WASHINGTON TRUST BANCORP INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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x
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Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
DECEMBER 31, 2009
or
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o
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________
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Commission file number: 001-32991
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 incorporation or organization)
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(I.R.S. Employer 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:
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COMMON STOCK, $.0625 PAR VALUE PER SHARE
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THE NASDAQ STOCK MARKET LLC
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(Title of each class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o
Yes
x
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o
Yes
x
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
o
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Mark one):
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Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)
o
Yes
x
No
The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2009 was $242,452,804 based on a closing sales price of $17.83 per share as reported for the NASDAQ Global Select Market, which includes $9,105,139 held by The Washington Trust Company under trust agreements and
other instruments.
The number of shares of the registrant’s common stock, $.0625 par value per share, outstanding as of February 25, 2010 was 16,066,181.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement dated March 11, 2010 for the Annual Meeting of Shareholders to be held April 27, 2010 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, 2009
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, eastern Massachusetts and southeastern Connecticut, ATMs, and its Internet website (www.washtrust.com). The Bancorp’s
common stock is traded on the NASDAQ Global Select
Ò
Market under the symbol “WASH.”
The accounting and reporting policies of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”) are in accordance with U. S. generally accepted accounting principles (“GAAP”) and conform to general practices of the banking industry. At
December 31, 2009, Washington Trust had total assets of $2.9 billion, total deposits of $1.9 billion and total shareholders’ equity of $254.9 million.
Commercial Banking
The Corporation offers a variety of banking and related financial services, including:
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Residential mortgages
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Consumer installment loans
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Merchant credit card services
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Reverse mortgages
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Commercial and consumer demand deposits
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Telephone banking services
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Commercial loans
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Savings, NOW and money market deposits
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Internet banking services
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Construction loans
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Certificates of deposit
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Cash management services
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Home equity lines of credit
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Retirement accounts
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Remote deposit capture
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Home equity loans
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Automated teller machines (ATMs)
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Safe deposit boxes
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The Corporation’s largest source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds.
The Corporation’s lending activities are conducted primarily in southern New England and, to a lesser extent, other states. Washington Trust offers a variety of commercial and retail lending products. In addition, Washington Trust purchases loans for its portfolio from various other
financial institutions. In making commercial loans, Washington Trust may occasionally solicit the participation of other banks and may also occasionally participate in commercial loans originated by other banks. From time to time, we sell the guaranteed portion of Small Business Administration (“SBA”) loans to investors. Washington Trust generally underwrites its residential mortgages based upon secondary market standards. Residential mortgages are originated
both for sale in the secondary market as well as for retention in the Corporation’s loan portfolio. Loan sales in the secondary market provide funds for additional lending and other banking activities. The majority of loans are sold with servicing released. We also originate residential loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.
Washington Trust offers a wide range of banking services, including the acceptance of demand, savings, NOW, money market and time deposits. Banking services are accessible through a variety of delivery channels including branch facilities, ATMs, telephone and Internet banking. Washington
Trust also sells various business services products including merchant credit card processing and cash management services.
Wealth Management Services
The Corporation generates fee income from providing investment management, trust and financial planning services. Washington Trust provides personal trust services, including services as executor, trustee, administrator, custodian and guardian. Institutional trust services are also provided,
including services as trustee for pension and profit sharing plans. Investment management and financial planning services are provided for both personal and institutional clients.
At December 31, 2009 and 2008, wealth management assets under administration totaled $3.8 billion and $3.1 billion, respectively. These assets are not included in the Consolidated Financial Statements.
Business Segments
Segment reporting information is presented in Note 17 to the Consolidated Financial Statements.
Acquisitions
The following summarizes Washington Trust’s acquisition history:
On August 31, 2005, the Bancorp completed the acquisition of Weston Financial Group, Inc. (“Weston Financial”), a Registered Investment Adviser and financial planning company located in Wellesley, Massachusetts, with broker-dealer and insurance agency subsidiaries. Pursuant to the Stock Purchase
Agreement, dated March 18, 2005, as amended December 24, 2008, the acquisition was effected by the Bancorp’s acquisition of all of Weston Financial’s outstanding capital stock.
(1)
On April 16, 2002, the Bancorp completed the acquisition of First Financial Corp., the parent company of First Bank and Trust Company, a Rhode Island chartered community bank. First Financial Corp. was headquartered in Providence, Rhode Island and its subsidiary, First Bank and Trust Company,
operated banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The Richmond and North Kingstown branches were closed and consolidated into existing Bank branches in May 2002. Pursuant to the Agreement and Plan of Merger, dated November 12, 2001, the acquisition was effected by means of the merger of First Financial Corp. with and into the Bancorp and the merger of First Bank with and into the Bank.
(1)
On June 26, 2000, the Bancorp completed the acquisition of Phoenix Investment Management Company, Inc. (“Phoenix”), an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition
was effected by means of merger of Phoenix with and into the Bank.
(2)
On August 25, 1999, the Bancorp completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of merger of Pier Bank
with and into the Bank.
(2)
_____________
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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.
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Subsidiaries
The Bancorp’s subsidiaries include the Bank and Weston Securities Corporation (“WSC”). The Bancorp also owns all of the outstanding common stock of WT Capital Trust I, WT Capital Trust II and Washington Preferred Capital Trust, special purpose finance entities formed with the sole
purpose of issuing trust preferred debt securities and investing the proceeds in junior subordinated debentures of the Bancorp. See Note 11 to the Consolidated Financial Statements for additional information.
The following is a description of Bancorp’s primary operating subsidiaries:
The Washington Trust Company
The Bank was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area and is among the oldest banks in the United States. Its current corporate charter dates to 1902.
The Bank provides a broad range of financial services, including lending, deposit and cash management services, wealth management services and merchant credit card services. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”), subject to regulatory
limits.
The Bank’s subsidiary, Weston Financial, is a Registered Investment Adviser and financial planning company located in Wellesley, Massachusetts, with an insurance agency subsidiary. In addition, the Bank has other passive investment
subsidiaries whose primary functions are to provide servicing on passive investments, such as residential and consumer loans acquired from the Bank and investment securities. In 2009, the Bank made an investment in a real estate limited partnership to renovate and operate a low-income housing complex
in the Bank’s market area. In connection with this investment, in 2009 the Bank formed a limited liability company subsidiary to serve as a special limited partner responsible for certain administrative responsibilities.
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 eighteen branch offices in Washington County, Rhode Island. As of June 30, 2009, based upon information reported in the FDIC’s Deposit Market Share Report, the Bank had 48% of total deposits reported by all financial institutions for Washington County. We have
excluded our out-of-market brokered certificates of deposit from this measurement to provide a more representative measurement of our market share. Out-of-market brokered certificates of deposit are utilized by the Corporation as part of its overall funding program along with other sources. The closest competitor held 23%, and the second closest competitor held 9% of total deposits in Washington County. We believe that being the largest commercial banking institution headquartered
within this market area provides a competitive advantage over other financial institutions.
The Bank’s remaining eight branch offices are located in Providence and Kent Counties in Rhode Island and New London County in southeastern Connecticut. In November 2009, the Bank opened a de novo branch in Kent County (Warwick), bringing the total number of the Bank’s branch offices
to eighteen. We continue to expand our branch footprint and broaden our presence in Providence and Kent Counties. Both the population and number of businesses in Providence and Kent Counties far exceed those in Washington County.
Washington Trust has a commercial lending office located in the financial district of Providence. In addition, in August 2009, Washington Trust opened a mortgage lending office in Sharon, Massachusetts, representing the Bank’s first residential lending office in Massachusetts.
Washington Trust provides wealth management services from its main office and offices located in Providence and Narragansett, Rhode Island and Wellesley, Massachusetts. 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, 2009, Washington Trust had 465 full-time and 47 part-time and other employees. Washington Trust maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, a pension plan and a 401(k)
plan. Management considers relations with its employees to be good. See Note 15 to the Consolidated Financial Statements for additional information on certain employee benefit programs.
Supervision and Regulation
The business in which the Corporation is engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other governmental agencies. State and federal banking laws have as their principal objective either the maintenance of the safety and soundness
of financial institutions and the federal deposit insurance system or the protection of consumers, or classes of consumers, and depositors, in particular, rather than the specific protection of shareholders of a bank or its parent company.
Set forth below is a brief description of certain laws and regulations that relate to the regulation of Washington Trust. In response to the deterioration of the financial markets in 2008, comprehensive financial regulatory reform proposals are pending in both the U.S. House of Representatives and
the U.S. Senate, which may be adopted in whole or in part in 2010. These proposals, if adopted, would restructure the regulatory regime for financial institutions and impose significant additional regulatory requirements and restrictions on banks and bank holding companies. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. A change in applicable statutes, regulations or regulatory
policy may have a material effect on our business.
Regulation of the Bancorp.
As a registered bank holding company, the Bancorp is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to inspection, examination and supervision by the
Board of Governors of the Federal Reserve System (the “FRB”), and the State of Rhode Island, Department of Business Regulation, Division of Banking (the “Rhode Island Division of Banking”).
The FRB has the authority to issue orders to bank holding companies to cease and desist from unsafe or unsound banking practices and violations of conditions imposed by, or violations of agreements with, or commitments to, the FRB. The FRB is also empowered to assess civil money penalties against companies
or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company.
In 2005, the Bancorp elected financial holding company status pursuant to the provisions of the Gramm-Leach-Bliley Act of 1999 (“GLBA”). As a financial holding company, the Bancorp is authorized to engage in certain financial activities in which a bank holding company may not engage. “Financial
activities” is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Currently, pursuant to its authority as a financial
holding company, the Bancorp engages, through WSC, in broker-dealer activities pursuant to this authority. If a financial holding company fails to remain well capitalized and well managed, the company and its affiliates may not commence any new activity that is authorized particularly for financial holding companies. If a financial holding company remains out of compliance for 180 days or such longer period as the FRB permits, the FRB may require the financial holding company to divest either
its insured depository institution or all of its nonbanking subsidiaries engaged in activities not permissible for a bank holding company. If a financial holding company fails to maintain a “satisfactory” or better record of performance under the Community Reinvestment Act, it will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities, or acquiring companies other than bank holding companies, banks or savings associations, except that the Bancorp
could engage in new activities, or acquire companies engaged in activities that are closely related to banking under the BHCA. In addition, if the FRB finds that the Bank is not well capitalized or well managed, the Bancorp would be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and which may contain additional limitations or conditions. Until corrected, the Bancorp would not be able to engage in any new activity or acquire
companies engaged in activities that are not closely related to banking under the BHCA without prior FRB approval. If the Bancorp fails to correct any such condition within a prescribed period, the FRB could order the Bancorp to divest its banking subsidiary or, in the alternative, to cease engaging in activities other than those closely related to banking under the BHCA.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(“Riegle-Neal”). Riegle-Neal permits adequately capitalized or well-capitalized and adequately or well-managed bank holding companies, as determined by the
FRB, to acquire banks in any state subject to certain concentration limits and other conditions. Riegle-Neal also generally authorizes the interstate merger of banks. In addition, among other things, Riegle-Neal permits banks to
establish new branches on an interstate basis provided that the law of the host state specifically authorizes such action. Rhode Island and Connecticut, the two states in which the Corporation conducts branch-banking operations, have adopted legislation to "opt in" to interstate merger and branching
provisions that effectively eliminated state law barriers. However, as a bank holding company, we are required to obtain prior FRB approval before acquiring more than 5% of a class of voting securities, or substantially all of the assets, of a bank holding company, bank or savings association.
Control Acquisitions.
The Change in Bank Control Act prohibits a person or a group of persons from acquiring “control” of a bank holding company or a depository institution, such as the Bancorp or the Bank, unless the FRB
has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a bank holding company or a depository institution 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 such institution. In
addition, a company is required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting securities of a bank holding company, or otherwise obtaining control or a “controlling influence” over that bank holding company. In September 2008, the FRB released guidance on minority investments in banks which relaxed the presumption of control for investments of greater than 10%
of a class of outstanding voting securities of a bank holding company in certain instances discussed in the guidance. In addition, certain states, including Rhode Island and Massachusetts, have similar statutes that regulate the acquisition of “control” of local depository institutions.
Bank Holding Company Dividends.
The FRB and the Rhode Island Division of Banking have authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB
has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. Additionally, under Rhode Island law, distributions of dividends cannot be made if a bank holding company would not be able to pay
its debts as they become due in the usual course of business or the bank holding company’s total assets would be less than the sum of its total liabilities. The Bancorp’s revenues consist primarily of cash dividends paid to it by the Bank. As described below, the FDIC and the Rhode Island Division of Banking may also regulate the amount of dividends payable by the Bank. The inability of the Bank to pay dividends may have an adverse effect on the Bancorp.
Regulation of the Bank.
The Bank is subject to the regulation, supervision and examination by the FDIC, the Rhode Island Division of Banking and the State of Connecticut, Department of Banking. The Bank is also subject to various
Rhode Island and Connecticut business and banking regulations.
Regulation of the Registered Investment Adviser and Broker-Dealer.
WSC is a registered broker-dealer and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and is subject to extensive regulation, supervision,
and examination by the Securities and Exchange Commission (“SEC”), FINRA and the Commonwealth of Massachusetts. Weston Financial is registered as an investment advisor under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), and is subject to extensive regulation, supervision, and examination by the SEC and the Commonwealth of Massachusetts, including those related to sales methods, trading practices, the use and safekeeping of customers’
funds and securities, capital structure, record keeping and the conduct of directors, officers and employees.
As an investment advisor, Weston Financial is subject to the Investment Advisers Act and any regulations promulgated thereunder, including fiduciary, recordkeeping, operational and disclosure obligations. Each of the mutual funds for which Weston Financial acts an advisor or subadvisor is registered
with the SEC under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and subject to requirements thereunder. Shares of each mutual fund are registered with the SEC under the Securities Act of 1933, as amended (the “Securities Act”), and are qualified for sale (or exempt from such qualification) under the laws of each state and the District of Columbia to the extent such shares are sold in any of those jurisdictions. In addition, an advisor
or subadvisor to a registered investment company generally has obligations with respect to the qualification of the registered investment company under the Internal Revenue Code of 1986, as amended (the “Code”).
The foregoing laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict Weston Financial from conducting its business in the event it fails to comply with such laws and regulations. Possible sanctions that may be imposed
in the event of such noncompliance include the suspension of individual employees, limitations on business activities for specified periods of time, revocation of registration as an investment advisor, commodity trading advisor and/or other registrations, and other censures and fines.
ERISA.
The Bank and Weston Financial are each also subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and related regulations, to the extent it is a “fiduciary” under ERISA with
respect to some of its clients. ERISA and related provisions of the Code impose duties on persons who are fiduciaries under ERISA, and prohibit certain transactions involving the assets of each ERISA plan that is a client of the Bank or Weston Financial, as applicable, as well as certain transactions by the fiduciaries (and several other related parties) to such plans.
Insurance of Accounts and FDIC Regulation.
The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC. For most banks and savings associations, including the Bank, FDIC rates depend
upon a combination of CAMELS component ratings and financial ratios. CAMELS ratings reflect the applicable bank regulatory agency’s evaluation of the financial institution’s capital, asset quality, management, earnings, liquidity and sensitivity to risk. For large banks and savings associations that have long-term debt issuer ratings, assessment rates will depend upon such ratings, and CAMELS component ratings. For institutions, such as the Bank, which are in the lowest
risk category, assessment rates vary initially from ten (10) to sixteen (16) basis points of insured deposits with additional adjustments which could result in total base assessment rates of seven (7) to twenty-four (24) basis points of insured deposits. In November 2009, the FDIC issued a final rule that mandated that insured depository institutions prepay their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009 and for all of 2010, 2011, and 2012 on December 30, 2009. The
Bank recorded the entire amount of its prepayment as an asset (a prepaid expense). The prepaid assessments bear a zero-percent risk weight for risk-based capital purposes. The prepaid assessment base for the Bank was calculated using its third quarter 2009 assessment rate (using its CAMELS rating on that date). That assessment base will be adjusted quarterly with an estimated 5 percent annual growth in the assessment base through the end of 2012. The prepaid assessment
rate for the fourth quarter of 2009 and for 2010 is based on the Bank’s total base assessment rate for the third quarter of 2009, adjusted as if the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter. Further, the prepaid assessment rate for 2011 and 2012 is equal to the adjusted third quarter 2009 total base assessment rate plus 3 basis points. As of December 31, 2009, and each quarter thereafter, the Bank will record an
expense for its regular quarterly assessment for the quarter and a corresponding credit to the prepaid assessment until the asset is exhausted. The FDIC will not refund or collect additional prepaid assessments because of a decrease or growth in deposits over the next three years. However, if the prepaid assessment is not exhausted after collection of the amount due on June 30, 2013, the remaining amount of the prepayment will be returned to the institution. In 2008, FDIC
deposit insurance was temporarily increased from $100,000 to $250,000 per depositor through December 31, 2013. The Bank’s FDIC deposit insurance costs totaled $4.4 million in 2009, which included a second quarter 2009 FDIC special assessment of $1.35 million. The FDIC has the power to adjust the assessment rates at any time. We cannot predict whether, as a result of the adverse change in U.S. economic conditions and, in particular, declines in the value of
real estate in certain markets served by the Bank, the FDIC will in the future require further increases to deposit insurance assessment levels.
Bank Holding Company Support to Subsidiary Bank.
Under FRB policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary bank and to commit resources to its support. This
support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository
institution “in danger of default.” The Bank is a FDIC-insured depository institution.
Regulatory Capital Requirements.
The FRB and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may
from
time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth.
The FRB risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common shareholders’ equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible
debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for loan losses up to 1.25% of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the FRB and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain
below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4% and the minimum total risk-based capital is
8%. At December 31, 2009, the Corporation’s Tier 1 capital ratio was 11.14% and its total risk-based capital ratio was 12.40%.
The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, as a matter of policy the actual minimum is 100 to 200 basis points above 3%. Banking organizations must maintain a ratio of at least 5% to be classified
as “well-capitalized.” The Corporation’s leverage ratio was 7.82% as of December 31, 2009.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and
requires the federal banking agencies (the “Agencies”) to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution
to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent
holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the Agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
The Agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital, and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action
to be taken when an institution is considered undercapitalized. Under the regulations, a bank generally shall be deemed to be:
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“well-capitalized” if it has a total risk-based capital ratio of 10.0% or greater, has a Tier 1 risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or greater and is not subject to any written agreement, order or capital directive or prompt corrective action directive;
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“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or more, and a leverage ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well-capitalized bank;”
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“undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances);
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“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and
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“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
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Regulators also must take into consideration (1) concentrations of credit risk; (2) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position); and (3) risks from non-traditional activities, as well
as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. In addition, the Bancorp, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. At December 31, 2009, the Bank’s capital ratios placed it in the well-capitalized
category. Reference is made to Note 12 to the Consolidated Financial Statements for additional discussion of the Corporation’s regulatory capital requirements.
An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate FDIC regional director within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. An institution that is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Immediately upon becoming undercapitalized, an institution becomes
subject to the provisions of Section 38 of the Federal Deposit Insurance Act, including for example, (i) restricting the payment of capital distributions and management fees, (ii) requiring that the FDIC monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting growth of the institution’s assets and (v) requiring prior approval of certain expansion proposals.
The Agencies issued a final rule entitled “Risk-Based Capital Standards: Advanced Capital Adequacy Framework - Basel II” (“Basel II”), which became effective on April 1, 2008 and “core banks” (“core banks” are the approximately 15 largest U.S. bank holding
companies) were required to adopt a board-approved plan to implement Basel II by October 1, 2008. Basel II will result in significant changes to the risk based capital standards for “core banks” subject to Basel II and other banks that elect to use such rules to calculate their risk-based capital requirements. Furthermore, it is possible that Basel II will be revised to reflect new proposals. In connection with Basel II, the Agencies published
a joint notice of proposed rulemaking entitled "Risk-Based Capital Guidelines; Capital Adequacy Guidelines: Standardized Framework" on July 29, 2008 (the "Standardized Approach Proposal"). The Standardized Approach Proposal, if adopted by the Agencies, would provide all non-core banks with an optional framework, based upon the standardized approach under the international Basel II Accord, for calculating their risk-based capital requirements. The Bank does not currently expect
to calculate its capital ratios under Basel II or in accordance with the Standardized Approach Proposal.
Accordingly, the Corporation is not yet in a position to determine the effect of such rules on its risk capital requirements.
Transactions with Affiliates.
Under Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder, there are various legal restrictions on the extent to which a bank holding company and its nonbank subsidiaries may
borrow, obtain credit from or otherwise engage in “covered transactions” with its FDIC-insured depository institution subsidiaries. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its nondepository institution affiliates are limited to the following amounts:
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In the case of one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution.
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In the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution.
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“Covered transactions” are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the FRB, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Limitations on Bank Dividends.
The Bancorp’s revenues consist primarily of cash dividends paid to it by the Bank. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in
its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Payment of dividends by a bank is also restricted pursuant to various state regulatory limitations. Reference is made to Note 12 to the Consolidated Financial Statements for additional discussion of the Corporation’s ability
to pay dividends.
Customer Information Security.
The Agencies have adopted final guidelines for establishing standards for safeguarding nonpublic personal information about customers. These guidelines implement provisions of GLBA, which establishes
a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework. Specifically, the Information Security Guidelines established by the GLBA require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed
to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Agencies have issued guidance for banks on response programs for unauthorized access to customer information. This guidance, among other things, requires notice to be sent to
customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible”. A majority of states have enacted legislation concerning breaches of data security and Congress is considering federal legislation that would require consumer notice of data security breaches.
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.
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the “USA Patriot Act”). The USA Patriot Act, designed to deny terrorists and others the ability to
obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers, mutual funds, insurance companies and businesses of other types involved in the transfer of money. The USA Patriot Act, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, including banks, to adopt and implement additional, or amend existing, policies and procedures with respect to, among other things, anti-money
laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant and a target institution
in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. In 2006, final regulations under the USA Patriot Act were issued requiring financial institutions, including the Bank, to take additional steps to monitor their correspondent banking and private banking relationships as well as their relationships with “shell banks.” Management believes that the Corporation is in compliance with all the requirements
prescribed by the USA Patriot Act and all applicable final implementing regulations.
The Community Reinvestment Act
(the “CRA”). The CRA requires lenders to identify the communities served by the institution’s offices and other deposit taking facilities and to make loans and investments and provide services
that meet the credit needs of these communities. Regulatory agencies examine each of the banks and rate such institutions’ compliance with CRA as “Outstanding”, “Satisfactory”, “Needs to Improve” or “Substantial Noncompliance”. Failure of an institution to receive at least a “Satisfactory” rating could inhibit an institution or its holding company from undertaking certain activities, including engaging in activities newly
permitted as a financial holding company under GLBA and acquisitions of other financial institutions. The FRB must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low and moderate income neighborhoods. The Bank has achieved a rating of “Satisfactory” on its most recent examination dated August 31, 2009. Rhode Island and Connecticut also have enacted substantially similar community reinvestment
requirements.
