WASHINGTON TRUST BANCORP INC - Annual Report: 2010 (Form 10-K)

 

FORM 10-K

x	Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended    DECEMBER 31, 2010 or

o	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition    period from ____________ to ____________

 

 

WASHINGTON TRUST BANCORP, INC.

RHODE ISLAND		05-0404671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
23 BROAD STREET, WESTERLY, RHODE ISLAND		02891
(Address of principal executive offices)		(Zip Code)

 

 

COMMON STOCK, $.0625 PAR VALUE PER SHARE		THE NASDAQ STOCK MARKET LLC
(Title of each class)		(Name of each exchange on which registered)

 

 

 

 

 

 

 

Large accelerated filer  o	Accelerated filer  x
Non-accelerated filer  o	Smaller reporting company  o

 

 

 

 

Description		Page Number
Part I
Item 1	Business	3
Item 1A	Risk Factors	17
Item 1B	Unresolved Staff Comments	21
Item 2	Properties	21
Item 3	Legal Proceedings	22
Item 4	[Removed and Reserved]	22
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and    Issuer Purchases of Equity Securities	22
Item 6	Selected Financial Data	24
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	64
Item 8	Financial Statements and Supplementary Data	65
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	136
Item 9A	Controls and Procedures	136
Item 9B	Other Information	136
Part III
Item 10	Directors, Executive Officers and Corporate Governance	136
Item 11	Executive Compensation	136
Item 12	Security Ownership of Certain Beneficial Owners and Management and    Related Stockholder Matters	137
Item 13	Certain Relationships and Related Party Transactions, and Director Independence	137
Item 14	Principal Accounting Fees and Services	138
Item 15	Exhibits, Financial Statement Schedules	138
Signatures		142

Exhibit 10.47

Annual Performance Plan, dated December 13, 2010

Exhibit 10.48

Amended and Restated Wealth Management Business Building Incentive Plan, dated December 31, 2010

Exhibit 10.49

Terms of Change in Control Agreement with an executive officer, dated December 21, 2010

Exhibit 10.50

Terms of Deferred Stock Unit Award Agreement with certain executive officers, dated January 18, 2011

Exhibit 23.1

Consent of Independent Accountants

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 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

 

 

 

 

 

·	Limiting the amount of credit that individual lenders may extend;

·	Establishment of formal, documented processes for credit approval accountability;

·	Prudent initial underwriting and analysis of borrower, transaction, market and collateral risks;

·	Ongoing servicing of the majority of individual loans and lending relationships;

·	Continuous monitoring of the portfolio, market dynamics and the economy; and

·	Periodic reevaluation of our strategy and overall exposure as economic, market and other relevant conditions change.

 

 

 

 

(1)	These acquisitions have been accounted for as purchases and, accordingly, the operations of the acquired companies are included in the Consolidated Financial Statements from their dates of acquisition.

(2)	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.

 

 

 

Reserve System (the “FRB”) to regulate interchange fees for debit card transactions and establishes new minimum mortgage underwriting standards for residential mortgages.  Further, the Dodd-Frank Act bars banking organizations, such as the Bancorp, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.  The Dodd-Frank Act empowers the newly established Financial Stability Oversight Council to designate certain activities as posing a risk to the U.S. financial system and to recommend new or heightened standards and safeguards for financial institutions engaging in such activities.

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.

the FDIC).  Additionally, under the Dodd-Frank Act the FRB may directly examine the subsidiaries of the Bancorp, including the Bank.

prepaid assessments bear a zero-percent risk weight for risk-based capital purposes.  As of December 31, 2009, and each quarter thereafter, the Bank will record an expense for its regular quarterly assessment for the quarter and a corresponding credit to the prepaid assessment until the asset is exhausted.  The FDIC will not refund or collect additional prepaid assessments because of a decrease or growth in deposits over the next three years.  However, if the prepaid assessment is not exhausted after collection of the amount due on June 30, 2013, the remaining amount of the prepayment will be returned to the institution.  The timing of any refund of the prepaid assessment will not be affected by the change in the deposit insurance assessment calculation discussed above.  In 2008, FDIC deposit insurance was temporarily increased from $100,000 to $250,000 per depositor and this level of insurance was made permanent under the Dodd-Frank Act.  Additionally, the Dodd-Frank Act provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts beginning December 31, 2010, and ending December 31, 2012.  This replaced the FDIC’s Transaction Account Guarantee Program, which expired on December 31, 2010.  The Bank’s FDIC deposit insurance costs totaled $3.2 million in 2010.  The FDIC has the power to adjust the assessment rates at any time.  We cannot predict whether, as a result of the adverse change in U.S. economic conditions and, in particular, declines in the value of real estate in certain markets served by the Bank, the FDIC will in the future require increases to deposit insurance assessment levels.

