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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
For
annual and transition reports pursuant to sections 13 or 15(d) of the Securities Exchange Act of 1934
(Mark One)
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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, 2007 or |
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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 ____________ |
Commission file number: 000-13091
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
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RHODE ISLAND
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05-0404671 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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23 BROAD STREET |
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WESTERLY, RHODE ISLAND
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02891 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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.
o Yes x No
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes x No
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.
x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants 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 the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer
x |
Non-accelerated filer o
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Smaller reporting company o |
(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)
o Yes x No
The aggregate market value of voting stock held by non-affiliates of the registrant at June 30,
2007 was $275,574,440 based on a closing sales price of $25.21 per share as reported for the NASDAQ
Global Market, which includes $14,620,127 held by The Washington Trust Company under trust
agreements and other instruments.
The number of shares of the registrants common stock, $.0625 par value per share, outstanding as
of February 21, 2008 was 13,363,135.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement dated March 14, 2008 for the Annual Meeting of
Shareholders to be held April 22, 2008 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, 2007
TABLE OF CONTENTS
This report contains certain statements that may be considered forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than statements of historical
facts, including statements regarding our strategy, effectiveness of investment programs,
evaluations of future interest rate trends and liquidity, expectations as to growth in assets,
deposits and results of operations, success of acquisitions, future operations, market position,
financial position, and prospects, plans, goals and objectives of management are forward-looking
statements. The actual results, performance or achievements of the Corporation (as defined below)
could differ materially from those projected in the forward-looking statements as a result of,
among other factors, changes in general national or regional economic conditions, 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, reductions in loan demand, changes in loan collectibility, default and charge-off
rates, changes in the size and nature of the Corporations 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. The Corporation assumes no obligation to update
forward-looking statements or update the reasons actual results, performance or achievements could
differ materially from those provided in the forward-looking statements, except as required by
law.
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PART I
ITEM 1. Business
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 Bancorps common
stock is traded on the NASDAQ Global MarketÒ 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 accounting principles generally
accepted in the United States of America and conform to general practices of the banking industry.
At December 31, 2007, Washington Trust had total assets of $2.5 billion, total deposits of $1.6
billion and total shareholders equity of $186.5 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 |
Reverse mortgages
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Commercial and consumer demand deposits
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Telephone banking services |
Commercial loans
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Savings, NOW and money market deposits
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Internet banking services |
Construction loans
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Certificates of deposit
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Cash management services |
Home equity lines of credit
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Retirement accounts
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Remote deposit capture |
Home equity loans
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Automated teller machines (ATMs)
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Safe deposit boxes |
The Corporations 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 Corporations lending activities are conducted primarily in Rhode Island and, to a lesser
extent, Connecticut and Massachusetts, as well as 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 for both sale in the secondary market as well as for retention in the Corporations 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
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institutional clients. At December 31, 2007 and 2006, wealth management assets under
administration totaled $4.0 billion and $3.6 billion, respectively. These assets are not included
in the Consolidated Financial Statements.
Business Segments
Segment reporting information is presented in Note 18 to the Consolidated Financial Statements.
Acquisitions
The following summarizes Washington Trusts 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, the acquisition was effected by the Bancorps acquisition of all
of Weston Financials 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)
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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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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. |
Subsidiaries
The Bancorps subsidiaries include the Bank and Weston Securities Corporation (WSC). The Bancorp
also owns all of the outstanding common stock of WT Capital Trust I and WT Capital Trust II,
special purpose finance entities formed in connection with the acquisition of Weston Financial and
with the sole purpose of issuing trust preferred debt securities and investing the proceeds in
junior subordinated debentures of the Bancorp. See Note 12 to the Consolidated Financial
Statements for additional information.
The following is a description of Bancorps 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 Banks 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
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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 Financials 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, 2007, based upon information reported in the FDICs Deposit Market Share Report, the Bank
had 47% of total deposits reported by all financial institutions for Washington County. We have
excluded our brokered certificates of deposit from this measurement to provide a more
representative measurement of our market share. 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 Banks remaining seven branch offices are located in Providence and Kent Counties in Rhode
Island and New London County in southeastern Connecticut. In June 2007, Washington Trust opened a
de novo branch in Providence County (Cranston). In 2008, Washington Trust plans to relocate the
Washington Street branch office closer to the financial district of Providence and plans to open a
de novo branch in Kent County (Warwick) in 2009, subject to the approval of state and federal
regulators. The Warwick branch will bring the total number of the Banks 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, 2007, Washington Trust had 434 full-time and 40 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 16 to
the Consolidated Financial Statements for additional information on certain employee benefit
programs.
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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
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. As a bank holding
company, prior FRB approval is required before
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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.
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 companys net income
over the preceding year is sufficient to fund the dividends and the expected rate of earnings
retention is consistent with the organizations 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 companys total assets would be less than the sum of its total
liabilities. The Bancorps 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.
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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).
The FDIC 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 Deposit Insurance Fund (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 agencys evaluation of the financial institutions capital, asset quality, management,
earnings, liquidity and sensitivity to risk. For institutions, such as the Bank, which are in the
lowest risk category, assessment rates vary initially from five to seven basis points per $100 of
insured deposits. 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 2007, the
FDIC has set the initial DRR at 1.25%. Under the FDIR Act and the FDICs revised premium
assessment program, every FDIC-insured institution will pay some level of deposit insurance
assessments regardless of the level of the DRR. The new rules became effective on January 1, 2007;
however, the utilization of a one-time assessment credit minimized the financial impact of this
change to the Bank in 2007. Under the assessment rates currently in effect, which are subject to
change by the FDIC, the new rules are expected to increase the Banks deposit insurance assessments
over previous levels, resulting in an adverse effect on earnings 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 banks 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, 2007, the Corporations net risk-weighted assets amounted to $1.6
billion, its Tier 1 capital ratio was 9.10% and its total risk-based capital ratio was 10.39%.
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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 are
required to maintain a ratio of at least 5% to be classified as well capitalized. The
Corporations leverage ratio was 6.09% as of December 31, 2007.
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 bank regulatory 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 banks compliance with the plan. The liability
of the parent holding company under any such guarantee is limited to the lesser of 5% of the banks
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 parents general unsecured creditors. In addition, FDICIA requires the
various regulatory 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 various regulatory 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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§ |
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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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§ |
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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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§ |
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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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§ |
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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%. |
Regulators also must take into consideration (1) concentrations of credit risk; (2) interest rate
risk (when the interest rate sensitivity of an institutions 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 institutions ability to manage those risks, when determining the
adequacy of an institutions capital. This evaluation will be made as a part of the institutions
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, 2007, the Banks capital ratios placed it in the well-capitalized
category. Reference is made to Note 13 to the Consolidated Financial Statements for additional
discussion of the Corporations 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
- 9 -
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 institutions assets and (v) requiring prior
approval of certain expansion proposals.
U.S. bank regulatory authorities and international bank supervisory organizations, principally the
Basel Committee on Banking Supervision (the Basel Committee), continue to consider and to make
changes to the risk-based capital adequacy framework, which could affect the appropriate capital
guidelines to which the Bancorp and the bank are subject.
In 2005, the federal banking agencies issued an advance notice of proposed rulemaking (ANPR)
concerning potential changes in the risk-based capital rules (Basel 1-A) that are designed to
apply to, and potentially reduce the risk capital requirements of bank holding companies, such as
the Bancorp, that are not among the core 20 or so largest U.S. bank holding companies (the Core
Banks). In December 2006, the FDIC issued a revised Interagency Notice of Proposed Rulemaking
concerning Basel 1-A (the NPR), which would allow banks and bank holding companies that are not
among the Core Banks to either adopt Basel 1-A or remain subject to the existing risk-based capital
rules. In July 2007 an interagency press release stated that the federal banking agencies have
agreed to issue a proposed rule that would provide non-Core Banks with the option to adopt an
approach consistent with the standardized approach of Basel II. This proposal would replace Basel
1-A. In December 2007 the federal banking agencies issued the final regulation that will implement
Basel II for the Core Banks, permitting only the advanced approach. The final rule implementing
Basel II reiterated that non-Core Banks would have the option to take the standardized approach and
that it is the agencies intention to have the standardized proposal finalized before the Core Banks
begin the first transitional floor period under Basel II. 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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§ |
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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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§ |
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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. |
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 Bancorps 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 13 to the Consolidated Financial Statements for additional discussion of
the Corporations ability to pay dividends.
- 10 -
Customer Information Security. The FDIC and other bank regulatory 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 institutions 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. The exceptions were intended to preserve bank activity after Congress repealed
the blanket bank exemption from broker regulation. After several attempts by the SEC that were
criticized by banks and banking agencies, Congress last fall required the SEC to withdraw its
previous
- 11 -
rules, including Regulation B, and issue rules jointly with the FRB. The SEC and the FRB have
approved the final regulation, and a bank must start complying with Regulation R on the first day
of the banks 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. Significantly,
regarding formal enforcement actions, the two agencies have stated that they will consult with each
other and the appropriate federal banking agency and coordinate when appropriate. Also, with
regard to Exchange Act section 29 risk (voiding contracts made in violation of the Exchange Act), a
permanent exemption is provided if the bank acted in good faith and had reasonable policies and
procedures in place, and the violation did not result in significant harm or financial loss.
Regulatory Enforcement Authority. The enforcement powers available to federal banking
regulators 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 federal
banking agencies.
Identity Theft Red Flags. The federal banking agencies (the Agencies) jointly issued
final rules and guidelines in November 2007 implementing section 114 of the Fair and Accurate
Credit Transactions Act of 2003 (FACT Act) and final rules implementing section 315 of the FACT
Act. The rules implementing section 114 require 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. In addition, the Agencies issued guidelines to assist financial institutions and
creditors in the formulation and maintenance of a Program that satisfies the requirements of the
rules. The rules implementing section 114 also require credit and debit card issuers to assess the
validity of notifications of changes of address under certain circumstances. Additionally, the
Agencies are issuing 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 joint final rules and guidelines are
effective January 1, 2008. The mandatory compliance date for this rule is November 1, 2008.
Fair Credit Reporting Affiliate Marketing Regulations. In November 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 are effective January 1,
2008. The mandatory compliance date for these rules is 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-Oxleys 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. 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
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.
- 12 -
Item 1A Risk Factors
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 managements 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.
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion
on 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 28% of our total revenues for 2007. 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
- 13 -
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, primarily Rhode Island and, to a lesser extent, Connecticut and
Massachusetts, because a significant portion of our loan portfolio is concentrated among
borrowers in these markets. 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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The second half of 2007 was highlighted by volatility in the financial markets associated
with subprime mortgages, including adverse impacts on credit quality and liquidity within the
financial markets. The volatility has been exacerbated by 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. |
- 14 -
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 and corporate
debt securities. We also invest in capital securities, which include common and preferred stocks
as well as trust preferred securities. We seek to limit credit losses in our securities portfolios
by generally purchasing only highly-rated securities. However, we may, in the future, experience
losses attributable to credit risk in our securities portfolio that could materially adversely
affect our results of operations.
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 Banks service areas.
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 accounting principles generally accepted in the United States applicable to the
Corporation could have a material impact on the Corporations reported results of operations.
ITEM 1B. Unresolved Staff Comments
None.
- 15 -
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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Page |
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I. |
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Distribution of Assets, Liabilities and Stockholder Equity; |
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Interest Rates and Interest Differentials |
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28, 29 |
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II. |
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Investment Portfolio |
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36, 64-68 |
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III. |
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Loan Portfolio |
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37-39, 69 |
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IV. |
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Summary of Loan Loss Experience |
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40-42, 71 |
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V. |
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Deposits |
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28, 76 |
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VI. |
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Return on Equity and Assets |
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20 |
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VII. |
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Short-Term Borrowings |
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N/A |
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ITEM 2. Properties
The Corporation conducts its business from seventeen branch offices, including its headquarters
located at 23 Broad Street, Westerly, Rhode Island and branch 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, 2007, ten of the
Corporations facilities were owned, eleven were leased and one branch office was owned on leased
land. Lease expiration dates range from three months to fifteen years with renewal options of one
to twenty years. All of the Corporations properties are considered to be in good condition and
adequate for the purpose for which they are used.
In addition to the branch locations mentioned above, the Bank has four owned offsite-ATMs in leased
spaces. The terms of three of these leases are negotiated annually. The lease term for the fourth
offsite-ATM expires in five years with no renewal option.
The Bank also operates ATMs that are branded with the Banks 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 8 to the
Consolidated Financial Statements.
ITEM 3. Legal Proceedings
The Corporation is involved in various other claims and legal proceedings arising out of the
ordinary course of business. Management is of the opinion, based on its review with counsel of the
development of such matters to date, that the ultimate disposition of such other matters will not
materially affect the consolidated financial position or results of operations of the Corporation.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year ended December 31, 2007.
- 16 -
Executive Officers of the Registrant
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, 2007.
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Years of |
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Title |
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Age |
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Service |
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John C. Warren |
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Chairman and Chief Executive Officer of the Bancorp and the Bank |
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62 |
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12 |
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John F. Treanor |
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President and Chief Operating Officer of the Bancorp and the Bank |
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60 |
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9 |
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Galan G. Daukas |
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Executive Vice President of Wealth Management of the Bancorp and the Bank |
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44 |
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2 |
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David V. Devault |
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Executive Vice President, Secretary, Treasurer and Chief Financial Officer of the Bancorp and the Bank |
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53 |
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21 |
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Stephen M. Bessette |
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Executive Vice President Retail Lending of the Bank |
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60 |
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11 |
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B. Michael Rauh, Jr. |
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Executive Vice President Sales, Service and Delivery of the Bank |
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48 |
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16 |
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James M. Vesey |
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Executive Vice President and Chief Credit Officer of the Bank |
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60 |
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9 |
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|
|
|
|
|
|
|
|
|
|
Dennis L. Algiere |
|
Senior Vice President Chief Compliance Officer and Director of Community Affairs of the Bank |
|
47 |
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Vernon F. Bliven |
|
Senior Vice President Human Resources of the Bank |
|
58 |
|
35 |
|
|
|
|
|
|
|
|
|
|
|
Elizabeth B. Eckel |
|
Senior Vice President Marketing of the Bank |
|
47 |
|
16 |
|
|
|
|
|
|
|
|
|
|
|
William D. Gibson |
|
Senior Vice President Risk Management of the Bank |
|
61 |
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Barbara J. Perino, CPA |
|
Senior Vice President Operations and Technology of the Bank |
|
46 |
|
19 |
|
|
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 April 1999 as President and Chief Operating
Officer.
Galan G. Daukas joined the Bancorp and the Bank in August 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 elected Vice President and Chief
Financial Officer of the Bancorp and the Bank in 1987. He was elected 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. In 1998, he was elected Executive Vice President, Treasurer
and Chief Financial Officer of the Bancorp and the Bank. He was appointed to the position of
Secretary of the Bank in 2002 and Secretary of the Bancorp in 2005.
Stephen M. Bessette joined the Bank in February 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.
- 17 -
Dennis L. Algiere joined the Bank in April 1995 as Compliance Officer. He was named Vice President
Compliance in December 1996 and was promoted to Senior Vice President Compliance and
Community Affairs in September 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 March 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.
PART II
ITEM 5. Market for the Registrants Common Stock, Related Stockholder Matters
The Bancorps common stock has traded on the NASDAQ Global Market since July 2006. Previously, the
Bancorps stock traded on the NASDAQ National Market since May 1996, the NASDAQ Small Cap Market
since June 1992, and had been listed on the NASDAQ Over-The-Counter Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the years ended December
31, 2007 and 2006 are presented in the following table. The stock prices are based on the high and
low sales prices during the respective quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarters |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
29.49 |
|
|
$ |
28.93 |
|
|
$ |
27.44 |
|
|
$ |
29.30 |
|
Low |
|
|
25.45 |
|
|
|
24.07 |
|
|
|
24.01 |
|
|
|
25.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per share |
|
|
$0.19 |
|
|
|
$0.19 |
|
|
|
$0.19 |
|
|
|
$0.19 |
|
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 Bancorps 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 13 to the Consolidated Financial Statements.
At February 21, 2008 there were 2,044 holders of record of the Bancorps 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.