Regulation R.
The FRB approved Regulation R implementing the bank broker push out provisions under Title II of the GLBA. GLBA provided 11 exceptions from the definition of “broker” in the Exchange Act that
permit banks not registered as broker-dealers with the SEC to effect securities transactions under certain conditions. Regulation R implements certain of these exceptions. In 2007, the SEC also approved Regulation R. The Bank began complying with Regulation R on the first day of the bank’s fiscal quarter starting after September 30, 2008. The FRB and SEC have stated that they will jointly issue any interpretations or no-action letters/guidance regarding Regulation
R and consult with each other and the appropriate federal banking agency with respect to formal enforcement actions pursuant to Regulation R.
Regulatory Enforcement Authority.
The enforcement powers available to the Agencies include, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Under certain circumstances, federal and state law requires public disclosure and reports of certain criminal offenses and also
final enforcement actions by the Agencies.
Identity Theft Red Flags.
The Agencies jointly issued final rules and guidelines in 2007 implementing Section 114 (“Section 114”) of the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) and final
rules implementing Section 315 of the FACT Act (“Section 315”). Section 114 requires the Bank to develop and implement a written Identity Theft Prevention Program (the “Program”) to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Section 114 also requires credit and debit card issuers to assess the validity of notifications of changes of address under certain circumstances. The
Agencies issued joint rules under Section 315 that provide guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. The final rules and guidelines became effective January 1, 2008 and the Bank had to begin complying with the rules by November 1, 2008.
Fair Credit Reporting Affiliate Marketing Regulations.
In 2007, the Agencies published final rules to implement the affiliate marketing provisions in Section 214 of the FACT Act, which amends the Fair Credit Reporting Act. The
final rules generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations. These rules became effective January 1, 2008 and the Bank had to begin complying with the rules by October 1, 2008.
The Sarbanes-Oxley Act of 2002, as amended
(“Sarbanes-Oxley”). Sarbanes-Oxley implemented a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such
as Bancorp) designed to promote honesty and transparency in corporate America. Sarbanes-Oxley’s principal provisions, many of which have been interpreted through regulations released in 2003, provide for and include, among other things, (1) requirements for audit committees, including independence and financial expertise; (2) certification of financial statements by the principal executive officer and principal financial officer of the reporting company; (3) standards for auditors and regulation
of audits; (4) disclosure and reporting requirements for the reporting company and directors and executive officers; and (5) a range of civil and criminal penalties for fraud and other violations of securities laws.
Securities and Exchange Commission Availability of Filings
Under Sections 13 and 15(d) of the Exchange Act, periodic and current reports must be filed or furnished with the SEC. You may read and copy any reports, statements or other information filed by Washington Trust with the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Washington Trust’s filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov. In addition, Washington Trust makes available free of charge on the Investor Relations section of its website (www.washtrust.com) its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and exhibits
and amendments to those reports as soon as reasonably practicable after it electronically files such
material with, or furnishes it to, the SEC. Information on the Washington Trust website is not incorporated by reference into this Annual Report on Form 10-K.
In addition to the other information contained or incorporated by reference in this Annual Report on Form 10-K, you should consider the following factors relating to the business of the Corporation.
Interest Rate Volatility May Reduce Our Profitability
Our consolidated results of operations depend, to a large extent, on the level of net interest income, which is the difference between interest income from interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. If
interest rate fluctuations cause the cost of interest-bearing liabilities to increase faster than the yield on interest-earning assets, then our net interest income will decrease. If the cost of interest-bearing liabilities declines faster than the yield on interest-earning assets, then our net interest income will increase.
We are unable to predict future fluctuations in interest rates or the specific impact thereof. The market values of most of our financial assets are sensitive to fluctuations in market interest rates. Fixed-rate investments, mortgage-backed securities and mortgage loans typically decline
in value as interest rates rise. Prepayments on mortgage-backed securities may adversely affect the value of such securities and the interest income generated by them.
Changes in interest rates can also affect the amount of loans that we originate, as well as the value of loans and other interest-earning assets and our ability to realize gains on the sale of such assets and liabilities. Prevailing interest rates also affect the extent to which our borrowers prepay
their loans. When interest rates increase, borrowers are less likely to prepay their loans, and when interest rates decrease, borrowers are more likely to prepay loans. Funds generated by prepayments might be reinvested at a less favorable interest rate. Prepayments may adversely affect the value of mortgage loans, the levels of such assets that are retained in our portfolio, net interest income, loan servicing income and capitalized servicing rights.
Increases in interest rates might cause depositors to shift funds from accounts that have a comparatively lower cost, such as regular savings accounts, to accounts with a higher cost, such as certificates of deposit. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning
assets increase, our net interest income will be negatively affected. Changes in the asset and liability mix may also affect our net interest income.
For additional discussion on interest rate risk, see disclosures in Item 7 under the caption “Asset / Liability Management and Interest Rate Risk.”
The Market Value of Wealth Management Assets Under Administration May Be Negatively Affected by Changes in Economic and Market Conditions
Revenues from wealth management services represented 22% of our total revenues for 2009. A substantial portion of these fees are dependent on the market value of wealth management assets under administration, which are primarily marketable securities. Changes in domestic and foreign economic
conditions, volatility in financial markets, and general trends in business and finance, all of which are beyond our control, could adversely impact the market value of these assets and the fee revenues derived from the management of these assets.
We May Not Be Able to Attract and Retain Wealth Management Clients at Current Levels
Due to strong competition, our wealth management division may not be able to attract and retain clients at current levels. Competition is strong because there are numerous well-established and successful investment management and wealth advisory firms including commercial banks and trust companies,
investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Many of our competitors have greater resources than we have.
Our ability to successfully attract and retain wealth management clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. If we are not successful, our results of operations
and financial condition may be negatively impacted.
Wealth management revenues are primarily derived from investment management (including mutual funds), trust fees and financial planning services. Most of our investment management clients may withdraw funds from accounts under management generally at their sole discretion. Financial planning
contracts must typically be renewed on an annual basis and are terminable upon relatively short notice. The financial performance of our wealth management business is a significant factor in our overall results of operations and financial condition.
Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses
We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse effect
on our operating results, and may also cause us to increase the allowance in the future. Material additions to our allowance would materially decrease our net income. In addition to general real estate and economic factors, the following factors could affect our ability to collect our loans and require us to increase the allowance in the future:
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Regional credit concentration - We are exposed to real estate and economic factors in southern New England, because a significant portion of our loan portfolio is concentrated among borrowers in this market. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including residential mortgages,
most consumer loans, commercial mortgages and other commercial loans, the value of our collateral is also subject to regional real estate market conditions and other factors that might affect the value of real estate, including natural disasters.
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Industry concentration - A portion of our loan portfolio consists of loans to the hospitality, tourism and recreation industries. Loans to companies in these industries may have a somewhat higher risk of loss than some other industries because these businesses are seasonal, with a substantial portion of commerce concentrated in the summer
season. Accordingly, the ability of borrowers to meet their repayment terms is more dependent on economic, climate and other conditions and may be subject to a higher degree of volatility from year to year.
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Current economic conditions have contributed to varying declines in residential and commercial real estate values and the value of other collateral as well as increasing the constraints on the cash flows of borrowers. These conditions may also result in an increase in delinquencies with a negative impact on our loan loss experience. Accordingly,
our allowance for loan losses may need to be increased, which could have an adverse effect on our results of operations and financial condition.
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Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional charge-offs. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our results of
operations and financial condition.
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For a more detailed discussion on the allowance for loan losses, see additional information disclosed in Item 7 under the caption “Application of Critical Accounting Policies and Estimates.”
Our Focus on Commercial Lending May Expose Us to Increased Lending Risks
Commercial loans are historically more sensitive to economic downturns. Such sensitivity includes potentially higher default rates and possible declines in collateral values. Commercial lending involves larger loan sizes and significant relationship exposures, which can have a greater impact
on profits in the event of adverse loan performance. Commercial lending also involves development financing, which is dependent on the future success of new operations. In addition, commercial loans include lending to nonprofit organizations, which in some cases are particularly sensitive to negative economic events. As of December 31, 2009, commercial loans represent 51% of our loan portfolio.
We Have Credit Risk Inherent in Our Securities Portfolio
We maintain a diversified securities portfolio, which includes mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, obligations of the U.S. Department of the Treasury and U.S. government-sponsored agencies, securities issued by state and political subdivisions,
trust preferred debt securities issued primarily by financial service companies, and corporate debt securities. We also invest in capital securities,
which include common and perpetual preferred stocks. We seek to limit credit losses in our securities portfolios by generally purchasing only highly-rated securities.
The current economic environment increases the difficulty of assessing investment securities impairment, which increases the risk of potential impairment of these assets. During the year ended December 31, 2009, other-than-temporary impairment losses on investment securities amounted to $3.1 million. Further
declines in fair value may occur and additional material other-than-temporary impairments may be charged to income in future periods, resulting in realized losses.
If We Are Required to Write-Down Goodwill Recorded in Connection with Our Acquisitions, Our Profitability Would be Negatively Impacted
Applicable accounting standards require us to use the purchase method of accounting for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance
sheet as goodwill. At December 31, 2009, the Corporation had approximately $58 million of goodwill on its balance sheet. Goodwill must be evaluated for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs,
which would have an adverse effect on the Corporation’s financial condition and results of operations.
We May Not Be Able to Compete Effectively Against Larger Financial Institutions in Our Increasingly Competitive Industry
We compete with larger bank and non-bank financial institutions for loans and deposits in the communities we serve, and we may face even greater competition in the future due to legislative, regulatory and technological changes and continued consolidation. Many of our competitors have significantly
greater resources and lending limits than we have. Banks and other financial services firms can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automated transfer and automatic payment systems. Many competitors have fewer regulatory constraints and may have
lower cost structures than we do. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in the Bank’s service areas.
We May Be Unable to Attract and Retain Key Personnel
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and we may not be able to hire or retain the key personnel that we depend upon for success. The unexpected loss of
services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Changes in the National and Local Economy May Affect Our Future Growth Possibilities
National and local economic conditions have an impact on the banking and financial services industry. Our operating results depend to a large extent on providing products and services to customers in our local market area. Unemployment rates, real estate values, demographic changes, property
tax rates, and local and state governments have an impact on local and regional economic conditions. An increase in unemployment, a decrease in real estate values, an increase in property tax rates, or decrease in population could weaken the local economies in which we operate. Weak economic conditions could lead to credit quality concerns related to repayment ability and collateral protection. These conditions could also affect our ability to retain or grow deposits.
Our Stock Price Can Be Volatile
The price of our common stock can fluctuate widely in response to a variety of factors. These include, but are not limited to, actual or anticipated variations in reported operating results, recommendations by securities analysts, the level of trading activity in our common stock, new services or delivery
systems offered by competitors, business combinations involving our competitors, operating and stock price performance of companies that investors deem to
be comparable to Washington Trust, news reports relating to trends or developments in the credit, mortgage and housing markets as well as the financial services industry, and changes in government regulations.
We are Subject to Operational Risk That Could Adversely Affect Our Business
We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We depend upon data processing, software, communication,
and information exchange on a variety of computing platforms and networks and over the Internet. Despite instituted safeguards, we cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. While we
maintain a system of internal controls and procedures, any of these results could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Changes in Laws and Regulations May Adversely Affect Our Results of Operations
We are subject to extensive federal and state laws and regulations and are 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 we 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 our results of operations. See the section entitled "Supervision and Regulation" in Item 1 of this Annual Report on Form 10-K.
We are also subject to tax laws and regulations promulgated by the United States government and the states in which we operate. Changes to these laws and regulations or the interpretation of such laws and regulations by taxing authorities could impact future tax expense and the value of deferred tax
assets.
We May Need To Raise Additional Capital in the Future and Such Capital May Not Be Available When Needed.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which
are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms or at all. Our inability to raise sufficient additional capital on acceptable terms when needed could adversely affect our businesses, financial condition and results of operations.
None.
GUIDE 3 Statistical Disclosures
The information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below.
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Page
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I.
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Distribution of Assets, Liabilities and Stockholder Equity;
Interest Rates and Interest Differentials
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32-33
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II.
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Investment Portfolio
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38-43, 85
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III.
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Loan Portfolio
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44-51, 86
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IV.
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Summary of Loan Loss Experience
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51-54, 89
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V.
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Deposits
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32, 94
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VI.
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Return on Equity and Assets
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19
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VII.
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Short-Term Borrowings
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96
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The Corporation conducts its business from eighteen offices, including its headquarters located at 23 Broad Street, Westerly, Rhode Island and offices located within Washington, Providence and Kent Counties in Rhode Island and New London County in southeastern Connecticut. In addition, Washington Trust
has a commercial lending office located in the financial district of Providence, Rhode Island and a residential lending office in Sharon, Massachusetts. Washington Trust also provides wealth management services from its main office and offices located in Providence
and Narragansett, Rhode Island and Wellesley, Massachusetts. The Bank also has two operations facilities and an additional corporate office located in Westerly, Rhode Island. At December 31, 2009, eleven of the Corporation’s facilities were owned, thirteen were leased and one
branch office was owned on leased land. Lease expiration dates range from sixteen months to thirteen years with renewal options on certain leases of two to twenty-five years. All of the Corporation’s properties are considered to be in good condition and adequate for the purpose for which they are used.
In addition to the locations mentioned above, the Bank has three owned offsite-ATMs in leased spaces. The terms of two of these leases are negotiated annually. The lease term for the third offsite-ATM expires in two years with no renewal option.
The Bank also operates ATMs that are branded with the Bank’s logo under contracts with a third party vendor located in retail stores and other locations in Rhode Island, southeastern Connecticut and southeastern Massachusetts.
For additional information regarding premises and equipment and lease obligations see Note 7 to the Consolidated Financial Statements.
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
| ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of |
| Equity Securities. |
The Bancorp’s common stock trades on the NASDAQ Global Select
Ò
Market under the symbol WASH.
The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 2009 and 2008 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter.
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2009 Quarters
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1 | 2 | 3 | 4 | ||||||||||||
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Stock prices:
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High
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$ | 20.62 | $ | 20.75 | $ | 19.61 | $ | 17.95 | ||||||||
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Low
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11.50 | 15.67 | 16.16 | 13.97 | ||||||||||||
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Cash dividend declared per share
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$ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.21 | ||||||||
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2008 Quarters
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1 | 2 | 3 | 4 | ||||||||||||
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Stock prices:
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High
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$ | 26.50 | $ | 26.49 | $ | 33.34 | $ | 27.30 | ||||||||
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Low
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21.84 | 19.70 | 18.43 | 16.33 | ||||||||||||
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Cash dividend declared per share
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$ | 0.20 | $ | 0.21 | $ | 0.21 | $ | 0.21 |
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 by the Bank to the Bancorp is included in Note 12 to the Consolidated Financial Statements.
At February 25, 2010 there were 1,966 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 Bancorp did not repurchase any shares during the fourth quarter of 2009.
Stock Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on the Corporation's common stock against the cumulative total return of the NASDAQ Bank Stocks index and the NASDAQ Stock Market (U.S.) for the five years ended December 31. The historical information set forth
below is not necessarily indicative of future performance.
The results presented assume that the value of the Corporation's common stock and each index was $100.00 on December 31, 2004. The total return assumes reinvestment of dividends.
Washington Trust Bancorp, Inc. – Total Return Performance
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For the period ending December 31
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2004
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2005
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2006
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2007
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2008
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2009
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Washington Trust Bancorp, Inc.
|
$ | 100.00 | $ | 91.72 | $ | 100.51 | $ | 93.73 | $ | 76.08 | $ | 63.00 | ||||||||||||
|
NASDAQ Bank Stocks
|
$ | 100.00 | $ | 95.67 | $ | 106.20 | $ | 82.76 | $ | 62.96 | $ | 51.31 | ||||||||||||
|
NASDAQ Stock Market (U.S.)
|
$ | 100.00 | $ | 101.37 | $ | 111.03 | $ | 121.92 | $ | 72.49 | $ | 104.31 | ||||||||||||
The selected consolidated financial data set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information including the Consolidated Financial Statements and related Notes, and the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this Annual Report on Form 10-K.
|
Selected Financial Data
|
(Dollars in thousands, except per share amounts)
|
|||||||||||||||||||
|
At or for the years ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Financial Results:
|
||||||||||||||||||||
|
Interest income
|
$ | 129,630 | $ | 140,662 | $ | 136,434 | $ | 131,134 | $ | 115,693 | ||||||||||
|
Interest expense
|
63,738 | 75,149 | 76,490 | 69,660 | 55,037 | |||||||||||||||
|
Net interest income
|
65,892 | 65,513 | 59,944 | 61,474 | 60,656 | |||||||||||||||
|
Provision for loan losses
|
8,500 | 4,800 | 1,900 | 1,200 | 1,200 | |||||||||||||||
|
Net interest income after provision for loan losses
|
57,392 | 60,713 | 58,044 | 60,274 | 59,456 | |||||||||||||||
|
Noninterest income:
|
||||||||||||||||||||
|
Net realized gains on sales of securities
|
314 | 2,224 | 455 | 443 | 389 | |||||||||||||||
|
Net other-than-temporary impairment losses on securities
|
(3,137 | ) | (5,937 | ) | – | – | (32 | ) | ||||||||||||
|
Other noninterest income
|
45,041 | 44,233 | 45,054 | 41,740 | 30,589 | |||||||||||||||
|
Total noninterest income
|
42,218 | 40,520 | 45,509 | 42,183 | 30,946 | |||||||||||||||
|
Noninterest expense
|
77,168 | 71,742 | 68,906 | 65,335 | 56,393 | |||||||||||||||
|
Income before income taxes
|
22,442 | 29,491 | 34,647 | 37,122 | 34,009 | |||||||||||||||
|
Income tax expense
|
6,346 | 7,319 | 10,847 | 12,091 | 10,985 | |||||||||||||||
|
Net income
|
$ | 16,096 | $ | 22,172 | $ | 23,800 | $ | 25,031 | $ | 23,024 | ||||||||||
|
Per share information ($):
|
||||||||||||||||||||
|
Earnings per share:
|
||||||||||||||||||||
|
Basic
|
1.01 | 1.59 | 1.78 | 1.86 | 1.73 | |||||||||||||||
|
Diluted
|
1.00 | 1.57 | 1.75 | 1.82 | 1.69 | |||||||||||||||
|
Cash dividends declared
(1)
|
0.84 | 0.83 | 0.80 | 0.76 | 0.72 | |||||||||||||||
|
Book value
|
15.89 | 14.75 | 13.97 | 12.89 | 11.86 | |||||||||||||||
|
Market value - closing stock price
|
15.58 | 19.75 | 25.23 | 27.89 | 26.18 | |||||||||||||||
|
Performance Ratios (%):
|
||||||||||||||||||||
|
Return on average assets
|
0.55 | 0.82 | 0.99 | 1.04 | 0.98 | |||||||||||||||
|
Return on average shareholders’ equity
|
6.56 | 11.12 | 13.48 | 14.99 | 14.80 | |||||||||||||||
|
Average equity to average total assets
|
8.40 | 7.35 | 7.33 | 6.93 | 6.62 | |||||||||||||||
|
Dividend payout ratio
(2)
|
84.00 | 52.87 | 45.71 | 41.76 | 42.60 | |||||||||||||||
|
Asset Quality Ratios (%):
|
||||||||||||||||||||
|
Total past due loans to total loans
|
1.64 | 0.96 | 0.45 | 0.49 | 0.27 | |||||||||||||||
|
Nonperforming loans to total loans
|
1.43 | 0.42 | 0.27 | 0.19 | 0.17 | |||||||||||||||
|
Nonperforming assets to total assets
|
1.06 | 0.30 | 0.17 | 0.11 | 0.10 | |||||||||||||||
|
Allowance for loan losses to nonaccrual loans
|
99.75 | 305.07 | 471.12 | 693.87 | 742.25 | |||||||||||||||
|
Allowance for loan losses to total loans
|
1.43 | 1.29 | 1.29 | 1.29 | 1.28 | |||||||||||||||
|
Net charge-offs (recoveries) to average loans
|
0.25 | 0.08 | 0.03 | 0.02 | (0.01 | ) | ||||||||||||||
|
Capital Ratios (%):
|
||||||||||||||||||||
|
Tier 1 leverage capital ratio
|
7.82 | 7.53 | 6.09 | 6.01 | 5.45 | |||||||||||||||
|
Tier 1 risk-based capital ratio
|
11.14 | 11.29 | 9.10 | 9.57 | 9.06 | |||||||||||||||
|
Total risk-based capital ratio
|
12.40 | 12.54 | 10.39 | 10.96 | 10.51 | |||||||||||||||
____________
|
(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.