Tier 1 capital to the same extent as before the enactment of the Collins Amendment.  The Collins Amendment also specifies that the Federal Reserve may not establish risk-based capital requirements for bank holding companies that are quantitatively lower than the risk-based capital requirements in effect for insured depository institutions as of July 21, 2010.

 

However, the federal banking agencies have delayed finalizing the Standardized Approach Proposal until they can determine how best to eliminate its reliance on credit ratings, as required by Section 939A of the Dodd-Frank Act.

§	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.

 

§	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.

inconvenience to any customer.  The federal banking agencies 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.

 

The Bancorp and the Bank are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the FACT Act, GLBA, Truth in Lending Act, the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services.  Further, the Dodd-Frank Act established the CFPB, which has

 

 

the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services.  The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties.  The FDIC will examine the Bank for compliance with CFPB rules and enforce CFPB rules with respect to the Bank.

 

 

·

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.

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.

Financial Accounting Standards Board (“FASB”) or regulatory authorities change the financial accounting and reporting standards that govern the preparation of our financial statements.  These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.  In some cases, we could be required to apply a new or revised standard retroactively, resulting in the Corporation restating prior period financial statements.

		Page
I.	Distribution of Assets, Liabilities and Stockholder Equity; Interest Rates and Interest Differentials	36-37
II.	Investment Portfolio	43-46, 90
III.	Loan Portfolio	48-55, 91
IV.	Summary of Loan Loss Experience	55-58, 98
V.	Deposits	36, 104
VI.	Return on Equity and Assets	24
VII.	Short-Term Borrowings	106

 

 

ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

2010 Quarters			1				2				3				4
Stock prices:
High		$	20.09			$	20.44			$	20.48			$	22.71
Low			14.50				16.84				16.70				18.53
Cash dividend declared per share		$	0.21			$	0.21			$	0.21			$	0.21
2009 Quarters			1				2				3				4
Stock prices:
High		$	20.62			$	20.75			$	19.61			$	17.95
Low			11.50				15.67				16.16				13.97
Cash dividend declared per share		$	0.21			$	0.21			$	0.21			$	0.21

 

 

 

For the period ending December 31		2005				2006				2007				2008				2009				2010
Washington Trust Bancorp, Inc.		$	100.00			$	109.59			$	102.20			$	82.95			$	68.69			$	100.68
NASDAQ Bank Stocks		$	100.00			$	113.82			$	91.16			$	71.52			$	59.87			$	68.34
NASDAQ Stock Market (U.S.)		$	100.00			$	110.39			$	122.15			$	73.32			$	106.57			$	125.91

 

 

Selected Financial Data		(Dollars in thousands, except per share amounts)
At or for the years ended December 31,		2010				2009				2008				2007				2006
Financial Results:
Interest income		$	123,254			$	129,630			$	140,662			$	136,434			$	131,134
Interest expense			46,063				63,738				75,149				76,490				69,660
Net interest income			77,191				65,892				65,513				59,944				61,474
Provision for loan losses			6,000				8,500				4,800				1,900				1,200
Net interest income after provision for loan losses			71,191				57,392				60,713				58,044				60,274
Noninterest income:
Net realized gains on sales of securities			729				314				2,224				455				443
Net other-than-temporary impairment losses on securities			(417	)			(3,137	)			(5,937	)			–				–
Other noninterest income			48,161				45,476				44,550				45,294				41,950
Total noninterest income			48,473				42,653				40,837				45,749				42,393
Noninterest expense			85,311				77,603				72,059				69,146				65,545
Income before income taxes			34,353				22,442				29,491				34,647				37,122
Income tax expense			10,302				6,346				7,319				10,847				12,091
Net income		$	24,051			$	16,096			$	22,172			$	23,800			$	25,031
Per share information ($):
Earnings per share:
Basic			1.49				1.01				1.59				1.78				1.86
Diluted			1.49				1.00				1.57				1.75				1.82
Cash dividends declared  (1)			0.84				0.84				0.83				0.80				0.76
Book value			16.63				15.89				14.75				13.97				12.89
Market value - closing stock price			21.88				15.58				19.75				25.23				27.89
Performance Ratios (%):
Return on average assets			0.82				0.55				0.82				0.99				1.04
Return on average shareholders’ equity			9.09				6.56				11.12				13.48				14.99
Average equity to average total assets			9.08				8.40				7.35				7.33				6.93
Dividend payout ratio  (2)			56.38				84.00				52.87				45.71				41.76
Asset Quality Ratios (%):
Total past due loans to total loans			1.27				1.64				0.96				0.45				0.49
Nonperforming loans to total loans			0.93				1.43				0.42				0.27				0.19
Nonperforming assets to total assets			0.79				1.06				0.30				0.17				0.11
Allowance for loan losses to nonaccrual loans			154.42				99.75				305.07				471.12				693.87
Allowance for loan losses to total loans			1.43				1.43				1.29				1.29				1.29
Net charge-offs (recoveries) to average loans			0.24				0.25				0.08				0.03				0.02
Capital Ratios (%):
Tier 1 leverage capital ratio			8.25				7.82				7.53				6.09				6.01
Tier 1 risk-based capital ratio			11.53				11.14				11.29				9.10				9.57
Total risk-based capital ratio			12.79				12.40				12.54				10.39				10.96

