20-1”). FSP No. 99-20-1 amends the impairment
guidance in Emerging Issues Task Force Issue No. 99-20, “Recognition of
Interest Income and Impairment on a Purchased Beneficial Interests and
Beneficial Interests that Continue to be Held by a Transferor in Securitized
Financial Asset” (“EITF Issue No. 99-20”), to achieve more consistent
determination of whether an
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
December
31, 2008 and 2007
|
other-than-temporary
impairment has occurred. EITF Issue No. 99-20 required the use
of market participant assumptions about future cash flows. FSP
No. 99-20-1 modified the guidance in EITF Issue No. 99-20 to permit
holders of relevant assets to develop estimates of cash flows upon consideration
of information including, but not limited to, past events, current conditions,
and reasonable and supporting forecasts. Such information generally
should include the remaining payment terms of the security, prepayments speeds,
the financial condition of the issuer(s), expected defaults, and the value of
any underlying collateral. FSP No. 99-20-1 also retains and
emphasizes the objective of an other-than-temporary impairment assessment and
the related disclosure requirements in SFAS No. 115 “Accounting for Certain
Investments in Debt and Equity Securities.” FSP No. 99-20-1 was
effective for interim and annual reporting periods ending after
December 15, 2008. Retrospective application to a prior interim
or annual reporting period is not permitted. The Corporation complied
with the guidance in FSP 99-20-1 in determining whether an other-than-temporary
impairment occurred as of December 31, 2008 with respect to its holdings of
collateralized debt obligations representing pooled trust preferred debt
securities. See Note 4 for further discussion on the
Corporation’s investment securities portfolio.
Premiums
and discounts are amortized and accreted over the term of the securities on a
method that approximates the level yield method. The amortization and
accretion is included in interest income on securities. 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.
Federal
Home Loan Bank Stock
The
Bank is a member of the Federal Home Loan Bank (“FHLB”) of Boston. As
a requirement of membership, the Bank must own a minimum amount of FHLB stock,
calculated periodically based primarily on its level of borrowings from the
FHLB. No market exists for shares of the FHLB and therefore, they are
carried at par value. FHLB stock may be redeemed at par value five
years following termination of FHLB membership, subject to limitations which may
be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to
maintain capital adequacy of the FHLB. While the Corporation
currently has no intentions to terminate its FHLB membership, the ability to
redeem its investment in FHLB stock would be subject to the conditions imposed
by the FHLB. The FHLB has advised its members that it is focusing on
preserving capital in response to ongoing market volatility and, accordingly, it
will not pay a quarterly dividend in the first quarter of 2009 and the payment
of any dividend in 2009 is unlikely; further, a moratorium has been placed on
excess stock repurchases. The FHLB also announced that the estimated
fair value of private-label mortgage-backed securities it owned at
September 30, 2008 was approximately $1.3 billion less than the
$4.6 billion carrying value of the securities. If this
unrealized loss were deemed to be an other-than-temporary loss in the future, it
could exceed the FHLB’s current level of retained earnings and possibly put into
question whether the fair value of FHLB stock owned by the Corporation was less
than par value. The FHLB has stated that it expects and intends to
hold its private-label mortgage-backed securities to maturity. The
Corporation will continue to monitor its investment in FHLB stock.
Mortgage
Banking Activities
Mortgage Loans Held for
Sale - Residential mortgage loans originated for sale are classified as
held for sale. These loans are specifically identified and are
carried at the lower of aggregate cost, net of unamortized deferred loan
origination fees and costs, or fair value. Gains or losses on sales
of loans are included in noninterest income and are recognized at the time of
sale.
Loan Servicing Rights
- Rights to service loans for others are recognized as an asset, including
rights acquired through both purchases and originations. The total
cost of originated loans that are sold with servicing rights retained is
allocated between the loan servicing rights and the loans without servicing
rights based on their relative fair values. Capitalized loan
servicing rights are included in other assets and are amortized as an offset to
other income over the period of estimated net servicing income. They
are periodically evaluated for impairment based on their fair
value. Impairment is measured on an aggregated basis according to
interest rate band and period of origination. The fair value is
estimated based on the present value of expected cash flows, incorporating
assumptions for discount rate, prepayment speed and servicing
cost. Any impairment is recognized as a charge to earnings through a
valuation allowance.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Loans
Portfolio Loans -
Loans held in the portfolio are stated at the principal amount outstanding, net
of unamortized deferred loan origination fees and costs. Interest
income is accrued on a level yield basis based on principal amounts
outstanding. Deferred loan origination fees and costs are amortized
as an adjustment to yield over the life of the related loans.
Nonaccrual Loans -
Loans, with the exception of certain well-secured residential mortgage loans
that are in the process of collection, 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 or sooner if considered appropriate by
management. Well-secured residential mortgage loans are permitted to
remain on accrual status provided that full collection of principal and interest
is assured and the loan is in the process of collection. Loans are
also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously
accrued but not collected on such loans is reversed against current period
income. Subsequent cash receipts on nonaccrual loans are applied to
the outstanding principal balance of the loan or recognized as interest income
depending on management’s assessment of the ultimate collectibility of the
loan. Loans are removed from nonaccrual status when they have been
current as to principal and interest for a period of time, the borrower has
demonstrated an ability to comply with repayment terms, and when, in
management’s opinion, the loans are considered to be fully
collectible.
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.
Impaired Loans - A loan is impaired when
it is probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All
nonaccrual commercial loans and loans restructured in a troubled debt
restructuring are considered to be impaired. Impairment is measured
on a discounted cash flow method based upon the loan’s contractual effective
interest rate, or at the loan’s observable market price, or at the fair value of
the collateral if the loan is collateral dependent. Impairment is
measured based on the fair value of the collateral if it is determined that
foreclosure is probable.
Allowance
for Loan Losses
A
methodology is used to systematically measure the amount of estimated loan loss
exposure inherent in the loan portfolio for purposes of establishing a
sufficient allowance for loan losses. The methodology includes three
elements: (1) identification of loss allocations for certain specific loans, (2)
loss allocation factors for certain loan types based on credit grade and loss
experience, and (3) general loss allocations for other environmental
factors. The methodology includes an analysis of individual loans
deemed to be impaired in accordance with GAAP (SFAS No. 114, “Accounting by
Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and
15”). Other individual commercial and commercial mortgage loans are
evaluated using an internal rating system and the application of loss allocation
factors. The loan rating system and the related loss allocation
factors take into consideration parameters including the borrower’s financial
condition, the borrower’s performance with respect to loan terms, and the
adequacy of collateral. We periodically reassess and revise the loss
allocation factors used in the assignment of loss exposure to appropriately
reflect our analysis of migrational loss experience. Revisions to
loss allocation factors are not retroactively applied. Portfolios of
more homogenous populations of loans including residential mortgages and
consumer loans are analyzed as groups taking into account delinquency ratios and
other indicators, the Corporation’s historical loss experience and comparison to
industry standards of loss allocation factors for each type of credit
product. Finally, an additional allowance is maintained based on a
judgmental process whereby management considers qualitative and quantitative
assessments of other factors including regional credit concentration, industry
concentration, results of regulatory examinations, historical loss ranges,
portfolio composition, economic conditions such as interest rates and energy
costs, weighted average length of time since loan origination (which, based on
our historical experience has been an indicator of lower loss probability) and
other changes in the portfolio. The allowance for loan losses is
management’s best estimate of the probable loan losses
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
incurred inherent in the
loan portfolio as of the balance sheet date. The allowance is
increased by provisions charged to earnings and by recoveries of amounts
previously charged off, and is reduced by charge-offs on loans (or portions
thereof) deemed to be uncollectible.
While
management believes that the allowance for loan losses is adequate, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically
review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about
information available to them at the time of their examination.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated depreciation. Depreciation for
financial reporting purposes is calculated on the straight-line method over the
estimated useful lives of assets. Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses. The estimated useful lives
of premises and improvements range from three to forty years. For
furniture, fixtures and equipment, the estimated useful lives range from two to
twenty years.
Goodwill
and Other Identifiable Intangible Assets
The
Corporation allocates the cost of an acquired entity to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Other intangible assets identified in acquisitions
generally consist of wealth management advisory contracts, core deposit
intangibles, and non-compete agreements. The value attributed to
advisory contracts is based on the time period over which they are expected to
generate economic benefits. Core deposit intangibles are valued based
on the expected longevity of the core deposit accounts and the expected cost
savings associated with the use of the existing core deposit base rather than
alternative funding sources. Non-compete agreements are valued based
on the expected receipt of future economic benefits protected by clauses in the
non-compete agreements that restrict competitive behavior.
The
Corporation tests other intangible assets with definite lives for impairment at
least annually or more frequently whenever events or circumstances occur that
indicate that their carrying amount may not be fully recoverable. The
carrying value of the intangible assets is compared to the sum of undiscounted
cash flows expected to be generated by the asset. If the carrying
amount of the asset exceeds its undiscounted cash flows, then an impairment loss
is recognized for the amount by which the carrying amount exceeds its fair
value.
The
excess of the purchase price for acquisitions over the fair value of the net
assets acquired, including other intangible assets, is reported as
goodwill. Goodwill is not amortized but is tested for impairment at
the segment level at least annually or more frequently whenever events or
circumstances occur that indicate that it is more likely than not that an
impairment loss has occurred. The impairment test includes a review
of estimates of selected market information for the respective segments of the
Corporation. If the fair value is determined to be less than the
carrying value, an additional analysis is performed to determine if carrying
amount of the goodwill exceeds its estimated fair value. The excess
goodwill is recognized as an impairment loss.
Impairment of Long-Lived Assets Other than
Goodwill
Long-lived
assets are reviewed for impairment at least annually or whenever events or
changes in business circumstances indicate that the remaining useful life may
warrant revision or that the carrying amount of the long-lived asset may not be
fully recoverable. If impairment is determined to exist, any related
impairment loss is calculated based on fair value. Impairment losses
on assets to be disposed of, if any, are based on the estimated proceeds to be
received, less costs of disposal.
Property
Acquired through Foreclosure or Repossession
Property
acquired through foreclosure or repossession is stated at the lower of cost or
fair value minus estimated costs to sell at the date of acquisition or
classification to this 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
repossession is charged to the allowance for loan losses. A valuation
allowance is maintained for declines in market
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
value
and for estimated selling expenses. Increases to the valuation
allowance, expenses associated with ownership of these properties, and gains and
losses from their sale are included in foreclosed property costs.
Loans
that are substantively repossessed include only those loans for which the
Corporation has taken possession of the collateral, but has not completed legal
foreclosure proceedings.
Property
acquired through foreclosure or repossession is classified in other assets on
the Corporation’s Consolidated Balance Sheets and totaled $392 thousand at
December 31, 2008. There was no property acquired through
foreclosure or repossession at December 31, 2007.
Bank-Owned
Life Insurance (“BOLI”)
The
investment in BOLI represents the cash surrender value of life insurance
policies on the lives of certain Bank employees who have provided positive
consent allowing the Bank to be the beneficiary of such
policies. Increases in the cash value of the policies, as well as
insurance proceeds received, are recorded in other noninterest income, and are
not subject to income taxes. The financial strength of the insurance
carrier is reviewed prior to the purchase of BOLI and annually
thereafter.
Transfers
and Servicing of Assets and Extinguishments of Liabilities
The
accounting for transfers and servicing of financial assets and extinguishments
of liabilities is based on consistent application of a financial components
approach that focuses on control. This approach distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. After a transfer of financial assets, the Corporation
recognizes all financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and liabilities
that have been extinguished. This financial components approach
focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer
does not meet the criteria for a sale, the transfer is accounted for as a
secured borrowing with a pledge of collateral.
Fee
Revenue
Trust
and investment advisory fees and mutual fund fees are primarily accrued as
earned based upon a percentage of asset values under
administration. Financial planning commissions and other wealth
management service fee revenue is recognized to the extent that services have
been completed. Fee revenue from deposit service charges is generally
recognized when earned. Fee revenue for merchant processing services
is generally accrued as earned.
Pension
Costs
Effective
December 31, 2006, the Corporation adopted the recognition and disclosure
provisions of SFAS No. 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS
No. 158 required that the funded status of an employer’s postretirement
benefit plan, measured as the difference between the fair value of plan assets
and the projected benefit obligation, be recognized in its statement of
financial position. SFAS No. 158 also requires that changes in
the funded status of a defined benefit plan, including actuarial gains and
losses and prior service costs and credits, must be recognized in comprehensive
income in the year in which the changes occur. The adoption of the
recognition provisions of SFAS No. 158 had no effect on the Corporation’s
Consolidated Statements of Income or Cash Flows for the periods
presented.
Effective
January 1, 2008, Washington Trust adopted the measurement date provisions
of SFAS No. 158. These provisions required the Corporation to
change its measurement date for plan assets and benefit obligations to
December 31. Prior to 2008, Washington Trust measured its plan
assets and benefit obligations as of September 30 of each
year. As a result of the adoption of the measurement date provisions
of SFAS No. 158, the Corporation recognized the following adjustments in
individual line items of its Consolidated Balance Sheet as of January 1,
2008:
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(Dollars
in thousands)
|
Prior
to Adoption of Measurement Date Provisions of SFAS
No. 158
|
Effect
of Adopting Measurement Date Provisions of SFAS
No. 158
|
As
of
January 1,
2008
|
|||||||||
|
Net
deferred tax asset
|
$ | 7,705 | $ | 229 | $ | 7,934 | ||||||
|
Defined
benefit pension liabilities
|
11,801 | 655 | 12,456 | |||||||||
|
Retained
earnings
|
154,647 | (468 | ) | 154,179 | ||||||||
|
Accumulated
other comprehensive loss
|
(239 | ) | 42 | (197 | ) | |||||||
The
adoption of the measurement date provisions of SFAS No. 158 had no effect
on the Corporation’s Consolidated Statements of Income or Cash Flows for the
periods presented.
Prior
to the adoption of the recognition provisions of SFAS No. 158, the
Corporation accounted for its defined benefit post-retirement plans under SFAS
No. 87, “Employers Accounting for Pensions” (“SFAS
No. 87”). SFAS No. 87 required that a liability (minimum
pension liability) be recorded when the accumulated benefit obligation liability
exceeded the fair value of plan assets. Minimum pension liability
adjustments were recorded as a non-cash charge to accumulated other
comprehensive income in shareholders’ equity. Under SFAS No. 87,
changes in the funded status were not immediately recognized, rather they were
deferred and recognized ratably over future periods.
Pension
benefits are accounted for using the net periodic benefit cost method, which
recognizes the compensation cost of an employee’s pension benefit over that
employee’s approximate service period. Pension benefit cost
calculations incorporate various actuarial and other assumptions, including
discount rates, mortality, assumed rates of return, compensation increases, and
turnover rates. Washington Trust reviews its assumptions on an annual
basis and makes modifications to the assumptions based on current rates and
trends when it is appropriate to so do. Effective January 1,
2007, the effect of modifications to those assumptions is recorded in other
comprehensive income and amortized to net periodic cost over future
periods. Washington Trust believes that the assumptions utilized in
recording its obligations under its plans are reasonable based on its experience
and market conditions.
Stock-Based
Compensation
Effective
January 1, 2006, the Corporation adopted the fair value recognition
provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS
No. 123R”). This statement replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” SFAS No. 123R requires that all stock-based
compensation be recognized as an expense in the financial statements and that
such cost be measured at the fair value of the award. SFAS
No. 123R was adopted using the modified prospective method of application,
which requires the Corporation to recognize compensation cost on a prospective
basis. Under this method, the Corporation recorded stock-based
compensation expense for awards granted prior to, but not yet vested as of
January 1, 2006, using the fair value amounts determined for pro forma
disclosures under SFAS No. 123. For stock-based awards granted
after January 1, 2006, the Corporation recognizes compensation expense
based on estimated grant date fair value using the Black-Scholes option-pricing
model.
SFAS
No. 123R also requires that excess tax benefits related to stock option
exercises be reflected as financing cash inflows.
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. Beginning with the adoption of FAS Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of
January 1, 2007, the Corporation recognizes the effect of income tax
positions only if those positions are more likely than not of being
sustained. Recognized income
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
tax
positions are measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement are reflected
in the period in which the change in judgment occurs. Prior to the
adoption of FIN 48, the Corporation recognized the effect of income tax
positions if such positions were probable of being sustained.
The
Corporation records interest related to unrecognized tax benefits in income tax
expense. To the extent interest is not assessed with respect to
uncertain tax positions, amounts accrued will be reduced and reflected as a
reduction of the overall income tax provision. Penalties, if
incurred, would be recognized as a component of income tax expense.
Earnings
Per Share (“EPS”)
Diluted
EPS is computed by dividing net income by the average number of common shares
and common stock equivalents outstanding. Common stock equivalents
arise from the assumed exercise of outstanding stock options, if
dilutive. The computation of basic EPS excludes common stock
equivalents from the denominator.
Comprehensive
Income
Comprehensive
income is defined as all changes in equity, except for those resulting from
investments by and distribution to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight
basis.
Guarantees
FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,”
considers standby letters of credit a guarantee of the
Corporation. 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. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer’s failure to perform
under the terms of the underlying contract with the beneficiary. The
fair value of standby letters of credit is considered immaterial to the
Corporation’s Consolidated Financial Statements.
Derivative
Instruments and Hedging Activities
As
required by SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended, all derivatives are recognized as either assets
or liabilities on the balance sheet and are measured at fair
value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative and resulting
designation. Derivatives used to hedge the exposure to changes in
fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives used to hedge the exposure to variability in
expected cash flows, or other types of forecasted transactions, are considered
cash flow hedges.
For
derivatives designated as fair value hedges, changes in the fair value of the
derivative are recognized in earnings together with the changes in the fair
value of the related hedged item. The net amount, if any,
representing hedge ineffectiveness, is reflected in earnings. For
derivatives designated as cash flow hedges, the effective portion of changes in
the fair value of the derivative are recorded in other comprehensive income
(loss) and recognized in earnings when the hedged transaction affects
earnings. The ineffective portion of changes in the fair value of
cash flow hedges is recognized directly in earnings. For derivatives
not designated as hedges, changes in fair value are recognized in earnings, in
noninterest income.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
From
time to time, interest rate contracts (swaps and floors) are used as part of
interest rate risk management strategy. Interest rate swap and floor
agreements are entered into as hedges against future interest rate fluctuations
on specifically identified assets or liabilities.
We
also utilize interest rate swap contracts to help commercial loan borrowers
manage their interest rate risk. The interest rate swap contracts
with commercial loan borrowers allow them to convert floating rate loan payments
to fixed rate loan payments. When we enter into an interest rate swap
contract with a commercial loan borrower, we simultaneously enter into a mirror
swap contract with a third party. The third party exchanges the
client’s fixed rate loan payments for floating rate loan payments.
The
accrued net settlements on derivatives that qualify for hedge accounting are
recorded in interest income or interest expense based on the item being
hedged. Changes in fair value of derivatives including accrued net
settlements that do not qualify for hedge accounting are reported in noninterest
income.
When
hedge accounting is discontinued, the future changes in fair value of the
derivative are recorded as noninterest income. When a fair value
hedge is discontinued, the hedged asset or liability is no longer adjusted for
changes in fair value and the existing basis adjustment is amortized or accreted
over the remaining life of the asset or liability. When a cash flow
hedge is discontinued, but the hedged cash flows or forecasted transaction is
still expected to occur, changes in value that were accumulated in other
comprehensive income are amortized or accreted into earnings over the same
periods which the hedged transactions will affect earnings.
By
using derivative financial instruments, the Corporation exposes itself to credit
risk. Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Corporation, which
creates credit risk for the Corporation. When the fair value of a
derivative contract is negative, the Corporation owes the counterparty and,
therefore, it does not possess credit risk. The credit risk in
derivative instruments is minimized by entering into transactions with highly
rated counterparties that management believes to be creditworthy.
Fair
Value Measurements
On
January 1, 2008, the Corporation adopted the provisions SFAS No. 157,
Fair Value Measurements (“SFAS No. 157”), for fair value measurements of
financial assets and financial liabilities and for fair value measurements of
nonfinancial items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. SFAS No. 157 defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 157 also establishes a framework
for measuring fair value and expands disclosures about fair value
measurements.
Financial
Accounting Standards Board (“FASB”) Staff Position No. 157-2, “Effective
Date of FASB Statement No. 157,” delayed the effective date of SFAS No. 157
until fiscal years beginning after November 15, 2008 for all nonfinancial
assets, such as goodwill, and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis. On January 1, 2009, the Corporation will be required to
apply the provisions of SFAS No. 157 to fair value measurements of
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis. The Corporation believes that the application of these
provisions of SFAS No. 157 will not have a material impact on its financial
position or results of operations.