|
|
December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 57,260 | $ | 58,190 | $ | 41,112 | $ | 71,909 | $ | 66,163 | ||||||||||
|
Total securities
|
691,484 | 866,219 | 751,778 | 703,851 | 783,941 | |||||||||||||||
|
FHLBB stock
|
42,008 | 42,008 | 31,725 | 28,727 | 34,966 | |||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Commercial and other
|
984,550 | 880,313 | 680,266 | 587,397 | 554,734 | |||||||||||||||
|
Residential real estate
|
605,575 | 642,052 | 599,671 | 588,671 | 582,708 | |||||||||||||||
|
Consumer
|
329,543 | 316,789 | 293,715 | 283,918 | 264,466 | |||||||||||||||
|
Total loans
|
1,919,668 | 1,839,154 | 1,573,652 | 1,459,986 | 1,401,908 | |||||||||||||||
|
Less allowance for loan losses
|
27,400 | 23,725 | 20,277 | 18,894 | 17,918 | |||||||||||||||
|
Net loans
|
1,892,268 | 1,815,429 | 1,553,375 | 1,441,092 | 1,383,990 | |||||||||||||||
|
Investment in bank-owned life insurance
|
44,957 | 43,163 | 41,363 | 39,770 | 30,360 | |||||||||||||||
|
Goodwill and other intangibles
|
67,057 | 68,266 | 61,912 | 57,374 | 54,372 | |||||||||||||||
|
Other assets
|
89,439 | 72,191 | 58,675 | 56,442 | 48,211 | |||||||||||||||
|
Total assets
|
$ | 2,884,473 | $ | 2,965,466 | $ | 2,539,940 | $ | 2,399,165 | $ | 2,402,003 | ||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||
|
Demand deposits
|
$ | 194,046 | $ | 172,771 | $ | 175,542 | $ | 186,533 | $ | 196,102 | ||||||||||
|
NOW accounts
|
202,367 | 171,306 | 164,944 | 175,479 | 178,677 | |||||||||||||||
|
Money market accounts
|
403,333 | 305,879 | 321,600 | 286,998 | 223,255 | |||||||||||||||
|
Savings accounts
|
191,580 | 173,485 | 176,278 | 205,998 | 212,499 | |||||||||||||||
|
Time deposits
|
931,684 | 967,427 | 807,841 | 822,989 | 828,725 | |||||||||||||||
|
Total deposits
|
1,923,010 | 1,790,868 | 1,646,205 | 1,677,997 | 1,639,258 | |||||||||||||||
|
FHLBB advances
|
607,328 | 829,626 | 616,417 | 474,561 | 545,323 | |||||||||||||||
|
Junior subordinated debentures
|
32,991 | 32,991 | 22,681 | 22,681 | 22,681 | |||||||||||||||
|
Other borrowings
|
21,501 | 26,743 | 32,560 | 14,684 | 9,774 | |||||||||||||||
|
Other liabilities
|
44,697 | 50,127 | 35,564 | 36,186 | 26,521 | |||||||||||||||
|
Shareholders' equity
|
254,946 | 235,111 | 186,513 | 173,056 | 158,446 | |||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,884,473 | $ | 2,965,466 | $ | 2,539,940 | $ | 2,399,165 | $ | 2,402,003 | ||||||||||
|
Asset Quality:
|
||||||||||||||||||||
|
Nonaccrual loans
|
$ | 27,470 | $ | 7,777 | $ | 4,304 | $ | 2,723 | $ | 2,414 | ||||||||||
|
Nonaccrual investment securities
|
1,065 | 633 | – | – | – | |||||||||||||||
|
Property acquired through foreclosure
|
||||||||||||||||||||
|
or repossession
|
1,974 | 392 | – | – | – | |||||||||||||||
|
Total nonperforming assets
|
$ | 30,509 | $ | 8,802 | $ | 4,304 | $ | 2,723 | $ | 2,414 | ||||||||||
|
Wealth Management Assets:
|
||||||||||||||||||||
|
Market value of assets under administration
|
$ | 3,770,193 | $ | 3,147,649 | $ | 4,014,352 | $ | 3,609,180 | $ | 3,215,763 | ||||||||||
|
Selected Quarterly Financial Data
|
(Dollars and shares in thousands, except per share amounts)
|
||||||||||||||||||||
|
2009
|
Q1 | Q2 | Q3 | Q4 |
Year
|
||||||||||||||||
|
Interest income:
|
|||||||||||||||||||||
|
Interest and fees on loans
|
$ | 24,139 | $ | 24,147 | $ | 24,303 | $ | 24,207 | $ | 96,796 | |||||||||||
|
Income on securities:
|
|||||||||||||||||||||
|
Taxable
|
8,449 | 7,588 | 7,028 | 6,358 | 29,423 | ||||||||||||||||
|
Nontaxable
|
780 | 778 | 781 | 777 | 3,116 | ||||||||||||||||
|
Dividends on corporate stock and FHLBB stock
|
72 | 55 | 63 | 55 | 245 | ||||||||||||||||
|
Other interest income
|
17 | 9 | 13 | 11 | 50 | ||||||||||||||||
|
Total interest income
|
33,457 | 32,577 | 32,188 | 31,408 | 129,630 | ||||||||||||||||
|
Interest expense:
|
|||||||||||||||||||||
|
Deposits
|
9,547 | 8,481 | 7,577 | 7,033 | 32,638 | ||||||||||||||||
|
FHLBB advances
|
7,227 | 7,112 | 7,094 | 6,739 | 28,172 | ||||||||||||||||
|
Junior subordinated debentures
|
479 | 479 | 545 | 444 | 1,947 | ||||||||||||||||
|
Other interest expense
|
245 | 244 | 246 | 246 | 981 | ||||||||||||||||
|
Total interest expense
|
17,498 | 16,316 | 15,462 | 14,462 | 63,738 | ||||||||||||||||
|
Net interest income
|
15,959 | 16,261 | 16,726 | 16,946 | 65,892 | ||||||||||||||||
|
Provision for loan losses
|
1,700 | 3,000 | 1,800 | 2,000 | 8,500 | ||||||||||||||||
|
Net interest income after provision for loan losses
|
14,259 | 13,261 | 14,926 | 14,946 | 57,392 | ||||||||||||||||
|
Noninterest income:
|
|||||||||||||||||||||
|
Wealth management services:
|
|||||||||||||||||||||
|
Trust and investment advisory fees
|
4,122 | 4,402 | 4,717 | 4,887 | 18,128 | ||||||||||||||||
|
Mutual fund fees
|
915 | 993 | 1,089 | 1,143 | 4,140 | ||||||||||||||||
|
Financial planning, commissions and other service fees
|
376 | 559 | 243 | 340 | 1,518 | ||||||||||||||||
|
Wealth management services
|
5,413 | 5,954 | 6,049 | 6,370 | 23,786 | ||||||||||||||||
|
Service charges on deposit accounts
|
1,113 | 1,201 | 1,257 | 1,289 | 4,860 | ||||||||||||||||
|
Merchant processing fees
|
1,349 | 2,086 | 2,619 | 1,790 | 7,844 | ||||||||||||||||
|
Income from bank-owned life insurance
|
444 | 447 | 451 | 452 | 1,794 | ||||||||||||||||
|
Net gains on loan sales and commissions
|
|||||||||||||||||||||
|
on loans originated for others
|
1,044 | 1,552 | 591 | 1,165 | 4,352 | ||||||||||||||||
|
Net realized gains on securities
|
57 | 257 | – | – | 314 | ||||||||||||||||
|
Net unrealized gains on interest rate swap contracts
|
60 | 341 | 92 | 204 | 697 | ||||||||||||||||
|
Other income
|
419 | 465 | 445 | 379 | 1,708 | ||||||||||||||||
|
Noninterest income, excluding other-than-temporary
|
|||||||||||||||||||||
|
impairment losses
|
9,899 | 12,303 | 11,504 | 11,649 | 45,355 | ||||||||||||||||
|
Total other-than-temporary impairment losses on securities
|
(4,244 | ) | – | (2,293 | ) | (113 | ) | (6,650 | ) | ||||||||||||
|
Portion of loss recognized in other comprehensive
|
|||||||||||||||||||||
|
income (before taxes)
|
2,253 | – | 1,826 | (566 | ) | 3,513 | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(1,991 | ) | – | (467 | ) | (679 | ) | (3,137 | ) | ||||||||||||
|
Total noninterest income
|
7,908 | 12,303 | 11,037 | 10,970 | 42,218 | ||||||||||||||||
|
Noninterest expense:
|
|||||||||||||||||||||
|
Salaries and employee benefits
|
10,475 | 10,359 | 10,416 | 10,667 | 41,917 | ||||||||||||||||
|
Net occupancy
|
1,226 | 1,122 | 1,232 | 1,210 | 4,790 | ||||||||||||||||
|
Equipment
|
975 | 1,036 | 916 | 990 | 3,917 | ||||||||||||||||
|
Merchant processing costs
|
1,143 | 1,780 | 2,213 | 1,516 | 6,652 | ||||||||||||||||
|
FDIC deposit insurance costs
|
651 | 2,143 | 808 | 795 | 4,397 | ||||||||||||||||
|
Outsourced services
|
786 | 568 | 683 | 697 | 2,734 | ||||||||||||||||
|
Legal, audit and professional fees
|
675 | 664 | 546 | 558 | 2,443 | ||||||||||||||||
|
Advertising and promotion
|
301 | 491 | 422 | 473 | 1,687 | ||||||||||||||||
|
Amortization of intangibles
|
308 | 308 | 303 | 290 | 1,209 | ||||||||||||||||
|
Other expenses
|
1,850 | 1,858 | 1,653 | 2,061 | 7,422 | ||||||||||||||||
|
Total noninterest expense
|
18,390 | 20,329 | 19,192 | 19,257 | 77,168 | ||||||||||||||||
|
Income before income taxes
|
3,777 | 5,235 | 6,771 | 6,659 | 22,442 | ||||||||||||||||
|
Income tax expense
|
1,107 | 1,470 | 1,858 | 1,911 | 6,346 | ||||||||||||||||
|
Net income
|
$ | 2,670 | $ | 3,765 | $ | 4,913 | $ | 4,748 | $ | 16,096 | |||||||||||
|
Weighted average shares outstanding - basic
|
15,942.7 | 15,983.6 | 16,016.8 | 16,035.4 | 15,994.9 | ||||||||||||||||
|
Weighted average shares outstanding - diluted
|
15,997.8 | 16,037.4 | 16,074.5 | 16,082.0 | 16,040.9 | ||||||||||||||||
|
Per share information:
|
Basic earnings per share
|
$ | 0.17 | $ | 0.24 | $ | 0.31 | $ | 0.30 | $ | 1.01 | ||||||||||
|
Diluted earnings per share
|
$ | 0.17 | $ | 0.23 | $ | 0.31 | $ | 0.30 | $ | 1.00 | |||||||||||
|
Cash dividends declared per share
|
$ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.84 | |||||||||||
|
Selected Quarterly Financial Data
|
(Dollars and shares in thousands, except per share amounts)
|
||||||||||||||||||||
|
2008
|
Q1 | Q2 | Q3 | Q4 |
Year
|
||||||||||||||||
|
Interest income:
|
|||||||||||||||||||||
|
Interest and fees on loans
|
$ | 24,970 | $ | 24,406 | $ | 25,520 | $ | 26,043 | $ | 100,939 | |||||||||||
|
Income on securities:
|
|||||||||||||||||||||
|
Taxable
|
8,416 | 8,302 | 8,504 | 9,160 | 34,382 | ||||||||||||||||
|
Nontaxable
|
780 | 786 | 778 | 781 | 3,125 | ||||||||||||||||
|
Dividends on corporate stock and FHLBB stock
|
620 | 489 | 407 | 366 | 1,882 | ||||||||||||||||
|
Other interest income
|
140 | 50 | 128 | 16 | 334 | ||||||||||||||||
|
Total interest income
|
34,926 | 34,033 | 35,337 | 36,366 | 140,662 | ||||||||||||||||
|
Interest expense:
|
|||||||||||||||||||||
|
Deposits
|
11,899 | 9,248 | 9,884 | 10,164 | 41,195 | ||||||||||||||||
|
FHLBB advances
|
7,299 | 7,794 | 8,011 | 7,790 | 30,894 | ||||||||||||||||
|
Junior subordinated debentures
|
338 | 509 | 524 | 508 | 1,879 | ||||||||||||||||
|
Other interest expense
|
314 | 275 | 274 | 318 | 1,181 | ||||||||||||||||
|
Total interest expense
|
19,850 | 17,826 | 18,693 | 18,780 | 75,149 | ||||||||||||||||
|
Net interest income
|
15,076 | 16,207 | 16,644 | 17,586 | 65,513 | ||||||||||||||||
|
Provision for loan losses
|
450 | 1,400 | 1,100 | 1,850 | 4,800 | ||||||||||||||||
|
Net interest income after provision for loan losses
|
14,626 | 14,807 | 15,544 | 15,736 | 60,713 | ||||||||||||||||
|
Noninterest income:
|
|||||||||||||||||||||
|
Wealth management services:
|
|||||||||||||||||||||
|
Trust and investment advisory fees
|
5,342 | 5,321 | 5,238 | 4,415 | 20,316 | ||||||||||||||||
|
Mutual fund fees
|
1,341 | 1,445 | 1,383 | 1,036 | 5,205 | ||||||||||||||||
|
Financial planning, commissions and other service fees
|
575 | 884 | 570 | 723 | 2,752 | ||||||||||||||||
|
Wealth management services
|
7,258 | 7,650 | 7,191 | 6,174 | 28,273 | ||||||||||||||||
|
Service charges on deposit accounts
|
1,160 | 1,208 | 1,215 | 1,198 | 4,781 | ||||||||||||||||
|
Merchant processing fees
|
1,272 | 1,914 | 2,221 | 1,493 | 6,900 | ||||||||||||||||
|
Income from bank-owned life insurance
|
447 | 453 | 452 | 448 | 1,800 | ||||||||||||||||
|
Net gains on loan sales and commissions
|
|||||||||||||||||||||
|
on loans originated for others
|
491 | 433 | 239 | 233 | 1,396 | ||||||||||||||||
|
Net realized gains on securities
|
813 | 1,096 | – | 315 | 2,224 | ||||||||||||||||
|
Net unrealized gains (losses) on interest rate swap contracts
|
119 | 26 | (24 | ) | (663 | ) | (542 | ) | |||||||||||||
|
Other income
|
342 | 528 | 278 | 477 | 1,625 | ||||||||||||||||
|
Noninterest income, excluding other-than-temporary
|
|||||||||||||||||||||
|
impairment losses
|
11,902 | 13,308 | 11,572 | 9,675 | 46,457 | ||||||||||||||||
|
Total other-than-temporary impairment losses on securities
|
(858 | ) | (1,149 | ) | (982 | ) | (2,948 | ) | (5,937 | ) | |||||||||||
|
Portion of loss recognized in other comprehensive
|
|||||||||||||||||||||
|
income (before taxes)
|
– | – | – | – | – | ||||||||||||||||
|
Net impairment losses recognized in earnings
|
(858 | ) | (1,149 | ) | (982 | ) | (2,948 | ) | (5,937 | ) | |||||||||||
|
Total noninterest income
|
11,044 | 12,159 | 10,590 | 6,727 | 40,520 | ||||||||||||||||
|
Noninterest expense:
|
|||||||||||||||||||||
|
Salaries and employee benefits
|
10,343 | 10,411 | 10,580 | 9,703 | 41,037 | ||||||||||||||||
|
Net occupancy
|
1,138 | 1,064 | 1,123 | 1,211 | 4,536 | ||||||||||||||||
|
Equipment
|
944 | 977 | 956 | 961 | 3,838 | ||||||||||||||||
|
Merchant processing costs
|
1,068 | 1,598 | 1,857 | 1,246 | 5,769 | ||||||||||||||||
|
FDIC deposit insurance costs
|
256 | 251 | 265 | 272 | 1,044 | ||||||||||||||||
|
Outsourced services
|
636 | 742 | 700 | 781 | 2,859 | ||||||||||||||||
|
Legal, audit and professional fees
|
543 | 430 | 626 | 726 | 2,325 | ||||||||||||||||
|
Advertising and promotion
|
386 | 467 | 376 | 500 | 1,729 | ||||||||||||||||
|
Amortization of intangibles
|
326 | 326 | 320 | 309 | 1,281 | ||||||||||||||||
|
Other expenses
|
1,502 | 1,788 | 1,668 | 2,366 | 7,324 | ||||||||||||||||
|
Total noninterest expense
|
17,142 | 18,054 | 18,471 | 18,075 | 71,742 | ||||||||||||||||
|
Income before income taxes
|
8,528 | 8,912 | 7,663 | 4,388 | 29,491 | ||||||||||||||||
|
Income tax expense
|
2,712 | 2,817 | 1,623 | 167 | 7,319 | ||||||||||||||||
|
Net income
|
$ | 5,816 | $ | 6,095 | $ | 6,040 | $ | 4,221 | $ | 22,172 | |||||||||||
|
Weighted average shares outstanding - basic
|
13,358.1 | 13,381.1 | 13,409.5 | 15,765.4 | 13,981.9 | ||||||||||||||||
|
Weighted average shares outstanding - diluted
|
13,560.6 | 13,566.7 | 13,588.3 | 15,871.6 | 14,146.3 | ||||||||||||||||
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Per share information:
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Basic earnings per share
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$ | 0.44 | $ | 0.45 | $ | 0.45 | $ | 0.27 | $ | 1.59 | ||||||||||
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Diluted earnings per share
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$ | 0.43 | $ | 0.45 | $ | 0.44 | $ | 0.27 | $ | 1.57 | |||||||||||
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Cash dividends declared per share
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$ | 0.20 | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.83 | |||||||||||
The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Corporation for the periods shown. For a full understanding of this analysis, it should be read in conjunction with other sections of this Annual
Report on Form 10-K, including Part I, “Item 1. Business”, Part II, “Item 6. Selected Financial Data” and Part II, “Item 8. Financial Statements and Supplementary Data.”
Forward-Looking Statements
This report contains statements that are “forward-looking statements.” We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by
our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they
involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial
markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectibility, default and charge-off rates, changes in the size and nature of the Corporation’s competition, changes in legislation
or regulation and accounting principles, policies and guidelines, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of this Annual Report on Form 10-K may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based
on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies. The Corporation considers the following to be its critical accounting
policies: allowance for loan losses, accounting for acquisitions and review of goodwill and intangible assets for impairment, and other-than-temporary impairment of investment securities. As a result of the early adoption of provisions of the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification
TM
(“Codification” or “ASC”) ASC 320, “Investments – Debt
and Equity Securities,” effective January 1, 2009, the Corporation has revised its critical accounting policy pertaining to other-than-temporary impairment of investment securities. These provisions applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted. Therefore, the revised accounting policy below under the caption “Valuation of Investment Securities for Impairment
”
represents
the only significant change in the Corporation’s critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and applies prospectively beginning January 1, 2009.
Allowance for Loan Losses
Determining an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for
loan losses. The methodology includes three elements:
|
(1)
|
Loss allocations are identified for individual loans deemed to be impaired in accordance with GAAP. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due
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|
according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is
measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral less costs to sell if it is determined that foreclosure is probable. For collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other
discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.
|
|
(2)
|
Loss allocation factors are used for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar economic indicators.
|
Individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s
financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. We adjust loss allocations for various factors including declining trends in real estate values and deterioration in general economic conditions.
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 and our historical loss experience for each type of credit product. We
periodically update these analyses and adjust the loss allocations for various factors that we believe are not adequately presented in historical loss experience including declining trends in real estate values, changes in unemployment levels and increases in delinquency levels.
|
(3)
|
An additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, a significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio
is collateralized by real estate in this area. A portion of the commercial loans and commercial mortgage loans are to borrowers in the hospitality, tourism and recreation industries. Further, economic conditions which may affect the ability of borrowers to meet debt service requirements are considered, including interest rates and energy costs. Results of regulatory examinations, portfolio composition, including a trend toward somewhat larger credit relationships, and other changes
in the portfolio are also considered.
|
Because the methodology is based upon historical experience and trends, current economic data as well as management's judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes
in economic conditions in our market area, concentration of risk, and declines in local property values. Adversely different conditions or assumptions could lead to increase the allowance. As of December 31, 2009, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators.
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.
Review of Goodwill and Identifiable Intangible Assets for Impairment
Goodwill is recorded as part of the Corporation’s acquisitions of businesses where the purchase price exceeds the fair market value of the net tangible and identifiable intangible assets. Goodwill is not amortized, but rather is subject to ongoing periodic impairment tests at least annually or
more frequently upon the occurrence of significant adverse events. See Part I, Item 1A, “Risk Factors” for additional information. Goodwill was reviewed in 2009 by performing a discounted cash flow analysis (“income approach”) and by estimates of selected market information (“market approach”) for both the commercial banking and the wealth management segments of the Corporation. The
values determined using the income approach and the market approach were weighted equally for each segment. The results of the 2009 review indicated that the fair value exceeded the carrying value for both segments.
For acquisitions accounted for using the purchase method of accounting, assets acquired and liabilities assumed are required to be recorded at their fair value. Intangible assets acquired are primarily comprised of wealth management advisory contracts and core deposit intangibles. The values
of these intangible assets were estimated using valuation techniques, based on discounted cash flow analysis. These intangible assets are being amortized over the period the assets are expected to contribute to the cash flows of the Corporation, which reflect the expected pattern of benefit. These intangible assets are amortized based upon the projected cash flows the Corporation will receive from the customer relationships during the estimated useful lives. These intangible assets
are subject to impairment tests in accordance with GAAP. The carrying value of the wealth management advisory contracts and other identifiable intangibles are reviewed for impairment on an annual basis, or sooner, whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable. Wealth management assets under administration are analyzed to determine if there has been a reduction since acquisition that could indicate possible impairment of the advisory
contracts. Impairment would be recognized if the carrying value exceeded the sum of the undiscounted expected future cash flows from the intangible assets. Impairment would result in a write-down to the estimated fair value based on the anticipated discounted future cash flows. The remaining useful life of an intangible asset that is being amortized is also evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period
of amortization.
The Corporation makes certain estimates and assumptions that affect the determination of the expected future cash flows from the advisory contracts and other identifiable intangibles. These estimates and assumptions include account attrition, market appreciation for wealth management assets under administration
and anticipated fee rates, projected costs and other factors. Significant changes in these estimates and assumptions could cause a different valuation for the intangible assets. Changes in the original assumptions could change the amount of the intangible recognized and the resulting amortization. Subsequent changes in assumptions could result in recognition of impairment of the intangible assets.
These assumptions used in the impairment tests of goodwill and intangible assets are susceptible to change based on changes in economic conditions and other factors. Significant assumptions used to test goodwill for impairment include estimated discount rates and the timing and amount of projected
cash flows. Any change in the estimates which the Corporation uses to determine the carrying value of the Corporation’s goodwill and identifiable intangible assets, or which otherwise adversely affects their value or estimated lives could adversely affect the Corporation’s results of operations. See Note 8 to the Consolidated Financial Statements for additional information.
Valuation of Investment Securities for Impairment
Securities available for sale are carried at fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. The fair values of securities are based on either quoted market prices, third party pricing services
or third party valuation specialists. When the fair value of an investment security is less than its amortized cost basis, the Corporation assesses whether the decline in value is other-than-temporary. The Corporation considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in the value subsequent to the
reporting date, forecasted performance of the issuer, changes in the dividend or interest payment practices of the issuer, changes in the credit rating of the issuer or the specific security, and the general market condition in the geographic area or industry the issuer operates in.
Future adverse changes in market conditions, continued poor operating results of the issuer, projected adverse changes in cash flows which might impact the collection of all principal and interest related to the security, 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.
Equity securities:
In determining whether an other-than-temporary impairment has occurred for common equity securities, the Corporation also considers whether it has the ability and intent to hold the investment until a market price recovery in the foreseeable future. Management evaluates the near-term prospects of the
issuers in relation to the severity and
duration of the impairment. 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.
With respect to perpetual preferred stocks, the Corporation’s assessment of other-than-temporary impairment is made using an impairment model (including an anticipated recovery period) similar to a debt security, provided there has been no evidence of a deterioration in credit of the issuer.
Debt securities:
In determining whether an other-than-temporary impairment has occurred for debt securities, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost of the security. If the present value of expected cash flows is less than the amortized
cost of the security, then the entire amortized cost of the security will not be recovered; that is, a credit loss exists, and an other-than-temporary impairment shall be considered to have occurred.
With respect to holdings of collateralized debt obligations representing pooled trust preferred debt securities, estimates of cash flows are evaluated upon consideration of information including, but not limited to, past events, current conditions, and reasonable and supporting forecasts for the respective holding. Such
information generally includes the remaining payment terms of the security, prepayment speeds, the financial condition of the issuer(s), expected defaults, and the value of any underlying collateral. The estimated cash flows shall be discounted at a rate equal to the current yield used to accrete the beneficial interest.
When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings for a debt security depends on whether the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost
less any current period credit loss. If the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the amortized cost and fair value of the security. If the Corporation does not intend to sell or more likely than not will not be required to sell the security before recovery of its amortized cost,
the amount of the other-than-temporary impairment related to credit loss shall be recognized in earnings and the noncredit-related portion of the other-than-temporary impairment shall be recognized in other comprehensive income.
Overview
Washington Trust offers a comprehensive product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and southeastern Connecticut,
ATMs, and its Internet website (www.washtrust.com).
