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)
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
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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23
BROAD STREET
WESTERLY,
RHODE ISLAND
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02891
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: 401-348-1200
Securities
registered pursuant to Section 12(b) of the Act: NONE
Securities
registered pursuant to Section 12(g) of the Act:
COMMON
STOCK, $.0625 PAR VALUE PER SHARE
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. oYes
xNo
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes
xNo
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. xYes
oNo
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Mark
one):
Large
accelerated filero Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2) oYes
xNo
The
aggregate market value of voting stock held by non-affiliates of the registrant
at June 30, 2006 was $303,706,881 based on a closing sales price of $27.72
per share as reported for the NASDAQ Global Market, which includes $19,906,785
held by The Washington Trust Company under trust agreements and other
instruments.
The
number of shares of the registrant’s common stock, $.0625 par value per share,
outstanding as of February 26, 2007 was 13,492,110.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement dated March 15, 2007 for the Annual
Meeting of Shareholders to be held April 24, 2007 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, 2006
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.
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, among other factors, of changes in general national
or
regional economic conditions, changes in interest rates, reductions in the
market value of wealth management assets under administration, reductions in
loan demand, reductions in deposit levels necessitating increased borrowing
to
fund loans and investments, changes in loan default and charge-off rates,
changes in the size and nature of the Corporation’s competition, changes in
legislation or regulation and accounting principles, policies and guidelines,
and changes in the assumptions used in making such forward-looking statements.
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.
Washington
Trust Bancorp, Inc.
Washington
Trust Bancorp, Inc. (the “Bancorp”), a publicly-owned registered bank holding
company and financial holding company, was organized in 1984 under the laws
of
the state of Rhode Island. The Bancorp owns all of the outstanding common stock
of The Washington Trust Company (the “Bank”), a Rhode Island-chartered
commercial bank. The Bancorp was formed in 1984 under a plan of reorganization
in which outstanding common shares of the Bank were exchanged for common shares
of the Bancorp. See additional information under the caption
“Subsidiaries”.
Through
its subsidiaries, the Bancorp offers a broad range of financial services to
individuals and businesses, including wealth management, through its offices
in
Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and its Internet
website (www.washtrust.com). The Bancorp’s common stock is traded on the NASDAQ
Global 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, 2006,
Washington Trust had total assets of $2.4 billion, total deposits of
$1.7 billion and total shareholders’ equity of
$173.1 million.
Commercial
Banking
The
Corporation offers a variety of banking and related financial services,
including:
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Residential
mortgages
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Telephone
banking services
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Commercial
loans
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Internet
banking services
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Construction
loans
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Commercial
and consumer demand deposits
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Home
equity lines of credit
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Savings,
NOW and money market deposits
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Home
equity loans
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Certificates
of deposit
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Consumer
installment loans
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Retirement
accounts
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Merchant
credit card services
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Cash
management services
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Automated
teller machines (ATMs)
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Safe
deposit boxes
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The
Corporation’s largest source of income is net interest income, the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing deposits and other borrowed funds.
The
Corporation’s lending activities are conducted primarily in 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 Corporation’s
loan portfolio. Loan sales in the secondary market provide funds for additional
lending and other banking activities. The majority of loans are sold with
servicing released.
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 trust, investment management
and
financial planning services. Washington Trust provides personal trust services,
including services as executor, trustee, administrator, custodian and guardian.
Corporate 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 corporate clients. At December 31, 2006 and 2005, wealth
management assets under administration totaled $3.7 billion and
$3.3 billion, respectively. These assets are not included in the
Consolidated Financial Statements.
The
August 2005 acquisition of Weston Financial Group, Inc. (“Weston Financial”)
increased the size and range of products and services offered by Washington
Trust’s wealth management group. Revenue from wealth management services, as a
percent of total revenues, increased from 18.2% in 2005 to 25.4% in 2006. See
additional information under the caption “Acquisitions” below and in Note 2
to the Consolidated Financial Statements.
Business
Segments
Segment
reporting information is presented in Note 18 to the Consolidated Financial
Statements.
Acquisitions
The
following summarizes Washington Trust’s acquisition history:
On
August 31, 2005, the Bancorp completed the acquisition of Weston Financial,
a registered investment advisor 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 Bancorp’s acquisition of all of Weston
Financial’s outstanding capital stock. (1)
On
April 16, 2002, the Bancorp completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. First Financial Corp. was headquartered in
Providence, Rhode Island and its subsidiary, First Bank and Trust Company,
operated banking offices in Providence, Cranston, Richmond and North Kingstown,
Rhode Island. The Richmond and North Kingstown branches were closed and
consolidated into existing Bank branches in May 2002. Pursuant to the Agreement
and Plan of Merger, dated November 12, 2001, the acquisition was effected
by means of the merger of First Financial Corp. with and into the Bancorp and
the merger of First Bank with and into the Bank. (1)
On
June 26, 2000, the Bancorp completed the acquisition of Phoenix Investment
Management Company, Inc. (“Phoenix”), an independent investment advisory firm
located in Providence, Rhode Island. Pursuant to the Agreement and Plan of
Merger, dated April 24, 2000, the acquisition was effected by means of
merger of Phoenix with and into the Bank. (2)
On
August 25, 1999, the Bancorp completed the acquisition of Pier Bank, a
Rhode Island chartered community bank headquartered in South Kingstown, Rhode
Island. Pursuant to the Agreement and Plan of Merger, dated February 22,
1999, the acquisition was effected by means of merger of Pier Bank with and
into
the Bank. (2)
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(1)
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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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(2)
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These acquisitions were accounted for as poolings of interests and, accordingly, all financial data was restated to reflect the combined financial condition and results of operations as if these acquisitions were in effect for all periods presented. |
Subsidiaries
The
Bancorp’s subsidiaries include the Bank and Weston Securities Corporation
(“WSC”). The Bancorp also owns all of the outstanding common stock of WT Capital
Trust I 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 Notes 2 and 12 to the
Consolidated Financial Statements for additional information.
The
following is a description of Bancorp’s primary operating
subsidiaries:
The
Washington Trust Company
The
Bank
was originally chartered in 1800 as the Washington Bank and is the oldest
banking institution headquartered in its market area and is among the oldest
banks in the United States. Its current corporate charter dates to
1902.
The
Bank
provides a broad range of financial services, including lending, deposit and
cash management services, wealth management services and merchant credit card
services. The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (“FDIC”), subject to regulatory limits.
The
Bank’s subsidiary, Weston Financial, is a registered investment advisor and
financial planning company located in Wellesley, Massachusetts, with an
insurance agency subsidiary. In addition, the Bank has other passive investment
subsidiaries whose primary functions are to provide servicing on passive
investments, such as residential and consumer loans acquired from the Bank
and
investment securities.
Weston
Securities Corporation
WSC
is a
licensed broker-dealer that markets several of Weston Financial’s investment
programs, including mutual funds and variable annuities. WSC acts as the
principal distributor to a group of mutual funds for which Weston Financial
is
the investment advisor.
Market
Area and Competition
Washington
Trust faces considerable competition in its market area for all aspects of
banking and related financial service activities. Competition from both bank
and
non-bank organizations is expected to continue.
The
Bank
contends with strong competition both in generating loans and attracting
deposits. The primary factors in competing are interest rates, financing terms,
fees charged, products offered, personalized customer service, online access
to
accounts and convenience of branch locations, ATMs and branch hours. Competition
comes from commercial banks, credit unions, and savings institutions, as well
as
other non-bank institutions. The Bank faces strong competition from larger
institutions with greater resources, broader product lines and larger delivery
systems than the Bank.
The
Bank
operates ten of its sixteen branch offices in Washington County, Rhode Island.
As of June 30, 2006, based upon information reported in the FDIC’s Deposit
Market Share Report, the Bank had 50% 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. The Corporation believes that being
the largest commercial banking institution headquartered within this market
area
provides a competitive advantage over other financial institutions.
The
Bank’s remaining six branch offices are located in Providence and Kent Counties
in Rhode Island and New London County in southeastern Connecticut. In December
2006, Washington Trust relocated its Providence-based commercial lending staff,
formerly based at the Washington Street branch office in Providence, to a leased
office with 6,200 square feet of space located in the financial district of
Providence. Washington Trust also plans to open a de novo branch in Providence
County (Cranston) in the second quarter of 2007 and a de novo branch in Kent
County (Warwick) in the second quarter of 2008. The Warwick branch is subject
to
the approval of state and federal regulators. These branches will bring the
total number of the Bank’s branch offices to eighteen and will increase the
Bank’s 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, 2006, Washington Trust had 419 full-time and 46 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.
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 “Federal Reserve Board”), and the State of Rhode Island, Department
of Business Regulation, Division of Banking (the “Rhode Island Division of
Banking”).
The
Federal Reserve Board 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, the Federal Reserve
Board. The Federal Reserve Board is also empowered to assess civil money
penalties against companies or individuals who violate the BHCA or orders or
regulations thereunder, 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 that a bank holding company may not engage in. “Financial activities”
is broadly defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities that the Federal
Reserve Board, 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 Federal Reserve Board permits, the Federal Reserve Board 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 Federal Reserve
Board finds that the Bank is not well capitalized or well managed, the Bancorp
would be required to enter into an agreement with the Federal Reserve Board
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
Federal Reserve Board approval. If the Bancorp fails to correct any such
condition within a prescribed period, the Federal Reserve Board could order
the
Bancorp to divest of 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 and
adequately managed bank holding companies, as determined by the Federal Reserve
Board, to acquire banks in any state subject to certain concentration limits
and
other conditions. The Interstate Act also 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
Federal Reserve Board approval is required before acquiring more than
5%
of a
class of voting securities, or substantially all of the assets, of a bank
holding company, bank or savings association.
Control
Acquisitions.
The
Change in Bank Control Act prohibits a person or a group of persons from
acquiring “control” of a bank holding company, such as the Bancorp, unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, 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 Federal Reserve Board 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
Federal Reserve Board 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 Federal Reserve Board has indicated
generally that it may be an unsafe or unsound practice for bank holding
companies to pay dividends unless the bank holding company’s net income over the
preceding year is sufficient to fund the dividends and the expected rate of
earnings retention is consistent with the organization’s capital needs, asset
quality and overall financial condition. Additionally, under Rhode Island law,
distributions of dividends cannot be made if a bank holding company would not
be
able to pay its debts as they become due in the usual course of business or
the
bank holding company’s total assets would be less than the sum of its total
liabilities. The Bancorp’s revenues consist primarily of cash dividends paid to
it by the Bank. As described below, the FDIC and the Rhode Island Division
of
Banking may also regulate the amount of dividends payable by the Bank. The
inability of the Bank to pay dividends may have an adverse effect on the
Bancorp.
Regulation
of the Bank.
The Bank
is subject to the regulation, supervision and examination by the FDIC, the
Rhode
Island Division of Banking and the State of Connecticut, Department of Banking.
The Bank is also subject to various Rhode Island and Connecticut business and
banking regulations.
Regulation
of the Registered Investment Advisor and Broker-Dealer.
WSC is a
registered broker-dealer and a member of the National Association of Securities
Dealers, Inc. (“NASD”) and is subject to extensive regulation, supervision, and
examination by the Securities and Exchange Commission (“SEC”), NASD 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 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 sub-advisor to a registered investment company generally
has obligations with respect to the qualification of the registered investment
company under the Internal Revenue Code of 1986, as amended (the
“Code”).
The
foregoing laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Weston
Financial from conducting its business in the event it fails to comply with
such
laws and regulations. Possible sanctions that may be imposed in the event of
such noncompliance include the suspension of individual employees, limitations
on business activities for specified periods of time, revocation of registration
as an investment advisor, commodity trading advisor and/or other registrations,
and other censures and fines.
ERISA.
The
Bank
and Weston Financial are each also subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), and related regulations, to the
extent it is a “fiduciary” under ERISA with respect to some of its clients.
ERISA and related provisions of the Code impose duties on persons who are
fiduciaries under ERISA, and prohibit certain transactions involving the assets
of each ERISA plan that is a client of the Bank or Weston Financial, as
applicable, as well as certain transactions by the fiduciaries (and several
other related parties) to such plans.
Insurance
of Accounts and FDIC Regulation.
The Bank
currently pays deposit insurance premiums to the FDIC based on an assessment
rate established by the FDIC for Bank Insurance Fund (“BIF”) - member
institutions. The FDIC has established a risk-based premium system under which
the FDIC classifies institutions based on their capital ratios and on other
relevant information and generally assesses higher rates on those institutions
that tend to pose greater risks to the federal deposit insurance funds. Prior
to
the enactment of the Federal Deposit Insurance Reform Act of 2005 (the “FDIR
Act”) on February 8, 2006, the FDIC was not required to charge all banks
deposit insurance premiums when the ratio of deposit insurance reserves to
insured deposits was maintained above specified levels. Under new rules issued
by the FDIC pursuant to the FDIR Act, the FDIC will impose assessments on all
banks at a rate determined by the institution’s risk classification regardless
of the ratio of deposit insurance reserves to insured deposits. The new rules
were issued November 2, 2006 and became effective on January 1, 2007,
however the utilization of a one-time assessment credit is expected to minimize
the financial impact of this change in 2007. The new rules are expected to
increase the Bank’s deposit insurance assessments over previous levels,
resulting in an adverse effect on net earnings in 2008.
Additionally,
as a result of the passage of the FDIR Act: (i) the BIF will be merged with
the FDIC’s Savings Association Insurance Fund, creating the Deposit Insurance
Fund (the “DIF’); (ii) the $100,000 per account insurance level will be
indexed to reflect inflation; (iii) deposit insurance coverage for certain
retirement accounts will be increased to $250,000; and (iv) a cap will be
placed on the level of the DIF and dividends will be paid to banks once the
level of the DIF exceeds the specified threshold. The Corporation 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
Federal Reserve Board 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
Federal Reserve Board 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
Federal Reserve Board risk-based guidelines define a three-tier capital
framework. Tier 1 capital includes common shareholders’ equity, perpetual
preferred stock and trust preferred securities (both subject to certain
limitations and in the case of the latter, to specific limitations on the kind
and amount of such securities that may be included as Tier 1 capital), and
minority interest in the equity accounts of consolidated subsidiaries, 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 Federal Reserve
Board and includes a lock-in clause precluding payment of either interest or
principal if the payment would cause the issuing bank’s risk-based capital ratio
to fall or remain below the required minimum. The sum of Tier 1 and Tier 2
capital less investments in unconsolidated subsidiaries represents qualifying
total capital. Risk-based capital ratios are calculated by dividing Tier 1
and
total capital by risk-weighted assets. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based primarily on
relative credit risk. The
minimum
Tier 1 capital ratio is 4% and the minimum total risk-based capital (Tier 1
and
Tier 2) is 8%. At December 31, 2006, the Corporation’s net risk-weighted
assets amounted to $1.5 billion, its Tier 1 capital ratio was 9.60% and its
total risk-based capital ratio was 11.00%.
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 Corporation’s leverage ratio was 6.04% as of
December 31, 2006.
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 bank’s
compliance with the plan. The liability of the parent holding company under
any
such guarantee is limited to the lesser of 5% of the bank’s assets at the time
it became “undercapitalized” or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent’s general unsecured creditors. In
addition, FDICIA requires the 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 “well-capitalized” institution must
have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10% and a leverage ratio of at least 5% and not be
subject to a capital directive order.
Regulators
also must take into consideration (a) concentrations of credit risk; (b)
interest rate risk (when the interest rate sensitivity of an institution’s
assets does not match the sensitivity of its liabilities or its off-balance
sheet position); and (c) risks from non-traditional activities, as well as
an
institution’s ability to manage those risks, when determining the adequacy of an
institution’s capital. This evaluation will be made as a part of the
institution’s regular safety and soundness examination. In addition, the
Bancorp, and any bank with significant trading activity, must incorporate a
measure for market risk in their regulatory capital calculations. At
December 31, 2006, the Bank’s 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 Corporation’s regulatory
capital requirements.
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 20 or so largest U.S. bank holding companies. 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 20 or so largest U.S. bank holding companies to either adopt Basel
1-A
or remain subject to the existing risk-based capital rules. The NPR would also,
among other things, amend the ANPR to add new risk weights, expand the use
of
external credit ratings for certain exposures and expand the range of eligible
collateral and guarantors used to mitigate credit risk. The NPR remains subject
to approval by other regulatory agencies, and if approved, will be made
available to the public for comment, and in all likelihood, will be subject
to
further revision. The effective date, if adopted, of the Basel 1-A rules also
remains uncertain. 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:
| § |
In
the case of one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries
cannot exceed 10% of the capital stock and surplus of the insured
depository institution.
|
| § |
In
the case of all affiliates, the aggregate amount of covered transactions
of the insured depository institution and its subsidiaries cannot
exceed
20% of the capital stock and surplus of the insured depository
institution.
|
“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 Federal Reserve Board, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any person or
company, or the issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. Covered transactions are also subject to certain
collateral security requirements. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind,
or furnishing of any service.
Limitations
on Bank Dividends.
The
Bancorp’s revenues consist primarily of cash dividends paid to it by the Bank.
The FDIC has the authority to use its enforcement powers to prohibit a bank
from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice. Payment of dividends by a bank is restricted
pursuant to various state and federal regulatory limitations. Reference
is made to Note 13 to the Consolidated Financial Statements for additional
discussion of the Corporation’s ability to pay dividends.
Customer
Information Security.
The FDIC
and other bank regulatory agencies have adopted final guidelines for
establishing standards for safeguarding nonpublic personal information about
customers that 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”.
Various states have enacted legislation concerning breaches of data security
and
various bills requiring consumer notice of data security breaches are being
considered by Congress.
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, among other things, to deny
terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer
of
money. The Patriot Act, together with the regulations implemented by various
federal regulatory agencies, requires financial institutions, including the
Bank, to implement new policies and procedures or amend existing policies or
procedures with respect to, among other matters, anti-money laundering
compliance, suspicious activity and currency transaction reporting, and due
diligence on customers. The Patriot Act and 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 Federal Reserve
Board to evaluate the effectiveness of an applicant 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 to take additional steps to
monitor their correspondent banking and private banking relationships as well
as
their relationships with “shell Banks.” Management believes that the Corporation
is in compliance with all the requirements prescribed by the Patriot Act and
all
applicable final implementing regulations.
The
Community Reinvestment Act
(the
“CRA”). The CRA requires lenders to identify the communities served by the
institution’s offices and other deposit taking facilities and to make loans and
investments and provide services that meet the credit needs of these
communities. Regulatory agencies examine each of the banks and rate such
institutions’ compliance with CRA as “Outstanding”, “Satisfactory”, “Needs to
Improve” or “Substantial Noncompliance”. Failure of an institution to receive at
least a “Satisfactory” rating could inhibit an institution or its holding
company from undertaking certain activities, including engaging in activities
newly permitted as a financial holding company under GLBA and acquisitions
of
other financial institutions. The Federal Reserve Board 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.
The
Sarbanes-Oxley Act of 2002, as amended
(“Sarbanes-Oxley”). Sarbanes-Oxley implements a broad range of corporate
governance and accounting measures for public companies (including publicly-held
bank holding companies such as Bancorp) designed to promote honesty and
transparency in corporate America. Sarbanes-Oxley’s principal provisions, many
of which have been interpreted through regulations released in 2003, provide
for
and include, among other things:
| § |
The
creation of an independent accounting oversight
board;
|
| § |
Auditor
independence provisions that restrict non-audit services that accountants
may provide to their audit clients;
|
| § |
Additional
corporate governance and responsibility measures, including the
requirement that the principal executive officer and principal financial
officer of a public company certify financial
statements;
|
| § |
The
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of a public company’s securities by directors and senior
officers in the twelve month period following initial publication
of any
financial statements that later require
restatement;
|
| § |
An
increase in the oversight of, and enhancement of certain requirements
relating to, audit committees of public companies and how they interact
with the company’s independent
auditors;
|
| § |
Requirements
that audit committee members be independent and are barred from accepting
consulting, advisory or other compensatory fees from public
companies;
|
| § |
Requirements
that public companies disclose whether at least one member of the
audit
committee is a “financial expert” (as such term is defined by the SEC) and
if not, why not;
|
| § |
Expanded
disclosure requirements for corporate insiders, including accelerated
reporting of stock transactions by insiders and a prohibition on
insider
trading during pension blackout
periods;
|
| § |
A
prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions, such as the Bank, on
nonpreferential terms and in compliance with other bank regulatory
requirements;
|
| § |
Disclosure
of a code of ethics and filing a Form 8-K for a change to or waiver
of
such code; and
|
| § |
A
range of enhanced penalties for fraud and other
violations.
|
The
Corporation is monitoring the status of other related ongoing rulemaking by
the
SEC and other regulatory entities. Currently, management believes that the
Corporation is in compliance with the rulemaking promulgated to date.
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.
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
Significant
changes in market interest rates may adversely affect both our profitability
and
our financial condition. Our profitability depends in part on the difference
between rates earned on loans and investments and rates paid on deposits and
other interest-bearing liabilities. Since market interest rates may change
by
differing magnitudes and at different times, significant changes in interest
rates over an extended period of time could reduce overall net interest income.
(See Item 7A, Quantitative and Qualitative Disclosures about Market Risk,
for additional discussion on interest rate risk.)
Changes
in the Market Value of Wealth Management Assets under Administration May Reduce
Our Profitability
Revenues
from wealth management services provide an important source of our total
revenues. These fees are primarily dependent on the market value of wealth
management assets under administration. These assets primarily consist of
marketable securities. Reductions in the market value of these assets due to
market conditions or the inability to attract and retain wealth management
clients could reduce the level of fees that we earn.
Reductions
in Deposit Levels Necessitating Increased Borrowing to Fund Loans and
Investments
The
Bank’s principal source of funding is 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 the Bank’s deposits were
to decline relative to the total sources of funds, the Bank may have to rely
more heavily on higher cost borrowings in the future.
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. Further,
our net income would decrease if we had to add additional amounts to our
allowance for loan losses. 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:
| · |
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.
|
| · |
Industry
concentration - A portion of our loan portfolio consists of loans
to the
hospitality, tourism and recreation industries. Loans to companies
in this
industry 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.
|
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
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 as well as other sources
of funding in the communities we serve, and we will likely face even greater
competition in the future as a result of recent federal legislative changes.
Many of our competitors have significantly greater resources and lending limits
than we have. As a result of those greater resources, the large financial
institutions that we compete with may be able to provide a broader range of
services to their customers and may be able to afford newer and more
sophisticated technology. Our long-term success depends on the ability of the
Bank to compete successfully with other financial institutions in the Bank’s
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.
Changes
in accounting principles generally accepted in the United States applicable
to
the Corporation could have a material impact on the Corporation’s reported
results of operations.
None.
GUIDE
3 Statistical Disclosures
The
information required by Securities Act Guide 3 “Statistical Disclosure by Bank
Holding Companies” is located on the pages noted below.
|
Page
|
||
|
I.
|
Distribution
of Assets, Liabilities and Stockholder Equity;
Interest
Rates and Interest Differentials
|
26,
27
|
|
II.
|
Investment
Portfolio
|
34,
62-65
|
|
III.
|
Loan
Portfolio
|
35-37,
67
|
|
IV.
|
Summary
of Loan Loss Experience
|
38-39,
68
|
|
V.
|
Deposits
|
26,
73
|
|
VI.
|
Return
on Equity and Assets
|
18
|
|
VII.
|
Short-Term
Borrowings
|
N/A
|
The
Corporation conducts its business from sixteen 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 December 2006, Washington
Trust relocated its Providence-based commercial lending staff, formerly based
at
Washington Street branch office in Providence, to a leased office located in
the
financial district of Providence. The Corporation also provides wealth
management services from its main office and offices located in Providence
and
Narragansett, Rhode Island and Wellesley, Massachusetts. In addition, the Bank
has two operations facilities located in Westerly, Rhode Island. At
December 31, 2006, ten of the Corporation’s facilities were owned, ten were
leased and one branch office was owned on leased land. Lease expiration dates
range from four months to fifteen years with renewal options of one to twenty
years. All of the Corporation’s properties are considered to be in good
condition and adequate for the purpose for which they are used.
In
addition to the 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 six years with
no
renewal option.
The
Bank
also operates ATMs that are branded with the Bank’s logo under contracts with a
third party vendor located in retail stores and other locations in Rhode Island,
southeastern Connecticut and southeastern Massachusetts.
For
additional information regarding premises and equipments and lease obligations
see Note 8 to the Consolidated Financial Statements.
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.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2006.
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, 2006.
|
Years
of
|
|||
|
Name
|
Title
|
Age
|
Service
|
|
John
C. Warren
|
Chairman
and Chief Executive Officer of the Bancorp and the Bank
|
61
|
11
|
|
John
F. Treanor
|
President
and Chief Operating Officer of the Bancorp and the Bank
|
59
|
8
|
|
Galan
G. Daukas
|
Executive
Vice President of Wealth Management of the Bancorp and the
Bank
|
43
|
1
|
|
David
V. Devault
|
Executive
Vice President, Secretary, Treasurer and Chief Financial
|
52
|
20
|
|
Officer
of the Bancorp and the Bank
|
|||
|
Stephen
M. Bessette
|
Executive
Vice President - Retail Lending of the Bank
|
59
|
10
|
|
B.
Michael Rauh, Jr.
|
Executive
Vice President - Corporate Sales, Planning and Delivery of the
Bank
|
47
|
15
|
|
Dennis
L. Algiere
|
Senior
Vice President - Chief Compliance Officer and Director of
|
46
|
12
|
|
Community
Affairs of the Bank
|
|||
|
Vernon
F. Bliven
|
Senior
Vice President - Human Resources of the Bank
|
57
|
34
|
|
Elizabeth
B. Eckel
|
Senior
Vice President - Marketing of the Bank
|
46
|
15
|
|
William
D. Gibson
|
Senior
Vice President - Credit Administration of the Bank
|
60
|
8
|
|
Barbara
J. Perino, CPA
|
Senior
Vice President - Operations and Technology of the Bank
|
45
|
18
|
|
James
M. Vesey
|
Senior
Vice President and Chief Credit Officer of the Bank
|
59
|
8
|
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. He served as Chief Operating Officer and Chairman of
the
Management Committee of Harbor Capital Management Company from 2000 to
2002.
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 February 2007 his title was changed to Executive Vice President, Sales,
Service & Delivery.
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.
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.
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.
The
Bancorp’s common stock has traded on the NASDAQ Global Market since July 2006.
Previously, the Bancorp’s 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, 2006 and 2005 are presented in the following table. The
stock prices are based on the high and low sales prices during the respective
quarter.
|
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
|
$
|
.19
|
$
|
.19
|
$
|
.19
|
$
|
.19
|
|||||
|
2005
Quarters
|
1
|
2
|
3
|
4
|
|||||||||
|
Stock
prices:
|
|||||||||||||
|
High
|
$
|
29.99
|
$
|
28.81
|
$
|
30.38
|
$
|
29.98
|
|||||
|
Low
|
27.00
|
23.94
|
26.08
|
25.77
|
|||||||||
|
Cash
dividend declared per share
|
$
|
.18
|
$
|
.18
|
$
|
.18
|
$
|
.18
|
|||||
The
Bancorp will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The Bancorp
(including the Bank prior to 1984) has recorded consecutive quarterly dividends
for over 100 years.
The
Bancorp’s primary source of funds for dividends paid to shareholders is the
receipt of dividends from the Bank. A discussion of the restrictions on the
advance of funds or payment of dividends to the Bancorp is included in
Note 13 to the Consolidated Financial Statements.
At
February 26, 2007 there were 2,075 holders of record of the Bancorp’s
common stock.
See
additional disclosures on Equity Compensation Plan Information in Part III,
Item
12 “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
The
following table provides information as of and for the quarter ended
December 31, 2006 regarding shares of common stock of the Corporation that
were repurchased under the Nonqualified Deferred Compensation Plan (“Deferred
Compensation Plan”), the 2001 Stock Repurchase Plan, the 2006 Stock Repurchase
Plan, the Amended and Restated 1988 Stock Option Plan (the “1988 Plan”), the
Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), and the
Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003 Plan”).
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced
plan(s)
|
Maximum
number of shares that may yet be purchased under the
plan(s)
|
||||||||||
|
Deferred
Compensation Plan (1)
|
|||||||||||||
|
Balance
at beginning of period
|
5,565
|
||||||||||||
|
10/1/2006
to 10/31/2006
|
374
|
$
|
26.81
|
374
|
5,191
|
||||||||
|
11/1/2006
to 11/30/2006
|
265
|
27.31
|
265
|
4,926
|
|||||||||
|
12/1/2006
to 12/31/2006
|
356
|
28.31
|
356
|
4,570
|
|||||||||
|
Total
Deferred Compensation Plan
|
995
|
$
|
27.48
|
995
|
4,570
|
||||||||
|
2001
Stock Repurchase Plan (2)
|
|||||||||||||
|
Balance
at beginning of period
|
162,000
|
||||||||||||
|
10/1/2006
to 10/31/2006
|
-
|
-
|
-
|
162,000
|
|||||||||
|
11/1/2006
to 11/30/2006
|
-
|
-
|
-
|
162,000
|
|||||||||
|
12/1/2006
to 12/31/2006
|
50,000
|
$
|
28.20
|
50,000
|
-
|
||||||||
|
Total
2001 Stock Repurchase Plan
|
50,000
|
$
|
28.20
|
50,000
|
-
|
||||||||
|
2006
Stock Repurchase Plan (3)
|
|||||||||||||
|
Balance
at beginning of period
|
-
|
||||||||||||
|
10/1/2006
to 10/31/2006
|
-
|
-
|
-
|
-
|
|||||||||
|
11/1/2006
to 11/30/2006
|
-
|
-
|
-
|
-
|
|||||||||
|
12/1/2006
to 12/31/2006
|
-
|
-
|
-
|
400,000
|
|||||||||
|
Total
2006 Stock Repurchase Plan
|
-
|
-
|
-
|
400,000
|
|||||||||
|
Other
(4)
|
|||||||||||||
|
Balance
at beginning of period
|
N/A
|
||||||||||||
|
10/1/2006
to 10/31/2006
|
-
|
-
|
-
|
N/A
|
|||||||||
|
11/1/2006
to 11/30/2006
|
4,302
|
$
|
11.29
|
4,302
|
N/A
|
||||||||
|
12/1/2006
to 12/31/2006
|
1,346
|
12.31
|
1,346
|
N/A
|
|||||||||
|
Total
Other
|
5,648
|
$
|
11.54
|
5,648
|
N/A
|
||||||||
|
Total
Purchases of Equity Securities
|
56,643
|
$
|
26.53
|
56,643
|
|||||||||
(1)
The
Deferred Compensation Plan was established on January 1, 1999. A maximum of
25,000 shares were authorized under this plan. This plan allows directors and
officers to defer a portion of their compensation. The deferred compensation
is
contributed to a rabbi trust that invests the assets of the trust into selected
mutual funds as well as shares of the Bancorp’s common stock pursuant to the
direction of the plan participants. All shares are purchased in the open market.