In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active,”
(“FSP No. 157-3”), which was effective immediately. FSP
No. 157-3 clarifies the application of SFAS No. 157 in cases where the
market for a financial instrument is not active and provides an example to
illustrate key considerations in determining fair value in those circumstances.
The Corporation complied with the guidance in FSP No. 157-3 in determining
the fair value of its securities during 2008.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
adoption of SFAS No. 157 for financial assets and liabilities did not have
a material impact on the Corporation’s financial position or results of
operations. The required disclosures about fair value measurements
for financial assets and liabilities have been included in
Note 14.
(2)
Recently Issued Accounting Pronouncements
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No. 161”). SFAS
No. 161 changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedge items are accounted for under SFAS
No. 133 and its related interpretations, and (3) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. SFAS
No. 161 encourages but does not require comparative disclosures for earlier
periods at initial adoption. The Corporation will provide the
additional disclosures necessary upon the adoption of SFAS No. 161 in
2009.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS No. 162”). SFAS
No. 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP. The current GAAP hierarchy is set forth in the American
Institute of Certified Public Accountants Statement on Auditing Standards
No. 69, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” The FASB has concluded that the GAAP
hierarchy should reside in the accounting literature established by the FASB and
issued SFAS No. 162 to achieve that result. SFAS No. 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to Interim Auditing Standards AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The FASB does not expect that SFAS No. 162 will
result in a change in current practice.
In
December 2008, the FASB issued FASB Staff Position No. 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP
No. 132(R)-1”). FSP No. 132(R)-1 provides guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. FSP No. 132(R)-1 states that in providing
detailed disclosures about plan assets, entities should consider (1) how
investment allocations decisions are made, (2) the major categories of plan
assets, (3) the inputs and valuation techniques used to measure the fair value
of plan assets, (4) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period and (5)
significant concentrations of risks within plan assets. The
disclosures about plan assets required by FSP No. 132(R)-1 must be provided
for fiscal years ending after December 15, 2009. The Corporation
will provide the additional disclosures necessary upon the adoption of FSP
No. 132(R)-1 in 2009.
(3)
Cash and Due from Banks
The
Bank is required to maintain certain average reserve balances with the Federal
Reserve Board. Such reserve balances amounted to $4.0 million
and $8.0 million at December 31, 2008 and 2007,
respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(4)
Securities
The
amortized cost, gross unrealized holding gains, gross unrealized holding losses,
and fair value of securities by major security type and class of security at
December 31, 2008 and 2007 were as follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
December
31, 2008
|
Cost (1)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Securities
Available for Sale:
|
||||||||||||||||
|
U.S.
Treasury obligations and obligations of U.S. government-sponsored
enterprises
|
$ | 59,022 | $ | 5,355 | $ | – | $ | 64,377 | ||||||||
|
Mortgage-backed
securities issued by U.S. government agencies and U.S.
government-sponsored enterprises
|
675,159 | 12,543 | (4,083 | ) | 683,619 | |||||||||||
|
States
and political subdivisions
|
80,680 | 1,348 | (815 | ) | 81,213 | |||||||||||
|
Trust
preferred securities:
|
||||||||||||||||
|
Individual
name issuers
|
30,525 | – | (13,732 | ) | 16,793 | |||||||||||
|
Collateralized
debt obligations (2)
|
5,633 | – | (3,693 | ) | 1,940 | |||||||||||
|
Corporate
bonds
|
12,973 | 603 | – | 13,576 | ||||||||||||
|
Common
stocks
|
942 | 50 | – | 992 | ||||||||||||
|
Perpetual
preferred stocks (3)
|
4,499 | 2 | (792 | ) | 3,709 | |||||||||||
|
Total
securities available for sale
|
$ | 869,433 | $ | 19,901 | $ | (23,115 | ) | $ | 866,219 | |||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
December
31, 2007
|
Cost
(1)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Securities
Available for Sale:
|
||||||||||||||||
|
U.S.
Treasury obligations and obligations of U.S. government-sponsored
enterprises
|
$ | 136,721 | $ | 2,888 | $ | (10 | ) | $ | 139,599 | |||||||
|
Mortgage-backed
securities issued by U.S. government agencies and U.S.
government-sponsored enterprises
|
469,197 | 2,899 | (2,708 | ) | 469,388 | |||||||||||
|
States
and political subdivisions
|
80,634 | 499 | (239 | ) | 80,894 | |||||||||||
|
Trust
preferred securities:
|
||||||||||||||||
|
Individual
name issuers
|
30,487 | – | (2,792 | ) | 27,695 | |||||||||||
|
Collateralized
debt obligations (2)
|
7,508 | – | (749 | ) | 6,759 | |||||||||||
|
Corporate
bonds
|
13,940 | 161 | – | 14,101 | ||||||||||||
|
Common
stocks
|
3,931 | 2,850 | – | 6,781 | ||||||||||||
|
Perpetual preferred stocks
(3)
|
8,165 | – | (1,604 | ) | 6,561 | |||||||||||
|
Total
securities available for sale
|
$ | 750,583 | $ | 9,297 | $ | (8,102 | ) | $ | 751,778 | |||||||
|
(1)
|
Net
of other-than-temporary impairment write-downs recognized in
earnings.
|
|
(2)
|
Includes
two pooled trust preferred holdings in which there are 73 issuers in one
of the holdings and 38 issuers in the other. For both of its
pooled trust preferred holdings, Washington Trust’s investment is senior
to one or more subordinated tranches that have first loss exposure. One of
the pooled trust preferred security holdings began deferring interest
payments until future periods and based on the financial condition and
operating outlook some of the issuers, was deemed to be
other-than-temporarily impaired and placed on nonaccrual status as of
December 31, 2008. After the 2008 recognition of the
$1.859 million of impairment charges, this investment security had an
amortized cost and fair value of $633 thousand at December 31,
2008.
|
|
(3)
|
Callable
at the discretion of the issuer. Includes 6 stocks that are
callable at any time and 3 stocks that will be callable no later than
November 2010.
|
Securities
available for sale with a fair value of $712.8 million and
$592.7 million were pledged in compliance with state regulations concerning
trust powers and to secure Treasury Tax and Loan deposits, borrowings and
certain
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
public
deposits at December 31, 2008 and 2007, respectively. (See
Note 11 to the Consolidated Financial Statements for additional discussion
of FHLB borrowings). In addition, securities available for sale with
a fair value of $16.1 million and $8.4 million were collateralized for
the discount window at the Federal Reserve Bank at December 31, 2008 and
2007, respectively. There were no borrowings with the Federal Reserve
Bank at either date. Securities available for sale with a fair value
of $9.0 million and $1.9 million were designated in rabbi trusts for
nonqualified retirement plans at December 31, 2008 and 2007,
respectively. Securities available for sale with a fair value of
$569 thousand and $532 thousand were pledged as collateral to secure
certain interest rate swap agreements as of December 31, 2008 and 2007,
respectively.
The
Corporation intended to elect early adoption of SFAS No. 159, “The Fair
Value Option for Financial Assets and Liabilities” (“SFAS No. 159”) and
sold twelve held to maturity securities with an amortized cost of
$61.9 million on April 13, 2007. The Corporation intended
to account for these transactions under the transition provisions of SFAS
No. 159. Subsequent to the Corporation’s original decision to
early adopt SFAS No. 159, clarifications of the interpretation of the
application of SFAS No. 159 by applicable regulatory and industry bodies,
including the AICPA’s Center for Audit Quality, led us to conclude that the
application of SFAS No. 159 to our transactions might be inconsistent with
the intent and spirit of SFAS No. 159. Consequently, the
Corporation subsequently decided not to early-adopt SFAS No. 159 and
realized securities losses of $1.7 million were recognized in the second
quarter of 2007. In addition, the remaining held to maturity
portfolio was reclassified to the available for sale category as of the
April 13, 2007 sale date of the securities. The Corporation will
not be able to classify securities in the held to maturity category for a period
of two years from the April 13, 2007 sales date as a result of this
action.
Washington
Trust evaluates whether unrealized losses on investment securities indicate
other-than-temporary impairment. Based on this evaluation, losses on
write-downs of investments to fair value were charged to earnings for securities
deemed to be other-than-temporarily impaired in the amounts shown in the
following table:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Trust
preferred securities
|
||||||||||||
|
Collateralized
debt obligations
|
$ | 1,859 | $ | – | $ | – | ||||||
|
Common
and perpetual preferred stocks
|
||||||||||||
|
Fannie
Mae and Freddie Mac perpetual preferred stocks
|
1,470 | – | – | |||||||||
|
Other
perpetual preferred stocks
|
2,173 | – | – | |||||||||
|
Other
common stocks
|
435 | – | – | |||||||||
|
Losses
on write-downs of investments to fair value
|
$ | 5,937 | $ | – | $ | – | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
following table summarizes temporarily impaired investment securities at
December 31, 2008, segregated by length of time the securities have been
continuously in an unrealized loss position.
|
(Dollars
in thousands)
|
Less
than 12 Months
|
12
Months or Longer
|
Total
|
|||||||||||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
At
December 31, 2008
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
|||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||
|
issued
by U.S. government agencies and U.S. government-sponsored
enterprises
|
64 | $ | 124,387 | $ | 2,140 | 22 | $ | 34,350 | $ | 1,943 | 86 | $ | 158,737 | $ | 4,083 | |||||||||||||||||||||
|
States
and
|
||||||||||||||||||||||||||||||||||||
|
political
subdivisions
|
25 | 18,846 | 523 | 7 | 7,423 | 292 | 32 | 26,269 | 815 | |||||||||||||||||||||||||||
|
Trust
preferred securities:
|
||||||||||||||||||||||||||||||||||||
|
Individual
name issuers
|
– | – | – | 11 | 16,793 | 13,732 | 11 | 16,793 | 13,732 | |||||||||||||||||||||||||||
|
Collateralized
debt obligations
|
– | – | – | 1 | 1,307 | 3,693 | 1 | 1,307 | 3,693 | |||||||||||||||||||||||||||
|
Subtotal,
debt securities
|
89 | 143,233 | 2,663 | 41 | 59,873 | 19,660 | 130 | 203,106 | 22,323 | |||||||||||||||||||||||||||
|
Perpetual
preferred stocks
|
– | – | – | 5 | 2,062 | 792 | 5 | 2,062 | 792 | |||||||||||||||||||||||||||
|
Total
temporarily
|
||||||||||||||||||||||||||||||||||||
|
impaired
securities
|
89 | $ | 143,233 | $ | 2,663 | 46 | $ | 61,935 | $ | 20,452 | 135 | $ | 205,168 | $ | 23,115 | |||||||||||||||||||||
The
following table summarizes temporarily impaired investment securities at
December 31, 2007, segregated by length of time the securities have been
continuously in an unrealized loss position.
|
(Dollars
in thousands)
|
Less
than 12 Months
|
12
Months or Longer
|
Total
|
|||||||||||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
At
December 31, 2007
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
|||||||||||||||||||||||||||
|
U.S.
Treasury obligations
|
||||||||||||||||||||||||||||||||||||
|
and
obligations of U.S. government-sponsored enterprises
|
1 | $ | 6,996 | $ | 1 | 1 | $ | 3,990 | $ | 9 | 2 | $ | 10,986 | $ | 10 | |||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||
|
issued
by U.S. government agencies and U.S. government-sponsored
enterprises
|
22 | 108,630 | 1,028 | 46 | 110,348 | 1,680 | 68 | 218,978 | 2,708 | |||||||||||||||||||||||||||
|
States
and
|
||||||||||||||||||||||||||||||||||||
|
political
subdivisions
|
13 | 12,402 | 128 | 10 | 7,681 | 111 | 23 | 20,083 | 239 | |||||||||||||||||||||||||||
|
Trust
preferred securities:
|
||||||||||||||||||||||||||||||||||||
|
Individual
name issuers
|
6 | 16,408 | 2,020 | 5 | 11,287 | 772 | 11 | 27,695 | 2,792 | |||||||||||||||||||||||||||
|
Collateralized
debt obligations
|
2 | 6,759 | 749 | - | - | - | 2 | 6,759 | 749 | |||||||||||||||||||||||||||
|
Subtotal,
debt securities
|
44 | 151,195 | 3,926 | 62 | 133,306 | 2,572 | 106 | 284,501 | 6,498 | |||||||||||||||||||||||||||
|
Perpetual
preferred stocks
|
5 | 5,257 | 1,407 | 4 | 1,304 | 197 | 9 | 6,561 | 1,604 | |||||||||||||||||||||||||||
|
Total
temporarily
|
||||||||||||||||||||||||||||||||||||
|
impaired
securities
|
49 | $ | 156,452 | $ | 5,333 | 66 | $ | 134,610 | $ | 2,769 | 115 | $ | 291,062 | $ | 8,102 | |||||||||||||||||||||
Unrealized
losses on debt securities generally occur as a result of increases in interest
rates since the time of purchase, a structural change in an investment or from
deterioration in credit quality of the issuer. Management evaluates
impairments in value whether caused by adverse interest rates or credit
movements to determine if they are other-than-temporary.
In
accordance with applicable accounting literature, Washington Trust must, in
addition to other criteria, demonstrate an ability and intent to hold
temporarily impaired securities until full recovery of their cost basis, which
may be at maturity, to classify such losses as temporary. Management
uses both internal and external information sources to arrive at the most
informed decision. This quantitative and qualitative assessment
begins with a review of general
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
market
conditions and changes to market conditions, credit, investment performance and
structure since the prior review period. The ability to hold
temporarily impaired securities will involve a number of factors, including:
forecasted recovery period based on average life and Washington Trust’s capital,
earnings and cash flow positions, among other things. Washington Trust currently
intends and has the ability to hold all temporarily impaired securities to full
recovery of the cost basis, which may be until maturity.
Management
assesses a variety of factors in determining if an impairment is other than
temporary, including but not limited to the likelihood of and probable time
horizon for recovery of the cost basis, including analyst forecasts, earnings
assumptions and other company specific or sector financial performance
metrics.
Debt
securities in an unrealized loss position at December 31, 2008 consisted of
130 debt security holdings. The majority of the loss for debt
securities reported in an unrealized loss position at December 31, 2008 was
concentrated in variable rate trust preferred securities issued by financial
services companies and in mortgage-backed securities issued by U.S. government
agencies or U.S. government-sponsored enterprises.
Included
in debt securities in an unrealized loss position at December 31, 2008 were
11 trust preferred security holdings issued by seven individual name companies
in the financial services/banking industry, reflecting, where applicable, the
impact of mergers and acquisitions of issuers subsequent to original
purchase. The
aggregate unrealized losses on these securities amounted to $13.7 million
at December 31, 2008. The
largest unrealized loss dollar amount of any single individual name issuer was
$4.8 million, or 50% of its amortized cost, at December 31,
2008. All individual name trust preferred debt securities held in our
portfolio continue to accrue and make payments as expected and have investment
grade credit ratings as of December 31, 2008. Subsequent to
December 31, 2008, one credit rating agency has downgraded to below
investment grade four of these trust preferred security holdings, with total
unrealized losses of $4.0 million at December 31, 2008. The
ratings of these four securities by other credit rating agencies remain at
investment grade as of the filing date of this report. Management has
considered this information in its assessment of other-than-temporary impairment
as of December 31, 2008. Management believes the
December 31, 2008 temporary impairment on these trust preferred securities
primarily reflected increased investor concerns about recent and potential
future losses in the financial services industry related to subprime lending and
other credit related exposure. These concerns resulted in a
substantial decrease in market liquidity and increased risk premiums for
securities in this sector. Credit spreads for issuers in this sector
widened substantially during recent months, causing prices for these securities
holdings to decline. Based on its analysis, management believes that
it is probable that all contractual principal and interest payments for these
trust preferred securities will be received. Furthermore, Washington
Trust has the ability and intent to hold these trust preferred securities to
full recovery of the cost basis. Therefore, management does not
consider these investments to be other-than-temporarily impaired at this
time.
Also
included in debt securities in an unrealized loss position at December 31,
2008 was one pooled trust preferred holding in the form of a collateralized debt
obligation with an unrealized loss of $3.7 million. This pooled trust
preferred holding consists of trust preferred obligations of banking industry
companies and, to a lesser extent, insurance industry
companies. Washington Trust’s investment in this pooled trust
preferred security is senior to two subordinated tranches which have first loss
exposure. Valuations of the pooled trust preferred holdings are
dependent in part on cash flows from underlying issuers. Unexpected
cash flow disruptions could have an adverse impact on the fair value and
performance of pooled trust preferred securities. As part of
management’s evaluation to determine if impairment is other-than-temporary,
management prepared an analysis consistent with FSP
No. 99-20-1. This pooled trust preferred security continues to
accrue and make payments as expected and has an investment grade credit rating
as of December 31, 2008. Management believes the
December 31, 2008 temporary impairment on this pooled trust preferred
security primarily reflected increased investor concerns about recent and
potential future losses in the financial services industry related to subprime
lending and other credit related exposure. These concerns resulted in
a substantial decrease in market liquidity and increased risk premiums for
securities in this sector. Credit spreads for issuers in this sector
widened substantially during recent months, causing prices for this security
holding to decline. Based on its analysis, management believes that
it is probable that all contractual principal and interest payments for this
trust preferred security will be received. Furthermore, Washington
Trust has the ability and intent
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
to
hold this trust preferred security to full recovery of the cost
basis. Therefore, management does not consider this investment to be
other-than-temporarily impaired at this time.
The
unrealized losses on mortgage-backed securities issued by U.S. government
agencies or U.S. government-sponsored enterprises amounted to $4.1 million
at December 31, 2008 and were attributable to a combination of factors,
including relative changes in interest rates since the time of purchase and
decreased liquidity for investment securities in general. The largest unrealized
loss percentage amount on any holding in these categories was 9.45% of its
amortized cost at December 31, 2008. Management believes that
the contractual cash flows will be received on these securities and that the
nature and duration of impairment on these debt security holdings are a function
of changes in investment spreads and interest rate movements. Based
on its analysis, management believes that it is probable that all contractual
principal and interest payments for these mortgage-backed securities will be
received. Furthermore, Washington Trust has the ability and intent to
hold these securities to full recovery of the cost basis. Therefore,
management does not consider these investments to be other-than-temporarily
impaired at this time.
The
equity securities in an unrealized loss position at December 31, 2008
consisted of 5 perpetual preferred stock holdings of financial and commercial
entities with unrealized losses of $792 thousand, or 27.7% of their
aggregate cost. As of December 31, 2008, the Corporation had 2
perpetual preferred stock holdings of Freddie Mac and Fannie Mae with a total
fair value and carrying value of $30 thousand and 7 perpetual preferred
stock holdings of financial and utility companies with a total fair value of
$3.7 million and net unrealized losses of $790 thousand. In
October 2008, the SEC’s Office of the Chief Accountant, after consultation and
concurrence with the FASB, concluded that the assessment of other-than-temporary
impairment of perpetual preferred securities for filings made after
October 14, 2008 can be made using an impairment model (including an
anticipated recovery period) similar to a debt security provided there has been
no evidence of a deterioration in credit of the issuer, as evidenced by, among
other factors, a downgrade to a below “investment grade” credit
rating. Washington Trust complied with this guidance in its
evaluation of other-than-temporary impairment of perpetual preferred
stocks. Causes of conditions whereby the fair value of equity
securities is less than cost include the timing of purchases and changes in
valuation specific to individual industries or issuers. The
relationship between the level of market interest rates and the dividend rates
paid on individual equity securities may also be a contributing
factor. Management believes that a portion of the December 31,
2008 temporary impairment on its perpetual preferred equity securities holdings
was not a function of the financial condition and operating outlook of the
issuers but, rather reflected increased investor concerns about recent losses in
the financial services industry related to subprime lending and other credit
related exposure. These concerns resulted in greater volatility in
market prices for perpetual preferred stocks in this market
sector. Based on its analysis, management believes that it is
probable that all contractual payments for these perpetual preferred securities
will be received. Furthermore, Washington Trust has the ability and
intent to hold these investments to full recovery of the cost
basis. Therefore, management considers the unrealized losses on these
equity securities to be temporary at this time.