- 18 -
The following table provides information as of and for the quarter ended December 31, 2007
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 Amended and Restated 1988 Stock Option Plan (the1988 Plan), the Bancorps
1997 Equity Incentive Plan, as amended (the 1997 Plan), and the Bancorps 2003 Stock Incentive
Plan, as amended (the 2003 Plan).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
Maximum number |
|
|
|
|
Total number of |
|
|
|
|
|
shares purchased as |
|
of shares that may |
|
|
|
|
shares |
|
Average price |
|
part of publicly |
|
yet be purchased |
|
|
|
|
purchased |
|
paid per share |
|
announced plan(s) |
|
under the plan(s) |
|
|
|
|
Deferred Compensation Plan (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
10/1/2007 to 10/31/2007 |
|
|
287 |
|
|
$ |
27.68 |
|
|
|
287 |
|
|
|
N/A |
|
|
|
11/1/2007 to 11/30/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
12/1/2007 to 12/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
Total Deferred Compensation Plan |
|
|
287 |
|
|
$ |
27.68 |
|
|
|
287 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Stock Repurchase Plan (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,600 |
|
|
|
10/1/2007 to 10/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/1/2007 to 11/30/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/1/2007 to 12/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2006 Stock Repurchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
10/1/2007 to 10/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
11/1/2007 to 11/30/2007 |
|
|
289 |
|
|
$ |
18.25 |
|
|
|
289 |
|
|
|
N/A |
|
|
|
12/1/2007 to 12/31/2007 |
|
|
138 |
|
|
|
18.25 |
|
|
|
138 |
|
|
|
N/A |
|
|
|
|
Total Other |
|
|
427 |
|
|
$ |
18.25 |
|
|
|
427 |
|
|
|
N/A |
|
|
|
|
|
|
Total Purchases of Equity Securities |
|
|
714 |
|
|
$ |
22.04 |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
(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 Bancorps common
stock. The plan authorizes Bancorp to acquire shares of Bancorps common stock to satisfy its
obligation under this plan. All shares are purchased in the open market. As of October 15,
2007, the Bancorps common stock was no longer available as a new benchmark investment under
the plan. Further, directors and officers who currently have selected Bancorps 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 September 15, 2008. After September 15,
2008, 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 Bancorps 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 Corporations 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 Corporations Consolidated Financial Statements. The Corporations share-based
compensation plans (the 1988 Plan, the 1997 Plan and the 2003 Plan) have expiration dates of
December 31, 1997, April 29, 2007 and April 29, 2013, respectively. |
- 19 -
ITEM 6. Selected Financial Data
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
Managements 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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
$136,434 |
|
|
|
$131,134 |
|
|
|
$115,693 |
|
|
|
$96,853 |
|
|
|
$86,245 |
|
|
|
Interest expense |
|
|
76,490 |
|
|
|
69,660 |
|
|
|
55,037 |
|
|
|
42,412 |
|
|
|
37,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
59,944 |
|
|
|
61,474 |
|
|
|
60,656 |
|
|
|
54,441 |
|
|
|
48,799 |
|
|
|
Provision for loan losses |
|
|
1,900 |
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
610 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses |
|
|
58,044 |
|
|
|
60,274 |
|
|
|
59,456 |
|
|
|
53,831 |
|
|
|
48,339 |
|
|
|
Noninterest income |
|
|
45,509 |
|
|
|
42,183 |
|
|
|
30,946 |
|
|
|
26,905 |
|
|
|
26,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and noninterest income |
|
|
103,553 |
|
|
|
102,457 |
|
|
|
90,402 |
|
|
|
80,736 |
|
|
|
75,074 |
|
|
|
Noninterest expense |
|
|
68,906 |
|
|
|
65,335 |
|
|
|
56,393 |
|
|
|
50,373 |
|
|
|
47,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
34,647 |
|
|
|
37,122 |
|
|
|
34,009 |
|
|
|
30,363 |
|
|
|
27,442 |
|
|
|
Income tax expense |
|
|
10,847 |
|
|
|
12,091 |
|
|
|
10,985 |
|
|
|
9,534 |
|
|
|
8,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$23,800 |
|
|
|
$25,031 |
|
|
|
$23,024 |
|
|
|
$20,829 |
|
|
|
$18,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information ($): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.78 |
|
|
|
1.86 |
|
|
|
1.73 |
|
|
|
1.57 |
|
|
|
1.44 |
|
|
|
Diluted |
|
|
1.75 |
|
|
|
1.82 |
|
|
|
1.69 |
|
|
|
1.54 |
|
|
|
1.41 |
|
|
|
Cash dividends declared (1) |
|
|
0.80 |
|
|
|
0.76 |
|
|
|
0.72 |
|
|
|
0.68 |
|
|
|
0.62 |
|
|
|
Book value |
|
|
13.97 |
|
|
|
12.89 |
|
|
|
11.86 |
|
|
|
11.44 |
|
|
|
10.46 |
|
|
|
Tangible book value |
|
|
9.33 |
|
|
|
8.61 |
|
|
|
7.79 |
|
|
|
9.64 |
|
|
|
8.60 |
|
|
|
Market value closing stock price |
|
|
25.23 |
|
|
|
27.89 |
|
|
|
26.18 |
|
|
|
29.31 |
|
|
|
26.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios (%): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.99 |
|
|
|
1.04 |
|
|
|
0.98 |
|
|
|
0.97 |
|
|
|
1.03 |
|
|
|
Return on average shareholders equity |
|
|
13.48 |
|
|
|
14.99 |
|
|
|
14.80 |
|
|
|
14.40 |
|
|
|
14.15 |
|
|
|
Average equity to average total assets |
|
|
7.33 |
|
|
|
6.93 |
|
|
|
6.62 |
|
|
|
6.73 |
|
|
|
7.24 |
|
|
|
Dividend payout ratio (2) |
|
|
45.71 |
|
|
|
41.76 |
|
|
|
42.60 |
|
|
|
44.16 |
|
|
|
43.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios (%): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.27 |
|
|
|
0.19 |
|
|
|
0.17 |
|
|
|
0.38 |
|
|
|
0.29 |
|
|
|
Nonperforming assets to total assets |
|
|
0.17 |
|
|
|
0.11 |
|
|
|
0.10 |
|
|
|
0.21 |
|
|
|
0.14 |
|
|
|
Allowance for loan losses to nonaccrual loans |
|
|
471.12 |
|
|
|
693.87 |
|
|
|
742.25 |
|
|
|
354.49 |
|
|
|
580.17 |
|
|
|
Allowance for loan losses to total loans |
|
|
1.29 |
|
|
|
1.29 |
|
|
|
1.28 |
|
|
|
1.34 |
|
|
|
1.66 |
|
|
|
Net charge-offs (recoveries) to average loans |
|
|
0.03 |
|
|
|
0.02 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios (%): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital ratio |
|
|
6.09 |
|
|
|
6.01 |
|
|
|
5.45 |
|
|
|
5.35 |
|
|
|
5.65 |
|
|
|
Tier 1 risk-based capital ratio |
|
|
9.10 |
|
|
|
9.57 |
|
|
|
9.06 |
|
|
|
9.15 |
|
|
|
10.00 |
|
|
|
Total risk-based capital ratio |
|
|
10.39 |
|
|
|
10.96 |
|
|
|
10.51 |
|
|
|
10.72 |
|
|
|
11.57 |
|
|
|
|
|
(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. |
- 20 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
$41,112 |
|
|
|
$71,909 |
|
|
|
$66,163 |
|
|
|
$52,081 |
|
|
|
$61,110 |
|
|
|
Total securities |
|
|
751,778 |
|
|
|
703,851 |
|
|
|
783,941 |
|
|
|
890,058 |
|
|
|
839,421 |
|
|
|
FHLB stock |
|
|
31,725 |
|
|
|
28,727 |
|
|
|
34,966 |
|
|
|
34,373 |
|
|
|
31,464 |
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other |
|
|
680,266 |
|
|
|
587,397 |
|
|
|
554,734 |
|
|
|
507,711 |
|
|
|
408,477 |
|
|
|
Residential real estate |
|
|
599,671 |
|
|
|
588,671 |
|
|
|
582,708 |
|
|
|
513,695 |
|
|
|
389,855 |
|
|
|
Consumer |
|
|
293,715 |
|
|
|
283,918 |
|
|
|
264,466 |
|
|
|
228,270 |
|
|
|
162,649 |
|
|
|
|
|
|
Total loans |
|
|
1,573,652 |
|
|
|
1,459,986 |
|
|
|
1,401,908 |
|
|
|
1,249,676 |
|
|
|
960,981 |
|
|
|
Less allowance for loan losses |
|
|
20,277 |
|
|
|
18,894 |
|
|
|
17,918 |
|
|
|
16,771 |
|
|
|
15,914 |
|
|
|
|
|
|
Net loans |
|
|
1,553,375 |
|
|
|
1,441,092 |
|
|
|
1,383,990 |
|
|
|
1,232,905 |
|
|
|
945,067 |
|
|
|
Investment in bank-owned life insurance |
|
|
41,363 |
|
|
|
39,770 |
|
|
|
30,360 |
|
|
|
29,249 |
|
|
|
28,074 |
|
|
|
Goodwill and other intangibles |
|
|
61,912 |
|
|
|
57,374 |
|
|
|
54,372 |
|
|
|
23,900 |
|
|
|
24,544 |
|
|
|
Other assets |
|
|
58,675 |
|
|
|
56,442 |
|
|
|
48,211 |
|
|
|
45,254 |
|
|
|
44,127 |
|
|
|
|
|
|
Total assets |
|
|
$2,539,940 |
|
|
|
$2,399,165 |
|
|
|
$2,402,003 |
|
|
|
$2,307,820 |
|
|
|
$1,973,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
$175,542 |
|
|
|
$186,533 |
|
|
|
$196,102 |
|
|
|
$189,588 |
|
|
|
$194,144 |
|
|
|
NOW accounts |
|
|
164,944 |
|
|
|
175,479 |
|
|
|
178,677 |
|
|
|
174,727 |
|
|
|
153,344 |
|
|
|
Money market accounts |
|
|
321,600 |
|
|
|
286,998 |
|
|
|
223,255 |
|
|
|
196,775 |
|
|
|
83,037 |
|
|
|
Savings accounts |
|
|
176,278 |
|
|
|
205,998 |
|
|
|
212,499 |
|
|
|
251,920 |
|
|
|
257,497 |
|
|
|
Time deposits |
|
|
807,841 |
|
|
|
822,989 |
|
|
|
828,725 |
|
|
|
644,875 |
|
|
|
518,119 |
|
|
|
|
|
|
Total deposits |
|
|
1,646,205 |
|
|
|
1,677,997 |
|
|
|
1,639,258 |
|
|
|
1,457,885 |
|
|
|
1,206,141 |
|
|
|
FHLB advances |
|
|
616,417 |
|
|
|
474,561 |
|
|
|
545,323 |
|
|
|
672,748 |
|
|
|
607,104 |
|
|
|
Junior subordinated debentures |
|
|
22,681 |
|
|
|
22,681 |
|
|
|
22,681 |
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
32,560 |
|
|
|
14,684 |
|
|
|
9,774 |
|
|
|
3,417 |
|
|
|
2,311 |
|
|
|
Other liabilities |
|
|
35,564 |
|
|
|
36,186 |
|
|
|
26,521 |
|
|
|
21,918 |
|
|
|
20,196 |
|
|
|
Shareholders equity |
|
|
186,513 |
|
|
|
173,056 |
|
|
|
158,446 |
|
|
|
151,852 |
|
|
|
138,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
|
$2,539,940 |
|
|
|
$2,399,165 |
|
|
|
$2,402,003 |
|
|
|
$2,307,820 |
|
|
|
$1,973,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
$4,304 |
|
|
|
$2,723 |
|
|
|
$2,414 |
|
|
|
$4,731 |
|
|
|
$2,743 |
|
|
|
|
Other real estate owned, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
11 |
|
|
|
|
Total nonperforming assets |
|
|
$4,304 |
|
|
|
$2,723 |
|
|
|
$2,414 |
|
|
|
$4,735 |
|
|
|
$2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth Management Assets: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value of assets under
administration |
|
|
$4,014,352 |
|
|
|
$3,609,180 |
|
|
|
$3,215,763 |
|
|
|
$1,821,718 |
|
|
|
$1,741,948 |
|
|
|
|
|
|
(1) |
|
Certain prior year amounts have been adjusted to conform to the current year presentation. |
- 21 -
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
Other income |
|
|
358 |
|
|
|
372 |
|
|
|
399 |
|
|
|
400 |
|
|
|
1,529 |
|
|
|
|
|
|
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 |
|
|
- 22 -
|
|
|
|
|
|
|
|
|
|
Selected Quarterly Financial Data
|
|
|
|
(Dollars and shares in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Year |
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
|
$21,897 |
|
|
|
$23,130 |
|
|
|
$23,430 |
|
|
|
$23,733 |
|
|
|
$92,190 |
|
|
|
Income on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
8,412 |
|
|
|
8,648 |
|
|
|
8,493 |
|
|
|
8,210 |
|
|
|
33,763 |
|
|
|
Nontaxable |
|
|
328 |
|
|
|
371 |
|
|
|
405 |
|
|
|
514 |
|
|
|
1,618 |
|
|
|
Dividends on corporate stock and FHLB stock |
|
|
678 |
|
|
|
249 |
|
|
|
1,197 |
|
|
|
718 |
|
|
|
2,842 |
|
|
|
Other interest income |
|
|
115 |
|
|
|
150 |
|
|
|
252 |
|
|
|
204 |
|
|
|
721 |
|
|
|
|
|
|
Total interest income |
|
|
31,430 |
|
|
|
32,548 |
|
|
|
33,777 |
|
|
|
33,379 |
|
|
|
131,134 |
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
10,238 |
|
|
|
11,161 |
|
|
|
12,473 |
|
|
|
13,110 |
|
|
|
46,982 |
|
|
|
FHLB advances |
|
|
5,359 |
|
|
|
5,745 |
|
|
|
5,011 |
|
|
|
4,801 |
|
|
|
20,916 |
|
|
|
Junior subordinated debentures |
|
|
338 |
|
|
|
338 |
|
|
|
338 |
|
|
|
338 |
|
|
|
1,352 |
|
|
|
Other interest expense |
|
|
80 |
|
|
|
87 |
|
|
|
89 |
|
|
|
154 |
|
|
|
410 |
|
|
|
|
|
|
Total interest expense |
|
|
16,015 |
|
|
|
17,331 |
|
|
|
17,911 |
|
|
|
18,403 |
|
|
|
69,660 |
|
|
|
|
|
|
Net interest income |
|
|
15,415 |
|
|
|
15,217 |
|
|
|
15,866 |
|
|
|
14,976 |
|
|
|
61,474 |
|
|
|
Provision for loan losses |
|
|
300 |
|
|
|
300 |
|
|
|
300 |
|
|
|
300 |
|
|
|
1,200 |
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
15,115 |
|
|
|
14,917 |
|
|
|
15,566 |
|
|
|
14,676 |
|
|
|
60,274 |
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment advisory fees |
|
|
4,627 |
|
|
|
4,682 |
|
|
|
4,727 |
|
|
|
5,063 |
|
|
|
19,099 |
|
|
|
Mutual fund fees |
|
|
1,130 |
|
|
|
1,214 |
|
|
|
1,229 |
|
|
|
1,092 |
|
|
|
4,665 |
|
|
|
Financial planning, commissions and
other service fees |
|
|
683 |
|
|
|
841 |
|
|
|
509 |
|
|
|
583 |
|
|
|
2,616 |
|
|
|
|
|
|
Wealth management services |
|
|
6,440 |
|
|
|
6,737 |
|
|
|
6,465 |
|
|
|
6,738 |
|
|
|
26,380 |
|
|
|
Service charges on deposit accounts |
|
|
1,119 |
|
|
|
1,236 |
|
|
|
1,312 |
|
|
|
1,248 |
|
|
|
4,915 |
|
|
|
Merchant processing fees |
|
|
1,047 |
|
|
|
1,656 |
|
|
|
2,125 |
|
|
|
1,380 |
|
|
|
6,208 |
|
|
|
Income from bank-owned life insurance |
|
|
279 |
|
|
|
346 |
|
|
|
389 |
|
|
|
396 |
|
|
|
1,410 |
|
|
|
Net gains on loan sales and commissions
on loans originated for others |
|
|
276 |
|
|
|
336 |
|
|
|
417 |
|
|
|
394 |
|
|
|
1,423 |
|
|
|
Net realized gains (losses) on securities |
|
|
59 |
|
|
|
765 |
|
|
|
(365 |
) |
|
|
(16 |
) |
|
|
443 |
|
|
|
Other income |
|
|
300 |
|
|
|
371 |
|
|
|
440 |
|
|
|
293 |
|
|
|
1,404 |
|
|
|
|
|
|
Total noninterest income |
|
|
9,520 |
|
|
|
11,447 |
|
|
|
10,783 |
|
|
|
10,433 |
|
|
|
42,183 |
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
9,619 |
|
|
|
9,830 |
|
|
|
9,651 |
|
|
|
9,598 |
|
|
|
38,698 |
|
|
|
Net occupancy |
|
|
954 |
|
|
|
1,018 |
|
|
|
934 |
|
|
|
982 |
|
|
|
3,888 |
|
|
|
Equipment |
|
|
799 |
|
|
|
881 |
|
|
|
872 |
|
|
|
818 |
|
|
|
3,370 |
|
|
|
Merchant processing costs |
|
|
887 |
|
|
|
1,407 |
|
|
|
1,796 |
|
|
|
1,167 |
|
|
|
5,257 |
|
|
|
Outsourced services |
|
|
518 |
|
|
|
496 |
|
|
|
490 |
|
|
|
505 |
|
|
|
2,009 |
|
|
|
Advertising and promotion |
|
|
437 |
|
|
|
681 |
|
|
|
371 |
|
|
|
405 |
|
|
|
1,894 |
|
|
|
Legal, audit and professional fees |
|
|
376 |
|
|
|
403 |
|
|
|
563 |
|
|
|
295 |
|
|
|
1,637 |
|
|
|
Amortization of intangibles |
|
|
405 |
|
|
|
406 |
|
|
|
398 |
|
|
|
384 |
|
|
|
1,593 |
|
|
|
Other expenses |
|
|
1,709 |
|
|
|
2,158 |
|
|
|
1,536 |
|
|
|
1,586 |
|
|
|
6,989 |
|
|
|
|
|
|
Total noninterest expense |
|
|
15,704 |
|
|
|
17,280 |
|
|
|
16,611 |
|
|
|
15,740 |
|
|
|
65,335 |
|
|
|
|
|
|
Income before income taxes |
|
|
8,931 |
|
|
|
9,084 |
|
|
|
9,738 |
|
|
|
9,369 |
|
|
|
37,122 |
|
|
|
Income tax expense |
|
|
2,858 |
|
|
|
2,907 |
|
|
|
3,160 |
|
|
|
3,166 |
|
|
|
12,091 |
|
|
|
|
|
|
Net income |
|
|
$6,073 |
|
|
|
$6,177 |
|
|
|
$6,578 |
|
|
|
$6,203 |
|
|
|
$25,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic |
|
|
13,386.8 |
|
|
|
13,419.9 |
|
|
|
13,436.6 |
|
|
|
13,452.5 |
|
|
|
13,424.1 |
|
|
|
Weighted
average shares outstanding diluted |
|
|
13,698.6 |
|
|
|
13,703.2 |
|
|
|
13,726.3 |
|
|
|
13,769.3 |
|
|
|
13,723.2 |
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
$0.45 |
|
|
|
$0.46 |
|
|
|
$0.49 |
|
|
|
$0.46 |
|
|
|
$1.86 |
|
|
|
Diluted earnings per share |
|
|
$0.44 |
|
|
|
$0.45 |
|
|
|
$0.48 |
|
|
|
$0.45 |
|
|
|
$1.82 |
|
|
|
Cash dividends declared per share |
|
|
$0.19 |
|
|
|
$0.19 |
|
|
|
$0.19 |
|
|
|
$0.19 |
|
|
|
$0.76 |
|
|
- 23 -
ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
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.
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 Bank, a Rhode Island chartered commercial
bank founded in 1800. Through its subsidiaries, the Bancorp 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 branch
offices in Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and its Internet web
site (www.washtrust.com).
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 or regional economic conditions, 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, reductions in loan demand, changes
in loan collectibility, default and charge-off rates, changes in the size and nature of the
Corporations 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 do not
promise 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
Arriving at 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) general 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 U.S. generally accepted accounting principles (SFAS 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
- 24 -
loss allocation factors take into consideration parameters including the borrowers financial
condition, the borrowers performance with respect to loan terms, and the adequacy of collateral.