(2)
The
2001 Stock Repurchase Plan was established in September 2001. A maximum of
250,000 shares were authorized under the plan. The Bancorp held the repurchased
shares as treasury stock for general corporate purposes. This plan was
terminated in December 2006 and the Bancorp does not intend to make further
purchases under this plan.
(3)
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.
(4)
Pursuant to the Corporation’s share-based compensation plans, employees may
deliver back shares of stock previously issued in payment of the exercise price
of stock options. While required to be reported in this table, such transactions
are not reported as share repurchases in the Corporation’s Consolidated
Financial Statements. The Corporation’s 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.
The
selected consolidated financial data set forth below does not purport to be
complete and should be read in conjunction with, and is qualified in its
entirety by, the more detailed information including the Consolidated Financial
Statements and related Notes, and the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” appearing
elsewhere in this Annual Report on Form 10-K.
|
Selected
Operating Data and Financial Ratios:
|
(Dollars
in thousands, except per share
amounts)
|
|||||||||||||||
|
At
or for the years ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Financial
Results:
|
||||||||||||||||
|
Interest
income
|
$
|
131,134
|
$
|
115,693
|
$
|
96,853
|
$
|
86,245
|
$
|
87,339
|
||||||
|
Interest
expense
|
69,660
|
55,037
|
42,412
|
37,446
|
43,057
|
|||||||||||
|
Net
interest income
|
61,474
|
60,656
|
54,441
|
48,799
|
44,282
|
|||||||||||
|
Provision
for loan losses
|
1,200
|
1,200
|
610
|
460
|
400
|
|||||||||||
|
Net
interest income after
|
||||||||||||||||
|
provision
for loan losses
|
60,274
|
59,456
|
53,831
|
48,339
|
43,882
|
|||||||||||
|
Noninterest
income
|
42,183
|
30,946
|
26,905
|
26,735
|
23,258
|
|||||||||||
|
Net
interest and noninterest income
|
102,457
|
90,402
|
80,736
|
75,074
|
67,140
|
|||||||||||
|
Noninterest
expense
|
65,335
|
56,393
|
50,373
|
47,632
|
42,990
|
|||||||||||
|
Income
before income taxes
|
37,122
|
34,009
|
30,363
|
27,442
|
24,150
|
|||||||||||
|
Income
tax expense
|
12,091
|
10,985
|
9,534
|
8,519
|
7,393
|
|||||||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
$
|
20,829
|
$
|
18,923
|
$
|
16,757
|
||||||
|
Per
share information ($):
|
||||||||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
1.86
|
1.73
|
1.57
|
1.44
|
1.32
|
|||||||||||
|
Diluted
|
1.82
|
1.69
|
1.54
|
1.41
|
1.30
|
|||||||||||
|
Cash
dividends declared (1)
|
.76
|
.72
|
.68
|
.62
|
.56
|
|||||||||||
|
Book
value
|
12.89
|
11.86
|
11.44
|
10.46
|
9.87
|
|||||||||||
|
Tangible
book value
|
8.61
|
7.79
|
9.64
|
8.60
|
7.93
|
|||||||||||
|
Market
value - closing stock price
|
27.89
|
26.18
|
29.31
|
26.20
|
19.53
|
|||||||||||
|
Performance
Ratios (%):
|
||||||||||||||||
|
Return
on average assets
|
1.04
|
.98
|
.97
|
1.03
|
1.07
|
|||||||||||
|
Return
on average shareholders’ equity
|
14.99
|
14.80
|
14.40
|
14.15
|
14.25
|
|||||||||||
|
Average
equity to average total assets
|
6.93
|
6.62
|
6.73
|
7.24
|
7.50
|
|||||||||||
|
Dividend
payout ratio (2)
|
41.76
|
42.60
|
44.16
|
43.97
|
43.08
|
|||||||||||
|
Asset
Quality Ratios (%):
|
||||||||||||||||
|
Nonperforming
loans to total loans
|
.19
|
.17
|
.38
|
.29
|
.53
|
|||||||||||
|
Nonperforming
assets to total assets
|
.11
|
.10
|
.21
|
.14
|
.24
|
|||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
693.87
|
742.25
|
354.49
|
580.17
|
370.78
|
|||||||||||
|
Allowance
for loan losses to total loans
|
1.29
|
1.28
|
1.34
|
1.66
|
1.95
|
|||||||||||
|
Net
charge-offs (recoveries) to average loans
|
.02
|
(.01
|
)
|
(.02
|
)
|
-
|
.05
|
|||||||||
|
Capital
Ratios (%):
|
||||||||||||||||
|
Tier
1 leverage capital ratio
|
6.04
|
5.45
|
5.35
|
5.65
|
5.63
|
|||||||||||
|
Tier
1 risk-based capital ratio
|
9.60
|
9.06
|
9.15
|
10.00
|
10.13
|
|||||||||||
|
Total
risk-based capital ratio
|
11.00
|
10.51
|
10.72
|
11.57
|
11.55
|
|||||||||||
____________
| (1) |
Represents
historical per share dividends declared by the
Bancorp.
|
| (2) |
Represents
the ratio of historical per share dividends declared by the Bancorp
to
diluted earnings per share.
|
| Selected Balance Sheet Data: |
(Dollars
in thousands)
|
|||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
71,909
|
$
|
66,163
|
$
|
52,081
|
$
|
61,110
|
$
|
51,048
|
||||||
|
Total
securities
|
703,851
|
783,941
|
890,058
|
839,421
|
795,833
|
|||||||||||
|
FHLB
stock
|
28,727
|
34,966
|
34,373
|
31,464
|
24,582
|
|||||||||||
|
Loans:
|
||||||||||||||||
|
Commercial
and other
|
587,397
|
554,734
|
507,711
|
408,477
|
382,169
|
|||||||||||
|
Residential
real estate
|
588,671
|
582,708
|
513,695
|
389,855
|
280,886
|
|||||||||||
|
Consumer
|
283,918
|
264,466
|
228,270
|
162,649
|
132,071
|
|||||||||||
|
Total
loans
|
1,459,986
|
1,401,908
|
1,249,676
|
960,981
|
795,126
|
|||||||||||
|
Less
allowance for loan losses
|
18,894
|
17,918
|
16,771
|
15,914
|
15,487
|
|||||||||||
|
Net
loans
|
1,441,092
|
1,383,990
|
1,232,905
|
945,067
|
779,639
|
|||||||||||
|
Investment
in bank-owned life insurance
|
39,770
|
30,360
|
29,249
|
28,074
|
22,013
|
|||||||||||
|
Goodwill
and other intangibles
|
57,374
|
54,372
|
23,900
|
24,544
|
25,260
|
|||||||||||
|
Other
|
56,442
|
48,211
|
45,254
|
44,127
|
47,286
|
|||||||||||
|
Total
assets
|
$
|
2,399,165
|
$
|
2,402,003
|
$
|
2,307,820
|
$
|
1,973,807
|
$
|
1,745,661
|
||||||
|
Liabilities:
|
||||||||||||||||
|
Deposits:
|
||||||||||||||||
|
Demand
deposits
|
$
|
186,533
|
$
|
196,102
|
$
|
189,588
|
$
|
194,144
|
$
|
157,539
|
||||||
|
NOW
accounts
|
175,479
|
178,677
|
174,727
|
153,344
|
120,092
|
|||||||||||
|
Money
market accounts
|
286,998
|
223,255
|
196,775
|
83,037
|
75,446
|
|||||||||||
|
Savings
accounts
|
205,998
|
212,499
|
251,920
|
257,497
|
275,816
|
|||||||||||
|
Time
deposits
|
822,989
|
828,725
|
644,875
|
518,119
|
481,600
|
|||||||||||
|
Total
deposits
|
1,677,997
|
1,639,258
|
1,457,885
|
1,206,141
|
1,110,493
|
|||||||||||
|
FHLB
advances
|
474,561
|
545,323
|
672,748
|
607,104
|
480,080
|
|||||||||||
|
Junior
subordinated debentures
|
22,681
|
22,681
|
-
|
-
|
-
|
|||||||||||
|
Other
borrowings
|
14,684
|
9,774
|
3,417
|
2,311
|
9,183
|
|||||||||||
|
Other
liabilities
|
36,186
|
26,521
|
21,918
|
20,196
|
17,184
|
|||||||||||
|
Shareholders'
equity
|
173,056
|
158,446
|
151,852
|
138,055
|
128,721
|
|||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
2,399,165
|
$
|
2,402,003
|
$
|
2,307,820
|
$
|
1,973,807
|
$
|
1,745,661
|
||||||
|
Asset
Quality:
|
||||||||||||||||
|
Nonaccrual
loans
|
$
|
2,723
|
$
|
2,414
|
$
|
4,731
|
$
|
2,743
|
$
|
4,177
|
||||||
|
Other
real estate owned, net
|
-
|
-
|
4
|
11
|
86
|
|||||||||||
|
Total
nonperforming assets
|
$
|
2,723
|
$
|
2,414
|
$
|
4,735
|
$
|
2,754
|
$
|
4,263
|
||||||
|
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
|
677
|
250
|
1,197
|
718
|
2,842
|
|||||||||||
|
Interest
on federal funds sold
|
||||||||||||||||
|
and
other short-term investments
|
116
|
149
|
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
|
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
|
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
|
$
|
.45
|
$
|
.46
|
$
|
.49
|
$
|
.46
|
$
|
1.86
|
||||||
|
Diluted
earnings per share
|
$
|
.44
|
$
|
.45
|
$
|
.48
|
$
|
.45
|
$
|
1.82
|
||||||
|
Cash
dividends declared per share
|
$
|
.19
|
$
|
.19
|
$
|
.19
|
$
|
.19
|
$
|
.76
|
||||||
|
Selected
Quarterly Financial Data
|
(Dollars
and shares in thousands, except per share amounts)
|
|||||||||||||||
|
2005
|
Q1
|
Q2
|
Q3
|
Q4
|
Year
|
|||||||||||
|
Interest
income:
|
||||||||||||||||
|
Interest
and fees on loans
|
$
|
17,825
|
$
|
19,096
|
$
|
20,418
|
$
|
21,592
|
$
|
78,931
|
||||||
|
Income
on securities:
|
||||||||||||||||
|
Taxable
|
8,434
|
8,285
|
8,085
|
8,130
|
32,934
|
|||||||||||
|
Nontaxable
|
185
|
204
|
221
|
276
|
886
|
|||||||||||
|
Dividends
on corporate stock and FHLB stock
|
619
|
625
|
594
|
653
|
2,491
|
|||||||||||
|
Interest
on federal funds sold
|
||||||||||||||||
|
and
other short-term investments
|
55
|
79
|
187
|
130
|
451
|
|||||||||||
|
Total
interest income
|
27,118
|
28,289
|
29,505
|
30,781
|
115,693
|
|||||||||||
|
Interest
expense:
|
||||||||||||||||
|
Deposits
|
6,932
|
7,627
|
8,241
|
9,386
|
32,186
|
|||||||||||
|
FHLB
advances
|
5,549
|
5,670
|
5,741
|
5,273
|
22,233
|
|||||||||||
|
Junior
subordinated debentures
|
-
|
-
|
124
|
334
|
458
|
|||||||||||
|
Other
|
16
|
20
|
39
|
85
|
160
|
|||||||||||
|
Total
interest expense
|
12,497
|
13,317
|
14,145
|
15,078
|
55,037
|
|||||||||||
|
Net
interest income
|
14,621
|
14,972
|
15,360
|
15,703
|
60,656
|
|||||||||||
|
Provision
for loan losses
|
300
|
300
|
300
|
300
|
1,200
|
|||||||||||
|
Net
interest income after provision for loan losses
|
14,321
|
14,672
|
15,060
|
15,403
|
59,456
|
|||||||||||
|
Noninterest
income:
|
||||||||||||||||
|
Wealth
management services:
|
||||||||||||||||
|
Trust
and investment advisory fees
|
3,156
|
3,150
|
3,594
|
4,507
|
14,407
|
|||||||||||
|
Mutual
fund fees
|
-
|
-
|
304
|
1,032
|
1,336
|
|||||||||||
|
Financial
planning, commissions and
|
||||||||||||||||
|
other
service fees
|
56
|
336
|
226
|
301
|
919
|
|||||||||||
|
Wealth
management services
|
3,212
|
3,486
|
4,124
|
5,840
|
16,662
|
|||||||||||
|
Service
charges on deposit accounts
|
1,011
|
1,168
|
1,158
|
1,165
|
4,502
|
|||||||||||
|
Merchant
processing fees
|
778
|
1,337
|
1,932
|
1,156
|
5,203
|
|||||||||||
|
Income
from bank-owned life insurance
|
272
|
279
|
283
|
277
|
1,110
|
|||||||||||
|
Net
gains on loan sales and commissions
|
||||||||||||||||
|
on
loans originated for others
|
487
|
418
|
415
|
359
|
1,679
|
|||||||||||
|
Net
realized gains on securities
|
-
|
3
|
17
|
337
|
357
|
|||||||||||
|
Other
income
|
319
|
303
|
445
|
365
|
1,433
|
|||||||||||
|
Total
noninterest income
|
6,079
|
6,994
|
8,374
|
9,499
|
30,946
|
|||||||||||
|
Noninterest
expense:
|
||||||||||||||||
|
Salaries
and employee benefits
|
7,459
|
7,450
|
8,194
|
9,030
|
32,133
|
|||||||||||
|
Net
occupancy
|
853
|
802
|
828
|
977
|
3,460
|
|||||||||||
|
Equipment
|
882
|
869
|
832
|
873
|
3,456
|
|||||||||||
|
Merchant
processing costs
|
636
|
1,098
|
1,623
|
962
|
4,319
|
|||||||||||
|
Outsourced
services
|
413
|
444
|
406
|
460
|
1,723
|
|||||||||||
|
Advertising
and promotion
|
303
|
733
|
460
|
481
|
1,977
|
|||||||||||
|
Legal,
audit and professional fees
|
392
|
520
|
513
|
475
|
1,900
|
|||||||||||
|
Amortization
of intangibles
|
147
|
99
|
196
|
410
|
852
|
|||||||||||
|
Other
|
1,359
|
1,358
|
1,758
|
2,098
|
6,573
|
|||||||||||
|
Total
noninterest expense
|
12,444
|
13,373
|
14,810
|
15,766
|
56,393
|
|||||||||||
|
Income
before income taxes
|
7,956
|
8,293
|
8,624
|
9,136
|
34,009
|
|||||||||||
|
Income
tax expense
|
2,546
|
2,654
|
2,802
|
2,983
|
10,985
|
|||||||||||
|
Net
income
|
$
|
5,410
|
$
|
5,639
|
$
|
5,822
|
$
|
6,153
|
$
|
23,024
|
||||||
|
Weighted
average shares outstanding - basic
|
13,282.7
|
13,296.0
|
13,330.3
|
13,352.4
|
13,315.2
|
|||||||||||
|
Weighted
average shares outstanding - diluted
|
13,617.3
|
13,592.3
|
13,671.9
|
13,659.6
|
13,626.7
|
|||||||||||
|
Per
share information:
|
||||||||||||||||
|
Basic
earnings per share
|
$
|
.41
|
$
|
.42
|
$
|
.44
|
$
|
.46
|
$
|
1.73
|
||||||
|
Diluted
earnings per share
|
$
|
.40
|
$
|
.41
|
$
|
.43
|
$
|
.45
|
$
|
1.69
|
||||||
|
Cash
dividends declared per share
|
$
|
.18
|
$
|
.18
|
$
|
.18
|
$
|
.18
|
$
|
.72
|
||||||
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 the Corporation’s Consolidated
Financial Statements and Notes thereto included in Item 8 “Financial Statements
and Supplementary Data.”
Forward-Looking
Statements
This
report contains statements that are “forward-looking statements.” We may also
make written or oral forward-looking statements in other documents we file
with
the SEC, in our annual reports to shareholders, in press releases and other
written materials, and in oral statements made by our officers, directors or
employees. You can identify forward-looking statements by the use of the words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,”
“will,” “should,” and other expressions that predict or indicate future events
and trends and which do not relate to historical matters. You should not rely
on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Corporation. These risks, uncertainties and other factors may cause the actual
results, performance or achievements of the Corporation to be materially
different from the anticipated future results, performance or achievements
expressed or implied by the forward-looking statements.
Some
of
the factors that might cause these differences include the following: changes
in
general national or regional economic conditions, changes in interest rates,
reductions in the market value of wealth management assets under administration,
reductions in loan demand, reductions in deposit levels necessitating increased
borrowing to fund loans and investments, changes in loan defaults and charge-off
rates, changes in the size and nature of the Corporation’s competition, changes
in legislation or regulation and accounting principles, policies and guidelines
and changes in the assumptions used in making such forward-looking statements.
In addition, the factors described under “Risk Factors” in Item 1A of this
Annual Report on Form 10-K may result in these differences. You should carefully
review all of these factors, and you should be aware that there may be other
factors that could cause these differences. These forward-looking statements
were based on information, plans and estimates at the date of this report,
and
we 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, other-than-temporary impairment, interest income
recognition and tax estimates. 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 allocations for certain loan types based on
credit grade and loss experience factors, and (3) general loss allocations
for
other environmental factors. The methodology includes an analysis of individual
loans deemed to be impaired in accordance with accounting principles generally
accepted in the United States of America (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 loss allocation factors take
into consideration parameters including the borrower’s financial condition, the
borrower’s performance with respect to loan terms, and the adequacy of
collateral. Portfolios of more homogenous populations of loans
including residential
mortgages and consumer loans are analyzed as groups taking into account
delinquency ratios and other indicators, the Corporation’s historical loss
experience and comparison to industry standards of loss allocation factors
for
each type of credit product. Finally, an additional unallocated allowance is
maintained based on a judgmental process whereby management considers
qualitative and quantitative assessments of other environmental factors. For
example, a significant portion of our loan portfolio is concentrated among
borrowers in southern New England, 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.
The
Corporation’s Audit Committee of the Board of Directors is responsible for
oversight of the loan review process. This process includes review of the Bank’s
procedures for determining the adequacy of the allowance for loan losses,
administration of its internal credit rating systems and the reporting and
monitoring of credit granting standards.
Accounting
for Acquisitions and Review of Goodwill and 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 Corporation’s 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
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 investment’s current carrying value, possibly requiring an additional
impairment charge in the future.
Defined
Benefit Pension Obligations
The
Corporation accounts for its qualified pension plan and non-qualified retirement
plans based on calculations that incorporate various actuarial and other
assumptions. These assumptions include discount rates, mortality, assumed rates
of return, and compensation increases. The Corporation reviews its assumptions
on an annual basis and makes modifications to the assumptions based on current
rates and trends when necessary. The
effect
of the modifications to those assumptions is recorded in accumulated other
comprehensive income beginning in 2006, with the adoption of 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),
and
amortized to net periodic cost over future periods. The Corporation believes
that the assumptions utilized in recording its obligations under its plans
are
reasonable based on its experience and market conditions.
Interest
Income Recognition
Interest
on loans is included in income as earned based upon rates applied to unpaid
principal. Interest is not accrued on loans 90 days or more past due unless
they
are adequately secured and in the process of collection or on other loans when
management believes collection is doubtful. All loans considered impaired are
nonaccruing. Interest on nonaccruing loans is recognized as payments are
received when the ultimate collectibility of interest is no longer considered
doubtful. When a loan is placed on nonaccrual status, all interest previously
accrued is reversed against
current-period
interest income; therefore, an increase in loans on nonaccrual status could
have
impact on interest income recognized in future periods.
Tax
Estimates
The
Corporation accounts for income taxes by deferring income taxes based on
estimated future tax effects of differences between the tax and book basis
of
assets and liabilities considering the provisions of enacted tax laws. These
differences result in deferred tax assets and liabilities, which are included
in
the Consolidated Balance Sheets. The Corporation must also assess the likelihood
that any deferred tax assets will be recovered from future taxable income and
establish a valuation allowance for those assets determined to not likely be
recoverable. Management judgment is required in determining the amount and
timing of recognition of the resulting deferred tax assets and liabilities,
including projections of future taxable income. 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 carryback to taxable income in prior years and future reversals of
existing taxable temporary differences.
Results
of Operations
Overview
Net
income for the year ended December 31, 2006 amounted to $25.0 million,
up $2.0 million, or 8.7%, from $23.0 million reported for 2005. On a
per 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 2005 were 14.80% and 0.98%,
respectively.
Selected
financial highlights for 2006 and 2005 are presented in the table
below:
|
(Dollars
and shares in thousands, except per share amounts)
|
|||||||
|
Years
ended December 31,
|
2006
|
2005
|
|||||
|
Earnings:
|
|||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
|||
|
Diluted
earnings per share
|
$
|
1.82
|
$
|
1.69
|
|||
|
Dividends
declared per share
|
$
|
0.76
|
$
|
0.72
|
|||
|
Book
value per share
|
$
|
12.89
|
$
|
11.86
|
|||
|
Tangible
book value per share
|
$
|
8.61
|
$
|
7.79
|
|||
|
Weighted
average shares - Basic
|
13,424.1
|
13,315.2
|
|||||
|
Weighted
average shares - Diluted
|
13,723.2
|
13,626.7
|
|||||
|
Select
Ratios:
|
|||||||
|
Return
on average assets
|
1.04
|
%
|
0.98
|
%
|
|||
|
Return
on average shareholders equity
|
14.99
|
%
|
14.80
|
%
|
|||
|
Interest
rate spread (taxable equivalent basis)
|
2.47
|
%
|
2.49
|
%
|
|||
|
Net
interest margin (taxable equivalent basis)
|
2.80
|
%
|
2.79
|
%
|
|||
On
August 31, 2005, the Corporation completed the acquisition of Weston
Financial, a registered investment advisor and financial planning company
located in Wellesley, Massachusetts, with broker-dealer and insurance agency
subsidiaries. The results of Weston Financial’s 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 Trust’s wealth management group. As a result of the Weston Financial
acquisition, investment 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). In connection with the transaction, Washington Trust also elected
to become a financial holding company. See Note 2 to the Consolidated
Financial Statements for a more complete description of the acquisition
transaction.
Net
Interest Income
Net
interest income is the difference between interest earned on loans and
securities and interest paid on deposits and other borrowings, and continues
to
be the primary source of Washington Trust’s operating income. Included in
interest income are loan prepayment fees and certain other fees, such as late
charges. Net interest income is affected by the level of interest rates, changes
in interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
totaled $61.5 million for 2006, up $818 thousand, or 1.3%, from the
amount reported for 2005.
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 2006 amounted to $62.9 million, up $1.2 million,
or 2.0%, from the $61.7 million reported for 2005. The net interest margin
(FTE net interest income as a percentage of average interest-earning assets)
for
2006 amounted to 2.80%, compared to 2.79% for 2005. Excluding the impact of
loan
prepayment fees and certain 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 has caused deposit costs to rise, while yields on loans and securities
have increased by lesser amounts.
Average
interest-earning assets increased $34.7 million, or 1.6%, in 2006. Growth
of $88.1 million, or 6.6%, in the loan portfolio 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 and other fees to the yield on total loans was 5 basis points
and 6 basis points, respectively, in 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 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 60 basis point increase in the total yield on securities
in 2006 reflects 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. The Corporation continues to consider appropriate strategies to
manage rising funding costs and more slowly increasing investment yields given
the relatively flat yield curve.
Average
interest-bearing liabilities rose $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 increased 70 basis points in 2006. 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.
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,
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||
|
Residential
real estate loans
|
$
|
590,245
|
$
|
30,237
|
5.12
|
$
|
562,838
|
$
|
27,890
|
4.96
|
$
|
450,898
|
$
|
22,737
|
5.04
|
|||||||||||||
|
Commercial
and other loans
|
564,310
|
43,409
|
7.69
|
531,434
|
37,244
|
7.01
|
454,251
|
29,266
|
6.44
|
|||||||||||||||||||
|
Consumer
loans
|
274,764
|
18,748
|
6.82
|
246,959
|
13,983
|
5.66
|
198,857
|
8,984
|
4.52
|
|||||||||||||||||||
|
Total
loans
|
1,429,319
|
92,394
|
6.46
|
1,341,231
|
79,117
|
5.90
|
1,104,006
|
60,987
|
5.52
|
|||||||||||||||||||
|
Federal
funds sold and other
short-term
investments
|
14,548
|
721
|
4.96
|
14,703
|
451
|
3.07
|
12,371
|
133
|
1.08
|
|||||||||||||||||||
|
Taxable
debt securities
|
712,870
|
33,763
|
4.74
|
783,662
|
32,934
|
4.20
|
835,091
|
33,125
|
3.97
|
|||||||||||||||||||
|
Nontaxable
debt securities
|
42,977
|
2,486
|
5.79
|
23,329
|
1,362
|
5.84
|
16,430
|
1,018
|
6.20
|
|||||||||||||||||||
|
Corporate
stocks and FHLB stock
|
48,643
|
3,205
|
6.59
|
50,763
|
2,858
|
5.63
|
54,706
|
2,543
|
4.65
|
|||||||||||||||||||
|
Total
securities
|
819,038
|
40,175
|
4.91
|
872,457
|
37,605
|
4.31
|
918,598
|
36,819
|
4.01
|
|||||||||||||||||||
|
Total
interest-earning assets
|
2,248,357
|
132,569
|
5.90
|
2,213,688
|
116,722
|
5.27
|
2,022,604
|
97,806
|
4.84
|
|||||||||||||||||||
|
Noninterest-earning
assets
|
159,115
|
137,460
|
126,302
|
|||||||||||||||||||||||||
|
Total
assets
|
$
|
2,407,472
|
$
|
2,351,148
|
$
|
2,148,906
|
||||||||||||||||||||||
|
Liabilities
and
|
||||||||||||||||||||||||||||
|
shareholders’
equity:
|
||||||||||||||||||||||||||||
|
NOW
accounts
|
$
|
173,137
|
302
|
0.17
|
$
|
176,706
|
295
|
0.17
|
$
|
162,714
|
341
|
0.21
|
||||||||||||||||
|
Money
market accounts
|
262,613
|
9,063
|
3.45
|
203,799
|
4,386
|
2.15
|
152,664
|
2,205
|
1.44
|
|||||||||||||||||||
|
Savings
accounts
|
198,040
|
1,464
|
0.74
|
234,311
|
1,392
|
0.59
|
257,274
|
1,581
|
0.61
|
|||||||||||||||||||
|
Time
deposits
|
856,979
|
36,153
|
4.22
|
741,456
|
26,113
|
3.52
|
575,877
|
18,070
|
3.14
|
|||||||||||||||||||
|
FHLB
advances
|
509,611
|
20,916
|
4.10
|
611,177
|
22,233
|
3.64
|
644,520
|
20,153
|
3.13
|
|||||||||||||||||||
|
Junior
subordinated debentures
|
22,681
|
1,352
|
5.96
|
7,767
|
458
|
5.90
|
-
|
-
|
-
|
|||||||||||||||||||
|
Other
|
8,627
|
410
|
4.76
|
3,581
|
160
|
4.48
|
2,014
|
62
|
3.10
|
|||||||||||||||||||
|
Total
interest-bearing liabilities
|
2,031,688
|
69,660
|
3.43
|
1,978,797
|
55,037
|
2.78
|
1,795,063
|
42,412
|
2.36
|
|||||||||||||||||||
|
Demand
deposits
|
185,322
|
197,245
|
193,905
|
|||||||||||||||||||||||||
|
Other
liabilities
|
23,517
|
19,498
|
15,281
|
|||||||||||||||||||||||||
|
Shareholders’
equity
|
166,945
|
155,608
|
144,657
|
|||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||
|
shareholders’
equity
|
$
|
2,407,472
|
$
|
2,351,148
|
$
|
2,148,906
|
||||||||||||||||||||||
|
Net
interest income
|
$
|
62,909
|
$
|
61,685
|
$
|
55,394
|
||||||||||||||||||||||
|
Interest
rate spread
|
2.47
|
2.49
|
2.48
|
|||||||||||||||||||||||||
|
Net
interest margin
|
2.80
|
2.79
|
2.74
|
|||||||||||||||||||||||||
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,
|
2006
|
2005
|
2004
|
|||||||
|
Commercial
and other loans
|
$
|
204
|
$
|
186
|
$
|
159
|
||||
|
Nontaxable
debt securities
|
868
|
476
|
356
|
|||||||
|
Corporate
stocks and FHLB stock
|
363
|
367
|
438
|
|||||||
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.
|
2006/2005
|
2005/2004
|
||||||||||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Net
Change
|
Volume
|
Rate
|
Net
Change
|
|||||||||||||
|
Interest
on interest-earning assets:
|
|||||||||||||||||||
|
Residential
real estate loans
|
$
|
1,412
|
$
|
935
|
$
|
2,347
|
$
|
5,521
|
$
|
(368
|
)
|
$
|
5,153
|
||||||
|
Commercial
and other loans
|
2,401
|
3,764
|
6,165
|
5,246
|
2,732
|
7,978
|
|||||||||||||
|
Consumer
loans
|
1,689
|
3,076
|
4,765
|
2,447
|
2,552
|
4,999
|
|||||||||||||
|
Federal
funds sold and
|
|||||||||||||||||||
|
other
short-term investments
|
(5
|
)
|
275
|
270
|
30
|
288
|
318
|
||||||||||||
|
Taxable
debt securities
|
(3,150
|
)
|
3,979
|
829
|
(2,078
|
)
|
1,887
|
(191
|
)
|
||||||||||
|
Nontaxable
debt securities
|
1,136
|
(12
|
)
|
1,124
|
406
|
(62
|
)
|
344
|
|||||||||||
|
Corporate
stocks and FHLB stock
|
(124
|
)
|
471
|
347
|
(193
|
)
|
508
|
315
|
|||||||||||
|
Total
interest income
|
3,359
|
12,488
|
15,847
|
11,379
|
7,537
|
18,916
|
|||||||||||||
|
Interest
on interest-bearing liabilities:
|
|||||||||||||||||||
|
NOW
accounts
|
7
|
-
|
7
|
26
|
(72
|
)
|
(46
|
)
|
|||||||||||
|
Money
market accounts
|
1,511
|
3,166
|
4,677
|
1,004
|
1,177
|
2,181
|
|||||||||||||
|
Savings
accounts
|
(239
|
)
|
311
|
72
|
(138
|
)
|
(51
|
)
|
(189
|
)
|
|||||||||
|
Time
deposits
|
4,411
|
5,629
|
10,040
|
5,660
|
2,383
|
8,043
|
|||||||||||||
|
FHLB
advances
|
(3,942
|
)
|
2,625
|
(1,317
|
)
|
(1,083
|
)
|
3,163
|
2,080
|
||||||||||
|
Junior
subordinated debentures
|
889
|
5
|
894
|
458
|
-
|
458
|
|||||||||||||
|
Other
|
239
|
11
|
250
|
62
|
36
|
98
|
|||||||||||||
|
Total
interest expense
|
2,876
|
11,747
|
14,623
|
5,989
|
6,636
|
12,625
|
|||||||||||||
|
Net
interest income
|
$
|
483
|
$
|
741
|
$
|
1,224
|
$
|
5,390
|
$
|
901
|
$
|
6,291
|
|||||||
Provision
and Allowance for Loan Losses
The
allowance for loan losses is management’s best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance for loan losses
was
$18.9 million, or 1.29% of total loans, at December 31, 2006, compared
to $17.9 million, or 1.28% of total loans, at December 31, 2005. For
the year ended December 31, 2006, the Corporation’s 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
Noninterest
income is an important source of revenue for Washington Trust. 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. Washington Trust’s
primary sources of noninterest income are revenues from wealth management
services, service charges on deposit accounts, merchant credit card processing
fees, and net gains on loan sales and commissions on loans originated for
others. Also included in noninterest income are earnings generated from
bank-owned life insurance (“BOLI”). Noninterest income amounted to
$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 $3.695 billion at December 31, 2006, up
$423 million, or 12.9%, from $3.272 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. The
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 increased $1.0 million, or 19.3%, in 2006 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.