Further
deterioration in credit quality of the companies backing the securities, further
deterioration in the condition of the financial services industry, a
continuation of the current imbalances in liquidity that exist in the
marketplace, a continuation or worsening of the current economic recession, or
additional declines in real estate values may further affect the fair value of
these securities and increase the potential that certain unrealized losses be
designated as other than temporary in future periods and the Corporation may
incur additional write-downs.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
maturities of debt securities as of December 31, 2008 are presented
below. Mortgage-backed securities are included based on weighted
average maturities, adjusted for anticipated prepayments. All other
securities are included based on contractual maturities. Actual
maturities may differ from amounts presented because certain issuers have the
right to call or prepay obligations with or without call or prepayment
penalties. Yields on tax exempt obligations are not computed on a tax
equivalent basis. Included in the securities portfolio at
December 31, 2008 were debt securities with an aggregate carrying value of
$102.4 million that are callable at the discretion of the
issuers. Final maturities of the callable securities range from six
to twenty-eight years, with call features ranging from one month to eight
years.
|
(Dollars
in thousands)
|
Due
in
|
After
1 Year
|
After
5 Years
|
|||||||||||||||||
|
1
Year
|
but
within
|
but
within
|
After
|
|||||||||||||||||
|
or
Less
|
5
Years
|
10
Years
|
10
Years
|
Totals
|
||||||||||||||||
|
Securities
Available for Sale:
|
||||||||||||||||||||
|
U.S.
Treasury obligations and obligations
|
||||||||||||||||||||
|
of
U.S. government-sponsored enterprises:
|
||||||||||||||||||||
|
Amortized
cost
|
$ | 16,948 | $ | 12,164 | $ | 29,910 | $ | – | $ | 59,022 | ||||||||||
|
Weighted
average yield
|
4.50 | % | 4.69 | % | 5.42 | % | – | % | 5.01 | % | ||||||||||
|
Mortgage-backed
securities issued by U.S.
|
||||||||||||||||||||
|
government
agencies & U.S.
|
||||||||||||||||||||
|
government-sponsored
enterprises:
|
||||||||||||||||||||
|
Amortized
cost
|
115,158 | 299,392 | 160,383 | 100,226 | 675,159 | |||||||||||||||
|
Weighted
average yield
|
4.56 | % | 4.41 | % | 4.24 | % | 3.39 | % | 4.24 | % | ||||||||||
|
State
and political subdivisions:
|
||||||||||||||||||||
|
Amortized
cost
|
476 | 19,476 | 60,728 | – | 80,680 | |||||||||||||||
|
Weighted
average yield
|
3.15 | % | 3.86 | % | 3.90 | % | – | % | 3.88 | % | ||||||||||
|
Trust
preferred securities:
|
||||||||||||||||||||
|
Amortized
cost (1)
|
– | – | – | 36,158 | 36,158 | |||||||||||||||
|
Weighted
average yield
|
– | % | – | % | – | % | 3.15 | % | 3.15 | % | ||||||||||
|
Corporate
bonds:
|
||||||||||||||||||||
|
Amortized
cost
|
– | 7,983 | 4,990 | – | 12,973 | |||||||||||||||
|
Weighted
average yield
|
– | % | 6.49 | % | 6.69 | % | – | % | 6.56 | % | ||||||||||
|
Total
debt securities:
|
||||||||||||||||||||
|
Amortized
cost
|
$ | 132,582 | $ | 339,015 | $ | 256,011 | $ | 136,384 | $ | 863,992 | ||||||||||
|
Weighted
average yield
|
4.55 | % | 4.44 | % | 4.35 | % | 2.49 | % | 4.12 | % | ||||||||||
|
Fair
value
|
$ | 135,567 | $ | 333,646 | $ | 254,665 | $ | 137,640 | $ | 861,518 | ||||||||||
|
(1)
|
Net
of other-than-temporary
impairment write-downs recognized in
earnings.
|
The
following is a summary of amounts relating to sales of securities:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Proceeds from sales
(1)
|
$ | 81,718 | $ | 151,672 | $ | 106,866 | ||||||
|
Gross
realized gains (1)
|
$ | 2,382 | $ | 2,181 | $ | 3,984 | ||||||
|
Gross
realized losses
|
(158 | ) | (1,726 | ) | (3,541 | ) | ||||||
|
Net
realized gains on securities
|
$ | 2,224 | $ | 455 | $ | 443 | ||||||
|
(1)
|
Includes
annual contributions of appreciated equity securities to the Corporation’s
charitable foundation. The cost of the annual contributions,
included in noninterest expenses, amounted to $397 thousand,
$520 thousand and $513 thousand in 2008, 2007 and 2006,
respectively. These transactions resulted in realized
securities gains of $315 thousand, $397 thousand and
$381 thousand, respectively, for the same
periods.
|
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(5)
Loans
The
following is a summary of loans:
|
(Dollars
in thousands)
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Commercial:
|
||||||||||||||||
|
Mortgages
(1)
|
$ | 407,904 | 22 | % | $ | 278,821 | 18 | % | ||||||||
|
Construction
and development (2)
|
49,599 | 3 | % | 60,361 | 4 | % | ||||||||||
|
Other
(3)
|
422,810 | 23 | % | 341,084 | 21 | % | ||||||||||
|
Total
commercial
|
880,313 | 48 | % | 680,266 | 43 | % | ||||||||||
|
Residential
real estate:
|
||||||||||||||||
|
Mortgages
(4)
|
626,663 | 34 | % | 588,628 | 37 | % | ||||||||||
|
Homeowner
construction
|
15,389 | 1 | % | 11,043 | 1 | % | ||||||||||
|
Total
residential real estate
|
642,052 | 35 | % | 599,671 | 38 | % | ||||||||||
|
Consumer
|
||||||||||||||||
|
Home
equity lines
|
170,662 | 9 | % | 144,429 | 9 | % | ||||||||||
|
Home
equity loans
|
89,297 | 5 | % | 99,827 | 6 | % | ||||||||||
|
Other
(5)
|
56,830 | 3 | % | 49,459 | 4 | % | ||||||||||
|
Total
consumer
|
316,789 | 17 | % | 293,715 | 19 | % | ||||||||||
|
Total
loans (6)
|
$ | 1,839,154 | 100 | % | $ | 1,573,652 | 100 | % | ||||||||
|
(1)
|
Amortizing
mortgages, primarily secured by income producing
property.
|
|
(2)
|
Loans
for construction of residential and commercial properties and for land
development.
|
|
(3)
|
oans
to businesses and individuals, a substantial portion of which are fully or
partially collateralized by real
estate.
|
|
(4)
|
A
substantial portion of these loans is used as qualified collateral for
FHLB borrowings (See Note 11 for additional discussion of FHLB
borrowings).
|
|
(5)
|
Fixed
rate consumer installment loans.
|
|
(6)
|
Net
of unamortized loan origination fees, net of costs, totaling
$2 thousand and $100 thousand at December 31, 2008 and
2007, respectively. Also includes $259 thousand of net
discounts and $297 thousand of net premiums on purchased loans at
December 31, 2008 and 2007,
respectively.
|
Concentrations
of Credit Risk
A
significant portion of our loan portfolio is concentrated among borrowers in
southern New England and a substantial portion of the portfolio is
collateralized by real estate in this area. In addition, a portion of
the commercial loans and commercial mortgage loans are to borrowers in the
hospitality, tourism and recreation industries. The ability of single
family residential and consumer borrowers to honor their repayment commitments
is generally dependent on the level of overall economic activity within the
market area and real estate values. The ability of commercial
borrowers to honor their repayment commitments is dependent on the general
economy as well as the health of the real estate economic sector in the
Corporation’s market area.
Nonaccrual
Loans
The
balance of loans on nonaccrual status as of December 31, 2008 and 2007 was
$7.8 million and $4.3 million, respectively. Interest
income that would have been recognized had these loans been current in
accordance with their original terms was approximately $583 thousand,
$341 thousand and $218 thousand in 2008, 2007 and 2006,
respectively. Interest income attributable to these loans included in
the Consolidated Statements of Income amounted to approximately
$469 thousand, $318 thousand and $192 thousand in 2008, 2007 and
2006, respectively.
There
were no accruing loans 90 days or more past due at December 31, 2008 and
2007.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Impaired
Loans
Impaired
loans consist of all nonaccrual commercial loans and loans restructured in a
troubled debt restructuring.
The
following is a summary of impaired loans:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Impaired
loans requiring an allowance
|
$ | 3,492 | $ | 2,102 | ||||
|
Impaired
loans not requiring an allowance
|
3,165 | 2,490 | ||||||
|
Total
recorded investment in impaired loans
|
$ | 6,657 | $ | 4,592 | ||||
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Average
recorded investment in impaired loans
|
$ | 6,161 | $ | 2,903 | $ | 1,105 | ||||||
|
Interest
income recognized on impaired loans
|
$ | 507 | $ | 457 | $ | 192 | ||||||
At
December 31, 2008, there were no commitments to lend any additional funds
to borrowers in troubled debt restructurings.
Loan
Servicing Activities
An
analysis of loan servicing rights for the years ended December 31, 2008,
2007 and 2006 follows:
|
(Dollars
in thousands)
|
Loan
|
|||||||||||
|
Servicing
|
Valuation
|
|||||||||||
|
Rights
|
Allowance
|
Total
|
||||||||||
|
Balance
at December 31, 2005
|
$ | 1,346 | $ | (260 | ) | $ | 1,086 | |||||
|
Loan
servicing rights capitalized
|
255 | – | 255 | |||||||||
|
Amortization
(1)
|
(419 | ) | – | (419 | ) | |||||||
|
Decrease
in impairment reserve (2)
|
– | 36 | 36 | |||||||||
|
Balance
at December 31, 2006
|
1,182 | (224 | ) | 958 | ||||||||
|
Loan
servicing rights capitalized
|
246 | – | 246 | |||||||||
|
Amortization
(1)
|
(361 | ) | – | (361 | ) | |||||||
|
Decrease
in impairment reserve (2)
|
– | 40 | 40 | |||||||||
|
Balance
at December 31, 2007
|
1,067 | (184 | ) | 883 | ||||||||
|
Loan
servicing rights capitalized
|
167 | – | 167 | |||||||||
|
Amortization
(1)
|
(273 | ) | – | (273 | ) | |||||||
|
Increase
in impairment reserve (2)
|
– | (59 | ) | (59 | ) | |||||||
|
Balance
at December 31, 2008
|
$ | 961 | $ | (243 | ) | $ | 718 | |||||
|
(1)
|
Amortization
expense is charged against loan servicing fee
income.
|
|
(2)
|
(Increases)
and decreases in the impairment reserve are recorded as (reductions) and
additions to loan servicing fee
income.
|
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Estimated aggregate
amortization expense related to loan servicing assets is as
follows:
|
(Dollars
in thousands)
|
|||||
|
Years
ending December 31:
|
2009
|
$ | 188 | ||
|
2010
|
152 | ||||
|
2011
|
121 | ||||
|
2012
|
96 | ||||
|
2013
|
76 | ||||
|
Thereafter
|
328 | ||||
|
Total
estimated amortization expense
|
$ | 961 | |||
Mortgage
loans and other loans sold to others are serviced on a fee basis under various
agreements. Loans serviced for others are not included in the
Consolidated Balance Sheets. Balance of loans serviced for others, by
type of loan:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Residential
mortgages
|
$ | 82,961 | $ | 67,942 | ||||
|
Commercial
loans
|
43,094 | 36,105 | ||||||
|
Total
|
$ | 126,055 | $ | 104,047 | ||||
(6)
Allowance for Loan Losses
The
following is an analysis of the allowance for loan losses:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Balance
at beginning of year
|
$ | 20,277 | $ | 18,894 | $ | 17,918 | ||||||
|
Provision
charged to expense
|
4,800 | 1,900 | 1,200 | |||||||||
|
Recoveries
of loans previously charged off
|
241 | 261 | 204 | |||||||||
|
Loans
charged off
|
(1,593 | ) | (778 | ) | (428 | ) | ||||||
|
Balance
at end of year
|
$ | 23,725 | $ | 20,277 | $ | 18,894 | ||||||
Included
in the allowance for loan losses at December 31, 2008, 2007 and 2006 was an
allowance for impaired loans amounting to $698 thousand, $183 thousand
and $258 thousand, respectively.
The
allowance for loan losses is management’s best estimate of inherent risk of loss
in the loan portfolio as of the balance sheet date. We make various
assumptions and judgments about the collectibility of our loan portfolio and
provide an allowance for potential losses based on a number of
factors. If our assumptions are wrong, our allowance for loan losses
may not be sufficient to cover our losses and may cause us to increase the
allowance in the future. Among the factors that could affect our
ability to collect our loans and require us to increase the allowance in the
future are: general real estate and economic conditions; regional credit
concentration; industry concentration, for example in the hospitality, tourism
and recreation industries; and a requirement by our Federal and state regulators
to increase our provision for loan losses or recognize additional
charge-offs.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(7)
Premises and Equipment
The
following is a summary of premises and equipment:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Land
and improvements
|
$ | 5,021 | $ | 5,389 | ||||
|
Premises
and improvements
|
30,957 | 29,914 | ||||||
|
Furniture,
fixtures and equipment
|
20,269 | 21,375 | ||||||
| 56,247 | 56,678 | |||||||
|
Less
accumulated depreciation
|
31,145 | 31,258 | ||||||
|
Total
premises and equipment, net
|
$ | 25,102 | $ | 25,420 | ||||
Depreciation
of premises and equipment amounted to $3.0 million of expense for each of
the years ended December 31, 2008, 2007 and 2006.
At
December 31, 2008, the Corporation was committed to rent premises used in
banking operations under non-cancellable operating leases. Rental
expense under the operating leases amounted to $1.3 million,
$1.1 million and $963 thousand for 2008, 2007 and 2006,
respectively. The minimum annual lease payments under the terms of
these leases, exclusive of renewal provisions, are as follows:
|
(Dollars
in thousands)
|
|||||
|
Years
ending December 31:
|
2009
|
$ | 1,247 | ||
|
2010
|
1,034 | ||||
|
2011
|
936 | ||||
|
2012
|
388 | ||||
|
2013
|
317 | ||||
|
2014
and thereafter
|
1,822 | ||||
|
Total
minimum lease payments
|
$ | 5,744 | |||
Lease
expiration dates range from five months to fourteen years, with renewal options
on certain leases of two to fifteen years.
(8)
Goodwill and Other Intangibles
The
changes in the carrying value of goodwill and other intangible assets for the
years ended December 31, 2008 and 2007 were as follows:
Goodwill
|
Wealth
|
||||||||||||
|
(Dollars
in thousands)
|
Commercial
|
Management
|
||||||||||
|
Banking
|
Service
|
|||||||||||
|
Segment
|
Segment
|
Total
|
||||||||||
|
Balance
at December 31, 2006
|
$ | 22,591 | $ | 21,967 | $ | 44,558 | ||||||
|
Additions
to goodwill during the period
|
- | 5,921 | 5,921 | |||||||||
|
Impairment
recognized
|
- | - | - | |||||||||
|
Balance
at December 31, 2007
|
22,591 | 27,888 | 50,479 | |||||||||
|
Additions
to goodwill during the period
|
- | 7,635 | 7,635 | |||||||||
|
Impairment
recognized
|
- | - | - | |||||||||
|
Balance
at December 31, 2008
|
$ | 22,591 | $ | 35,523 | $ | 58,114 | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Other
Intangible Assets
|
(Dollars
in thousands)
|
||||||||||||||||
|
Core
Deposit
|
Advisory
|
Non-compete
|
||||||||||||||
|
Intangible
|
Contracts
|
Agreements
|
Total
|
|||||||||||||
|
Balance
at December 31, 2006
|
$ | 650 | $ | 11,937 | $ | 229 | $ | 12,816 | ||||||||
|
Amortization
|
140 | 1,194 | 49 | 1,383 | ||||||||||||
|
Balance
at December 31, 2007
|
510 | 10,743 | 180 | 11,433 | ||||||||||||
|
Amortization
|
120 | 1,112 | 49 | 1,281 | ||||||||||||
|
Balance
at December 31, 2008
|
$ | 390 | $ | 9,631 | $ | 131 | $ | 10,152 | ||||||||
The
Stock Purchase Agreement dated March 18, 2005, as amended December 24,
2008, by and among the Corporation, Weston Financial and Weston Financial’s
shareholders, provides for the payment of contingent purchase price amounts
based on operating results in each of the years in the three-year earn-out
period ending December 31, 2008. During 2007, the Corporation
recognized a liability of $5.9 million, with a corresponding addition to
goodwill, representing the 2007 portion of the earn-out
period. During 2008, the Corporation recognized a liability of
$7.6 million, with a corresponding addition to goodwill, representing the
2008 and final portion of the earn-out period. Goodwill is not
deductible for tax purposes. See additional disclosure regarding
deferred acquisition obligations in Note 11 to the Consolidated Financial
Statements.
The
value attributable to the core deposit intangible (“CDI”) is a function of the
estimated attrition of the core deposit accounts, and the expected cost savings
associated with the use of the existing core deposit base rather than
alternative funding sources.
The
value attributed to the wealth management advisory contracts was based on the
time period over which the advisory contracts are expected to generate economic
benefits. The intangible values of advisory contracts are being
amortized over a 20-year life using a declining balance method, based on
expected attrition for Weston Financial’s current customer base derived from
historical runoff data. The amortization schedule is based on the
anticipated future customer runoff rate. This schedule will result in
amortization of approximately 50% of the intangible asset after six years, and
approximately 70% amortization of the balance after ten years.
The
value attributable to the Weston Financial non-compete agreements was based on
the expected receipt of future economic benefits related to provisions in the
non-compete agreements that restrict competitive behavior. The intangible value
of non-compete agreements is being amortized on a straight-line basis over the
six-year contractual lives of the agreements.
Estimated
annual amortization expense is as follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Core
|
Advisory
|
Non-compete
|
||||||||||||||
|
Estimated
amortization expense
|
Deposits
|
Contracts
|
Agreements
|
Total
|
||||||||||||
|
2009
|
$ | 120 | $ | 1,040 | $ | 49 | $ | 1,209 | ||||||||
|
2010
|
120 | 922 | 49 | 1,091 | ||||||||||||
|
2011
|
120 | 768 | 33 | 921 | ||||||||||||
|
2012
|
30 | 727 | – | 757 | ||||||||||||
|
2013
|
– | 680 | – | 680 | ||||||||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
components of intangible assets at December 31, 2008 and 2007 were as
follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Core
|
Advisory
|
Non-compete
|
||||||||||||||
|
Deposits
|
Contracts
|
Agreements
|
Total
|
|||||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
Gross
carrying amount
|
$ | 2,997 | $ | 13,657 | $ | 1,147 | $ | 17,801 | ||||||||
|
Accumulated
amortization
|
2,607 | 4,026 | 1,016 | 7,649 | ||||||||||||
|
Net
amount
|
$ | 390 | $ | 9,631 | $ | 131 | $ | 10,152 | ||||||||
|
December
31, 2007:
|
||||||||||||||||
|
Gross
carrying amount
|
$ | 2,997 | $ | 13,657 | $ | 1,147 | $ | 17,801 | ||||||||
|
Accumulated
amortization
|
2,487 | 2,914 | 967 | 6,368 | ||||||||||||
|
Net
amount
|
$ | 510 | $ | 10,743 | $ | 180 | $ | 11,433 | ||||||||
(9)
Net Deferred Tax Asset and Income Taxes
The
components of income tax expense were as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Current
tax expense (benefit):
|
||||||||||||
|
Federal
|
$ | 12,900 | $ | 12,512 | $ | 13,435 | ||||||
|
State
|
(273 | ) | 646 | 625 | ||||||||
|
Total
current tax expense
|
12,627 | 13,158 | 14,060 | |||||||||
|
Deferred
tax benefit:
|
||||||||||||
|
Federal
|
(3,830 | ) | (2,179 | ) | (1,828 | ) | ||||||
|
State
|
(1,478 | ) | (132 | ) | (141 | ) | ||||||
|
Total
deferred tax benefit
|
(5,308 | ) | (2,311 | ) | (1,969 | ) | ||||||
|
Total
income tax expense
|
$ | 7,319 | $ | 10,847 | $ | 12,091 | ||||||
Total
income tax expense varied from the amount determined by applying the Federal
income tax rate to income before income taxes. The reasons for the
differences were as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Tax
expense at Federal statutory rate
|
$ | 10,322 | $ | 12,127 | $ | 12,993 | ||||||
|
(Decrease)
increase in taxes resulting from:
|
||||||||||||
|
Tax-exempt
income
|
(1,094 | ) | (1,014 | ) | (613 | ) | ||||||
|
Dividends
received deduction
|
(138 | ) | (217 | ) | (244 | ) | ||||||
|
BOLI
|
(630 | ) | (557 | ) | (493 | ) | ||||||
|
Adjustment
to net deferred tax assets for enacted changes in state
|
||||||||||||
|
tax
law and rates, net of Federal income tax
|
(841 | ) | – | – | ||||||||
|
Net
decrease related to uncertain state tax positions, net of
|
||||||||||||
|
Federal
income tax
|
(556 | ) | – | – | ||||||||
|
State
income tax expense, net of Federal income tax benefit
|
380 | 420 | 406 | |||||||||
|
Other
|
(124 | ) | 88 | 42 | ||||||||
|
Total
income tax expense
|
$ | 7,319 | $ | 10,847 | $ | 12,091 | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
On
July 3, 2008, the Commonwealth of Massachusetts enacted a law that included
reducing the tax rate on net income applicable to financial institutions and
requiring combined income tax reporting. The rate will be reduced
from the current rate of 10.5% to 10.0% for 2010, 9.5% for 2011 and 9.0% for
2012 and thereafter. Previously, certain Washington Trust
subsidiaries were subject to Massachusetts income tax on a separate return
basis. Under the new legislation, effective January 1, 2009,
Washington Trust, as a consolidated tax group, will be subject to income tax in
the Commonwealth of Massachusetts. Washington Trust has analyzed the
impact of this law and, as a result of revaluing its net deferred tax asset,
recognized an income tax benefit of $841 thousand in 2008.