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
Corporations 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, primarily Rhode Island and, to a
lesser extent, Connecticut and Massachusetts, 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 managements
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
managements evaluation of the allowance for loan losses as of December 31, 2007, considers the
allowance to be adequate, under adversely different conditions or assumptions, the Corporation
would need to increase the allowance.
The Corporations Audit Committee of the Board of Directors is responsible for oversight of the
loan review process. This process includes review of the Banks 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 Intangible Assets for Impairment
For acquisitions accounted for under the purchase method, the Corporation is required to record
assets acquired and liabilities assumed at their fair value. The valuation techniques used to
determine the carrying value of tangible and intangible assets acquired in acquisitions and the
estimated lives of identifiable intangible assets involve estimates for discount rates, projected
future cash flows and time period calculations, all of which are susceptible to change based on
changes in economic conditions and other factors. Any change in the estimates that are used to
determine the carrying value of goodwill and identifiable intangible assets or that otherwise
adversely affects their value or estimated lives could adversely affect the Corporations results
of operations. Core deposit and other identifiable intangible assets are amortized to expense over
their estimated useful lives and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. Furthermore,
the determination of which intangible assets have finite lives is subjective, as is the
determination of the amortization period for such intangible assets. Goodwill and intangible
assets are evaluated for impairment, based on fair values, at least annually. The valuation
techniques contain estimates as to the comparability of selected market information to the
specifics of the Corporation.
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 year end, forecasted performance of
the issuer, and the general market condition in the geographic area or industry the issuer operates
in. 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 investments current carrying value, possibly requiring an
additional impairment charge in the future.
- 25 -
Results of Operations
Overview
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 Federal Home Loan Bank of Boston
(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.
Selected financial highlights for 2007 and 2006 are presented in the table below:
(Dollars and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31, |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$23,800 |
|
|
|
$25,031 |
|
|
|
Diluted earnings per share |
|
|
$1.75 |
|
|
|
$1.82 |
|
|
|
Dividends declared per share |
|
|
$0.80 |
|
|
|
$0.76 |
|
|
|
Book value per share |
|
|
$13.97 |
|
|
|
$12.89 |
|
|
|
Tangible book value per share |
|
|
$9.33 |
|
|
|
$8.61 |
|
|
|
Weighted average shares Basic |
|
|
13,355.5 |
|
|
|
13,424.1 |
|
|
|
Weighted average shares Diluted |
|
|
13,604.1 |
|
|
|
13,723.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Ratios: |
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.99% |
|
|
|
1.04% |
|
|
|
Return on average shareholders equity |
|
|
13.48% |
|
|
|
14.99% |
|
|
|
Interest rate spread (taxable equivalent basis) |
|
|
2.39% |
|
|
|
2.47% |
|
|
|
Net interest margin (taxable equivalent basis) |
|
|
2.76% |
|
|
|
2.80% |
|
|
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 Trusts
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 2007 totaled $59.9 million, down $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.
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 2007 amounted to $61.8 million, down $1.1 million, or 1.8%, from the
$62.9 million reported for 2006. The net interest margin (FTE net interest income as a percentage
of average interest-earning assets) 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
- 26 -
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 $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 $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,
respectively, in 2007 and 2006. 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 $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 $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 $20.4 million in 2007, while the average rate paid on FHLB advances increased 32 basis
points. In addition, the decline in average interest-bearing 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 $54.3 million, or 26.6%, in 2007.
- 27 -
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)
The following table presents average balance and interest rate information. Tax-exempt income is
converted to a fully taxable equivalent basis using the statutory federal income tax rate. For
dividends on corporate stocks, the 70% federal dividends received deduction is also used in the
calculation of tax equivalency. 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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
$589,619 |
|
|
|
$31,540 |
|
|
|
5.35 |
|
|
|
$590,245 |
|
|
|
$30,237 |
|
|
|
5.12 |
|
|
|
$562,838 |
|
|
|
$27,890 |
|
|
|
4.96 |
|
|
|
Commercial and other loans |
|
|
626,309 |
|
|
|
47,713 |
|
|
|
7.62 |
|
|
|
564,310 |
|
|
|
43,409 |
|
|
|
7.69 |
|
|
|
531,434 |
|
|
|
37,244 |
|
|
|
7.01 |
|
|
|
Consumer loans |
|
|
283,873 |
|
|
|
19,634 |
|
|
|
6.92 |
|
|
|
274,764 |
|
|
|
18,748 |
|
|
|
6.82 |
|
|
|
246,959 |
|
|
|
13,983 |
|
|
|
5.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,499,801 |
|
|
|
98,887 |
|
|
|
6.59 |
|
|
|
1,429,319 |
|
|
|
92,394 |
|
|
|
6.46 |
|
|
|
1,341,231 |
|
|
|
79,117 |
|
|
|
5.90 |
|
|
|
Cash, federal funds sold and
other short-term investments |
|
|
16,759 |
|
|
|
831 |
|
|
|
4.96 |
|
|
|
14,548 |
|
|
|
721 |
|
|
|
4.96 |
|
|
|
14,703 |
|
|
|
451 |
|
|
|
3.07 |
|
|
|
Taxable debt securities |
|
|
605,443 |
|
|
|
31,163 |
|
|
|
5.15 |
|
|
|
712,870 |
|
|
|
33,763 |
|
|
|
4.74 |
|
|
|
783,662 |
|
|
|
32,934 |
|
|
|
4.20 |
|
|
|
Nontaxable debt securities |
|
|
77,601 |
|
|
|
4,368 |
|
|
|
5.63 |
|
|
|
42,977 |
|
|
|
2,486 |
|
|
|
5.79 |
|
|
|
23,329 |
|
|
|
1,362 |
|
|
|
5.84 |
|
|
|
Corporate stocks and FHLB stock |
|
|
42,544 |
|
|
|
3,047 |
|
|
|
7.16 |
|
|
|
48,643 |
|
|
|
3,205 |
|
|
|
6.59 |
|
|
|
50,763 |
|
|
|
2,858 |
|
|
|
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
742,347 |
|
|
|
39,409 |
|
|
|
5.31 |
|
|
|
819,038 |
|
|
|
40,175 |
|
|
|
4.91 |
|
|
|
872,457 |
|
|
|
37,605 |
|
|
|
4.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,242,148 |
|
|
|
138,296 |
|
|
|
6.17 |
|
|
|
2,248,357 |
|
|
|
132,569 |
|
|
|
5.90 |
|
|
|
2,213,688 |
|
|
|
116,722 |
|
|
|
5.27 |
|
|
|
Noninterest-earning assets |
|
|
165,561 |
|
|
|
|
|
|
|
|
|
|
|
159,115 |
|
|
|
|
|
|
|
|
|
|
|
137,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
$2,407,709 |
|
|
|
|
|
|
|
|
|
|
|
$2,407,472 |
|
|
|
|
|
|
|
|
|
|
|
$2,351,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
$166,580 |
|
|
|
$285 |
|
|
|
0.17 |
|
|
|
$173,137 |
|
|
|
$302 |
|
|
|
0.17 |
|
|
|
$176,706 |
|
|
|
$ 295 |
|
|
|
0.17 |
|
|
|
Money market accounts |
|
|
303,138 |
|
|
|
11,846 |
|
|
|
3.91 |
|
|
|
262,613 |
|
|
|
9,063 |
|
|
|
3.45 |
|
|
|
203,799 |
|
|
|
4,386 |
|
|
|
2.15 |
|
|
|
Savings accounts |
|
|
194,342 |
|
|
|
2,619 |
|
|
|
1.35 |
|
|
|
198,040 |
|
|
|
1,464 |
|
|
|
0.74 |
|
|
|
234,311 |
|
|
|
1,392 |
|
|
|
0.59 |
|
|
|
Time deposits |
|
|
821,951 |
|
|
|
37,672 |
|
|
|
4.58 |
|
|
|
856,979 |
|
|
|
36,153 |
|
|
|
4.22 |
|
|
|
741,456 |
|
|
|
26,113 |
|
|
|
3.52 |
|
|
|
FHLB advances |
|
|
489,229 |
|
|
|
21,641 |
|
|
|
4.42 |
|
|
|
509,611 |
|
|
|
20,916 |
|
|
|
4.10 |
|
|
|
611,177 |
|
|
|
22,233 |
|
|
|
3.64 |
|
|
|
Junior subordinated debentures |
|
|
22,681 |
|
|
|
1,352 |
|
|
|
5.96 |
|
|
|
22,681 |
|
|
|
1,352 |
|
|
|
5.96 |
|
|
|
7,767 |
|
|
|
458 |
|
|
|
5.90 |
|
|
|
Other |
|
|
23,990 |
|
|
|
1,075 |
|
|
|
4.48 |
|
|
|
8,627 |
|
|
|
410 |
|
|
|
4.76 |
|
|
|
3,581 |
|
|
|
160 |
|
|
|
4.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,021,911 |
|
|
|
76,490 |
|
|
|
3.78 |
|
|
|
2,031,688 |
|
|
|
69,660 |
|
|
|
3.43 |
|
|
|
1,978,797 |
|
|
|
55,037 |
|
|
|
2.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
177,342 |
|
|
|
|
|
|
|
|
|
|
|
185,322 |
|
|
|
|
|
|
|
|
|
|
|
197,245 |
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
31,886 |
|
|
|
|
|
|
|
|
|
|
|
23,517 |
|
|
|
|
|
|
|
|
|
|
|
19,498 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
176,570 |
|
|
|
|
|
|
|
|
|
|
|
166,945 |
|
|
|
|
|
|
|
|
|
|
|
155,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
|
$2,407,709 |
|
|
|
|
|
|
|
|
|
|
|
$2,407,472 |
|
|
|
|
|
|
|
|
|
|
|
$2,351,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
$61,806 |
|
|
|
|
|
|
|
|
|
|
|
$62,909 |
|
|
|
|
|
|
|
|
|
|
|
$61,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.39 |
|
|
|
|
|
|
|
|
|
|
|
2.47 |
|
|
|
|
|
|
|
|
|
|
|
2.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.76 |
|
|
|
|
|
|
|
|
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
|
|
2.79 |
|
|
|
|
|
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, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans |
|
|
$167 |
|
|
|
$204 |
|
|
|
$186 |
|
|
|
Nontaxable debt securities |
|
|
1,385 |
|
|
|
868 |
|
|
|
476 |
|
|
|
Corporate stocks and FHLB stock |
|
|
310 |
|
|
|
363 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$1,862 |
|
|
|
$1,435 |
|
|
|
$1,029 |
|
|
|
|
|
- 28 -
Volume/Rate Analysis Interest Income and Expense (Fully Taxable Equivalent Basis)
The following table presents certain information on a fully taxable equivalent 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007/2006 |
|
2006/2005 |
|
|
(Dollars in thousands) |
|
Volume |
|
Rate |
|
Net Change |
|
Volume |
|
Rate |
|
Net Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
$(33 |
) |
|
|
$1,336 |
|
|
|
$1,303 |
|
|
|
$1,412 |
|
|
|
$935 |
|
|
|
$2,347 |
|
|
|
Commercial and other loans |
|
|
4,704 |
|
|
|
(400 |
) |
|
|
4,304 |
|
|
|
2,401 |
|
|
|
3,764 |
|
|
|
6,165 |
|
|
|
Consumer loans |
|
|
615 |
|
|
|
271 |
|
|
|
886 |
|
|
|
1,689 |
|
|
|
3,076 |
|
|
|
4,765 |
|
|
|
Cash, federal funds sold and
other short-term investments |
|
|
109 |
|
|
|
1 |
|
|
|
110 |
|
|
|
(5 |
) |
|
|
275 |
|
|
|
270 |
|
|
|
Taxable debt securities |
|
|
(5,366 |
) |
|
|
2,766 |
|
|
|
(2,600 |
) |
|
|
(3,150 |
) |
|
|
3,979 |
|
|
|
829 |
|
|
|
Nontaxable debt securities |
|
|
1,953 |
|
|
|
(71 |
) |
|
|
1,882 |
|
|
|
1,136 |
|
|
|
(12 |
) |
|
|
1,124 |
|
|
|
Corporate stocks and FHLB stock |
|
|
(421 |
) |
|
|
263 |
|
|
|
(158 |
) |
|
|
(124 |
) |
|
|
471 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,561 |
|
|
|
4,166 |
|
|
|
5,727 |
|
|
|
3,359 |
|
|
|
12,488 |
|
|
|
15,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
Money market accounts |
|
|
1,493 |
|
|
|
1,290 |
|
|
|
2,783 |
|
|
|
1,511 |
|
|
|
3,166 |
|
|
|
4,677 |
|
|
|
Savings accounts |
|
|
(27 |
) |
|
|
1,182 |
|
|
|
1,155 |
|
|
|
(239 |
) |
|
|
311 |
|
|
|
72 |
|
|
|
Time deposits |
|
|
(1,507 |
) |
|
|
3,026 |
|
|
|
1,519 |
|
|
|
4,411 |
|
|
|
5,629 |
|
|
|
10,040 |
|
|
|
FHLB advances |
|
|
(859 |
) |
|
|
1,584 |
|
|
|
725 |
|
|
|
(3,942 |
) |
|
|
2,625 |
|
|
|
(1,317 |
) |
|
|
Junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889 |
|
|
|
5 |
|
|
|
894 |
|
|
|
Other |
|
|
689 |
|
|
|
(24 |
) |
|
|
665 |
|
|
|
239 |
|
|
|
11 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(228 |
) |
|
|
7,058 |
|
|
|
6,830 |
|
|
|
2,876 |
|
|
|
11,747 |
|
|
|
14,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
$1,789 |
|
|
|
$(2,892 |
) |
|
|
$(1,103 |
) |
|
|
$483 |
|
|
|
$741 |
|
|
|
$1,224 |
|
|
|
|
|
Provision and Allowance for Loan Losses
The allowance for loan losses is managements best estimate of the probable loan losses incurred as
of the balance sheet date. 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. For the year 2007, the Corporations 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
managements 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. 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. Noninterest income was
43% of total revenues (net interest income plus noninterest income) in 2007. Washington Trusts
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 $45.5 million
for 2007, up $3.3 million, or 7.9%, from 2006. This increase was largely attributable to higher
revenues from wealth management services.
- 29 -
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 |
|
|
|
Other income |
|
|
1,529 |
|
|
|
1,404 |
|
|
|
125 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $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. The following table presents the changes in wealth management assets under administration
for the year ended December 31, 2007:
|
|
|
|
|
(Dollars in thousands) |
|
2007 |
|
|
|
|
|
|
Wealth Management Assets Under Administration: |
|
|
|
|
Balance at the beginning of period (1) |
|
$ |
3,609,180 |
|
Net market appreciation and income |
|
|
272,398 |
|
Net customer cash flows |
|
|
132,774 |
|
|
|
|
|
|
|
Balance at the end of period |
|
$ |
4,014,352 |
|
|
|
|
|
(1) |
|
Prior period amounts have been adjusted to conform to the current year presentation. |
Service charges on deposit accounts decreased $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 $502 thousand, or 8.1%, in 2007 primarily due to increases in
the volume of transactions processed for existing and new customers. Merchant processing fees
represents charges to merchants for credit card transactions processed. See discussion on the
corresponding increase in merchant processing costs under the caption Noninterest Expense.
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 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. During the second quarter of 2006, Washington Trust purchased an additional $8
million in BOLI. 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.
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 $1.5 million in 2007, up 4.9% from 2006. Increases in residential mortgage origination
and sales activity were offset in part by declines in sales of SBA loans.
- 30 -
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 $125 thousand, or
8.9%, 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 Corporations annual charitable contribution of
appreciated equity securities to the Corporations charitable foundation. The cost of the annual
contributions, which was included in noninterest expenses, amounted to $520 thousand and $513
thousand in 2007 and 2006, respectively. 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. See additional discussion under the caption Financial Condition
for further information on the investment securities portfolio.
Noninterest Expense
Noninterest expense totaled $68.9 million, up $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 expense for 2007 increased $2.5 million, or 3.8%, over the prior year.
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 $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 $262 thousand, or 6.7%. The increase reflected higher
rental expense for premises leased by the Bank. Equipment expense increased 3.1% in 2007,
primarily due to additional investments in technology and other equipment.
Merchant processing costs increased $429 thousand, or 8.2%, in 2007 due largely to increased volume
of transactions processed for existing and new customers. Merchant processing costs represent
third-party costs incurred that are directly attributable to handling merchant credit card
transactions.
Outsourced services increased $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. See Note 9
to the Consolidated Financial Statements for additional information on intangible assets.
- 31 -
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 $207 thousand, or 3.0%, in 2007. This includes an increase of
$109 thousand in credit and collection costs.
Income Taxes
Income tax expense amounted to $10.8 million and $12.1 million in 2007 and 2006, respectively. The
Corporations 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.
The Corporations net deferred tax asset amounted to $7.7 million at December 31, 2007, compared to
$6.7 million at December 31, 2006. 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 10 to the Consolidated Financial Statements
for additional information regarding income taxes.
Comparison of 2006 with 2005
Net income for the year ended December 31, 2006 amounted to $25.0 million, up $2.0 million, or 8.7%
from the amount reported for 2005. On a diluted share basis, net income was $1.82 for 2006, up
$0.13, or 7.7% from the $1.69 reported for 2005. The rates of return on average equity and average
assets for 2006 were 14.99% and 1.04%, respectively. Comparable amounts for the year 2005 were
14.80% and 0.98%, respectively.
On August 31, 2005, the Corporation completed the acquisition of Weston Financial, a Registered
Investment Adviser and financial planning company located in Wellesley, Massachusetts, with
broker-dealer and insurance agency subsidiaries. The results of Weston Financials operations have
been included in the Consolidated Statements of Income since that date. One-time expenses
associated with the acquisition amounting to $605 thousand were recognized in the third quarter of
2005. After tax, this amounted to $440 thousand, or approximately 3 cents per diluted share. The
acquisition of Weston Financial increased the size and range of products and services offered by
Washington Trusts wealth management group. As a result of the Weston Financial acquisition,
wealth management assets under administration increased from approximately $1.9 billion to $3.3
billion. Washington Trust financed the payments made at closing through the issuance of two series
of trust preferred stock by newly-formed special purpose finance entities in an aggregate amount of
$22 million (see Note 12 to the Consolidated Financial Statements).