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 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.
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 SBA loans to investors. 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
Small Business Administration (“SBA”) loans. In general, loan originations have
been adversely affected by higher interest rates.
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 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 Corporation’s 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. See additional discussion under
the caption “Financial Condition” for further information on the investment
securities portfolio and FHLB advances.
Noninterest
Expense
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 benefit expense, the largest component of total noninterest
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. See Note 17 to the Consolidated
Financial Statements for additional discussion on 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 increased $938 thousand, or 21.7%, in 2006 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 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.
Taxes
Income
tax expense amounted to $12.1 million and $11.0 million in 2006 and
2005, respectively. The Corporation’s effective tax rate was 32.6% in 2006,
compared to a rate of 32.3% in 2005. 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 2006, 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.
The
Corporation’s net deferred tax asset amounted to $6.7 million at
December 31, 2006, compared to $3.6 million at December 31, 2005.
The increase in net deferred tax asset included a $1.7 million adjustment
to initially apply the recognition provisions of SFAS No. 158. See
Note 16 to the Consolidated Financial Statements for further discussion on
the impact of the adoption of SFAS No. 158. 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 2005 with 2004
Net
income for the year ended December 31, 2005 amounted to $23.0 million,
up 10.5% from the amount reported for 2004. On a diluted share basis, Washington
Trust earned $1.69 for 2005, up 9.7% from the $1.54 earned in 2004. The rates
of
return on average equity and average assets for 2005 were 14.80% and 0.98%,
respectively. Comparable amounts for the year 2004 were 14.40% and 0.97%,
respectively.
On
August 31, 2005, the Corporation completed the acquisition of Weston
Financial, a registered investment advisor and financial planning company
located in Wellesley, Massachusetts, with broker-dealer and insurance agency
subsidiaries. The results of Weston Financial’s 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.
Net
interest income totaled $60.7 million in 2005, an increase of
$6.2 million, or 11.4% from 2004. FTE net interest income for 2005 totaled
$61.7 million, up 11.4% from 2004. The increase in net interest income
reflected growth in the loan portfolio and a higher yield on earning assets,
which were partially offset by the growth in time deposits and an increase
in
the cost of funds.
The
net
interest margin increased 5 basis points in 2005 to 2.79. Excluding the impact
of loan prepayment fees and other fees, such as late charges, the net interest
margin was up 3 basis points from 2004. The increase in the net interest
margin was attributable to the higher amount of loans as a percentage of
interest-earnings assets and to changes in loan and deposit rates.
Average
interest-earning assets increased by $191.1 million, or 9.4%, in 2005. This
increase was mainly due to growth of $237.2 million, or 21.5%, in the loan
portfolio, which was partially offset by reductions of $46.1 million, or
5.0%, in the securities portfolio. Growth in average loan balances resulted
from
purchases of primarily adjustable rate residential mortgage loans as well as
internal growth in commercial and consumer loans.
The
yield
on total loans increased 38 basis points in 2005. This increase was primarily
due to higher marginal yields on loans as compared to 2004 and higher yields
on
new loan originations and purchases. The contribution of loan prepayment
penalties and other fees to the yield on total loans was 6 basis points and
3 basis points, respectively, for 2005 and 2004. Total average securities
declined in 2005 as the flattening of the yield curve made reinvestment of
maturing balances relatively unattractive. The total yield on securities
increased 30 basis points in 2005, reflecting a combination of higher
yields on variable rate securities tied to short term interest rates, runoff
of
lower yielding securities and higher marginal rates on reinvestment of cash
flows in 2005 compared to 2004.
Average
interest-bearing liabilities increased $183.7 million, or 10.2%, in 2005.
The Corporation experienced growth in time deposits, NOW accounts and money
market accounts, and declines in savings account balances and FHLB advances.
In
the third quarter of 2005, the Corporation also issued junior subordinated
debentures and recorded a liability for the minimum future payments due in
connection with the acquisition of Weston Financial. The increase in average
interest-bearing liabilities was principally due to $165.6 million of
growth in time deposits in 2005. The average rate paid on time deposits in
2005
increased 38 basis points and amounted to 3.52%. Included in time deposits
were brokered certificates of deposit. Average brokered certificates of deposit
increased $45.5 million in 2005. Average FHLB advances decreased
$33.3 million in 2005, while the average rate paid on FHLB advances
increased 51 basis points.
For
the
years ended December 31, 2005 and 2004, the Corporation’s provision for
loan losses amounted to $1.2 million and $610 thousand, respectively.
The increase in the loan loss provision was in response to growth in the loan
portfolio. The allowance for loan losses amounted to $17.9 million, or
1.28% of total loans, at December 31, 2005, compared to $16.8 million,
or 1.34% of total loans, at December 31, 2004.
Noninterest
income amounted to $30.9 million for 2005, up $4.0 million, or 15.0%,
from 2004. The following table presents a noninterest income comparison for
the
years ended December 31, 2005 and 2004:
|
(Dollars
in thousands)
|
2005
|
2004
|
$
Change
|
%
Change
|
|||||||||
|
Noninterest
income:
|
|||||||||||||
|
Wealth
management services:
|
|||||||||||||
|
Trust
and investment advisory fees
|
$
|
14,407
|
$
|
12,385
|
$
|
2,022
|
16.3
|
%
|
|||||
|
Mutual
fund fees
|
1,336
|
-
|
1,336
|
100.0
|
|||||||||
|
Financial
planning, commissions and other service fees
|
919
|
663
|
256
|
38.6
|
|||||||||
|
Wealth
management services
|
16,662
|
13,048
|
3,614
|
27.7
|
|||||||||
|
Service
charges on deposit accounts
|
4,502
|
4,483
|
19
|
0.4
|
|||||||||
|
Merchant
processing fees
|
5,203
|
4,259
|
944
|
22.2
|
|||||||||
|
Income
from BOLI
|
1,110
|
1,175
|
(65
|
)
|
(5.5
|
)
|
|||||||
|
Net
gains on loan sales
|
1,679
|
1,901
|
(222
|
)
|
(11.7
|
)
|
|||||||
|
Other
income
|
1,433
|
1,791
|
(358
|
)
|
(20.0
|
)
|
|||||||
|
Subtotal
|
30,589
|
26,657
|
3,932
|
14.8
|
|||||||||
|
Net
realized gains on securities
|
357
|
248
|
109
|
44.0
|
|||||||||
|
Total
noninterest income
|
$
|
30,946
|
$
|
26,905
|
$ |
4,041
|
15.0
|
%
|
|||||
In
2005,
revenue from wealth management services represented 54% of noninterest income,
excluding net realized gains on securities, compared to 49% in 2004. Revenue
from wealth management services increased $3.6 million, or 27.7%, in 2005.
This increase was primarily attributable to the acquisition of Weston Financial
which was completed on August 31, 2005. Assets under administration rose
significantly due to the addition of Weston Financial, and amounted to
$3.272 billion at December 31, 2005. This included approximately
$1.376 billion attributable to Weston Financial. Assets under
administration were $1.871 billion at December 31, 2004.
Service
charges on deposit accounts were essentially unchanged from 2004. This revenue
source was affected by deposit account pricing strategies and reflects a very
competitive retail-banking environment.
Merchant
processing fees (charges to merchants for credit card transactions processed)
increased $944 thousand, or 22.2%, in 2005 due primarily to increases in
the volume of transactions processed.
Net
gains
on loan sales decreased $222 thousand, or 11.7%, in 2005, reflecting a
decline in Small Business Administration loans.
Other
income decreased $358 thousand in 2005. Included in other income in 2004
was a non-routine item of $150 thousand unrelated to the Corporation’s
normal course of business, and $280 thousand recovered as a result of a
favorable litigation decision.
In
2005
and 2004, net realized gains on securities totaled $357 thousand and
$248 thousand, respectively. The Corporation recognized net realized gains
on securities of $337 thousand and $387 thousand in the fourth quarter
of
2005
and
2004, respectively, resulting principally from the Corporation’s annual
contributions of appreciated equity securities to the Corporation’s charitable
foundation. The cost of the contributions, included in noninterest expenses,
amounted to $522 thousand and $454 thousand in 2005 and 2004,
respectively.
Noninterest
expense amounted to $56.4 million in 2005, an increase of 12.0% from the
$50.4 million reported in 2004. 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.
As
previously mentioned, 2005 financial results include the operations of Weston
Financial for the period subsequent to August 31, 2005. Approximately
$3.1 million, or 51%, of the total increase in noninterest expense was
attributable to the one-time acquisition related charges and the operating
expenses of Weston Financial.
The
following table presents a noninterest expense comparison for the years ended
December 31, 2005 and 2004:
|
(Dollars
in thousands)
|
2005
|
2004
|
$
Change
|
%
Change
|
|||||||||
|
Noninterest
expense:
|
|||||||||||||
|
Salaries
and employee benefits
|
$
|
32,133
|
$
|
28,816
|
$
|
3,317
|
11.5
|
%
|
|||||
|
Net
occupancy
|
3,460
|
3,201
|
259
|
8.1
|
|||||||||
|
Equipment
|
3,456
|
3,267
|
189
|
5.8
|
|||||||||
|
Merchant
processing costs
|
4,319
|
3,534
|
785
|
22.2
|
|||||||||
|
Outsourced
services
|
1,723
|
1,616
|
107
|
6.6
|
|||||||||
|
Advertising
and promotion
|
1,977
|
1,748
|
229
|
13.1
|
|||||||||
|
Legal,
audit and professional fees
|
1,900
|
1,535
|
365
|
23.8
|
|||||||||
|
Amortization
of intangibles
|
852
|
644
|
208
|
32.3
|
|||||||||
|
Other
|
6,573
|
6,012
|
561
|
9.3
|
|||||||||
|
Total
noninterest expense
|
$
|
56,393
|
$
|
50,373
|
$
|
6,020
|
12.0
|
%
|
|||||
Salaries
and employee benefit expense increased $3.3 million, or 11.5%, in 2005.
Excluding
one-time acquisition related charges and the operating expenses of Weston
Financial, salaries and employee benefits expense rose $1.5 million, or
5.1%, in 2005. This 5.1% increase was mainly due to an increase in salaries
and
wages, higher defined benefit pension costs and increases in performance-based
and stock-based compensation. Salaries and wages increased $441 thousand,
or 2.3%. Pension costs increased $398 thousand in 2005, primarily due to
higher service cost and a lower discount rate. Performance-based compensation
expense increased $219 thousand in 2005, and stock compensation expense
associated with nonvested shares and nonvested share unit awards increased
$213 thousand.
Net
occupancy expense in 2005 increased 8.1%. The increase reflected higher rental
expense for premises leased by the Bank and included operating expenses of
Weston Financial. Equipment expense increased 5.8% in 2005 primarily due to
additional investments in technology and other equipment.
Merchant
processing costs (third-party costs incurred that are directly attributable
to
handling merchant credit card transactions) increased 22.2% in 2005 due to
increases in the volume of transactions processed.
Outsourced
services increased 6.6% in 2005 due to higher costs for data processing services
and third party vendors.
As
a
result of stronger marketing and promotion efforts, advertising and promotion
expense increased 13.1% in 2005.
Legal,
audit and professional fees totaled $1.9 million in 2005, up from
$1.5 million in 2004. The increase was primarily due to costs incurred for
various consulting matters.
Amortization
of intangibles amounted to $852 thousand in 2005, compared to
$644 thousand in 2004. See Note 9 to the Consolidated Financial
Statements for additional information on identifiable intangible
assets.
Other
noninterest expense increased $561 thousand, or 9.3%, in 2005. Excluding
one-time acquisition related costs, other noninterest expense increased
$298 thousand, or 5.0%, primarily due to the operations of Weston
Financial. Also included in other noninterest expense in 2005 was
$129 thousand in prepayment costs associated with the payoff of a match
funded FHLB advance.
Income
tax expense amounted to $11.0 million and $9.5 million in 2005 and
2004, respectively. The Corporation’s effective tax rate was 32.3% in 2005,
compared to a rate of 31.4% in 2004. The increase in the Corporation’s effective
tax rate in 2005 was primarily due to a higher effective tax rate associated
with Weston Financial.
Financial
Condition
Summary
Total
assets were $2.399 billion at December 31, 2006, down
$2.8 million from December 31, 2005. Total liabilities declined
$17.4 million in 2006, with total deposits increasing $38.7 million
and FHLB advances decreasing $70.8 million. Shareholders’ equity totaled
$173.1 million at December 31, 2006, compared to $158.4 million
at the end of 2005. Washington Trust experienced relatively modest loan demand
during 2006. The investment securities portfolio was reduced in 2006 through
balance sheet repositioning transactions during the third and fourth quarters
of
2006. Proceeds from these transactions were primarily used to reduce FHLB
advances.
Securities
Washington
Trust’s securities portfolio is managed to generate interest income, to
implement interest rate risk management strategies, and to provide a readily
available source of liquidity for balance sheet management. Securities are
designated as either available for sale or held to maturity at the time of
purchase. Securities available for sale may be sold in response to changes
in
market conditions, prepayment risk, rate fluctuations, liquidity, or capital
requirements. Securities available for sale are reported at fair value, with
any
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders’ equity, net of tax, until realized. Securities
designated as held to maturity are part of the Corporation’s portfolio of
long-term interest-earning assets. These securities are classified as held
to
maturity 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, 2006, the Corporation’s portfolio consisted primarily of
mortgage-backed securities and U.S. government treasury and agency securities.
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 Trust’s internal investment policy. Permissible bank
investments include federal funds, banker’s acceptances, commercial paper,
reverse repurchase agreements, interest-bearing deposits of federally insured
banks, U.S. Treasury and government-sponsored agency debt obligations, including
mortgage-backed securities and collateralized mortgage obligations, municipal
securities, corporate debt, trust preferred securities, mutual funds, auction
rate preferred stock, common and preferred equity securities, and FHLB
stock.
Investment
activity is monitored by an Investment Committee, the members of which also
sit
on the Corporation’s Asset/Liability Committee (“ALCO”). Asset and liability
management objectives are the primary influence on the Corporation’s investment
activities. However, the Corporation also recognizes that there are certain
specific risks inherent in investment portfolio activity. The securities
portfolio is managed in accordance with regulatory guidelines and established
internal corporate investment policies that provide limitations on specific
risk
factors such as market risk, credit risk and concentration, liquidity risk
and
operational risk to help monitor risks associated with investing in
securities.
The
carrying amounts of securities as of the dates indicated are presented in the
following tables:
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||
|
Securities
Available for Sale:
|
|||||||||||||||||||
|
U.S.
Treasury obligations and obligations
|
|||||||||||||||||||
|
of
U.S. government-sponsored agencies
|
$
|
157,285
|
30
|
%
|
$
|
107,651
|
18
|
%
|
$
|
137,663
|
19
|
%
|
|||||||
|
Mortgage-backed
securities
|
293,787
|
56
|
%
|
428,174
|
69
|
%
|
491,847
|
67
|
%
|
||||||||||
|
Corporate
bonds
|
55,608
|
11
|
%
|
63,195
|
10
|
%
|
78,834
|
10
|
%
|
||||||||||
|
Corporate
stocks
|
19,716
|
3
|
%
|
20,214
|
3
|
%
|
27,322
|
4
|
%
|
||||||||||
|
Total
securities available for sale
|
$
|
526,396
|
100
|
%
|
$
|
619,234
|
100
|
%
|
$
|
735,666
|
100
|
%
|
|||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
||||||||||||||||
|
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
|
%
|
$
|
30,000
|
19
|
%
|
|||||||
|
Mortgage-backed
securities
|
69,340
|
39
|
%
|
84,960
|
52
|
%
|
105,753
|
69
|
%
|
||||||||||
|
States
and political subdivisions
|
66,115
|
37
|
%
|
32,497
|
19
|
%
|
18,639
|
12
|
%
|
||||||||||
|
Total
securities held to maturity
|
$
|
177,455
|
100
|
%
|
$
|
164,707
|
100
|
%
|
$
|
154,392
|
100
|
%
|
|||||||
Total
investment securities declined $80.1 million in 2006, primarily as a result
of third and fourth quarter balance sheet repositioning transactions in response
to the flat to inverted yield curve shape in effect during most of the period.
These transactions included sales of mortgage-backed securities and other debt
securities totaling $104.6 million with a realized loss of
$3.5 million. The decision to sell lower yielding fixed and adjustable rate
mortgage-backed securities was related to the inversion of the yield curve
during the period caused by rising short-term interest rates and falling
longer-term interest rates. The inversion of the yield curve resulted in both
higher FHLB borrowing costs and a relative price appreciation on the sold
mortgage-backed securities compared to earlier periods. The
funds
provided by reducing investment portfolio balances were primarily used to reduce
advances from the FHLB, which have declined by $70.8 million in 2006.
In
addition, during 2006 equity securities were sold with a realized gain of
$3.5 million.
The
net
unrealized losses on securities available for sale and held to maturity amounted
to $1.7 million and $3.4 million at December 31, 2006 and 2005,
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,
2006 and 2005, the Corporation’s investment in FHLB stock totaled
$28.7 million and $35.0 million, respectively.
Loans
The
following table sets forth the composition of the Corporation’s loan portfolio
for each of the past five years:
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||
|
Commercial:
|
|||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
282,019
|
19
|
%
|
$
|
291,292
|
21
|
%
|
$
|
266,670
|
21
|
%
|
$
|
227,334
|
24
|
%
|
$
|
197,814
|
25
|
%
|
|||||||||||
|
Construction
& development
|
32,233
|
2
|
%
|
37,190
|
3
|
%
|
29,263
|
2
|
%
|
12,486
|
1
|
%
|
10,337
|
1
|
%
|
||||||||||||||||
|
Other
(1)
|
273,145
|
19
|
%
|
226,252
|
16
|
%
|
211,778
|
18
|
%
|
168,657
|
18
|
%
|
174,018
|
22
|
%
|
||||||||||||||||
|
Total
commercial
|
587,397
|
40
|
%
|
554,734
|
40
|
%
|
507,711
|
41
|
%
|
408,477
|
43
|
%
|
382,169
|
48
|
%
|
||||||||||||||||
|
Residential
real estate:
|
|||||||||||||||||||||||||||||||
|
Mortgages
|
577,522
|
40
|
%
|
565,680
|
40
|
%
|
494,720
|
40
|
%
|
375,706
|
39
|
%
|
269,548
|
34
|
%
|
||||||||||||||||
|
Homeowner
construction
|
11,149
|
-
|
%
|
17,028
|
2
|
%
|
18,975
|
1
|
%
|
14,149
|
2
|
%
|
11,338
|
1
|
%
|
||||||||||||||||
|
Total
residential real estate
|
588,671
|
40
|
%
|
582,708
|
42
|
%
|
513,695
|
41
|
%
|
389,855
|
41
|
%
|
280,886
|
35
|
%
|
||||||||||||||||
|
Consumer:
|
|||||||||||||||||||||||||||||||
|
Home
equity lines
|
145,676
|
10
|
%
|
161,100
|
11
|
%
|
155,001
|
12
|
%
|
80,523
|
12
|
%
|
81,503
|
10
|
%
|
||||||||||||||||
|
Home
equity loans
|
93,947
|
6
|
%
|
72,288
|
5
|
%
|
54,297
|
4
|
%
|
35,935
|
4
|
%
|
39,010
|
5
|
%
|
||||||||||||||||
|
Other
(2)
|
44,295
|
4
|
%
|
31,078
|
2
|
%
|
18,972
|
2
|
%
|
46,191
|
-
|
%
|
11,558
|
2
|
%
|
||||||||||||||||
|
Total
consumer loans
|
283,918
|
20
|
%
|
264,466
|
18
|
%
|
228,270
|
18
|
%
|
162,649
|
16
|
%
|
132,071
|
17
|
%
|
||||||||||||||||
|
Total
loans
|
$
|
1,459,986
|
100
|
%
|
$
|
1,401,908
|
100
|
%
|
$
|
1,249,676
|
100
|
%
|
$
|
960,981
|
100
|
%
|
$
|
795,126
|
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
Trust’s loan portfolio amounted to $1.460 billion at December 31,
2006, up $58.1 million, or 4.1%, in 2006. Modest growth occurred in all
lines of business.
Commercial
loans, including commercial real estate and construction loans, increased
$32.7 million, or 5.9%, from the balance at December 31, 2005.
Substantially all of the growth in commercial loans was the result of internal
growth.
Consumer
loans increased $19.5 million, or 7.4%, in 2006, led by growth in home
equity loans.
The
Corporation originates residential mortgages for both portfolio and sale, and
purchases mortgages from other financial institutions. Residential real estate
loans grew $6.0 million, or 1.0%, in 2006.
An
analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 2006
follows:
|
(Dollars
in thousands)
|
|||||||||||||
|
1
Year
|
1
to 5
|
After
5
|
|||||||||||
|
Matures
in:
|
or
Less
|
Years
|
Years
|
Totals
|
|||||||||
|
Construction
and development (1)
|
$
|
13,919
|
$
|
6,038
|
$
|
23,425
|
$
|
43,382
|
|||||
|
Commercial
- other
|
116,247
|
110,084
|
46,814
|
273,145
|
|||||||||
|
$
|
130,166
|
$
|
116,122
|
$
|
70,239
|
$
|
316,527
|
||||||
| (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
|
$
|
132,003
|
$
|
54,358
|
$
|
186,361
|
||||
Asset
Quality
The
Board
of Directors of the Bank monitors credit risk management through two committees,
the Finance Committee and the Audit Committee. The Finance Committee reviews
and
approves large exposure credit requests, monitors asset quality on a regular
basis and has approval authority for credit granting policies. The Audit
Committee oversees management’s system and procedures to monitor the credit
quality of the loan portfolio, conduct a loan review program, maintain the
integrity of the loan rating system and determine the adequacy of the allowance
for loan losses. The Bank’s practice is to identify problem credits early and
take charge-offs as promptly as practicable.
Nonperforming
Assets
Nonperforming
assets include nonaccrual loans and other real estate owned. Nonperforming
assets were 0.11% of total assets at December 31, 2006, compared to 0.10% at
December 31, 2005. Nonaccrual loans as a percentage of total loans
increased slightly from 0.17% at the end of 2005 to 0.19% at December 31,
2006.
The
following table presents nonperforming assets for the dates
indicated:
|
(Dollars
in thousands)
|
||||||||||||||||
|
December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||
|
Residential
real estate
|
$
|
721
|
$
|
1,147
|
$
|
1,027
|
$
|
946
|
$
|
1,202
|
||||||
|
Commercial
and other:
|
||||||||||||||||
|
Mortgages
|
981
|
394
|
2,357
|
342
|
1,356
|
|||||||||||
|
Construction
and development
|
-
|
-
|
390
|
-
|
-
|
|||||||||||
|
Other
|
831
|
624
|
730
|
1,236
|
1,354
|
|||||||||||
|
Consumer
|
190
|
249
|
227
|
219
|
265
|
|||||||||||
|
Total
nonaccrual loans
|
2,723
|
2,414
|
4,731
|
2,743
|
4,177
|
|||||||||||
|
Other
real estate owned, net
|
-
|
-
|
4
|
11
|
86
|
|||||||||||
|
Total
nonperforming assets
|
$
|
2,723
|
$
|
2,414
|
$
|
4,735
|
$
|
2,754
|
$
|
4,263
|
||||||
|
Loans
past due 90 days or more and accruing
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
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 management’s opinion, the loans are considered to be fully
collectible.
For
the
year ended December 31, 2006, 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 $218 thousand. Interest
recognized on these loans amounted to approximately
$192 thousand.
There
were no significant commitments to lend additional funds to borrowers whose
loans were on nonaccrual status at December 31, 2006.
The
following table presents additional detail on nonaccrual loans as of the dates
indicated:
|
(Dollars
in thousands)
|
|||||||
|
December 31,
|
2006
|
2005
|
|||||
|
Nonaccrual
loans 90 days or more past due
|
$
|
1,470
|
$
|
1,257
|
|||
|
Nonaccrual
loans less than 90 days past due
|
1,253
|
1,157
|
|||||
|
Total
nonaccrual loans
|
$
|
2,723
|
$
|
2,414
|
|||
Restructured
Loans
Loans
are
considered restructured when the Corporation has granted concessions to a
borrower due to the borrower’s financial condition that it otherwise would not
have considered. These concessions include modifications of the terms of the
debt such as reduction of the stated interest rate other than normal market
rate
adjustments, extension of maturity dates, or reduction of principal balance
or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit the Corporation by increasing
the ultimate probability of collection. There were no significant commitments
to
lend additional funds to borrowers whose loans had been
restructured.
There
were no restructured accruing loans as of December 31 in each of the years
2002 through 2006.
There
were no loans whose terms had been restructured included in nonaccrual loans
at
December 31, 2006 and 2005.
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, 2006. 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, 2006, potential problem loans
amounted to approximately $2.9 million. The Corporation’s loan policy
provides guidelines for the review of such loans in order to facilitate
collection.
Depending
on future events, these potential problem loans, and others not currently
identified, could be classified as nonperforming in the future.
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, 2006 and 2005, 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”.
The
allowance for loan losses is management’s best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
At
December 31, 2006, the allowance for loan losses was $18.9 million, or
1.29% of the total loan portfolio, and 694% of total nonaccrual loans. This
compares with an allowance of $17.9 million or 1.28% of the total loan
portfolio, and 742% of total nonaccrual loans at December 31,
2005.
The
following table reflects the activity in the allowance for loan losses for
the
dates presented:
|
(Dollars
in thousands)
|
||||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Balance
at beginning of year
|
$
|
17,918
|
$
|
16,771
|
$
|
15,914
|
$
|
15,487
|
$
|
13,593
|
||||||
|
Charge-offs:
|
||||||||||||||||
|
Commercial:
|
||||||||||||||||
|
Mortgages
|
-
|
85
|
215
|
-
|
27
|
|||||||||||
|
Construction
and development
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Other
|
295
|
198
|
257
|
200
|
284
|
|||||||||||
|
Residential:
|
||||||||||||||||
|
Mortgages
|
-
|
-
|
-
|
-
|
29
|
|||||||||||
|
Homeowner
construction
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Consumer
|
133
|
86
|
95
|
94
|
157
|
|||||||||||
|
Total
charge-offs
|
428
|
369
|
567
|
294
|
497
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
Commercial:
|
||||||||||||||||
|
Mortgages
|
-
|
71
|
36
|
17
|
72
|
|||||||||||
|
Construction
and development
|
-
|
-
|
34
|
-
|
-
|
|||||||||||
|
Other
|
171
|
389
|
569
|
177
|
-
|
|||||||||||
|
Residential:
|
||||||||||||||||
|
Mortgages
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Homeowner
construction
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Consumer
|
33
|
106
|
175
|
67
|
90
|
|||||||||||
|
Total
recoveries
|
204
|
566
|
814
|
261
|
162
|
|||||||||||
|
Net
charge-offs (recoveries)
|
224
|
(197
|
)
|
(247
|
)
|
33
|
335
|
|||||||||
|
Allowance
on acquired loans
|
-
|
-
|
-
|
-
|
1,829
|
|||||||||||
|
Reclassification
of allowance
|
||||||||||||||||
|
on
off-balance sheet exposures
|
-
|
(250
|
)
|
-
|
-
|
-
|
||||||||||
|
Provision
charged to earnings
|
1,200
|
1,200
|
610
|
460
|
400
|
|||||||||||
|
Balance
at end of year
|
$
|
18,894
|
$
|
17,918
|
$
|
16,771
|
$
|
15,914
|
$
|
15,487
|
||||||
|
Net
charge-offs (recoveries) to average loans
|
.02
|
%
|
(.01
|
)%
|
(.02
|
)%
|
-
|
%
|
.05
|
%
|
||||||
In
2005,
the Corporation reclassified to other liabilities that portion of the allowance
for loan losses related to off-balance sheet credit risk.
The
following table presents the allocation of the allowance for loan
losses:
|
(Dollars
in thousands)
|
||||||||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Commercial:
|
||||||||||||||||
|
Mortgages
|
$
|
4,757
|
$
|
4,467
|
$
|
4,385
|
$
|
4,102
|
$
|
3,161
|
||||||
|
%
of these loans to all loans
|
19.3
|
%
|
20.8
|
%
|
21.3
|
%
|
23.7
|
%
|
24.9
|
%
|
||||||
|
Construction
and development
|
589
|
713
|
729
|
294
|
243
|
|||||||||||
|
%
of these loans to all loans
|
2.2
|
%
|
2.7
|
%
|
2.3
|
%
|
1.3
|
%
|
1.3
|
%
|
||||||
|
Other
|
4,137
|
3,263
|
3,633
|
3,248
|
2,832
|
|||||||||||
|
%
of these loans to all loans
|
18.7
|
%
|
16.1
|
%
|
16.9
|
%
|
17.6
|
%
|
21.9
|
%
|
||||||
|
Residential:
|
||||||||||||||||
|
Mortgages
|
1,619
|
1,642
|
1,447
|
1,965
|
1,457
|
|||||||||||
|
%
of these loans to all loans
|
39.6
|
%
|
40.3
|
%
|
39.7
|
%
|
39.0
|
%
|
33.9
|
%
|
||||||
|
Homeowner
construction
|
56
|
43
|
47
|
74
|
61
|
|||||||||||
|
%
of these loans to all loans
|
0.8
|
%
|
1.2
|
%
|
1.5
|
%
|
1.5
|
%
|
1.4
|
%
|
||||||
|
Consumer
|
1,882
|
1,585
|
1,323
|
1,507
|
1,305
|
|||||||||||
|
%
of these loans to all loans
|
19.4
|
%
|
18.9
|
%
|
18.3
|
%
|
16.9
|
%
|
16.6
|
%
|
||||||
|
Unallocated
|
5,854
|
6,205
|
5,207
|
4,724
|
6,428
|
|||||||||||
|
Balance
at end of year
|
$
|
18,894
|
$
|
17,918
|
$
|
16,771
|
$
|
15,914
|
$
|
15,487
|
||||||
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Investment
in Bank-Owned Life Insurance (“BOLI”)
BOLI
amounted to $39.8 million and $30.4 million at December 31, 2006
and 2005, 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 & Poor’s rated all such general
account carriers “AA” or better at December 31, 2006. BOLI is included in
the Consolidated Balance Sheets at its cash surrender value. Increases in BOLI’s
cash surrender value are reported as a component of noninterest income in the
Consolidated Statements of Income.