Our largest source of operating income is net interest income, the difference between interest earned on loans and securities and interest paid on deposits and other borrowings. In addition, we generate noninterest income from a number of sources including wealth management services, deposit services,
merchant credit card processing, bank-owned life insurance, loan sales, commissions on loans originated for others and sales of investment securities. Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, merchant processing costs, FDIC deposit insurance costs, technology and other administrative expenses.
Our financial results are affected by interest rate volatility, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles. During the latter part of 2008 and continuing into 2009, market and economic
conditions have been severely impacted by deterioration in credit conditions as well as illiquidity with respect to various parts of the financial markets and elevated levels of volatility. Concerns about future economic growth, lower consumer confidence, contraction of credit availability and lower corporate earnings continue to challenge the economy. The rate of unemployment continued to increase, reaching its highest level in several years. Corporate and related counterparty
credit spreads widened and heightened concerns about numerous financial services companies adversely impacted the financial markets. As a result of these unparalleled market conditions, federal government agencies initiated several intervening actions in the U.S. financial services industry.
Management believes that the downturn in the local and national economies negatively impacted the credit quality of our loans, particularly in our commercial portfolio. We have increased the allowance for loan losses in response to
this condition as well as growth in the commercial portfolio. In response to these conditions, the Corporation has continued to refine its loan underwriting standards and has continued to enhance its credit monitoring and collection practices. The weakness in the financial markets described
above also contributed to declines in the values of portions of our investment securities portfolio. In addition, wealth management revenues are largely dependent on the value of assets under administration and are closely tied to the performance of the financial markets.
Opportunities and Risks
A significant portion of the Corporation’s commercial banking and wealth management business is conducted in the Rhode Island and greater southern New England area. Management recognizes that substantial competition exists in this marketplace and views this as a key business risk. A
substantial portion of the banking industry market share in this region is held by much larger financial institutions with greater resources and larger delivery systems than the Bank. Market competition also includes the expanded commercial banking presence of credit unions and savings banks. While these competitive forces will continue to present risk, we have been successful in growing our commercial banking base and wealth management business, and management believes that the breadth
of our product line and our size provide opportunities to compete effectively in our marketplace.
Significant challenges also exist with respect to credit risk, interest rate risk, the condition of the financial markets and related impact on wealth management assets, and operational risk.
Credit risk is the risk of loss due to the inability of borrower customers to repay loans or lines of credit. Credit risk on loans is reviewed below under the heading “Asset Quality.” Credit risk also exists with respect to debt instrument investment securities, which is reviewed
below under the heading “Investment Securities.”
Interest rate risk exists because the repricing frequency and magnitude of interest earning assets and interest bearing liabilities are not identical. This risk is reviewed in more detail below under the heading “Asset/Liability Management and Interest Rate Risk.”
Wealth management service revenues, which represented approximately 22% of total revenues in 2009, are substantially dependent on the market value of wealth management assets under administration. These values may be negatively affected by changes in economic conditions and volatility in the financial
markets.
Operational risk is the risk of loss resulting from data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. Operational risk is discussed above under Item 1A. “Risk
Factors.”
For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
Composition of Earnings
Comparison of 2009 with 2008
Net income for the year ended December 31, 2009 amounted to $16.1 million, or $1.00 per diluted share, compared to $22.2 million, or $1.57 per diluted share, for 2008. The returns on average equity and average assets for 2009 were 6.56% and 0.55%, respectively, compared to 11.12%
and 0.82%, respectively, for 2008. Earnings in 2009 were influenced by several factors as described below.
Net interest income increased by $379 thousand, or 1%, in 2009. No dividend was received from the Federal Home Loan Bank of Boston (“FHLBB”) in 2009. Dividend income on the Corporation’s investment in FHLBB stock totaled to $1.3 million for 2008. The
net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earning assets) declined 16 basis points in 2009. This decrease in net interest margin reflects the elimination of FHLBB dividend income and margin compression, in general, on core deposit rates, as well as the impact of higher levels of nonaccrual loans in 2009 compared to 2008.
The loan loss provision charged to earnings in 2009 was $8.5 million, an increase of $3.7 million from 2008. The provision for loan losses was based on management’s assessment of economic and credit conditions, with particular emphasis on commercial and commercial real estate categories,
as well as growth in the loan portfolio. In 2009, net charge-offs totaled $4.8 million, or 0.25% of average total loans, compared to $1.4 million, or 0.08% of average total loans, in 2008.
Revenue from wealth management services, our primary source of noninterest income, is largely dependent on the value of assets under administration. For 2009, wealth management revenues decreased by $4.5 million, or 16%, from 2008. The decline in the revenue source was primarily due
to lower valuations in the financial markets in 2009, compared to 2008. While the balance of assets under administration at December 31, 2009 was approximately 20% higher than the balance a year earlier, the average balance for the year ended December 31, 2009 was lower than the comparable average balance in 2008.
Due to strong residential mortgage refinancing and sales activity, net gains on loan sales and commissions on loans originated for others for 2009 increased by $3.0 million from 2008.
Credit-related impairment losses of $3.1 million were charged to earnings in 2009 for investment securities deemed to be other-than-temporarily impaired. Impairment losses of $5.9 million were recognized in earnings in 2008. Also included in noninterest income in the year ended
December 31, 2009 and 2008, were net realized gains on sales of securities of $314 thousand and $2.2 million, respectively.
Noninterest expenses were up by $5.4 million, or 8%, from 2008, which included a $3.4 million increase in FDIC deposit insurance costs. In the second quarter of 2009, the Corporation recognized a FDIC special assessment of $1.35 million ($869 thousand after tax). In addition
to the special assessment, the year over year increase in FDIC deposit insurance costs also reflects higher assessment rates, which are generally expected to continue in effect for the foreseeable future.
Income tax expense amounted to $6.3 million in 2009, a decrease of $973 thousand from 2008. The effective tax rate for 2009 was 28.3%, compared to 24.8% in 2008. In 2008, income tax benefits of $1.4 million, or 10 cents per diluted share were recognized resulting from
a change in state corporate income tax legislation and the resolution of certain state tax positions. Excluding these income tax benefits, the effective income tax rate for 2008 was 29.6%.
Comparison of 2008 with 2007
Net income for 2008 amounted to $22.2 million, or $1.57 per diluted share, compared to $23.8 million, or $1.75 per diluted share, for 2007. The rates of return on average equity and average assets for 2008 were 11.12% and 0.82%, respectively. Comparable amounts for 2007 were 13.48%
and 0.99%, respectively. The $1.6 million, or 6.8%, decrease in net income in 2008 as compared to 2007 was attributable to several factors as described below.
Net interest income increased by $5.6 million, or 9.3%, in 2008, reflecting higher interest-earning asset levels and lower deposit costs. The net interest margin declined 12 basis points in 2008 primarily due to compression of asset yields and funding costs resulting from the 450 basis
point aggregate impact of FRB rate-cutting actions from October 2007 through December 2008.
The loan loss provision charged to earnings in 2008 was $4.8 million, up by $2.9 million from 2007 largely due to growth in the loan portfolio as well as our ongoing evaluation of credit quality and general economic conditions. Asset quality remained manageable during the year with net charge-offs
of only 0.08% of average total loans in 2008, compared to a ratio of 0.03% in 2007.
Noninterest income amounted to $40.5 million in 2008, down $5.0 million, or 11.0%, from 2007. This decline in noninterest income was largely due to the recognition of losses on write-downs of investment securities to fair value of $5.9 million ($3.8 million after tax, or 27 cents
per diluted share). Wealth management revenues are largely dependent on the value of wealth management assets under administration and are closely tied to the performance of the financial markets. Revenues from wealth management services declined by $743 thousand, or 2.6%, in 2008. Wealth management assets under administration were down $866.7 million, or 21.6%, from December 31, 2007.
Noninterest expenses totaled $71.7 million for 2008, up by $2.8 million, or 4.1%, from 2007. Noninterest expenses for 2007 included $1.1 million in debt prepayment charges recorded as a result of prepayments of higher cost FHLBB advances in the first quarter of 2007. There
were no debt prepayment penalty charges recognized in 2008. Excluding the 2007 debt prepayment charge, noninterest expenses rose by $3.9 million, or 5.8%. Approximately 40% of the 2008 increase, on this basis, represents costs attributable to our wealth management business, an increase in FDIC deposit insurance costs and operating expenses related to a de novo branch opened in June 2007.
Income tax expense amounted to $7.3 million in 2008, a decrease of $3.5 million from 2007. Income tax benefits of $1.4 million, or 10 cents per diluted share, were recognized in 2008 resulting from a change in state corporate income tax legislation and the resolution of certain
state tax positions. Excluding these income tax benefits, the Corporation’s effective income tax rate for 2008 was 29.6%, as compared to 31.3% in 2007.
Results of Operations
Segment Reporting
Washington Trust manages its operations through two business segments, Commercial Banking and Wealth Management Services. The Commercial Banking segment includes commercial, commercial real estate, residential and consumer lending activities; mortgage banking, secondary market and loan servicing activities;
deposit generation; merchant credit card services; cash management activities; and direct banking activities, which include the operation of ATMs, telephone and internet banking services and customer support and sales. Wealth Management Services includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services, including services as trustee for pension and profit
sharing plans; and other financial planning and advisory services. All other activity, such as the investment securities portfolio, wholesale funding activities and administrative units, are not related to the segments and are considered Corporate. See Note 17 to the Consolidated Financial Statements for additional disclosure related to business segments.
Comparison of 2009 with 2008
The Commercial Banking segment reported net income of $17.0 million in 2009, down by $2.9 million, or 14%, from 2008. Net interest income increased by 3% over 2008 amounts, reflecting growth in average loan balances and lower deposit costs, offset in part by the impact of higher levels of
nonaccrual loans in 2009. Noninterest income derived from the Commercial Banking segment increased by 33% over 2008 reported amounts largely due to increases in net gains on loan sales and commissions on loans originated for others. The increases in net interest income and noninterest income were offset by a higher loan loss provision and an increase in Commercial Banking other noninterest expenses in 2009, as compared to 2008. The increase in other noninterest expenses was attributable
to increases in staffing and higher FDIC deposit insurance costs, including the second quarter 2009 special FDIC assessment.
The Wealth Management Services segment reported net income of $3.0 million in 2009, a decrease of $1.9 million, or 39%, from net income in 2008. Noninterest income derived from the Wealth Management Services segment was $23.8 million in 2009, down by $4.5 million, or 16%, from 2008. This
revenue is dependent to a large extent on the value of assets under administration and is closely tied to the performance of the financial markets. Noninterest expenses for the Wealth Management Services segment also declined in 2009, as compared to 2008, reflecting lower incentive-based compensation.
Comparison of 2008 with 2007
The Commercial Banking segment reported net income of $19.9 million in 2008, up by $2.1 million, or 12%, from 2007, primarily due to higher net interest income. Net interest income was up by $8.7 million, or 16%, driven by growth in average loan balances and lower deposit costs. This
increase in net interest income was partially offset by a $2.9 million increase in the loan loss provision and $2.7 million increase in Commercial Banking noninterest expenses in 2008. Higher noninterest expenses reflected increases in FDIC deposit insurance costs and operating expenses related to a de novo branch opened in June 2007.
The Wealth Management Services segment reported net income of $4.9 million in 2008, a decrease of $796 thousand, or 14%, from net income in 2007. Noninterest income derived from the Wealth Management Services segment was $28.3 million in 2008, down by $743 thousand, or 3%, from
2007. Lower noninterest income resulted from declines in wealth management assets under administration due to lower valuations in the financial markets. In 2008, noninterest expenses for the Wealth Management Services segment amounted to $20.1 million, up by $451 thousand, or 2%, from 2007. This increase was attributable to higher outsourced services expenses for wealth management platform and product support costs.
Net Interest Income
Comparison of 2009 with 2008
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. Net interest
income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are loan prepayment fees and certain other fees, such as late charges.
Net interest income for 2009 totaled $65.9 million, up by $379 thousand, or 1%, from 2008. Included in net interest income in the year ended December 31, 2008 was dividend income on the Corporation’s investment in FHLBB stock of $1.3 million. No dividend was received
from FHLBB in 2009.
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. For more information see the section entitled “Average Balances / Net
Interest Margin - Fully Taxable Equivalent (FTE) Basis” below.
FTE net interest income for 2009 amounted to $67.7 million, an increase of $370 thousand from 2008. The net interest margin (FTE net interest income as a percentage of average interest–earnings assets) for 2009 amounted to 2.48%, compared to 2.64% for 2008. The 16 basis
point decline in the net interest margin was primarily attributable to the elimination of the FHLBB dividend income, margin compression, in general, on core deposit rates following the Federal Reserve’s actions to reduce short-term interest rates in late 2008 and early 2009, and the impact of higher levels of nonaccrual loans in 2009 compared to 2008.
Average interest-earning assets increased by $186 million, or 7%, in 2009. The increase primarily reflects growth in the loan portfolio. Total average loans for the year 2009 increased $197 million from 2008 largely due to growth in the commercial loan portfolio. The
yield on total loans for the year 2009 decreased by 84 basis points from 2008, reflecting declines in short-term interest rates. The contribution of loan prepayment and other fees to the yield on total loans was 1 basis point and 3 basis points in 2009 and 2008, respectively. Total average securities for the year 2009 decreased by $12 million from 2008, due to maturities and pay-downs on mortgage-backed securities. The FTE rate of return on securities for the
year 2009 decreased by 60 basis points, from 2008. The decrease in the total yield on securities reflects lower yields on variable rate securities tied to short-term interest rates.
Average interest-bearing liabilities increased by $137 million or 6% in 2009 primarily due to growth in deposits, offset in part by declines in FHLBB advances. The increase in deposits includes the successful first quarter 2009 transition of wealth management client money market deposits previously
held in outside money market funds to fully insured and collateralized deposits. This resulted in a $45 million increase in average interest-bearing deposits. Average interest-bearing deposits increased by $190 million from 2009 to 2008, while the average rate paid on interest-bearing deposits decreased by 81 basis points. Interest-bearing deposits include out-of-market brokered certificates of deposit, which are utilized by the Corporation as part of its overall
funding program along with FHLBB advances and other sources. Average out-of-market brokered certificates of deposit for 2009 decreased by $26 million from 2008, with a 14 basis point decline in the average rate paid. Excluding out-of-market brokered certificates of deposit, average in-market interest-bearing deposits for the year 2009 increased by $216 million from 2008 while the average rate paid on in-market interest-bearing deposits decreased by 81 basis points. See
additional discussion on brokered certificates of deposit in the “Financial Condition” section under the caption “Deposits.”
The growth in deposits enabled the Corporation to reduce its level of FHLBB advances in 2009. The average balance of FHLBB advances for the year 2009 decreased by $51 million from 2008. The average rate paid on such advances for the year 2009 decreased 9 basis points from 2008. In
connection with the Corporation’s ongoing interest rate risk management efforts, in January 2010, the Corporation modified the terms to extend the maturity dates of FHLBB advances totaling $50 million with original maturity dates in 2011 and 2012. As a result, the Corporation expects interest expense savings of approximately $212 thousand in 2010.
Comparison of 2008 with 2007
Net interest income for 2008 totaled $65.5 million, up $5.6 million, or 9%, from the amount reported for 2007. The increase in net interest income reflected growth in interest-earning assets and lower deposit costs.
FTE net interest income for 2008 amounted to $67.4 million, up $5.6 million, or 9%, from 2007. The net interest margin for 2008 amounted to 2.64%, compared to 2.76% for 2007. The 12 basis point decline in the net interest margin was primarily attributable to lower yields on
variable rate commercial and consumer loans resulting from
Federal Reserve actions to reduce short-term interest rates, with less commensurate reduction in deposit and other funding rates.
Average interest-earning assets increased by $308 million, or 14%, in 2008, including the reinvestment of the $46.7 million in net proceeds received from the issuance of Common Stock in October 2008. The increase in average interest-earning assets was largely due to growth in the loan portfolio. Average
loan balances grew $198 million, or 13%, primarily due to growth in the commercial loan category. The yield on total loans decreased 63 basis points in 2008, reflecting declines in short-term interest rates. The contribution of loan prepayment and other fees to the yield on total loans was 3 basis points and 4 basis points in 2008 and 2007, respectively. Total average securities increased by $94 million, or 14%, in 2008, largely due to purchases of mortgage-backed
securities issued by U.S. government agencies and government-sponsored enterprises during a period of substantial spread widening for these and many other classes of investment securities. The FTE rate of return on securities decreased 24 basis points in 2008, reflecting lower yields on variable rate securities tied to short-term interest rates
In 2008, average interest-bearing liabilities increased by $284 million, or 14%, while cost of funds decreased 52 basis points. The increase in average interest-bearing liabilities was largely due to increases in FHLBB advances. The balance of average FHLBB advances increased $249 million
in 2008, while the average rate paid on FHLBB advances decreased 23 basis points. In addition, the increase in average interest-bearing liabilities included a $40 million increase in time deposits. Time deposits include out-of-market brokered certificates of deposit, which are utilized by the Corporation as part of its overall funding program along with FHLBB advances and other sources. Average out-of-market brokered certificates of deposit increased $10 million,
or 7%, in 2008. See Note 11 to the Consolidated Financial Statements for additional discussion on junior subordinated debentures issued in the second quarter of 2008.
Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following table presents average balance and interest rate information. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the
70% federal dividends received deduction is also used in the calculation of tax equivalency. 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,
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Commercial and other loans
|
$ | 941,833 | $ | 50,092 | 5.32 | $ | 782,825 | $ | 50,589 | 6.46 | $ | 626,309 | $ | 47,713 | 7.62 | |||||||||||||||||||||
|
Residential real estate loans, including
|
||||||||||||||||||||||||||||||||||||
|
mortgage loans held for sale
|
629,035 | 33,410 | 5.31 | 613,367 | 33,954 | 5.54 | 589,619 | 31,540 | 5.35 | |||||||||||||||||||||||||||
|
Consumer loans
|
323,576 | 13,494 | 4.17 | 301,653 | 16,584 | 5.50 | 283,873 | 19,634 | 6.92 | |||||||||||||||||||||||||||
|
Total loans
|
1,894,444 | 96,996 | 5.12 | 1,697,845 | 101,127 | 5.96 | 1,499,801 | 98,887 | 6.59 | |||||||||||||||||||||||||||
|
Cash, federal funds sold and
|
||||||||||||||||||||||||||||||||||||
|
other short-term investments
|
20,201 | 50 | 0.25 | 21,515 | 334 | 1.55 | 16,759 | 831 | 4.96 | |||||||||||||||||||||||||||
|
FHLBB stock
|
42,008 | – | – | 39,282 | 1,345 | 3.42 | 28,905 | 1,915 | 6.62 | |||||||||||||||||||||||||||
|
Taxable debt securities
|
693,050 | 29,423 | 4.25 | 700,546 | 34,382 | 4.91 | 605,443 | 31,163 | 5.15 | |||||||||||||||||||||||||||
|
Nontaxable debt securities
|
80,629 | 4,662 | 5.78 | 81,046 | 4,583 | 5.65 | 77,601 | 4,368 | 5.63 | |||||||||||||||||||||||||||
|
Corporate stocks
|
5,618 | 339 | 6.05 | 9,426 | 740 | 7.85 | 13,639 | 1,132 | 8.29 | |||||||||||||||||||||||||||
|
Total securities
|
779,297 | 34,424 | 4.42 | 791,018 | 39,705 | 5.02 | 696,683 | 36,663 | 5.26 | |||||||||||||||||||||||||||
|
Total interest-earning assets
|
2,735,950 | 131,470 | 4.81 | 2,549,660 | 142,511 | 5.59 | 2,242,148 | 138,296 | 6.17 | |||||||||||||||||||||||||||
|
Noninterest-earning assets
|
185,345 | 163,730 | 165,561 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 2,921,295 | $ | 2,713,390 | $ | 2,407,709 | ||||||||||||||||||||||||||||||
|
Liabilities and
|
||||||||||||||||||||||||||||||||||||
|
shareholders’ equity:
|
||||||||||||||||||||||||||||||||||||
|
NOW accounts
|
$ | 181,171 | $ | 327 | 0.18 | $ | 165,479 | $ | 306 | 0.18 | $ | 166,580 | $ | 285 | 0.17 | |||||||||||||||||||||
|
Money market accounts
|
375,175 | 3,960 | 1.06 | 310,445 | 6,730 | 2.17 | 303,138 | 11,846 | 3.91 | |||||||||||||||||||||||||||
|
Savings accounts
|
187,862 | 530 | 0.28 | 173,840 | 1,059 | 0.61 | 194,342 | 2,619 | 1.35 | |||||||||||||||||||||||||||
|
Time deposits
|
957,449 | 27,821 | 2.91 | 861,814 | 33,100 | 3.84 | 821,951 | 37,672 | 4.58 | |||||||||||||||||||||||||||
|
FHLBB advances
|
687,210 | 28,172 | 4.10 | 737,830 | 30,894 | 4.19 | 489,229 | 21,641 | 4.42 | |||||||||||||||||||||||||||
|
Junior subordinated debentures
|
32,991 | 1,947 | 5.90 | 30,259 | 1,879 | 6.21 | 22,681 | 1,352 | 5.96 | |||||||||||||||||||||||||||
|
Other
|
21,476 | 981 | 4.57 | 26,678 | 1,181 | 4.43 | 23,990 | 1,075 | 4.48 | |||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
2,443,334 | 63,738 | 2.61 | 2,306,345 | 75,149 | 3.26 | 2,021,911 | 76,490 | 3.78 | |||||||||||||||||||||||||||
|
Demand deposits
|
187,800 | 177,032 | 177,342 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
44,712 | 30,618 | 31,886 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
245,449 | 199,395 | 176,570 | |||||||||||||||||||||||||||||||||
|
Total liabilities and
|
||||||||||||||||||||||||||||||||||||
|
shareholders’ equity
|
$ | 2,921,295 | $ | 2,713,390 | $ | 2,407,709 | ||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 67,732 | $ | 67,362 | $ | 61,806 | ||||||||||||||||||||||||||||||
|
Interest rate spread
|
2.20 | 2.33 | 2.39 | |||||||||||||||||||||||||||||||||
|
Net interest margin
|
2.48 | 2.64 | 2.76 | |||||||||||||||||||||||||||||||||
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,
|
2009
|
2008
|
2007
|
|||||||||
|
Commercial and other loans
|
$ | 200 | $ | 188 | $ | 167 | ||||||
|
Nontaxable debt securities
|
1,546 | 1,458 | 1,385 | |||||||||
|
Corporate stocks
|
94 | 203 | 310 | |||||||||
|
Total
|
$ | 1,840 | $ | 1,849 | $ | 1,862 | ||||||
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the periods indicated. The net change attributable to both volume and rate has been allocated proportionately.
| 2009/2008 | 2008/2007 | |||||||||||||||||||||||
|
(Dollars in thousands)
|
Volume
|
Rate
|
Net Change
|
Volume
|
Rate
|
Net Change
|
||||||||||||||||||
|
Interest on interest-earning assets:
|
||||||||||||||||||||||||
|
Commercial and other loans
|
$ | 9,285 | $ | (9,782 | ) | $ | (497 | ) | $ | 10,817 | $ | (7,941 | ) | $ | 2,876 | |||||||||
|
Residential real estate loans, including
|
||||||||||||||||||||||||
|
mortgage loans held for sale
|
867 | (1,411 | ) | (544 | ) | 1,284 | 1,130 | 2,414 | ||||||||||||||||
|
Consumer loans
|
1,140 | (4,230 | ) | (3,090 | ) | 1,172 | (4,222 | ) | (3,050 | ) | ||||||||||||||
|
Cash, federal funds sold and
|
||||||||||||||||||||||||
|
other short-term investments
|
(19 | ) | (265 | ) | (284 | ) | 189 | (686 | ) | (497 | ) | |||||||||||||
|
FHLBB stock
|
87 | (1,432 | ) | (1,345 | ) | 546 | (1,116 | ) | (570 | ) | ||||||||||||||
|
Taxable debt securities
|
(366 | ) | (4,593 | ) | (4,959 | ) | 4,724 | (1,505 | ) | 3,219 | ||||||||||||||
|
Nontaxable debt securities
|
(24 | ) | 103 | 79 | 198 | 17 | 215 | |||||||||||||||||
|
Corporate stocks
|
(255 | ) | (146 | ) | (401 | ) | (335 | ) | (57 | ) | (392 | ) | ||||||||||||
|
Total interest income
|
10,715 | (21,756 | ) | (11,041 | ) | 18,595 | (14,380 | ) | 4,215 | |||||||||||||||
|
Interest on interest-bearing liabilities:
|
||||||||||||||||||||||||
|
NOW accounts
|
22 | (1 | ) | 21 | (1 | ) | 22 | 21 | ||||||||||||||||
|
Money market accounts
|
1,194 | (3,964 | ) | (2,770 | ) | 279 | (5,395 | ) | (5,116 | ) | ||||||||||||||
|
Savings accounts
|
80 | (609 | ) | (529 | ) | (252 | ) | (1,308 | ) | (1,560 | ) | |||||||||||||
|
Time deposits
|
3,378 | (8,657 | ) | (5,279 | ) | 1,753 | (6,325 | ) | (4,572 | ) | ||||||||||||||
|
FHLBB advances
|
(2,073 | ) | (649 | ) | (2,722 | ) | 10,435 | (1,182 | ) | 9,253 | ||||||||||||||
|
Junior subordinated debentures
|
164 | (96 | ) | 68 | 468 | 59 | 527 | |||||||||||||||||
|
Other
|
(236 | ) | 36 | (200 | ) | 119 | (13 | ) | 106 | |||||||||||||||
|
Total interest expense
|
2,529 | (13,940 | ) | (11,411 | ) | 12,801 | (14,142 | ) | (1,341 | ) | ||||||||||||||
|
Net interest income
|
$ | 8,186 | $ | (7,816 | ) | $ | 370 | $ | 5,794 | $ | (238 | ) | $ | 5,556 | ||||||||||
Provision and Allowance for Loan Losses
The provision for loan losses is based on management’s periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of nonperforming loans and charge-offs,
both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.