The
approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 2008 and
2007 are as follows:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Gross
deferred tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 8,456 | $ | 7,097 | ||||
|
Defined
benefit pension obligations
|
8,757 | 4,130 | ||||||
|
Losses
on write-downs of securities to fair value
|
2,627 | – | ||||||
|
Net
unrealized losses on securities available for sale
|
1,146 | – | ||||||
|
Deferred
compensation
|
1,186 | 1,341 | ||||||
|
Deferred
loan origination fees
|
973 | 888 | ||||||
|
Other
|
1,939 | 2,048 | ||||||
|
Gross
deferred tax assets
|
25,084 | 15,504 | ||||||
|
Gross
deferred tax liabilities:
|
||||||||
|
Amortization
of intangibles
|
(3,522 | ) | (4,621 | ) | ||||
|
Deferred
loan origination costs
|
(2,135 | ) | (1,940 | ) | ||||
|
Net
unrealized gains on securities available for sale
|
– | (418 | ) | |||||
|
Other
|
(643 | ) | (820 | ) | ||||
|
Gross
deferred tax liabilities
|
(6,300 | ) | (7,799 | ) | ||||
|
Net
deferred tax asset
|
$ | 18,784 | $ | 7,705 | ||||
The
Corporation has determined that a valuation allowance is not required for any of
the deferred tax assets since it is more likely than not that these assets will
be realized primarily through future reversals of existing taxable temporary
differences or carryback to taxable income in prior years.
Effective
January 1, 2007, the Corporation adopted the provisions of
FIN 48. The adoption of FIN 48 did not result in any
adjustment to retained earnings as of January 1, 2007.
A
reconciliation of the beginning and ending amount of total unrecognized tax
benefit is as follows:
|
(Dollars
in thousands)
|
||||||||
|
Years
ended December 31,
|
2008
|
2007
|
||||||
|
Balance
at beginning of year
|
$ | 1,358 | $ | 1,195 | ||||
|
Increase
related to current year tax positions
|
87 | 163 | ||||||
|
Reductions
relating to settlements with taxing authorities
|
(892 | ) | – | |||||
|
Reductions
as a result of lapse of statute of limitations
|
(8 | ) | – | |||||
|
Balance
at end of year
|
$ | 545 | $ | 1,358 | ||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
As of
December 31, 2008, the Corporation had gross tax affected unrecognized tax
benefits of $545 thousand. If recognized, this amount would be
recorded as a component of income tax expense.
The
Corporation files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Corporation is no longer subject to
U.S. federal income tax examinations by tax authorities for years before
2005. The Corporation is no longer subject to state income tax
examinations by tax authorities for years before 2002. In 2008, a
state income tax examination commenced for the tax years 2002 through 2006 and
was effectively settled at the end of 2008. As a result, previously
unrecognized tax benefits of $892 thousand were recognized in
2008.
Total
accrued interest related to uncertain tax positions was $80 thousand and
$123 thousand as of December 31, 2008 and 2007,
respectively. In 2008, interest amounts accrued were reduced by
$44 thousand and were reflected as a reduction of the overall income tax
provision. Interest expense recognized related to uncertain tax
positions amounted to $53 thousand in 2007.
To
the extent interest is not assessed with respect to uncertain tax positions,
amounts accrued will be reduced and reflected as a reduction of the overall
income tax provision.
(10)
Time Certificates of Deposit
Scheduled
maturities of time certificates of deposit at December 31, 2008 were as
follows:
|
(Dollars
in thousands)
|
|||||
|
Years
ending December 31:
|
2009
|
$ | 631,797 | ||
|
2010
|
226,490 | ||||
|
2011
|
42,918 | ||||
|
2012
|
20,084 | ||||
|
2013
|
46,135 | ||||
|
2014
and thereafter
|
3 | ||||
|
Balance
at December 31, 2008
|
$ | 967,427 | |||
The
aggregate amount of time certificates of deposit in denominations of
$100 thousand or more was $294.4 million and $418.7 million at
December 31, 2008 and 2007, respectively.
The
following table represents the amount of certificates of deposit of
$100 thousand or more at December 31, 2008 maturing during the periods
indicated:
|
(Dollars
in thousands)
|
|||||
|
Maturing:
|
January 1,
2009 to March 31, 2009
|
$ | 108,591 | ||
|
April 1,
2009 to June 30, 2009
|
40,897 | ||||
|
July 1,
2009 to December 31, 2009
|
58,881 | ||||
|
January 1,
2010 and beyond
|
86,025 | ||||
|
Balance
at December 31, 2008
|
$ | 294,394 | |||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(11)
Borrowings
Federal
Home Loan Bank Advances
The
following table presents maturities and weighted average interest rates paid on
FHLB advances outstanding at December 31, 2008 and 2007:
|
(Dollars in
thousands)
|
||||||||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||||||||
|
Scheduled Maturity |
Redeemed
at Call Date (1) |
Weighted Average Rate (2) |
Scheduled Maturity |
Redeemed
at Call Date (1) |
Weighted Average Rate (2) |
|||||||||||||||||||
|
2008
|
$ | – | $ | – | – | % | $ | 186,220 | $ | 204,220 | 4.15 | % | ||||||||||||
|
2009
|
286,232 | 299,232 | 2.17 | % | 115,441 | 110,441 | 4.27 | % | ||||||||||||||||
|
2010
|
115,638 | 115,638 | 4.29 | % | 83,569 | 83,569 | 4.72 | % | ||||||||||||||||
|
2011
|
124,559 | 116,559 | 4.09 | % | 69,414 | 61,414 | 4.54 | % | ||||||||||||||||
|
2012
|
94,372 | 94,372 | 4.76 | % | 89,842 | 89,842 | 4.83 | % | ||||||||||||||||
|
2013
|
101,472 | 96,472 | 4.16 | % | 23,535 | 18,535 | 4.72 | % | ||||||||||||||||
|
2014
and after
|
107,353 | 107,353 | 4.82 | % | 48,396 | 48,396 | 5.03 | % | ||||||||||||||||
| $ | 829,626 | $ | 829,626 | $ | 616,417 | $ | 616,417 | |||||||||||||||||
|
(1)
|
Callable
FHLB advances are shown in the respective periods assuming that the
callable debt is redeemed at the call date while all other advances are
shown in the periods corresponding to their scheduled maturity
date.
|
|
(2)
|
Weighted
average rate based on scheduled maturity
dates.
|
During
2007, the Corporation prepaid $26.5 million in advances payable to the FHLB
resulting in a debt prepayment penalty charge, recorded in noninterest expense,
of $1.1 million. There were no prepayment penalty charges in
2008.
In
addition to the outstanding advances, the Bank also has access to an unused line
of credit with the FHLB amounting to $8.0 million at December 31,
2008. Under agreement with the FHLB, the Bank is required to maintain
qualified collateral, free and clear of liens, pledges, or encumbrances that,
based on certain percentages of book and fair values, has a value equal to the
aggregate amount of the line of credit and outstanding advances. The
FHLB maintains a security interest in various assets of the Bank including, but
not limited to, residential mortgage loans, U.S. government or agency
securities, U.S. government-sponsored agency securities, and amounts maintained
on deposit at the FHLB. The Bank maintains qualified collateral in
excess of the amount required to collateralize the line of credit and
outstanding advances at December 31, 2008. Included in the
collateral were securities available for sale with a fair value of
$512.3 million and $476.8 million that were specifically pledged to
secure FHLB borrowings at December 31, 2008 and December 31, 2007,
respectively. Unless there is an event of default under the
agreement, the Corporation may use, encumber or dispose any portion of the
collateral in excess of the amount required to secure FHLB borrowings, except
for that collateral which has been specifically pledged.
The
following table sets forth certain information concerning short-term FHLB
advances as of the dates for the years indicated:
|
(Dollars
in thousands)
|
||||||||||||
|
As
of and for the years ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Average
amount outstanding during the period
|
$ | 92,915 | $ | 36,640 | $ | 44,199 | ||||||
|
Amount
outstanding at end of period
|
170,000 | 70,000 | 50,000 | |||||||||
|
Highest
month end balance during period
|
170,000 | 70,000 | 85,000 | |||||||||
|
Weighted-average
interest rate at end of period
|
0.73 | % | 4.70 | % | 5.36 | % | ||||||
|
Weighted-average
interest rate during the period
|
2.45 | % | 5.25 | % | 5.07 | % | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Junior
Subordinated Debentures
Junior
subordinated debentures are summarized as follows:
|
(Dollars
in thousands)
|
December 31,
|
December 31,
|
||||||
|
2008
|
2007
|
|||||||
|
Junior
subordinated debentures
|
$ | 32,991 | $ | 22,681 | ||||
The
Bancorp sponsored the creation of WT Capital Trust I (“Trust I”), WT Capital
Trust II (“Trust II”) and Washington Preferred Capital Trust (“Washington
Preferred”). Trust I, Trust II and Washington Preferred are Delaware
statutory trusts created for the sole purpose of issuing trust preferred
securities and investing the proceeds in junior subordinated debentures of the
Bancorp. The Bancorp is the owner of all of the common securities of
Trust I, Trust II and Washington Preferred. In accordance
with FASB Interpretation 46-R, “Consolidation of Variable Interest
Entities—Revised”, Trust I, Trust II and Washington Preferred are
treated as unconsolidated subsidiaries. The common stock investment
in the statutory trusts is included in “Other Assets” in the Consolidated
Balance Sheet.
On
August 29, 2005, Trust I issued $8 million of Capital
Securities in a private placement of trust preferred
securities. The Capital Securities mature in September 2035, are
redeemable at the Bancorp’s option beginning after five years, and require
quarterly distributions by Trust I to the holder of the Capital Securities, at a
rate of 5.965% until September 15, 2010, and thereafter at a rate equal to
the three-month LIBOR rate plus 1.45%. The Bancorp has guaranteed the
Capital Securities and, to the extent not paid by Trust I, accrued and unpaid
distributions on the Capital Securities, as well as the redemption price payable
to the Capital Securities holders. The proceeds of the Capital
Securities, along with proceeds from the issuance of common securities by Trust
I to the Bancorp, were used to purchase $8.3 million of the Bancorp's
junior subordinated deferrable interest notes (the “Trust I Debentures”) and
constitute the primary asset of Trust I. Like the Capital Securities,
the Trust I Debentures bear interest at a rate of 5.965% until
September 15, 2010, and thereafter at a rate equal to the three-month LIBOR
rate plus 1.45%. The Trust I Debentures mature on September 15,
2035, but may be redeemed at par at the Bancorp’s option, subject to the
approval of the applicable banking regulator to the extent required under
applicable guidelines or policies, at any time on or after September 15,
2010, or upon the occurrence of certain special qualifying
events.
On
August 29, 2005, Trust II issued $14 million of Capital Securities in
a private placement of trust preferred securities. The Capital
Securities mature in November 2035, are redeemable at the Bancorp’s option
beginning after five years, and require quarterly distributions by Trust II to
the holder of the Capital Securities, at a rate of 5.96% until November 23,
2010, and thereafter at a rate equal to the three-month LIBOR rate plus
1.45%. The Bancorp has guaranteed the Capital Securities and, to the
extent not paid by Trust II, accrued and unpaid distributions on the Capital
Securities, as well as the redemption price payable to the Capital Securities
holders. The proceeds of the Capital Securities, along with proceeds
from the issuance of common securities by Trust II to the Bancorp, were used to
purchase $14.4 million of the Bancorp's junior subordinated deferrable
interest notes (the “Trust II Debentures”) and constitute the primary asset of
Trust II. Like the Capital Securities, the Trust II Debentures bear
interest at a rate of 5.96% until November 23, 2010, and thereafter at a
rate equal to the three-month LIBOR rate plus 1.45%. The Trust II
Debentures mature on November 23, 2035, but may be redeemed at par at the
Bancorp's option, subject to the approval of the applicable banking regulator to
the extent required under applicable guidelines or policies, at any time on or
after November 23, 2010, or upon the occurrence of certain special
qualifying events.
On
April 7, 2008, Washington Preferred issued $10 million of trust
preferred securities (“Capital Securities”) in a private placement to two
institutional investors pursuant to an applicable exemption from
registration. The Capital Securities mature in June 2038, are
redeemable at the Bancorp’s option beginning after five years, and required
quarterly distributions by Washington Preferred to the holder of the Capital
Securities, at a rate of 6.2275% until June 15, 2008, and reset quarterly
thereafter at a rate equal to the three-month LIBOR rate plus
3.50%. The Bancorp has guaranteed the Capital Securities and, to the
extent not paid by Washington Preferred, accrued and unpaid distributions on the
Capital Securities, as well as the redemption price payable to the Capital
Securities holders. The proceeds of the Capital Securities, along
with the proceeds of $310 thousand from the issuance of common securities
by Washington Preferred to the Bancorp, were used to purchase $10,310,000 of the
Bancorp's junior subordinated
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
deferrable interest notes
(the “Washington Preferred Debentures”) and constitute the primary asset of
Washington Preferred. The Bancorp will use the proceeds from the sale
of the Washington Preferred Debentures for general corporate
purposes. Like the Capital Securities, the Washington Preferred
Debentures bear interest at a rate of 6.2275% until June 15, 2008, and
reset quarterly thereafter at a rate equal to the three-month LIBOR rate plus
3.50%. The Washington Preferred Debentures mature on June 15,
2038, but may be redeemed at par at the Bancorp’s option, subject to the
approval of the applicable banking regulator to the extent required under
applicable guidelines or policies, at any time on or after June 15, 2013,
or upon the occurrence of certain special qualifying events.
Other
Borrowings
The
following is a summary of other borrowings:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Treasury,
Tax and Loan demand note balance
|
$ | 4,382 | $ | 2,793 | ||||
|
Deferred
acquisition obligations
|
2,506 | 9,884 | ||||||
|
Securities
sold under repurchase agreements
|
19,500 | 19,500 | ||||||
|
Other
|
355 | 383 | ||||||
|
Other
borrowings
|
$ | 26,743 | $ | 32,560 | ||||
The
Stock Purchase Agreement, as amended, for the 2005 acquisition of Weston
Financial provides for the payment of contingent purchase price amounts based on
operating results in each of the years in the three-year earn-out period ending
December 31, 2008. Contingent payments are added to goodwill and
recorded as deferred acquisition liabilities at the time the payments are
determinable beyond a reasonable doubt. See additional disclosure on
goodwill in Note 8 to the Consolidated Financial
Statements. Deferred acquisition obligations amounted to
$2.5 million and $9.9 million at December 31, 2008 and 2007,
respectively. During 2008, the Corporation recognized a liability of
$7.6 million, representing amounts earned under the terms of the
acquisition agreement. In the first quarter of 2008 the Corporation
paid approximately $8.1 million, which represented the 2007 earn-out
payment. Also in the fourth quarter of 2008, the Corporation paid
approximately $7.1 million, in settlement of a portion of the 2008 earn-out
liability. The balance of the 2008 earn-out liability will be paid in
the first quarter of 2009.
Securities
sold under repurchase agreements amounted to $19.5 million at
December 31, 2008 and 2007. The securities sold under agreements
to repurchase are callable at the issuer’s option, at one time only, in one year
and mature in five years. The securities underlying the agreements
are held in safekeeping by the counterparty in the name of the Corporation and
are repurchased when the agreement matures. Accordingly, these
underlying securities are included in securities available for sale and the
obligations to repurchase such securities are reflected as a
liability.
(12)
Shareholders' Equity
2006
Stock Repurchase Plan
In
December 2006, the Bancorp’s Board of Directors approved the 2006 Stock
Repurchase Plan authorizing the repurchase of up to 400,000 shares, or
approximately 3%, of the Corporation’s common stock in open market
transactions. This authority may be exercised from time to time and
in such amounts as market conditions warrant, and subject to regulatory
considerations. The Bancorp plans to hold the repurchased shares as
treasury stock to be used for general corporate purposes. Under this
plan, no shares were repurchased in 2008 and 185,400 shares of stock were
repurchased in 2007 at a total cost of $4.8 million. As of
December 31, 2008, a cumulative total of 185,400 shares have been
repurchased.
In
addition, from time to time shares are acquired pursuant to the Nonqualified
Deferred Compensation Plan.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Shareholder
Rights Plan
In
August 2006, the Bancorp’s Board of Directors adopted a shareholder rights plan,
as set forth in the Shareholders Rights Agreement, dated August 17, 2006
(the “2006 Rights Agreement”). Pursuant to the terms of the 2006
Rights Agreement, the Bancorp declared a dividend distribution of one common
share purchase right (a “Right”) for each outstanding share of common stock to
shareholders of record on August 31, 2006. Such Rights also
apply to new issuances of shares after that date. Each Right entitles
the registered holder to purchase from the Corporation one share of its common
stock at a price of $100.00 per share, subject to adjustment.
The
Rights are not exercisable or separable from the common stock until the earlier
of 10 days after a person or group (an “Acquiring Person”) acquires beneficial
ownership of 15% or more of the outstanding common shares or announces a tender
offer to do so. The Rights, which expire on August 31, 2016, may
be redeemed by the Bancorp at any time prior to the acquisition by an Acquiring
Person of beneficial ownership of 15% or more of the common stock at a price of
$.01 per Right. In the event that any party becomes an Acquiring
Person, each holder of a Right, other than Rights owned by the Acquiring Person,
will have the right to receive upon exercise that number of common shares having
a market value of two times the purchase price of the Right. In the
event that, at any time after any party becomes an Acquiring Person, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of its assets or earning power are sold, each holder of a Right will
have the right to purchase that number of shares of the acquiring company having
a market value of two times the purchase price of the Right.
Dividends
The
primary source of liquidity for the Bancorp is dividends received from the
Bank. The Bancorp and the Bank are regulated enterprises and their
abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist
regarding dividends, loans, and advances from the Bank to the
Bancorp. Generally, the Bank has the ability to pay dividends to the
Bancorp subject to minimum regulatory capital requirements. The FDIC
has the authority to use its enforcement powers to prohibit a bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. In addition, the Rhode Island Division of
Banking may also restrict the declaration of dividends if a bank would not be
able to pay its debts as they become due in the usual course of business or the
bank’s total assets would be less than the sum of its total
liabilities. Under the most restrictive of these requirements, the
Bank could have declared aggregate additional dividends of $100.8 million
as of December 31, 2008.
Dividend
Reinvestment
Under
the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500
shares of the Corporation’s common stock were originally reserved to be issued
for dividends reinvested and cash payments to the plan.
Reserved
Shares
As
of December 31, 2008, a total of 1,570,215 common stock shares were
reserved for issuance under the 1997 Plan, 2003 Plan, the Amended and Restated
Dividend Reinvestment, the 2006 Stock Repurchase Plan and the Nonqualified
Deferred Compensation Plan.
Regulatory
Capital Requirements
The
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the Federal Reserve Board and the FDIC,
respectively. These requirements were established to more accurately
assess the credit risk inherent in the assets and off-balance sheet activities
of financial institutions. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined in
the regulations), and of Tier 1 capital to average assets (as defined in
the regulations). Management believes that, as of December 31,
2008, the Corporation meets all capital adequacy requirements to which it is
subject.