Deposits
Total
deposits amounted to $1.678 billion at December 31, 2006, up
$38.7 million, or 2.4%, from the balance at December 31, 2005.
Excluding the $24.5 million decrease in brokered certificates of deposit,
in-market deposits were up $63.2 million, or 4.4%, in 2006. Due to
increases in short-term rates, Washington Trust has continued to experience
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 $186.5 million at December 31, 2006, down
$9.6 million, or 4.9%, from December 31, 2005.
NOW
account balances decreased $3.2 million, or 1.8%, in 2006 and totaled
$175.5 million at December 31, 2006.
Money
market account balances totaled $287.0 million at December 31, 2006,
up $63.7 million, or 28.6%, from December 31, 2005.
During
2006, savings deposits declined $6.5 million, or 3.1%, and amounted to
$206.0 million at December 31, 2006.
Time
deposits (including brokered certificates of deposit) amounted to
$823.0 million, down $5.7 million, or 0.7%, during 2006. The
Corporation utilizes brokered time deposits as part of its overall funding
program along with other sources. Brokered time deposits amounted to
$175.6 million, down $24.5 million, or 12.2%, during 2006. Excluding
the brokered time deposits, time deposits rose $18.8 million, or 3.0%, in
2006 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. Proceeds from balance sheet repositioning transactions were
utilized to reduce FHLB advances, which declined $70.8 million during 2006.
Included in the December 31, 2006 balance are $49.5 million of
callable advances with call dates ranging from January 2007 through November
2007.
In
the
third quarter of 2005, the Corporation issued $22.7 million of junior
subordinated debentures and recorded a liability of $5.4 million for
minimum future payments due in connection with the acquisition of Weston
Financial. The Stock Purchase Agreement dated March 18, 2005, by and among
the Corporation, Weston Financial and Weston Financial’s shareholders, provides
for the payment of contingent purchase price amounts based on operating results
in each of the years in the three-year earn-out period ending December 31,
2008. During the third quarter of 2006 the Corporation recognized a
liability of $4.6 million, with a corresponding addition to goodwill,
representing the 2006 portion of the earn-out period. See additional discussion
on the acquisition in Note 2 to the Consolidated Financial
Statements.
Liquidity
and Capital Resources
Liquidity
is the ability of a financial institution to meet maturing liability obligations
and customer loan demand. Washington Trust’s primary source of liquidity is
deposits. Deposits (demand, NOW, money market, savings and time deposits) funded
approximately 69.6% of total average assets in 2006. Other sources of funding
include discretionary use of purchased liabilities (e.g., FHLB term advances
and
federal funds purchased), cash flows from the Corporation’s 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.
The
ALCO
establishes and monitors internal liquidity measures to manage liquidity
exposure. Liquidity remained well within target ranges established by the ALCO
during 2006. Net loans as a percentage of total assets amounted to 60.1% at
December 31, 2006, compared to 57.6% at December 31, 2005. Total
securities as a percentage of total assets amounted to 29.3% at
December 31, 2006, down from 32.6% at December 31, 2005.
For
2006,
net cash used in financing activities amounted to $40.8 million and was
used primarily to reduce FHLB advances. Net cash provided by investing
activities was $18.0 million in 2006 and resulted primarily from maturities
and principal payments of securities and proceeds from the sales of securities,
offset in part by purchased loans and internal loan growth. Net cash provided
by
operating activities amounted to $28.5 million in 2006, $25.0 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 $173.1 million at December 31, 2006,
compared to $158.4 million at December 31, 2005. The increase in
shareholder’s equity in 2006 was primarily attributable to net income of
$25.0 million, which was partially offset by $10.2 million in
dividends to shareholders. As a result of the December 31, 2006 adoption of
the recognition provisions of SFAS No. 158, Washington Trust recorded a
$3.2 million charge to the accumulated other comprehensive loss component
of shareholders’ equity. See Note 16 to the Consolidated Financial
Statements for further discussion on the impact of the adoption of SFAS
No. 158.
The
ratio
of total equity to total assets amounted to 7.21% at December 31, 2006,
compared to 6.60% at December 31, 2005. Book value per share at
December 31, 2006 amounted to $12.89, an 8.7% increase from the
year-earlier amount of $11.86 per share. Tangible book value increased 10.6%
from $7.79 per share at the end of 2005 to $8.61 per share at December 31,
2006.
In
December 2006, the Bancorp’s Board of Directors approved a new common stock
repurchase plan to replace its stock repurchase plan approved in 2001. The
new
plan authorizes the repurchase of up to 400,000 shares, or approximately 3%,
of
the Corporation’s common stock in open market transactions. No shares have been
repurchased under the 2006 plan. During 2006, the Bancorp purchased 50,000
shares at a total cost of $1.4 million under the 2001 plan.
In
connection with the August 2005 Weston Financial acquisition, trust preferred
securities totaling $22 million were issued in the third quarter of 2005 by
capital trusts created by the Corporation. In accordance with FIN 46-R, the
capital trusts that issued the trust preferred securities are not consolidated
into the Corporation’s financial statements, however, the Corporation reflects
the amounts of junior subordinated debentures payable to the capital trusts
as
debt in its financial statements. The trust preferred securities qualify as
Tier 1 capital.
The
Corporation is subject to various regulatory capital requirements. The
Corporation is categorized as “well-capitalized” under the regulatory framework
for prompt corrective action. On March 1, 2005, the Federal Reserve Board
issued a final rule that retains trust preferred securities in Tier 1
capital of bank holding companies, but with stricter quantitative limits and
clearer standards. After a five-year transition period that would end on
March 31, 2009, the aggregate amount of trust preferred securities would be
limited to 25% of Tier 1 capital elements, net of goodwill. The Corporation
has evaluated the potential impact of such a change on its Tier 1 capital
ratio and has concluded that the regulatory capital treatment of the trust
preferred securities in the Corporation’s total capital ratio would be
unchanged. 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, 2006.
|
(Dollars
in thousands)
|
Payments
Due by Period
|
|||||||||||||||
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||
|
Contractual
Obligations:
|
||||||||||||||||
|
FHLB
advances (1)
|
$
|
474,561
|
$
|
154,935
|
$
|
190,051
|
$
|
59,308
|
$
|
70,267
|
||||||
|
Junior
subordinated debentures
|
22,681
|
-
|
-
|
-
|
22,681
|
|||||||||||
|
Operating
lease obligations
|
5,122
|
945
|
1,445
|
928
|
1,804
|
|||||||||||
|
Software
licensing arrangements
|
1,587
|
878
|
549
|
160
|
-
|
|||||||||||
|
Treasury,
tax and loan demand note
|
3,863
|
3,863
|
-
|
-
|
-
|
|||||||||||
|
Deferred
acquisition obligations
|
10,372
|
6,644
|
3,728
|
-
|
-
|
|||||||||||
|
Other
borrowings
|
449
|
65
|
58
|
68
|
258
|
|||||||||||
|
Total
contractual obligations
|
$
|
518,635
|
$
|
167,330
|
$
|
195,831
|
$
|
60,464
|
$
|
95,010
|
||||||
| (1) |
All
FHLB advances are shown in the period corresponding to their scheduled
maturity.
|
|
(Dollars
in thousands)
|
Amount
of Commitment Expiration - Per Period
|
|||||||||||||||
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||
|
Other
Commitments:
|
||||||||||||||||
|
Commercial
loans
|
$
|
122,376
|
$
|
82,272
|
$
|
12,318
|
$
|
12,668
|
$
|
15,118
|
||||||
|
Home
equity lines
|
185,483
|
4,209
|
7,588
|
10,923
|
162,763
|
|||||||||||
|
Other
loans
|
10,671
|
8,662
|
1,422
|
587
|
-
|
|||||||||||
|
Standby
letters of credit
|
9,401
|
9,401
|
-
|
-
|
-
|
|||||||||||
|
Forward
loan commitments to:
|
||||||||||||||||
|
Originate
loans
|
2,924
|
2,924
|
-
|
-
|
-
|
|||||||||||
|
Sell
loans
|
5,066
|
5,066
|
-
|
-
|
-
|
|||||||||||
|
Total
commitments
|
$
|
335,921
|
$
|
112,534
|
$
|
21,328
|
$
|
24,178
|
$
|
177,881
|
||||||
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
the
year ended December 31, 2006, Washington Trust engaged in no off-balance
sheet transactions reasonably likely to have a material effect on the
consolidated financial condition.
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 Trust’s liquidity, capital adequacy, growth, risk and profitability
goals.
The
ALCO
manages the Corporation’s interest rate risk using income simulation to measure
interest rate risk inherent in the Corporation’s on-balance sheet and
off-balance sheet financial instruments at a given point in time by showing
the
effect of interest rate shifts on net interest income over a 12-month horizon,
the month 13 to month 24 horizon, and a 60-month horizon. The simulations assume
that the size and general composition of the Corporation’s balance sheet remain
static over the simulation horizons and take into account the specific
repricing, maturity, call options, and prepayment characteristics of differing
financial instruments that may vary under different interest rate scenarios.
The
characteristics of financial instrument classes are reviewed periodically by
the
ALCO to ensure their accuracy and consistency.
The
ALCO
reviews simulation results to determine whether the Corporation’s exposure to a
decline in net interest income remains within established tolerance levels
over
the simulation horizons and to develop appropriate strategies to manage this
exposure. As of December 31, 2006 and 2005, net interest income simulations
indicated that exposure to changing interest rates over the simulation horizons
remained within tolerance levels established by the Corporation. The Corporation
defines maximum unfavorable net interest income exposure to be a change of
no
more than 5% in net interest income over the first 12 months, no more than
10%
over the second 12 months, and no more than 10% over the full 60-month
simulation horizon. All changes are measured in comparison to the projected
net
interest income that would result from an “unchanged” rate scenario where both
interest rates and the composition of the Corporation’s balance sheet remain
stable for a 60-month period. In addition to measuring the change in net
interest income as compared to an unchanged interest rate scenario, the ALCO
also measures the trend of both net interest income and net interest margin
over
a 60-month horizon to ensure the stability and adequacy of this source of
earnings in different interest rate scenarios.
The
ALCO
reviews a variety of interest rate shift scenario results to evaluate interest
risk exposure, including scenarios showing the effect of steepening or
flattening changes in yield curve shape as well as parallel changes in interest
rates. Because income simulations assume that the Corporation’s balance sheet
will remain static over the simulation horizon, the results do not reflect
adjustments in strategy that the ALCO could implement in response to rate
shifts.
The
following table sets forth the estimated change in net interest income from
an
unchanged interest rate scenario over the periods indicated for parallel changes
in market interest rates using the Corporation’s on and off-balance sheet
financial instruments as of December 31, 2006 and 2005. Interest rates are
assumed to shift by a parallel 100 or 200 basis points upward or 100 basis
points downward over the periods indicated, except for core savings deposits,
which are assumed to shift by lesser amounts due to their relative historical
insensitivity to market interest rate movements. Further, deposits are assumed
to have certain minimum rate levels below which they will not fall. It should
be
noted that the rate scenarios shown do not necessarily reflect the ALCO’s view
of the “most likely” change in interest rates over the periods
indicated.
|
December
31,
|
2006
|
2005
|
|||||||||||
|
Months
1 - 12
|
Months
13 - 24
|
Months
1 - 12
|
Months
13 - 24
|
||||||||||
|
100
basis point rate decrease
|
-1.63
|
%
|
-2.47
|
%
|
-0.08
|
%
|
-1.18
|
%
|
|||||
|
100
basis point rate increase
|
-1.18
|
%
|
-5.03
|
%
|
0.93
|
%
|
-0.14
|
%
|
|||||
|
200
basis point rate increase
|
-0.78
|
%
|
-8.01
|
%
|
1.59
|
%
|
-1.31
|
%
|
|||||
The
ALCO
estimates that the negative exposure of net interest income to falling rates
as
compared to an unchanged rate scenario results from asset yields declining
as
current asset holdings mature or reprice, while rates paid on certain core
savings deposits are unlikely to fall significantly given their already low
current levels. If rates were to fall and remain low for a sustained period,
core savings deposit rates would likely decline more slowly than other market
rates, while asset yields would decline as current asset holdings mature or
reprice with increasing cash flows from more rapid mortgage-related prepayments
and redemption of callable securities.
The
negative exposure of net interest income to rising rates as compared to an
unchanged rate scenario results from more rapid increases in funding costs
than
for asset yields. The ALCO’s estimate of interest rate risk exposure to rising
rate environments, including those involving a further flattening or inversion
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 current rising interest rate
cycle. Although asset yields would also increase in a rising interest rate
environment, the cumulative impact of relative growth in the higher cost deposit
categories suggests that by Year 2 of rising interest rate scenarios, the
increase in the Corporation’s cost of funds could result in a relative decline
in net interest margin compared to an unchanged rate scenario. For simulation
purposes, core savings rate changes are anticipated to lag other market rates
related to loan and investment yields in both timing and magnitude.
While
the
ALCO reviews simulation assumptions 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 since the repricing, maturity
and prepayment characteristics of financial instruments and the composition
of
the Corporation’s balance sheet may change to a different degree than estimated.
Firstly, simulation modeling assumes a static balance sheet, with the exception
of certain modeled deposit mix shifts from low-cost core savings deposits to
higher-cost money market and time deposits in a rising interest rate environment
as noted above. The static balance sheet assumption does not necessarily reflect
the Corporation’s expectation for future balance sheet growth, which is a
function of the business environment and customer behavior. Another significant
simulation assumption is the sensitivity of core savings deposits to
fluctuations in interest rates. Income simulation results assume that changes in
both core savings deposit rates and balances are related to changes in
short-term interest rates. The assumed relationship between short-term interest
rate changes and core deposit rate and balance changes used in income simulation
may differ from the ALCO’s estimates. Lastly, mortgage-backed securities and
mortgage loans involve a level of risk that unforeseen changes in prepayment
speeds may cause related cash flows to vary significantly in differing rate
environments. Such changes could affect the level of reinvestment risk
associated with cash flow from these instruments, as well as their market value.
Changes in prepayment speeds could also increase or decrease the amortization
of
premium or accretion of discounts related to such instruments, thereby affecting
interest income.
The
Corporation also monitors the potential change in market value of its available
for sale debt securities in changing interest rate environments. The purpose
is
to determine market value exposure that may not be captured by income
simulation, but which might result in changes to the Corporation’s capital
position. Results are calculated using industry-standard analytical techniques
and securities data. Available for sale equity securities are excluded from
this
analysis because the market value of such securities cannot be directly
correlated with changes in interest
rates.
The following table summarizes the potential change in market value of the
Corporation’s available for sale debt securities as of December 31, 2006
and 2005 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)
|
$
|
2,867
|
$
|
(5,250
|
)
|
||
|
U.S.
government-sponsored agency securities (callable)
|
1,259
|
(5,947
|
)
|
||||
|
Mortgage-backed
securities
|
7,025
|
(17,450
|
)
|
||||
|
Corporate
securities
|
416
|
(800
|
)
|
||||
|
Total
change in market value as of December 31, 2006
|
$
|
11,567
|
$
|
(29,447
|
)
|
||
|
Total
change in market value as of December 31, 2005
|
$
|
13,533
|
$
|
(34,327
|
)
|
||
See
Note 15 to the Consolidated Financial Statements for more information
regarding the nature and business purpose of financial instruments with
off-balance sheet risk and derivative financial instruments.
Information
regarding quantitative and qualitative disclosures about market risk appears
under Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” under the caption “Asset/Liability Management and
Interest Rate Risk”.
ITEM
8. Financial Statements and Supplementary Data
The
financial statements and supplementary data are contained herein.
|
Description
|
Page
|
|
Management’s
Annual Report on Internal Control Over Financial Reporting
|
45
|
|
Reports
of Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Balance Sheets December 31, 2006 and 2005
|
48
|
|
Consolidated
Statements of Income For the Years Ended December 31, 2006, 2005
and
2004
|
49
|
|
Consolidated
Statements of Changes in Shareholders’ Equity For the Years Ended December
31, 2006, 2005 and 2004
|
50
|
|
Consolidated
Statements of Cash Flows For the Years Ended December 31, 2006, 2005
and
2004
|
51
|
|
Notes
to Consolidated Financial Statements
|
53
|
Management’s
Annual Report on Internal Control Over Financial Reporting
The
management of Washington Trust Bancorp, Inc. and subsidiaries (the
“Corporation”) is responsible for establishing and maintaining adequate internal
control over financial reporting for the Corporation. The Corporation’s internal
control system was designed to provide reasonable assurance to management and
the Board of Directors regarding the preparation and fair presentation of
published financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The
Corporation’s management assessed the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2006. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework.
Based
on our assessment, we believe that, as of December 31, 2006, the
Corporation’s internal control over financial reporting is effective based on
those criteria.
The
Corporation’s independent registered public accounting firm has issued an
attestation report on our assessment of the Corporation’s internal control over
financial reporting. This report appears on the following page of this Annual
Report on Form 10-K.
|
/s/
John C. Warren
|
/s/
David V Devault
|
|
John
C. Warren
Chairman
and
Chief
Executive Officer
|
David
V. Devault
Executive
Vice President, Secretary,
Treasurer
and Chief Financial Officer
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Washington
Trust Bancorp, Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that Washington
Trust Bancorp, Inc. and subsidiaries (the “Corporation”) maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
The Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of the
Corporation’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Corporation maintained effective
internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal
Control—Integrated Framework
issued
by the COSO. Also, in our opinion, the Corporation maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal
Control—Integrated Framework
issued
by the COSO.
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, 2006 and 2005, and the related consolidated
statements of operations, changes in shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2006, and our
report dated March 12, 2007 expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG
LLP
Providence,
Rhode Island
March 12,
2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Washington
Trust Bancorp, Inc.:
We
have
audited the consolidated financial statements of Washington Trust Bancorp,
Inc.
and subsidiaries (the “Corporation”) as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Washington Trust Bancorp,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006, 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 effectiveness of the Corporation’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and
our
report dated March 12, 2007 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/
KPMG
LLP
Providence,
Rhode Island
March 12,
2007
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
||
|
December
31,
|
2006
|
2005
|
|||||
|
Assets:
|
|||||||
|
Cash
and due from banks
|
$
|
54,337
|
$
|
48,997
|
|||
|
Federal
funds sold and other short-term investments
|
17,572
|
17,166
|
|||||
|
Mortgage
loans held for sale
|
2,148
|
439
|
|||||
|
Securities:
|
|||||||
|
Available
for sale, at fair value; amortized cost $525,966 in 2006 and $620,638
in
2005
|
526,396
|
619,234
|
|||||
|
Held
to maturity, at cost; fair value $175,369 in 2006 and $162,756 in
2005
|
177,455
|
164,707
|
|||||
|
Total
securities
|
703,851
|
783,941
|
|||||
|
Federal
Home Loan Bank stock, at cost
|
28,727
|
34,966
|
|||||
|
Loans:
|
|||||||
|
Commercial
and other
|
587,397
|
554,734
|
|||||
|
Residential
real estate
|
588,671
|
582,708
|
|||||
|
Consumer
|
283,918
|
264,466
|
|||||
|
Total
loans
|
1,459,986
|
1,401,908
|
|||||
|
Less
allowance for loan losses
|
18,894
|
17,918
|
|||||
|
Net
loans
|
1,441,092
|
1,383,990
|
|||||
|
Premises
and equipment, net
|
24,307
|
23,737
|
|||||
|
Accrued
interest receivable
|
11,268
|
10,594
|
|||||
|
Investment
in bank-owned life insurance
|
39,770
|
30,360
|
|||||
|
Goodwill
|
44,558
|
39,963
|
|||||
|
Identifiable
intangible assets, net
|
12,816
|
14,409
|
|||||
|
Other
assets
|
18,719
|
13,441
|
|||||
|
Total
assets
|
$
|
2,399,165
|
$
|
2,402,003
|
|||
|
Liabilities:
|
|||||||
|
Deposits:
|
|||||||
|
Demand
deposits
|
$
|
186,533
|
$
|
196,102
|
|||
|
NOW
accounts
|
175,479
|
178,677
|
|||||
|
Money
market accounts
|
286,998
|
223,255
|
|||||
|
Savings
accounts
|
205,998
|
212,499
|
|||||
|
Time
deposits
|
822,989
|
828,725
|
|||||
|
Total
deposits
|
1,677,997
|
1,639,258
|
|||||
|
Dividends
payable
|
2,556
|
2,408
|
|||||
|
Federal
Home Loan Bank advances
|
474,561
|
545,323
|
|||||
|
Junior
subordinated debentures
|
22,681
|
22,681
|
|||||
|
Other
borrowings
|
14,684
|
9,774
|
|||||
|
Accrued
expenses and other liabilities
|
33,630
|
24,113
|
|||||
|
Total
liabilities
|
2,226,109
|
2,243,557
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Shareholders’
Equity:
|
|||||||
|
Common
stock of $.0625 par value; authorized 30,000,000 shares in 2006 and
2005;
|
|||||||
|
issued
13,492,110 shares in 2006 and 13,372,295 shares in 2005
|
843
|
836
|
|||||
|
Paid-in
capital
|
35,893
|
32,778
|
|||||
|
Retained
earnings
|
141,548
|
126,735
|
|||||
|
Accumulated
other comprehensive loss
|
(3,515
|
)
|
(1,653
|
)
|
|||
|
Treasury
stock, at cost; 62,432 shares in 2006 and 10,519 shares in
2005
|
(1,713
|
)
|
(250
|
)
|
|||
|
Total
shareholders’ equity
|
173,056
|
158,446
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
2,399,165
|
$
|
2,402,003
|
|||
The
accompanying notes are an integral part of these
consolidated financial statements.
-48-
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
and shares in thousands,
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
except
per share amounts)
|
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Interest
income:
|
||||||||||
|
Interest
and fees on loans
|
$
|
92,190
|
$
|
78,931
|
$
|
60,828
|
||||
|
Interest
on securities:
|
||||||||||
|
Taxable
|
33,763
|
32,934
|
33,125
|
|||||||
|
Nontaxable
|
1,618
|
886
|
662
|
|||||||
|
Dividends
on corporate stock and Federal Home Loan Bank stock
|
2,842
|
2,491
|
2,105
|
|||||||
|
Interest
on federal funds sold and other short-term investments
|
721
|
451
|
133
|
|||||||
|
Total
interest income
|
131,134
|
115,693
|
96,853
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
46,982
|
32,186
|
22,197
|
|||||||
|
Federal
Home Loan Bank advances
|
20,916
|
22,233
|
20,153
|
|||||||
|
Junior
subordinated debentures
|
1,352
|
458
|
-
|
|||||||
|
Other
|
410
|
160
|
62
|
|||||||
|
Total
interest expense
|
69,660
|
55,037
|
42,412
|
|||||||
|
Net
interest income
|
61,474
|
60,656
|
54,441
|
|||||||
|
Provision
for loan losses
|
1,200
|
1,200
|
610
|
|||||||
|
Net
interest income after provision for loan losses
|
60,274
|
59,456
|
53,831
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Wealth
management services:
|
||||||||||
|
Trust
and investment advisory fees
|
19,099
|
14,407
|
12,385
|
|||||||
|
Mutual
fund fees
|
4,665
|
1,336
|
-
|
|||||||
|
Financial
planning, commissions and other service fees
|
2,616
|
919
|
663
|
|||||||
|
Wealth
management services
|
26,380
|
16,662
|
13,048
|
|||||||
|
Service
charges on deposit accounts
|
4,915
|
4,502
|
4,483
|
|||||||
|
Merchant
processing fees
|
6,208
|
5,203
|
4,259
|
|||||||
|
Income
from bank-owned life insurance
|
1,410
|
1,110
|
1,175
|
|||||||
|
Net
gains on loan sales and commissions on loans originated for
others
|
1,423
|
1,679
|
1,901
|
|||||||
|
Net
realized gains on securities
|
443
|
357
|
248
|
|||||||
|
Other
income
|
1,404
|
1,433
|
1,791
|
|||||||
|
Total
noninterest income
|
42,183
|
30,946
|
26,905
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
38,698
|
32,133
|
28,816
|
|||||||
|
Net
occupancy
|
3,888
|
3,460
|
3,201
|
|||||||
|
Equipment
|
3,370
|
3,456
|
3,267
|
|||||||
|
Merchant
processing costs
|
5,257
|
4,319
|
3,534
|
|||||||
|
Outsourced
services
|
2,009
|
1,723
|
1,616
|
|||||||
|
Advertising
and promotion
|
1,894
|
1,977
|
1,748
|
|||||||
|
Legal,
audit and professional fees
|
1,637
|
1,900
|
1,535
|
|||||||
|
Amortization
of intangibles
|
1,593
|
852
|
644
|
|||||||
|
Other
|
6,989
|
6,573
|
6,012
|
|||||||
|
Total
noninterest expense
|
65,335
|
56,393
|
50,373
|
|||||||
|
Income
before income taxes
|
37,122
|
34,009
|
30,363
|
|||||||
|
Income
tax expense
|
12,091
|
10,985
|
9,534
|
|||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
$
|
20,829
|
||||
|
Weighted
average shares outstanding - basic
|
13,424.1
|
13,315.2
|
13,227.8
|
|||||||
|
Weighted
average shares outstanding - diluted
|
13,723.2
|
13,626.7
|
13,542.7
|
|||||||
|
Per
share information:
|
||||||||||
|
Basic
earnings per share
|
$
|
1.86
|
$
|
1.73
|
$
|
1.57
|
||||
|
Diluted
earnings per share
|
$
|
1.82
|
$
|
1.69
|
$
|
1.54
|
||||
|
Cash
dividends declared per share
|
$
|
.76
|
$
|
.72
|
$
|
.68
|
||||
The
accompanying notes are an integral part of these
consolidated financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
and shares in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
||
|
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, 2004
|
13,195
|
$
|
825
|
$
|
29,846
|
$
|
101,492
|
$
|
6,101
|
$
|
(209
|
)
|
$
|
138,055
|
||||||||
|
Net
income for 2004
|
20,829
|
20,829
|
||||||||||||||||||||
|
Unrealized
gains on securities,
|
||||||||||||||||||||||
|
net
of $383 income tax expense
|
1,006
|
1,006
|
||||||||||||||||||||
|
Reclassification
adjustments for net
|
||||||||||||||||||||||
|
realized
gains included in net income,
|
||||||||||||||||||||||
|
net
of $87 income tax expense
|
(161
|
)
|
(161
|
)
|
||||||||||||||||||
|
Minimum
pension liability adjustment,
|
||||||||||||||||||||||
|
net
of $5 income tax benefit
|
(9
|
)
|
(9
|
)
|
||||||||||||||||||
|
Comprehensive
income
|
21,665
|
|||||||||||||||||||||
|
Cash
dividends declared
|
(9,007
|
)
|
(9,007
|
)
|
||||||||||||||||||
|
Share-based
compensation
|
135
|
135
|
||||||||||||||||||||
|
Deferred
compensation plan
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
||||||||||||||||
|
Exercise
of stock options and
|
||||||||||||||||||||||
|
related
tax benefit
|
80
|
5
|
1,000
|
125
|
1,130
|
|||||||||||||||||
|
Shares
repurchased
|
(5
|
)
|
(125
|
)
|
(125
|
)
|
||||||||||||||||
|
Balance
at December 31, 2004
|
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
|
|||||||
The
accompanying notes are an integral part of these
consolidated financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
$
|
20,829
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Provision
for loan losses
|
1,200
|
1,200
|
610
|
|||||||
|
Depreciation
of premises and equipment
|
2,995
|
3,020
|
3,124
|
|||||||
|
Net
amortization of premium and discount
|
1,252
|
2,295
|
2,758
|
|||||||
|
Net
amortization of intangibles
|
1,593
|
852
|
644
|
|||||||
|
Share-based
compensation
|
694
|
372
|
135
|
|||||||
|
Deferred
income tax benefit
|
(1,969
|
)
|
(1,296
|
)
|
(296
|
)
|
||||
|
Earnings
from bank-owned life insurance
|
(1,410
|
)
|
(1,110
|
)
|
(1,175
|
)
|
||||
|
Net
gains on loan sales
|
(1,423
|
)
|
(1,679
|
)
|
(1,901
|
)
|
||||
|
Net
realized gains on securities
|
(443
|
)
|
(357
|
)
|
(248
|
)
|
||||
|
Proceeds
from sales of loans
|
44,398
|
65,000
|
67,426
|
|||||||
|
Loans
originated for sale
|
(45,082
|
)
|
(63,045
|
)
|
(64,456
|
)
|
||||
|
Increase
in accrued interest receivable, excluding purchased
interest
|
(513
|
)
|
(1,008
|
)
|
(1,075
|
)
|
||||
|
(Increase)
decrease in other assets
|
(2,175
|
)
|
4,970
|
(1,755
|
)
|
|||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
4,689
|
(3,145
|
)
|
1,578
|
||||||
|
Other,
net
|
(372
|
)
|
(450
|
)
|
(12
|
)
|
||||
|
Net
cash provided by operating activities
|
28,465
|
28,643
|
26,186
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of: Mortgage-backed
securities available for sale
|
(39,279
|
)
|
(84,852
|
)
|
(174,933
|
)
|
||||
|
Other
investment securities available for sale
|
(77,111
|
)
|
(57,401
|
)
|
(122,354
|
)
|
||||
|
Mortgage-backed
securities held to maturity
|
-
|
(17,505
|
)
|
(6,131
|
)
|
|||||
|
Other
investment securities held to maturity
|
(38,358
|
)
|
(28,184
|
)
|
(38,406
|
)
|
||||
|
Proceeds
from sales of: Mortgage-backed
securities available for sale
|
92,401
|
11,426
|
-
|
|||||||
|
Other
investment securities available for sale
|
14,465
|
56,116
|
4,604
|
|||||||
|
Maturities
and principal payments of: Mortgage-backed
securities available for sale
|
86,778
|
128,019
|
144,896
|
|||||||
|
Other
investment securities available for sale
|
16,999
|
48,995
|
85,500
|
|||||||
|
Mortgage-backed
securities held to maturity
|
16,019
|
25,957
|
43,030
|
|||||||
|
Other
investment securities held to maturity
|
9,360
|
9,052
|
12,160
|
|||||||
|
Remittance
(purchase) of Federal Home Loan Bank stock
|
6,239
|
(593
|
)
|
(2,909
|
)
|
|||||
|
Net
increase in loans
|
(25,047
|
)
|
(78,822
|
)
|
(169,228
|
)
|
||||
|
Purchases
of loans, including purchased interest
|
(33,238
|
)
|
(73,520
|
)
|
(119,796
|
)
|
||||
|
Proceeds
from the sale of other real estate owned
|
380
|
4
|
6
|
|||||||
|
Purchases
of premises and equipment
|
(3,571
|
)
|
(2,443
|
)
|
(2,431
|
)
|
||||
|
Purchases
of bank-owned life insurance
|
(8,000
|
)
|
-
|
-
|
||||||
|
Equity
investment in capital trusts
|
-
|
(681
|
)
|
-
|
||||||
|
Cash
paid for acquisition, net of cash acquired
|
-
|
(19,827
|
)
|
-
|
||||||
|
Net
cash provided by (used in) investing activities
|
18,037
|
(84,259
|
)
|
(345,992
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
increase in deposits
|
38,740
|
181,384
|
251,767
|
|||||||
|
Net
increase in other borrowings
|
315
|
970
|
1,106
|
|||||||
|
Proceeds
from Federal Home Loan Bank advances
|
516,162
|
669,643
|
1,077,228
|
|||||||
|
Repayment
of Federal Home Loan Bank advances
|
(586,868
|
)
|
(796,919
|
)
|
(1,011,465
|
)
|
||||
|
Purchase
of treasury stock, including deferred compensation plan
activity
|
(1,547
|
)
|
(33
|
)
|
(126
|
)
|
||||
|
Proceeds
from the issuance of common stock under dividend reinvestment
plan
|
1,216
|
606
|
-
|
|||||||
|
Proceeds
from the exercise of stock options
|
912
|
367
|
561
|
|||||||
|
Tax
benefit from stock option exercises
|
384
|
451
|
569
|
|||||||
|
Proceeds
from the issuance of junior subordinated debentures
|
-
|
22,681
|
-
|
|||||||
|
Cash
dividends paid
|
(10,070
|
)
|
(9,452
|
)
|
(8,863
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(40,756
|
)
|
69,698
|
310,777
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
5,746
|
14,082
|
(9,029
|
)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
66,163
|
52,081
|
61,110
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
71,909
|
$
|
66,163
|
$
|
52,081
|
||||
The
accompanying notes are an integral part of these
consolidated financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars
in thousands)
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Noncash
Investing and Financing Activities:
|
||||||||||
|
Loans
charged off
|
$
|
428
|
$
|
369
|
$
|
567
|
||||
|
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
|
4,595
|
32,561
|
-
|
|||||||
|
Fair
value of liabilities assumed
|
-
|
7,347
|
-
|
|||||||
|
Net
assets acquired, excluding cash
|
4,595
|
25,214
|
-
|
|||||||
|
Less:
|
||||||||||
|
Deferred
acquisition obligation incurred
|
4,595
|
5,387
|
-
|
|||||||
|
Cash
paid for acquisition, net of cash acquired
|
-
|
19,827
|
-
|
|||||||
|
Supplemental
Disclosures:
|
||||||||||
|
Interest
payments
|
68,946
|
53,722
|
41,305
|
|||||||
|
Income
tax payments
|
14,054
|
11,962
|
9,731
|
|||||||
The
accompanying notes are an integral part of these
consolidated financial statements.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
December
31, 2006 and 2005
|
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 and other intangible assets 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.