The provision for loan losses charged to earnings amounted to $8.5 million in 2009, compared to $4.8 million in 2008 and $1.9 million in 2007. The increase in the provision was based on management’s assessment of various factors affecting the loan portfolio, including, among others,
our ongoing evaluation of credit quality, with particular emphasis on the commercial portfolio, general economic conditions and growth in the loan portfolio. Net charge-offs were $4.8 million in 2009, $1.4 million in 2008 and $517 thousand in 2007. Commercial loan net charge-offs amounted to $4.2 million, or 88% of total net charge-offs, in 2009. This compares to commercial loan net charge-offs of $1.1 million, or 82% of total net charge-offs, in 2008
and $329 thousand, or 64% in 2007.
The allowance for loan losses was $27.4 million, or 1.43% of total loans, at December 31, 2009, compared to $23.7 million, or 1.29% of total loans, at December 31, 2008.
The Corporation will continue to assess the adequacy of its allowance for loan losses in accordance with its established policies.
See additional discussion under the caption “Asset Quality” for further information on the Allowance for
Loan Losses.
Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table.
| 2009/2008 | 2008/2007 | |||||||||||||||||||||||||||
|
Years Ended December 31,
|
Change
|
Change
|
||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
$ | % | $ | % | ||||||||||||||||||||||
|
Noninterest income
:
|
||||||||||||||||||||||||||||
|
Wealth management services:
|
||||||||||||||||||||||||||||
|
Trust and investment advisory fees
|
$ | 18,128 | $ | 20,316 | $ | 21,124 | $ | (2,188 | ) | (11 | )% | $ | (808 | ) | (4 | )% | ||||||||||||
|
Mutual fund fees
|
4,140 | 5,205 | 5,430 | (1,065 | ) | (20 | ) | (225 | ) | (4 | ) | |||||||||||||||||
|
Financial planning, commissions
|
||||||||||||||||||||||||||||
|
and other service fees
|
1,518 | 2,752 | 2,462 | (1,234 | ) | (45 | ) | 290 | 12 | |||||||||||||||||||
|
Wealth management services
|
23,786 | 28,273 | 29,016 | (4,487 | ) | (16 | ) | (743 | ) | (3 | ) | |||||||||||||||||
|
Service charges on deposit accounts
|
4,860 | 4,781 | 4,713 | 79 | 2 | 68 | 1 | |||||||||||||||||||||
|
Merchant processing fees
|
7,844 | 6,900 | 6,710 | 944 | 14 | 190 | 3 | |||||||||||||||||||||
|
Income from bank-owned life insurance
|
1,794 | 1,800 | 1,593 | (6 | ) | – | 207 | 13 | ||||||||||||||||||||
|
Net gains on loan sales and commissions
|
||||||||||||||||||||||||||||
|
on loans originated for others
|
4,352 | 1,396 | 1,493 | 2,956 | 212 | (97 | ) | (6 | ) | |||||||||||||||||||
|
Net realized gains on securities
|
314 | 2,224 | 455 | (1,910 | ) | (86 | ) | 1,769 | 389 | |||||||||||||||||||
|
Net gains (losses) on interest rate swap contracts
|
697 | (542 | ) | 27 | 1,239 | (229 | ) | (569 | ) | (2,107 | ) | |||||||||||||||||
|
Other income
|
1,708 | 1,625 | 1,502 | 83 | 5 | 123 | 8 | |||||||||||||||||||||
|
Noninterest income, excluding
|
||||||||||||||||||||||||||||
|
other-than-temporary impairment losses
|
45,355 | 46,457 | 45,509 | (1,102 | ) | (2 | ) | 948 | 2 | |||||||||||||||||||
|
Total other-than-temporary impairment losses
|
||||||||||||||||||||||||||||
|
on securities
|
(6,650 | ) | (5,937 | ) | – | (713 | ) | 12 | (5,937 | ) | – | |||||||||||||||||
|
Portion of loss recognized in other comprehensive
|
||||||||||||||||||||||||||||
|
income (before taxes)
|
3,513 | – | – | 3,513 | – | – | – | |||||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(3,137 | ) | (5,937 | ) | – | 2,800 | (47 | ) | (5,937 | ) | – | |||||||||||||||||
|
Total noninterest income
|
$ | 42,218 | $ | 40,520 | $ | 45,509 | $ | 1,698 | 4 | % | $ | (4,989 | ) | (11 | )% | |||||||||||||
Revenue from wealth management services is our largest source of noninterest income. It is largely dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. The following table presents the changes in wealth management assets
under administration for the years ended December 31, 2009, 2008 and 2007:
|
(Dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Wealth Management Assets Under Administration:
|
||||||||||||
|
Balance at the beginning of period
|
$ | 3,147,649 | $ | 4,014,352 | $ | 3,609,180 | ||||||
|
Net market value appreciation (depreciation) and income
|
547,091 | (980,909 | ) | 272,398 | ||||||||
|
Net client cash flows
|
75,453 | 114,206 | 132,774 | |||||||||
|
Balance at the end of period
|
$ | 3,770,193 | $ | 3,147,649 | $ | 4,014,352 | ||||||
Noninterest Income Analysis
Comparison of 2009 with 2008
Revenue from wealth management services decreased $4.5 million or 16% in 2009. This included a decline of approximately $3.3 million in revenues primarily derived from the fair value of assets under administration. Assets under administration totaled $3.770 billion at December 31,
2009, up $623 million, or 20 percent, from December 31, 2008, reflecting net market value appreciation and income of $547 million and net client cash inflows of $75 million. While the balance of assets under administration at December 31, 2009 was 20% higher than the balance a year earlier, financial market declines in the latter part of 2008 and early part of 2009 caused the average balance for the year 2009 to be approximately 12% lower than the comparable average balance
for 2008. Wealth management related fees from sources that are not primarily derived from the value of assets under administration, including financial planning fees, commissions and other services, declined by $1.2 million, or 45%, from 2008 due largely to lower commissions earned on annuity and insurance contracts.
Merchant processing fees represents charges to merchants for credit card transactions processed. This revenue source increased by $944 thousand, or 14%, in 2009 primarily due to increases in the volume of transactions
processed for existing and new customers. See discussion on the corresponding increase in merchant processing costs under the caption “Noninterest Expense.”
We originate residential mortgage loans for sale in the secondary market and also originate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages. This revenue source is subject to market volatility and dependent on mortgage origination volume, which
is sensitive to rates and the condition of housing markets. In addition, from time to time we sell the guaranteed portion of SBA loans to investors. Due to strong residential mortgage refinancing and sales activity, net gains on loan sales and commissions on loans originated for others increased by $3.0 million from 2008.
Net realized gains on securities amounted to $314 thousand in 2009, compared to $2.2 million in 2008. See discussion below under the caption “Comparison of 2008 with 2007”, for additional information on 2008 net realized gains on securities.
Included in noninterest income in 2009 were net gains on interest rate swap contracts of $697 thousand. This amount includes $580 thousand of gains attributable to interest rate swap contracts executed by Washington Trust to help commercial loan borrowers manage their interest rate risk. The
interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. Gains on another interest rate swap contract executed in April 2008 with Lehman Brothers Special Financing, Inc. amounted to $117 thousand in 2009. See additional discussion regarding this specific interest rate swap transaction below under the caption “Comparison of 2008 with 2007.” See additional discussion on interest rate
swap contracts in Note 13 to the Consolidated Financial Statements.
Other-than-temporary impairment losses on investment securities amounted to $3.1 million ($2.0 million after tax, or 13 cents per diluted share) in 2009 and $5.9 million ($3.8 million after tax, or 27 cents per diluted share) in 2008. See additional discussion in the “Financial
Condition” section under the caption “Securities.”
Comparison of 2008 with 2007
Revenue from wealth management services decreased $743 thousand, or 3%, in 2008. Assets under administration totaled $3.1 billion at December 31, 2008, down $866.7 million, or 22%, from December 31, 2007. This decline in assets under administration was primarily
due to lower valuations in the financial markets.
Income from bank owned life insurance (“BOLI”) amounted to $1.8 million and $1.6 million for 2008 and 2007, respectively. BOLI represents life insurance on the lives of certain employees who have consented to allowing the Bank to be the beneficiary of such policies. The
Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The BOLI investment provides a means to mitigate increasing employee benefit costs. See additional discussion under the caption “Financial Condition” for further information on the investment in BOLI.
In the first quarter of 2008, Washington Trust sold $17.9 million in residential portfolio loans for interest rate risk and balance sheet management purposes, which resulted in a gain on sale of $80 thousand. We do not have a practice of selling loans from portfolio and except for the sale
described above we have not sold any packages of loans from our portfolio in many years. Net gains on loan sales and commissions on loans originated for others amounted to $1.4 million in 2008, down by 6% from 2007, primarily due to declines in sales of SBA loans.
In 2008 and 2007, net realized gains on securities totaled $2.2 million and $455 thousand, respectively. These amounts included $315 thousand and $397 thousand of gains recognized in 2008 and 2007, respectively, resulting from the annual charitable contribution of appreciated equity
securities to our charitable foundation. In 2008, Washington Trust recognized net realized gains of $1.7 million on the sale of equity securities and $232 thousand on the sale of commercial debt securities. In 2007, net realized gains of $314 thousand were recognized from certain debt and equity securities that were called prior to their maturity by the issuers and net realized losses of $256 thousand resulted from sales of debt and equity securities.
Included in noninterest income in 2008 were net losses on interest rate swap contracts of $542 thousand. This amount includes $638 thousand of losses attributable to an interest rate swap contract executed in April 2008 with Lehman Brothers Special Financing, Inc. to hedge the interest rate
risk associated with variable rate junior subordinated debentures. Under the terms of this swap, Washington Trust agreed to pay a fixed rate and receive a
variable rate based on LIBOR. At inception, this hedging transaction was deemed to be highly effective and, therefore, changes in the value of this interest rate swap contract were recognized in the accumulated other comprehensive income component of shareholders’ equity. In September
2008, Lehman Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for bankruptcy protection, followed in October 2008 by the swap counterparty itself. Due to the change in the creditworthiness of the swap counterparty, the hedging relationship was deemed to be not highly effective, with the result that subsequent changes in the valuation are recognized in earnings. The valuation decline was attributable to a decline in the swap yield curve during the fourth quarter
of 2008, which reduced market fixed rates for terms similar to this swap contract. The bankruptcy filings by the Lehman entities constituted events of default under the interest rate swap contract, entitling Washington Trust to immediately suspend performance and to terminate the transaction. On March 31, 2009, this interest rate swap contract was reassigned to a new creditworthy counterparty, unrelated to the prior counterparty. On May 1, 2009, this interest rate swap
contract qualified for cash flow hedge accounting to hedge the interest rate risk associated with the variable rate junior subordinated debentures. Effective May 1, 2009, the effective portion of changes in fair value of the swap was recorded in other comprehensive income and subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the variable rate debentures affect earnings. The ineffective portion of changes in fair
value was recognized directly in earnings as interest expense. Gains on other interest rate swap transactions not affected by this matter amounted to $96 thousand in 2008 and $27 thousand in 2007. See additional discussion in Note 13 to the Consolidated Financial Statements.
Other income consists of mortgage servicing fees, non-customers ATM fees, safe deposit rents, wire transfer fees, fees on letters of credit and other fees. Other income increased $123 thousand, or 8%, in 2008 primarily due to nonrecurring income of $114 thousand.
See additional discussion regarding other-than-temporary impairment losses on investment securities in the “Financial Condition” section under the caption “Securities.”
Noninterest Expense
The following table presents a noninterest expense comparison for the years ended December 31, 2009, 2008 and 2007:
| 2009/2008 | 2008/2007 | ||||||||||||||||||||||||||||
|
Years Ended December 31,
|
Change
|
Change
|
|||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
$ | % | $ | % | |||||||||||||||||||||||
|
Noninterest expense
|
|||||||||||||||||||||||||||||
|
Salaries and employee benefits
|
$ | 41,917 | $ | 41,037 | $ | 39,986 | $ | 880 | 2 | % | $ | 1,051 | 3 | % | |||||||||||||||
|
Net occupancy
|
4,790 | 4,536 | 4,150 | 254 | 6 | 386 | 9 | ||||||||||||||||||||||
|
Equipment
|
3,917 | 3,838 | 3,473 | 79 | 2 | 365 | 11 | ||||||||||||||||||||||
|
Merchant processing costs
|
6,652 | 5,769 | 5,686 | 883 | 15 | 83 | 1 | ||||||||||||||||||||||
|
FDIC deposit insurance costs
|
4,397 | 1,044 | 213 | 3,353 | 321 | 831 | 390 | ||||||||||||||||||||||
|
Outsourced services
|
2,734 | 2,859 | 2,180 | (125 | ) | (4 | ) | 679 | 31 | ||||||||||||||||||||
|
Legal, audit and professional fees
|
2,443 | 2,325 | 1,761 | 118 | 5 | 564 | 32 | ||||||||||||||||||||||
|
Advertising and promotion
|
1,687 | 1,729 | 2,024 | (42 | ) | (2 | ) | (295 | ) | (15 | ) | ||||||||||||||||||
|
Amortization of intangibles
|
1,209 | 1,281 | 1,383 | (72 | ) | (6 | ) | (102 | ) | (7 | ) | ||||||||||||||||||
|
Debt prepayment penalties
|
– | – | 1,067 | – | – | (1,067 | ) | (100 | ) | ||||||||||||||||||||
|
Other
|
7,422 | 7,324 | 6,983 | 98 | 1 | 341 | 5 | ||||||||||||||||||||||
|
Total noninterest expense
|
$ | 77,168 | $ | 71,742 | $ | 68,906 | $ | 5,426 | 8 | % | $ | 2,836 | 4 | % | |||||||||||||||
Noninterest Expense Analysis
Comparison of 2009 with 2008
Salaries and employee benefits expense, the largest component of total noninterest expense, increased by $880 thousand, or 2%, in 2009. This increase reflects increases in staffing and higher defined benefit pension costs due to the discount rate and asset value changes in effect at the end of
2008 offset in part by lower profitability-based incentive costs.
Net occupancy expense increased by $254 thousand, or 6%, in 2009 largely due to increased rental expense for premises leased by the Bank.
Merchant processing costs increased by $883 thousand, or 15%, in 2009 primarily due to increases in the 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. See discussion on the corresponding increase in merchant processing fees under the caption “Noninterest Income.”
FDIC deposit insurance costs were up by $3.4 million from 2008. A special FDIC assessment of $1.35 million ($869 thousand after tax) was recorded in the second quarter of 2009. In addition to the special assessment, the year over year increase in FDIC deposit insurance costs
also reflects higher assessment rates.
Included in other noninterest expenses in 2009 was a $250 thousand charge incurred in the first quarter of 2009 in connection with the repositioning of investment options in the Corporation’s 401(k) Plan. The increase in other noninterest expenses in 2009 also included an increase of $331 thousand
in credit and collection costs. These increases were offset for the most part by the results of efforts to control operating costs.
Comparison of 2008 with 2007
Salaries and employee benefits expense increased by $1.1 million, or 3%, in 2008. This increase was largely due to increases in salaries and wages.
Net occupancy expense increased by $386 thousand, or 9%, in 2008. The increase reflects higher utility costs, higher rental expense for premises leased by the Bank, and includes occupancy costs associated with the de novo branch opened in June 2007. Equipment expense increased by $365 thousand,
or 11%, in 2008, primarily due to additional investments in technology and other equipment.
FDIC deposit insurance costs increased by $831 thousand in 2008, due primarily to new FDIC assessment rules. The new rules became effective on January 1, 2007; however, the utilization of a one-time assessment credit minimized the financial impact of this change to the Bank in 2007.
Outsourced services increased by $679 thousand, or 31%, in 2008 due largely to higher third party vendor costs. Approximately 68% of this increase was attributable to higher outsourced services expenses for our wealth management business and included wealth management platform and product support
costs.
Legal, audit and professional fees increased by $564 thousand, or 32%, from 2007, which included higher recruitment costs of $209 thousand primarily associated with executive management positions, $45 thousand in legal fees associated with the second quarter 2008 issuance of junior subordinated
debentures (see Note 11), legal costs associated with product development and maintenance and various consulting matters.
Advertising and promotion expense decreased by $295 thousand, or 15%, in 2008 reflecting management’s discretion over this category.
Debt prepayment penalties expense, resulting from the first quarter 2007 prepayment of $26.5 million in higher cost FHLBB advances, amounted to $1.1 million in 2007. There were no prepayment penalty charges recognized in 2008.
Other noninterest expense increased by $341 thousand, or 5%, in 2008, which included an increase of $108 thousand in credit and collection costs.
Income Taxes
Income tax expense for 2009, 2008 and 2007 totaled $6.3 million, $7.3 million and $10.8 million, respectively. The effective tax rates for the years ended December 31, 2009, 2008 and 2007 were 28.3%, 24.8% and 31.3%, respectively. In 2008, the Corporation recognized $1.4 million
in income tax benefits (as described in the following paragraph). Excluding these income tax benefits, the effective tax rate for 2008 was 29.6%. The effective tax rates differed from the federal rate of 35.0% due primarily to the benefits of tax-exempt income, the dividends received deduction and income from BOLI.
On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rate on net income applicable to financial institutions and requiring combined income tax reporting. The rate will be reduced from the rate of 10.5% to 10.0% for 2010, 9.5% for 2011 and 9.0% for 2012
and thereafter. Previously, certain Washington Trust subsidiaries were subject to Massachusetts income tax on a separate return basis. Under the new legislation, effective January 1, 2009, Washington Trust, as a consolidated tax group, will be subject to income tax in
the Commonwealth of Massachusetts. Washington Trust analyzed the impact of this law and, as a result of revaluing its net deferred tax asset, recognized an income tax benefit of $841 thousand in the third quarter of 2008. In addition, the Corporation recognized an income tax benefit
of $556 thousand in the fourth quarter of 2008 resulting primarily from the resolution of certain state tax positions (see Note 9).
The Corporation’s net deferred tax asset amounted to $12.0 million at December 31, 2009, compared to $18.8 million at December 31, 2008. The Corporation has determined that a valuation allowance is not required for any of the deferred tax assets since it is more likely than
not that these assets will be realized primarily through future reversals of existing taxable temporary differences or carryback to taxable income in prior years. See Note 9 to the Consolidated Financial Statements for additional information regarding income taxes.
Financial Condition
Summary
Total assets amounted to $2.9 billion at December 31, 2009, down by $81 million, or 3%, from the end of 2008. Total loans increased by $81 million, or 4%, in 2009 and amounted to $1.9 billion, or 67% of total assets, at December 31, 2009. During 2009, Washington
Trust experienced firm demand for commercial loans in large part due to decreased lending activity by larger institutions in its lending area. As a result, we selectively expanded our commercial lending relationships with new and existing customers while at the same time seeking to maintain our traditional commercial lending underwriting standards. Commercial loans increased by $104 million, or 12%, in 2009 and amounted to $985 million, or 51% of total loans, at the end of 2009.
Total nonaccrual loans increased from $7.8 million at December 31, 2008 to $27.5 million at December 31, 2009. Total 30 day+ delinquencies amounted to $31.6 million, or 1.64% of total loans, at December 31, 2009, up $14.0 million in 2009, with the largest increases
in the commercial categories. Management believes that the declining credit quality trend experienced in 2009 is attributable to weakened economic conditions in general, and not to any specific underwriting characteristic or credit risk category.
The fair value of securities available for sale totaled $691 million at December 31, 2009, or 24% of total assets. During 2009, the investment securities portfolio declined by approximately $175 million largely due to maturities and pay-downs on mortgage-backed securities. Management
elected not to increase the portfolio primarily due to a lack of attractive investment opportunities in the current environment.
Total liabilities decreased by $101 million in 2009, with an increase of $132 million in total deposits and a decrease of $222 million in FHLBB advances. Total deposits, which included brokered certificates of deposit, were up by 7% from the balance at December 31, 2008. Excluding
out-of-market brokered certificates of deposit, in-market deposits grew by $226 million, or 14 percent, in 2009 which included $42 million in wealth management client money market deposits previously held in outside money market funds. At December 31, 2009, Washington Trust had $94 million in out-of-market brokered certificates of deposit and $607 million in FHLBB advances compared to $188 million and $830 million, respectively, at December 31, 2008.