Net interest income totaled $61.5 million in 2006, an increase of $818 thousand, or 1.3%, from
2005. FTE net interest income for 2006 totaled $62.9 million, up $1.2 million, or 2.0% from 2005.
The net interest margin for 2006 amounted to 2.80%, compared to 2.79% for 2005. Excluding the
impact of loan prepayment fees and other fees, such as late charges, the net interest margin was up
2 basis points from 2005. The continued rise in short-term rates in 2006 caused deposit costs to
rise, while yields on loans and securities have increased by lesser amounts.
Average interest-earning assets increased by $34.7 million, or 1.6%, in 2006. This increase was
mainly due to growth of $88.1 million, or 6.6%, in the loan portfolio, which was partially offset
by reductions of $53.4 million, or 6.1%, in the securities portfolio. Growth in average loan
balances resulted from internal loan growth.
The yield on total loans increased 56 basis points in 2006. The contribution of loan prepayment
penalties and other fees to the yield on total loans was 5 basis points and 6 basis points,
respectively, for 2006 and 2005. 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 in 2006. The flattening and inversion of the
yield curve made reinvestment of maturing balances relatively unattractive relative to funding
costs during this period and lower yielding fixed and adjustable rate mortgage-backed securities
totaling $104.6 million were sold in the second half of 2006. The total yield on securities
increased 60 basis points in 2006, reflecting a combination of higher yields on variable rate securities tied to short-term interest rates, sale or
runoff of lower yielding securities and higher marginal rates on reinvestment of cash flows in 2006
relative to the prior year.
- 32 -
Average interest-bearing liabilities increased $52.9 million, or 2.7%, in 2006. The Corporation
experienced growth in time deposits and money market accounts, and declines in NOW accounts,
savings account balances and FHLB advances. The increase in average interest-bearing liabilities
was largely due to $115.5 million of growth in time deposits in 2006. The average rate paid on
time deposits in 2006 increased 70 basis points and amounted to 4.22%. Included in time deposits
were brokered certificates of deposit, which are utilized by the Corporation as part of its overall
funding program along with other sources. Average brokered certificates of deposit increased $12.0
million in 2006. The balance of average FHLB advances decreased $101.6 million in 2006, while the
average rate paid on FHLB advances increased 46 basis points.
For the year ended December 31, 2006, the Corporations provision for loan losses amounted to $1.2
million, unchanged from the amount recorded in 2005. See the additional discussion under the
caption Asset Quality for further information on the Allowance for Loan Losses.
Noninterest income, as a percent of total revenues (net interest income plus noninterest income),
increased from 33.8% in 2005 to 40.7% in 2006. Noninterest income amounted to $42.2 million for
2006, up $11.2 million, or 36.3%, from 2005. This increase is primarily attributable to higher
revenues from wealth management services, mainly due to the acquisition of Weston Financial in the
third quarter of 2005.
The following table presents a noninterest income comparison for the years ended December 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment advisory fees |
|
|
$19,099 |
|
|
|
$14,407 |
|
|
|
$4,692 |
|
|
|
32.6 |
% |
|
Mutual fund fees |
|
|
4,665 |
|
|
|
1,336 |
|
|
|
3,329 |
|
|
|
249.2 |
|
|
Financial planning, commissions and other service fees |
|
|
2,616 |
|
|
|
919 |
|
|
|
1,697 |
|
|
|
184.7 |
|
|
|
|
Wealth management services |
|
|
26,380 |
|
|
|
16,662 |
|
|
|
9,718 |
|
|
|
58.3 |
|
|
Service charges on deposit accounts |
|
|
4,915 |
|
|
|
4,502 |
|
|
|
413 |
|
|
|
9.2 |
|
|
Merchant processing fees |
|
|
6,208 |
|
|
|
5,203 |
|
|
|
1,005 |
|
|
|
19.3 |
|
|
Income from BOLI |
|
|
1,410 |
|
|
|
1,110 |
|
|
|
300 |
|
|
|
27.0 |
|
|
Net gains on loan sales and commissions
on loans originated for others |
|
|
1,423 |
|
|
|
1,679 |
|
|
|
(256 |
) |
|
|
(15.2 |
) |
|
Other income |
|
|
1,404 |
|
|
|
1,433 |
|
|
|
(29 |
) |
|
|
(2.0 |
) |
|
|
|
Subtotal |
|
|
41,740 |
|
|
|
30,589 |
|
|
|
11,151 |
|
|
|
36.5 |
|
|
Net realized gains on securities |
|
|
443 |
|
|
|
357 |
|
|
|
86 |
|
|
|
24.1 |
|
|
|
|
Total noninterest income |
|
|
$42,183 |
|
|
|
$30,946 |
|
|
|
$11,237 |
|
|
|
36.3 |
% |
|
|
Revenue from wealth management services increased $9.7 million, or 58.3%, in 2006. This increase
was primarily due to the acquisition of Weston Financial completed on August 31, 2005. 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 $3.609 billion at December 31, 2006, up $393 million, or 12.2%, from $3.216
billion at December 31, 2005. This increase was due to financial market appreciation and business
development efforts.
Service charges on deposit accounts were up $413 thousand, or 9.2%, in 2006. This increase was
primarily attributable to higher fees as well as expanded fee arrangements in the areas of
insufficient funds fees and debit card fees.
Merchant processing fees (charges to merchants for credit card transactions processed) increased
$1.0 million, or 19.3%, in 2006 primarily due to increases in the volume of transactions processed
for existing and new customers.
Income from BOLI amounted to $1.4 million and $1.1 million for 2006 and 2005, 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.
- 33 -
Net gains on loan sales and commissions on loans originated for others decreased $256 thousand, or
15.2%, in 2006, due to a decline in sales of residential mortgage loans and SBA loans. In general,
loan originations have been adversely affected by higher interest rates.
Other income consisted of mortgage servicing fees, non-customers ATM fees, safe deposit rents, wire
transfer fees, fees on letters of credit and other fees. Other income amounted to $1.4 million in
2006, down 2.0% from 2005.
In 2006 and 2005, net realized gains on sales of securities totaled $443 thousand and $357
thousand, respectively. This included realized gains of $381 thousand and $337 thousand recognized
in 2006 and 2005, respectively, in connection with the Corporations annual charitable contribution
of appreciated equity securities. The cost of the annual contributions is included in noninterest
expenses and amounted to $513 thousand and $522 thousand in 2006 and 2005, respectively. In the
third and fourth quarters of 2006, balance sheet repositioning transactions were conducted in
response to the flat to inverted yield curve shape in effect during most of the period. These
transactions included sales of mortgage-backed and other debt securities totaling $104.6 million
with a realized loss of $3.5 million. The proceeds from these transactions were primarily used to
reduce advances from the FHLB. In addition, during 2006 equity securities were sold with a
realized gain of $3.5 million.
For the year ended December 31, 2006, total noninterest expense amounted to $65.3 million, up $8.9
million, or 15.9%, from 2005. This increase is largely the result of the August 2005 acquisition
of Weston Financial, which added $5.4 million to noninterest expense in 2006 that did not exist in
the prior year. Also contributing to the increase was the 21.7% increase in merchant processing
costs in 2006. Included in noninterest expenses in 2005 were direct acquisition and acquisition
related costs amounting to $605 thousand, which included $292 thousand in salaries and benefits,
$50 thousand in legal, audit and professional fees, and $263 thousand in other noninterest
expenses. Acquisition related costs included costs incurred in connection with management changes,
organization costs related to the establishment of the trust preferred entities, accounting and
legal costs and other charges. Excluding the impact of Weston Financial operating expenses, the
increase in merchant processing costs and the direct acquisition and acquisition related costs
recognized in 2005, noninterest expenses for 2006 increased $3.2 million, or 6.5%, from 2005.
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, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
$38,698 |
|
|
|
$32,133 |
|
|
|
$6,565 |
|
|
|
20.4 |
% |
|
Net occupancy |
|
|
3,888 |
|
|
|
3,460 |
|
|
|
428 |
|
|
|
12.4 |
|
|
Equipment |
|
|
3,370 |
|
|
|
3,456 |
|
|
|
(86 |
) |
|
|
(2.5 |
) |
|
Merchant processing costs |
|
|
5,257 |
|
|
|
4,319 |
|
|
|
938 |
|
|
|
21.7 |
|
|
Outsourced services |
|
|
2,009 |
|
|
|
1,723 |
|
|
|
286 |
|
|
|
16.6 |
|
|
Advertising and promotion |
|
|
1,894 |
|
|
|
1,977 |
|
|
|
(83 |
) |
|
|
(4.2 |
) |
|
Legal, audit and professional fees |
|
|
1,637 |
|
|
|
1,900 |
|
|
|
(263 |
) |
|
|
(13.8 |
) |
|
Amortization of intangibles |
|
|
1,593 |
|
|
|
852 |
|
|
|
741 |
|
|
|
87.0 |
|
|
Other |
|
|
6,989 |
|
|
|
6,573 |
|
|
|
416 |
|
|
|
6.3 |
|
|
|
|
Total noninterest expense |
|
|
$65,335 |
|
|
|
$56,393 |
|
|
|
$8,942 |
|
|
|
15.9 |
% |
|
Salaries and employee benefits expense increased $6.6 million, or 20.4%, in 2006. Approximately
58.2% of the increase in 2006 was due to the operating expenses of Weston Financial. The remainder
of the increase in 2006 was due to increases in salaries and wages, higher defined benefit plan
costs, increases in performance-based compensation and higher share-based compensation.
Net occupancy expense in 2006 increased $428 thousand, or 12.4%. The increase reflected higher
rental expense for premises leased by the Bank and included operating expenses of Weston Financial.
Merchant processing costs (third-party costs incurred that are directly attributable to handling
merchant credit card transactions) increased $938 thousand, or 21.7%, in 2006 due largely to
increased volume of transactions processed for existing and new customers.
- 34 -
Outsourced services increased 16.6% in 2006 due to higher costs for data processing services and
third-party vendor costs.
Legal, audit and professional fees decreased 13.8% from 2005. This decrease was primarily due to
costs incurred for special projects in 2005.
Amortization of intangibles amounted to $1.6 million in 2006 and $852 thousand in 2005. See Note 9
to the Consolidated Financial Statements for additional information on identifiable intangible
assets.
Other noninterest expense increased $416 thousand, or 6.3%, in 2006. Approximately $293 thousand
of this increase was attributable to the operating expenses of Weston Financial, which was acquired
in August 2005. Included in other noninterest expense in 2005 were $263 thousand of acquisition
related costs and $129 thousand in prepayment costs associated with the payoff of a match funded
FHLB advance.
Income tax expense amounted to $12.1 million and $11.0 million in 2006 and 2005, respectively. The
Corporations effective tax rate was 32.6% in 2006, compared to a rate of 32.3% in 2005. The net
increase in the effective tax rate was primarily a result of higher state tax provision, offset in
part by higher levels of tax-exempt income.
Financial Condition
Summary
Total assets were $2.5 billion at December 31, 2007, up $140.8 million from December 31, 2006,
largely due to the $112.3 million increase in the loan portfolio. Total liabilities increased
$127.3 million in 2007, primarily due to increases in FHLB advances. Shareholders equity totaled
$186.5 million at December 31, 2007, compared to $173.1 million at the end of 2006.
Securities
Washington Trusts 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, 2007, the Corporations portfolio consisted
primarily of mortgage-backed securities and U.S. government treasury and agency securities. All of
the Corporations mortgage-backed securities are issued by U.S. government and government-sponsored
agencies. See Note 5 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 Trusts internal investment policy. Permissible bank investments include federal funds,
bankers 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
Corporations Asset/Liability Committee (ALCO). Asset and liability management objectives are
the primary influence on the Corporations 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.
The Corporation intended to elect early adoption of Statement of Financial Accounting Standards 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
- 35 -
under the transition provisions of SFAS No.
159. Subsequent to the Corporations 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 AICPAs 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 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 2007 totaled $310.9 million and were comprised of $258.7
million of mortgage-backed securities issued by U.S. government and government-sponsored agencies,
$19.1 million in U.S. government-sponsored agency debentures, $15.3 million in trust preferred
securities, $16.0 million in municipal securities, and $1.8 million in equity securities.
The carrying amounts of securities as of the dates indicated are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies |
|
|
$139,599 |
|
|
|
18 |
% |
|
|
$157,285 |
|
|
|
30 |
% |
|
|
$107,651 |
|
|
|
18 |
% |
|
Mortgage-backed securities issued by U.S.
government and government-sponsored agencies |
|
|
469,388 |
|
|
|
62 |
% |
|
|
293,787 |
|
|
|
56 |
% |
|
|
428,174 |
|
|
|
69 |
% |
|
States and political subdivisions |
|
|
80,894 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
|
Trust preferred securities |
|
|
34,454 |
|
|
|
5 |
% |
|
|
30,574 |
|
|
|
6 |
% |
|
|
30,363 |
|
|
|
5 |
% |
|
Corporate bonds |
|
|
14,101 |
|
|
|
2 |
% |
|
|
25,034 |
|
|
|
5 |
% |
|
|
32,832 |
|
|
|
5 |
% |
|
Corporate stocks |
|
|
13,342 |
|
|
|
2 |
% |
|
|
19,716 |
|
|
|
3 |
% |
|
|
20,214 |
|
|
|
3 |
% |
|
|
|
Total securities available for sale |
|
|
$751,778 |
|
|
|
100 |
% |
|
|
$526,396 |
|
|
|
100 |
% |
|
|
$619,234 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies |
|
|
$ |
|
|
|
|
% |
|
|
$42,000 |
|
|
|
24 |
% |
|
|
$47,250 |
|
|
|
29 |
% |
|
Mortgage-backed securities issued by
U.S. government-sponsored agencies |
|
|
|
|
|
|
|
% |
|
|
69,340 |
|
|
|
39 |
% |
|
|
84,960 |
|
|
|
52 |
% |
|
States and political subdivisions |
|
|
|
|
|
|
|
% |
|
|
66,115 |
|
|
|
37 |
% |
|
|
32,497 |
|
|
|
19 |
% |
|
|
|
Total securities held to maturity |
|
|
$ |
|
|
|
|
% |
|
|
$177,455 |
|
|
|
100 |
% |
|
|
$164,707 |
|
|
|
100 |
% |
|
|
At December 31, 2007 and 2006, the securities portfolio included $1.2 million of net pretax
unrealized gains and $1.7 million of net pretax unrealized losses, respectively. See Note 5 to the
Consolidated Financial Statements for detail of unrealized gains and losses on securities.
Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in FHLB stock that currently is based
on the level of its FHLB advances. As of December 31, 2007 and 2006, the Corporations investment
in FHLB stock totaled $31.7 million and $28.7 million, respectively.
- 36 -
Loans
The following table sets forth the composition of the Corporations loan portfolio for each of the
past five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
$278,821 |
|
|
|
18 |
% |
|
|
$282,019 |
|
|
|
19 |
% |
|
|
$291,292 |
|
|
|
21 |
% |
|
|
$266,670 |
|
|
|
21 |
% |
|
|
$227,334 |
|
|
|
24 |
% |
|
Construction & development |
|
|
60,361 |
|
|
|
4 |
% |
|
|
32,233 |
|
|
|
2 |
% |
|
|
37,190 |
|
|
|
3 |
% |
|
|
29,263 |
|
|
|
2 |
% |
|
|
12,486 |
|
|
|
1 |
% |
|
Other (1) |
|
|
341,084 |
|
|
|
21 |
% |
|
|
273,145 |
|
|
|
19 |
% |
|
|
226,252 |
|
|
|
16 |
% |
|
|
211,778 |
|
|
|
18 |
% |
|
|
168,657 |
|
|
|
18 |
% |
|
|
|
Total commercial |
|
|
680,266 |
|
|
|
43 |
% |
|
|
587,397 |
|
|
|
40 |
% |
|
|
554,734 |
|
|
|
40 |
% |
|
|
507,711 |
|
|
|
41 |
% |
|
|
408,477 |
|
|
|
43 |
% |
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
588,628 |
|
|
|
37 |
% |
|
|
577,522 |
|
|
|
40 |
% |
|
|
565,680 |
|
|
|
40 |
% |
|
|
494,720 |
|
|
|
40 |
% |
|
|
375,706 |
|
|
|
39 |
% |
|
Homeowner construction |
|
|
11,043 |
|
|
|
1 |
% |
|
|
11,149 |
|
|
|
|
% |
|
|
17,028 |
|
|
|
2 |
% |
|
|
18,975 |
|
|
|
1 |
% |
|
|
14,149 |
|
|
|
2 |
% |
|
|
|
Total residential real estate |
|
|
599,671 |
|
|
|
38 |
% |
|
|
588,671 |
|
|
|
40 |
% |
|
|
582,708 |
|
|
|
42 |
% |
|
|
513,695 |
|
|
|
41 |
% |
|
|
389,855 |
|
|
|
41 |
% |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines |
|
|
144,429 |
|
|
|
9 |
% |
|
|
145,676 |
|
|
|
10 |
% |
|
|
161,100 |
|
|
|
11 |
% |
|
|
155,001 |
|
|
|
12 |
% |
|
|
80,523 |
|
|
|
12 |
% |
|
Home equity loans |
|
|
99,827 |
|
|
|
6 |
% |
|
|
93,947 |
|
|
|
6 |
% |
|
|
72,288 |
|
|
|
5 |
% |
|
|
54,297 |
|
|
|
4 |
% |
|
|
35,935 |
|
|
|
4 |
% |
|
Other (2) |
|
|
49,459 |
|
|
|
4 |
% |
|
|
44,295 |
|
|
|
4 |
% |
|
|
31,078 |
|
|
|
2 |
% |
|
|
18,972 |
|
|
|
2 |
% |
|
|
46,191 |
|
|
|
|
% |
|
|
|
Total consumer loans |
|
|
293,715 |
|
|
|
19 |
% |
|
|
283,918 |
|
|
|
20 |
% |
|
|
264,466 |
|
|
|
18 |
% |
|
|
228,270 |
|
|
|
18 |
% |
|
|
162,649 |
|
|
|
16 |
% |
|
|
|
Total loans |
|
|
$1,573,652 |
|
|
|
100 |
% |
|
|
$1,459,986 |
|
|
|
100 |
% |
|
|
$1,401,908 |
|
|
|
100 |
% |
|
|
$1,249,676 |
|
|
|
100 |
% |
|
|
$960,981 |
|
|
|
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. |
|
Washington Trusts loan portfolio amounted to $1.6 billion at December 31, 2007, up $113.7 million,
or 7.8%, in 2007.