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 interest 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.
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.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
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 management’s assessment of the ultimate collectibility of the loan.
Loans are removed from nonaccrual status when they have been current as to
principal and interest for a period of time, the borrower has demonstrated
an
ability to comply with repayment terms, and when, in management’s opinion, the
loans are considered to be fully collectible.
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 are considered to be impaired. Impairment is
measured on a discounted cash flow method, or at the loan’s observable market
price, or at the fair value of the collateral if the loan is collateral
dependent. 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 borrower’s financial
condition. Subsequent cash receipts on restructured loans are applied to the
outstanding principal balance of the loan, or recognized as interest income
depending on management’s assessment of the ultimate collectibility of the
loan.
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 allocations for certain loan types based on credit grade and loss
experience factors, and (3) general loss allocations for other environmental
factors. The methodology includes an analysis of individual loans deemed to
be
impaired in accordance with accounting principles generally accepted in the
United States of America (SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan - an amendment of FASB Statements No. 5 and 15”). Other
individual commercial and commercial mortgage loans are evaluated using an
internal rating system and the application of loss allocation factors. The
loan
rating system and the related loss allocation factors take into consideration
parameters including the borrower’s financial condition, the borrower’s
performance with respect to loan terms, and the adequacy of collateral.
Portfolios of more homogenous populations of loans including residential
mortgages and consumer loans are analyzed as groups taking into account
delinquency ratios and other indicators, the Corporation’s historical loss
experience and comparison to industry standards of loss allocation factors
for
each type of credit product. Finally, an
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
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 management’s best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans (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 fifty 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. 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 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
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
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 employer’s postretirement
benefit plan,
measured as the difference between the fair value of plan assets and the
projected benefit obligation, be recognized in its statement of financial
position. 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 employee’s pension benefit over that
employee’s 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.
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
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
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.
Earnings
Per Share (EPS)
Diluted
EPS is computed by dividing net income by the average number of common shares
and common stock equivalents outstanding. Common stock equivalents arise from
the assumed exercise of outstanding stock options, if dilutive. The computation
of basic EPS excludes common stock equivalents from the
denominator.
Comprehensive
Income
Comprehensive
income is defined as all changes in equity, except for those resulting from
investments by and distribution to shareholders. Net income is a component
of
comprehensive income, with all other components referred to in the aggregate
as
other comprehensive income.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight
basis.
Guarantees
FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,”
considers standby letters of credit a guarantee of the Corporation. Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Under the standby letters of credit, the Corporation
is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer’s failure to perform
under the terms of the underlying contract with the beneficiary.
Derivative
Instruments and Hedging Activities
Derivatives
are accounted for in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as amended by SFAS
Nos. 137, 138 and 149. All derivatives are recognized as either assets or
liabilities on the balance sheet and are measured at fair value. Changes in
the
fair value of the derivatives are reported in either earnings or other
comprehensive income (loss), depending on the use of the derivative and whether
or not it qualifies for hedge accounting. Hedge accounting treatment is
permitted only if specific criteria are met, including a requirement that the
hedging relationship be highly effective both at inception and on an ongoing
basis. Accounting for hedges varies based on the type of hedge — fair value or
cash flow. Results of effective hedges are recognized in current earnings for
fair value hedges and in other comprehensive income (loss) for cash flow hedges.
Ineffective portions of hedges are recognized immediately in earnings and are
not deferred. There may be increased volatility in net income and other
comprehensive income (loss) on an ongoing basis as a result of accounting for
derivative instruments in accordance with SFAS No. 133, as
amended.
Interest
rate lock commitments are extended to borrowers that relate to the origination
of readily marketable mortgage loans held for sale (“rate locks”). To mitigate
the interest rate risk inherent in these rate locks, as well as closed mortgage
loans held for sale (“loans held for sale”), best efforts forward commitments
are established to sell individual mortgage loans (“forward commitments”). Rate
locks and forward commitments are considered to be derivatives under SFAS
No. 133, as amended. The estimated fair value of the rate locks and forward
commitments are recorded on the balance sheet in other assets, with the offset
to net gains on sales of loans included in noninterest income. Market value
is
estimated based on outstanding investor commitments or, in the absence of such
information, current investor yield requirements.
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.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
By
using
derivative financial instruments to hedge exposures to changes in interest
rates, the Corporation exposes itself to credit risk and market 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.
Market
risk is the adverse effect on the value of a financial instrument that results
from a change in interest rates. The market risk associated with interest rate
contracts is managed by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken.
The
net
amounts to be paid or received on outstanding interest rate contracts are
recognized on the accrual basis as an adjustment to the related interest income
or expense over the life of the agreements. Changes in fair value of interest
rate contracts are recorded in current earnings. Gains or losses resulting
from
the termination of interest rate swap and floor agreements on qualifying hedges
of existing assets or liabilities are deferred and amortized over the remaining
lives of the related assets/liabilities as an adjustment to the yield.
Unamortized deferred gains/losses on terminated interest rate swap and floor
agreements are included in the underlying assets/liabilities
hedged.
(2)
Acquisition
On
August 31, 2005, the Corporation completed its acquisition of Weston
Financial Group, Inc. (“Weston Financial”), a registered investment advisor and
financial planning company located in Wellesley, Massachusetts, with
broker-dealer and insurance agency subsidiaries. The results of Weston
Financial’s 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. See
Note 9 for additional information on Goodwill and Other
Intangibles.
The
acquisition of Weston Financial increased the size and range of products and
services offered by Washington Trust’s wealth management services group. As a
result of the Weston Financial acquisition, wealth management assets under
administration increased from approximately $1.9 billion to
$3.3 billion in 2005.
Pursuant
to the Stock Purchase Agreement dated March 18, 2005, by and among the
Corporation, Weston Financial and Weston Financial’s 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
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. During the
third quarter of 2006 the Corporation recognized a liability for the 2006
portion of the earn-out period, with a corresponding addition to goodwill.
Goodwill is not deductible for tax purposes. Contingent payments are added
to
goodwill and recorded as liabilities at the time the payments are determinable
beyond a reasonable doubt.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed for Weston Financial at August 31, 2005, the date of
acquisition.
|
(Dollars
in thousands)
|
||||
|
Assets:
|
||||
|
Cash
and due from banks
|
$
|
1,060
|
||
|
Short-term
investments
|
142
|
|||
|
Equipment,
net
|
72
|
|||
|
Goodwill
|
17,372
|
|||
|
Other
identified intangible assets
|
13,952
|
|||
|
Other
assets
|
1,165
|
|||
|
Total
assets acquired
|
$
|
33,763
|
||
|
Liabilities:
|
||||
|
Accrued
expenses and other liabilities
|
$
|
7,347
|
||
|
Total
liabilities acquired
|
7,347
|
|||
|
Net
assets acquired
|
$
|
26,416
|
||
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). In connection with the
transaction Washington Trust also elected to become a financial holding
company.
(3)
New Accounting Pronouncements
In
May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 154, “Accounting Changes and Error Corrections”. SFAS No 154
replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. SFAS No. 154 requires retrospective application to
prior periods’ financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 defines retrospective
application as the application of a different accounting principle to prior
accounting periods as if that principle had always been used or as the
adjustment of previously issued financial statements to reflect a change in
the
reporting entity. SFAS No. 154 also redefines restatement as the revising
of previously issued financial statements to reflect the correction of an error.
This Statement requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. This Statement carries
forward without change the guidance contained in APB Opinion No. 20 for
reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. SFAS No. 154 also carries forward the
guidance in APB Opinion No. 20 requiring justification of a change in
accounting principle on the basis of preferability. SFAS No. 154 was
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 did
not have a material impact on the Corporation’s financial position or results of
operations.
In
November 2005, the FASB issued FASB Staff Position (“FSP”) 115-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
This FSP provides additional guidance on when an investment in a debt or equity
security should be considered impaired, and when that impairment should be
considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP
also
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. This FSP was effective for
reporting periods
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
beginning
after December 15, 2005. The adoption of FSP 115-1 did not have a
material impact on the Corporation’s financial position or results of
operations.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140.”
This Statement 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 entity’s first fiscal year that begins after
September 15, 2006. Provisions of this Statement 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
Corporation believes the adoption of SFAS No. 155 will not have a material
impact on the Corporation’s 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.” This Statement 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 Corporation believes the adoption of
SFAS No. 156 will not have a material impact on the Corporation’s financial
position or results of operations.
In
June
2006, the FASB issued 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 enterprise's 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 Corporation believes that the adoption of FIN 48 will not
have a material impact on the Corporation’s financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
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. This Statement 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 Corporation’s 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 132(R)”. This Statement requires that the
funded status of an employer’s postretirement benefit plan 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. In addition, SFAS No. 158
requires the measurement of the defined benefit plan’s assets and obligations as
of the employer’s fiscal year end. The requirements to recognize funded status
and any changes in that funded status are effective as of the first fiscal
year
ending after December 15, 2006. The requirement to
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
measure
the plan’s assets and obligations as of the employer’s fiscal year end is
effective for fiscal years ending after December 15, 2008. The Corporation
adopted the recognition and disclosure requirements of SFAS No. 158
effective December 31, 2006. Washington Trust is currently evaluating the
impact that the measurement date provisions of SFAS No. 158 will have on
its consolidated financial statements.
The
SEC
released Staff Accounting Bulletin No. 108 (“SAB 108”) in September 2006. SAB
108 provides guidance on how the effects of the carryover or reversal of prior
year financial statement misstatements should be considered in quantifying
a
current period misstatement. In addition, upon adoption, SAB 108 permits the
Corporation to adjust the cumulative effect of immaterial errors relating to
prior years in the carrying amount of assets and liabilities as of the beginning
of the current fiscal year, with an offsetting adjustment to the opening balance
of retained earnings. SAB 108 also requires the adjustment of any prior
quarterly financial statement within the fiscal year of adoption for the effects
of such errors on the quarters when the information is next presented. The
adoption of SAB 108 did not have a material impact on the Corporation’s
financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities - Including an amendment to FASB no. 115”. This
Statement permits instrument-by-instrument election of fair value for entire
financial instruments, with changes in value realized in earnings. The election
is available upon adoption of SFAS No. 159, for newly recognized financial
instruments, or for financial instruments that are required to be remeasured.
The fair value option election may not be made for (1) an investment that would
otherwise be consolidated, (2) pension benefit, postretirement benefit,
postemployment benefit, employee stock option, stock purchase, and other
deferred compensation plans, (3) financial assets and liabilities recognized
under lease contracts per SFAS No. 13, (4) firm commitments that would otherwise
not be recognized at inception and that only involve financial instruments,
(5)
demand deposit account liabilities, (6) nonfinancial insurance contracts and
warranties that the insurer can settle by paying a third party to provide those
goods or services, and (7) host financial instruments resulting from separation
of an embedded nonfinancial derivative instrument from a nonfinancial hybrid
instrument. The fair value election cannot be revoked unless a new election
date
occurs. This Statement is effective as of the beginning of the first fiscal
year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157,
“Fair Value Instruments.” Retrospective application is allowed for early
adopters, prohibited for others. The choice to adopt early must be made within
120 days of the beginning of the fiscal year of adoption, provided the entity
has not yet issued financial statements. This Statement permits application
to
eligible items existing at the effective date (or early adoption date). The
Corporation is currently evaluating the impact that SFAS No. 159 will have
on its consolidated financial statements.
(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 $18.8 million and
$18.9 million at December 31, 2006 and 2005,
respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
(5)
Securities
Securities
are summarized as follows:
|
(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
|
298,038
|
923
|
(5,174
|
)
|
293,787
|
||||||||
|
Corporate
bonds
|
55,569
|
291
|
(252
|
)
|
55,608
|
||||||||
|
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
|
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
|
||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
|
December
31, 2005
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
Securities
Available for Sale:
|
|||||||||||||
|
U.S.
Treasury obligations and obligations of U.S.
government-sponsored
agencies
|
$
|
107,135
|
$
|
1,332
|
$
|
(816
|
)
|
$
|
107,651
|
||||
|
Mortgage-backed
securities
|
436,142
|
1,019
|
(8,987
|
)
|
428,174
|
||||||||
|
Corporate
bonds
|
63,565
|
346
|
(716
|
)
|
63,195
|
||||||||
|
Corporate
stocks
|
13,796
|
6,573
|
(155
|
)
|
20,214
|
||||||||
|
Total
securities available for sale
|
620,638
|
9,270
|
(10,674
|
)
|
619,234
|
||||||||
|
Securities
Held to Maturity:
|
|||||||||||||
|
U.S.
Treasury obligations and obligations of U.S.
government-sponsored
agencies
|
47,250
|
-
|
(797
|
)
|
46,453
|
||||||||
|
Mortgage-backed
securities
|
84,960
|
768
|
(1,527
|
)
|
84,201
|
||||||||
|
States
and political subdivisions
|
32,497
|
72
|
(467
|
)
|
32,102
|
||||||||
|
Total
securities held to maturity
|
164,707
|
840
|
(2,791
|
)
|
162,756
|
||||||||
|
Total
securities
|
$
|
785,345
|
$
|
10,110
|
$
|
(13,465
|
)
|
$
|
781,990
|
||||
Included
in corporate stocks at December 31, 2006 are preferred stocks, which are
callable at the discretion of the issuer, with an amortized cost of
$10.1 million and a fair value of $10.2 million. Call features on
these stocks range from six months to four years.
At
December 31, 2006 and 2005, the available for sale and held to maturity
securities portfolio included $1.7 million and $3.4 million of net
pretax unrealized losses, respectively. Included in these net amounts were
gross
unrealized losses amounting to $9.1 million and $13.5 million at
December 31, 2006 and 2005, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
The
following tables summarize, for all securities in an unrealized loss position
at
December 31, 2006 and 2005, 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, 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
|
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
|
|||||||||||||||||||
|
Corporate
bonds
|
2
|
6,130
|
34
|
8
|
17,846
|
218
|
10
|
23,976
|
252
|
|||||||||||||||||||
|
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
|
|||||||||||||
|
(Dollars
in thousands)
|
Less
than 12 Months
|
12
Months or Longer
|
Total
|
|||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||
|
At
December 31, 2005
|
#
|
Value
|
Losses
|
#
|
Value
|
Losses
|
#
|
Value
|
Losses
|
|||||||||||||||||||
|
U.S.
Treasury obligations
|
||||||||||||||||||||||||||||
|
and
obligations of U.S. government-sponsored agencies
|
12
|
$
|
70,586
|
$
|
827
|
6
|
$
|
43,464
|
$
|
786
|
18
|
$
|
114,050
|
$
|
1,613
|
|||||||||||||
|
Mortgage-backed
securities
|
56
|
178,688
|
2,565
|
47
|
238,844
|
7,949
|
103
|
417,532
|
10,514
|
|||||||||||||||||||
|
States
and
|
||||||||||||||||||||||||||||
|
political
subdivisions
|
33
|
19,129
|
349
|
5
|
3,557
|
118
|
38
|
22,686
|
467
|
|||||||||||||||||||
|
Corporate
bonds
|
5
|
10,929
|
75
|
9
|
25,019
|
641
|
14
|
35,948
|
716
|
|||||||||||||||||||
|
Subtotal,
debt securities
|
106
|
279,332
|
3,816
|
67
|
310,884
|
9,494
|
173
|
590,216
|
13,310
|
|||||||||||||||||||
|
Corporate
stocks
|
6
|
2,617
|
126
|
1
|
483
|
29
|
7
|
3,100
|
155
|
|||||||||||||||||||
|
Total
temporarily
|
||||||||||||||||||||||||||||
|
impaired
securities
|
112
|
$
|
281,949
|
$
|
3,942
|
68
|
$
|
311,367
|
$
|
9,523
|
180
|
$
|
593,316
|
$
|
13,465
|
|||||||||||||
For
those
debt securities whose amortized cost exceeds fair value, the primary cause
is
related to interest rates. The majority of the loss for debt securities reported
in an unrealized loss position at December 31, 2006 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 middle
of
2004. The Corporation believes that the nature and duration of impairment on
its
debt security holdings are primarily a function of future interest rate
movements and changes in investment spreads, 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, 2006 consisted of 181 debt security holdings. The largest
loss percentage of any single holding was 4.75% 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.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
The
Corporation believes that the nature and duration of impairment on its equity
securities holdings are a function of general financial market movements
and
industry conditions. The Corporation has the ability and intent to hold these
investments to full recovery of the cost basis. The equity securities in
an
unrealized loss position at December 31, 2006 consisted of nine holdings of
financial and commercial entities. The largest loss percentage position of
any
single holding was 10.34% of its cost.
The
maturities of debt securities as of December 31, 2006 are presented below.
Mortgage-backed securities are included based on weighted average maturities,
adjusted for anticipated prepayments. All other securities are included based
on
contractual maturities. Actual maturities may differ from amounts presented
because certain issuers have the right to call or prepay obligations with or
without call or prepayment penalties. Yields on tax exempt obligations are
not
computed on a tax equivalent basis. Included in the securities portfolio at
December 31, 2006 were debt securities with an aggregate carrying value of
$174.5 million that are callable at the discretion of the issuers. Final
maturities of the callable securities range from fifteen months to twenty-two
years, with call features ranging from one month to ten 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
|
$
|
17,183
|
$
|
110,309
|
$
|
29,891
|
$
|
-
|
$
|
157,383
|
||||||
|
Weighted
average yield
|
5.98
|
%
|
5.01
|
%
|
5.43
|
%
|
-
|
%
|
5.19
|
%
|
||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Amortized
cost
|
62,987
|
152,015
|
66,940
|
16,096
|
298,038
|
|||||||||||
|
Weighted
average yield
|
5.05
|
%
|
5.13
|
%
|
5.13
|
%
|
5.30
|
%
|
5.12
|
%
|
||||||
|
Corporate
bonds:
|
||||||||||||||||
|
Amortized
cost
|
14,002
|
12,002
|
8,721
|
20,844
|
55,569
|
|||||||||||
|
Weighted
average yield
|
5.80
|
%
|
5.65
|
%
|
5.73
|
%
|
6.58
|
%
|
6.05
|
%
|
||||||
|
Total
debt securities:
|
||||||||||||||||
|
Amortized
cost
|
$
|
94,172
|
$
|
274,326
|
$
|
105,552
|
$
|
36,940
|
$
|
510,990
|
||||||
|
Weighted
average yield
|
5.33
|
%
|
5.10
|
%
|
5.27
|
%
|
6.02
|
%
|
5.25
|
%
|
||||||
|
Fair
value
|
$
|
93,272
|
$
|
272,098
|
$
|
104,585
|
$
|
36,725
|
$
|
506,680
|
||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
|
(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
Held to Maturity:
|
||||||||||||||||
|
U.S.
Treasury obligations and obligations
|
||||||||||||||||
|
of
U.S. government-sponsored agencies:
|
||||||||||||||||
|
Amortized
cost
|
$
|
25,000
|
$
|
17,000
|
$
|
-
|
$
|
-
|
$
|
42,000
|
||||||
|
Weighted
average yield
|
3.17
|
%
|
4.19
|
%
|
-
|
%
|
-
|
%
|
3.58
|
%
|
||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Amortized
cost
|
13,740
|
34,775
|
17,652
|
3,173
|
69,340
|
|||||||||||
|
Weighted
average yield
|
5.06
|
%
|
4.94
|
%
|
4.69
|
%
|
5.18
|
%
|
4.91
|
%
|
||||||
|
States
and political subdivisions:
|
||||||||||||||||
|
Amortized
cost
|
1,470
|
2,291
|
15,186
|
47,168
|
66,115
|
|||||||||||
|
Weighted
average yield
|
4.39
|
%
|
3.00
|
%
|
3.62
|
%
|
3.95
|
%
|
3.85
|
%
|
||||||
|
Total
debt securities:
|
||||||||||||||||
|
Amortized
cost
|
$
|
40,210
|
$
|
54,066
|
$
|
32,838
|
$
|
50,341
|
$
|
177,455
|
||||||
|
Weighted
average yield
|
3.86
|
%
|
4.62
|
%
|
4.20
|
%
|
4.02
|
%
|
4.20
|
%
|
||||||
|
Fair
value
|
$
|
39,717
|
$
|
53,294
|
$
|
32,427
|
$
|
49,931
|
$
|
175,369
|
||||||
The
following is a summary of amounts relating to sales of securities available
for
sale:
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Proceeds
from sales
|
$
|
106,866
|
$
|
67,542
|
$
|
4,604
|
||||
|
Gross
realized gains
|
$
|
3,984
|
$
|
1,840
|
$
|
937
|
||||
|
Gross
realized losses
|
(3,541
|
)
|
(1,451
|
)
|
(689
|
)
|
||||
|
Other
than temporary write-downs
|
-
|
(32
|
)
|
-
|
||||||
|
Net
realized gains
|
$
|
443
|
$
|
357
|
$
|
248
|
||||
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, 2006, 2005
and 2004 were contributions of appreciated equity securities to the
Corporation’s charitable foundation amounting to $513 thousand,
$522 thousand and $454 thousand, respectively. These transactions
resulted in realized securities gains of $381 thousand, $369 thousand
and $387 thousand, respectively, for the same periods.
Securities
available for sale and held to maturity with a fair value of $557.4 million
and $564.3 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, 2006 and 2005, respectively.
(See Note 12 to the Consolidated Financial Statements for additional
discussion of FHLB borrowings). In addition, securities available for sale
and
held to maturity with a fair value of $9.6 million and $13.8 million
were collateralized for the discount window at the Federal Reserve Bank at
December 31, 2006 and 2005, respectively. There were no borrowings with the
Federal Reserve Bank at either date. Securities available for sale with a fair
value of $2.1 million and $2.2 million were designated in a rabbi
trust for a nonqualified retirement plan at December 31, 2006 and 2005,
respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
(6)
Loans
The
following is a summary of loans:
|
(Dollars
in thousands)
|
December
31, 2006
|
December
31, 2005
|
|||||||||||
|
Amount
|
%
|
Amount
|
%
|
||||||||||
|
Commercial:
|
|||||||||||||
|
Mortgages
(1)
|
$
|
282,019
|
19
|
%
|
$
|
291,292
|
21
|
%
|
|||||
|
Construction
and development (2)
|
32,233
|
2
|
%
|
37,190
|
3
|
%
|
|||||||
|
Other
(3)
|
273,145
|
19
|
%
|
226,252
|
16
|
%
|
|||||||
|
Total
commercial
|
587,397
|
40
|
%
|
554,734
|
40
|
%
|
|||||||
|
Residential
real estate:
|
|||||||||||||
|
Mortgages
(4)
|
577,522
|
40
|
%
|
565,680
|
40
|
%
|
|||||||
|
Homeowner
construction
|
11,149
|
-
|
%
|
17,028
|
2
|
%
|
|||||||
|
Total
residential real estate
|
588,671
|
40
|
%
|
582,708
|
42
|
%
|
|||||||
|
Consumer
|
|||||||||||||
|
Home
equity lines
|
145,676
|
10
|
%
|
161,100
|
11
|
%
|
|||||||
|
Home
equity loans
|
93,947
|
6
|
%
|
72,288
|
5
|
%
|
|||||||
|
Other
(5)
|
44,295
|
4
|
%
|
31,078
|
2
|
%
|
|||||||
|
Total
consumer
|
283,918
|
20
|
%
|
264,466
|
18
|
%
|
|||||||
|
Total
loans (6)
|
$
|
1,459,986
|
100
|
%
|
$
|
1,401,908
|
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 home equity loans and other consumer installment loans.
(6)
Net
of unamortized loan origination fees, net of costs, totaling $277 thousand
and $373 thousand at December 31, 2006 and December 31, 2005,
respectively. Also includes $342 thousand and $753 thousand of
premium, net of discount, on purchased loans at December 31, 2006 and
December 31, 2005, 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 economic activity within the market
area and real estate values. The ability of commercial borrowers to honor their
repayment commitments is dependent on the general economy as well as the health
of the real estate economic sector in the Corporation’s market
area.
Nonaccrual
Loans
The
balance of loans on nonaccrual status as of December 31, 2006 and 2005 was
$2.7 million and $2.4 million, respectively. Interest income that
would have been recognized had these loans been current in accordance with
their
original terms was approximately $218 thousand in 2006 and
$171 thousand in 2005. Interest income attributable to these loans included
in the Consolidated Statements of Income amounted to approximately
$192 thousand in 2006 and $176 thousand in 2005.
There
were no accruing loans 90 days or more past due at December 31, 2006 and
2005.
There
were no loans whose terms had been restructured included in nonaccrual loans
at
December 31, 2006 and 2005.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
Impaired
Loans
Impaired
loans consist of all nonaccrual commercial loans. The following is a summary
of
impaired loans:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Impaired
loans requiring an allowance
|
$
|
1,393
|
$
|
332
|
|||
|
Impaired
loans not requiring an allowance
|
419
|
686
|
|||||
|
Total
recorded investment in impaired loans
|
$
|
1,812
|
$
|
1,018
|
|||
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Average
recorded investment in impaired loans
|
$
|
1,105
|
$
|
1,076
|
$
|
3,300
|
||||
|
Interest
income recognized on impaired loans
|
$
|
192
|
$
|
94
|
$
|
222
|
||||
Loan
Servicing Activities
An
analysis of loan servicing rights for the years ended December 31, 2006,
2005 and 2004 follows:
|
(Dollars
in thousands)
|
Loan
|
|||||||||
|
Servicing
|
Valuation
|
|||||||||
|
Rights
|
Allowance
|
Total
|
||||||||
|
Balance
at December 31, 2003
|
$
|
1,300
|
$
|
(579
|
)
|
$
|
721
|
|||
|
Loan
servicing rights capitalized
|
487
|
-
|
487
|
|||||||
|
Amortization
(1)
|
(311
|
)
|
-
|
(311
|
)
|
|||||
|
Direct
write-down
|
(146
|
)
|
146
|
-
|
||||||
|
Decrease
in impairment reserve (2)
|
-
|
102
|
102
|
|||||||
|
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
|
|||
| (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:
|
2007
|
$
|
232
|
||||
|
2008
|
188
|
||||||
|
2009
|
151
|
||||||
|
2010
|
121
|
||||||
|
2011
|
96
|
||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
Mortgage
loans and other loans sold to others are serviced on a fee basis under various
agreements. Loans serviced for others are not included in the Consolidated
Balance Sheets. Balance of loans serviced for others, by type of
loan:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Residential
mortgages
|
$
|
64,269
|
$
|
66,533
|
|||
|
Commercial
loans
|
28,196
|
35,705
|
|||||
|
Total
|
$
|
92,465
|
$
|
102,238
|
|||
Loans
to Related Parties
The
Corporation has made loans in the ordinary course of business to certain
directors and executive officers including their immediate families and their
affiliated companies. Such loans were made under normal interest rate and
collateralization terms. Activity related to these loans in 2006 was as follows:
|
(Dollars
in thousands)
|
||||
|
Balance
at beginning of year
|
$
|
17,495
|
||
|
Additions
|
7,300
|
|||
|
Reductions
|
(8,106
|
)
|
||
|
Balance
at end of year
|
$
|
16,689
|
||
(7)
Allowance for Loan Losses
The
following is an analysis of the allowance for loan losses:
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at beginning of year
|
$
|
17,918
|
$
|
16,771
|
$
|
15,914
|
||||
|
Reclassification
of allowance on off-balance sheet exposures
|
-
|
(250
|
)
|
-
|
||||||
|
Provision
charged to expense
|
1,200
|
1,200
|
610
|
|||||||
|
Recoveries
of loans previously charged off
|
204
|
566
|
814
|
|||||||
|
Loans
charged off
|
(428
|
)
|
(369
|
)
|
(567
|
)
|
||||
|
Balance
at end of year
|
$
|
18,894
|
$
|
17,918
|
$
|
16,771
|
||||
Included
in the allowance for loan losses at December 31, 2006, 2005 and 2004 was an
allowance for impaired loans amounting to $258 thousand, $44 thousand
and $236 thousand, respectively.