Shareholders’ equity totaled $255 million at December 31, 2009, compared to $235 million at the end of 2008. As of December 31, 2009, the Corporation is categorized as “well-capitalized” under the regulatory framework for prompt corrective action. In
April 2008, the Bancorp issued $10.3 million in junior subordinated debentures, which supplemented the total risk-based capital position. In October 2008, Washington Trust issued $50.0 million of its Common Stock in a private placement with select institutional investors. Net proceeds were $46.9 million after deducting offering-related fees and expenses. See Notes 11 and 12 to the Consolidated Financial Statements for additional discussion on junior subordinated
debentures and capital requirements.
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, held to maturity or trading
at the time of purchase. The Corporation does not currently maintain portfolios of held to maturity or trading securities. 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. See Note 4 to the Consolidated Financial Statements for additional information.
Washington Trust may acquire, hold and transact in various types of investment securities in accordance with applicable federal regulations, state statutes and guidelines specified in Washington Trust’s internal investment policy. Permissible bank investments include federal funds, banker’s
acceptances, commercial paper, reverse repurchase agreements, interest-bearing deposits of federally insured banks, U.S. Treasury and government-sponsored agency debt obligations, including mortgage-backed securities and collateralized mortgage obligations, municipal securities, corporate debt, trust preferred securities, mutual funds, auction rate preferred stock, common and preferred equity securities, and FHLBB 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.
As disclosed in Note 4 to the Consolidated Financial Statements, Washington Trust elected to early adopt provisions of ASC 320, “Investments – Debt and Equity Securities,” (formerly FSP No. FAS 115-2 and FAS 124-2) and applied this guidance to existing and new debt securities
held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted.
As noted in Note 14 to the Consolidated Financial Statements, a majority of our fair value measurements utilize Level 2 inputs, which utilize quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived
valuations in which all significant input assumptions are observable in active markets. Our Level 2 financial instruments consist primarily of available for sale debt securities. These debt securities were initially valued at their transaction price and subsequently valued based on matrix pricing with market data inputs such as reportable trades, benchmark yields, broker/dealer quotes, bids, offers, issuers spreads, credit ratings and other industry and economic events. Such inputs
are observable in the market or can be derived principally from or corroborated by observable market data. When necessary, we validate our valuation techniques by reviewing the underlying basis for the models used by pricing sources and obtaining market values from other pricing sources. Level 3 financial instruments utilize valuation techniques in which one or more significant input assumptions are unobservable in the markets and which reflect the Corporation’s market assumptions. As
of December 31, 2009 and 2008, our Level 3 financial instruments consist primarily of two available for sale pooled trust preferred securities, which were not actively traded.
As of December 31, 2009, the Corporation concluded that there has been a significant decrease in the volume and level of activity for our Level 3 pooled trust preferred securities and quoted market prices were not indicative of fair value. The Corporation obtained valuations including broker
quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected highly limited sales evidenced by an inactive market. The cash flow scenarios were prepared using discounted cash flow
methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions. Our internal review procedures have confirmed that the fair values provided by the referenced sources and utilized by the Corporation are consistent with GAAP. If
Washington Trust was required to sell these securities in an unorderly fashion, actual proceeds received could potentially be significantly less than their fair values.
The carrying amounts of securities as of the dates indicated are presented in the following tables:
|
(Dollars in thousands)
|
||||||||||||||||||||||||
|
December 31,
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||
|
Securities Available for Sale:
|
||||||||||||||||||||||||
|
Obligations of U.S. government-sponsored enterprises
|
$ | 45,240 | 7 | % | $ | 64,377 | 7 | % | $ | 139,599 | 18 | % | ||||||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
523,446 | 75 | % | 683,619 | 80 | % | 469,388 | 62 | % | |||||||||||||||
|
States and political subdivisions
|
82,062 | 12 | % | 81,213 | 9 | % | 80,894 | 11 | % | |||||||||||||||
|
Trust preferred securities:
|
||||||||||||||||||||||||
|
Individual name issuers
|
20,586 | 3 | % | 16,793 | 2 | % | 27,695 | 4 | % | |||||||||||||||
|
Collateralized debt obligations
|
1,065 | – | % | 1,940 | – | % | 6,759 | 1 | % | |||||||||||||||
|
Corporate bonds
|
14,706 | 2 | % | 13,576 | 2 | % | 14,101 | 2 | % | |||||||||||||||
|
Common stocks
|
769 | – | % | 992 | – | % | 6,781 | 1 | % | |||||||||||||||
|
Perpetual preferred stocks
|
3,610 | 1 | % | 3,709 | – | % | 6,561 | 1 | % | |||||||||||||||
|
Total securities available for sale
|
$ | 691,484 | 100 | % | $ | 866,219 | 100 | % | $ | 751,778 | 100 | % | ||||||||||||
The securities portfolio amounted to $691 million at December 31, 2009, down by $175 million from the balance at December 31, 2008, reflecting $171 million in maturities and pay-downs on mortgage-backed securities. In 2009, management elected not to increase the portfolio primarily
due to a lack of attractive investment opportunities in the current environment.
The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. Government agencies or U.S. Government-sponsored enterprises.
At December 31, 2009, the securities portfolio included $13.8 million of net pretax unrealized gains, compared to $3.2 million of net pretax unrealized losses at December 31, 2008. At December 31, 2009, the net unrealized gain position on the securities portfolio included gross
unrealized losses of $14.7 million. Approximately 94% of the gross unrealized losses on the securities portfolio were concentrated in variable rate trust preferred securities primarily issued by financial services companies.
The Bank owns trust preferred security holdings of seven individual name issuers in the financial industry and two pooled trust preferred securities in the form of collateralized debt obligations. The following tables present information concerning the named issuers and pooled trust preferred obligations,
including credit ratings. The Corporation’s Investment Policy contains rating standards that specifically reference ratings issued by Moody’s and S&P.
Individual Issuer Trust Preferred Securities
|
(Dollars in thousands)
|
|||||||||||
|
December 31, 2009
|
Credit Ratings
|
||||||||||
|
Named Issuer
|
Amortized
|
Fair
|
Unrealized
|
December 31,
2009
|
Form 10-K
Filing Date
|
||||||
|
(parent holding company)
|
(a)
|
Cost (b)
|
Value
|
Loss
|
Moody's
|
S&P
|
Moody's
|
S&P
|
|||
|
JPMorgan Chase & Co.
|
2
|
$9,714
|
$6,891
|
$(2,823)
|
A2
|
BBB+
|
A2
|
BBB+ |
|
||
|
Bank of America Corporation
|
3
|
5,726
|
4,058
|
(1,668)
|
Baa3
|
BB
|
(c)
|
Baa3
|
BB
|
(c)
|
|
|
Wells Fargo & Company
|
2
|
5,099
|
3,241
|
(1,858)
|
Baa1/Baa2
|
A-
|
Baa1/Baa2
|
A-
|
|||
|
SunTrust Banks, Inc.
|
1
|
4,163
|
2,607
|
(1,556)
|
Baa2
|
BB+
|
(c)
|
Baa3
|
BB
|
(c)
|
|
|
Northern Trust Corporation
|
1
|
1,979
|
1,333
|
(646)
|
A2
|
A-
|
A3
|
A-
|
|||
|
State Street Corporation
|
1
|
1,967
|
1,633
|
(334)
|
A2
|
BBB+
|
A3
|
BBB+ |
|
||
|
Huntington Bancshares Incorporated
|
1
|
1,915
|
823
|
(1,092)
|
Baa3
|
B
|
(c)
|
Ba1 (c)
|
B
|
(c)
|
|
|
Totals
|
$30,563
|
$20,586
|
$(9,977)
|
||||||||
|
(a)
|
Number of separate issuances, including issuances of acquired institutions.
|
|
(b)
|
Net of other-than-temporary impairment losses recognized in earnings, other than such noncredit-related amounts reversed on January 1, 2009.
|
|
(c)
|
Rating is below investment grade.
|
The Corporation’s evaluation of the impairment status of individual name trust preferred securities includes various considerations in addition to the degree of impairment and the duration of impairment. We review the reported regulatory capital ratios of the issuer and, in all cases, the regulatory
capital ratios were deemed to be in excess of the regulatory minimums. Credit ratings were also taken into consideration, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report. We noted one additional downgrade to below investment grade between the reporting period date and the filing date of this report. Where available, credit ratings from multiple rating agencies are
obtained and rating downgrades are specifically analyzed. Our review process for these credit-sensitive holdings also includes a periodic review of relevant financial information for each issuer, such as quarterly financial reports, press releases and analyst reports. This information is used to evaluate the current and prospective financial condition of the issuer in order to assess the issuer’s ability to meet its debt obligations. Through the filing date of this report,
each of the individual name issuer securities was current with respect to interest payments. Based on our evaluation of the facts and circumstances relating to each issuer, management concluded that all principal and interest payments for these individual issuer trust preferred securities would be collected according to their contractual terms and it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities
and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Pooled Trust Preferred Obligations
|
(Dollars in thousands)
|
December 31, 2009
|
|||||||||||
|
Deferrals
|
Credit Ratings
|
|||||||||||
|
Amortized
|
Fair
|
Unrealized
|
No. of
Cos. in
|
and
Defaults
|
December 31,
2009
|
Form 10-K
Filing Date
|
||||||
|
Deal Name
|
Cost
|
Value
|
Loss
|
Issuance
|
(a)
|
Moody's
|
S&P
|
Moody's
|
S&P
|
|||
|
Tropic CDO 1,
tranche A4L (d)
|
$3,620
|
$978
|
$(2,642)
|
38
|
36.7%
|
Ca
|
(c)
|
(b)
|
Ca
|
(c)
|
(b)
|
|
|
Preferred Term Securities [PreTSL] XXV,
tranche C1 (e)
|
1,346
|
87
|
$(1,259)
|
73
|
31.0%
|
Ca
|
(c)
|
(b)
|
Ca
|
(c)
|
(b)
|
|
|
Totals
|
$4,966
|
$1,065
|
$(3,901)
|
|||||||||
|
(a)
|
Percentage of pool collateral in deferral or default status.
|
|
(b)
|
Not rated by S&P.
|
|
(c)
|
Rating is below investment grade.
|
|
(d)
|
Based on information available as of the filing date of this report, 15 of the 38 pooled institutions have invoked their original contractual right to defer interest payments. A total of $110.2 million of the underlying collateral pool was in deferral or default status, or 36.7% of the total original collateral balance of $300 million. The tranche instrument held by the Corporation
was current with respect to its quarterly debt service (interest) payments as of the most recent quarterly payment date of January 15, 2010. The instrument was downgraded to a below investment grade rating of “Caa3” by Moody’s on March 27, 2009 and further downgraded by Moody’s to a rating of “Ca” on October 30, 2009. During the quarter ended March 31, 2009, an adverse change occurred in the expected cash flows for this instrument indicating
that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of the security. The Corporation had concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of March 31, 2009 and recognized an other-than-temporary impairment charge
of $3.6 million pursuant to the provisions of ASC 320, which the Corporation early adopted effective January 1, 2009. The credit loss portion of the impairment charge, representing the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the debt security, was $1.4 million. This investment security was also placed on nonaccrual status as of March 31, 2009. The analysis of the expected cash flows for
this security as of December 31, 2009 and the rating downgrade on October 30, 2009 did not negatively affect the amount of credit-related impairment loss previously recognized on this security.
|
|
(e)
|
Based on information available as of the filing date of this report, 20 of the 73 pooled institutions have invoked their original contractual right to defer interest payments. A total of $271.6 million of the underlying collateral pool was in deferral or default status, or 31.0% of the total original collateral pool of $877.4 million. The tranche instrument held by the Corporation
had deferred the quarterly interest payment due in December 2008.
|
|
|
The instrument was downgraded to a below investment grade rating of “Ca” by Moody’s on March 27, 2009. This security began deferring interest payments until future periods and the Corporation recognized an other-than-temporary impairment charge in the fourth quarter of 2008 on this security in the amount of $1.9 million. This investment security was also placed
on nonaccrual status as of December 31, 2008. Pursuant to the provisions of ASC 320 adopted effective January 1, 2009 and based on Washington Trust’s assessment of the facts associated with this instrument, the Corporation has concluded that there was no credit loss portion of the other-than-temporary impairment charge as of December 31, 2008. Washington Trust reclassified this noncredit-related other-than-temporary impairment loss for this security previously recognized
in earnings in the fourth quarter of 2008 as a cumulative effect adjustment as of January 1, 2009 in the amount of $1.2 million after taxes ($1.9 million before taxes) with an increase in retained earnings and a decrease in accumulated other comprehensive loss. In addition, the amortized cost basis of this security was increased by the amount of the cumulative effect adjustment before taxes. During the quarter ended September 30, 2009, an adverse change occurred in the expected
cash flows for this instrument indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of the security. The Corporation had concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of September 30, 2009 and recognized
an other-than-temporary impairment charge of $2.3 million pursuant to the provisions of ASC 320 adopted effective January 1, 2009. The credit loss portion of the impairment charge, representing the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the debt security, was $467 thousand. The analysis of the expected cash flows for this security as of December 31, 2009 resulted in an additional credit-related
impairment loss of $679 thousand being recognized in earnings in the fourth quarter of 2009.
|
The following is supplemental information concerning common and perpetual preferred stock investment securities:
|
At December 31, 2009
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Fair
|
||||||||||||||
|
(Dollars in thousands)
|
Cost (a)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Common and perpetual preferred stocks
|
||||||||||||||||
|
Common stocks
|
$ | 658 | $ | 111 | $ | – | $ | 769 | ||||||||
|
Perpetual preferred stocks:
|
||||||||||||||||
|
Financials
|
2,354 | 396 | (27 | ) | 2,723 | |||||||||||
|
Utilities
|
1,000 | – | (113 | ) | 887 | |||||||||||
|
Total perpetual preferred stocks
|
3,354 | 396 | (140 | ) | 3,610 | |||||||||||
|
Total common and perpetual preferred stocks
|
$ | 4,012 | $ | 507 | $ | (140 | ) | $ | 4,379 | |||||||
|
(a)
|
Net of other-than-temporary impairment losses recognized in earnings.
|
In October 2008, the SEC’s Office of the Chief Accountant, after consultation and concurrence with the FASB, concluded that the assessment of other-than-temporary impairment of perpetual preferred securities for filings made after October 14, 2008 can be made using an impairment model (including an
anticipated recovery period) similar to a debt security provided there has been no evidence of a deterioration in credit of the issuer, as evidenced by, among other factors, a downgrade to a below “investment grade” credit rating. Washington Trust complied with this guidance in its evaluation of other-than-temporary impairment of perpetual preferred stocks.
The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Pooled trust preferred securities
|
||||||||||||
|
Tropic CDO 1, tranche A4L
|
$ | 1,350 | $ | – | $ | – | ||||||
|
Preferred Term Securities [PreTSL] XXV, tranche C1
|
1,146 | 1,859 | – | |||||||||
|
Common and perpetual preferred stocks
|
||||||||||||
|
Fannie Mae and Freddie Mac perpetual preferred stocks
|
– | 1,470 | – | |||||||||
|
Other perpetual preferred stocks (financials)
|
495 | 2,173 | – | |||||||||
|
Other common stocks (financials)
|
146 | 435 | – | |||||||||
|
Other-than-temporary impairment losses recognized in earnings
|
$ | 3,137 | $ | 5,937 | $ | – | ||||||
Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional
declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Corporation may incur additional impairment losses.
See Note 4 to the Consolidated Financial Statements for additional discussion on securities.
Federal Home Loan Bank Stock
As of December 31, 2009 and 2008, the Corporation’s investment in Federal Home Loan Bank of Boston (“FHLBB”) stock totaled $42.0 million. The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. The
Corporation is required to maintain a level of investment in FHLBB stock based on the level of its FHLBB advances, which is viewed as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. At December 31, 2009, the Corporation’s investment in FHLBB stock exceeded its required investment by $9.6 million. No market exists for shares of the FHLBB. FHLBB stock may be redeemed at par value five years following termination
of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock is subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including
the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends.
On February 22, 2010, the FHLBB announced its preliminary fourth quarter and annual financial results for 2009. The FHLBB reported net income of $6.3 million and a net loss of $187 million for the fourth quarter and year ended December 31, 2009, respectively. This compared
to net losses of $274 million and $116 million for the same periods in 2008. Additionally, it reported total capital of $2.8 billion at December 31, 2009, compared to $3.4 billion at December 31, 2008. These results reflected the impact on earnings and accumulated other comprehensive loss of fair value declines associated with securities deemed to be other-than-temporarily impaired. Despite these results, the FHLBB exceeded the regulatory capital
requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLBB’s primary source of funding is debt issued by the FHLB system. In 2009, the FHLB system demonstrated the ability to continue to issue additional debt. As of the filing date of this report, debt obligations issued by the FHLB System continue to be rated Aaa by Moody’s and AAA by Standard & Poor’s. If needed, the FHLB system also has the
ability to secure funding available to government-sponsored entities through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLBB stock as of December 31, 2009. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If
evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs.
Loans
Washington Trust’s loan portfolio amounted to $1.9 billion at December 31, 2009, up $81 million, or 4%, in 2009. Growth of $104 million in commercial loans and $13 million in consumer loans was offset in part by a $36 million decline in residential real estate 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,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgages
|
$ | 496,996 | 26 | % | $ | 407,904 | 22 | % | $ | 278,821 | 18 | % | $ | 282,019 | 19 | % | $ | 291,292 | 21 | % | ||||||||||||||||||||
|
Construction & development
|
72,293 | 4 | % | 49,599 | 3 | % | 60,361 | 4 | % | 32,233 | 2 | % | 37,190 | 3 | % | |||||||||||||||||||||||||
|
Other (1)
|
415,261 | 21 | % | 422,810 | 23 | % | 341,084 | 21 | % | 273,145 | 19 | % | 226,252 | 16 | % | |||||||||||||||||||||||||
|
Total commercial
|
984,550 | 51 | % | 880,313 | 48 | % | 680,266 | 43 | % | 587,397 | 40 | % | 554,734 | 40 | % | |||||||||||||||||||||||||
|
Residential real estate:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgages
|
593,981 | 31 | % | 626,663 | 34 | % | 588,628 | 37 | % | 577,522 | 40 | % | 565,680 | 40 | % | |||||||||||||||||||||||||
|
Homeowner construction
|
11,594 | 1 | % | 15,389 | 1 | % | 11,043 | 1 | % | 11,149 | – | % | 17,028 | 2 | % | |||||||||||||||||||||||||
|
Total residential real estate
|
605,575 | 32 | % | 642,052 | 35 | % | 599,671 | 38 | % | 588,671 | 40 | % | 582,708 | 42 | % | |||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Home equity lines
|
209,801 | 11 | % | 170,662 | 9 | % | 144,429 | 9 | % | 145,676 | 10 | % | 161,100 | 11 | % | |||||||||||||||||||||||||
|
Home equity loans
|
62,430 | 3 | % | 89,297 | 5 | % | 99,827 | 6 | % | 93,947 | 6 | % | 72,288 | 5 | % | |||||||||||||||||||||||||
|
Other (2)
|
57,312 | 3 | % | 56,830 | 3 | % | 49,459 | 4 | % | 44,295 | 4 | % | 31,078 | 2 | % | |||||||||||||||||||||||||
|
Total consumer loans
|
329,543 | 17 | % | 316,789 | 17 | % | 293,715 | 19 | % | 283,918 | 20 | % | 264,466 | 18 | % | |||||||||||||||||||||||||
|
Total loans
|
$ | 1,919,668 | 100 | % | $ | 1,839,154 | 100 | % | $ | 1,573,652 | 100 | % | $ | 1,459,986 | 100 | % | $ | 1,401,908 | 100 | % | ||||||||||||||||||||
|
(1)
|
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
|
|
(2)
|
Other consumer loans include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles.
|
An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 2009 follows:
|
(Dollars in thousands)
|
||||||||||||||||
|
1 Year
|
1 to 5
|
After 5
|
||||||||||||||
|
Matures in:
|
or Less
|
Years
|
Years
|
Totals
|
||||||||||||
|
Construction and development
(1)
|
$ | 17,973 | $ | 17,943 | $ | 47,971 | $ | 83,887 | ||||||||
|
Commercial - other
|
155,307 | 162,000 | 97,954 | 415,261 | ||||||||||||
| $ | 173,280 | $ | 179,943 | $ | 145,925 | $ | 499,148 | |||||||||
|
(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
|
$ | 226,483 | $ | 99,385 | $ | 325,868 | ||||||
Commercial Loans
Commercial loans fall into two major categories, commercial real estate and other commercial loans (commercial and industrial). Commercial real estate loans consist of commercial mortgages and construction and development loans. Commercial mortgages are loans secured by income producing
property.
Commercial lending represents a significant portion of the Bank’s loan portfolio. Beginning in 2007, as deteriorating conditions in the local economy caused a decline in residential and consumer loan demand, the Bank experienced increased demand for commercial mortgage and other commercial loans
in large part due to decreased lending activity by larger institutions in its lending area As a result, the Bank sought to selectively expand its commercial
lending relationships with new and existing customers while at the same time maintaining its traditional commercial lending underwriting standards. Total commercial loans increased from 40% of total loans at December 31, 2006 to 43% at December 31, 2007, 48% at December 31, 2008 and
51% at December 31, 2009. During 2009, total commercial loans increased by 12%. The pace of growth slowed in 2009 compared to 2008, which management believes was attributable to reduced demand related to a weakening in economic conditions.
With respect to commercial mortgage lending, management believes that the portfolio growth is in large part attributable to enhanced business cultivation efforts with new and existing borrowers. The growth in the commercial portfolio was achieved while maintaining the Bank’s overall commercial
lending underwriting standards, interest rates and levels of interest rate risk. With respect to other commercial loans (commercial and industrial, loans to small businesses), management believes that the portfolio growth in recent years was in large part attributable to the Bank’s success in attracting commercial borrowers from larger institutions in its regional market area of southern New England, primarily in Rhode Island. Management believes that continued deterioration in national
and regional economic conditions may cause some reduction in demand and loan origination activity for commercial mortgages and other commercial loans.
Management has continued to refine its underwriting standards in light of deteriorating national and regional economic conditions including such matters as market interest rates, energy prices, trends in real estate values, and employment levels. Based on management’s assessment of these factors,
underwriting standards and credit monitoring activities were enhanced from time to time in response to changes in these conditions, beginning in the latter part of 2007 and continuing to the current period. Examples of such revisions and monitoring activities include clarification of debt service ratio calculations, modifications to loan to value standards for real estate collateral, formalized watch list criteria, and enhancements to monitoring of commercial construction loans. Management
expects to continue to evaluate underwriting standards in response to continuing changes in national and regional economic conditions.