Commercial loans, including commercial real estate and construction loans, increased $92.9 million,
or 15.8%, from the balance at December 31, 2006. All of the growth in commercial loans was the
result of internal growth.
Consumer loan demand was modest in 2007. Consumer loans increased $9.8 million, or 3.5%, from the
balance at December 31, 2006.
The Corporation originates residential mortgages for both portfolio and sale, and purchases
mortgages from other financial institutions. Residential real estate loans increased $11.0
million, or 1.9%, in 2007.
An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other
Commercial loans as of December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
1 to 5 |
|
After 5 |
|
|
|
Matures in: |
|
or Less |
|
Years |
|
Years |
|
Totals |
|
|
Construction and development (1) |
|
|
$3,839 |
|
|
|
$23,527 |
|
|
|
$44,038 |
|
|
|
$71,404 |
|
|
Commercial other |
|
|
150,989 |
|
|
|
130,833 |
|
|
|
59,262 |
|
|
|
341,084 |
|
|
|
|
|
|
|
$154,828 |
|
|
|
$154,360 |
|
|
|
$103,300 |
|
|
|
$412,488 |
|
|
|
|
|
|
(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 |
|
$ |
172,458 |
|
|
$ |
85,202 |
|
|
$ |
257,660 |
|
|
|
- 37 -
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 managements 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 Banks practice is to identify problem credits early and take charge-offs as promptly as
practicable.
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets
amounted to $4.3 million, or 0.17% of total assets, at December 31, 2007, compared to $2.7 million,
or 0.11% of total assets, at December 31, 2006. Nonaccrual loans as a percentage of total loans
stood at 0.27% at December 31, 2007, compared to 0.19% at December 31, 2006.
The following table presents nonperforming assets for the dates indicated:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
$1,158 |
|
|
|
$721 |
|
|
|
$1,147 |
|
|
|
$1,027 |
|
|
|
$946 |
|
|
Commercial and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
1,094 |
|
|
|
981 |
|
|
|
394 |
|
|
|
2,357 |
|
|
|
342 |
|
|
Construction and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
|
|
|
Other |
|
|
1,781 |
|
|
|
831 |
|
|
|
624 |
|
|
|
730 |
|
|
|
1,236 |
|
|
Consumer |
|
|
271 |
|
|
|
190 |
|
|
|
249 |
|
|
|
227 |
|
|
|
219 |
|
|
|
|
Total nonaccrual loans |
|
|
4,304 |
|
|
|
2,723 |
|
|
|
2,414 |
|
|
|
4,731 |
|
|
|
2,743 |
|
|
Other real estate owned, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
11 |
|
|
|
|
Total nonperforming assets |
|
|
$4,304 |
|
|
|
$2,723 |
|
|
|
$2,414 |
|
|
|
$4,735 |
|
|
|
$2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and accruing |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total 30 day+ delinquencies amounted to $7.0 million, or 0.45% of total loans, at December 31,
2007, up $1.2 million in the fourth quarter of 2007, but down $191 thousand from the balance at
December 31, 2006. The $1.2 million increase in total 30 day+ delinquencies in the fourth quarter
of 2007 was primarily due to an increase in the commercial category that was offset in part by
declines in residential and consumer loan delinquencies.
Total residential mortgage and consumer loan 30 day+ delinquencies declined in the fourth quarter
to $2.3 million, or 0.26% of these loans, at December 31, 2007, compared to $3.6 million, or 0.42%,
at September 30, 2007. Total 90 day+ delinquencies in the residential mortgage and consumer loans
portfolios amounted to $441 thousand (two loans) and $86 thousand (two loans), respectively, as of
December 31, 2007. Total nonaccrual loans, which include the 90 day+ delinquencies, amounted to
$1.2 million and $271 thousand in the residential mortgage and consumer loan categories,
respectively, at December 31, 2007.
Many reports and articles have been published in the latter half of 2007 and continuing into 2008
regarding problems in the financial markets with subprime mortgage lending. Washington Trust has
never offered a subprime residential loan program. The market does not apply a uniform definition of what
constitutes subprime lending. One of the more common criteria indicative of subprime lending,
among others, is a FICO score of 660 or below. From time to time, we make loans to borrowers whose
FICO score may be 660 or below, however we do not target this market. In cases where we do make
such loans, we consider other relevant mitigating information including such factors as loan to
value ratio, employment history, the banking relationship, and other data in the borrowers credit
report, and we do not base our underwriting decisions solely on FICO scores.
- 38 -
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans, are placed on
nonaccrual status and interest recognition is suspended when such loans are 90 days or more past
due with respect to principal and/or interest. Well-secured residential mortgage loans are
permitted to remain on accrual status provided that full collection of principal and interest is
assured. Loans are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is
reversed against current period income. Subsequent cash receipts on nonaccrual loans are
recognized as interest income, or recorded as a reduction of principal if full collection of the
loan is doubtful or if impairment of the collateral is identified. 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 managements
opinion, the loans are considered to be fully collectible.
For the year ended December 31, 2007, the gross interest income that would have been recognized if
loans on nonaccrual status had been current in accordance with their original terms was
approximately $341 thousand. Interest recognized on these loans amounted to approximately $318
thousand.
There were no significant commitments to lend additional funds to borrowers whose loans were on
nonaccrual status at December 31, 2007.
The following table presents additional detail on nonaccrual loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Nonaccrual loans 90 days or more past due |
|
|
$2,490 |
|
|
|
$1,470 |
|
|
|
Nonaccrual loans less than 90 days past due |
|
|
1,814 |
|
|
|
1,253 |
|
|
|
|
|
|
Total nonaccrual loans |
|
|
$4,304 |
|
|
|
$2,723 |
|
|
|
|
|
Restructured Loans
Loans are considered restructured when the Corporation has granted concessions to a borrower due to
the borrowers 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, 2007, there were no significant commitments to lend additional funds
to borrowers whose loans had been restructured.
At December 31, 2007, the Corporation had one restructured accruing loan which was a commercial
mortgage with a balance of $1.7 million. There were no restructured accruing loans as of December
31 in each of the years 2003 through 2006.
There were no loans whose terms had been restructured included in nonaccrual loans at December 31,
2007 and 2006.
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, 2007.
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, 2007,
potential problem loans amounted to approximately $8.1 million, compared to $2.9 million at
December 31, 2006. Approximately 90% of the potential problem loans at December 31, 2007 consisted
of five commercial lending relationships, which have been classified based on our evaluation of the
financial condition of the borrowers. The Corporations loan policy provides guidelines for the
review of such loans in order to facilitate collection.
- 39 -
Depending on future events, these potential problem loans, and others not currently identified,
could be classified as nonperforming in the future.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets is comprised of properties acquired through
foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is
considered to be substantively repossessed when the Corporation has taken possession of the
collateral, but has not completed legal foreclosure proceedings. These assets are carried at the
lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for
declines in market value and estimated selling costs.
At December 31, 2007 and 2006, the balances of other real estate owned and repossessed assets were
insignificant and were reported in other assets in the Corporations Consolidated Balance Sheets.
Washington Trust occasionally provides financing to facilitate the sales of some of these
properties. Financing is generally provided at market rates with credit terms similar to those
available to other borrowers.
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.
The allowance for loan losses is managements 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, 2007, the allowance for loan losses was $20.3 million, or 1.29% of the total loan
portfolio, and 471% of total nonaccrual loans. This compares with an allowance of $18.9 million or
1.29% of the total loan portfolio, and 694% of total nonaccrual loans at December 31, 2006.
- 40 -
The following table reflects the activity in the allowance for loan losses for the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
Balance at beginning of year |
|
|
$18,894 |
|
|
|
$17,918 |
|
|
|
$16,771 |
|
|
|
$15,914 |
|
|
|
$15,487 |
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
26 |
|
|
|
|
|
|
|
85 |
|
|
|
215 |
|
|
|
|
|
|
|
Construction and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
506 |
|
|
|
295 |
|
|
|
198 |
|
|
|
257 |
|
|
|
200 |
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowner construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
246 |
|
|
|
133 |
|
|
|
86 |
|
|
|
95 |
|
|
|
94 |
|
|
|
|
|
|
Total charge-offs |
|
|
778 |
|
|
|
428 |
|
|
|
369 |
|
|
|
567 |
|
|
|
294 |
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
36 |
|
|
|
17 |
|
|
|
Construction and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
Other |
|
|
203 |
|
|
|
171 |
|
|
|
389 |
|
|
|
569 |
|
|
|
177 |
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowner construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
58 |
|
|
|
33 |
|
|
|
106 |
|
|
|
175 |
|
|
|
67 |
|
|
|
|
|
|
Total recoveries |
|
|
261 |
|
|
|
204 |
|
|
|
566 |
|
|
|
814 |
|
|
|
261 |
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
|
517 |
|
|
|
224 |
|
|
|
(197 |
) |
|
|
(247 |
) |
|
|
33 |
|
|
|
Reclassification of allowance
on off-balance sheet exposures |
|
|
|
|
|
|
|
|
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
Provision charged to earnings |
|
|
1,900 |
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
610 |
|
|
|
460 |
|
|
|
|
|
|
|
Balance at end of year |
|
|
$20,277 |
|
|
|
$18,894 |
|
|
|
$17,918 |
|
|
|
$16,771 |
|
|
|
$15,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average loans |
|
|
.03 |
% |
|
|
.02 |
% |
|
|
(.01 |
)% |
|
|
(.02 |
)% |
|
|
|
% |
|
|
|
|
The increase in the 2007 provision for loan losses was based on managements assessment of various
factors affecting the loan portfolio, including, among others, $92.9 million, or 15.8%, of growth
in the commercial loan portfolio, which has a higher loan loss allocation than the residential and
consumer loan portfolios; 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 and the increase in potential problem loans for
2007.
Net charge-offs amounted to $517 thousand for 2007, compared to net charge-offs of $224 thousand
for the year 2006. 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.
- 41 -
The following table presents the allocation of the allowance for loan losses:
|
|
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|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
$5,218 |
|
|
|
$4,408 |
|
|
|
$4,467 |
|
|
|
$4,385 |
|
|
|
$4,102 |
|
|
|
% of these loans to all loans |
|
|
17.7% |
|
|
|
19.3% |
|
|
|
20.8% |
|
|
|
21.3% |
|
|
|
23.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development |
|
|
1,445 |
|
|
|
589 |
|
|
|
713 |
|
|
|
729 |
|
|
|
294 |
|
|
|
% of these loans to all loans |
|
|
3.8% |
|
|
|
2.2% |
|
|
|
2.7% |
|
|
|
2.3% |
|
|
|
1.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
4,229 |
|
|
|
4,200 |
|
|
|
3,263 |
|
|
|
3,633 |
|
|
|
3,248 |
|
|
|
% of these loans to all loans |
|
|
21.7% |
|
|
|
18.7% |
|
|
|
16.1% |
|
|
|
16.9% |
|
|
|
17.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
|
1,681 |
|
|
|
1,619 |
|
|
|
1,642 |
|
|
|
1,447 |
|
|
|
1,965 |
|
|
|
% of these loans to all loans |
|
|
37.4% |
|
|
|
39.6% |
|
|
|
40.3% |
|
|
|
39.7% |
|
|
|
39.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowner construction |
|
|
55 |
|
|
|
56 |
|
|
|
43 |
|
|
|
47 |
|
|
|
74 |
|
|
|
% of these loans to all loans |
|
|
0.7% |
|
|
|
0.8% |
|
|
|
1.2% |
|
|
|
1.5% |
|
|
|
1.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
2,027 |
|
|
|
1,882 |
|
|
|
1,585 |
|
|
|
1,323 |
|
|
|
1,507 |
|
|
|
% of these loans to all loans |
|
|
18.7% |
|
|
|
19.4% |
|
|
|
18.9% |
|
|
|
18.3% |
|
|
|
16.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
5,622 |
|
|
|
6,140 |
|
|
|
6,205 |
|
|
|
5,207 |
|
|
|
4,724 |
|
|
|
|
|
|
|
Balance at end of year |
|
|
$20,277 |
|
|
|
$18,894 |
|
|
|
$17,918 |
|
|
|
$16,771 |
|
|
|
$15,914 |
|
|
|
|
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
|
|
As more fully described under the caption, Application of Critical Accounting Policies and
Estimates 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) general 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 the general loss allocation factors used in
the assignment of loss exposure to appropriately reflect our analysis of migrational loss
experience. 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. During 2007, we reassessed and revised various loss allocation
factors that have been used in determining the amounts presented in the table above. The revised
factors were not retroactively applied to years prior to 2007. The decrease in the unallocated
portion of the allowance is partially attributable to the change in the loss allocation factors.
Had the 2006 factors been applied to the portfolio as of
December 31, 2007, the unallocated balance
at that date would have been $5.801 million. In addition, our assessment of other environmental
factors, including the favorable impact of lower market interest rates and a higher weighted
average length of time since loan origination (which, based on our historical experience has been
an indicator of lower loss probability), supports the level of the
unallocated allowance. Amounts presented in the table above for 2006
have been adjusted to correct an inadvertent mathematical error in
the Annual Report on Form 10-K for December 31, 2006. The
impact of these adjustments included a decrease of $349 thousand for
Commercial Mortgages, an increase of $63 thousand for Other
Commercial Loans and an increase of $286 thousand in the unallocated
amount.
Investment in Bank-Owned Life Insurance (BOLI)
BOLI amounted to $41.4 million and $39.8 million at December 31, 2007 and 2006, respectively.
During the second quarter of 2006, Washington Trust purchased an additional $8 million in BOLI.
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. Standard & Poors rated all such general account carriers AA or better at December
31, 2007. BOLI is included in the Consolidated Balance Sheets at its cash surrender value.
Increases in BOLIs cash surrender value are reported as a component of noninterest income in the
Consolidated Statements of Income.
- 42 -
Deposits
Total deposits amounted to $1.6 billion at December 31, 2007, down $31.8 million, or 1.9%, from the
balance at December 31, 2006. Excluding the $45.8 million decrease in brokered certificates of
deposit, in-market deposits were up $14.0 million, or 0.9%, in 2007. Washington Trust experienced
a shift in the mix of deposits away from lower cost savings accounts and into higher cost premium
money market accounts and certificates of deposit. Deposit gathering continues to be extremely
competitive.
Demand deposits amounted to $175.5 million at December 31, 2007, down $11.0 million, or 5.9%, from
December 31, 2006.
NOW account balances decreased $10.5 million, or 6.0%, in 2007 and totaled $164.9 million at
December 31, 2007.
Money market account balances totaled $321.6 million at December 31, 2007, up $34.6 million, or
12.1%, from December 31, 2006.
During 2007, savings deposits declined $29.7 million, or 14.4%, and amounted to $176.3 million at
December 31, 2007.
Time deposits (including brokered certificates of deposit) amounted to $807.8 million, down $15.1
million, or 1.8%, during 2007. The Corporation utilizes brokered time deposits as part of its
overall funding program along with other sources. Brokered time deposits amounted to $129.8
million, down $45.8 million, or 26.1%, during 2007. Excluding the brokered time deposits, time
deposits rose $30.7 million, or 4.7%, in 2007 due to growth in consumer and commercial certificates
of deposit.
Borrowings
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 $141.9 million
during the year and amounted to $616.4 million at December 31, 2007. Included in the December 31,
2007 balance are $18.0 million of callable advances with call dates ranging from January 2008
through March 2008.
In the first quarter of 2007, securities sold under repurchase agreements of $19.5 million were
executed. The securities sold under agreements to repurchase are callable at the issuers 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.
The Stock Purchase Agreement for the August 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 $9.9 million at December 31, 2007
compared to $10.4 million at December 31, 2006. During the third quarter of 2007 the Corporation
recognized a liability of $5.9 million, representing the 2007 portion of the earn-out period. In
the first quarter of 2007 the Corporation paid approximately $6.7 million, which represented the
2006 earn-out payment.
Liquidity and Capital Resources
Liquidity is the ability of a financial institution to meet maturing liability obligations and
customer loan demand. Washington Trusts primary source of liquidity is deposits. Deposits
(demand, NOW, money market, savings and time deposits) funded approximately 69.1% of total average
assets in 2007. Other sources of funding include discretionary use of purchased liabilities (e.g.,
FHLB term advances and federal funds purchased), cash flows from the Corporations securities
portfolios and loan repayments. In addition, securities designated as available for sale may be
sold in response to short-term or long-term liquidity needs.
- 43 -
The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure.
Liquidity remained well within target ranges established by the ALCO during 2007. Net loans as a
percentage of total assets amounted to 61.2% at December 31, 2007, compared to 60.1% at December
31, 2006. Total securities as a percentage of total assets amounted to 29.6% at December 31, 2007,
compared to 29.3% at December 31, 2006.
For 2007, net cash provided by financing activities amounted to $114.8 million due to net increases
in FHLB advances, as well as other borrowings. Net cash used in investing activities totaled
$175.5 million in 2007 and was used primarily to purchase securities and loans and to fund internal
loan growth. Net cash provided by operating activities amounted to $29.9 million in 2007, $23.8
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 $186.5 million at December 31, 2007, compared to $173.1
million at December 31, 2006. The increase in shareholders equity in 2007 was primarily
attributable to net income of $23.8 million, which was partially offset by $10.7 million in
dividends to shareholders. Under the Corporations 2006 Stock Repurchase Plan, 185,400 shares were
repurchased at a total cost of $4.8 million during the year ended December 31, 2007.
The ratio of total equity to total assets amounted to 7.34% at December 31, 2007, compared to 7.21%
at December 31, 2006. Book value per share at December 31, 2007 amounted to $13.97, an 8.4%
increase from the year-earlier amount of $12.89 per share. Tangible book value increased from
$8.61 per share at the end of 2006 to $9.33 per share at December 31, 2007.
The Corporation is subject to various regulatory capital requirements. The Corporation is
categorized as well-capitalized under the regulatory framework for prompt corrective action. See
Note 13 to the Consolidated Financial Statements for additional discussion of capital requirements.