As
of December 31, 2008, the most recent notification from the FDIC
categorized the Bank as “well-capitalized” under the regulatory framework for
prompt corrective action. To be categorized as “well-capitalized,”
the Bank must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios. There are no conditions or events since
that notification that management believes have changed the Bank’s
categorization.
The
following table presents the Corporation’s and the Bank’s actual capital amounts
and ratios at December 31, 2008 and 2007, as well as the corresponding
minimum regulatory amounts and ratios:
|
(Dollars
in thousands)
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be “Well Capitalized” Under Prompt Corrective Action
Provisions
|
|||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
As
of December 31, 2008:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 235,728 | 12.54 | % | $ | 150,339 | 8.00 | % | $ | 187,923 | 10.00 | % | ||||||||||||
|
Bank
|
$ | 237,023 | 12.62 | % | $ | 150,201 | 8.00 | % | $ | 187,751 | 10.00 | % | ||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 212,231 | 11.29 | % | $ | 75,169 | 4.00 | % | $ | 112,754 | 6.00 | % | ||||||||||||
|
Bank
|
$ | 213,547 | 11.37 | % | $ | 75,101 | 4.00 | % | $ | 112,651 | 6.00 | % | ||||||||||||
|
Tier
1 Capital (to Average Assets): (1)
|
||||||||||||||||||||||||
|
Corporation
|
$ | 212,231 | 7.53 | % | $ | 112,799 | 4.00 | % | $ | 140,999 | 5.00 | % | ||||||||||||
|
Bank
|
$ | 213,547 | 7.58 | % | $ | 112,724 | 4.00 | % | $ | 140,905 | 5.00 | % | ||||||||||||
|
As
of December 31, 2007:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 167,061 | 10.39 | % | $ | 128,648 | 8.00 | % | $ | 160,810 | 10.00 | % | ||||||||||||
|
Bank
|
$ | 174,750 | 10.87 | % | $ | 128,574 | 8.00 | % | $ | 160,717 | 10.00 | % | ||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 146,393 | 9.10 | % | $ | 64,324 | 4.00 | % | $ | 96,486 | 6.00 | % | ||||||||||||
|
Bank
|
$ | 154,093 | 9.59 | % | $ | 64,287 | 4.00 | % | $ | 96,430 | 6.00 | % | ||||||||||||
|
Tier
1 Capital (to Average Assets): (1)
|
||||||||||||||||||||||||
|
Corporation
|
$ | 146,393 | 6.09 | % | $ | 96,088 | 4.00 | % | $ | 120,110 | 5.00 | % | ||||||||||||
|
Bank
|
$ | 154,093 | 6.42 | % | $ | 96,042 | 4.00 | % | $ | 120,053 | 5.00 | % | ||||||||||||
|
(1)
|
Leverage
ratio
|
As
of December 31, 2008, Bancorp has sponsored the creation of three statutory
trusts for the sole purpose of issuing trust preferred securities and investing
the proceeds in junior subordinated debentures of the Bancorp. In
accordance with FIN 46-R, these statutory trusts created by Bancorp are not
consolidated into the Corporation’s financial statements; however, the
Corporation reflects the amounts of junior subordinated debentures payable to
the preferred shareholders of statutory trusts as debt in its financial
statements. The trust preferred securities qualify as Tier 1
capital.
In
October 2008, Bancorp issued $50.0 million of is Common Stock in a private
placement with select institutional investors. Net proceeds were
approximately $46.9 million after deducting offering-related fees and
expenses. The closing took place on October 7,
2008. Bancorp issued a total of 2.5 million shares of Common
Stock at a price of $20 per share in the private placement. On
October 20, 2008, Bancorp filed a registration statement with the SEC to
register these shares for resale. Washington Trust will use the net
proceeds from the capital raise for general corporate purposes and to support
strategic growth initiatives in its commercial and wealth management business
lines.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
Corporation’s capital ratios at December 31, 2008 place the Corporation in
the “well-capitalized” category according to regulatory standards. On
March 1, 2005, the Federal Reserve Board issued a final rule that would
retain trust preferred securities in Tier 1 capital of bank holding companies,
but with stricter quantitative limits and clearer standards. Under
the proposal, after a five-year transition period that would end on
March 31, 2009, the aggregate amount of trust preferred securities would be
limited to 25% of Tier 1 capital elements, net of goodwill. The
Corporation has evaluated the potential impact of such a change on its Tier 1
capital ratio and has concluded that the regulatory capital treatment of the
trust preferred securities in the Corporation’s total capital ratio would be
unchanged.
(13)
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 exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, financial guarantees, interest rate swaps and floors, and commitments to
originate and commitments to sell fixed rate mortgage loans. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the Corporation’s 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:
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Financial
instruments whose contract amounts represent credit risk:
|
||||||||
|
Commitments
to extend credit:
|
||||||||
|
Commercial
loans
|
$ | 206,515 | $ | 149,465 | ||||
|
Home
equity lines
|
178,371 | 176,284 | ||||||
|
Other
loans
|
22,979 | 20,770 | ||||||
|
Standby
letters of credit
|
7,679 | 8,048 | ||||||
|
Financial
instruments whose notional amounts exceed the amount of credit
risk:
|
||||||||
|
Forward
loan commitments:
|
||||||||
|
Commitments
to originate fixed rate mortgage loans to be sold
|
25,662 | 3,495 | ||||||
|
Commitments
to sell fixed rate mortgage loans
|
28,192 | 5,472 | ||||||
|
Customer
related derivative contracts:
|
||||||||
|
Interest
rate swaps with customers
|
13,981 | 3,850 | ||||||
|
Mirror
swaps with counterparties
|
13,981 | 3,850 | ||||||
|
Interest
rate risk management contract:
|
||||||||
|
Interest
rate swap
|
10,000 | – | ||||||
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.
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. Under the standby letters of
credit, the Corporation is required to make payments to the beneficiary of the
letters of credit upon request by the beneficiary contingent upon the customer’s
failure to perform under the terms of the underlying contract with the
beneficiary. Standby letters of credit extend up to five
years. At December 31, 2008 and 2007, the maximum potential
amount of undiscounted future payments, not reduced by amounts that may be
recovered, totaled $7.7 million and $8.0 million,
respectively. At
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
December 31, 2008 and
2007, there was no liability to beneficiaries resulting from standby letters of
credit. Fee income on standby letters of credit totaled
$97 thousand in 2008, essentially unchanged from 2007.
At
December 31, 2008, a substantial portion of the standby letters of credit
were supported by pledged collateral. The collateral obtained is
determined based on management’s credit evaluation of the
customer. Should the Corporation be required to make payments to the
beneficiary, repayment from the customer to the Corporation is
required.
Interest
Rate Risk Management Agreements
Interest
rate swaps and floors are used from time to time as part of the Corporation’s
interest rate risk management strategy. Swaps are agreements in which
the Corporation and another party agree to exchange interest payments (e.g.,
fixed-rate for variable-rate payments) computed on a notional principal
amount. A floor is a purchased contract that entitles the Corporation
to receive payment from a counterparty if a rate index falls below a contractual
rate. The amount of the payment is the difference between the
contractual floor rate and the rate index multiplied by the notional principal
amount of the contract. If the rate index does not fall below the
contractual floor rate, no payment is received. The credit risk
associated with swap and floor transactions is the risk of default by the
counterparty. To minimize this risk, the Corporation enters into
interest rate agreements only with highly rated counterparties that management
believes to be creditworthy. The notional amounts of these agreements
do not represent amounts exchanged by the parties and thus, are not a measure of
the potential loss exposure.
In
April 2008, the Bancorp entered into an interest rate swap contract with a
notional amount of $10 million to hedge the interest rate risk associated
with $10 million of the variable rate junior subordinated
debentures. See additional disclosure in Note 11. The
interest rate swap contract matures in 2013. At inception, the swap
was intended to convert the debt from variable rate to fixed rate and qualify
for cash flow hedge accounting under SFAS No. 133. In September
2008, the hedging relationship was no longer highly effective due to changes in
the creditworthiness of the counterparty to the derivative. As a
result, cash flow hedge accounting was discontinued prospectively and all
subsequent changes in fair value of the interest rate swap were recognized
directly in earnings as noninterest income. As of the date of
discontinuance in September 2008, Washington Trust had a net unrealized gain on
the swap contract of $30 thousand which was recorded in accumulated other
comprehensive loss, net of taxes. This amount will be subsequently
reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the variable rate debentures affect
earnings. The fair value of the interest rate swap contract amounted
to $601 thousand at December 31, 2008 and was reported in other
liabilities on the consolidated balance sheet. Included in
noninterest income were unrealized losses on this interest rate swap contract of
$638 thousand in 2008. The valuation decline in the fourth
quarter of 2008 was attributable to a decline in the swap yield curve during the
quarter, which reduced market fixed rates for terms similar to this swap
contract.
The
Corporation has entered into interest rate swap contracts to help commercial
loan borrowers manage their interest rate risk. The interest rate
swap contracts with commercial loan borrowers allow them to convert floating
rate loan payments to fixed rate loan payments. When we enter into an
interest rate swap contract with a commercial loan borrower, we simultaneously
enter into a “mirror” swap contract with a third party. The third
party exchanges the client’s fixed rate loan payments for floating rate loan
payments. We retain the risk that is associated with the potential
failure of counterparties and inherent in making loans.
At
December 31, 2008 and 2007, Washington Trust had interest rate swap
contracts with commercial loan borrowers with notional amounts of
$14.0 million and $3.9 million, respectively, and equal amounts of
“mirror” swap contracts with third-party financial
institutions. These interest rate swap contracts are carried at fair
value with changes in fair value recorded as noninterest income. The
fair values of the interest rate swap contracts with commercial loan borrowers
amounted to $1.4 million as of December 31, 2008 and $60 thousand
as of December 31, 2007. The fair values of the “mirror” swap
contracts with third-party financial institutions totaled $1.5 million as
of December 31, 2008 and $60 thousand as of December 31,
2007. For the years ended December 31, 2008 and 2007, net gains
on customer related interest rate swap contracts amounted to $96 thousand
and $27 thousand, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Forward
Loan Commitments
Interest
rate lock commitments are extended to borrowers that relate to the origination
of readily marketable mortgage loans held for sale. To mitigate the
interest rate risk inherent in these rate locks, as well as closed mortgage
loans held for sale, best efforts forward commitments are established to sell
individual mortgage loans. Commitments to originate and commitments
to sell fixed rate mortgage loans are derivative financial
instruments. Accordingly, the fair value of these commitments is
recognized in other assets or other liabilities on the balance sheet and the
changes in fair value of such commitments are recorded in current earnings in
the income statement. The net carrying values of such commitments as
of December 31, 2008 and 2007 and the respective changes in fair values for
the years then ended were immaterial.
(14)
Fair Value Measurements
Effective
January 1, 2008, the Corporation adopted SFAS No. 157 for financial
assets and liabilities. The effective date of SFAS No. 157, as
it applies to nonfinancial assets and liabilities, has been delayed to
January 1, 2009. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure
requirements about fair value measurements. SFAS No. 157, among
other things, emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and states that a fair value measurement should be
determined based on the assumptions the market participants would use in pricing
the asset or liability. In addition, SFAS No. 157 specifies a
hierarchy of valuation techniques based on whether the types of valuation
information (“inputs”) are observable or unobservable. Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Corporation’s market assumptions. These two types
of inputs have created the following fair value hierarchy:
|
·
|
Level
1 – Quoted prices for identical assets or
liabilities in active markets.
|
|
·
|
Level
2 – Quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar
assets or liabilities in inactive markets; and model-derived valuations in
which all significant inputs and significant value drivers are observable
in active markets.
|
|
·
|
Level
3 – Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable in the
markets and which reflect the Corporation’s market
assumptions.
|
The
Corporation uses fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures. Securities available for sale and derivatives are
recorded at fair value on a recurring basis. Additionally, from time
to time, we may be required to record at fair value other assets on a
nonrecurring basis, such as loans held for sale, collateral dependent impaired
loans and mortgage servicing rights. These nonrecurring fair value
adjustments typically involve the application of lower-of-cost-or-market
accounting or write-downs of individual assets.
FASB
Staff Position No. 157-3 was issued on October 10, 2008 to clarify the
application of SFAS No. 157 in a market that is not active. FASB
Staff Position No. 157-3 was effective upon issuance, including prior
periods for which financial statements have not been issued. The
Corporation complied with the guidance in FASB Staff Position No. 157-3 in
determining the fair value of its securities during 2008.
Determination
of Fair Value
Under
SFAS No. 157, fair values are based on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When available, the
Corporation uses quoted market prices to determine fair value. If
quoted prices are not available, fair value is based upon valuation techniques
such as matrix pricing or other models that use, where possible, current
market-based or independently sourced market parameters, such as interest
rates. If observable market-based inputs are not available, the
Corporation uses unobservable inputs to determine appropriate valuation
adjustments using methodologies applied consistently over time.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
following is a description of valuation methodologies for assets and liabilities
recorded at fair value, including the general classification of such assets and
liabilities pursuant to the valuation hierarchy.
Items
Measured at Fair Value on a Recurring Basis
Securities Available for
Sale
Securities
available for sale are recorded at fair value on a recurring
basis. When available, the Corporation uses quoted market prices to
determine the fair value of securities; such items are classified as Level
1. This category includes exchange-traded equity securities and U.S.
Treasury obligations.
Level
2 securities include debt securities with quoted prices, which are traded less
frequently than exchange-traded instruments, whose value is determined using
matrix pricing with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. This
category generally includes obligations of U.S. government-sponsored agencies,
mortgage-backed securities issued by U.S. government and government-sponsored
agencies, municipal bonds, trust preferred securities, corporate bonds and
certain preferred equity securities.
In
certain cases where there is limited activity or less transparency around inputs
to the valuation, securities may be classified as Level 3. As of
December 31, 2008, Level 3 securities were comprised of two trust preferred
CDO holdings, which were not actively traded. To determine their fair
value, Washington Trust utilized third party pricing models and discounted cash
flow methodologies. Their fair values were reviewed against similar
securities that were more actively traded in order to assess the reasonableness
of the fair values. Our fair values assumed liquidation in an orderly
market and not under distressed circumstances. Due to the continued
market illiquidity and credit risk for securities in the financial sector, the
fair value of these securities is highly sensitive to assumption changes and
market volatility.
Derivatives
Substantially
all of our derivatives are traded in over-the-counter markets where quoted
market prices are not readily available. Fair value measurements are
determined using independent pricing models that utilize primarily market
observable inputs, such as swap rates of different maturities and LIBOR rates,
and, accordingly, are classified as Level 2. Examples include
interest rate swap contracts. Any derivative for which we measure
fair value using significant assumptions that are unobservable are classified as
Level 3. Level 3 derivatives include interest rate lock
commitments written for our residential mortgage loans that we intend to
sell.
For
purposes of potential valuation adjustments to its interest rate swap contracts,
the Corporation evaluates the credit risk of its counterparties as well as that
of the Corporation. Accordingly, Washington Trust considers factors
such as the likelihood of default by the Corporation and its counterparties, its
net exposures and remaining contractual life, among other factors, in
determining if any fair value adjustments related to credit risk are
required. Counterparty exposure is evaluated by netting positions
that are subject to master netting agreements, as well as considering the amount
of collateral securing the position.
Items
Measured at Fair Value on a Nonrecurring Basis
Mortgage Loans Held for
Sale
Mortgage
loans held for sale are carried on an aggregate basis at the lower of cost or
fair value. The fair value of loans held for sale is based on what
secondary markets are currently offering for loans with similar
characteristics. As such, we classify loans subjected to nonrecurring
fair value adjustments as Level 2.
Collateral Dependent
Impaired Loans
Collateral
dependent loans that are deemed to be impaired in accordance with SFAS
No. 114, “Accounting by Creditors for Impairment of a Loan,” are valued
based upon the fair value of the underlying collateral. The inputs
used in the appraisals of the collateral are observable, and, therefore, the
loans are categorized as Level 2.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Loan Servicing
Rights
Loan
servicing rights do not trade in an active market with readily observable
prices. Accordingly, we determine the fair value of loan servicing
rights using a valuation model that calculates the present value of the
estimated future net servicing income. The model incorporates
assumptions used in estimating future net servicing income, including estimates
of prepayment speeds, discount rate, cost to service and contractual servicing
fee income. Loan servicing rights are subject to fair value
measurements on a nonrecurring basis. Fair value measurements of our
loan servicing rights use significant unobservable inputs and, accordingly, are
classified as Level 3.
Items
Recorded at Fair Value on a Recurring Basis
The
table below presents the balances of assets and liabilities reported at fair
value on a recurring basis.
|
(Dollars
in thousands)
|
Assets/
|
|||||||||||||||
|
Fair
Value Measurements Using
|
Liabilities
at
|
|||||||||||||||
|
December 31,
2008
|
Level
1
|
Level
2
|
Level
3
|
Fair
Value
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities
available for sale
|
$ | 4,200 | $ | 860,079 | $ | 1,940 | $ | 866,219 | ||||||||
|
Derivative
assets (1)
|
– | 1,413 | 158 | 1,571 | ||||||||||||
|
Total
assets at fair value on a recurring basis
|
$ | 4,200 | $ | 861,492 | $ | 2,098 | $ | 867,790 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
liabilities (1)
|
$ | – | $ | 2,080 | $ | 195 | $ | 2,275 | ||||||||
|
Total
liabilities at fair value on a recurring basis
|
$ | – | $ | 2,080 | $ | 195 | $ | 2,275 | ||||||||
|
(1)
|
Derivative
assets are included in other assets and derivative liabilities are
reported in accrued expenses and other liabilities in the Consolidated
Balance Sheets.
|
The
following table presents the changes in Level 3 assets and liabilities measured
at fair value on a recurring basis in the year ended December 31,
2008.
|
Securities
|
Derivative
|
|||||||||||
|
Available
|
Assets
/
|
|||||||||||
|
(Dollars
in thousands)
|
for
Sale
|
(Liabilities)
|
Total
|
|||||||||
|
Balance
at January 1, 2008
|
$ | – | $ | (4 | ) | $ | (4 | ) | ||||
|
Losses
(realized and unrealized):
|
||||||||||||
|
Included
in earnings
|
(1,859 | ) | (24 | ) | (1,883 | ) | ||||||
|
Included
in other comprehensive income
|
(1,949 | ) | – | (1,949 | ) | |||||||
|
Purchases,
issuances and settlements (net)
|
13 | (9 | ) | 4 | ||||||||
|
Transfers
in and/or out of Level 3
|
5,735 | – | 5,735 | |||||||||
|
Balance
at December 31, 2008
|
$ | 1,940 | $ | (37 | ) | $ | 1,903 | |||||
The
losses included in earnings for Level 3 derivative assets and liabilities,
which were comprised of interest rate lock commitments written for our
residential mortgage loans that we intend to sell, were included in net gains on
loan sales and commissions on loans originated for others in the Consolidated
Statements of Income.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Items
Recorded at Fair Value on a Nonrecurring Basis
Certain
assets are measured at fair value on a nonrecurring basis in accordance with
GAAP. These adjustments to fair value usually result from the
application of lower of cost or fair value accounting or write-downs of
individual assets. The valuation methodologies used to measure these
fair value adjustments are described above. The following table
presents the carrying value of certain assets measured at fair value on a
nonrecurring basis during the year ended December 31, 2008.
|
(Dollars
in thousands)
|
Carrying
Value at December 31, 2008
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Collateral
dependent impaired loans
|
$ | – | $ | 3,396 | $ | – | $ | 3,396 | ||||||||
|
Loan
servicing rights
|
– | – | 385 | 385 | ||||||||||||
|
Total
assets at fair value on a nonrecurring basis
|
$ | – | $ | 3,396 | $ | 385 | $ | 3,781 | ||||||||
At
December 31, 2008, collateral dependent impaired loans had a carrying value
of $3.4 million and related allowance for loan losses allocation of
$274 thousand. At December 31, 2007, collateral dependent
impaired loans had a carrying value of $4.3 million and related allowance
for loan losses allocation of $113 thousand.
In
2008, certain loan servicing rights were written down to their fair value
resulting in a valuation allowance increase of $59 thousand, which was
recorded as a component of other income in the Corporation’s Consolidated
Statements of Income.
SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” requires
disclosures of the fair value of financial instruments, including those
financial instruments that are not measured and reported at fair value on a
recurring or nonrecurring basis. The methodologies for estimating the
fair value of financial instruments that are measured at fair value on a
recurring or nonrecurring basis are discussed above. The estimated
fair value approximates carrying value for cash and cash equivalents, accrued
interest and the cash surrender value of bank-owned life
insurance. The methodologies for other financial instruments
are discussed below:
FHLB
Stock
No
market exists for shares of the FHLB. Subject to certain limitation,
such stock may be redeemed at par upon termination of FHLB membership and is,
therefore, valued at par, which equals cost.
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, 2008 and
2007 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, NOW accounts, money market accounts and savings
accounts is equal to the amount payable on demand as of December 31, 2008
and 2007. 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.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
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.
Junior
Subordinated Debentures
The
fair value of the junior subordinated debentures is estimated using rates
currently available to the Corporation for debentures with similar terms and
maturities.
Securities
Sold Under Agreements to Repurchase
The
carrying amount of securities sold under repurchase agreements is estimated
based on bid quotations received from brokers.
Standby
Letters of Credit
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. Letters of credit contain
provisions for fees, conditions and term periods that are consistent with
customary market practices. Accordingly, the fair value amounts
(considered to be the discounted present value of the remaining contractual fees
over the unexpired commitment period) would not be material and therefore are
not disclosed.
The
following table presents the fair values of financial instruments:
|
December
31,
|
2008
|
2007
|
||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
||||||||||||
| Financial Assets: | ||||||||||||||||
|
Cash
and cash equivalents
|
$ | 58,190 | $ | 58,190 | $ | 41,112 | $ | 41,112 | ||||||||
|
Mortgage
loans held for sale
|
2,543 | 2,604 | 1,981 | 2,004 | ||||||||||||
|
Securities
available for sale
|
866,219 | 866,219 | 751,778 | 751,778 | ||||||||||||
|
FHLB
stock
|
42,008 | 42,008 | 31,725 | 31,725 | ||||||||||||
|
Loans,
net of allowance for loan losses
|
1,815,429 | 1,857,433 | 1,553,375 | 1,576,278 | ||||||||||||
|
Accrued
interest receivable
|
10,980 | 10,980 | 11,427 | 11,427 | ||||||||||||
|
Bank-owned
life insurance
|
43,163 | 43,163 | 41,363 | 41,363 | ||||||||||||
|
Customer
related interest rate swap contracts
|
1,413 | 1,413 | 60 | 60 | ||||||||||||
|
Forward
loan commitments (1)
|
158 | 158 | 19 | 19 | ||||||||||||
| Financial Liabilities: | ||||||||||||||||
|
Noninterest-bearing
demand deposits
|
$ | 172,771 | $ | 172,771 | $ | 175,542 | $ | 175,542 | ||||||||
|
NOW
accounts
|
171,306 | 171,306 | 164,944 | 164,944 | ||||||||||||
|
Money
market accounts
|
305,879 | 305,879 | 321,600 | 321,600 | ||||||||||||
|
Savings
accounts
|
173,485 | 173,485 | 176,278 | 176,278 | ||||||||||||
|
Time
deposits
|
967,427 | 975,255 | 807,841 | 812,009 | ||||||||||||
|
FHLB
advances
|
829,626 | 863,884 | 616,417 | 625,833 | ||||||||||||
|
Junior
subordinated debentures
|
32,991 | 17,386 | 22,681 | 18,706 | ||||||||||||
|
Securities
sold under repurchase agreements
|
19,500 | 21,310 | 19,500 | 20,050 | ||||||||||||
|
Other
borrowings
|
7,243 | 7,243 | 13,060 | 13,060 | ||||||||||||
|
Accrued
interest payable
|
7,995 | 7,995 | 7,483 | 7,483 | ||||||||||||
|
Customer
related interest rate swap contracts
|
1,479 | 1,479 | 60 | 60 | ||||||||||||
|
Interest
rate risk management contract
|
601 | 601 | – | – | ||||||||||||
|
Forward
loan commitments (1)
|
195 | 195 | 23 | 23 | ||||||||||||
(1)
Interest rate lock commitments written for our residential mortgage loans that
we intend to sell.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(15)
Employee Benefits
Defined
Benefit Pension Plans
The
Corporation offers a tax-qualified defined benefit pension plan for the benefit
of certain eligible employees. During 2007, the Corporation reviewed its
retirement program, benefit trends, and best practices, and made a strategic
decision to shift retirement benefits from the pension plan to the 401(k)
Plan. Effective October 1, 2007, the pension plan was amended to
freeze plan entry to new hires and rehires. Existing employees hired
prior to October 1, 2007 continue to accrue benefits under the
plan. Benefits are based on an employee’s years of service and
compensation earned during the years of service. The plan is funded
on a current basis, in compliance with the requirements of ERISA.
The
Corporation also has non-qualified retirement plans to provide supplemental
retirement benefits to certain employees, as defined in the
plans. The supplemental retirement plans provide eligible
participants with an additional retirement benefit.
The
non-qualified retirement plans provide for the designation of assets in rabbi
trusts. Securities available for sale designated for this purpose,
with the carrying value of $9.5 million and $2.3 million are included
in the Consolidated Balance Sheets at December 31, 2008 and 2007,
respectively.
Pension
benefit cost and benefit obligations are developed from actuarial
valuations. Two critical assumptions in determining pension expense
and obligations are the discount rate and the expected long-term rate of return
on plan assets. We evaluate these assumptions at least
annually. The discount rate is used to calculate the present value of
the expected future cash flows for benefit obligations under our pension
plans. Future decreases in discount rates would increase the present
value of pension obligations and increase our pension costs. Future
decreases in the long-term rate of return assumption on plan assets would
increase pension costs and, in general, increase the requirement to make funding
contributions to the plans.
The
following table sets forth the plans’ benefit obligations, fair value of plan
assets and funded status as of December 31, 2008 and 2007.
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||
|
Pension
Plan
|
Retirement
Plans
|
|||||||||||||||
|
At
December 31,
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Change
in Benefit Obligation:
|
||||||||||||||||
|
Benefit
obligation at beginning of period
|
$ | 33,028 | $ | 31,763 | $ | 9,223 | $ | 8,944 | ||||||||
|
Service
cost
|
2,046 | 2,010 | 250 | 345 | ||||||||||||
|
Interest
cost
|
2,027 | 1,848 | 571 | 519 | ||||||||||||
|
Adjustment
for change in measurement date
|
771 | - | 121 | - | ||||||||||||
|
Actuarial
loss (gain)
|
2,645 | (1,644 | ) | (249 | ) | (250 | ) | |||||||||
|
Benefits
paid
|
(878 | ) | (842 | ) | (335 | ) | (335 | ) | ||||||||
|
Administrative
expenses
|
(110 | ) | (107 | ) | - | - | ||||||||||
|
Benefit
obligation at end of period
|
$ | 39,529 | $ | 33,028 | $ | 9,581 | $ | 9,223 | ||||||||
|
Change
in Plan Assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of period
|
$ | 30,450 | $ | 25,661 | $ | - | $ | - | ||||||||
|
Actual
(loss) return on plan assets
|
(5,350 | ) | 3,888 | - | - | |||||||||||
|
Employer
contribution
|
2,000 | 1,850 | 335 | 335 | ||||||||||||
|
Benefits
paid
|
(878 | ) | (842 | ) | (335 | ) | (335 | ) | ||||||||
|
Administrative
expenses
|
(110 | ) | (107 | ) | - | - | ||||||||||
|
Adjustment
for change in measurement date
|
(1,585 | ) | - | - | - | |||||||||||
|
Fair
value of plan assets at end of period
|
$ | 24,527 | $ | 30,450 | $ | - | $ | - | ||||||||
|
Funded
status at end of period
|
$ | (15,002 | ) | $ | (2,578 | ) | $ | (9,581 | ) | $ | (9,223 | ) | ||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
funded status of the qualified pension plan and non-qualified retirement plans
has been recognized in accrued expenses and other liabilities in the
Consolidated Balance Sheets at December 31, 2008 and 2007.
The
components of accumulated other comprehensive loss related to the qualified
pension plan and non-qualified retirement plans, on a pre-tax basis, are
summarized below:
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||
|
Pension
Plan
|
Retirement
Plans
|
|||||||||||||||
|
At
December 31,
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
actuarial loss (gain)
|
$ | 12,031 | $ | (129 | ) | $ | 1,280 | $ | 1,884 | |||||||
|
Prior
service cost (credit)
|
(353 | ) | (394 | ) | 125 | 203 | ||||||||||
|
Net
transition asset
|
- | (1 | ) | - | - | |||||||||||
|
Total
pre-tax amounts recognized in
|
||||||||||||||||
|
accumulated
other comprehensive loss (income)
|
$ | 11,678 | $ | (524 | ) | $ | 1,405 | $ | 2,087 | |||||||
The
accumulated benefit obligation for the qualified pension plan was
$30.1 million and $25.2 million at December 31, 2008 and 2007,
respectively. The accumulated benefit obligation for the
non-qualified retirement plans amounted to $8.4 million and
$7.4 million at December 31, 2008 and 2007, respectively.
The
following table presents information for pension plans with an accumulated
benefit obligation in excess of plan assets:
|
(Dollars
in thousands)
|
Non-Qualified
|
|||||||
|
Retirement
Plans
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Projected
benefit obligation
|
$ | 9,581 | $ | 9,223 | ||||
|
Accumulated
benefit obligation
|
8,361 | 7,422 | ||||||
|
Fair
value of plan assets
|
- | - | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
components of net periodic benefit cost and other amounts recognized in other
comprehensive income, on a pre-tax basis, were as follows:
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||||||||||
|
Pension
Plan
|
Retirement
Plans
|
|||||||||||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Net
Periodic Benefit Cost:
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 2,046 | $ | 2,010 | $ | 2,067 | $ | 250 | $ | 345 | $ | 351 | ||||||||||||
|
Interest
cost
|
2,027 | 1,848 | 1,651 | 571 | 519 | 467 | ||||||||||||||||||
|
Expected
return on plan assets
|
(2,276 | ) | (1,984 | ) | (1,800 | ) | - | - | - | |||||||||||||||
|
Amortization
of transition asset
|
(1 | ) | (6 | ) | (6 | ) | - | - | - | |||||||||||||||
|
Amortization
of prior service cost
|
(33 | ) | (33 | ) | (33 | ) | 63 | 63 | 63 | |||||||||||||||
|
Recognized
net actuarial loss
|
15 | 187 | 317 | 217 | 218 | 215 | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 1,778 | $ | 2,022 | $ | 2,196 | $ | 1,101 | $ | 1,144 | $ | 1,096 | ||||||||||||
|
Other
Changes in Plan Assets and
|
||||||||||||||||||||||||
|
Benefit
Obligations Recognized in
|
||||||||||||||||||||||||
|
Other
Comprehensive Income
|
||||||||||||||||||||||||
|
(on
a pre-tax basis):
|
||||||||||||||||||||||||
|
Net
loss (gain)
|
$ | 12,160 | $ | (3,735 | ) | $ | – | $ | (605 | ) | $ | (468 | ) | $ | – | |||||||||
|
Prior
service cost (credit)
|
41 | 33 | – | (78 | ) | (63 | ) | – | ||||||||||||||||
|
Net
transition asset
|
1 | 6 | – | – | – | – | ||||||||||||||||||
|
Recognized
in other comprehensive income
|
$ | 12,202 | $ | (3,696 | ) | $ | – | $ | (683 | ) | $ | (531 | ) | $ | – | |||||||||
|
Total
recognized in net periodic benefit
|
||||||||||||||||||||||||
|
cost
and other comprehensive income
|
$ | 13,980 | $ | (1,674 | ) | $ | 2,196 | $ | 418 | $ | 613 | $ | 1,096 | |||||||||||
The
estimated prior service credit and net loss for the qualified pension plan that
will be amortized from accumulated other comprehensive loss into net periodic
benefit cost during 2009 are $(33) thousand and $303 thousand,
respectively. The estimated prior service cost and net loss for the
non-qualified retirement plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost during 2009 are
$63 thousand and $28 thousand, respectively.
Assumptions:
The
measurement date and weighted-average assumptions used to determine benefit
obligations at December 31, 2008 and 2007 were as follows:
|
Qualified
Pension Plan
|
Non-Qualified
Retirement Plans
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Measurement
date
|
Dec.
31, 2008
|
Sept.
30, 2007
|
Dec.
31, 2008
|
Sept.
30, 2007
|
||||||||||||
|
Discount
rate
|
5.875 | % | 6.25 | % | 6.25 | % | 6.25 | % | ||||||||
|
Rate
of compensation increase
|
4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | ||||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
The
measurement date and weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31, 2008, 2007 and 2006 were as
follows:
|
Qualified
Pension Plan
|
Non-Qualified
Retirement Plans
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
Measurement
date
|
Sept.
30, 2007
|
Sept.
30, 2006
|
Sept.
30, 2005
|
Sept.
30, 2007
|
Sept.
30, 2006
|
Sept.
30, 2005
|
||||||||||||||||||
|
Discount
rate
|
6.25 | % | 5.90 | % | 5.50 | % | 6.25 | % | 5.90 | % | 5.50 | % | ||||||||||||
|
Expected
long-term
|
||||||||||||||||||||||||
|
return
on plan assets
|
8.25 | % | 8.25 | % | 8.25 | % | - | - | - | |||||||||||||||
|
Rate
of compensation
|
||||||||||||||||||||||||
|
increase
|
4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | ||||||||||||
The
expected long-term rate of return on plan assets is based on what the
Corporation believes is realistically achievable based on the types of assets
held by the plan and the plan's investment practices. The assumption
is updated at least annually, taking into account the asset
allocation, historical asset return trends on the types of assets held and
the current and expected economic conditions. At September 30,
2007, the measurement date used in the determination of net periodic benefit
cost for 2008, the Corporation determined that a revision to the assumption was
not necessary based upon expected market performance and the expected long-term
rate of return assumption remained at 8.25%.
The
discount rate assumption for defined benefit pension plans is reset
annually. For measurement dates prior to December 31, 2008, the
Corporation’s discount rate was based on the published yield index for “AA”
long-term corporate bonds. Beginning with measurement date
December 31, 2008, the Corporation utilized the Citigroup Pension Discount
Curve and Liability Index to identify the discount rates for defined benefit
plan obligations. A discount rate is selected for each plan by
matching expected future benefit payments stream to the Citigroup Pension
Discount Curve and Liability Index as of the measurement date.
Plan
Assets:
The
asset allocations of the qualified pension plan at December 31, 2008 and
2007, by asset category were as follows:
|
December
31,
|
2008
|
2007
|
||||||
|
Asset
Category:
|
||||||||
|
Equity
securities
|
52.1 | % | 66.4 | % | ||||
|
Debt
securities
|
36.6 | % | 30.6 | % | ||||
|
Other
|
11.3 | % | 3.0 | % | ||||
|
Total
|
100.0 | % | 100.0 | % | ||||
The
assets of the qualified defined benefit pension plan trust (the “Pension Trust”)
are managed to balance the needs of cash flow requirements and long-term rate of
return. Cash inflow is typically comprised of invested income from
portfolio holdings and Bank contributions, while cash outflow is for the purpose
of paying plan benefits. As early as possible each year, the trustee
is advised of the projected schedule of employer contributions and estimations
of benefit payments. As a general rule, the trustee shall invest the
funds so as to produce sufficient income to cover benefit payments and maintain
a funded status that exceeds the regulatory requirements for tax-qualified
defined benefit plans.
The
investment philosophy used for the Pension Trust emphasizes consistency of
results over an extended market cycle, while reducing the impact of the
volatility of the security markets upon investment results. The
assets of the Pension Trust should be protected by substantial diversification
of investments, providing exposure to a wide range of quality investment
opportunities in various asset classes.
The
investment objective with respect to the Pension Trust assets is to provide
capital appreciation with a current income component. At any time,
the portfolio will typically be invested in the following ranges: 50%
to 70% in
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
equities; 30% to 50% in
fixed income; and 0% to 10% in cash and cash equivalents. The trustee
investment manager will have authorization to invest within these ranges, making
decisions based upon market conditions.
At
December 31, 2008, the holdings in the Other category, primarily cash
equivalents (short-term investments), represented 11.3% of total assets versus
the 0-10% target range in response to the unprecedented market volatility and
illiquid conditions in the fixed income market during the final quarter of
2008.
Fixed
income bond investments should be limited to those in the top four categories
used by the major credit rating agencies. High yield bond funds
may be used to provide exposure to this asset class as a diversification tool
provided they do not exceed 15% of the portfolio. In order to reduce
the volatility of the annual rate of return of the bond portfolio, attention
will be given to the maturity structure of the portfolio in the light of money
market conditions and interest rate forecasts. The assets of Pension
Trust will typically have a laddered maturity structure, avoiding large
concentrations in any single year. Common stock and equity holdings
provide opportunities for dividend and capital appreciation
returns. Holdings will be appropriately diversified by maintaining
broad exposure to large-, mid- and small-cap stocks as well as international
equities. Concentration in small-cap, mid-cap and international
equities is limited to 20%, 20% and 30% of the equity portfolio,
respectively. Investment selection and mix of equity holdings should
be influenced by forecasts of economic activity, corporate profits and
allocation among different segments of the economy while ensuring efficient
diversification. The fair value of equity securities of any one
issuer will not be permitted to exceed 10% of the total fair value of equity
holdings of the Pension Trust. Investments in publicly traded real
estate investment trust securities and low-risk derivatives securities such as
callable securities, floating rate notes, mortgage backed securities and
treasury inflation protected securities, are permitted.
Cash
Flows:
Contributions
The
Internal Revenue Code permits flexibility in plan contributions so that normally
a range of contributions is possible. The Corporation’s current
funding policy has been generally to contribute the minimum required
contribution and additional amounts up to the maximum deductible
contribution. The Corporation expects to contribute $2.0 million
to the qualified pension plan in 2009. In addition, the Corporation
expects to contribute $435 thousand in benefit payments to the
non-qualified retirement plans in 2009.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as follows:
|
(Dollars
in thousands)
|
Qualified
Pension
Plan
|
Non-Qualified
Plans
|
||||||
|
2009
|
$ | 1,074 | $ | 435 | ||||
|
2010
|
1,230 | 585 | ||||||
|
2011
|
1,363 | 658 | ||||||
|
2012
|
1,508 | 724 | ||||||
|
2013
|
1,775 | 775 | ||||||
|
Years
2014 - 2018
|
11,682 | 3,990 | ||||||
401(k)
Plan
The
Corporation’s 401(k) Plan provides a specified match of employee contributions
for substantially all employees. In addition, substantially all
employees hired after September 30, 2007, who are ineligible for
participation in the qualified defined benefit pension plan, will receive a
non-elective employer contribution of 4%. Total employer matching
contributions under this plan amounted to $749 thousand, $685 thousand
and $647 thousand in 2008, 2007 and 2006, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Other
Incentive Plans
The
Corporation maintains several non-qualified incentive compensation
plans. Substantially all employees participate in one of the
incentive compensation plans. Incentive plans provide for annual or
more frequent payments based on a combination of individual performance targets
and the achievement of target levels of net income, earnings per share and
return on equity, or for certain employees, solely on the achievement of
individual performance targets. Total incentive based compensation
amounted to $7.1 million, $7.6 million and $7.1 million in 2008,
2007 and 2006, respectively. In general, the terms of incentive plans
are subject to annual renewal and may be terminated at any time by the Board of
Directors.
Deferred
Compensation Plan
The
Amended and Restated Nonqualified Deferred Compensation Plan provides
supplemental retirement and tax benefits to directors and certain
officers. The plan is funded primarily through pre-tax contributions
made by the participants. The assets and liabilities of the Deferred
Compensation Plan are recorded at fair value in the Corporation’s Consolidated
Balance Sheets. The participants in the plan bear the risk of market
fluctuations of the underlying assets. The accrued liability related
to this plan amounted to $3.3 million and $3.8 million at
December 31, 2008 and 2007, respectively, and is included in other
liabilities on the accompanying Consolidated Balance Sheets. The
corresponding invested assets are reported in other assets.
(16)
Share-Based Compensation Arrangements
Washington
Trust has two share-based compensation plans, which are described
below.
The
Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003 Plan”), which was
shareholder approved, permits the granting of share options and other equity
incentives to officers, employees, directors, and other key
persons. Up to 600,000 shares of the Bancorp’s common stock may be
used from authorized but unissued shares, treasury stock, shares reacquired by
the Corporation, or shares available from expired or terminated
awards. No more than 200,000 shares may be issued in the form of
awards other than share options or stock appreciation rights. Share
options are designated as either non-qualified or incentive share
options. Incentive share option awards may be granted at any time
until February 20, 2013.