Commercial Real Estate Loans
Commercial real estate loans at December 31, 2009 amounted to $569 million, including $72 million in commercial construction loans, up by $112 million, or 24%, from December 31, 2008. Growth in this category in 2009 was primarily in our general market area of southern New England. These
loans are secured by a variety of property types, with approximately 82% of the total composed of retail, office, lodging, commercial mixed use, multi-family and industrial properties.
The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location.
|
(Dollars in thousands)
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||
|
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
|
Rhode Island, Connecticut, Massachusetts
|
$ | 512,748 | 90 | % | $ | 405,040 | 89 | % | ||||||||
|
New York, New Jersey, Pennsylvania
|
40,485 | 7 | % | 37,448 | 8 | % | ||||||||||
|
New Hampshire, Maine
|
14,342 | 3 | % | 13,384 | 3 | % | ||||||||||
|
Other
|
1,714 | – | % | 1,631 | – | % | ||||||||||
|
Total
|
$ | 569,289 | 100 | % | $ | 457,503 | 100 | % | ||||||||
Other Commercial Loans
Other commercial loans amounted to $415 million at December 31, 2009, down by $8 million, or 2%, from the balance at the end of 2008. Other commercial loans are largely collateralized and in many cases the collateral consists of real estate occupied by the business as well as other business
assets. This portfolio includes loans to a variety of business types. Approximately 70% of the total is composed of retail, health care/social assistance, owner occupied and other real estate, manufacturing, construction and recreation businesses.
Residential Real Estate Mortgages
Residential real estate mortgages decreased by $36 million, or 6%, from the balance at December 31, 2008. Washington Trust experienced strong residential mortgage refinancing and mortgage sales activity in 2009. Washington Trust originates residential mortgage loans within our general market
area of southern New England for portfolio and for sale in the secondary market. The majority of loans sold are sold with servicing released. From time to time Washington Trust purchases one-to four-family residential mortgages originated in other states as well
as southern New England from other financial institutions. During 2009, $1.1 million of residential real estate loans were purchased from other financial institutions. All residential mortgage loans purchased from other financial institutions have been individually underwritten using
standards similar to those employed for Washington Trust’s self-originated loans. The total balance of purchased residential mortgages amounted to $130 million as of December 31, 2009.
Washington Trust has never offered a sub-prime mortgage program and has no option-adjusted ARMs.
The following is a geographic summary of residential mortgages by property location.
|
(Dollars in thousands)
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||
|
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
|
Rhode Island, Connecticut, Massachusetts
|
$ | 555,455 | 92 | % | $ | 566,857 | 88 | % | ||||||||
|
New York, Virginia, New Jersey, Maryland,
|
||||||||||||||||
|
Pennsylvania, District of Columbia
|
18,908 | 3 | % | 28,252 | 5 | % | ||||||||||
|
Ohio
|
13,700 | 2 | % | 19,940 | 3 | % | ||||||||||
|
California, Washington, Oregon
|
8,140 | 1 | % | 12,678 | 2 | % | ||||||||||
|
Colorado, Texas, New Mexico, Utah
|
5,038 | 1 | % | 8,623 | 1 | % | ||||||||||
|
Georgia
|
2,519 | 1 | % | 2,539 | 1 | % | ||||||||||
|
New Hampshire
|
1,333 | – | % | 1,399 | – | % | ||||||||||
|
Other
|
482 | – | % | 1,764 | – | % | ||||||||||
|
Total
|
$ | 605,575 | 100 | % | $ | 642,052 | 100 | % | ||||||||
Consumer Loans
Consumer loans increased by $13 million, or 4%, in 2009, primarily due to increases in home equity lines. Our consumer portfolio is predominantly home equity lines and home equity loans, representing 83% of the total consumer portfolio of $330 million at December 31, 2009. All home equity
lines and home equity loans were originated by Washington Trust in its general market area. The Corporation estimates that approximately 55% of the combined home equity line and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages. Consumer loans also include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles.
Asset Quality
The Board of Directors of the Bank monitors credit risk management through two committees, the Finance Committee and the Audit Committee. The Finance Committee reviews and approves large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting
policies. The Audit Committee oversees management’s system and procedures to monitor the credit quality of the loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the allowance for loan losses. The Bank’s practice is to identify problem credits early and take charge-offs as promptly as practicable. In addition, management continuously reassesses its underwriting standards in response to changes
in credit risk posed by changes in economic conditions.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, nonaccrual investment securities and property acquired through foreclosure or repossession.
The following table presents nonperforming assets and additional asset quality data for the dates indicated:
|
(Dollars in thousands)
|
||||||||||||||||||||
|
December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Nonaccrual loans:
|
||||||||||||||||||||
|
Commercial mortgages
|
$ | 11,588 | $ | 1,942 | $ | 1,094 | $ | 981 | $ | 394 | ||||||||||
|
Commercial construction and development
|
– | – | – | – | – | |||||||||||||||
|
Other commercial
|
9,075 | 3,845 | 1,781 | 831 | 624 | |||||||||||||||
|
Residential real estate mortgages
|
6,038 | 1,754 | 1,158 | 721 | 1,147 | |||||||||||||||
|
Consumer
|
769 | 236 | 271 | 190 | 249 | |||||||||||||||
|
Total nonaccrual loans
|
27,470 | 7,777 | 4,304 | 2,723 | 2,414 | |||||||||||||||
|
Nonaccrual investment securities
|
1,065 | 633 | – | – | – | |||||||||||||||
|
Property acquired through foreclosure
|
||||||||||||||||||||
|
or repossession, net
|
1,974 | 392 | – | – | – | |||||||||||||||
|
Total nonperforming assets
|
$ | 30,509 | $ | 8,802 | $ | 4,304 | $ | 2,723 | $ | 2,414 | ||||||||||
|
Nonperforming assets to total assets
|
1.06 | % | 0.30 | % | 0.17 | % | 0.11 | % | 0.10 | % | ||||||||||
|
Nonperforming loans to total loans
|
1.43 | % | 0.42 | % | 0.27 | % | 0.19 | % | 0.17 | % | ||||||||||
|
Total past due loans to total loans
|
1.64 | % | 0.96 | % | 0.45 | % | 0.49 | % | 0.27 | % | ||||||||||
|
Accruing loans 90 days or more past due
|
$ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
Total nonaccrual loans increased from $7.8 million at December 31, 2008 to $27.5 million at December 31, 2009. Management believes that the declining credit quality trend experienced in 2009 is primarily related to weakened national and regional economic conditions. These
conditions, including high unemployment levels, may continue through 2010 and possibly into 2011.
Nonaccrual investment securities at December 31, 2009 were comprised of two pooled trust preferred securities. See additional information herein under the caption “Securities.” Property acquired through foreclosure or repossession amounted to $2.0 million at December 31,
2009, compared to $392 thousand at the end of 2008. The balance at December 31, 2009 consisted of two residential properties and one commercial property.
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest or sooner if considered appropriate by
management. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent cash receipts on nonaccrual loans
are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.
The Corporation has made no changes in its practices or policies during 2009 concerning the placement of loans or investment securities into nonaccrual status.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2009.
The following table presents additional detail on nonaccrual loans as of the dates indicated:
|
(Dollars in thousands)
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||||||||||
|
Days Past Due
|
Days Past Due
|
||||||||||||||||||||||||
|
|
Over 90
|
Under 90
|
Total
|
Over 90
|
Under 90
|
Total
|
|||||||||||||||||||
|
Commercial mortgages
|
$ | 11,227 | $ | 361 | $ | 11,588 | $ | 1,826 | $ | 116 | $ | 1,942 | |||||||||||||
|
Commercial construction
|
|||||||||||||||||||||||||
|
and development
|
– | – | – | – | – | – | |||||||||||||||||||
|
Other commercial
|
4,829 | 4,246 | 9,075 | 3,408 | 437 | 3,845 | |||||||||||||||||||
|
Residential real estate
|
|||||||||||||||||||||||||
|
mortgages
|
4,028 | 2,010 | 6,038 | 973 | 781 | 1,754 | |||||||||||||||||||
|
Consumer
|
164 | 605 | 769 | 77 | 159 | 236 | |||||||||||||||||||
|
Total nonaccrual loans
|
$ | 20,248 | $ | 7,222 | $ | 27,470 | $ | 6,284 | $ | 1,493 | $ | 7,777 | |||||||||||||
Nonaccrual commercial real estate and other commercial loans totaling $20.7 million and $5.8 million as of December 31, 2009 and 2008, respectively, were classified as impaired loans. At December 31, 2009, approximately $14.2 million, or 69%, of nonaccrual commercial impaired loans
were considered to be collateral dependent. The balance of collateral dependent nonaccrual commercial impaired loans was net of partial charge-offs of $3.1 million. See Note 5 to the Consolidated Financial Statements for additional disclosure on impaired loans.
Nonaccrual commercial mortgages increased by $9.6 million in 2009 to $11.6 million. This included three commercial real estate relationships with a total carrying value as of December 31, 2009 of $10.4 million, which was net of $1.5 million in charge-offs recognized in 2009. As
of December 31, 2009, these loans carry a loss allocation of $523 thousand. The loans to these three borrowers, which were in the 90 days or more past due category, are secured by (i) a retail center and office complex, (ii) a hotel property and (iii) a residential housing development project. The Bank has additional accruing commercial real estate and residential mortgage loans totaling $4.8 million to one of these borrowers. These additional loans have performed
in accordance with terms of the loans, were not past due as of December 31, 2009 and management has concluded that these loans have properly been classified as accruing.
Nonaccrual other commercial loans were up by $5.2 million in 2009 to $9.1 million. The largest nonaccrual relationship in this category totaled $2.5 million as of December 31, 2009. This relationship is secured by an auto dealership and was not delinquent as of December 31,
2009. Based on management’s assessment of the operating condition of the borrower, no loss allocation on this relationship was deemed necessary as of December 31, 2009. The second largest nonaccrual relationship in this category amounted to $736 thousand and was included in the 90 days or more past due category as of December 31, 2009. This relationship is collateral dependent and is secured by a retail building. Based on the fair value of the underlying collateral,
no loss allocation on this relationship was deemed necessary as of December 31, 2009. The third largest nonaccrual relationship in this category amounted to $494 thousand and was included in the 90 days or more past due category as of December 31, 2009. This relationship has a loss allocation of $370 thousand at December 31, 2009. The Bank has additional accruing loans of $1.4 million to two of these borrowers. These additional loans have
performed in accordance with terms of the loans, were not past due as of December 31, 2009 and management has concluded that these loans have properly been classified as accruing.
Nonaccrual residential mortgages increased by $4.3 million in 2009 to $6.0 million. There are a total of 21 loans included in $6.0 million of nonaccrual residential mortgages as of December 31, 2009, net of $238 thousand in charge-offs recognized in 2009. The loss
allocation on total nonaccrual residential mortgages was $937 thousand at December 31, 2009. $4.8 million of the nonaccrual residential mortgages were located in Rhode Island, Massachusetts and Connecticut. Included in total nonaccrual residential mortgages were 13 loans purchased for portfolio and serviced by others amounting to $4.0 million, which was net of $179 thousand in charge-offs recognized in 2009. Loans purchased from other financial institutions
were individually assessed at the time of
purchase using standards similar to those employed by the Bank for its self-originated loans. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.
Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $1.8 million, $583 thousand and $341 thousand in 2009, 2008 and 2007, respectively. Interest income attributable to these loans included
in the Consolidated Statements of Income amounted to approximately $931 thousand, $469 thousand and $318 thousand in 2009, 2008 and 2007, respectively.
Past Due Loans
The following tables present past due loans by category as of the dates indicated:
|
(Dollars in thousands)
|
||||||||||||||||
|
December 31,
|
2009
|
2008
|
||||||||||||||
|
Amount
|
% | (1) |
Amount
|
% | (1) | |||||||||||
|
Loans 30 – 59 days past due:
|
||||||||||||||||
|
Commercial real estate
|
$ | 1,909 | $ | 3,466 | ||||||||||||
|
Other commercial loans
|
1,831 | 2,024 | ||||||||||||||
|
Residential real estate mortgages
|
2,409 | 3,113 | ||||||||||||||
|
Consumer loans
|
1,258 | 76 | ||||||||||||||
|
Loans 30 – 59 days past due
|
$ | 7,407 | $ | 8,679 | ||||||||||||
|
Loans 60 – 89 days past due:
|
||||||||||||||||
|
Commercial real estate
|
$ | 1,648 | $ | 6 | ||||||||||||
|
Other commercial loans
|
292 | 785 | ||||||||||||||
|
Residential real estate mortgages
|
1,383 | 1,452 | ||||||||||||||
|
Consumer loans
|
591 | 401 | ||||||||||||||
|
Loans 60 – 89 days past due
|
$ | 3,914 | $ | 2,644 | ||||||||||||
|
Loans 90 days or more past due:
|
||||||||||||||||
|
Commercial real estate
|
$ | 11,227 | $ | 1,826 | ||||||||||||
|
Other commercial loans
|
4,829 | 3,408 | ||||||||||||||
|
Residential real estate mortgages
|
4,028 | 973 | ||||||||||||||
|
Consumer loans
|
164 | 77 | ||||||||||||||
|
Loans 90 days or more past due
|
$ | 20,248 | $ | 6,284 | ||||||||||||
|
Total past due loans:
|
||||||||||||||||
|
Commercial real estate
|
$ | 14,784 | 2.60 | % | $ | 5,298 | 1.16 | % | ||||||||
|
Other commercial loans
|
6,952 | 1.67 | % | 6,217 | 1.47 | % | ||||||||||
|
Residential real estate mortgages
|
7,820 | 1.29 | % | 5,538 | 0.86 | % | ||||||||||
|
Consumer loans
|
2,013 | 0.61 | % | 554 | 0.17 | % | ||||||||||
|
Total past due loans
|
$ | 31,569 | 1.64 | % | $ | 17,607 | 0.96 | % | ||||||||
|
(1)
|
Percentage of past due loans to the total loans outstanding within the respective category.
|
We experienced an increase in delinquencies in all loan categories during 2009. Management believes the increase in delinquencies in each category was attributable to weakened economic conditions in general. Total delinquencies amounted to $31.6 million, or 1.64% of total loans, at
December 31, 2009, up $14.0 million in 2009. All loans 90 days or more past due at December 31, 2009 and 2008 were classified as nonaccrual. In response to the increase in delinquencies, the Bank has devoted additional staffing resources to collection efforts. Management will continue to monitor the appropriateness of resources devoted to this activity.
The largest increase in total delinquencies was in commercial real estate loans. Included in commercial real estate loans less than 90 days past due were two loans to one borrower relationship totaling $2.8 million at December 31, 2009. This relationship was in accruing status
based on management’s assessment of the overall collectibility of these loans. All other significant delinquency relationships in this category were described above under the caption “Nonaccrual Loans.”
Residential mortgage loan delinquencies consisted of 28 loans totaling $7.8 million, or 1.29% of residential mortgage loans, at December 31, 2009. The increase was concentrated in loans 90 days or more past due, all of
which were in nonaccrual status at December 31, 2009. See the discussion above under the caption “Nonaccrual Loans.”
Consumer loan delinquencies consisted of 38 loans totaling $2.0 million, or 0.61% of total consumer loans, at December 31, 2009 and primarily included home equity lines and loans which were less than 90 days past due.
We use various techniques to monitor credit deterioration in the portfolios of residential mortgage loans and home equity lines and loans. Among these techniques, the Corporation periodically tracks loans with an updated FICO score below 660 and an estimated loan to value (“LTV”) ratio
of more than 85%, with LTV determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV, and the date of origination of the loan and do not reflect actual appraisal amounts. This information and trends associated with this information is considered by management in its assessment of the allocation of loss exposure in the residential mortgage loan portfolio.
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.
Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management
considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms.
Troubled debt restructured loans of $10.3 million and $870 thousand as of December 31, 2009 and 2008, respectively, were classified as impaired loans. At December 31, 2009, approximately 8% of troubled debt restructured loans were considered to be collateral dependent. See
Note 5 to the Consolidated Financial Statements for additional disclosure on impaired loans.
At December 31, 2009, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.
The following table sets forth information on troubled debt restructured loans as of the dates indicated:
|
(Dollars in thousands)
|
||||||||||||||||||||
|
December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Accruing troubled debt restructured loans:
|
||||||||||||||||||||
|
Commercial mortgages
|
$ | 5,566 | $ | – | $ | 1,717 | $ | – | $ | – | ||||||||||
|
Other commercial
|
540 | – | – | – | – | |||||||||||||||
|
Residential real estate mortgages
|
2,736 | 263 | – | – | – | |||||||||||||||
|
Consumer
|
858 | 607 | – | – | – | |||||||||||||||
|
Accruing troubled debt restructured loans
|
9,700 | 870 | 1,717 | – | – | |||||||||||||||
|
Nonaccrual troubled debt restructured loans:
|
||||||||||||||||||||
|
Other commercial
|
228 | – | – | – | – | |||||||||||||||
|
Residential real estate mortgages
|
336 | – | – | – | – | |||||||||||||||
|
Consumer
|
45 | – | – | – | – | |||||||||||||||
|
Nonaccrual troubled debt restructured loans
|
609 | – | – | – | – | |||||||||||||||
|
Total troubled debt restructured loans
|
$ | 10,309 | $ | 870 | $ | 1,717 | $ | – | $ | – | ||||||||||
As a result of deteriorating economic conditions, the Corporation has experienced an increase in troubled debt restructuring events involving commercial and residential borrowers. Included in accruing restructured commercial mortgages are two relationships totaling $4.4 million; (i) secured by
a hotel and restaurant, restructured via the
extension of maturity and (ii) secured by multiple retail properties, restructured via temporary deferment of payments. These loans have been classified in accruing status based on management’s evaluation of the adequacy of collateral and the financial condition of the borrowers. There
are a total of nine loans included in the $2.7 million of accruing restructured residential mortgages as of December 31, 2009. These loans were primarily restructured with temporary deferment of payments. These loans have been classified in accruing status based on management’s evaluation of each borrower’s ability to repay the loan in accordance with the restructured terms.
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, 2009, but where known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the disclosure of nonaccrual or restructured loans above. Management cannot predict the extent to which economic conditions may worsen
or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. The Corporation has identified approximately $8.0 million in potential problem loans at December 31, 2009, as compared to $9.3 million at December 31, 2008. Approximately
93% of the potential problem loans at December 31, 2009 consisted of six commercial lending relationships, which have been classified based on our evaluation of the financial condition of the borrowers. The Corporation’s loan policy provides guidelines for the review and monitoring of such loans in order to facilitate collection.
Allowance for Loan Losses
Establishing 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. See additional discussion regarding the allowance for loan losses under the caption “Critical Accounting Policies” and in Note 1 to the Consolidated Financial Statements.
The allowance for loan losses is management’s best estimate of the probable loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs
on loans.
The Bank’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Bank recognizes full or partial charge-offs on collateral dependent impaired loans
when the collateral is deemed to be insufficient to support the carrying value of the loan. The Bank does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.
At December 31, 2009, the allowance for loan losses was $27.4 million, or 1.43% of total loans, which compares to an allowance of $23.7 million, or 1.29% of total loans at December 31, 2008. The status of nonaccrual loans, delinquent loans and performing loans were all taken into
consideration in the assessment of the adequacy of the allowance for loans losses. Management believes that the allowance for loan losses is adequate and consistent with asset quality and delinquency indicators.
Various loan loss allowance coverage ratios are affected by the timing and extent of charge-offs, particularly with respect to impaired collateral dependent loans. For such loans the Bank generally recognizes a partial charge-off equal to the identified loss exposure, therefore the remaining allocation
of loss is minimal. The ratio of the allowance for loan losses to nonaccrual loans was 99.75% at December 31, 2009. The $27.5 million balance of total nonaccrual loans at that date was net of charge-offs amounting to $5.8 million.
The estimation of loan loss exposure inherent in the loan portfolio includes, among other procedures, (1) identification of loss allocations for individual loans deemed to be impaired in accordance with GAAP, (2) loss allocation factors for non-impaired loans based on credit grade, loss experience, delinquency
factors and other similar economic indicators, and (3) general loss allocations for other environmental factors, which is classified as “unallocated”. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure
to appropriately reflect our analysis of migrational loss experience. We analyze historical loss experience in the various portfolios over periods deemed to be relevant for each portfolio. Revisions to loss allocation factors are not retroactively applied.
The methodology to measure the amount of estimated loan loss exposure includes an analysis of individual loans deemed to be impaired. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements
and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment
is measured based on the fair value of the collateral less costs to sell if it is determined that foreclosure is probable. For collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.
Other individual commercial loans and commercial mortgage loans not deemed to be impaired 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. During 2009 we have continued to periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. We have continued to adjust loss allocations for various factors including declining trends in real estate values and deterioration in general economic conditions. We
believe that the periodic reassessment and revision of the loss allocation factors during 2009 have not resulted in a material impact on the allocation of loan loss exposure.
Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. Updates to appraisals
are obtained when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.
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 and our historical loss experience for each type of credit product. During 2009, the Corporation has continued to
update these analyses on a quarterly basis and has continued to adjust its loss allocations for various factors that it believes are not adequately presented in historical loss experience including declining trends in real estate values, changes in unemployment levels and increases in delinquency levels. These factors are also evaluated taking into account the geographic location of the underlying loans. We believe that the updated analyses and related adjustments to loss factors during
2009 have not resulted in a material impact on the allocation of loan loss exposure.
For residential mortgages and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis or, in some cases, broker price opinions.
For years ended December 31, 2009 and 2008, the loan loss provision totaled $8.5 million and $4.8 million, respectively. The provision for loan losses was based on management’s assessment of economic and credit conditions, with particular emphasis on commercial and commercial real
estate categories, as well as growth in the loan portfolio. For 2009 and 2008, net charge-offs totaled $4.8 million and $1.4 million, respectively. Commercial and commercial real estate loan net charge-offs amounted to 88% of total net charge-offs in 2009 and 82% in 2008.
Management believes that the declining credit quality trend in 2009 is primarily related to weakened national and regional economic conditions. These conditions, including high unemployment levels, may continue through 2010 and possibly into 2011. While management believes that the level
of allowance for loan losses at December 31, 2009 is appropriate, management will continue to assess the adequacy of the allowance for loan losses in accordance with its established policies.