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, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Payments Due by Period |
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
Total |
|
1 Year |
|
1-3 Years |
|
4-5 Years |
|
5 Years |
|
|
|
|
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances (1) |
|
$ |
616,417 |
|
|
$ |
180,966 |
|
|
$ |
191,709 |
|
|
$ |
161,191 |
|
|
|
$82,551 |
|
|
|
Junior subordinated debentures |
|
|
22,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,681 |
|
|
|
Operating lease obligations |
|
|
5,076 |
|
|
|
1,044 |
|
|
|
1,774 |
|
|
|
855 |
|
|
|
1,403 |
|
|
|
Software licensing arrangements |
|
|
1,981 |
|
|
|
1,018 |
|
|
|
917 |
|
|
|
46 |
|
|
|
|
|
|
|
Treasury, tax and loan demand note |
|
|
2,793 |
|
|
|
2,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition obligations |
|
|
9,884 |
|
|
|
7,979 |
|
|
|
1,905 |
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
19,883 |
|
|
|
28 |
|
|
|
63 |
|
|
|
19,573 |
|
|
|
219 |
|
|
|
|
|
|
Total contractual obligations |
|
$ |
678,715 |
|
|
$ |
193,828 |
|
|
$ |
196,368 |
|
|
$ |
181,665 |
|
|
$ |
106,854 |
|
|
|
|
|
(1) All FHLB advances are shown in the period corresponding to their scheduled maturity.
- 44 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Amount
of Commitment Expiration Per Period |
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
Total |
|
1 Year |
|
1-3 Years |
|
4-5 Years |
|
5 Years |
|
|
|
|
|
|
Other Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
$149,465 |
|
|
|
$90,568 |
|
|
|
$28,305 |
|
|
|
$7,123 |
|
|
|
$23,469 |
|
|
|
Home equity lines |
|
|
176,284 |
|
|
|
679 |
|
|
|
4,895 |
|
|
|
3,831 |
|
|
|
166,879 |
|
|
|
Other loans |
|
|
20,770 |
|
|
|
18,268 |
|
|
|
1,776 |
|
|
|
726 |
|
|
|
|
|
|
|
Standby letters of credit |
|
|
8,048 |
|
|
|
1,409 |
|
|
|
|
|
|
|
6,639 |
|
|
|
|
|
|
|
Forward loan commitments to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originate loans |
|
|
3,495 |
|
|
|
3,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell loans |
|
|
5,472 |
|
|
|
5,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps with customers |
|
|
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,850 |
|
|
|
Mirror swaps with counterparties |
|
|
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,850 |
|
|
|
|
|
|
|
Total commitments |
|
|
$371,234 |
|
|
|
$119,891 |
|
|
|
$34,976 |
|
|
|
$18,319 |
|
|
|
$190,348 |
|
|
|
|
|
Off-Balance Sheet Arrangements
In the normal course of business, Washington Trust engages in a variety of financial transactions
that, in accordance with accounting principles generally accepted in the United States, 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.
For additional information on financial instruments with off-balance sheet risk and derivative
financial instruments see Note 14 to the Consolidated Financial Statements.
Asset/Liability Management and Interest Rate Risk
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 Trusts liquidity, capital adequacy, growth, risk and
profitability goals.
The ALCO manages the Corporations interest rate risk using income simulation to measure interest
rate risk inherent in the Corporations 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 Corporations 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 Corporations 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, 2007 and December 31,
2006, 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 Corporations 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
- 45 -
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 Corporations 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 Corporations on and off-balance sheet financial instruments as of December 31, 2007 and
2006. 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 ALCOs view of the most likely change in interest rates over the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
2006 |
|
|
|
|
Months 1 - 12 |
|
Months 13 - 24 |
|
Months 1 - 12 |
|
Months 13 - 24 |
|
|
|
|
|
100 basis point rate decrease |
|
|
-1.77 |
% |
|
|
-2.24 |
% |
|
|
-1.63 |
% |
|
|
-2.47 |
% |
|
|
100 basis point rate increase |
|
|
-1.41 |
% |
|
|
-3.62 |
% |
|
|
-1.18 |
% |
|
|
-5.03 |
% |
|
|
200 basis point rate increase |
|
|
-1.13 |
% |
|
|
-6.11 |
% |
|
|
-0.78 |
% |
|
|
-8.01 |
% |
|
The ALCO estimates that the 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 exposure of net interest income to rising rates in Year 1 as compared to an unchanged rate
scenario results from the difference between anticipated increases in asset yields and somewhat
more rapid increases in funding costs over the near term. For simulation purposes, core savings
deposit rate changes are anticipated to lag other market rates in both timing and magnitude. The
ALCOs 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 the
shift in mix from low-cost core savings deposits to higher-cost deposit categories, which has
characterized a shift in funding mix during the most recent rising interest rate cycle. This shift
begins to affect net interest income exposure to rising rates in Year 1 and continues into Year 2
of rising simulations.
The 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 funding costs associated with retail
deposits. Increases in interest rates have created greater growth in rate-sensitive money market
and time deposits than growth in other lower-cost deposit categories. The ALCO modeling process
assumes that this shift in deposit mix towards higher cost deposit categories would continue if
interest rates were to increase, and that this assumption accurately reflects historical operating
conditions in rising rate cycles. Although asset yields would also increase in a rising interest
rate environment, the cumulative impact of relative growth in the rate-sensitive higher cost
deposit category suggests that by Year 2 of rising interest rate scenarios, the increase in the
Corporations cost of funds could result in a relative decline in net interest margin compared to
an unchanged rate scenario.
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 Corporations
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 noted above. The static balance
sheet assumption
- 46 -
does not necessarily reflect the Corporations 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
ALCOs 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
Corporations 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
Corporations available for sale debt securities as of December 31, 2007 and 2006 resulting from
immediate parallel rate shifts:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Down 100 |
|
Up 200 |
|
|
|
|
Basis |
|
Basis |
|
|
Security Type |
|
Points |
|
Points |
|
|
|
|
|
U.S. Treasury and government-sponsored agency securities (noncallable) |
|
$ |
2,408 |
|
|
$ |
(4,442 |
) |
|
|
U.S. government-sponsored agency securities (callable) |
|
|
236 |
|
|
|
(2,035 |
) |
|
|
States and political subdivisions |
|
|
5,203 |
|
|
|
(12,665 |
) |
|
|
Mortgage-backed securities issued by U.S. government sponsored agencies |
|
|
7,721 |
|
|
|
(27,755 |
) |
|
|
Corporate securities |
|
|
(109 |
) |
|
|
85 |
|
|
|
|
|
|
Total change in market value as of December 31, 2007 |
|
$ |
15,459 |
|
|
$ |
(46,812 |
) |
|
|
|
|
|
Total change in market value as of December 31, 2006 |
|
$ |
11,567 |
|
|
$ |
(29,447 |
) |
|
|
|
|
See Note 14 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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item
7, Managements 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 |
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
52 |
|
|
|
|
|
|
53 |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
56 |
|
|
- 47 -
Managements 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 Corporations 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 Corporations management assessed the effectiveness of the Corporations internal control over
financial reporting as of December 31, 2007. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on our assessment, we believe that, as of December 31, 2007,
the Corporations internal control over financial reporting is effective based on those criteria.
The Corporations independent registered public accounting firm has issued an attestation report on
the effectiveness of the Corporations 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
|
|
David V. Devault |
Chairman and
|
|
Executive Vice President, Secretary, |
Chief Executive Officer
|
|
Treasurer and Chief Financial Officer |
- 48 -
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc:
We have audited Washington Trust Bancorp, Inc. and Subsidiaries (the Corporations) internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Corporations 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 Managements Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Corporations
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 companys 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
companys 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 companys 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, 2007, 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, 2007
and 2006, 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, 2007, and our report
dated February 25, 2008 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Providence, Rhode Island
February 25, 2008
- 49 -
Report of Independent Registered Public Accounting Firm
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, 2007 and 2006, 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, 2007.. These consolidated financial statements are the
responsibility of the Corporations 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, 2007 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2007, 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 Corporations internal control over financial reporting as of December
31, 2007, 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
25, 2008 expressed an unqualified opinion on the effectiveness of the Corporations internal
control over financial reporting.
/s/ KPMG LLP
Providence, Rhode Island
February 25, 2008
- 50 -
|
|
|
|
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
(Dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Cash and noninterest-bearing balances due from banks |
|
|
$30,817 |
|
|
|
$53,796 |
|
|
|
Interest-bearing balances due from banks |
|
|
1,973 |
|
|
|
541 |
|
|
|
Federal funds sold |
|
|
7,600 |
|
|
|
16,425 |
|
|
|
Other short-term investments |
|
|
722 |
|
|
|
1,147 |
|
|
|
Mortgage loans held for sale |
|
|
1,981 |
|
|
|
2,148 |
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
Available for sale, at fair value; amortized cost $750,583 in 2007 and $525,966 in 2006 |
|
|
751,778 |
|
|
|
526,396 |
|
|
|
Held to maturity, at cost; fair value $175,369 in 2006 |
|
|
|
|
|
|
177,455 |
|
|
|
|
|
|
Total securities |
|
|
751,778 |
|
|
|
703,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock, at cost |
|
|
31,725 |
|
|
|
28,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
Commercial and other |
|
|
680,266 |
|
|
|
587,397 |
|
|
|
Residential real estate |
|
|
599,671 |
|
|
|
588,671 |
|
|
|
Consumer |
|
|
293,715 |
|
|
|
283,918 |
|
|
|
|
|
|
Total loans |
|
|
1,573,652 |
|
|
|
1,459,986 |
|
|
|
Less allowance for loan losses |
|
|
20,277 |
|
|
|
18,894 |
|
|
|
|
|
|
Net loans |
|
|
1,553,375 |
|
|
|
1,441,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
25,420 |
|
|
|
24,307 |
|
|
|
Accrued interest receivable |
|
|
11,427 |
|
|
|
11,268 |
|
|
|
Investment in bank-owned life insurance |
|
|
41,363 |
|
|
|
39,770 |
|
|
|
Goodwill |
|
|
50,479 |
|
|
|
44,558 |
|
|
|
Identifiable intangible assets, net |
|
|
11,433 |
|
|
|
12,816 |
|
|
|
Other assets |
|
|
19,847 |
|
|
|
18,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
$2,539,940 |
|
|
|
$2,399,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
$175,542 |
|
|
|
$186,533 |
|
|
|
NOW accounts |
|
|
164,944 |
|
|
|
175,479 |
|
|
|
Money market accounts |
|
|
321,600 |
|
|
|
286,998 |
|
|
|
Savings accounts |
|
|
176,278 |
|
|
|
205,998 |
|
|
|
Time deposits |
|
|
807,841 |
|
|
|
822,989 |
|
|
|
|
|
|
Total deposits |
|
|
1,646,205 |
|
|
|
1,677,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable |
|
|
2,677 |
|
|
|
2,556 |
|
|
|
Federal Home Loan Bank advances |
|
|
616,417 |
|
|
|
474,561 |
|
|
|
Junior subordinated debentures |
|
|
22,681 |
|
|
|
22,681 |
|
|
|
Other borrowings |
|
|
32,560 |
|
|
|
14,684 |
|
|
|
Accrued expenses and other liabilities |
|
|
32,887 |
|
|
|
33,630 |
|
|
|
|
|
|
Total liabilities |
|
|
2,353,427 |
|
|
|
2,226,109 |
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 13,492,110 shares in 2007 and 2006 |
|
|
843 |
|
|
|
843 |
|
|
|
Paid-in capital |
|
|
34,874 |
|
|
|
35,893 |
|
|
|
Retained earnings |
|
|
154,647 |
|
|
|
141,548 |
|
|
|
Accumulated other comprehensive loss |
|
|
(239 |
) |
|
|
(3,515 |
) |
|
|
Treasury stock, at cost; 137,652 shares in 2007 and 62,432 shares in 2006 |
|
|
(3,612 |
) |
|
|
(1,713 |
) |
|
|
|
|
|
Total shareholders equity |
|
|
186,513 |
|
|
|
173,056 |
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
|
$2,539,940 |
|
|
|
$2,399,165 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 51 -
|
|
|
|
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
(Dollars
and shares in thousands, |
CONSOLIDATED STATEMENTS OF INCOME |
|
except
per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
|
$98,720 |
|
|
|
$92,190 |
|
|
|
$78,931 |
|
|
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
31,163 |
|
|
|
33,763 |
|
|
|
32,934 |
|
|
|
Nontaxable |
|
|
2,983 |
|
|
|
1,618 |
|
|
|
886 |
|
|
|
Dividends on corporate stock and Federal Home Loan Bank stock |
|
|
2,737 |
|
|
|
2,842 |
|
|
|
2,491 |
|
|
|
Other interest income |
|
|
831 |
|
|
|
721 |
|
|
|
451 |
|
|
|
|
|
|
Total interest income |
|
|
136,434 |
|
|
|
131,134 |
|
|
|
115,693 |
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
52,422 |
|
|
|
46,982 |
|
|
|
32,186 |
|
|
|
Federal Home Loan Bank advances |
|
|
21,641 |
|
|
|
20,916 |
|
|
|
22,233 |
|
|
|
Junior subordinated debentures |
|
|
1,352 |
|
|
|
1,352 |
|
|
|
458 |
|
|
|
Other interest expense |
|
|
1,075 |
|
|
|
410 |
|
|
|
160 |
|
|
|
|
|
|
Total interest expense |
|
|
76,490 |
|
|
|
69,660 |
|
|
|
55,037 |
|
|
|
|
|
|
Net interest income |
|
|
59,944 |
|
|
|
61,474 |
|
|
|
60,656 |
|
|
|
Provision for loan losses |
|
|
1,900 |
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
58,044 |
|
|
|
60,274 |
|
|
|
59,456 |
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment advisory fees |
|
|
21,124 |
|
|
|
19,099 |
|
|
|
14,407 |
|
|
|
Mutual fund fees |
|
|
5,430 |
|
|
|
4,665 |
|
|
|
1,336 |
|
|
|
Financial planning, commissions and other service fees |
|
|
2,462 |
|
|
|
2,616 |
|
|
|
919 |
|
|
|
|
|
|
Wealth management services |
|
|
29,016 |
|
|
|
26,380 |
|
|
|
16,662 |
|
|
|
Service charges on deposit accounts |
|
|
4,713 |
|
|
|
4,915 |
|
|
|
4,502 |
|
|
|
Merchant processing fees |
|
|
6,710 |
|
|
|
6,208 |
|
|
|
5,203 |
|
|
|
Income from bank-owned life insurance |
|
|
1,593 |
|
|
|
1,410 |
|
|
|
1,110 |
|
|
|
Net gains on loan sales and commissions on loans originated
for others |
|
|
1,493 |
|
|
|
1,423 |
|
|
|
1,679 |
|
|
|
Net realized gains on securities |
|
|
455 |
|
|
|
443 |
|
|
|
357 |
|
|
|
Other income |
|
|
1,529 |
|
|
|
1,404 |
|
|
|
1,433 |
|
|
|
|
|
|
Total noninterest income |
|
|
45,509 |
|
|
|
42,183 |
|
|
|
30,946 |
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
39,986 |
|
|
|
38,698 |
|
|
|
32,133 |
|
|
|
Net occupancy |
|
|
4,150 |
|
|
|
3,888 |
|
|
|
3,460 |
|
|
|
Equipment |
|
|
3,473 |
|
|
|
3,370 |
|
|
|
3,456 |
|
|
|
Merchant processing costs |
|
|
5,686 |
|
|
|
5,257 |
|
|
|
4,319 |
|
|
|
Outsourced services |
|
|
2,180 |
|
|
|
2,009 |
|
|
|
1,723 |
|
|
|
Advertising and promotion |
|
|
2,024 |
|
|
|
1,894 |
|
|
|
1,977 |
|
|
|
Legal, audit and professional fees |
|
|
1,761 |
|
|
|
1,637 |
|
|
|
1,900 |
|
|
|
Amortization of intangibles |
|
|
1,383 |
|
|
|
1,593 |
|
|
|
852 |
|
|
|
Debt prepayment penalties |
|
|
1,067 |
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
7,196 |
|
|
|
6,989 |
|
|
|
6,573 |
|
|
|
|
|
|
Total noninterest expense |
|
|
68,906 |
|
|
|
65,335 |
|
|
|
56,393 |
|
|
|
|
|
|
Income before income taxes |
|
|
34,647 |
|
|
|
37,122 |
|
|
|
34,009 |
|
|
|
Income tax expense |
|
|
10,847 |
|
|
|
12,091 |
|
|
|
10,985 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$23,800 |
|
|
|
$25,031 |
|
|
|
$23,024 |
|
|
|
|
|
|
Weighted
average shares outstanding - basic |
|
|
13,355.5 |
|
|
|
13,424.1 |
|
|
|
13,315.2 |
|
|
|
Weighted
average shares outstanding - diluted |
|
|
13,604.1 |
|
|
|
13,723.2 |
|
|
|
13,626.7 |
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
$1.78 |
|
|
|
$1.86 |
|
|
|
$1.73 |
|
|
|
Diluted earnings per share |
|
|
$1.75 |
|
|
|
$1.82 |
|
|
|
$1.69 |
|
|
|
Cash dividends declared per share |
|
|
$0.80 |
|
|
|
$0.76 |
|
|
|
$0.72 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 52 -
|
|
|
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, 2005 |
|
|
13,269 |
|
|
|
$830 |
|
|
|
$30,981 |
|
|
|
$113,314 |
|
|
|
$ 6,937 |
|
|
|
$(210 |
) |
|
|
$151,852 |
|
|
|
Net income for 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,024 |
|
|
|
|
|
|
|
|
|
|
|
23,024 |
|
|
Unrealized losses on securities,
net of $4,443 income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,061 |
) |
|
|
|
|
|
|
(8,061 |
) |
|
Reclassification adjustments for net
realized gains included in net income,
net of $125 income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232 |
) |
|
|
|
|
|
|
(232 |
) |
|
Minimum pension liability adjustment,
net of $160 income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297 |
) |
|
|
|
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,434 |
|
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,603 |
) |
|
|
|
|
|
|
|
|
|
|
(9,603 |
) |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372 |
|
|
Deferred compensation plan |
|
|
(1 |
) |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
(33 |
) |
|
Exercise of stock options and related tax
benefit |
|
|
66 |
|
|
|
4 |
|
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
818 |
|
|
Shares issued dividend reinvestment
plan and other |
|
|
28 |
|
|
|
2 |
|
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606 |
|
|
|
|
Balance at December 31, 2005 |
|
|
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 and related tax
benefit |
|
|
97 |
|
|
|
|
|
|
|
(922 |
) |
|
|
|
|
|
|
|
|
|
|
2,612 |
|
|
|
1,690 |
|
|
Shares issued other |
|
|
26 |
|
|
|
|
|
|
|
(601 |
) |
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
89 |
|
|
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.