(8)
Premises and Equipment
The
following is a summary of premises and equipment:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Land
and improvements
|
$
|
4,203
|
$
|
4,026
|
|||
|
Premises
and improvements
|
29,298
|
28,921
|
|||||
|
Furniture,
fixtures and equipment
|
22,839
|
20,634
|
|||||
|
56,340
|
53,581
|
||||||
|
Less
accumulated depreciation
|
32,033
|
29,844
|
|||||
|
Total
premises and equipment, net
|
$
|
24,307
|
$
|
23,737
|
|||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
Depreciation
of premises and equipment amounted to $3.0 million, $3.0 million and
$3.1 million of expense for the years ended December 31, 2006, 2005
and 2004, respectively.
At
December 31, 2006, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $963 thousand, $706 thousand and
$569 thousand for 2006, 2005 and 2004, respectively. The minimum annual
lease payments under the terms of these leases, exclusive of renewal provisions,
are as follows:
|
(Dollars
in thousands)
|
|||||||
|
Years
ending December 31:
|
2007
|
$
|
945
|
||||
|
2008
|
743
|
||||||
|
2009
|
702
|
||||||
|
2010
|
506
|
||||||
|
2111
|
422
|
||||||
|
|
2012
and thereafter
|
1,804
|
|||||
|
Total
minimum lease payments
|
$
|
5,122
|
|||||
Lease
expiration dates range from four months to fifteen years, with renewal options
of one to twenty years.
(9)
Goodwill and Other Intangibles
The
changes in the carrying value of goodwill and other intangible assets for the
year ended December 31, 2006 were as follows:
Goodwill
|
Wealth
|
||||||||||
|
(Dollars
in thousands)
|
Commercial
|
Management
|
||||||||
|
Banking
|
Service
|
|||||||||
|
Segment
|
Segment
|
Total
|
||||||||
|
Balance
at December 31, 2004
|
$
|
22,591
|
$
|
-
|
$
|
22,591
|
||||
|
Additions
to goodwill during the period
|
-
|
17,372
|
17,372
|
|||||||
|
Impairment
recognized
|
-
|
-
|
-
|
|||||||
|
Balance
at December 31, 2005
|
22,591
|
17,372
|
39,963
|
|||||||
|
Additions
to goodwill during the period
|
-
|
4,595
|
4,595
|
|||||||
|
Impairment
recognized
|
-
|
-
|
-
|
|||||||
|
Balance
at December 31, 2006
|
$
|
22,591
|
$
|
21,967
|
$
|
44,558
|
||||
Other
Intangible Assets
|
(Dollars
in thousands)
|
Non-compete
Agreements
|
|||||||||||||||
|
Core
Deposit
|
Advisory
|
Weston
|
||||||||||||||
|
Intangible
|
Contracts
|
Financial
|
Other
|
Total
|
||||||||||||
|
Balance
at December 31, 2004
|
$
|
1,214
|
$
|
-
|
$
|
-
|
$
|
95
|
$
|
1,309
|
||||||
|
Acquisition
|
-
|
13,657
|
295
|
-
|
13,952
|
|||||||||||
|
Amortization
|
303
|
437
|
17
|
95
|
852
|
|||||||||||
|
Balance
at December 31, 2005
|
911
|
13,220
|
278
|
-
|
14,409
|
|||||||||||
|
Amortization
|
261
|
1,283
|
49
|
-
|
1,593
|
|||||||||||
|
Balance
at December 31, 2006
|
$
|
650
|
$
|
11,937
|
$
|
229
|
$
|
-
|
$
|
12,816
|
||||||
During
the third quarter of 2005, goodwill and intangible assets related to the
acquisition of Weston Financial were recorded amounting to $17.4 million
and $14.0 million, respectively. The Stock Purchase Agreement dated
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
March 18,
2005, by and among the Corporation, Weston Financial and Weston Financial’s
shareholders, provides for the payment of contingent purchase price amounts
based on operating results in each of the years in the three-year earn-out
period ending December 31, 2008. During the third quarter of 2006 the
Corporation recognized a liability of $4.6 million, with a corresponding
addition to goodwill, representing the 2006 portion of the earn-out period.
Goodwill is not deductible for tax purposes.
The
value
attributable to the core deposit intangible (“CDI”) is a function of the
estimated attrition of the core deposit accounts, and the expected cost savings
associated with the use of the existing core deposit base rather than
alternative funding sources.
The
value
attributed to the advisory contracts was based on the time period over which
the
advisory contracts are expected to generate economic benefits. The intangible
values of advisory contracts are being amortized over a 20-year life using
a
declining balance method, based on expected attrition for Weston Financial’s
current customer base derived from historical runoff data. The amortization
schedule is based on the anticipated future customer runoff rate. This schedule
will result in amortization of approximately 50% of the intangible asset after
six years, and approximately 70% amortization of the balance after ten
years.
The
value
attributable to the Weston Financial non-compete agreements was based on the
expected receipt of future economic benefits related to provisions in the
non-compete agreements that restrict competitive behavior. The intangible value
of non-compete agreements is being amortized on a straight-line basis over
the
six-year contractual lives of the agreements.
Estimated
annual amortization expense is as follows:
|
(Dollars
in thousands)
|
|||||||||||||
|
Core
|
Advisory
|
Non-compete
|
|||||||||||
|
Estimated
amortization expense
|
Deposits
|
Contracts
|
Agreements
|
Total
|
|||||||||
|
2007
|
$
|
140
|
$
|
1,194
|
$
|
49
|
$
|
1,383
|
|||||
|
2008
|
120
|
1,111
|
49
|
1,280
|
|||||||||
|
2009
|
120
|
1,040
|
49
|
1,209
|
|||||||||
|
2010
|
120
|
922
|
49
|
1,091
|
|||||||||
|
2011
|
120
|
768
|
33
|
921
|
|||||||||
The
components of intangible assets at December 31, 2006 and 2005 were as
follows:
|
(Dollars
in thousands)
|
|||||||||||||
|
Core
|
Advisory
|
Non-compete
|
|||||||||||
|
Deposits
|
Contracts
|
Agreements
|
Total
|
||||||||||
|
December
31, 2006:
|
|||||||||||||
|
Gross
carrying amount
|
$
|
2,997
|
$
|
13,657
|
$
|
1,147
|
$
|
17,801
|
|||||
|
Accumulated
amortization
|
2,347
|
1,720
|
918
|
4,985
|
|||||||||
|
Net
amount
|
$
|
650
|
$
|
11,937
|
$
|
229
|
$
|
12,816
|
|||||
|
December
31, 2005:
|
|||||||||||||
|
Gross
carrying amount
|
$
|
2,997
|
$
|
13,657
|
$
|
1,147
|
$
|
17,801
|
|||||
|
Accumulated
amortization
|
2,086
|
437
|
869
|
3,392
|
|||||||||
|
Net
amount
|
$
|
911
|
$
|
13,220
|
$
|
278
|
$
|
14,409
|
|||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
(10)
Net
Deferred Tax Asset and Income Taxes
The
components of income tax expense were as follows:
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Current
tax expense:
|
||||||||||
|
Federal
|
$
|
13,435
|
$
|
12,106
|
$
|
9,826
|
||||
|
State
|
625
|
175
|
4
|
|||||||
|
Total
current tax expense
|
14,060
|
12,281
|
9,830
|
|||||||
|
Deferred
tax benefit:
|
||||||||||
|
Federal
|
(1,828
|
)
|
(1,261
|
)
|
(296
|
)
|
||||
|
State
|
(141
|
)
|
(35
|
)
|
-
|
|||||
|
Total
deferred tax benefit
|
(1,969
|
)
|
(1,296
|
)
|
(296
|
)
|
||||
|
Total
income tax expense
|
$
|
12,091
|
$
|
10,985
|
$
|
9,534
|
||||
Total
income tax expense varied from the amount determined by applying the Federal
income tax rate to income before income taxes. The reasons for the differences
were as follows:
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Tax
expense at Federal statutory rate
|
$
|
12,993
|
$
|
11,903
|
$
|
10,627
|
||||
|
(Decrease)
increase in taxes resulting from:
|
||||||||||
|
Tax-exempt
income
|
(613
|
)
|
(383
|
)
|
(305
|
)
|
||||
|
Dividends
received deduction
|
(244
|
)
|
(240
|
)
|
(288
|
)
|
||||
|
Bank-owned
life insurance
|
(493
|
)
|
(389
|
)
|
(411
|
)
|
||||
|
State
tax, net of Federal income tax benefit
|
406
|
114
|
3
|
|||||||
|
Other
|
42
|
(20
|
)
|
(92
|
)
|
|||||
|
Total
income tax expense
|
$
|
12,091
|
$
|
10,985
|
$
|
9,534
|
||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
The
approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 2006
and
2005 are as follows:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Gross
deferred tax assets:
|
|||||||
|
Allowance
for loan losses
|
$
|
6,613
|
$
|
6,257
|
|||
|
Defined
benefit pension obligations
|
5,266
|
3,166
|
|||||
|
Deferred
loan origination fees
|
923
|
864
|
|||||
|
Deferred
compensation
|
963
|
760
|
|||||
|
Securities
available for sale
|
-
|
341
|
|||||
|
Net
operating loss carryover from acquired bank
|
-
|
39
|
|||||
|
Other
|
1,043
|
906
|
|||||
|
Gross
deferred tax assets
|
14,808
|
12,333
|
|||||
|
Gross
deferred tax liabilities:
|
|||||||
|
Securities
available for sale
|
(181
|
)
|
-
|
||||
|
Deferred
loan origination costs
|
(1,803
|
)
|
(1,758
|
)
|
|||
|
Premises
and equipment
|
(440
|
)
|
(683
|
)
|
|||
|
Amortization
of intangibles
|
(5,160
|
)
|
(5,778
|
)
|
|||
|
Other
|
(512
|
)
|
(557
|
)
|
|||
|
Gross
deferred tax liabilities
|
(8,096
|
)
|
(8,776
|
)
|
|||
|
Net
deferred tax asset
|
$
|
6,712
|
$
|
3,557
|
|||
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.
(11)
Time Certificates of Deposit
Scheduled
maturities of time certificates of deposit at December 31, 2006 were as
follows:
|
(Dollars
in thousands)
|
|||||||
|
Years
ending December 31:
|
2007
|
$
|
550,981
|
||||
|
2008
|
156,130
|
||||||
|
2009
|
75,535
|
||||||
|
2010
|
25,925
|
||||||
|
2011
|
10,373
|
||||||
|
|
2012
and thereafter
|
4,045
|
|||||
|
Balance
at December 31, 2006
|
$
|
822,989
|
|||||
The
aggregate amount of time certificates of deposit in denominations of
$100 thousand
or more was $426.3 million and $424.6 million at December 31,
2006 and 2005, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
The
following table represents the amount of certificates of deposit of
$100 thousand or more at December 31, 2006 maturing during the periods
indicated:
|
(Dollars
in thousands)
|
||
|
Maturing:
|
January 1,
2007 to March 31, 2007
|
$116,316
|
|
April 1,
2007 to June 30, 2007
|
52,871
|
|
|
July 1,
2007 to December 31, 2007
|
85,935
|
|
|
January 1,
2008 and beyond
|
171,188
|
|
|
Balance
at December 31, 2006
|
426,310
|
(12)
Borrowings
Federal
Home Loan Bank Advances
The
following table presents maturities and weighted average interest rates paid
on
FHLB advances outstanding at December 31, 2006 and 2005:
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
December
31, 2006
|
December
31, 2005
|
||||||||||||||||||
|
Scheduled
|
Redeemed
at
|
Weighted
|
Scheduled
|
Redeemed
at
|
Weighted
|
||||||||||||||
|
Maturity
|
Call
Date (1)
|
Average
Rate (2)
|
Maturity
|
Call
Date (1)
|
Average
Rate (2)
|
||||||||||||||
|
2006
|
$
|
-
|
$
|
-
|
-
|
%
|
$
|
152,437
|
$
|
202,937
|
3.43
|
%
|
|||||||
|
2007
|
161,000
|
210,500
|
4.09
|
%
|
109,970
|
119,970
|
3.51
|
%
|
|||||||||||
|
2008
|
115,860
|
115,860
|
3.84
|
%
|
107,508
|
107,508
|
3.72
|
%
|
|||||||||||
|
2009
|
82,063
|
70,063
|
4.17
|
%
|
81,160
|
69,160
|
4.17
|
%
|
|||||||||||
|
2010
|
29,671
|
15,171
|
5.49
|
%
|
28,395
|
13,895
|
5.51
|
%
|
|||||||||||
|
2011
|
28,993
|
20,993
|
4.77
|
%
|
29,874
|
10,874
|
4.61
|
%
|
|||||||||||
|
2012
and after
|
56,974
|
41,974
|
4.74
|
%
|
35,979
|
20,979
|
4.58
|
%
|
|||||||||||
|
$
|
474,561
|
$
|
474,561
|
$
|
545,323
|
$
|
545,323
|
||||||||||||
| (1) |
Callable
FHLB advances are shown in the respective periods assuming that the
callable debt is redeemed at the call date while all other advances
are
shown in the periods corresponding to their scheduled maturity
date.
|
| (2) |
Weighted
average rate based on scheduled maturity
dates.
|
In
addition to the outstanding advances, the Bank also has access to an unused
line
of credit amounting to $8.0 million at December 31, 2006. Under
agreement with the FHLB, the Bank is required to maintain qualified collateral,
free and clear of liens, pledges, or encumbrances that, based on certain
percentages of book and market values, has a value equal to the aggregate amount
of the line of credit and outstanding advances. The FHLB maintains a security
interest in various assets of the Bank including, but not limited to,
residential mortgage loans, U.S. government or agency securities, U.S.
government-sponsored agency securities, and amounts maintained on deposit at
the
FHLB. The Bank maintains qualified collateral in excess of the amount required
to collateralize the line of credit and outstanding advances at
December 31, 2006. Included in the collateral were securities available for
sale and held to maturity with a fair value of $451.5 million and
$498.0 million that were specifically pledged to secure FHLB borrowings at
December 31, 2006 and December 31, 2005, respectively. Unless there is
an event of default under the agreement, the Corporation may use, encumber
or
dispose any portion of the collateral in excess of the amount required to secure
FHLB borrowings, except for that collateral which has been specifically
pledged.
Junior
Subordinated Debentures
In
August
2005, the Bancorp sponsored the creation of WT Capital Trust I (“Trust I”) and
WT Capital Trust II (“Trust II”). Trust I and Trust II are Delaware statutory
trusts created for the sole purpose of issuing trust preferred securities and
investing the proceeds in junior subordinated debentures of the Bancorp. The
Bancorp is the owner of all of the common securities of Trust I and Trust II.
In
accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest
Entities—Revised”, Trust I and Trust II are treated as unconsolidated
subsidiaries. The common stock investment in the statutory trusts is included
in
“Other Assets” in the Consolidated Balance Sheet.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
On
August 29, 2005, Trust
I issued
$8 million of
Capital
Securities in
a
private placement of trust preferred securities.
The
Capital Securities mature in September 2035, are redeemable at the Bancorp’s
option beginning after five years, and require quarterly distributions by Trust
I to the holder of the Capital Securities, at a rate of 5.965% until
September 15, 2010, and thereafter at a rate equal to the three-month LIBOR
rate plus 1.45%. The Bancorp has guaranteed the Capital Securities and, to
the
extent not paid by Trust I, accrued and unpaid distributions on the Capital
Securities, as well as the redemption price payable to the Capital Securities
holders. The proceeds of the Capital Securities, along with proceeds from the
issuance of common securities by Trust I to the Bancorp, were used to purchase
$8.3 million of the Bancorp's junior subordinated deferrable interest notes
(the “Trust I Debentures”) and constitute the primary asset of Trust I. Like the
Capital Securities, the Trust I Debentures bear interest at a rate of 5.965%
until September 15, 2010, and thereafter at a rate equal to the three-month
LIBOR rate plus 1.45%. The Trust I Debentures mature on September 15, 2035,
but may be redeemed at par at the Bancorp’s option, subject to the approval of
the applicable banking regulator to the extent required under applicable
guidelines or policies, at any time on or after September 15, 2010, or upon
the occurrence of certain special qualifying events.
On
August 29, 2005, Trust II issued $14 million of Capital Securities in
a private placement of trust preferred securities. The Capital Securities mature
in November 2035, are redeemable at the Bancorp’s option beginning after five
years, and require quarterly distributions by Trust II to the holder of the
Capital Securities, at a rate of 5.96% until November 23, 2010, and
thereafter at a rate equal to the three-month LIBOR rate plus 1.45%. The Bancorp
has guaranteed the Capital Securities and, to the extent not paid by Trust
II,
accrued and unpaid distributions on the Capital Securities, as well as the
redemption price payable to the Capital Securities holders. The proceeds of
the
Capital Securities, along with proceeds from the issuance of common securities
by Trust II to the Bancorp, were used to purchase $14.4 million of the
Bancorp's junior subordinated deferrable interest notes (the “Trust II
Debentures”) and constitute the primary asset of Trust II. Like the Capital
Securities, the Trust II Debentures bear interest at a rate of 5.96% until
November 23, 2010, and thereafter at a rate equal to the three-month LIBOR
rate plus 1.45%. The Trust II Debentures mature on September 15, 2035, but
may be redeemed at par at the Bancorp's option, subject to the approval of
the
applicable banking regulator to the extent required under applicable guidelines
or policies, at any time on or after September 15, 2010, or upon the
occurrence of certain special qualifying events.
Other
Borrowings
The
following is a summary of other borrowings:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Treasury,
Tax and Loan demand note balance
|
$
|
3,863
|
$
|
3,794
|
|||
|
Deferred
acquisition obligations
|
10,372
|
5,469
|
|||||
|
Other
|
449
|
511
|
|||||
|
Other
borrowings
|
$
|
14,684
|
$
|
9,774
|
|||
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. During 2006, the Corporation recognized additional deferred acquisition
obligation of $4.6 million, representing the 2006 portion of the earn-out
period. As of December 31, 2006, approximately $6.6 million of the
deferred acquisition obligations will be paid in 2007 and the remainder will
be
paid in 2008.
There
were no securities sold under repurchase agreements outstanding at
December 31, 2006, 2005 and 2004. Securities sold under repurchase
agreements generally mature within 90 days. 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.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
(13)
Shareholders' Equity
Stock
Repurchase Plan
In
December 2006, the Bancorp’s Board of Directors approved a new common stock
repurchase plan to replace a prior stock repurchase plan approved in 2001,
which
was terminated. The 2006 plan authorizes the repurchase of up to 400,000 shares,
or approximately 3%, of the Corporation’s common stock in open market
transactions. This authority may be exercised from time to time and in such
amounts as market conditions warrant, and subject to regulatory considerations.
The Bancorp plans to hold the repurchased shares as treasury stock to be used
for general corporate purposes. No shares have been repurchased under the 2006
plan.
The
2001
stock repurchase plan had authorized the repurchase of up to 250,000 shares,
or
2.1%, of the Corporation’s outstanding common shares. The 2001 plan had
approximately 112,000 shares remaining to be repurchased. During 2006, the
Bancorp purchased 50,000 shares at a total cost of $1.4 million under this
plan. No shares were repurchased during 2005 and 5,000 shares at a total cost
of
$125 thousand were purchased during 2004. The 2001 Plan was terminated with
the adoption of the 2006 plan.
In
addition, from time to time shares are acquired pursuant to the Nonqualified
Deferred Compensation Plan.
Rights
In
August
2006, the Bancorp’s Board of Directors adopted a new shareholder rights plan, as
set forth in the Shareholders Rights Agreement, dated August 17, 2006 (the
“2006 Rights Agreement”). The 2006 Rights Agreement replaced a previous rights
plan, which expired in August 2006. Pursuant to the terms of the 2006 Rights
Agreement, the Bancorp declared a dividend distribution of one common share
purchase right (a “Right”) for each outstanding share of common stock to
shareholders of record on August 31, 2006. Such Rights also apply to new
issuances of shares after that date. Each Right entitles the registered holder
to purchase from the Corporation one share of its common stock at a price of
$100.00 per share, subject to adjustment.
The
Rights are not exercisable or separable from the common stock until the earlier
of 10 days after a person or group (an “Acquiring Person”) acquires beneficial
ownership of 15% or more of the outstanding common shares or announces a tender
offer to do so. The Rights, which expire on August 31, 2016, may be
redeemed by the Bancorp at any time prior to the acquisition by an Acquiring
Person of beneficial ownership of 15% or more of the common stock at a price
of
$.001 per Right. In the event that any party becomes an Acquiring Person, each
holder of a Right, other than Rights owned by the Acquiring Person, will have
the right to receive upon exercise that number of common shares having a market
value of two times the purchase price of the Right. In the event that, at any
time after any party becomes an Acquiring Person, the Corporation is acquired
in
a merger or other business combination transaction or 50% or more of its assets
or earning power are sold, each holder of a Right will have the right to
purchase that number of shares of the acquiring company having a market value
of
two times the purchase price of the Right.
Dividends
The
primary source of liquidity for the Bancorp is dividends received from the
Bank.
The Bancorp and the Bank are regulated enterprises and their abilities to pay
dividends are subject to regulatory review and restriction. Certain regulatory
and statutory restrictions exist regarding dividends, loans, and advances from
the Bank to the Bancorp. Generally the Bank has the ability to pay dividends
to
the Bancorp subject to minimum regulatory capital requirements. The FDIC has
the
authority to use its enforcement powers to prohibit a bank from paying dividends
if, in its opinion, the payment of dividends would constitute an unsafe or
unsound practice. In addition, the Rhode Island Division of Banking may also
restrict the declaration of dividends if a bank would not be able to pay its
debts as they become due in the usual course of business or the bank’s total
assets would be less than the sum of its total liabilities. Under the most
restrictive of these requirements, the Bank could have declared aggregate
additional dividends of $54.8 million as of December 31,
2006.
Dividend
Reinvestment
Under
the
Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500
shares of common stock were originally reserved to be issued for dividends
reinvested and cash payments to the plan.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
Reserved
Shares
As
of
December 31, 2006, a total of 1,598,576 common stock shares were reserved
for issuance under the 1988 Plan, 1997 Plan, 2003 Plan and the Amended and
Restated Dividend Reinvestment and Stock Purchase Plan.
Regulatory
Capital Requirements
The
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the Federal Reserve Board and the FDIC, respectively. These
requirements were established to more accurately assess the credit risk inherent
in the assets and off-balance sheet activities of financial institutions.
Failure to meet minimum capital requirements can initiate certain mandatory,
and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The
capital amounts and classification are also subject to qualitative judgments
by
the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined
in
the regulations), and of Tier 1 capital to average assets (as defined in
the regulations). Management believes, as of December 31, 2006 that the
Corporation meets all capital adequacy requirements to which it is
subject.
As
of
December 31, 2006, the most recent notification from the FDIC categorized
the Bank as “well-capitalized” under the regulatory framework for prompt
corrective action. To be categorized as “well-capitalized,” the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios. There are no conditions or events since that notification
that
management believes have changed the Bank’s categorization.
The
following table presents the Corporation’s and the Bank’s actual capital amounts
and ratios at December 31, 2006 and 2005, as well as the corresponding
minimum regulatory amounts and ratios:
|
(Dollars
in thousands)
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be “Well Capitalized” Under Prompt Corrective Action
Provisions
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2006:
|
|||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Corporation
|
$
|
161,606
|
11.00
|
%
|
$
|
117,538
|
8.00
|
%
|
$
|
146,922
|
10.00
|
%
|
|||||||
|
Bank
|
$
|
168,765
|
11.49
|
%
|
$
|
117,465
|
8.00
|
%
|
$
|
146,832
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Corporation
|
$
|
141,098
|
9.60
|
%
|
$
|
58,769
|
4.00
|
%
|
$
|
88,153
|
6.00
|
%
|
|||||||
|
Bank
|
$
|
148,268
|
10.10
|
%
|
$
|
58,733
|
4.00
|
%
|
$
|
88,099
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets): (1)
|
|||||||||||||||||||
|
Corporation
|
$
|
141,098
|
6.04
|
%
|
$
|
93,487
|
4.00
|
%
|
$
|
116,858
|
5.00
|
%
|
|||||||
|
Bank
|
$
|
148,268
|
6.35
|
%
|
$
|
93,437
|
4.00
|
%
|
$
|
116,797
|
5.00
|
%
|
|||||||
|
As
of December 31, 2005:
|
|||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Corporation
|
$
|
147,454
|
10.51
|
%
|
$
|
112,221
|
8.00
|
%
|
$
|
140,277
|
10.00
|
%
|
|||||||
|
Bank
|
$
|
151,383
|
10.80
|
%
|
$
|
112,152
|
8.00
|
%
|
$
|
140,190
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Corporation
|
$
|
127,023
|
9.06
|
%
|
$
|
56,111
|
4.00
|
%
|
$
|
84,166
|
6.00
|
%
|
|||||||
|
Bank
|
$
|
130,962
|
9.34
|
%
|
$
|
56,076
|
4.00
|
%
|
$
|
84,114
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets): (1)
|
|||||||||||||||||||
|
Corporation
|
$
|
127,023
|
5.45
|
%
|
$
|
93,285
|
4.00
|
%
|
$
|
116,606
|
5.00
|
%
|
|||||||
|
Bank
|
$
|
130,962
|
5.62
|
%
|
$
|
93,254
|
4.00
|
%
|
$
|
116,568
|
5.00
|
%
|
|||||||
| (1) |
Leverage
ratio
|
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
In
connection with the Weston Financial acquisition, trust preferred securities
totaling $22 million were issued in the third quarter of 2005 by Trust I
and Trust II, capital trusts created by the Bancorp. In accordance with
FIN 46-R, Trust I and Trust II are not consolidated into the Corporation’s
financial statements; however, the Corporation reflects the amounts of junior
subordinated debentures payable to the preferred shareholders of Trust I and
Trust II as debt in its financial statements. The trust preferred securities
qualify as Tier 1 capital.
The
Corporation’s capital ratios at December 31, 2006 place the Corporation in
the “well-capitalized” category according to regulatory standards. On
March 1, 2005, the Federal Reserve Board issued a final rule that would
retain trust preferred securities in Tier 1 capital of bank holding companies,
but with stricter quantitative limits and clearer standards. Under the proposal,
after a five-year transition period that would end on March 31, 2009, the
aggregate amount of trust preferred securities would be limited to 25% of Tier
1
capital elements, net of goodwill. The Corporation has evaluated the potential
impact of such a change on its Tier 1 capital ratio and has concluded that
the
regulatory capital treatment of the trust preferred securities in the
Corporation’s total capital ratio would be unchanged.
(14)
Financial Instruments with Off-Balance Sheet Risk and Derivative Financial
Instruments
The
Corporation is a party to financial instruments with off-balance sheet risk
in
the normal course of business to meet the financing needs of its customers
and
to manage the exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
financial guarantees, interest rate swaps and floors, and commitments to
originate and commitments to sell fixed rate mortgage loans. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the Corporation’s Consolidated Balance Sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The contractual and notional
amounts of financial instruments with off-balance sheet risk are as
follows:
|
(Dollars
in thousands)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Financial
instruments whose contract amounts represent credit risk:
|
|||||||
|
Commitments
to extend credit:
|
|||||||
|
Commercial
loans
|
$
|
122,376
|
$
|
105,971
|
|||
|
Home
equity lines
|
185,483
|
174,073
|
|||||
|
Other
loans
|
10,671
|
17,271
|
|||||
|
Standby
letters of credit
|
9,401
|
10,986
|
|||||
|
Financial
instruments whose notional amounts exceed the amount of credit
risk:
|
|||||||
|
Forward
loan commitments:
|
|||||||
|
Commitments
to originate fixed rate mortgage loans to be sold
|
2,924
|
2,188
|
|||||
|
Commitments
to sell fixed rate mortgage loans
|
5,066
|
2,626
|
|||||
Commitments
to Extend Credit
Commitments
to extend credit are agreements to lend to a customer as long as there are
no
violations of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each borrower’s creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained is based on management’s
credit evaluation of the borrower.
Standby
Letters of Credit
Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Under the standby letters of credit, the Corporation
is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer’s failure to perform
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
under
the
terms of the underlying contract with the beneficiary. Standby letters of credit
extend up to five years. At December 31, 2006 and 2005, the maximum
potential amount of undiscounted future payments, not reduced by amounts that
may be recovered, totaled $9.4 million and $11.0 million,
respectively. At December 31, 2006 and 2005, there was no liability to
beneficiaries resulting from standby letters of credit.
At
December 31, 2006, a substantial portion of the standby letters of credit
were supported by pledged collateral. The collateral obtained is determined
based on management’s credit evaluation of the customer. Should the Corporation
be required to make payments to the beneficiary, repayment from the customer
to
the Corporation is required.
Interest
Rate Risk Management Agreements
Interest
rate swaps and floors are used from time to time as part of its interest rate
risk management strategy. Swaps are agreements in which the Corporation and
another party agree to exchange interest payments (e.g., fixed-rate for
variable-rate payments) computed on a notional principal amount. A floor is
a
purchased contract that entitles the Corporation to receive payment from a
counterparty if a rate index falls below a contractual rate. The amount of
the
payment is the difference between the contractual floor rate and the rate index
multiplied by the notional principal amount of the contract. If the rate index
does not fall below the contractual floor rate, no payment is received. The
credit risk associated with swap and floor transactions is the risk of default
by the counterparty. To minimize this risk, the Corporation enters into interest
rate agreements only with highly rated counterparties that management believes
to be creditworthy. The notional amounts of these agreements do not represent
amounts exchanged by the parties and thus, are not a measure of the potential
loss exposure.
For
the
years ended December 31, 2006, 2005 and 2004, the Corporation did not
engage in such agreements.