The
Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which was
shareholder approved, provided for the granting of share options and other
equity incentives to key employees, directors, advisors, and
consultants. The 1997 Plan permitted share options and other equity
incentives to be granted at any time until April 29, 2007. The
1997 Plan provided for shares of the Bancorp’s common stock to be used from
authorized but unissued shares, treasury stock, shares reacquired by the
Corporation, or shares available from expired or terminated
awards. Share options are designated as either non-qualified or
incentive share options.
The
1997 Plan and the 2003 Plan (collectively, “the Plans”) permit options to be
granted with stock appreciation rights ("SARs"), however, no share options have
been granted with SARs. Pursuant to the Plans, the exercise price of
each share option may not be less than fair market value of the Bancorp’s common
stock on the date of the grant. In general, the share option price is
payable in cash, by the delivery of shares of common stock already owned by the
grantee, or a combination thereof. The fair value of share options on
the date of grant is estimated using the Black-Scholes Option-Pricing
Model. Nonvested share units and shares are valued at the fair market
value of the Bancorp’s common stock as of the award date. Vesting of
share option and share awards may accelerate or may be subject to proportional
vesting if there is a change in control, disability, retirement or death (as
defined in the Plans).
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
Amounts
recognized in the consolidated financial statements for share options, nonvested
share units and nonvested share awards are as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
|
||||||||||||
|
Share-based
compensation expense
|
$ | 630 | $ | 508 | $ | 694 | ||||||
|
|
||||||||||||
|
Related
income tax benefit
|
$ | 225 | $ | 178 | $ | 229 | ||||||
During
2008, the Corporation granted 94,382 non-qualified share options to certain key
employees. These share options awarded were granted with three-year
cliff vesting terms. No share options were awarded during 2007 and
2006.
The
fair value of the share option awards granted in 2008 were estimated on the date
of grant using the Black-Scholes Option-Pricing Model based on assumptions noted
in the following table. Washington Trust uses historical data to
estimate share option exercise and employee departure behavior used in the
option-pricing model; groups of employees that have similar historical behavior
are considered separately for valuation purposes. The expected term
of options granted was derived from the output of the option valuation model and
represents the period of time that options granted are expected to be
outstanding. Expected volatility was based on historical volatility
of Washington Trust shares. The risk-free rate for periods within the
contractual life of the share option was based on the U.S. Treasury yield curve
in effect at the date of grant.
|
2008
|
||||
|
Expected
term (years)
|
9.0 | |||
|
Expected
dividend yield
|
2.86 | % | ||
|
Weighted
average expected volatility
|
33.75 | |||
|
Expected
forfeiture rate
|
– | |||
|
Weighted
average risk-free interest rate
|
4.51 | % | ||
The
weighted average grant-date fair value of the share options awarded during 2008
was $7.96.
A
summary of share option activity under the Plans as of December 31, 2008,
and changes during the year ended December 31, 2008, is presented
below:
|
(Dollars
in thousands)
|
Number
|
Weighted
|
Weighted
Average
|
|||||||||||||
|
of
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||
|
Share
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Price
|
Term
(Years)
|
Value
|
|||||||||||||
|
Outstanding
at January 1, 2008
|
955,485 | $ | 21.21 | – | – | |||||||||||
|
Granted
|
94,382 | 23.77 | – | – | ||||||||||||
|
Exercised
|
56,899 | 17.94 | – | – | ||||||||||||
|
Forfeited
or expired
|
5,550 | 27.87 |
–
|
– | ||||||||||||
|
|
||||||||||||||||
|
Outstanding
at December 31, 2008
|
987,418 | $ | 21.60 |
4.4
years
|
$ | 823 | ||||||||||
|
|
||||||||||||||||
|
Exercisable
at December 31, 2008
|
893,036 | $ | 21.37 |
3.9
years
|
$ | 812 | ||||||||||
|
|
||||||||||||||||
|
Options
expected to vest as of December 31, 2008
|
94,382 | $ | 23.77 |
9.5
years
|
$ | 11 | ||||||||||
The
total intrinsic value, which is the amount by which the fair value of the
underlying stock exceeds the exercise price of an option on the exercise date,
of share options exercised during the years ended December 31, 2008 and
2007 was $431 thousand and $1.3 million, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
During
2008, the Corporation granted 34,407 nonvested share units to directors and
certain key employees. The nonvested share units awarded were granted
with three-year cliff vesting terms.
A
summary of the status of Washington Trust’s nonvested shares as of
December 31, 2008, and changes during the year ended December 31,
2008, is presented below:
|
Weighted
|
||||||||
|
Number
|
Average
|
|||||||
|
of
|
Grant
Date
|
|||||||
|
Shares
|
Fair
Value
|
|||||||
|
Nonvested
at January 1, 2008
|
39,350 | $ | 26.52 | |||||
|
Granted
|
34,407 | 23.87 | ||||||
|
Vested
|
(16,200 | ) | 26.40 | |||||
|
Forfeited
|
– | – | ||||||
|
Nonvested
at December 31, 2008
|
57,557 | $ | 24.97 | |||||
During
2008, performance share awards were granted providing certain executives the
opportunity to earn shares of common stock of the Corporation, the number of
which will be determined pursuant to, and subject to the attainment of,
performance goals during a specified measurement period. The number
of shares to be earned ranges from zero to 24,186 shares, subject to the
attainment of specified performance goals discussed below.
The
performance share awards were granted at $24.12, which was the fair market value
at the date of grant, with vesting ranging from two to three
years. The number of shares awarded will range from zero to 200% of
the target number of shares (12,093 shares) dependent upon the Corporation’s
core return on equity and core earnings per share growth ranking at the end of
the vesting term. The current assumption based on the most recent
peer group information results in the shares vesting at 140% of the target, or
16,930 shares. The Corporation has recognized compensation expense
based on this assumption and will make the necessary adjustments each time the
percentage of the target shares is adjusted. If the goals are not
met, no compensation cost will be recognized and any recognized compensation
costs will be reversed.
A
summary of the status of Washington Trust’s performance share awards as of
December 31, 2008, and changes during the year ended December 31,
2008, is presented below:
|
Weighted
|
||||||||
|
Number
|
Average
|
|||||||
|
of
|
Grant
Date
|
|||||||
|
Shares
|
Fair
Value
|
|||||||
|
Performance
shares at January 1, 2008
|
– | $ | – | |||||
|
Granted
|
16,930 | 24.12 | ||||||
|
Vested
|
– | – | ||||||
|
Forfeited
|
– | – | ||||||
|
Performance
shares at December 31, 2008
|
16,930 | $ | 24.12 | |||||
As
of December 31, 2008, there was $1.7 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
(including share options, nonvested share awards and performance share awards)
granted under the Plans. That cost is expected to be recognized over
a weighted average period of 2.3 years.
(17)
Business Segments
Washington
Trust segregates financial information in assessing its results among two
operating segments: Commercial Banking and Wealth Management
Services. The amounts in the Corporate column include activity not
related to the segments, such as the investment securities portfolio, wholesale
funding activities and administrative units. The Corporate column is
not considered to be an operating segment. The methodologies and
organizational
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
hierarchies that define
the business segments are periodically reviewed and revised. Results
may be restated, when necessary, to reflect changes in organizational structure
or allocation methodology. The following table presents the statement of
operations and total assets for Washington Trust’s reportable
segments.
|
(Dollars
in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year
ended December 31, 2008
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net
interest income (expense)
|
$ | 62,651 | $ | (27 | ) | $ | 2,889 | $ | 65,513 | |||||||
|
Noninterest
income (expense)
|
14,457 | 28,273 | (2,210 | ) | 40,520 | |||||||||||
|
Total
income
|
77,108 | 28,246 | 679 | 106,033 | ||||||||||||
|
Provision
for loan losses
|
4,800 | – | – | 4,800 | ||||||||||||
|
Depreciation
and amortization expense
|
2,506 | 1,640 | 178 | 4,324 | ||||||||||||
|
Other
noninterest expenses
|
40,340 | 18,456 | 8,622 | 67,418 | ||||||||||||
|
Total
noninterest expenses
|
47,646 | 20,096 | 8,800 | 76,542 | ||||||||||||
|
Income
before income taxes
|
29,462 | 8,150 | (8,121 | ) | 29,491 | |||||||||||
|
Income
tax expense (benefit)
|
10,309 | 3,237 | (6,227 | ) | 7,319 | |||||||||||
|
Net
income
|
$ | 19,153 | $ | 4,913 | $ | (1,894 | ) | $ | 22,172 | |||||||
|
Total
assets at period end
|
$ | 1,895,436 | $ | 53,096 | $ | 1,016,934 | $ | 2,965,466 | ||||||||
|
Expenditures
for long-lived assets
|
$ | 3,596 | $ | 389 | $ | 198 | $ | 4,183 | ||||||||
|
(Dollars
in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year
ended December 31, 2007
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net
interest income (expense)
|
$ | 53,927 | $ | (61 | ) | $ | 6,078 | $ | 59,944 | |||||||
|
Noninterest
income
|
14,263 | 29,016 | 2,230 | 45,509 | ||||||||||||
|
Total
income
|
68,190 | 28,955 | 8,308 | 105,453 | ||||||||||||
|
Provision
for loan losses
|
1,900 | – | – | 1,900 | ||||||||||||
|
Depreciation
and amortization expense
|
2,454 | 1,703 | 177 | 4,334 | ||||||||||||
|
Other
noninterest expenses
|
37,530 | 17,942 | 9,100 | 64,572 | ||||||||||||
|
Total
noninterest expenses
|
41,884 | 19,645 | 9,277 | 70,806 | ||||||||||||
|
Income
before income taxes
|
26,306 | 9,310 | (969 | ) | 34,647 | |||||||||||
|
Income
tax expense (benefit)
|
9,234 | 3,601 | (1,988 | ) | 10,847 | |||||||||||
|
Net
income
|
$ | 17,072 | $ | 5,709 | $ | 1,019 | $ | 23,800 | ||||||||
|
Total
assets at period end
|
$ | 1,643,200 | $ | 46,163 | $ | 850,577 | $ | 2,539,940 | ||||||||
|
Expenditures
for long-lived assets
|
$ | 3,658 | $ | 264 | $ | 200 | $ | 4,122 | ||||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(Dollars
in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year
ended December 31, 2006
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net
interest income (expense)
|
$ | 53,561 | $ | (106 | ) | $ | 8,019 | $ | 61,474 | |||||||
|
Noninterest
income
|
13,904 | 26,380 | 1,899 | 42,183 | ||||||||||||
|
Total
income
|
67,465 | 26,274 | 9,918 | 103,657 | ||||||||||||
|
Provision
for loan losses
|
1,200 | – | – | 1,200 | ||||||||||||
|
Depreciation
and amortization expense
|
2,184 | 1,661 | 743 | 4,588 | ||||||||||||
|
Other
noninterest expenses
|
35,802 | 17,337 | 7,608 | 60,747 | ||||||||||||
|
Total
noninterest expenses
|
39,186 | 18,998 | 8,351 | 66,535 | ||||||||||||
|
Income
before income taxes
|
28,279 | 7,276 | 1,567 | 37,122 | ||||||||||||
|
Income
tax expense (benefit)
|
9,885 | 2,827 | (621 | ) | 12,091 | |||||||||||
|
Net
income
|
$ | 18,394 | $ | 4,449 | $ | 2,188 | $ | 25,031 | ||||||||
|
Total
assets at period end
|
$ | 1,553,351 | $ | 40,125 | $ | 805,689 | $ | 2,399,165 | ||||||||
|
Expenditures
for long-lived assets
|
$ | 2,752 | $ | 466 | $ | 360 | $ | 3,578 | ||||||||
Management
uses certain methodologies to allocate income and expenses to the business
lines. A funds transfer pricing methodology is used to assign
interest income and interest expense to each interest-earning asset and
interest-bearing liability on a matched maturity funding
basis. Certain indirect expenses are allocated to
segments. These include support unit expenses such as technology and
processing operations and other support functions. Taxes are
allocated to each segment based on the effective rate for the period
shown.
Commercial
Banking
The
Commercial Banking segment includes commercial, commercial real estate,
residential and consumer lending activities; mortgage banking, secondary market
and loan servicing activities; deposit generation; merchant credit card
services; cash management activities; and direct banking activities, which
include the operation of ATMs, telephone and internet banking services and
customer support and sales.
Wealth
Management Services
Wealth
Management Services includes asset management services provided for individuals
and institutions; personal trust services, including services as executor,
trustee, administrator, custodian and guardian; institutional trust services,
including services as trustee for pension and profit sharing plans; and other
financial planning and advisory services.
Corporate
Corporate
includes the Treasury Unit, which is responsible for managing the wholesale
investment portfolio and wholesale funding needs. It also includes
income from BOLI as well as administrative and executive expenses not allocated
to the business lines and the residual impact of methodology allocations such as
funds transfer pricing offsets.
Included
in the Corporate column above were income tax benefits of $1.4 million
recognized in 2008 resulting from a change in state corporate income tax
legislation and the resolution of certain state tax positions.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(18)
Earnings per Share
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
|||||||||||||||||||
|
Net
income
|
$ | 22,172 | $ | 22,172 | $ | 23,800 | $ | 23,800 | $ | 25,031 | $ | 25,031 | ||||||||||||
|
Share
amounts, in thousands:
|
||||||||||||||||||||||||
|
Average
outstanding
|
13,981.9 | 13,981.9 | 13,355.5 | 13,355.5 | 13,424.1 | 13,424.1 | ||||||||||||||||||
|
Common
stock equivalents
|
– | 164.4 | – | 248.6 | – | 299.1 | ||||||||||||||||||
|
Weighted
average outstanding
|
13,981.9 | 14,146.3 | 13,355.5 | 13,604.1 | 13,424.1 | 13,723.2 | ||||||||||||||||||
|
Earnings
per share
|
$ | 1.59 | $ | 1.57 | $ | 1.78 | $ | 1.75 | $ | 1.86 | $ | 1.82 | ||||||||||||
Weighted
average stock options outstanding, not included in common stock equivalents
above because they were anti-dilutive, totaled 325 thousand,
283 thousand and 284 thousand for 2008, 2007 and 2006,
respectively.
(19)
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 such matters will not materially affect the consolidated
financial position or results of operations of the Corporation.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
(20)
Parent Company Financial Statements
The
following are parent company only financial statements of Washington Trust
Bancorp, Inc. reflecting the investment in the Bank 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.
|
Balance
Sheets
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Cash
on deposit with bank subsidiary
|
$ | 803 | $ | 2,101 | ||||
|
Investment
in subsidiaries at equity value
|
270,076 | 217,455 | ||||||
|
Dividends
receivable from subsidiaries
|
3,480 | 2,280 | ||||||
|
Other
assets
|
395 | 71 | ||||||
|
Total
assets
|
$ | 274,754 | $ | 221,907 | ||||
|
Liabilities:
|
||||||||
|
Junior
subordinated debentures
|
$ | 32,991 | $ | 22,681 | ||||
|
Deferred
acquisition obligations
|
2,506 | 9,884 | ||||||
|
Dividends
payable
|
3,351 | 2,677 | ||||||
|
Accrued
expenses and other liabilities
|
795 | 152 | ||||||
|
Total
liabilities
|
39,643 | 35,394 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
stock of $.0625 par value; authorized 30,000,000 shares;
|
||||||||
|
issued
16,018,868 shares in 2008 and 13,492,110 in 2007
|
1,001 | 843 | ||||||
|
Paid-in
capital
|
82,095 | 34,874 | ||||||
|
Retained
earnings
|
164,679 | 154,647 | ||||||
|
Accumulated
other comprehensive loss
|
(10,458 | ) | (239 | ) | ||||
|
Treasury
stock, at cost; 84,191 shares in 2008 and 137,652 shares in
2007
|
(2,206 | ) | (3,612 | ) | ||||
|
Total
shareholders’ equity
|
235,111 | 186,513 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 274,754 | $ | 221,907 | ||||
|
Statements
of Income
|
(Dollars
in thousands)
|
|||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Income:
|
||||||||||||
|
Dividends
from subsidiaries
|
$ | 26,259 | $ | 21,093 | $ | 11,801 | ||||||
|
Unrealized
losses on interest rate swap contracts
|
(638 | ) | – | – | ||||||||
|
Other
income
|
71 | – | – | |||||||||
|
Total
income
|
25,692 | 21,093 | 11,801 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest
on junior subordinated debentures
|
1,879 | 1,352 | 1,352 | |||||||||
|
Interest
on deferred acquisition obligations
|
217 | 312 | 308 | |||||||||
|
Legal
and professional fees
|
309 | 187 | – | |||||||||
|
Other
|
236 | 173 | 1 | |||||||||
|
Total
expenses
|
2,641 | 2,024 | 1,661 | |||||||||
|
Income
before income taxes
|
23,051 | 19,069 | 10,140 | |||||||||
|
Income
tax benefit
|
1,104 | 691 | 567 | |||||||||
|
Income
before equity in undistributed earnings of subsidiaries
|
24,155 | 19,760 | 10,707 | |||||||||
|
Equity
in (over-distributed) undistributed earnings of
subsidiaries
|
(1,983 | ) | 4,040 | 14,324 | ||||||||
|
Net
income
|
$ | 22,172 | $ | 23,800 | $ | 25,031 | ||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Statements
of Cash Flows
|
(Dollars
in thousands)
|
|||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flow from operating activities:
|
||||||||||||
|
Net
income
|
$ | 22,172 | $ | 23,800 | $ | 25,031 | ||||||
|
Adjustments
to reconcile net income
|
||||||||||||
|
to
net cash provided by operating activities:
|
||||||||||||
|
Equity
in over-distributed (undistributed) earnings of subsidiary
|
1,983 | (4,040 | ) | (14,324 | ) | |||||||
|
Unrealized
losses on interest rate swap contracts
|
638 | – | – | |||||||||
|
(Increase)
decrease in dividend receivable
|
(1,200 | ) | 2,520 | (2,700 | ) | |||||||
|
Increase
in other assets
|
(37 | ) | (8 | ) | (4 | ) | ||||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
187 | 350 | (1 | ) | ||||||||
|
Other,
net
|
(320 | ) | (375 | ) | 61 | |||||||
|
Net
cash provided by operating activities
|
23,423 | 22,247 | 8,063 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Equity
investment in subsidiary bank
|
(56,425 | ) | – | – | ||||||||
|
Equity
investment in capital trust
|
(310 | ) | – | – | ||||||||
|
Payment
of deferred acquisition obligation
|
(15,159 | ) | (6,720 | ) | – | |||||||
|
Net
cash used in investing activities
|
(71,894 | ) | (6,720 | ) | – | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Issuance
(purchase) of treasury stock, including net deferred compensation plan
activity
|
36 | (5,200 | ) | (1,547 | ) | |||||||
|
Proceeds
from the issuance of common stock under dividend reinvestment
plan
|
864 | – | 1,216 | |||||||||
|
Proceeds
from the issuance of common stock, net
|
46,874 | – | – | |||||||||
|
Proceeds
from the exercise of stock options and issuance of other equity
instruments
|
182 | 1,052 | 912 | |||||||||
|
Tax
benefit from stock option exercises and issuance of other equity
instruments
|
199 | 727 | 384 | |||||||||
|
Proceeds
from the issuance of junior subordinated debentures, net of issuance
costs
|
10,016 | – | – | |||||||||
|
Cash
dividends paid
|
(10,998 | ) | (10,580 | ) | (10,070 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
47,173 | (14,001 | ) | (9,105 | ) | |||||||
|
Net
(decrease) increase in cash
|
(1,298 | ) | 1,526 | (1,042 | ) | |||||||
|
Cash
at beginning of year
|
2,101 | 575 | 1,617 | |||||||||
|
Cash
at end of year
|
$ | 803 | $ | 2,101 | $ | 575 | ||||||
None.
Disclosure
Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, the Corporation carried out
an evaluation under the supervision and with the participation of the
Corporation’s management, including the Corporation’s principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the Corporation’s disclosure controls and procedures as of the end
of the period ended December 31, 2008. Based upon that
evaluation, the principal executive officer and principal financial officer
concluded that the Corporation’s disclosure controls and procedures are
effective and designed to ensure that information required to be disclosed by
the Corporation in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. The Corporation will continue to review
and document its disclosure controls and procedures and consider such changes in
future evaluations of the effectiveness of such controls and procedures, as it
deems appropriate.