- 53 -
|
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
(Dollars in thousands) |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$23,800 |
|
|
|
$25,031 |
|
|
|
$23,024 |
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,900 |
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
Depreciation of premises and equipment |
|
|
2,951 |
|
|
|
2,995 |
|
|
|
3,020 |
|
|
|
Net amortization of premium and discount |
|
|
631 |
|
|
|
1,252 |
|
|
|
2,295 |
|
|
|
Net amortization of intangibles |
|
|
1,383 |
|
|
|
1,593 |
|
|
|
852 |
|
|
|
Noncash charitable contribution |
|
|
520 |
|
|
|
513 |
|
|
|
516 |
|
|
|
Sharebased compensation |
|
|
508 |
|
|
|
694 |
|
|
|
372 |
|
|
|
Deferred income tax benefit |
|
|
(2,311 |
) |
|
|
(1,969 |
) |
|
|
(1,296 |
) |
|
|
Earnings from bank-owned life insurance |
|
|
(1,593 |
) |
|
|
(1,410 |
) |
|
|
(1,110 |
) |
|
|
Net gains on loan sales |
|
|
(1,493 |
) |
|
|
(1,423 |
) |
|
|
(1,679 |
) |
|
|
Net realized gains on securities |
|
|
(455 |
) |
|
|
(443 |
) |
|
|
(357 |
) |
|
|
Proceeds from sales of loans |
|
|
59,013 |
|
|
|
44,398 |
|
|
|
65,000 |
|
|
|
Loans originated for sale |
|
|
(57,926 |
) |
|
|
(45,082 |
) |
|
|
(63,045 |
) |
|
|
Decrease (increase) in accrued interest receivable, excluding purchased interest |
|
|
43 |
|
|
|
(513 |
) |
|
|
(1,008 |
) |
|
|
Decrease (increase) in other assets |
|
|
1,472 |
|
|
|
(2,175 |
) |
|
|
4,970 |
|
|
|
Increase (decrease) in accrued expenses and other liabilities |
|
|
1,475 |
|
|
|
4,689 |
|
|
|
(3,145 |
) |
|
|
Other, net |
|
|
24 |
|
|
|
(263 |
) |
|
|
(450 |
) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
29,942 |
|
|
|
29,087 |
|
|
|
29,159 |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of: Mortgage-backed securities available for sale |
|
|
(258,737 |
) |
|
|
(39,279 |
) |
|
|
(84,852 |
) |
|
|
Other investment securities available for sale |
|
|
(39,290 |
) |
|
|
(77,111 |
) |
|
|
(57,401 |
) |
|
|
Mortgage-backed securities held to maturity |
|
|
|
|
|
|
|
|
|
|
(17,505 |
) |
|
|
Other investment securities held to maturity |
|
|
(12,882 |
) |
|
|
(38,358 |
) |
|
|
(28,184 |
) |
|
|
Proceeds from sales of: Mortgage-backed securities available for sale |
|
|
47,938 |
|
|
|
94,118 |
|
|
|
11,426 |
|
|
|
Other investment securities available for sale |
|
|
43,015 |
|
|
|
12,235 |
|
|
|
55,600 |
|
|
|
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 |
|
|
65,443 |
|
|
|
86,778 |
|
|
|
128,019 |
|
|
|
Other investment securities available for sale |
|
|
22,967 |
|
|
|
16,999 |
|
|
|
48,995 |
|
|
|
Mortgage-backed securities held to maturity |
|
|
3,191 |
|
|
|
16,019 |
|
|
|
25,957 |
|
|
|
Other investment securities held to maturity |
|
|
20,490 |
|
|
|
9,360 |
|
|
|
9,052 |
|
|
|
(Purchase) remittance of Federal Home Loan Bank stock |
|
|
(2,998 |
) |
|
|
6,239 |
|
|
|
(593 |
) |
|
|
Net increase in loans |
|
|
(23,054 |
) |
|
|
(25,047 |
) |
|
|
(78,822 |
) |
|
|
Purchases of loans, including purchased interest |
|
|
(90,988 |
) |
|
|
(33,238 |
) |
|
|
(73,520 |
) |
|
|
Proceeds from the sale of other real estate owned |
|
|
|
|
|
|
380 |
|
|
|
4 |
|
|
|
Purchases of premises and equipment |
|
|
(4,091 |
) |
|
|
(3,571 |
) |
|
|
(2,443 |
) |
|
|
Purchases of bank-owned life insurance |
|
|
|
|
|
|
(8,000 |
) |
|
|
|
|
|
|
Equity investment in capital trusts |
|
|
|
|
|
|
|
|
|
|
(681 |
) |
|
|
Payment of deferred acquisition obligation |
|
|
(6,720 |
) |
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(19,827 |
) |
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(175,517 |
) |
|
|
17,524 |
|
|
|
(84,775 |
) |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(31,792 |
) |
|
|
38,740 |
|
|
|
181,384 |
|
|
|
Net increase in other borrowings |
|
|
18,675 |
|
|
|
315 |
|
|
|
970 |
|
|
|
Proceeds from Federal Home Loan Bank advances |
|
|
803,513 |
|
|
|
516,162 |
|
|
|
669,643 |
|
|
|
Repayment of Federal Home Loan Bank advances |
|
|
(661,617 |
) |
|
|
(586,868 |
) |
|
|
(796,919 |
) |
|
|
Purchase of treasury stock, including deferred compensation plan activity |
|
|
(5,200 |
) |
|
|
(1,547 |
) |
|
|
(33 |
) |
|
|
Proceeds from the issuance of common stock under dividend reinvestment plan |
|
|
|
|
|
|
1,216 |
|
|
|
606 |
|
|
|
Net proceeds from the exercise of stock options and issuance of other equity instruments |
|
|
1,052 |
|
|
|
803 |
|
|
|
367 |
|
|
|
Tax benefit from stock option exercises and issuance of other equity instruments |
|
|
727 |
|
|
|
384 |
|
|
|
451 |
|
|
|
Proceeds from the issuance of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
22,681 |
|
|
|
Cash dividends paid |
|
|
(10,580 |
) |
|
|
(10,070 |
) |
|
|
(9,452 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
114,778 |
|
|
|
(40,865 |
) |
|
|
69,698 |
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(30,797 |
) |
|
|
5,746 |
|
|
|
14,082 |
|
|
|
Cash and cash equivalents at beginning of year |
|
|
71,909 |
|
|
|
66,163 |
|
|
|
52,081 |
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
|
$41,112 |
|
|
|
$71,909 |
|
|
|
$66,163 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 54 -
|
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
(Dollars in thousands) |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
Noncash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
$778 |
|
|
|
$428 |
|
|
|
$369 |
|
|
|
Net transfers from loans to other real estate owned |
|
|
|
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with the purchase acquisition detailed in Note 2 to the Consolidated
Financial Statements, assets were acquired and liabilities were assumed as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, excluding cash |
|
|
5,921 |
|
|
|
4,595 |
|
|
|
32,561 |
|
|
|
Fair value of liabilities assumed |
|
|
|
|
|
|
|
|
|
|
7,347 |
|
|
|
|
|
|
Net assets acquired, excluding cash |
|
|
5,921 |
|
|
|
4,595 |
|
|
|
25,214 |
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition obligation incurred |
|
|
5,921 |
|
|
|
4,595 |
|
|
|
5,387 |
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
19,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments |
|
|
76,264 |
|
|
|
68,946 |
|
|
|
53,722 |
|
|
|
Income tax payments |
|
|
11,440 |
|
|
|
14,054 |
|
|
|
11,962 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 55 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
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 branch 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.
Securities
Investments in debt securities that management has the positive intent 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
5, 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.
When a decline in market value of a security is considered other than temporary, the cost basis of
the individual security is written down to fair value as the new cost basis and the write-down is
charged to net realized securities losses in the consolidated statements of income. Washington
Trust does not have a trading 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. The Bank may redeem FHLB stock in excess of
the minimum required. In addition, the FHLB may require members to redeem stock in excess of the
requirement. FHLB stock is redeemable at par value, which equals cost. Since no market exists for
these shares, they are carried at par value.
- 56 -
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 market. 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.
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,
are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days
or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans
are permitted to remain on accrual status provided that full collection of principal and interest
is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued but not collected on
such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans
are applied to the outstanding principal balance of the loan or recognized as interest income
depending on managements 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
managements opinion, the loans are considered to be fully collectible.
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, or at the loans observable
market price, or at the fair value of the collateral if the loan is collateral dependent.
Impairment is measured based on the fair value of the collateral if it is determined that
foreclosure is probable.
Restructured Loans - Restructured loans include those for which concessions such as reduction of
interest rates, other than normal market rate adjustments, or deferral of principal or interest
payments have been granted due to a borrowers 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 managements assessment of the ultimate collectibility of the loan.
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) general 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 U.S. generally accepted accounting principles (SFAS No. 114, Accounting by
Creditors for Impairment of a Loan an amendment
- 57 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2007 and 2006
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 borrowers financial condition, the borrowers performance with respect to loan terms, and the
adequacy of collateral. 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 Corporations 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 and other changes in the portfolio. The
allowance for loan losses is managements 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 (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 Intangibles
Goodwill represents the excess of the purchase price over the fair value of net assets acquired for
transactions accounted for using purchase accounting. Goodwill and intangible assets that are not
amortized are tested for impairment, based on their fair values, at least annually. Identifiable
intangible assets that are subject to amortization are also reviewed for impairment, based on their
fair value, annually or more frequently if conditions or events indicate that an impairment loss
has been incurred. Any impairment is recognized as a charge to earnings and the adjusted carrying
amount of the intangible asset becomes its new accounting basis. 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.
Impairment of Long-Lived Assets Other than Goodwill
Long-lived assets and other intangible 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.
Other Real Estate Owned (OREO)
OREO consists of property acquired through foreclosure and loans determined to be substantively
repossessed. Real estate loans that are substantively repossessed include only those loans for
which the Corporation has taken possession of the collateral, but has not completed legal
foreclosure proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of
acquisition or classification to OREO status. Fair value of such assets is determined based on
independent appraisals and other relevant factors. Any write-down to fair value at the time of
foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for
declines in market value and for estimated selling expenses. Increases to the
- 58 -
valuation allowance,
expenses associated with ownership of these properties, and gains and losses from their sale are
included in foreclosed property costs.
Bank-Owned Life Insurance (BOLI)
BOLI represents life insurance 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 cash value is included in assets. 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
Revenue from wealth management services is primarily accrued as earned based upon a percentage of
asset values under administration. Certain trust service and financial planning 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). This Statement required that the funded
status of an employers 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. This Statement 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.
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 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 employees pension benefit over that employees approximate service period.
Stock-Based Compensation
Effective January 1, 2006, the Corporation adopted the fair value recognition provisions of SFAS
No. 123R, Share-Based Payment, using the modified prospective basis. Under this method,
compensation cost includes the portion of awards vested in the period for (1) all share-based
payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123; and (2) all share-based
payments granted subsequent to December 31, 2005, based on the grant date fair value.
- 59 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
Prior to January 1, 2006, compensation cost for stock-based compensation plans was measured using
the intrinsic value based method prescribed by Accounting Principles Board (APB) Opinion No. 25
and related interpretations. Under APB Opinion No. 25, because the exercise price of the stock
options equaled the market price of the underlying stock on the date of grant (intrinsic value
method), no compensation expense was recognized.
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 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, Guarantors 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 customers
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 Corporations 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
- 60 -
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 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.
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 clients 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.
(2) Acquisition
On August 31, 2005, the Corporation completed its 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. The results of
Weston Financials operations have been
included in the Consolidated Statements of Income since that date. The acquisition was accounted
for as a purchase in accordance with SFAS No. 141 Business Combinations and the provisions of
SFAS No. 142 Goodwill and Other Intangible Assets were also applied.
Pursuant to the Stock Purchase Agreement dated March 18, 2005, by and among the Corporation, Weston
Financial and Weston Financials shareholders, the Corporation purchased all of the outstanding
shares of capital stock of Weston Financial in exchange for an aggregate amount of cash equal to
$20.3 million plus certain future payments. The future payments include minimum payments of $2
million per year in each of the years 2007, 2008 and 2009. The present value of these minimum
payments is included in Other Borrowings in the Consolidated Balance Sheet. In addition, the
transaction is structured to provide for the contingent payment of additional amounts up to a
- 61 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
maximum of $18.5 million based on operating results in each of the years during a three-year
earn-out period ending December 31, 2008. Through December 31, 2007 $15.9 million of contingent
payments have been recognized with a corresponding addition to goodwill. See Notes 9 and 12 for
additional information.
(3) New Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155
eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so
that similar instruments are accounted for similarly regardless of the form of the instruments.
SFAS No. 155 also allows a preparer to elect fair value measurement at acquisition, at issuance, or
when a previously recognized financial instrument is subject to a remeasurement event, on an
instrument-by-instrument basis, in cases in which a derivative would otherwise have to be
bifurcated. SFAS No. 155 is effective for all financial instruments acquired or issued after the
beginning of an entitys first fiscal year that begins after September 15, 2006. Provisions of
SFAS No. 155 may be applied to instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. Prior periods should not be restated. The adoption of SFAS No.
155 did not have a material impact on the Corporations financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS No. 156). SFAS No. 156 requires that all separately
recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS
No. 156 permits, but does not require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. An entity that used derivative instruments to mitigate the risks
inherent in servicing assets and servicing liabilities is required to account for those derivative
instruments at fair value. SFAS No. 156 is effective as of the beginning of the first fiscal year
that begins after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact
on the Corporations financial position or results of operations.
Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.
FIN 48 also prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. In addition, FIN 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this standard. Only tax positions that meet
the more-likely-than-not recognition threshold at the effective date may be recognized or continue
to be recognized upon adoption of FIN 48. The adoption of FIN 48 did not have a material impact on
the Corporations financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This
Statement defines fair value, establishes a framework for measuring fair value and expands
disclosures of fair value measurements. SFAS No. 157 applies to the accounting principles that
currently use fair value measurement, and does not require any new fair value measurements. The
expanded disclosures focus on the inputs used to measure fair value as well as the effect of the
fair value measurements on earnings. SFAS No. 157 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007 and interim periods within
that fiscal year. The Corporation believes the adoption of SFAS No. 157 will not have a material
impact on the Corporations financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Post Retirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R) (SFAS
No. 158). The recognition and disclosure provisions of SFAS No. 158 were adopted by the
Corporation for the fiscal year ended December 31, 2006. Upon adoption, the funded status of an
employers postretirement benefit plan was recognized in the statement of financial position and
the future changes in funded status of the defined benefit plan, including actuarial gains and
losses and prior service costs and credits, were recognized in comprehensive income.
- 62 -
The requirement to measure the plan assets and obligations as of the employers fiscal year end is
effective for fiscal years ending after December 15, 2008. The Corporation is currently evaluating
the impact the measurement date provisions of SFAS No. 158 will have on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159. SFAS No. 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each subsequent reporting
date. The fair value option (1) may be applied instrument-by-instrument with certain exceptions,
(2) is irrevocable (unless a new election date occurs) and (3) is applied only to entire
instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of
the first fiscal year that begins after November 15, 2007. Early adoption was permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also
elected to apply the provisions of SFAS No. 157, Fair Value Instruments. We did not early-adopt
SFAS 159. See further discussion under the caption Securities in Note 5 to the Consolidated
Financial Statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No.
141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (SFAS No. 160). SFAS No. 141R and SFAS No. 160 require significant
changes in the accounting and reporting for business acquisitions and the reporting of a
noncontrolling interest in a subsidiary. Among many changes under SFAS No. 141R, an acquirer will
record 100% of all assets and liabilities at fair value for partial acquisitions, contingent
consideration will be recognized at fair value at the acquisition date with changes possibly
recognized in earnings, and acquisition related costs will be expensed rather than capitalized.
SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in
a subsidiary. Key changes under the standard are that noncontrolling interests in a subsidiary
will be reported as part of equity, losses allocated to a noncontrolling interest can result in a
deficit balance, and changes in ownership interests that do not result in a change of control are
accounted for as equity transactions and upon a loss of control, gain or loss is recognized and the
remaining interest is remeasured at fair value on the date control is lost. SFAS No. 141R and SFAS
No. 160 apply prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008 (that is
January 1, 2009 for entities with a calendar year end). Early adoption is not permitted. The
Corporation is currently evaluating the impact that the adoption of SFAS No. 141R and SFAS No. 160
will have on the Corporations financial position and results of operations.
The SEC released Staff Accounting Bulletin No. 109 (SAB No. 109) in November 2007. SAB No. 109
provides guidance on written loan commitments that are accounted for at fair value through
earnings. SAB No. 109 supersedes SAB No. 105 which provided guidance on derivative loan
commitments pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging
Transactions. SAB No. 105 stated that in measuring the fair value of a derivative loan commitment
it would be inappropriate to incorporate the expected net future cash flows related to the
associated loan. SAB No. 109, consistent with the guidance in SFAS No. 156 and SFAS No. 159,
requires that expected net future cash flows related to the associated servicing of the loan be
included in the measurement of all written loan commitments that are accounted for at fair value
through earnings. The Corporation is currently evaluating the impact that the adoption of SAB No.
109 will have on the Corporations financial position and results of operations.
The SEC released SAB No. 110 in December 2007. SAB No. 110 provides guidance on the use of a
simplified method, as discussed in SAB No. 107, in developing an estimate of expected term of
plain vanilla share options in accordance with SFAS No. 123 (revised 2004), Share-Based
Payment. SAB No. 107 did not expect a company to use the simplified method for share option
grants after December 31, 2007. At the time SAB No. 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily available to
companies. The staff understands that such detailed information about employee exercise behavior
may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept,
under certain circumstances, the use of the simplified method beyond December 31, 2007. The
Corporation is currently evaluating the impact that the adoption of SAB No. 110 will have on the
Corporations financial position and results of operations.
- 63 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
(4) 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 $8.0 million and $18.8 million at December 31, 2007 and 2006,
respectively.