Forward
Loan Commitments
Commitments
to originate and commitments to sell fixed rate mortgage loans are derivative
financial instruments. Accordingly, the fair value of these commitments is
recognized in other assets on the balance sheet and the changes in fair value
of
such commitments are recorded in current earnings in the income statement.
The
carrying values of such commitments as of December 31, 2006 and 2005 and
the respective changes in fair values for the years then ended were
insignificant.
(15)
Fair Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Value of Financial Instruments”, requires the
disclosure of estimated fair values of its financial instruments. Fair value
estimates are made as of a specific point in time, based on relevant market
information and information about the financial instrument. These estimates
do
not reflect any pricing adjustments that could result from the sale of the
entire holding of a particular financial instrument. Because no quoted market
exists for a portion of the financial instruments, fair value estimates are
based on subjective judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments
and
other factors. Changes in assumptions could significantly affect the estimates
of fair value. Fair value estimates, methods, and assumptions are set forth
as
follows:
Cash
and Securities
The
carrying amount of short-term instruments such as cash and federal funds sold
is
used as an estimate of fair value.
The
fair
value of securities available for sale and held to maturity is estimated based
on bid prices published in financial newspapers or bid quotations received
from
securities dealers. No market exists for shares of the FHLB. Such stock may
be
redeemed at par upon termination of FHLB membership and is, therefore, valued
at
par, which equals cost.
Mortgage
Loans Held for Sale
The
fair
value of mortgage loans held for sale is the estimated value to sell the loans
using the quoted market prices for sales of similar loans on the secondary
market.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
Bank-Owned
Life Insurance
The
carrying amount of BOLI represents its cash surrender value and approximates
fair value.
Loans
Fair
values are estimated for categories of loans with similar financial
characteristics. Loans are segregated by type and are then further segmented
into fixed rate and adjustable rate interest terms to determine their fair
value. The fair value of fixed rate commercial and consumer loans is calculated
by discounting scheduled cash flows through the estimated maturity of the loan
using interest rates offered at December 31, 2006 and 2005 that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity
is
based on the Corporation’s historical repayment experience. For residential
mortgages, fair value is estimated by using quoted market prices for sales
of
similar loans on the secondary market, adjusted for servicing costs. The fair
value of floating rate commercial and consumer loans approximates carrying
value. The fair value of nonaccrual loans is calculated by discounting estimated
cash flows, using a rate commensurate with the risk associated with the loan
type or by other methods that give consideration to the value of the underlying
collateral.
Deposit
Liabilities
The
fair
value of demand deposits, NOW accounts, money market accounts and savings
accounts is equal to the amount payable on demand as of December 31, 2006
and 2005. The discounted values of cash flows using the rates currently offered
for deposits of similar remaining maturities were used to estimate the fair
value of certificates of deposit.
Securities
Sold Under Agreements to Repurchase
The
carrying amount of securities sold under repurchase agreements approximates
fair
value.
Federal
Home Loan Bank Advances
Rates
currently available to the Corporation for advances with similar terms and
remaining maturities are used to estimate fair value of existing
advances.
Junior
Subordinated Debentures
The
fair
value of the junior subordinated debentures is estimated using rates currently
available to the Corporation for debentures with similar terms and
maturities.
Derivative
Financial Instruments
Forward
Loan Commitments to Sell Loans Held for Sale - The fair value of forward loan
commitments to sell loans reflects the estimated amounts that the Corporation
would receive or pay to terminate the commitment at the reporting date. It
also
considers the difference between current levels of interest rates and the
committed rates. The fair values of such commitments as of December 31,
2006 and 2005 were insignificant.
Letters
of Credit - The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. Letters of credit
contain provisions for fees, conditions and term periods that are consistent
with customary market practices. Accordingly, the fair value amounts (considered
to be the discounted present value of the remaining contractual fees over the
unexpired commitment period) would not be material and therefore are not
disclosed.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
The
following table presents the fair values of financial instruments:
|
December
31,
|
2006
|
2005
|
|||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
54,337
|
$
|
54,337
|
$
|
48,997
|
$
|
48,997
|
|||||
|
Mortgage
loans held for sale
|
2,148
|
2,148
|
439
|
439
|
|||||||||
|
Securities
available for sale
|
526,396
|
526,396
|
619,234
|
619,234
|
|||||||||
|
Securities
held to maturity
|
177,455
|
175,369
|
164,707
|
162,756
|
|||||||||
|
FHLB
stock
|
28,727
|
28,727
|
34,966
|
34,966
|
|||||||||
|
Loans,
net of allowance for loan losses
|
1,441,092
|
1,439,619
|
1,383,990
|
1,389,113
|
|||||||||
|
Bank-owned
life insurance
|
39,770
|
39,770
|
30,360
|
30,360
|
|||||||||
| Financial Assets: | |||||||||||||
|
Noninterest
bearing demand deposits
|
$
|
186,533
|
$
|
186,533
|
$
|
196,102
|
$
|
196,102
|
|||||
|
NOW
accounts
|
175,479
|
175,479
|
178,677
|
178,677
|
|||||||||
|
Money
market accounts
|
286,998
|
286,998
|
223,255
|
223,255
|
|||||||||
|
Savings
accounts
|
205,998
|
205,998
|
212,499
|
212,499
|
|||||||||
|
Time
deposits
|
822,989
|
823,372
|
828,725
|
828,404
|
|||||||||
|
FHLB
advances
|
474,561
|
468,981
|
545,323
|
539,249
|
|||||||||
|
Junior
subordinated debentures
|
22,681
|
20,998
|
22,681
|
21,537
|
|||||||||
|
Other
borrowings
|
14,684
|
14,684
|
9,774
|
9,774
|
|||||||||
(16)
Employee Benefits
Defined
Benefit Pension Plans
The
Corporation’s noncontributory tax-qualified defined benefit pension plan covers
substantially all employees. Benefits are based on an employee’s years of
service and compensation earned during the years of service. The plan is funded
on a current basis, in compliance with the requirements of the
ERISA.
The
Corporation also has non-qualified retirement plans to provide supplemental
retirement benefits to certain employees, as defined in the plans. The
supplemental retirement plans provide eligible participants with an additional
retirement benefit. The
actuarial assumptions used for the supplemental plans are the same as those
used
for the Corporation’s tax-qualified pension plan.
The
non-qualified retirement plans provide for the designation of assets in rabbi
trusts. Securities available for sale designated for this purpose, with the
carrying value of $2.5 million and $2.8 million are included in the
Consolidated Balance Sheets at December 31, 2006 and 2005,
respectively.
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 employer’s postretirement
benefit plan,
measured as the difference between the fair value of plan assets and the
projected benefit obligation, be recognized in its statement of financial
position. 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.
In
addition, SFAS No. 158 requires the measurement of the defined benefit
plan’s assets and obligations as of the employer’s fiscal year end. The
measurement provision of this Statement will be effective for years beginning
after December 15, 2008, with early application encouraged. The Corporation
has not yet adopted the measurement date provisions of this
Statement.
Prior
to
the adoption of the recognition provisions of SFAS No. 158, Washington
Trust 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
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
fair
value of plan assets. Any adjustment was 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. Upon
adoption of the recognition provisions of SFAS No. 158, Washington Trust
recognized the amounts of prior changes in the funded status of its
post-retirement benefit plans through accumulated other comprehensive income
(loss). As a result, the Corporation recognized the following adjustments in
individual line items of its Consolidated Balance Sheet as of December 31,
2006:
|
(Dollars
in thousands)
|
Prior
to Adoption of SFAS No. 158
|
Effect
of Adopting SFAS No. 158
|
As
reported at December 31, 2006
|
|||||||
|
Net
deferred tax asset
|
$
|
4,971
|
$
|
1,741
|
$
|
6,712
|
||||
|
Defined
benefit pension liabilities
|
10,071
|
4,975
|
15,046
|
|||||||
|
Accumulated
other comprehensive loss
|
281
|
3,234
|
3,515
|
|||||||
The
adoption of SFAS No. 158 had no effect on the Corporation’s Consolidated
Statement of Income for the periods presented.
The
following table sets forth the plans’ benefit obligations, fair value of plan
assets and funded status as of December 31, 2006 and 2005.
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
|||||||||||
|
Pension
Plan
|
Retirement
Plans
|
||||||||||||
|
At
December 31,
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Change
in Benefit Obligation:
|
|||||||||||||
|
Benefit
obligation at beginning of period
|
$
|
30,416
|
$
|
25,777
|
$
|
8,628
|
$
|
7,396
|
|||||
|
Service
cost
|
2,067
|
1,871
|
351
|
311
|
|||||||||
|
Interest
cost
|
1,651
|
1,522
|
467
|
436
|
|||||||||
|
Amendments
|
-
|
(552
|
)
|
-
|
(121
|
)
|
|||||||
|
Transfer
of benefit obligation due to legislative change
|
231
|
-
|
(231
|
)
|
-
|
||||||||
|
Actuarial
loss (gain)
|
(1,744
|
)
|
2,708
|
64
|
938
|
||||||||
|
Benefits
paid
|
(774
|
)
|
(805
|
)
|
(335
|
)
|
(332
|
)
|
|||||
|
Administrative
expenses
|
(84
|
)
|
(105
|
)
|
-
|
-
|
|||||||
|
Benefit
obligation at end of period
|
$
|
31,763
|
$
|
30,416
|
$
|
8,944
|
$
|
8,628
|
|||||
|
Change
in Plan Assets:
|
|||||||||||||
|
Fair
value of plan assets at beginning of period
|
$
|
23,223
|
$
|
21,301
|
$
|
-
|
$
|
-
|
|||||
|
Actual
return on plan assets
|
1,996
|
1,532
|
-
|
-
|
|||||||||
|
Employer
contribution
|
1,300
|
1,300
|
335
|
332
|
|||||||||
|
Benefits
paid
|
(774
|
)
|
(805
|
)
|
(335
|
)
|
(332
|
)
|
|||||
|
Administrative
expenses
|
(84
|
)
|
(105
|
)
|
-
|
-
|
|||||||
|
Fair
value of plan assets at end of period
|
$
|
25,661
|
$
|
23,223
|
$
|
-
|
$
|
-
|
|||||
|
Funded
status at end of period
|
$
|
(6,102
|
)
|
$
|
(7,194
|
)
|
$
|
(8,944
|
)
|
$
|
(8,628
|
)
|
|
|
Unrecognized
transition asset
|
-
|
(13
|
)
|
-
|
-
|
||||||||
|
Unrecognized
prior service (benefit) cost
|
-
|
(459
|
)
|
-
|
328
|
||||||||
|
Unrecognized
net actuarial loss
|
-
|
5,790
|
-
|
2,577
|
|||||||||
|
Net
amount recognized
|
$
|
(6,102
|
)
|
$
|
(1,876
|
)
|
$
|
(8,944
|
)
|
$
|
(5,723
|
)
|
|
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
Amounts
recognized in accumulated other comprehensive loss that have not yet been
recognized in net periodic benefit cost consist of:
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
|||||||||||
|
Pension
Plan
|
Retirement
Plans
|
||||||||||||
|
At
December 31,
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Minimum
pension liability
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
591
|
|||||
|
Net
actuarial loss
|
2,344
|
-
|
1,529
|
-
|
|||||||||
|
Prior
service cost (credit)
|
(278
|
)
|
-
|
173
|
-
|
||||||||
|
Net
transition asset
|
(4
|
)
|
-
|
-
|
-
|
||||||||
|
$
|
2,062
|
$
|
-
|
$
|
1,702
|
$
|
591
|
||||||
The
accumulated benefit obligation for the qualified pension plan was
$23.8 million and $22.9 million at December 31, 2006 and 2005,
respectively. The accumulated benefit obligation for the non-qualified
retirement plans amounted to $6.9 million and $6.7 million at
December 31, 2006 and 2005, respectively.
The
following table presents information for pension plans with an accumulated
benefit obligation in excess of plan assets:
|
(Dollars
in thousands)
|
Non-Qualified
|
||||||
|
Retirement
Plans
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Projected
benefit obligation
|
$
|
8,944
|
$
|
8,628
|
|||
|
Accumulated
benefit obligation
|
6,891
|
6,684
|
|||||
|
Fair
value of plan assets
|
-
|
-
|
|||||
The
components of net periodic benefit cost were as follows:
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
|||||||||||||||||
|
Pension
Plan
|
Retirement
Plans
|
||||||||||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
|||||||||||||
|
Service
cost
|
$
|
2,067
|
$
|
1,871
|
$
|
1,592
|
$
|
351
|
$
|
311
|
$
|
292
|
|||||||
|
Interest
cost
|
1,651
|
1,522
|
1,367
|
467
|
436
|
390
|
|||||||||||||
|
Expected
return on plan assets
|
(1,800
|
)
|
(1,686
|
)
|
(1,564
|
)
|
-
|
-
|
-
|
||||||||||
|
Amortization
of transition asset
|
(6
|
)
|
(6
|
)
|
(6
|
)
|
-
|
-
|
-
|
||||||||||
|
Amortization
of prior service cost
|
(33
|
)
|
30
|
30
|
63
|
76
|
76
|
||||||||||||
|
Recognized
net actuarial (gain) loss
|
317
|
123
|
37
|
215
|
131
|
63
|
|||||||||||||
|
Net
periodic benefit cost
|
$
|
2,196
|
$
|
1,854
|
$
|
1,456
|
$
|
1,096
|
$
|
954
|
$
|
821
|
|||||||
The
adjustments to minimum liability recognized in accumulated other comprehensive
income in 2006, 2005 and 2004 were as follows.
|
(Dollars
in thousands)
|
Qualified
|
Non-Qualified
|
|||||||||||||||||
|
Pension
Plan
|
Retirement
Plans
|
||||||||||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
|||||||||||||
|
(Decrease)
increase in minimum liability
|
|||||||||||||||||||
|
in
other comprehensive income
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(61
|
)
|
$
|
297
|
$
|
9
|
||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
The
estimated net transition asset, prior service credit and net loss for the
qualified pension plan that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost during 2007 are
$(6) thousand, $(33) thousand and $187 thousand, respectively.
The estimated prior service cost and net loss for the non-qualified retirement
plans that will be amortized from accumulated other comprehensive loss into
net
periodic benefit cost during 2007 are $63 thousand and $218 thousand,
respectively.
Assumptions:
The
measurement date and weighted-average assumptions used to determine benefit
obligations at December 31, 2006 and 2005 were as follows:
|
Qualified
Pension Plan
|
Non-Qualified
Retirement Plans
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Measurement
date
|
Sept.
30, 2006
|
Sept.
30, 2005
|
Sept.
30, 2006
|
Sept.
30, 2005
|
|||||||||
|
Discount
rate
|
5.90
|
%
|
5.50
|
%
|
5.90
|
%
|
5.50
|
%
|
|||||
|
Rate
of compensation increase
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
|||||
The
measurement date and weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31, 2006, 2005 and 2004 were as
follows:
|
Qualified
Pension Plan
|
Non-Qualified
Retirement Plans
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
||||||||||||||
|
Measurement
date
|
Sept.
30, 2005
|
Sept.
30, 2004
|
Sept.
30, 2003
|
Sept.
30, 2005
|
Sept.
30, 2004
|
Sept.
30, 2003
|
|||||||||||||
|
Discount
rate
|
5.50
|
%
|
6.00
|
%
|
6.10
|
%
|
5.50
|
%
|
6.00
|
%
|
6.10
|
%
|
|||||||
|
Expected
long-term
|
|||||||||||||||||||
|
return
on plan assets
|
8.25
|
%
|
8.25
|
%
|
8.25
|
%
|
-
|
-
|
-
|
||||||||||
|
Rate
of compensation
|
|||||||||||||||||||
|
increase
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
|||||||
The
expected long-term rate of return on plan assets is based on what the
Corporation believes is realistically achievable based on the types of assets
held by the plan and the plan's investment practices. The assumption is updated
at least annually, taking into account the asset allocation, historical
asset return trends on the types of assets held and the current and expected
economic conditions. At September 30, 2005, the measurement date used in
the determination of net periodic benefit cost for 2006, the Corporation
determined that a revision to the assumption was not necessary based upon
expected market performance and the expected long-term rate of return assumption
remained at 8.25%. The discount rate assumption for defined benefit pension
plans is reset annually based on the published yield index for “AA” long-term
corporate bonds, which is considered to be representative of the estimated
future benefit payments.
Plan
Assets:
The
asset
allocations of the qualified pension plan at December 31, 2006 and 2005, by
asset category were as follows:
|
December
31,
|
2006
|
2005
|
|||||
|
Asset
Category:
|
|||||||
|
Equity
securities
|
60.6
|
%
|
59.7
|
%
|
|||
|
Debt
securities
|
36.3
|
%
|
39.0
|
%
|
|||
|
Other
|
3.1
|
%
|
1.3
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
The
assets of the qualified defined benefit pension plan trust (the “Pension Trust”)
are managed to balance the needs of cash flow requirements and long-term rate
of
return. Cash inflow is typically comprised of invested income from portfolio
holdings and Bank contributions, while cash outflow is for the purpose of paying
plan benefits. As early as possible each year, the trustee is advised of the
projected schedule of employer contributions and estimations of benefit
payments. As a general rule, the trustee shall invest the funds so as to produce
sufficient income to cover
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
The
investment philosophy used for the Pension Trust emphasizes consistency of
results over an extended market cycle, while reducing the impact of the
volatility of the security markets upon investment results. The assets of the
Pension Trust should be protected by substantial diversification of investments,
providing exposure to a wide range of quality investment opportunities in
various asset classes.
The
investment objective with respect to the Pension Trust assets is to secure
a
balanced mix of current income with capital appreciation. At any time, the
portfolio will typically be invested in the following ranges: 40% to 60% in
equities; 40% to 60% in fixed income; and 0% to 25% in cash and cash
equivalents. The trustee investment manager will have authorization to invest
within these ranges, making decisions based upon market conditions.
Fixed
income bond investments should be limited to those in the top four categories
used by the major credit rating agencies.
In order
to reduce the volatility of the annual rate of return of the bond portfolio,
attention will be given to the maturity structure of the portfolio in the light
of money market conditions and interest rate forecasts. Generally, the Pension
Trust shall not purchase bonds with a maturity of more than twelve years and
the
maturity schedule will have a laddered character avoiding large concentrations
in any single year. Common stock and equity holdings provide opportunities
for
dividend and capital appreciation returns. Holdings will typically consist
of
large-cap companies. Diversification of equity holdings should be influenced
by
forecasts of economic activity, corporate profits and allocation among different
segments of the economy. The fair value of equity securities of any one issuer
will not be permitted to exceed 10% of the total fair value of equity holdings
of the Pension Trust. Investments in publicly traded real estate investment
trust securities and low-risk derivatives securities such as callable
securities, floating rate notes, mortgage backed securities and treasury
inflation protected securities, are permitted.
Cash
Flows:
Contributions
The
Internal Revenue Code permits flexibility in plan contributions so that normally
a range of contributions is possible. The Corporation’s current funding policy
has been generally to contribute the minimum required contribution and
additional amounts up to the maximum deductible contribution. The Corporation
expects to contribute $1.3 million to the qualified pension plan in 2007.
In addition, the Corporation expects to contribute $369 thousand in benefit
payments to the non-qualified retirement plans in 2007.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as follows:
|
(Dollars
in thousands)
|
Qualified
Pension
Plan
|
Non-Qualified
Plans
|
|||||
|
2007
|
$
|
892
|
$
|
369
|
|||
|
2008
|
926
|
415
|
|||||
|
2009
|
945
|
413
|
|||||
|
2010
|
1,130
|
491
|
|||||
|
2011
|
1,287
|
664
|
|||||
|
Years
2012 - 2016
|
9,463
|
3,922
|
|||||
401(k)
Plan
The
Corporation’s 401(k) Plan provides a specified match of employee contributions
for substantially all employees. Total employer matching contributions under
this plan amounted to $647 thousand, $528 thousand and
$504 thousand in 2006, 2005 and 2004, respectively.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
Other
Incentive Plans
The
Corporation maintains several non-qualified incentive compensation plans.
Substantially all employees participate in one of the incentive compensation
plans. Incentive plans provide for annual or more frequent payments based on
a
combination of individual performance targets and the achievement of target
levels of net income, earnings per share and return on equity, or for certain
employees, solely on the achievement of individual performance targets. Total
incentive based compensation amounted to $7.1 million, $4.9 million
and $3.8 million in 2006, 2005 and 2004, respectively. In general, the
terms of incentive plans are subject to annual renewal and may be terminated
at
any time by the Board of Directors.
Deferred
Compensation Plan
The
Nonqualified Deferred Compensation Plan provides supplemental retirement and
tax
benefits to directors and certain officers. The plan is funded primarily through
pre-tax contributions made by the participants. The assets and liabilities
of
the Deferred Compensation Plan are recorded at fair value in the Corporation’s
Consolidated Balance Sheets. The participants in the plan bear the risk of
market fluctuations of the underlying assets. The accrued liability related
to
this plan amounted to $2.8 million and $2.2 million at
December 31, 2006 and 2005, respectively, and is included in other
liabilities on the accompanying Consolidated Balance Sheets. The corresponding
invested assets are reported in other assets.
(17)
Share-Based Compensation Arrangements
Washington
Trust has three share-based compensation plans, which are described below.
Effective January 1, 2006, the fair value recognition provisions of SFAS
No. 123R, “Share-Based Payment”, were adopted on a modified prospective
basis. Prior to this date, the provisions of APB Opinion No. 25 and related
interpretations were applied for option grant accounting.
In
the
Corporation’s consolidated financial statements for the years ended
December 31, 2005 and 2004, the following pro forma net income and
earnings per share information was disclosed in accordance with SFAS
No. 123 and SFAS No. 148:
|
(Dollars
in thousands, except per share amounts)
|
||||||||||
|
Years
ended December 31,
|
2005
|
2004
|
||||||||
|
Net
income
|
As
reported
|
$
|
23,024
|
$
|
20,829
|
|||||
|
Less
total share-based compensation determined under
|
||||||||||
|
the
fair value method for all awards, net of tax
|
(1,586
|
)
|
(776
|
)
|
||||||
|
Pro
forma net income
|
Pro
forma
|
21,438
|
$
|
20,053
|
||||||
|
Basic
earnings per share
|
As
reported
|
$
|
1.73
|
$
|
1.57
|
|||||
|
Pro
forma
|
$
|
1.61
|
$
|
1.52
|
||||||
|
Diluted
earnings per share
|
As
reported
|
$
|
1.69
|
$
|
1.54
|
|||||
|
Pro
forma
|
$
|
1.57
|
$
|
1.48
|
||||||
|
Weighted
average fair value
|
$
|
7.30
|
$
|
8.95
|
||||||
|
Expected
life
|
4.8
years
|
6.3
years
|
||||||||
|
Risk-free
interest rate
|
4.13
|
%
|
3.97
|
%
|
||||||
|
Expected
volatility
|
33.0
|
%
|
35.4
|
%
|
||||||
|
Expected
dividend yield
|
2.7
|
%
|
2.8
|
%
|
||||||
The
Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003 Plan”), which is
shareholder approved, permits the granting of share options and other equity
incentives to officers, employees, directors, and other key persons. Up to
600,000 shares of the Bancorp’s common stock may be used from authorized but
unissued shares, treasury stock, shares reacquired by the Corporation, or shares
available from expired or terminated awards. No more than 200,000 shares may
be
issued in the form of awards other than share options or stock appreciation
rights. Share options are
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
designated
as either non-qualified or incentive share options. Incentive share option
awards may be granted at any time until February 20, 2013.
The
Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which is
shareholder approved, permits the granting of share options and other equity
incentives to key employees, directors, advisors, and consultants. Up to
1,012,500 shares of the Bancorp’s common stock may be used from authorized but
unissued shares, treasury stock, shares reacquired by the Corporation, or shares
available from expired or terminated awards. Share options are designated as
either non-qualified or incentive share options. Incentive share option awards
may be granted at any time until April 29, 2007.
The
Amended and Restated 1988 Stock Option Plan (the “1988 Plan”), which was
shareholder approved, provided for the granting of share options to directors,
officers and key employees. The 1988 Plan permitted share options to be granted
at any time until December 31, 1997. The 1988 Plan provided for shares of
the Bancorp’s common stock to be used from authorized but unissued shares,
treasury stock, or shares available from expired awards. Share options were
designated as either non-qualified or incentive share options.
The
1988
Plan, the 1997 Plan and the 2003 Plan (collectively, “the Plans”) permit options
to be granted with stock appreciation rights ("SARs"), however, no share options
have been granted with SARs. Pursuant to the Plans, the exercise price of each
share option may not be less than fair market value of the Bancorp’s common
stock on the date of the grant. In general, the share option price is payable
in
cash, by the delivery of shares of common stock already owned by the grantee,
or
a combination thereof. Nonvested share units and shares are valued at the fair
market value of the Bancorp’s common stock as of the award date. No option,
share unit or share awards made prior to January 1, 2003 had requisite
vesting periods remaining as of January 1, 2006. Share options awarded
during 2003, 2004 and 2005 were granted with a variety of vesting terms
including immediate vesting, graded vesting over three-year periods and cliff
vesting over three-year periods. Nonvested share units or shares awarded during
2004, 2005 and 2006 were granted with vesting terms ranging from one to five
years. Share option and share awards provide for accelerated vesting if there
is
a change in control (as defined in the Plans).
Amounts
recognized in the consolidated financial statements for share options, nonvested
share units and nonvested share awards are as follows:
|
(Dollars
in thousands)
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Share-based
compensation expense
|
$
|
694
|
$
|
372
|
$
|
135
|
||||
|
Related
income tax benefit
|
229
|
130
|
47
|
|||||||
A
summary
of share option activity under the Plans as of December 31, 2006, and
changes during the year ended December 31, 2006, is presented
below:
|
(Dollars
in thousands)
|
Number
|
Weighted
|
Weighted
Average
|
||||||||||
|
of
|
Average
|
Remaining
|
Aggregate
|
||||||||||
|
Share
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||
|
Options
|
Price
|
Term
(Years)
|
Value
|
||||||||||
|
Outstanding
at January 1, 2006
|
1,198,111
|
$
|
20.31
|
-
|
-
|
||||||||
|
Granted
|
-
|
-
|
-
|
-
|
|||||||||
|
Exercised
|
102,152
|
15.37
|
-
|
-
|
|||||||||
|
Forfeited
or expired
|
5,583
|
27.13
|
-
|
-
|
|||||||||
|
Outstanding
at December 31, 2006
|
1,090,376
|
$
|
20.74
|
5.4
years
|
$
|
7,830
|
|||||||
|
Exercisable
at December 31, 2006
|
1,062,042
|
$
|
20.56
|
5.4
years
|
$
|
7,820
|
|||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December
31, 2006 and 2005
|
The
total
intrinsic value, which is the amount by which the fair value of the underlying
stock exceeds the exercise price of an option on the exercise date, of share
options exercised during the year ended December 31, 2006 was
$1.2 million.
A
summary
of the status of Washington Trust’s nonvested shares as of December 31,
2006, and changes during the year ended December 31, 2006, is presented
below:
|
Weighted
|
|||||||
|
Number
|
Average
|
||||||
|
of
|
Grant
Date
|
||||||
|
Shares
|
Fair
Value
|
||||||
|
Nonvested
at January 1, 2006
|
55,850
|
$
|
24.77
|
||||
|
Granted
|
17,650
|
26.59
|
|||||
|
Vested
|
-
|
-
|
|||||
|
Forfeited
|
(450
|
)
|
23.61
|
||||
|
Nonvested
at December 31, 2006
|
73,050
|
$
|
25.22
|
||||
As
of
December 31, 2006, there was $825 thousand of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
(including share option and nonvested share awards) granted under the Plans.
That cost is expected to be recognized over a weighted average period of
2.4 years.
(18)
Business Segments
Washington
Trust segregates financial information in assessing its results among two
operating segments: Commercial Banking and Wealth Management Services. The
amounts in the Corporate column include activity not related to the segments,
such as the investment securities portfolio, wholesale funding activities and
administrative units. The Corporate column is not considered to be an operating
segment. The methodologies and organizational hierarchies that define the
business segments are periodically reviewed and revised. Results may be
restated, when necessary, to reflect changes in organizational structure or
allocation methodology. The following table presents the statement of operations
and total assets for Washington Trust’s reportable segments.
|
Year
ended December 31, 2006
|
Wealth
|
||||||||||||
|
Commercial
|
Management
|
Consolidated
|
|||||||||||
|
(Dollars
in thousands)
|
Banking
|
Services
|
Corporate
|
Total
|
|||||||||
|
Net
interest income
|
$
|
53,561
|
$
|
(106
|
)
|
$
|
8,019
|
$
|
61,474
|
||||
|
Noninterest
income
|
13,904
|
26,380
|
1,899
|
42,183
|
|||||||||
|
Total
income
|
67,465
|
26,274
|
9,918
|
103,657
|
|||||||||
|
Provision
for loan losses
|
1,200
|
-
|
-
|
1,200
|
|||||||||
|
Depreciation
and amortization expense
|
2,184
|
1,661
|
743
|
4,588
|
|||||||||
|
Other
noninterest expenses
|
35,802
|
17,337
|
7,608
|
60,747
|
|||||||||
|
Total
noninterest expenses
|
39,186
|
18,998
|
8,351
|
66,535
|
|||||||||
|
Income
before income taxes
|
28,279
|
7,276
|
1,567
|
37,122
|
|||||||||
|
Income
tax expense (benefit)
|
9,885
|
2,827
|
(621
|
)
|
12,091
|
||||||||
|
Net
income
|
$
|
18,394
|
$
|
4,449
|
$
|
2,188
|
$
|
25,031
|
|||||
|
Total
assets at period end
|
$
|
1,553,351
|
$
|
40,125
|
$
|
805,689
|
$
|
2,399,165
|
|||||
|
Expenditures
for long-lived assets
|
2,745
|
466
|
360
|
3,571
|
|||||||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
|
Year
ended December 31, 2005
|
Wealth
|
||||||||||||
|
Commercial
|
Management
|
Consolidated
|
|||||||||||
|
(Dollars
in thousands)
|
Banking
|
Services
|
Corporate
|
Total
|
|||||||||
|
Net
interest income
|
$
|
54,088
|
$
|
(60
|
)
|
$
|
6,628
|
$
|
60,656
|
||||
|
Noninterest
income
|
12,744
|
16,662
|
1,540
|
30,946
|
|||||||||
|
Total
income
|
66,832
|
16,602
|
8,168
|
91,602
|
|||||||||
|
Provision
for loan losses
|
1,200
|
-
|
-
|
1,200
|
|||||||||
|
Depreciation
and amortization expense
|
2,770
|
879
|
223
|
3,872
|
|||||||||
|
Other
noninterest expenses
|
33,679
|
11,121
|
7,721
|
52,521
|
|||||||||
|
Total
noninterest expenses
|
37,649
|
12,000
|
7,944
|
57,593
|
|||||||||
|
Income
before income taxes
|
29,183
|
4,602
|
224
|
34,009
|
|||||||||
|
Income
tax expense (benefit)
|
10,188
|
1,721
|
(924
|
)
|
10,985
|
||||||||
|
Net
income
|
$
|
18,995
|
$
|
2,881
|
$
|
1,148
|
$
|
23,024
|
|||||
|
Total
assets at period end
|
$
|
1,489,154
|
$
|
32,201
|
$
|
880,648
|
$
|
2,402,003
|
|||||
|
Expenditures
for long-lived assets
|
1,920
|
238
|
285
|
2,443
|
|||||||||
|
Year
ended December 31, 2004
|
Wealth
|
||||||||||||
|
Commercial
|
Management
|
Consolidated
|
|||||||||||
|
(Dollars
in thousands)
|
Banking
|
Services
|
Corporate
|
Total
|
|||||||||
|
Net
interest income
|
$
|
49,626
|
$
|
(62
|
)
|
$
|
4,877
|
$
|
54,441
|
||||
|
Noninterest
income
|
11,920
|
13,048
|
1,937
|
26,905
|
|||||||||
|
Total
income
|
61,546
|
12,986
|
6,814
|
81,346
|
|||||||||
|
Provision
for loan losses
|
610
|
-
|
-
|
610
|
|||||||||
|
Depreciation
and amortization expense
|
3,081
|
417
|
270
|
3,768
|
|||||||||
|
Other
noninterest expenses
|
31,312
|
8,415
|
6,878
|
46,605
|
|||||||||
|
Total
noninterest expenses
|
35,003
|
8,832
|
7,148
|
50,983
|
|||||||||
|
Income
(loss) before income taxes
|
26,543
|
4,154
|
(334
|
)
|
30,363
|
||||||||
|
Income
tax expense (benefit)
|
9,253
|
1,463
|
(1,182
|
)
|
9,534
|
||||||||
|
Net
income
|
$
|
17,290
|
$
|
2,691
|
$
|
848
|
$
|
20,829
|
|||||
|
Total
assets at period end
|
$
|
1,323,870
|
$
|
4,566
|
$
|
979,384
|
$
|
2,307,820
|
|||||
|
Expenditures
for long-lived assets
|
2,095
|
166
|
170
|
2,431
|
|||||||||
Management
uses certain methodologies to allocate income and expenses to the business
lines. A funds transfer pricing methodology is used to assign interest income
and interest expense to each interest-earning asset and interest-bearing
liability on a matched maturity funding basis. Certain indirect expenses are
allocated to segments. These include support
unit expenses such as technology and processing operations and other support
functions. Taxes are allocated to each segment based on the effective rate
for
the period shown.