 

(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 Quarterly Financial Data			(Dollars and shares in thousands, except per share amounts)
2010				Q1				Q2				Q3				Q4			Year
Interest income:
Interest and fees on loans			$	23,968			$	24,180			$	25,076			$	24,846			$	98,070
Income on securities:	Taxable			6,051				5,837				5,227				4,709				21,824
	Nontaxable			769				770				769				769				3,077
Dividends on corporate stock and FHLBB stock				55				54				55				34				198
Other interest income				21				13				25				26				85
Total interest income				30,864				30,854				31,152				30,384				123,254
Interest expense:
Deposits				5,769				5,331				4,747				4,465				20,312
FHLBB advances				6,219				6,000				5,574				4,993				22,786
Junior subordinated debentures				630				447				484				428				1,989
Other interest expense				242				243				246				245				976
Total interest expense				12,860				12,021				11,051				10,131				46,063
Net interest income				18,004				18,833				20,101				20,253				77,191
Provision for loan losses				1,500				1,500				1,500				1,500				6,000
Net interest income after provision for loan losses				16,504				17,333				18,601				18,753				71,191
Noninterest income:
Wealth management services:
Trust and investment advisory fees				5,017				5,153				5,052				5,448				20,670
Mutual fund fees				1,110				1,105				1,084				1,124				4,423
Financial planning, commissions and other service fees				179				505				349				266				1,299
Wealth management services				6,306				6,763				6,485				6,838				26,392
Service charges on deposit accounts				849				913				904				921				3,587
Merchant processing fees				1,606				2,406				3,050				2,094				9,156
Card interchange fees				389				487				507				592				1,975
Income from bank-owned life insurance				439				474				486				488				1,887
Net gains on loan sales and commissions
on loans originated for others				560				318				1,011				2,163				4,052
Net realized gains on securities				–				–				737				(8	)			729
Net unrealized gains on interest rate swap contracts				68				(121	)			(60	)			77				(36	)
Equity in losses of unconsolidated subsidiaries				(52	)			(50	)			(95	)			(140	)			(337	)
Other income				365				323				414				383				1,485
Noninterest income, excluding other-than-temporary
impairment losses				10,530				11,513				13,439				13,408				48,890
Total other-than-temporary impairment losses on securities				(2	)			(243	)			–				–				(245	)
Portion of loss recognized in other comprehensive
income (before taxes)				(61	)			(111	)			–				–				(172	)
Net impairment losses recognized in earnings				(63	)			(354	)			–				–				(417	)
Total noninterest income				10,467				11,159				13,439				13,408				48,473
Noninterest expense:
Salaries and employee benefits				11,501				11,726				12,067				12,135				47,429
Net occupancy				1,224				1,237				1,202				1,188				4,851
Equipment				997				1,014				1,037				1,051				4,099
Merchant processing costs				1,357				2,057				2,606				1,802				7,822
Outsourced services				840				855				769				840				3,304
FDIC deposit insurance costs				794				784				861				724				3,163
Legal, audit and professional fees				518				408				438				449				1,813
Advertising and promotion				364				419				467				383				1,633
Amortization of intangibles				291				290				273				237				1,091
Foreclosed property costs				36				87				203				515				841
Debt prepayment penalties				–				–				752				–				752
Other expenses				1,755				2,106				2,180				2,472				8,513
Total noninterest expense				19,677				20,983				22,855				21,796				85,311
Income before income taxes				7,294				7,509				9,185				10,365				34,353
Income tax expense				2,122				2,211				2,815				3,154				10,302
Net income			$	5,172			$	5,298			$	6,370			$	7,211			$	24,051
Weighted average common shares outstanding - basic				16,057.7				16,104.6				16,131.4				16,160.6				16,113.9
Weighted average common shares outstanding - diluted				16,063.9				16,111.3				16,136.3				16,182.7				16,122.5
Per share information:	Basic earnings per common share		$	0.32			$	0.33			$	0.39			$	0.44			$	1.49
	Diluted earnings per common share		$	0.32			$	0.33			$	0.39			$	0.44			$	1.49
	Cash dividends declared per share		$	0.21			$	0.21			$	0.21			$	0.21			$	0.84