(5) Securities
Securities are summarized as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
December 31, 2007 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies |
|
|
$136,721 |
|
|
|
$2,888 |
|
|
|
$(10 |
) |
|
|
$139,599 |
|
|
|
Mortgage-backed securities issued by U.S.
government and government-sponsored
agencies |
|
|
469,197 |
|
|
|
2,899 |
|
|
|
(2,708 |
) |
|
|
469,388 |
|
|
|
States and political subdivisions |
|
|
80,634 |
|
|
|
499 |
|
|
|
(239 |
) |
|
|
80,894 |
|
|
|
Trust preferred securities |
|
|
37,995 |
|
|
|
|
|
|
|
(3,541 |
) |
|
|
34,454 |
|
|
|
Corporate bonds |
|
|
13,940 |
|
|
|
161 |
|
|
|
|
|
|
|
14,101 |
|
|
|
Corporate stocks |
|
|
12,096 |
|
|
|
2,974 |
|
|
|
(1,728 |
) |
|
|
13,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
750,583 |
|
|
|
9,421 |
|
|
|
(8,226 |
) |
|
|
751,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
$750,583 |
|
|
|
$9,421 |
|
|
|
$(8,226 |
) |
|
|
$751,778 |
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
December 31, 2006 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies |
|
|
$157,383 |
|
|
|
$778 |
|
|
|
$(876 |
) |
|
|
$157,285 |
|
|
|
Mortgage-backed securities issued by U.S.
government-sponsored agencies |
|
|
298,038 |
|
|
|
923 |
|
|
|
(5,174 |
) |
|
|
293,787 |
|
|
|
Trust preferred securities |
|
|
30,571 |
|
|
|
208 |
|
|
|
(205 |
) |
|
|
30,574 |
|
|
|
Corporate bonds |
|
|
24,998 |
|
|
|
83 |
|
|
|
(47 |
) |
|
|
25,034 |
|
|
|
Corporate stocks |
|
|
14,976 |
|
|
|
4,915 |
|
|
|
(175 |
) |
|
|
19,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
525,966 |
|
|
|
6,907 |
|
|
|
(6,477 |
) |
|
|
526,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies |
|
|
42,000 |
|
|
|
|
|
|
|
(422 |
) |
|
|
41,578 |
|
|
|
Mortgage-backed securities issued by U.S.
government-sponsored agencies |
|
|
69,340 |
|
|
|
440 |
|
|
|
(1,604 |
) |
|
|
68,176 |
|
|
|
States and political subdivisions |
|
|
66,115 |
|
|
|
88 |
|
|
|
(588 |
) |
|
|
65,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
|
177,455 |
|
|
|
528 |
|
|
|
(2,614 |
) |
|
|
175,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
$703,421 |
|
|
|
$7,435 |
|
|
|
$(9,091 |
) |
|
|
$701,765 |
|
|
|
|
|
The Corporation intended to elect early adoption of Statement of Financial Accounting Standards 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 Corporations original decision to early adopt SFAS No. 159, clarifications
of the interpretation of the application of SFAS No. 159 by applicable regulatory and
- 64 -
industry
bodies, including the AICPAs 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 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.
Included in corporate stocks at December 31, 2007 are preferred stocks, which are callable at the
discretion of the issuer, with an amortized cost of $8.2 million and a fair value of $6.6 million.
Call features on these stocks range from one month to three years.
At December 31, 2007 and 2006, the securities portfolio included $1.2 million of net pretax
unrealized gains and $1.7 million of net pretax unrealized losses, respectively. Included in these
net amounts were gross unrealized losses amounting to $8.2 million and $9.1 million at December 31,
2007 and 2006, respectively.
The following tables summarize, for all securities in an unrealized loss position at December 31,
2007 and 2006, respectively, the aggregate fair value and gross unrealized loss by length of time
those 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
agencies |
|
|
1 |
|
|
|
$6,996 |
|
|
|
$1 |
|
|
|
1 |
|
|
|
$3,990 |
|
|
|
$9 |
|
|
|
2 |
|
|
|
$10,986 |
|
|
|
$10 |
|
|
|
Mortgage-backed securities
issued by U.S.
government and
government-sponsored
agencies |
|
|
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 |
|
|
8 |
|
|
|
23,167 |
|
|
|
2,769 |
|
|
|
5 |
|
|
|
11,287 |
|
|
|
772 |
|
|
|
13 |
|
|
|
34,454 |
|
|
|
3,541 |
|
|
|
|
|
|
Subtotal, debt securities |
|
|
44 |
|
|
|
151,195 |
|
|
|
3,926 |
|
|
|
62 |
|
|
|
133,306 |
|
|
|
2,572 |
|
|
|
106 |
|
|
|
284,501 |
|
|
|
6,498 |
|
|
|
Corporate stocks |
|
|
5 |
|
|
|
5,258 |
|
|
|
1,495 |
|
|
|
4 |
|
|
|
1,304 |
|
|
|
233 |
|
|
|
9 |
|
|
|
6,562 |
|
|
|
1,728 |
|
|
|
|
|
|
Total temporarily
impaired securities |
|
|
49 |
|
|
|
$156,453 |
|
|
|
$5,421 |
|
|
|
66 |
|
|
|
$134,610 |
|
|
|
$2,805 |
|
|
|
115 |
|
|
|
$291,063 |
|
|
|
$8,226 |
|
|
|
|
|
- 65 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
At December 31, 2006 |
|
# |
|
|
Value |
|
|
Losses |
|
|
# |
|
|
Value |
|
|
Losses |
|
|
# |
|
|
Value |
|
|
Losses |
|
|
|
|
|
U.S. Treasury obligations
and obligations of U.S.
government-sponsored
agencies |
|
|
8 |
|
|
|
$52,751 |
|
|
|
$211 |
|
|
|
14 |
|
|
|
$94,393 |
|
|
|
$1,087 |
|
|
|
22 |
|
|
$ |
147,144 |
|
|
|
$1,298 |
|
|
|
Mortgage-backed securities
issued by U.S.
government-sponsored
agencies |
|
|
7 |
|
|
|
20,620 |
|
|
|
122 |
|
|
|
69 |
|
|
|
240,457 |
|
|
|
6,656 |
|
|
|
76 |
|
|
|
261,077 |
|
|
|
6,778 |
|
|
|
States and
political subdivisions |
|
|
61 |
|
|
|
45,948 |
|
|
|
419 |
|
|
|
12 |
|
|
|
6,747 |
|
|
|
169 |
|
|
|
73 |
|
|
|
52,695 |
|
|
|
588 |
|
|
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
14,840 |
|
|
|
205 |
|
|
|
7 |
|
|
|
14,840 |
|
|
|
205 |
|
|
|
Corporate bonds |
|
|
2 |
|
|
|
6,130 |
|
|
|
34 |
|
|
|
1 |
|
|
|
3,006 |
|
|
|
13 |
|
|
|
3 |
|
|
|
9,136 |
|
|
|
47 |
|
|
|
|
|
|
Subtotal, debt securities |
|
|
78 |
|
|
|
125,449 |
|
|
|
786 |
|
|
|
103 |
|
|
|
359,443 |
|
|
|
8,130 |
|
|
|
181 |
|
|
|
484,892 |
|
|
|
8,916 |
|
|
|
Corporate stocks |
|
|
5 |
|
|
|
5,823 |
|
|
|
110 |
|
|
|
4 |
|
|
|
1,494 |
|
|
|
65 |
|
|
|
9 |
|
|
|
7,317 |
|
|
|
175 |
|
|
|
|
|
|
Total temporarily
impaired securities |
|
|
83 |
|
|
|
$131,272 |
|
|
|
$896 |
|
|
|
107 |
|
|
|
$360,937 |
|
|
|
$8,195 |
|
|
|
190 |
|
|
|
$492,209 |
|
|
|
$9,091 |
|
|
|
|
|
The majority of the loss for debt securities reported in an unrealized loss position at December
31, 2007 was concentrated in variable rate trust preferred securities issued by financial services
companies, and in U.S. agency or government-sponsored agency mortgage-backed securities. The
unrealized losses on trust preferred securities primarily reflect increased investor concerns about
recent losses in the financial services industry related to sub-prime lending and sub-prime
securities exposure. Credit spreads for issuers in this sector widened substantially during the
fourth quarter of 2007, causing prices for these securities holdings to decline. The majority of
the loss for other securities reported in an unrealized loss position at December 31, 2007 was
concentrated in mortgage-backed securities purchased during 2003 and 2004, during which time
interest rates were at or near historical lows. The market value for these and other security
holdings included in this analysis have declined due to the relative increase in short and medium
term interest rates since the time of purchase. The Corporation
believes that the nature and duration of impairment on its debt security holdings are a function of
changes in investment spreads and interest rate movements, and does not consider full repayment of
principal on the reported debt obligations to be at risk. The Corporation has the ability and
intent to hold these investments to full recovery of the cost basis. The debt securities in an
unrealized loss position at December 31, 2007 consisted of 106 debt security holdings. The largest
loss percentage of any single holding was 18.26% of its amortized cost.
Causes of conditions whereby the fair value of corporate stock 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. The Corporation believes that a
portion of the current impairment on its equity securities holdings is a function of investor
concerns about recent losses in the financial services industry related to sub-prime lending and
sub-prime securities exposure, which have resulted in greater volatility in market prices for both
common and preferred stocks in this market sector. The equity securities in an unrealized loss
position at December 31, 2007 consisted of nine holdings of financial and commercial entities with
unrealized losses totaling $1.728 million at December 31, 2007. The unrealized loss position of
these same securities was $720 thousand at September 30, 2007 and $1.178 million, or 82% of their
aggregate cost, at January 31, 2008. The Corporation has the ability and intent to hold these
investments to full recovery of the cost basis.
The maturities of debt securities as of December 31, 2007 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
- 66 -
exempt obligations are not computed on a tax
equivalent basis. Included in the securities portfolio at December 31, 2007 were debt securities
with an aggregate carrying value of $151.8 million that are callable at the discretion of the
issuers. Final maturities of the callable securities range from three months to twenty-nine years,
with call features ranging from one month to nine 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 agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
$62,710 |
|
|
|
$44,106 |
|
|
|
$29,905 |
|
|
|
$ |
|
|
|
$136,721 |
|
|
|
Weighted average yield |
|
|
4.97 |
% |
|
|
4.89 |
% |
|
|
5.43 |
% |
|
|
|
% |
|
|
5.05 |
% |
|
|
Mortgage-backed securities issued by U.S.
government & government-sponsored
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
79,701 |
|
|
|
214,283 |
|
|
|
117,010 |
|
|
|
58,203 |
|
|
|
469,197 |
|
|
|
Weighted average yield |
|
|
5.28 |
% |
|
|
5.23 |
% |
|
|
5.33 |
% |
|
|
5.36 |
% |
|
|
5.28 |
% |
|
|
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
957 |
|
|
|
9,017 |
|
|
|
61,402 |
|
|
|
9,258 |
|
|
|
80,634 |
|
|
|
Weighted average yield |
|
|
2.43 |
% |
|
|
3.77 |
% |
|
|
3.89 |
% |
|
|
3.98 |
% |
|
|
3.87 |
% |
|
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
1,028 |
|
|
|
4,805 |
|
|
|
6,945 |
|
|
|
25,217 |
|
|
|
37,995 |
|
|
|
Weighted average yield |
|
|
4.83 |
% |
|
|
3.44 |
% |
|
|
3.50 |
% |
|
|
4.18 |
% |
|
|
3.98 |
% |
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
4,781 |
|
|
|
6,106 |
|
|
|
3,053 |
|
|
|
|
|
|
|
13,940 |
|
|
|
Weighted average yield |
|
|
5.90 |
% |
|
|
5.24 |
% |
|
|
5.13 |
% |
|
|
|
% |
|
|
5.44 |
% |
|
|
|
|
|
Total debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
$149,177 |
|
|
|
$278,317 |
|
|
|
$218,315 |
|
|
|
$92,678 |
|
|
|
$738,487 |
|
|
|
Weighted average yield |
|
|
5.12 |
% |
|
|
5.04 |
% |
|
|
4.76 |
% |
|
|
3.77 |
% |
|
|
4.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
$149,380 |
|
|
|
$277,880 |
|
|
|
$218,445 |
|
|
|
$92,731 |
|
|
|
$738,436 |
|
|
|
|
|
The following is a summary of amounts relating to sales of securities available for sale:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
$151,672 |
|
|
|
$106,866 |
|
|
|
$67,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
$2,181 |
|
|
|
$3,984 |
|
|
|
$1,840 |
|
|
|
Gross realized losses |
|
|
(1,726 |
) |
|
|
(3,541 |
) |
|
|
(1,451 |
) |
|
|
Other than temporary write-downs |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
|
$455 |
|
|
|
$443 |
|
|
|
$357 |
|
|
|
|
|
Included in net realized gains on securities in 2005 were $32 thousand in loss write-downs on
certain equity securities deemed to be other-than-temporarily impaired based on an analysis of the
financial condition and operating outlook of the issuers.
Included in other noninterest expense for the years ended December 31, 2007, 2006 and 2005 were
contributions of appreciated equity securities to the Corporations charitable foundation amounting
to $520 thousand, $513 thousand
- 67 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
and $522 thousand, respectively. These transactions resulted in
realized securities gains of $397 thousand, $381 thousand and $369 thousand, respectively, for the
same periods.
Securities available for sale with a fair value of $592.7 million and securities available for sale
and held to maturity with a fair value of $557.4 million were pledged in compliance with state
regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings and
certain public deposits at December 31, 2007 and 2006, respectively. (See Note 12 to the
Consolidated Financial Statements for additional discussion of FHLB
borrowings). In addition, securities available for sale with a fair value of $8.4 million and
securities available for sale and held to maturity with a fair value $9.6 million were
collateralized for the discount window at the Federal Reserve Bank at December 31, 2007 and 2006,
respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities
available for sale with a fair value of $1.9 million and $2.1 million were designated in a rabbi
trust for a nonqualified retirement plan at December 31, 2007 and 2006, respectively. As of
December 31, 2007, securities available for sale with a fair value of $532 thousand were pledged as
collateral to secure certain interest rate swap agreements.
(6) Loans
The following is a summary of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages (1) |
|
$ |
278,821 |
|
|
|
18 |
% |
|
$ |
282,019 |
|
|
|
19 |
% |
|
|
Construction and development (2) |
|
|
60,361 |
|
|
|
4 |
% |
|
|
32,233 |
|
|
|
2 |
% |
|
|
Other (3) |
|
|
341,084 |
|
|
|
21 |
% |
|
|
273,145 |
|
|
|
19 |
% |
|
|
|
|
|
Total commercial |
|
|
680,266 |
|
|
|
43 |
% |
|
|
587,397 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages (4) |
|
|
588,628 |
|
|
|
37 |
% |
|
|
577,522 |
|
|
|
40 |
% |
|
|
Homeowner construction |
|
|
11,043 |
|
|
|
1 |
% |
|
|
11,149 |
|
|
|
|
% |
|
|
|
|
|
Total residential real estate |
|
|
599,671 |
|
|
|
38 |
% |
|
|
588,671 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines |
|
|
144,429 |
|
|
|
9 |
% |
|
|
145,676 |
|
|
|
10 |
% |
|
|
Home equity loans |
|
|
99,827 |
|
|
|
6 |
% |
|
|
93,947 |
|
|
|
6 |
% |
|
|
Other (5) |
|
|
49,459 |
|
|
|
4 |
% |
|
|
44,295 |
|
|
|
4 |
% |
|
|
|
|
|
Total consumer |
|
|
293,715 |
|
|
|
19 |
% |
|
|
283,918 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (6) |
|
$ |
1,573,652 |
|
|
|
100 |
% |
|
$ |
1,459,986 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
(1) |
|
Amortizing mortgages, primarily secured by income producing property.
|
|
(2) |
|
Loans for construction of residential and commercial properties and for land development. |
|
(3) |
|
Loans to businesses and individuals, a substantial portion of which are fully or partially
collateralized by real estate. |
|
(4) |
|
A substantial portion of these loans is used as qualified collateral for FHLB borrowings
(See Note 12 for additional discussion of FHLB borrowings). |
|
(5) |
|
Fixed rate consumer installment loans. |
|
(6) |
|
Net of unamortized loan origination fees, net of costs, totaling $100 thousand and $277
thousand at December 31, 2007 and December 31, 2006, respectively. Also includes $297
thousand and $342 thousand of premium, net of discount, on purchased loans at December 31,
2007 and December 31, 2006, respectively. |
Concentrations of Credit Risk
A significant portion of our loan portfolio is concentrated among borrowers in southern New
England, primarily Rhode Island and, to a lesser extent, Connecticut and Massachusetts, 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
- 68 -
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 Corporations market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 2007 and 2006 was $4.3 million and
$2.7 million, respectively. Interest income that would have been recognized had these loans been
current in accordance with
their original terms was approximately $341 thousand in 2007 and $218 thousand in 2006. Interest
income attributable to these loans included in the Consolidated Statements of Income amounted to
approximately $318 thousand in 2007 and $192 thousand in 2006.
There were no accruing loans 90 days or more past due at December 31, 2007 and 2006.
There were no loans whose terms had been restructured included in nonaccrual loans at December 31,
2007 and 2006.
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, |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans requiring an allowance |
|
|
$2,102 |
|
|
|
$1,393 |
|
|
|
Impaired loans not requiring an allowance |
|
|
2,490 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recorded investment in impaired loans |
|
|
$4,592 |
|
|
|
$1,812 |
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment in impaired loans |
|
|
$2,903 |
|
|
|
$1,105 |
|
|
|
$1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans |
|
|
$457 |
|
|
|
$192 |
|
|
|
$94 |
|
|
|
- 69 -
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006
Loan Servicing Activities
An analysis of loan servicing rights for the years ended December 31, 2007, 2006 and 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Loan |
|
|
|
|
|
|
|
Servicing |
|
Valuation |
|
|
|
|
|
Rights |
|
Allowance |
|
Total |
|
|
|
Balance at December 31, 2004 |
|
$ |
1,330 |
|
|
$ |
(331 |
) |
|
|
$999 |
|
|
Loan servicing rights capitalized |
|
|
391 |
|
|
|
|
|
|
|
391 |
|
|
Amortization (1) |
|
|
(375 |
) |
|
|
|
|
|
|
(375 |
) |
|
Decrease in impairment reserve (2) |
|
|
|
|
|
|
71 |
|
|
|
71 |
|
|
|
|
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 |
|
|
|
|
|
|
(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. |
Estimated aggregate amortization expense related to loan servicing assets is as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending December 31: |
|
|
2008 |
|
|
$ |
208 |
|
|
|
|
|
2009 |
|
|
|
169 |
|
|
|
|
|
2010 |
|
|
|
135 |
|
|
|
|
|
2011 |
|
|
|
108 |
|
|
|
|
|
2012 |
|
|
|
85 |
|
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