Commercial
Banking
The
Commercial Banking segment includes commercial, commercial real estate,
residential and consumer lending activities; mortgage banking, secondary market
and loan servicing activities; deposit generation; merchant credit card
services; cash management activities; and direct banking activities, which
include the operation of ATMs, telephone and internet banking services and
customer support and sales.
Wealth
Management Services
Wealth
Management Services includes asset management services provided for individuals
and institutions; personal trust services, including services as executor,
trustee, administrator, custodian and guardian; corporate trust services,
including services as trustee for pension and profit sharing plans; and other
financial planning and advisory services.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and 2005
|
The
increase in revenues and expenses for this segment in 2006 and 2005 is primarily
attributable to the August 2005 acquisition of Weston Financial.
Corporate
Corporate
includes the Treasury Unit, which is responsible for managing the wholesale
investment portfolio and wholesale funding needs. It also includes income from
bank-owned life insurance as well as administrative and executive expenses
not
allocated to the business lines and the residual impact of methodology
allocations such as funds transfer pricing offsets.
(19)
Earnings per Share
|
(Dollars
in thousands, except per share amounts)
|
|||||||||||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
||||||||||||||
|
Net
income
|
$
|
25,031
|
$
|
25,031
|
$
|
23,024
|
$
|
23,024
|
$
|
20,829
|
$
|
20,829
|
|||||||
|
Share
amounts, in thousands:
|
|||||||||||||||||||
|
Average
outstanding
|
13,424.1
|
13,424.1
|
13,315.2
|
13,315.2
|
13,227.8
|
13,227.8
|
|||||||||||||
|
Common
stock equivalents
|
-
|
299.1
|
-
|
311.5
|
-
|
314.9
|
|||||||||||||
|
Weighted
average outstanding
|
13,424.1
|
13,723.2
|
13,315.2
|
13,626.7
|
13,227.8
|
13,542.7
|
|||||||||||||
|
Earnings
per share
|
$
|
1.86
|
$
|
1.82
|
$
|
1.73
|
$
|
1.69
|
$
|
1.57
|
$
|
1.54
|
|||||||
(20)
Litigation
The
Corporation is involved in various claims and legal proceedings arising out
of
the ordinary course of business. Management is of the opinion, based on its
review with counsel of the development of such matters to date, that the
ultimate disposition of such matters will not materially affect the consolidated
financial position or results of operations of the Corporation.
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
(21)
Parent Company Financial Statements
The
following are parent company only financial statements of Washington Trust
Bancorp, Inc. reflecting the investment in the Bank on the equity basis of
accounting. The Statements of Changes in Shareholders’ Equity for the parent
company only are identical to the Consolidated Statements of Changes in
Shareholders’ Equity and are therefore not presented.
|
Balance
Sheets
|
(Dollars
in thousands)
|
||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Assets:
|
|||||||
|
Cash
on deposit with bank subsidiary
|
$
|
575
|
$
|
1,617
|
|||
|
Investment
in subsidiaries at equity value
|
203,339
|
185,340
|
|||||
|
Dividends
receivable from subsidiaries
|
4,800
|
2,100
|
|||||
|
Other
assets
|
63
|
59
|
|||||
|
Total
assets
|
$
|
208,777
|
$
|
189,116
|
|||
|
Liabilities:
|
|||||||
|
Junior
subordinated debentures
|
$
|
22,681
|
$
|
22,681
|
|||
|
Deferred
acquisition obligations
|
10,372
|
5,468
|
|||||
|
Dividends
payable
|
2,556
|
2,408
|
|||||
|
Accrued
expenses and other liabilities
|
112
|
113
|
|||||
|
Total
liabilities
|
35,721
|
30,670
|
|||||
|
Shareholders’
Equity:
|
|||||||
|
Common
stock of $.0625 par value; authorized 30,000,000 shares in
2006
|
|||||||
|
and
2005; issued 13,492,110 shares in 2006 and 13,372,295 shares in
2005
|
843
|
836
|
|||||
|
Paid-in
capital
|
35,893
|
32,778
|
|||||
|
Retained
earnings
|
141,548
|
126,735
|
|||||
|
Accumulated
other comprehensive loss
|
(3,515
|
)
|
(1,653
|
)
|
|||
|
Treasury
stock, at cost; 62,432 shares in 2006 and 10,519 shares in
2005
|
(1,713
|
)
|
(250
|
)
|
|||
|
Total
shareholders’ equity
|
173,056
|
158,446
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
208,777
|
$
|
189,116
|
|||
|
Statements
of Income
|
(Dollars
in thousands)
|
|||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Income:
|
||||||||||
|
Dividends
from subsidiaries
|
$
|
11,801
|
$
|
8,530
|
$
|
9,000
|
||||
|
Expenses:
|
||||||||||
|
Interest
on junior subordinated debentures
|
1,352
|
458
|
-
|
|||||||
|
Interest
on deferred acquisition obligations
|
308
|
82
|
-
|
|||||||
|
Legal
and professional fees
|
-
|
35
|
-
|
|||||||
|
Other
|
1
|
6
|
-
|
|||||||
|
Total
expenses
|
1,661
|
581
|
-
|
|||||||
|
Income
before income taxes
|
10,140
|
7,949
|
9,000
|
|||||||
|
Income
tax benefit
|
567
|
198
|
-
|
|||||||
|
Income
before equity in undistributed earnings of subsidiaries
|
10,707
|
8,147
|
9,000
|
|||||||
|
Equity
in undistributed earnings of subsidiaries
|
14,324
|
14,877
|
11,829
|
|||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
$
|
20,829
|
||||
|
WASHINGTON
TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December
31, 2006 and
2005
|
|
Statements
of Cash Flows
|
(Dollars
in thousands)
|
|||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flow from operating activities:
|
||||||||||
|
Net
income
|
$
|
25,031
|
$
|
23,024
|
$
|
20,829
|
||||
|
Adjustments
to reconcile net income
|
||||||||||
|
to
net cash provided by operating activities:
|
||||||||||
|
Equity
effect of undistributed earnings of subsidiary
|
(14,324
|
)
|
(14,877
|
)
|
(11,829
|
)
|
||||
|
(Increase)
decrease in dividend receivable
|
(2,700
|
)
|
150
|
(450
|
)
|
|||||
|
Increase
in other assets
|
(4
|
)
|
(59
|
)
|
-
|
|||||
|
(Decrease)
increase in accrued expenses and other liabilities
|
(1
|
)
|
113
|
-
|
||||||
|
Other,
net
|
61
|
(336
|
)
|
(539
|
)
|
|||||
|
Net
cash provided by operating activities
|
8,063
|
8,015
|
8,011
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Equity
investment in capital trust
|
(681
|
)
|
||||||||
|
Cash
paid for acquisition
|
-
|
(22,268
|
)
|
-
|
||||||
|
Net
cash used in investing activities
|
-
|
(22,949
|
)
|
-
|
||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Purchase
of treasury stock
|
(1,547
|
)
|
(33
|
)
|
(126
|
)
|
||||
|
Proceeds
from the issuance of common stock under
|
||||||||||
|
dividend
reinvestment plan
|
1,216
|
606
|
-
|
|||||||
|
Proceeds
from the exercise of stock options
|
912
|
367
|
561
|
|||||||
|
Tax
benefit from stock option exercises
|
384
|
451
|
569
|
|||||||
|
Proceeds
from the issuance of junior subordinated debentures
|
-
|
22,681
|
-
|
|||||||
|
Cash
dividends paid
|
(10,070
|
)
|
(9,452
|
)
|
(8,863
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(9,105
|
)
|
14,620
|
(7,859
|
)
|
|||||
|
Net
(decrease) increase in cash
|
(1,042
|
)
|
(314
|
)
|
152
|
|||||
|
Cash
at beginning of year
|
1,617
|
1,931
|
1,779
|
|||||||
|
Cash
at end of year
|
$
|
575
|
$
|
1,617
|
$
|
1,931
|
||||
None.
As
required by Rule 13a-15 under the Exchange Act, the Corporation carried out
an evaluation under the supervision and with the participation of the
Corporation’s management, including the Corporation’s Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of
the Corporation’s disclosure controls and procedures as of the end of the period
ended December 31, 2006. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Corporation’s disclosure
controls and procedures are adequate and designed to ensure that information
required to be disclosed by the Corporation in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. The Corporation will
continue to review and document its disclosure controls and procedures and
consider such changes in future evaluations of the effectiveness of such
controls and procedures, as it deems appropriate. There has been no change
in
our internal control over financial reporting during the period ended
December 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
None.
Required
information regarding directors is presented under the caption “Nominee and
Director Information” in the Bancorp’s Proxy Statement dated March 15, 2007
prepared for the Annual Meeting of Shareholders to be held April 24, 2007,
which is incorporated herein by reference.
Required
information regarding the Corporation’s audit committee and audit committee
financial experts is included under the caption “Board of Directors and
Committees - Audit Committee” in the Bancorp’s Proxy Statement dated
March 15, 2007 prepared for the Annual Meeting of Shareholders to be held
April 24, 2007, which is incorporated herein by reference.
Required
information regarding executive officers of the Corporation is included in
Part
I of this Annual Report under the caption “Executive Officers of the
Registrant.”
Information
required with respect to compliance with Section 16(a) of the Exchange Act
appears under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Bancorp’s Proxy Statement dated March 15, 2007 prepared
for the Annual Meeting of Shareholders to be held April 24, 2007, which is
incorporated herein by reference.
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Corporation’s Board of Directors.
The
Corporation maintains a code of ethics that applies to all of the Corporation’s
directors, officers and employees. This code of ethics is available on the
Corporation’s website at www.washtrust.com, under the heading Investor
Relations. The Corporation intends to disclose any amendments to, or waivers
from, our code of ethics that are required to be publicly disclosed pursuant
to
the rules of the SEC and the NASDAQ Global Market by filing such amendment
or
waiver with the SEC and by posting it on our website.
The
information required by this Item appears under the captions “Compensation
Discussion and Analysis,” “Compensation of Directors,” “Executive Compensation,”
“Change of Control Agreements,” “Compensation Committee Interlocks and Insider
Participation” and “Compensation Committee Report” in the Bancorp’s Proxy
Statement dated March 15, 2007 prepared for the Annual Meeting of
Shareholders to be held April 24, 2007, which are incorporated herein by
reference.
Required
information regarding security ownership of certain beneficial owners and
management appears under the caption “Nominee and Director Information” in the
Bancorp’s Proxy Statement dated March 15, 2007 prepared for the Annual
Meeting of Shareholders to be held April 24, 2007, which is incorporated
herein by reference.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2006 regarding
shares of common stock of the Bancorp that may be issued under our existing
equity compensation plans, including the 1988 Plan, the 1997 Plan, the 2003
Plan
and the Nonqualified Deferred Compensation Plan (the “Deferred Compensation
Plan”).
|
Equity
Compensation Plan Information
|
||||||||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights (1)
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plan (excluding securities referenced in column
(a))
|
|||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plans
approved
by security holders (2)
|
1,158,614
|
(3)
|
$
|
20.74
|
(7)
|
221,646
|
(5)
|
|||
|
Equity
compensation plans not
approved
by security holders (6)
|
20,431
|
N/A
|
(7)
|
4,569
|
||||||
|
Total
|
1,179,045
|
$
|
20.74
(4) (7
|
)
|
226,215
|
|||||
| (1) |
Does
not include any nonvested shares as such shares are already reflected
in
the Bancorp’s outstanding shares.
|
| (2) |
Consists
of the 1988 Plan, the 1997 Plan and the 2003
Plan.
|
| (3) |
Includes
51,988 nonvested share units outstanding under the 1997 Plan and
16,250
nonvested share units outstanding under the 2003
Plan.
|
| (4) |
Does
not include the effect of the nonvested share units awarded under
the 1997
Plan and the 2003 Plan because these units do not have an exercise
price.
|
| (5) |
Includes
up to 201,050 securities that may be issued in the form of nonvested
shares.
|
| (6) |
Consists
of the Deferred Compensation Plan, which is described
below.
|
| (7) |
Does
not include information about the phantom stock units outstanding
under
the Deferred Compensation Plan as such units do not have any exercise
price.
|
The
Deferred Compensation Plan
The
Deferred Compensation Plan was established as of January 1, 1999. The
Deferred Compensation Plan has not been approved by our
shareholders.
The
Deferred Compensation Plan allows our directors and officers to defer a portion
of their compensation. The deferred compensation is contributed to a rabbi
trust. The trustee of the rabbi trust invests the assets of the trust in shares
of selected mutual funds as well as shares of the Bancorp’s common stock
pursuant to the directions of the plan participants. All shares of the Bancorp’s
common stock are purchased in the open market.
The
Deferred Compensation Plan was included as part of Exhibit 4.4 to the Bancorp’s
Form S-8 Registration Statement (File No. 333-72277) filed with the SEC on
February 12, 1999.
The
information required by this Item is incorporated herein by reference to the
captions “Indebtedness and Other Transactions,” “Policies and Procedures for
Related Party Transactions” and “Board of Directors and Committees - Director
Independence” in the Bancorp’s Proxy Statement dated March 15, 2007
prepared for the Annual Meeting of Shareholders to be held April 24,
2007.
The
information required by this Item is incorporated herein by reference to the
caption “Independent Auditors” in the Bancorp’s Proxy Statement dated
March 15, 2007 prepared for the Annual Meeting of Shareholders to be held
April 24, 2007.
|
Exhibit
Number
|
||
|
(a)
|
1.
|
Financial
Statements. The financial statements of the Corporation required
in
response to this Item are listed in response to Part II, Item 8 of
this
Annual Report on Form 10-K
|
|
2.
|
Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-X and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. | |
|
3.
|
Exhibits. The following exhibits are included as part of this Form 10-K. | |
|
Exhibit
Number
|
|
|
2.1
|
Stock
Purchase Agreement, dated March 18, 2005, by and between Washington
Trust
Bancorp, Inc., Weston Financial Group, Inc., and the shareholders
of
Weston Financial Group, Inc.
-
Filed as Exhibit No. 10.1 to the Registrant’s Current Report on Form
8-K (File
No. 000-13091), as with the Securities and Exchange Commission
on
March 22, 2005. (1)
|
|
3.1
|
Restated
Articles of Incorporation of the Registrant - Filed
as Exhibit 3.a to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2000.
(1)
|
|
3.2
|
Amendment
to Restated Articles of Incorporation -
Filed as Exhibit 3.b to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. (1)
|
|
3.3
|
Amended
and Restated By-Laws of the Registrant -
Filed
as Exhibit 3.c to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. (1)
|
|
4.1
|
Transfer
Agency and Registrar Services Agreement, between Registrant and American
Stock Transfer & Trust Company, dated February 15, 2006
-
Filed as Exhibit 4.1 on the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2006. (1)
|
|
4.2
|
Agreement
of Substitution and Amendment of Amended and Restated Rights Agreement,
between Registrant and American Stock Transfer & Trust Company, dated
February 15, 2006 - Filed as Exhibit 4.2 on the Registrant’s
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2006. (1)
|
|
4.3
|
Shareholder
Rights Agreement, dated as of August 17, 2006, between Washington
Trust
Bancorp, Inc. and American Stock Transfer & Trust Company, as Rights
Agent - Filed as Exhibit 4.1 to the Registrant’s Current Report on Form
8-K dated August 17, 2006. (1)
|
|
10.1
|
Supplemental
Pension Benefit and Profit Sharing Plan - Filed
as Exhibit 10.a to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2000.
(1)
(2)
|
|
10.2
|
Annual
Performance Plan - Filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
January 20, 2005. (1)
(2)
|
|
10.3
|
Amended
and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit
4.4 to the Registrant’s Registration Statement on Form S-8 (File No.
333-72277) filed with the Commission on February 12, 1999.
(1)
(2)
|
|
10.4
|
Amended and Restated 1988 Stock Option Plan - Filed as Exhibit 10.d to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2000. (1) (2) |
|
10.5
|
Vote
of the Board of Directors of the Registrant, which constitutes the
1996
Directors’ Stock Plan -
Filed as Exhibit 10.e to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. (1)
(2)
|
|
10.6
|
The
Registrant’s 1997 Equity Incentive Plan -
Filed as Exhibit 10.f to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. (1)
(2)
|
|
10.7
|
Amendment
to the
Registrant’s 1997 Equity Incentive Plan
-
Filed
as Exhibit 10.b to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-13091) for the quarterly period ended June 30, 2000.
(1)
(2)
|
|
10.8
|
Amendment
to the
Registrant’s Supplemental
Pension Benefit and Profit Sharing Plan - Filed
as Exhibit 10.j to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2000.
(1)
(2)
|
|
10.9
|
July 2000
Amendment to the
Registrant’s Supplemental
Pension Benefit and Profit Sharing Plan - Filed
as Exhibit 10.k to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2000.
(1)
(2)
|
|
10.10
|
Amendment
to the
Registrant’s
Nonqualified Deferred Compensation Plan - Filed
as Exhibit 10.l to the Registrant’s Annual Report on Form 10-K (File
No. 000-13091) for the fiscal year ended December 31, 2000.
(1)
(2)
|
|
10.11
|
Supplemental
Executive Retirement Plan - Filed
as Exhibit 10.b to the Registrant’s Quarterly Report on Form 10-Q (File
No. 000-13091) for the quarterly period ended September 30,
2001. (1)
(2)
|
|
10.12
|
Amendment
to the
Registrant’s Trust Agreement Under The Washington Trust Company’s
Supplemental
Pension Benefit and Profit Sharing Plan - Filed
as Exhibit 10.b to the Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2002. (1)
(2)
|
|
10.13
|
2003
Stock Incentive Plan - Filed as Exhibit 10 to the Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2003.
(1)
(2)
|
|
10.14
|
First
Amendment to 2003 Stock Incentive Plan -
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
December 16, 2004. (1)
(2)
|
|
10.15
|
Amendment
to the
Registrant’s
Nonqualified Deferred Compensation Plan - Filed
as Exhibit 10.t to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2004. (2)
|
|
10.16
|
Form
of Executive Severance Agreement -
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
November 23, 2005. (1)
(2)
|
|
10.17
|
Form
of Restricted Stock Units Certificate under the Washington Trust
Bancorp,
Inc. 1997 Equity Incentive Plan, as amended (employees) - Filed as
exhibit
10.1 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on
June 17, 2005. (1)
|
|
10.18
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees)
-
Filed
as Exhibit No. 10.2 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.19
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 1997 Equity Incentive Plan, as amended (members of
the Board
of Directors) -
Filed
as Exhibit No. 10.3 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.20
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 1997 Equity Incentive Plan, as amended (employees)
- Filed
as Exhibit No. 10.4 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.21
|
Form
of Incentive Stock Option Certificate under the Washington Trust
Bancorp,
Inc. 1997 Equity Incentive Plan, as amended - Filed as Exhibit
No. 10.5 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.22
|
Form
of Restricted Stock Units Certificate under the Washington Trust
Bancorp,
Inc. 1997 Equity Incentive Plan, as amended (members of the Board
of
Directors) - Filed as Exhibit No. 10.6 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on June 17, 2005. (1)
|
|
10.23
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp,
Inc.
1997 Equity Incentive Plan, as amended - Filed as Exhibit No. 10.7 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on June 17, 2005.
(1)
|
|
10.24
|
Form
of Nonqualified Stock Option Certificate under the Washington Trust
Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the
Board
of Directors) - Filed as Exhibit No. 10.8 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on June 17, 2005. (1)
|
|
10.25
|
Form
of Incentive Stock Option Certificate under the Washington Trust
Bancorp,
Inc. 2003 Stock Incentive Plan, as amended - Filed as Exhibit
No. 10.9 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on June 17, 2005. (1)
|
|
10.26
|
Compensatory
agreement with Galan G. Daukas, dated July 28, 2005 - Filed as Exhibit
10.1 to the Bancorp’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2005. (1)
(2)
|
|
10.27
|
Amended
and Restated Declaration of Trust of WT Capital Trust I dated
August 29, 2005, by and among Wilmington Trust Company, as Delaware
Trustee and Institutional Trustee, Washington Trust Bancorp, Inc.,
as
Sponsor, and the Administrators listed therein - Filed as exhibit
10.1 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on September 1,
2005.
(1)
|
|
10.28
|
Indenture
dated as of August 29, 2005, between Washington Trust Bancorp, Inc.,
as Issuer, and Wilmington Trust Company, as Trustee - Filed as exhibit
10.2 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on September 1, 2005. (1)
|
|
10.29
|
Guaranty
Agreement dated August 29, 2005, by and between Washington Trust
Bancorp, Inc. and Wilmington Trust Company - Filed as exhibit 10.3
to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.30
|
Certificate
Evidencing Fixed/Floating Rate Capital Securities of WT Capital Trust
I
dated August 29, 2005 - Filed as exhibit 10.4 to the Bancorp’s Current
Report on Form 8-K (File No. 000-13091), as filed with the Securities
and Exchange Commission on September 1, 2005. (1)
|
|
10.31
|
Fixed/Floating
Rate Junior Subordinated Deferrable Interest Debenture of Washington
Trust
Bancorp, Inc. dated August 29, 2005 - Filed as exhibit 10.5 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.32
|
Amended
and Restated Declaration of Trust of WT Capital Trust II dated
August 29, 2005, by and among Wilmington Trust Company, as Delaware
Trustee and Institutional Trustee, Washington Trust Bancorp, Inc.,
as
Sponsor, and the Administrators listed therein - Filed as exhibit
10.6 to
the Bancorp’s Current Report on Form 8-K (File No. 000-13091), as
filed with the Securities and Exchange Commission on September 1,
2005.
(1)
|
|
10.33
|
Indenture
dated as of August 29, 2005, between Washington Trust Bancorp, Inc.,
as Issuer, and Wilmington Trust Company, as Trustee - Filed as exhibit
10.7 to the Bancorp’s Current Report on Form 8-K (File
No. 000-13091), as filed with the Securities and Exchange Commission
on September 1, 2005. (1)
|
|
10.34
|
Guaranty
Agreement dated August 29, 2005, by and between Washington Trust
Bancorp, Inc. and Wilmington Trust Company - Filed as exhibit 10.8
to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.35
|
Certificate
Evidencing Capital Securities of WT Capital Trust II (Number of Capital
Securities - 10,000) dated August 29, 2005 - Filed as exhibit 10.9
to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.36
|
Certificate
Evidencing Capital Securities of WT Capital Trust II (Number of Capital
Securities - 4,000) dated August 29, 2005 - Filed as exhibit 10.10
to the
Bancorp’s Current Report on Form 8-K (File No. 0-13091), as filed with the
Securities and Exchange Commission on September 1, 2005. (1)
|
|
10.37
|
Fixed/Floating
Rate Junior Subordinated Debt Security due 2035 of Washington Trust
Bancorp, Inc. dated August 29, 2005 - Filed as exhibit 10.11 to the
Bancorp’s Current Report on Form 8-K (File No. 000-13091), as filed
with the Securities and Exchange Commission on September 1, 2005.
(1)
|
|
10.38
|
Form
of Restricted Stock Units Certificate under the Washington Trust
Bancorp,
Inc. 1997 Equity Incentive Plan, as amended (employees) - Filed as
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K dated June 17,
2005. (1)
(2)
|
|
10.39
|
Form
of Restricted Stock Units Certificate under the Washington Trust
Bancorp,
Inc. 2003 Stock Incentive Plan, as amended (employees) - Filed as
Exhibit
10.2 to the Registrant’s Current Report on Form 8-K dated April 25,
2006. (1)
(2)
|
|
10.40
|
Form
of Restricted Stock Units Certificate under the Washington Trust
Bancorp,
Inc. 2003 Stock Incentive Plan, as amended (members of the Board
of
Directors) - Filed as Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K dated April 25, 2006. (1) (2)
|
|
10.41
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp,
Inc.
2003 Stock Incentive Plan, as amended (employees) - Filed as Exhibit
10.4
to the Registrant’s Current Report on Form 8-K dated April 25, 2006.
(1) (2)
|
|
10.42
|
Form
of Restricted Stock Agreement under the Washington Trust Bancorp,
Inc.
2003 Stock Incentive Plan, as amended (members of the Board of Directors)
- Filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K
dated April 25, 2006. (1) (2)
|
|
10.43
|
Second
Amendment to Supplemental Executive Retirement Plan - Filed as
Exhibit 10.1 to the Bancorp’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2006. (1) (2)
|
|
10.44
|
Second
Amendment to 2003 Stock Incentive Plan - Filed herewith. (2)
|
|
10.45
|
Amended
and Restated Nonqualified Deferred Compensation Plan - Filed herewith.
(2)
|
|
14.1
|
Code
of Ethics - Filed as Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K dated December 16, 2004. (1)
|
|
21.1
|
Subsidiaries
of the Registrant - Filed
as Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
|
|
23.1
|
Consent
of Independent Accountants - Filed
herewith.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - Filed herewith.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - Filed herewith.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Filed herewith. (3)
|
|
(1)
|
Not
filed herewith. In accordance with Rule 12b-32 promulgated pursuant
to the
Exchange Act, reference is made to the documents previously filed
with the
SEC, which are incorporated by reference herein.
|
|
(2)
|
Management
contract or compensatory plan or arrangement.
|
|
(3)
|
These
certifications are not “filed” for purposes of Section 18 of the Exchange
Act or incorporated by reference into any filing under the Securities
Act
or the Exchange Act.
|
(b)
See
(a)(3) above for all exhibits filed herewith and the
Exhibit Index.
(c)
Financial Statement Schedules. None.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
WASHINGTON
TRUST BANCORP, INC.
|
||
|
(Registrant)
|
||
|
Date:
March 12, 2007
|
By
|
/s/
John
C. Warren
|
|
John
C. Warren
|
||
|
Chairman,
Chief Executive Officer and Director
(principal
executive officer)
|
||
|
Date:
March 12, 2007
|
By
|
/s/
David
V. Devault
|
|
David
V. Devault
Executive
Vice President, Secretary,
|
||
|
Treasurer
and Chief Financial Officer
|
||
|
(principal
financial and principal accounting
officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Date:
March 12, 2007
|
/s/
Gary
P. Bennett
|
|
|
Gary
P. Bennett, Director
|
||
|
Date:
March 12, 2007
|
/s/
Steven
J. Crandall
|
|
|
Steven
J. Crandall, Director
|
||
|
Date:
March 12, 2007
|
/s/
Larry J. Hirsch
|
|
|
Larry
J. Hirsch, Director
|
||
|
Date:
March 12, 2007
|
/s/
Barry
G. Hittner
|
|
|
Barry
G. Hittner, Director
|
||
|
Date:
March 12, 2007
|
/s/
Katherine
W. Hoxsie
|
|
|
Katherine
W. Hoxsie, Director
|
||
|
Date:
March 12, 2007
|
/s/
Mary
E. Kennard
|
|
|
Mary
E. Kennard, Director
|
||
|
Date:
March 12, 2007
|
/s/
Edward
M. Mazze
|
|
|
Edward
M. Mazze, Director
|
||
|
Date:
March 12, 2007
|
/s/
Kathleen
McKeough
|
|
|
Kathleen
McKeough, Director
|
||
|
Date:
March 12, 2007
|
/s/
Victor
J. Orsinger II
|
|
|
Victor
J. Orsinger II, Director
|
||
|
Date:
March 12, 2007
|
/s/
H.
Douglas Randall III
|
|
|
H.
Douglas Randall, III, Director
|
||
|
Date:
March 12, 2007
|
/s/
Joyce Olson Resnikoff
|
|
|
Joyce
Olson Resnikoff, Director
|
||
|
Date:
March 12, 2007
|
/s/
Patrick J. Shanahan, Jr.
|
|
|
Patrick
J. Shanahan, Jr., Director
|
||
|
Date:
March 12, 2007
|
/s/
James P. Sullivan
|
|
|
James
P. Sullivan, Director
|
||
|
Date:
March 12, 2007
|
/s/
Neil H. Thorp
|
|
|
Neil
H. Thorp, Director
|
||
|
Date:
March 12, 2007
|
/s/
John F. Treanor
|
|
|
John
F. Treanor, Director
|
||
|
Date:
March 12, 2007
|
/s/
John
C. Warren
|
|
|
John
C. Warren, Director
|
||
-99-