Internal
Control Over Financial Reporting
There
has been no change in our internal control over financial reporting during the
fourth quarter ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
None.
Required
information regarding directors is presented under the caption “Nominee and
Director Information” in the Bancorp’s Proxy Statement dated March 11, 2009
prepared for the Annual Meeting of Shareholders to be held April 28, 2009,
which is incorporated herein by reference.
Required
information regarding the Corporation’s audit committee and audit committee
financial experts is included under the caption “Board of Directors and
Committees – Audit Committee” in the Bancorp’s Proxy Statement dated
March 11, 2009 prepared for the Annual Meeting of Shareholders to be held
April 28, 2009, which is incorporated herein by reference.
Required
information regarding executive officers of the Corporation is included in Part
I of this Annual Report under the caption “Executive Officers of the
Registrant.”
Information
required with respect to compliance with Section 16(a) of the Exchange Act
appears under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Bancorp’s Proxy Statement dated March 11, 2009 prepared
for the Annual Meeting of Shareholders to be held April 28, 2009, which is
incorporated herein by reference.
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Corporation’s Board of Directors.
The
Corporation maintains a code of ethics that applies to all of the Corporation’s
directors, officers and employees. This code of ethics is available
on the Corporation’s website at www.washtrust.com, under the heading Investor
Relations. The Corporation intends to disclose any amendments to, or
waivers from, our code of ethics that are required to be publicly disclosed
pursuant to the rules of the SEC and the NASDAQ Global Select Market by filing
such amendment or waiver with the SEC and by posting it on our
website.
The
information required by this Item appears under the captions “Compensation
Discussion and Analysis,” “Directors Compensation,” “Executive Compensation,”
“Compensation Committee Interlocks and Insider
Participation”
and “Compensation Committee Report” in the Bancorp’s Proxy Statement dated
March 11, 2009 prepared for the Annual Meeting of Shareholders to be held
April 28, 2009, which are incorporated herein by reference.
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2008 regarding
shares of common stock of the Bancorp that may be issued under our existing
equity compensation plans, including the 1997 Plan, the 2003 Plan and the
Amended and Restated Nonqualified Deferred Compensation Plan (the “Deferred
Compensation Plan”).
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights (1)
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plan (excluding securities referenced in column
(a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans
approved
by security holders (2)
|
1,115,880 (3) (4)
|
$ | 21.60 (5) | 69,202 (4) (6) | ||||||||
|
Equity
compensation plans not
approved
by security holders (7)
|
23,700 | N/A (8) | N/A | |||||||||
|
Total
|
1,139,580
|
$ | 21.60 (5) (8) | 69,202 | ||||||||
|
(1)
|
Does
not include any nonvested shares as such shares are already reflected in
the Bancorp’s outstanding shares.
|
|
(2)
|
Consists
of the 1997 Plan and the 2003 Plan.
|
|
(3)
|
Includes
51,819 nonvested share units outstanding under the 1997 Plan and 52,157
nonvested share units and 24,186 performance shares outstanding under the
2003 Plan.
|
| (4) | Includes the maximum amount of performance shares that could be issued under existing awards. The actual shares issued may differ based on the attainment of performance goals. |
|
(5)
|
Does
not include the effect of the nonvested share units awarded under the 1997
Plan and the 2003 Plan because these units do not have an exercise
price.
|
|
(6)
|
Includes
up to 69,202 securities that may be issued in the form of nonvested
shares.
|
|
(7)
|
Consists
of the Deferred Compensation Plan, which is described
below.
|
|
(8)
|
Does
not include information about the phantom stock units outstanding under
the Deferred Compensation Plan, as such units do not have any exercise
price.
|
The
Deferred Compensation Plan
The
Deferred Compensation Plan has not been approved by our
shareholders.
The
Deferred Compensation Plan allows our directors and officers to defer a portion
of their compensation. The deferred compensation is contributed to a
rabbi trust. The trustee of the rabbi trust invests the assets of the
trust in shares of selected mutual funds as well as shares of the Bancorp’s
common stock. All shares of the Bancorp’s common stock are purchased
in the open market. As of October 15, 2007, the Bancorp’s common
stock was no longer available as a new benchmark investment under the
plan. Further, directors and officers who currently have selected
Bancorp’s common stock as a benchmark investment (the “Bancorp Stock Fund”) will
be allowed to transfer from that fund during a transition period that will run
through March 14, 2009. After March 14, 2009, directors and
officers will not be allowed to make transfers from the Bancorp Stock Fund and
any distributions will be made in whole shares of Bancorp’s common stock to the
extent of the benchmark investment election in the Bancorp Stock
Fund.
The
Deferred Compensation Plan was included as part of Exhibit 10.1 to the
Bancorp’s Form S-8 Registration Statement (File No. 333-146388) filed with
the SEC on September 28, 2007.
The
information required by this Item is incorporated herein by reference to the
captions “Indebtedness and Other Transactions,” “Policies and Procedures for
Related Party Transactions” and “Board of Directors and Committees – Director
Independence” in the Bancorp’s Proxy Statement dated March 11, 2009
prepared for the Annual Meeting of Shareholders to be held April 28,
2009.
The
information required by this Item is incorporated herein by reference to the
caption “Independent Auditors” in the Bancorp’s Proxy Statement dated
March 11, 2009 prepared for the Annual Meeting of Shareholders to be held
April 28, 2009.
| (a) |
1.
|
Financial
Statements. The financial statements of the Corporation
required in response to this Item are listed in response to Part II, Item
8 of this Annual Report on Form 10-K.
|
| 2. | Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-X and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. | |
| 3. | Exhibits. The following exhibits are included as part of this Form 10-K. |
|
Exhibit
Number
|
|
|
2.1
|
Stock
Purchase Agreement, dated March 18, 2005, by and between Washington Trust
Bancorp, Inc., Weston Financial Group, Inc., and the shareholders of
Weston Financial Group, Inc. – Filed as Exhibit No. 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on March 22, 2005. (1)
|
|
2.2
|
Amendment
to Stock Purchase Agreement, dated December 24, 2008, by and between
Washington Trust Bancorp, Inc., Weston Financial Group, Inc., and the
shareholders of Weston Financial Group, Inc. – Filed
herewith.
|
|
3.1
|
Restated Articles of
Incorporation of the Registrant – Filed as Exhibit 3.a to the
Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the
fiscal year ended December 31, 2000. (1)
|
|
3.2
|
Amendment
to Restated Articles of Incorporation – Filed as Exhibit 3.b to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2002. (1)
|
|
3.3
|
Amended
and Restated By-Laws of the Registrant – Filed as Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K dated September 20, 2007.
(1)
|
|
4.1
|
Transfer
Agency and Registrar Services Agreement, between Registrant and American
Stock Transfer & Trust Company, dated February 15, 2006 – Filed
as Exhibit 4.1 on the Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2006. (1)
|
|
4.2
|
Agreement
of Substitution and Amendment of Amended and Restated Rights Agreement,
between Registrant and American Stock Transfer & Trust Company, dated
February 15, 2006 – Filed as Exhibit 4.2 on the Registrant’s
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2006. (1)
|
|
4.3
|
Shareholder
Rights Agreement, dated as of August 17, 2006, between Washington Trust
Bancorp, Inc. and American Stock Transfer & Trust Company, as Rights
Agent – Filed as Exhibit 4.1 to the Registrant’s Current Report on Form
8-K dated August 17, 2006. (1)
|
|
10.1
|
Vote
of the Board of Directors of the Registrant, which constitutes the 1996
Directors’ Stock Plan – Filed as Exhibit 10.e to the Registrant’s Annual
Report on Form 10-K (File No. 000-13091) for the fiscal year ended
December 31, 2002. (1) (2)
|
|
10.2
|
The
Registrant’s 1997 Equity Incentive Plan – Filed as Exhibit 10.f to the
Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the
fiscal year ended December 31, 2002. (1) (2)
|
|
10.3
|
Amendment
to the Registrant’s 1997 Equity Incentive Plan – Filed as Exhibit 10.b to
the Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091)
for the quarterly period ended June 30, 2000. (1) (2)
|
|
10.4
|
2003
Stock Incentive Plan - Filed as Exhibit 10 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2003.
(1)
(2)
|
|
Exhibit
Number
|
|
|
10.5
|
First
Amendment to 2003 Stock Incentive Plan - Filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated December 16, 2004.
(1)
(2)
|
|
10.6
|
Form
of Restricted Stock Units Certificate under the Washington Trust Bancorp,
Inc. 1997 Equity Incentive Plan, as amended (employees) – Filed as exhibit
10.1 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.7
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) - Filed as
Exhibit No. 10.2 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.8
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 1997 Equity Incentive Plan, as amended (members of the Board
of Directors) - Filed as Exhibit No. 10.3 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on June 17, 2005. (1)
|
|
10.9
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 1997 Equity Incentive Plan, as amended (employees) – Filed
as Exhibit No. 10.4 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.10
|
Form
of Incentive Stock Option Certificate under the Washington Trust Bancorp,
Inc. 1997 Equity Incentive Plan, as amended – Filed as Exhibit
No. 10.5 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.11
|
Form
of Restricted Stock Units Certificate under the Washington Trust Bancorp,
Inc. 1997 Equity Incentive Plan, as amended (members of the Board of
Directors) – Filed as Exhibit No. 10.6 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on June 17, 2005. (1)
|
|
10.12
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp, Inc.
1997 Equity Incentive Plan, as amended – Filed as Exhibit No. 10.7 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on June 17, 2005.
(1)
|
|
10.13
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the Board
of Directors) – Filed as Exhibit No. 10.8 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on June 17, 2005. (1)
|
|
10.14
|
Form
of Incentive Stock Option Certificate under the Washington Trust Bancorp,
Inc. 2003 Stock Incentive Plan, as amended – Filed as Exhibit
No. 10.9 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.15
|
Compensatory
agreement with Galan G. Daukas, dated July 28, 2005 – Filed as Exhibit
10.1 to the Bancorp’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2005. (1) (2)
|
|
10.16
|
Amended
and Restated Declaration of Trust of WT Capital Trust I dated
August 29, 2005, by and among Wilmington Trust Company, as Delaware
Trustee and Institutional Trustee, Washington Trust Bancorp, Inc., as
Sponsor, and the Administrators listed therein – Filed as exhibit 10.1 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.17
|
Indenture
dated as of August 29, 2005, between Washington Trust Bancorp, Inc.,
as Issuer, and Wilmington Trust Company, as Trustee – Filed as exhibit
10.2 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on September 1, 2005. (1)
|
|
10.18
|
Guaranty
Agreement dated August 29, 2005, by and between Washington Trust
Bancorp, Inc. and Wilmington Trust Company – Filed as exhibit 10.3 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005. (1)
|
|
10.19
|
Certificate
Evidencing Fixed/Floating Rate Capital Securities of WT Capital Trust I
dated August 29, 2005 – Filed as exhibit 10.4 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on September 1, 2005. (1)
|
|
Exhibit
Number
|
|
|
10.20
|
Fixed/Floating
Rate Junior Subordinated Deferrable Interest Debenture of Washington Trust
Bancorp, Inc. dated August 29, 2005 – Filed as exhibit 10.5 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.21
|
Amended
and Restated Declaration of Trust of WT Capital Trust II dated
August 29, 2005, by and among Wilmington Trust Company, as Delaware
Trustee and Institutional Trustee, Washington Trust Bancorp, Inc., as
Sponsor, and the Administrators listed therein – Filed as exhibit 10.6 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.22
|
Indenture
dated as of August 29, 2005, between Washington Trust Bancorp, Inc.,
as Issuer, and Wilmington Trust Company, as Trustee – Filed as exhibit
10.7 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on September 1, 2005. (1)
|
|
10.23
|
Guaranty
Agreement dated August 29, 2005, by and between Washington Trust
Bancorp, Inc. and Wilmington Trust Company – Filed as exhibit 10.8 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005. (1)
|
|
10.24
|
Certificate
Evidencing Capital Securities of WT Capital Trust II (Number of Capital
Securities – 10,000) dated August 29, 2005 – Filed as exhibit 10.9 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.25
|
Certificate
Evidencing Capital Securities of WT Capital Trust II (Number of Capital
Securities – 4,000) dated August 29, 2005 – Filed as exhibit 10.10 to the
Bancorp’s Current Report on Form 8-K (File No. 0-13091), as filed with the
Securities and Exchange Commission on September 1, 2005. (1)
|
|
10.26
|
Fixed/Floating
Rate Junior Subordinated Debt Security due 2035 of Washington Trust
Bancorp, Inc. dated August 29, 2005 – Filed as exhibit 10.11 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.27
|
Form
of Restricted Stock Units Certificate under the Washington Trust Bancorp,
Inc. 2003 Stock Incentive Plan, as amended (employees) – Filed as Exhibit
10.2 to the Registrant’s Current Report on Form 8-K dated April 25,
2006. (1)
(2)
|
|
10.28
|
Form
of Restricted Stock Units Certificate under the Washington Trust Bancorp,
Inc. 2003 Stock Incentive Plan, as amended (members of the Board of
Directors) – Filed as Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K dated April 25, 2006. (1) (2)
|
|
10.29
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp, Inc.
2003 Stock Incentive Plan, as amended (employees) – Filed as Exhibit 10.4
to the Registrant’s Current Report on Form 8-K dated April 25, 2006.
(1) (2)
|
|
10.30
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp, Inc.
2003 Stock Incentive Plan, as amended (members of the Board of Directors)
– Filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K
dated April 25, 2006. (1) (2)
|
|
10.31
|
Second
Amendment to 2003 Stock Incentive Plan – Filed as Exhibit 10.44 to the
Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the
fiscal year ended December 31, 2006. (1) (2)
|
|
10.32
|
Amended
and Restated Nonqualified Deferred Compensation Plan – Filed as Exhibit
10.1 to the Registrant’s Registration Statement on Form S-8 (File No.
333-146388) filed with the Securities and Exchange Commission on
September 28, 2007. (1) (2)
|
|
10.33
|
Wealth
Management Business Building Incentive Plan – Filed as Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the
quarterly period ended March 31, 2007. (1) (2)
|
|
10.34
|
Amended
and Restated Supplemental Pension Benefit and Profit Sharing Plan – Filed
as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2008.
(1) (2)
|
|
10.35
|
Amended
and Restated Supplemental Executive Retirement Plan – Filed as Exhibit
10.37 to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2008.
(1) (2)(2)
|
|
10.36
|
Form
of Executive Severance Agreement – Filed as Exhibit 10.38 to the
Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the
fiscal year ended December 31, 2008. (1) (2)
|
|
Exhibit
Number
|
|
|
10.37
|
Amended
and Restated Appendix A to The Washington Trust Company Annual Performance
Plan – Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q (File No. 000-13091) for the quarterly period ended March 31,
2008. (1) (2)
|
|
10.38
|
Amended
and Restated Declaration of Trust of Washington Preferred Capital Trust
dated April 7, 2008, by and among Wilmington Trust Company, as
Delaware Trustee and Institutional Trustee, Washington Trust Bancorp,
Inc., as sponsor, and the Administrators listed therein – Filed as
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
April 7, 2008. (1)
|
|
10.39
|
Indenture
dated as of April 7, 2008, between Washington Trust Bancorp, Inc., as
Issuer, and Wilmington Trust Company, as Trustee – Filed as Exhibit
10.2 to the Registrant’s Current Report on Form 8-K dated April 7,
2008. (1)
|
|
10.40
|
Guarantee
Agreement dated April 7, 2008, by and between Washington Trust
Bancorp, Inc. and Wilmington Trust Company – Filed as Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.41
|
Certificate
Evidencing Floating Rate Capital Securities of Washington Preferred
Capital Trust dated April 7, 2008 – Filed as Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K dated April 7, 2008. (1)
|
|
10.42
|
Floating
Rate Junior Subordinated Deferrable Interest Debenture of Washington Trust
Bancorp, Inc. dated April 7, 2008 – Filed as Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K dated April 7, 2008. (1)
|
|
10.43
|
Form
of Deferred Stock Unit Award Agreement under the Washington Trust Bancorp,
Inc. 2003 Stock Incentive Plan, as amended (employees) – Filed
as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-13091) for the quarterly period ended June 30, 2008. (1) (2)
|
|
10.44
|
First
Amendment to The Washington Trust Company Nonqualified Deferred
Compensation Plan As Amended and Restated– Filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the
quarterly period ended September 30, 2008. (1) (2)
|
|
10.45
|
Share
Purchase Agreement, dated October 2, 2008, by and among Washington Trust
Bancorp, Inc. and the Purchasers – Filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated October 2, 2008. (1)
|
|
10.46
|
Registration
Rights Agreement, dated October 2, 2008, by and among Washington Trust
Bancorp, Inc. and the Purchasers – Filed as Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K dated October 2, 2008. (1)
|
|
10.49
|
Annual
Performance Plan, dated December 31, 2008 – Filed herewith. (2)
|
|
10.50
|
Amendment
to the Registrant’s 1997 Equity Incentive Plan, dated April 23, 2001
– Filed herewith. (2)
|
|
10.51
|
Amendment
to the Registrant’s Wealth Management Business Building Incentive Plan,
dated January 1, 2009 – Filed herewith. (2)
|
|
21.1
|
Subsidiaries
of the Registrant – Filed herewith.
|
|
23.1
|
Consent
of Independent Accountants – Filed herewith.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 – Filed herewith.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 – Filed herewith.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 – Filed herewith. (3)
|
|
(1)
|
Not
filed herewith. In accordance with Rule 12b-32 promulgated
pursuant to the Exchange Act, reference is made to the documents
previously filed with the SEC, which are incorporated by reference
herein.
|
|
(2)
|
Management
contract or compensatory plan or arrangement.
|
|
(3)
|
These
certifications are not “filed” for purposes of Section 18 of the Exchange
Act or incorporated by reference into any filing under the Securities Act
or the Exchange Act.
|
(b) See
(a)(3) above for all exhibits filed herewith and the
Exhibit Index.
(c) Financial
Statement Schedules. None.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
WASHINGTON
TRUST BANCORP, INC.
|
||
|
(Registrant)
|
||
|
Date:
February 27, 2009
|
By
|
/s/ John C.
Warren
|
|
John
C. Warren
|
||
|
Chairman,
Chief Executive Officer and Director
(principal
executive officer)
|
||
|
Date:
February 27, 2009
|
By
|
/s/ David V.
Devault
|
|
David
V. Devault
Executive
Vice President,
|
||
|
Chief
Financial Officer and Secretary
|
||
|
(principal
financial and principal accounting
officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Date:
February 27, 2009
|
/s/ Gary P.
Bennett
|
|
|
Gary
P. Bennett, Director
|
||
|
Date:
February 27, 2009
|
/s/ Steven
J. Crandall
|
|
|
Steven
J. Crandall, Director
|
||
|
Date:
February 27, 2009
|
/s/ Larry J.
Hirsch
|
|
|
Larry
J. Hirsch, Director
|
||
|
Date:
February 27, 2009
|
/s/ Barry G.
Hittner
|
|
|
Barry
G. Hittner, Director
|
||
|
Date:
February 27, 2009
|
/s/ Katherine
W. Hoxsie
|
|
|
Katherine
W. Hoxsie, Director
|
||
|
Date:
February 27, 2009
|
/s/ Mary E.
Kennard
|
|
|
Mary
E. Kennard, Director
|
||
|
Date:
February 27, 2009
|
/s/ Edward
M. Mazze
|
|
|
Edward
M. Mazze, Director
|
||
|
Date:
February 27, 2009
|
/s/ Kathleen
McKeough
|
|
|
Kathleen
McKeough, Director
|
||
|
Date:
February 27, 2009
|
/s/ Victor
J. Orsinger II
|
|
|
Victor
J. Orsinger II, Director
|
||
|
Date:
February 27, 2009
|
/s/ H.
Douglas Randall III
|
|
|
H.
Douglas Randall, III, Director
|
||
|
Date:
February 27, 2009
|
/s/ Patrick
J. Shanahan, Jr.
|
|
|
Patrick
J. Shanahan, Jr., Director
|
||
|
Date:
February 27, 2009
|
/s/ Neil H.
Thorp
|
|
|
Neil
H. Thorp, Director
|
||
|
Date:
February 27, 2009
|
/s/ John F.
Treanor
|
|
|
John
F. Treanor, Director
|
||
|
Date:
February 27, 2009
|
/s/ John C.
Warren
|
|
|
John
C. Warren, Director
|
||
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