The following table reflects the activity in the allowance for loan losses for the dates presented:
|
(Dollars in thousands)
|
||||||||||||||||||||
|
December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance at beginning of year
|
$ | 23,725 | $ | 20,277 | $ | 18,894 | $ | 17,918 | $ | 16,771 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
1,615 | 185 | 26 | – | 85 | |||||||||||||||
|
Construction and development
|
– | – | – | – | – | |||||||||||||||
|
Other
|
2,907 | 1,044 | 506 | 295 | 198 | |||||||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
417 | 104 | – | – | – | |||||||||||||||
|
Homeowner construction
|
– | – | – | – | – | |||||||||||||||
|
Consumer
|
223 | 260 | 246 | 133 | 86 | |||||||||||||||
|
Total charge-offs
|
5,162 | 1,593 | 778 | 428 | 369 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
37 | 68 | – | – | 71 | |||||||||||||||
|
Construction and development
|
– | – | – | – | – | |||||||||||||||
|
Other
|
251 | 48 | 203 | 171 | 389 | |||||||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
28 | – | – | – | – | |||||||||||||||
|
Homeowner construction
|
– | – | – | – | – | |||||||||||||||
|
Consumer
|
21 | 125 | 58 | 33 | 106 | |||||||||||||||
|
Total recoveries
|
337 | 241 | 261 | 204 | 566 | |||||||||||||||
|
Net charge-offs (recoveries)
|
4,825 | 1,352 | 517 | 224 | (197 | ) | ||||||||||||||
|
Reclassification of allowance
|
||||||||||||||||||||
|
on off-balance sheet exposures
|
– | – | – | – | (250 | ) | ||||||||||||||
|
Provision charged to earnings
|
8,500 | 4,800 | 1,900 | 1,200 | 1,200 | |||||||||||||||
|
Balance at end of year
|
$ | 27,400 | $ | 23,725 | $ | 20,277 | $ | 18,894 | $ | 17,918 | ||||||||||
|
Net charge-offs (recoveries) to average loans
|
0.25 | % | 0.08 | % | 0.03 | % | 0.02 | % | (0.01 | )% | ||||||||||
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,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Mortgages
|
$ | 7,360 | $ | 4,904 | $ | 5,218 | $ | 4,408 | $ | 4,467 | ||||||||||
|
% of these loans to all loans
|
25.9 | % | 22.2 | % | 17.7 | % | 19.3 | % | 20.8 | % | ||||||||||
|
Construction and development
|
874 | 784 | 1,445 | 589 | 713 | |||||||||||||||
|
% of these loans to all loans
|
3.8 | % | 2.7 | % | 3.8 | % | 2.2 | % | 2.7 | % | ||||||||||
|
Other
|
6,423 | 6,889 | 4,229 | 4,200 | 3,263 | |||||||||||||||
|
% of these loans to all loans
|
21.6 | % | 23.0 | % | 21.7 | % | 18.7 | % | 16.1 | % | ||||||||||
|
Residential:
|
||||||||||||||||||||
|
Mortgages
|
3,638 | 2,111 | 1,681 | 1,619 | 1,642 | |||||||||||||||
|
% of these loans to all loans
|
30.9 | % | 34.1 | % | 37.4 | % | 39.6 | % | 40.3 | % | ||||||||||
|
Homeowner construction
|
43 | 84 | 55 | 56 | 43 | |||||||||||||||
|
% of these loans to all loans
|
0.6 | % | 0.8 | % | 0.7 | % | 0.8 | % | 1.2 | % | ||||||||||
|
Consumer
|
1,346 | 2,231 | 2,027 | 1,882 | 1,585 | |||||||||||||||
|
% of these loans to all loans
|
17.2 | % | 17.2 | % | 18.7 | % | 19.4 | % | 18.9 | % | ||||||||||
|
Unallocated
|
7,716 | 6,722 | 5,622 | 6,140 | 6,205 | |||||||||||||||
|
Balance at end of year
|
$ | 27,400 | $ | 23,725 | $ | 20,277 | $ | 18,894 | $ | 17,918 | ||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Investment in Bank-Owned Life Insurance (“BOLI”)
BOLI amounted to $45.0 million and $43.2 million at December 31, 2009 and 2008, respectively. BOLI provides a means to mitigate increasing employee benefit costs. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender
value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an interest sensitive asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is invested in the “general account” of quality
insurance companies. All such general account carriers were rated “A” or better by A.M. Best and “A2” or better by Moody’s at December 31, 2009. BOLI is included in the Consolidated Balance Sheets at its cash surrender value. Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements of Income.
Sources of Funds
Our sources of funds include deposits, brokered certificates of deposit, FHLBB borrowings, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. Washington Trust uses funds to originate and purchase loans, purchase investment securities, conduct operations,
expand the branch network and pay dividends to shareholders.
Management’s preferred strategy for funding asset growth is to grow low cost deposits (demand deposit, NOW savings accounts). Asset growth in excess of low cost deposits is typically funded through higher cost deposits (certificates of deposit and money market accounts), brokered certificates
of deposit, FHLBB borrowings, and securities portfolio cash flow.
Deposits
Washington Trust offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue.
Total deposits amounted to $1.9 billion at December 31, 2009, up by $132 million, or 7%, from the balance at December 31, 2008. Excluding out-of-market brokered certificates of deposit, in-market deposits were up by $226 million, or 14%, in 2009.
Demand deposits amounted to $194 million at December 31, 2009, up by $21 million, or 12%, from December 31, 2008.
NOW account balances increased by $31 million, or 18%, in 2009 and totaled $202 million at December 31, 2009.
Money market account balances totaled $403 million at December 31, 2009, up by $97 million, or 32%, from the end of 2008. Included in this increase was $42 million in wealth management client money market deposits previously held in outside money market mutual funds.
During 2009, savings deposits increased by $18 million, or 10%, and amounted to $192 million at December 31, 2009.
Time deposits (including brokered certificates of deposit) amounted to $932 million at December 31, 2009, down by $36 million from the balance at December 31, 2008, which included a $94 million decrease in out-of-market brokered time deposits. The Corporation utilizes out-of-market
brokered time deposits as part of its overall funding program along with other sources. Out-of-market brokered time deposits amounted to $94 million at December 31, 2009, compared to $188 million at December 31, 2008. Excluding out-of-market brokered certificates of deposit, in-market time deposits grew by $59 million, or 8%, in 2009. Washington Trust is a member of the Certificate of Deposit Account Registry Service (“CDARS”) network. Washington
Trust uses CDARS to place customer funds into certificates of deposit issued by other banks that are members of the CDARS network. This occurs in increments less than FDIC insurance limits to ensure that customers are eligible for full FDIC insurance. We receive a reciprocal amount of deposits from other network members who do the same with their customer deposits. CDARS deposits are considered to be brokered deposits for bank regulatory purposes. We consider these
reciprocal CDARS deposit balances to be in-market deposits as distinguished from traditional out-of-market brokered deposits. Included in in-market time deposits at December 31, 2009 are CDARS reciprocal time deposits of $176 million, which were up by $90 million from December 31, 2008.
Borrowings
Federal Home Loan Bank Advances
The Corporation utilizes advances from the FHLBB as well as other borrowings as part of its overall funding strategy. FHLBB advances were used to meet short-term liquidity needs, to purchase securities and to purchase loans from other institutions. FHLBB advances decreased by $222 million
during the year and amounted to $607 million at December 31, 2009. Included in the December 31, 2009 balance are $13 million of callable advances, with maturity dates ranging from January 2011 to December 2013 and call dates that reset quarterly.
Other Borrowings
Other borrowings primarily consist of securities sold under repurchase agreements, deferred acquisition obligations, and Treasury, Tax and Loan demand note balance. Other borrowings amounted to $21.5 million at December 31, 2009, down by $5.2 million from the balance at December 31,
2008 primarily due to a decrease in the Treasury, Tax and Loan demand note balance and the first quarter 2009 payment of deferred acquisition obligations.
See Note 11 to the Consolidated Financial Statements for additional information on borrowings.
Liquidity and Capital Resources
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust’s primary source of liquidity is deposits, which funded approximately 65% of total average assets in 2009. While the generally preferred funding strategy
is to attract and retain low cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLBB term advances and other borrowings), cash flows from the Corporation’s securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although management has no intention
to do so at this time.
Washington Trust has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected
outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential
runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual”
factors enter into the calculation of the adequacy of contingent liquidity including (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. Washington Trust has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLBB in excess of levels used in the ordinary course of business.
The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 2009. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s
sources of funding will meet anticipated funding needs.
For 2009, net cash used in financing activities amounted to $105 million. A $132 million net increase in deposits was offset by a $222 million net decrease in FHLBB advances and $13 million of cash dividends paid. For 2009, net cash provided by investing activities totaled
$97.3 million, with proceeds from maturities and principal repayments of mortgage-backed securities being offset, in part, by loan growth. In 2009, purchases of premises and equipment totaled $5.5 million. This included a purchase of $792 thousand for land and a building adjacent to our corporate headquarters to be used for general corporate purposes. In December 2009, Washington Trust made an investment in a real estate limited partnership to renovate and operate
a low-income housing complex. As of December 31, 2009, Washington Trust has invested $296 thousand to the limited partnership and has an additional contingent funding commitment of $690 thousand. Also in 2009, $2.5 million in deferred acquisition obligations were paid. Net cash provided by operating activities amounted to $6.6 million for 2009, including net income of $16.1 million. In 2009, Washington Trust experienced strong residential
mortgage refinancing activity and mortgage sales activity. Washington Trust originated for sale $253 million in residential mortgage loans and sold $250 million in 2009. On November 12, 2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their estimated quarterly regular risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009. As a result,
Washington Trust prepaid FDIC deposit insurance costs of $11.4 million in December 2009. See the Corporation’s Consolidated Statements of Cash Flows for further information about sources and uses of cash.
Total shareholders’ equity amounted to $255 million at December 31, 2009, compared to $235 million at December 31, 2008. Pursuant to the provisions of ASC 320, “Investments – Debt and Equity Securities,” which were adopted effective January 1, 2009,
Washington Trust reclassified the noncredit-related portion of an other-than-temporary impairment loss which had been previously recognized in earnings in the fourth quarter of 2008. This reclassification was reflected as a cumulative effect adjustment of $1.2 million after taxes ($1.9 million before taxes) that increased retained earnings and decreased accumulated other comprehensive loss. This reclassification had a positive impact on regulatory capital and no impact on net income.
At December 31, 2009, a $2.7 million net of tax adjustment was recorded to increase the accumulated other comprehensive income component of shareholder’s equity. This adjustment represented the periodic recognition of the change in value of qualified pension plan assets in comparison to
the change in pension liabilities. This 2009 adjustment reflected increases in the value of marketable security pension assets. The Corporation expects to contribute $2.0 million to the qualified pension plan in 2010. In addition, the Corporation expects to contribute $676 thousand in benefit payments to the non-qualified retirement plans in 2010. Volatility in the value of plan assets may cause the Corporation to make higher levels of contributions in future
years. See Note 15 to the Consolidated Financial Statements for disclosure on pension liabilities.
The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares. No shares were repurchased in 2009. As of December 31, 2009, a cumulative total of 185,400 shares have been repurchased under this plan at a total cost of $4.8 million.
The ratio of total equity to total assets amounted to 8.8% at December 31, 2009, compared to 7.9% at December 31, 2008. Book value per share at December 31, 2009 amounted to $15.89, an 8% increase from the year-earlier amount of $14.75 per share.
The Bancorp and the Bank are subject to various regulatory capital requirements. The Bancorp and the Bank are categorized as “well-capitalized” under the regulatory framework for prompt corrective action. See Note 12 to the Consolidated Financial Statements for additional
discussion of capital requirements.
While the Corporation believes its current and anticipated capital levels are adequate to support its business plan, the capital and credit markets have experienced volatility and disruption for more than 12 months. In some cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers’ underlying financial strength. If these conditions in the capital markets continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Contractual Obligations and Commitments
The Corporation has entered into numerous contractual obligations and commitments. The following table summarizes our contractual cash obligations and other commitments at December 31, 2009.
|
(Dollars in thousands)
|
Payments Due by Period
|
|||||||||||||||||||
|
Total
|
Less Than
1 Year
(1)
|
1-3 Years
|
4-5 Years
|
After
5 Years
|
||||||||||||||||
|
Contractual Obligations:
|
||||||||||||||||||||
|
FHLBB advances
(2)
|
$ | 607,328 | $ | 121,104 | $ | 237,405 | $ | 162,096 | $ | 86,723 | ||||||||||
|
Junior subordinated debentures
|
32,991 | – | – | – | 32,991 | |||||||||||||||
|
Operating lease obligations
|
6,444 | 1,384 | 1,979 | 1,200 | 1,881 | |||||||||||||||
|
Software licensing arrangements
|
1,358 | 1,217 | 141 | – | – | |||||||||||||||
|
Treasury, tax and loan demand note
|
1,676 | 1,676 | – | – | – | |||||||||||||||
|
Other borrowings
|
19,825 | 33 | 19,573 | 86 | 133 | |||||||||||||||
|
Total contractual obligations
|
$ | 669,622 | $ | 125,414 | $ | 259,098 | $ | 163,382 | $ | 121,728 | ||||||||||
|
(1)
|
Maturities or contractual obligations are considered by management in the administration of liquidity and are routinely refinanced in the ordinary course of business.
|
|
(2)
|
All FHLBB advances are shown in the period corresponding to their scheduled maturity. Some FHLBB advances are callable at earlier dates. See Note 11 to the Consolidated Financial Statements for additional information.
|
|
(Dollars in thousands)
|
Amount of Commitment Expiration – Per Period
|
|||||||||||||||||||
|
Total
|
Less Than
1 Year
|
1-3 Years
|
4-5 Years
|
After
5 Years
|
||||||||||||||||
|
Other Commitments:
|
||||||||||||||||||||
|
Commercial loans
|
$ | 186,943 | $ | 125,480 | $ | 34,475 | $ | 3,038 | $ | 23,950 | ||||||||||
|
Home equity lines
|
185,892 | 508 | 101 | – | 185,283 | |||||||||||||||
|
Other loans
|
25,691 | 22,343 | 50 | 3,298 | – | |||||||||||||||
|
Standby letters of credit
|
8,712 | 1,973 | 6,739 | – | – | |||||||||||||||
|
Forward loan commitments to:
|
||||||||||||||||||||
|
Originate loans
|
15,898 | 15,898 | – | – | – | |||||||||||||||
|
Sell loans
|
25,791 | 25,791 | – | – | – | |||||||||||||||
|
Customer related derivative contracts:
|
||||||||||||||||||||
|
Interest rate swaps with customers
|
53,725 | – | – | 43,820 | 9,905 | |||||||||||||||
|
Mirror swaps with counterparties
|
53,725 | – | – | 43,820 | 9,905 | |||||||||||||||
|
Interest rate risk management contract:
|
||||||||||||||||||||
|
Interest rate swap
|
10,000 | – | – | 10,000 | – | |||||||||||||||
|
Equity commitment to affordable
|
||||||||||||||||||||
|
housing limited partnership
(1)
|
690 | 690 | ||||||||||||||||||
|
Total commitments
|
$ | 567,067 | $ | 192,683 | $ | 41,365 | $ | 103,976 | $ | 229,043 | ||||||||||
|
(1)
|
The funding of this commitment is generally contingent upon substantial completion of the project.
|
Off-Balance Sheet Arrangements
In the normal course of business, Washington Trust engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional
amounts. Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates. These financial transactions include commitments to extend credit, standby letters of credit, interest rate swaps, 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’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.
In April 2008, the Bancorp entered into an interest rate swap contract with Lehman Brothers Special Financing, Inc. to hedge the interest rate risk associated with variable rate junior subordinated debentures. Under the terms of this swap, Washington Trust agreed to pay a fixed rate and receive a variable
rate based on LIBOR. At inception, this hedging transaction was deemed to be highly effective and, therefore, valuation changes for this derivative were recognized in the accumulated other comprehensive income component of shareholders’ equity. In September 2008, Lehman Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for bankruptcy protection, followed in October 2008 by the swap counterparty itself. Due to the change in the creditworthiness
of the derivative counterparty, the hedging relationship was deemed to be not highly effective, with the result that subsequent changes in the derivative valuation are recognized in earnings. The bankruptcy filings by the Lehman entities constituted events of default under the interest rate swap contract, entitling Washington Trust to immediately suspend performance and to terminate the transaction. On March 31, 2009, this interest rate swap contract was reassigned to a new creditworthy
counterparty, unrelated to the prior counterparty. On May 1, 2009, this interest rate swap contract qualified for cash flow hedge accounting to hedge the interest rate risk associated with the variable rate junior subordinated debentures. Effective May 1, 2009, the effective portion of changes in fair value of the swap was recorded in other comprehensive income and subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest
on the variable rate debentures affect earnings. The ineffective portion of changes in fair value was recognized directly in earnings as interest expense.
For additional information on financial instruments with off-balance sheet risk and derivative financial instruments see Note 13 to the Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.
Asset/Liability Management and Interest Rate Risk
Interest rate risk is the primary market risk category associated with the Corporation’s operations. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Interest rate risk is the risk of loss to future earnings due
to changes in interest rates. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with Washington Trust’s liquidity, capital adequacy, growth, risk and profitability goals.
The ALCO manages the Corporation’s interest rate risk using income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over
a 12-month horizon, the month 13 to month 24 horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics
of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of December 31, 2009 and 2008,
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 regularly reviews a wide variety of interest rate shift scenario results to evaluate interest risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points 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, 2009 and 2008. 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,
|
2009
|
2008
|
||||||||||||||
|
Months 1 - 12
|
Months 13 - 24
|
Months 1 - 12
|
Months 13 - 24
|
|||||||||||||
|
100 basis point rate decrease
|
-2.09 | % | -7.08 | % | -1.13 | % | 0.30 | % | ||||||||
|
100 basis point rate increase
|
1.85 | % | 2.89 | % | 0.61 | % | -1.09 | % | ||||||||
|
200 basis point rate increase
|
4.11 | % | 6.45 | % | 1.98 | % | -1.09 | % | ||||||||
The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall from their already low levels and remain
lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market rates fall.
The positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag other market
rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during past rising interest rate cycles.
While the ALCO reviews simulation assumptions and periodically back-tests the simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity
and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost money market and time deposits in rising rate scenarios as noted above. The static balance sheet assumption does not necessarily reflect the Corporation’s expectation
for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used
in income simulation may differ from the ALCO’s estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with
cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s
capital position. Results are calculated using industry-standard analytical techniques and securities data. Available for sale equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates. The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of December 31, 2009 and 2008 resulting from immediate parallel
rate shifts:
|
(Dollars in thousands)
|
Down 100
|
Up 200
|
||||||
|
Basis
|
Basis
|
|||||||
|
Security Type
|
Points
|
Points
|
||||||
|
U.S. Treasury and U.S. government-sponsored enterprise securities (noncallable)
|
$ | 1,401 | $ | (2,619 | ) | |||
|
U.S. government-sponsored enterprise securities (callable)
|
1 | (2 | ) | |||||
|
States and political subdivisions
|
3,894 | (10,196 | ) | |||||
|
Mortgage-backed securities issued by U.S. government-sponsored agencies
|
||||||||
|
and U.S. government-sponsored enterprises
|
6,521 | (21,992 | ) | |||||
|
Trust preferred debt and other corporate securities
|
434 | 1,007 | ||||||
|
Total change in market value as of December 31, 2009
|
$ | 12,251 | $ | (33,802 | ) | |||
|
Total change in market value as of December 31, 2008
|
$ | 14,624 | $ | (48,014 | ) | |||
See Note 13 to the Consolidated Financial Statements for more information regarding the nature and business purpose of financial instruments with off-balance sheet risk and derivative financial instruments.
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk”.
The financial statements and supplementary data are contained herein.
|
Description
|
Page
|
|
Management’s Annual Report on Internal Control Over Financial Reporting
|
61
|
|
Reports of Independent Registered Public Accounting Firm
|
62
|
|
Consolidated Balance Sheets at December 31, 2009 and 2008
|
64
|
|
Consolidated Statements of Income For the Years Ended December 31, 2009, 2008 and 2007
|
65
|
|
Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2009, 2008 and 2007
|
66
|
|
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007
|
68
|
|
Notes to Consolidated Financial Statements
|
70
|
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, 2009. 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, 2009, the Corporation’s internal control over financial reporting is effective based on those criteria.
The Corporation’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting. This report appears on the following page of this Annual Report on Form 10-K.
|
/s/ John C. Warren
|
/s/ David V. Devault
|
|
John C. Warren
Chairman and
Chief Executive Officer
|
David V. Devault
Executive Vice President, Chief Financial Officer
and Secretary
|
Report of Independent Registered Public Accounting Firm
[Graphic Omitted]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc:
We have audited Washington Trust Bancorp, Inc. and Subsidiaries’ (the “Corporation’s”) internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 1, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Providence, Rhode Island
March 1, 2010
Report of Independent Registered Public Accounting Firm
[Graphic Omitted]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Washington Trust Bancorp, Inc. and Subsidiaries (the “Corporation”) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, as of January 1, 2009, the Corporation changed its method of evaluating other-than-temporary impairments of debt securities to comply with new accounting requirements issued by the FASB.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, 2009, 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 1, 2010 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
/s/ KPMG LLP
Providence, Rhode Island
March 1, 2010
-63-
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars in thousands,
|
|
|
except par value)
|
|
December 31,
|
2009
|
2008
|
||||||
|
Assets:
|
||||||||
|
Cash and noninterest-bearing balances due from banks
|
$ | 38,167 | $ | 11,644 | ||||
|
Interest-bearing balances due from banks
|
13,686 | 41,780 | ||||||
|
Federal funds sold and securities purchased under resale agreements
|
– | 2,942 | ||||||
|
Other short-term investments
|
5,407 | 1,824 | ||||||
|
Mortgage loans held for sale
|
9,909 | 2,543 | ||||||
|
Securities available for sale, at fair value;
|
||||||||
|
amortized cost $677,676 in 2009 and $869,433 in 2008
|
691,484 | 866,219 | ||||||
|
Federal Home Loan Bank stock, at cost
|
42,008 | 42,008 | ||||||
|
Loans:
|
||||||||
|
Commercial and other
|
984,550 | 880,313 | ||||||
|
Residential real estate
|
605,575 | 642,052 | ||||||
|
Consumer
|
329,543 | 316,789 | ||||||
|
Total loans
|
1,919,668 | 1,839,154 | ||||||
|
Less allowance for loan losses
|
27,400 | 23,725 | ||||||
|
Net loans
|
1,892,268 | 1,815,429 | ||||||
|
Premises and equipment, net
|
27,524 | 25,102 | ||||||
|
Accrued interest receivable
|
9,137 | 11,036 | ||||||
|
Investment in bank-owned life insurance
|
44,957 | 43,163 | ||||||
|
Goodwill
|
58,114 | 58,114 | ||||||
|
Identifiable intangible assets, net
|
8,943 | 10,152 | ||||||
|
Property acquired through foreclosure or repossession, net
|
1,974 | 392 | ||||||
|
Other assets
|
40,895 | 33,118 | ||||||
|
Total assets
|
$ | 2,884,473 | $ | 2,965,466 | ||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Demand deposits
|
$ | 194,046 | $ | 172,771 | ||||
|
NOW accounts
|
202,367 | 171,306 | ||||||
|
Money market accounts
|
403,333 | 305,879 | ||||||
|
Savings accounts
|
191,580 | 173,485 | ||||||
|
Time deposits
|
931,684 | 967,427 | ||||||
|
Total deposits
|
1,923,010 | 1,790,868 | ||||||
|
Dividends payable
|
3,369 | 3,351 | ||||||
|
Federal Home Loan Bank advances
|
607,328 | 829,626 | ||||||
|
Junior subordinated debentures
|
32,991 | 32,991 | ||||||
|
Other borrowings
|
21,501 | 26,743 | ||||||
|
Accrued expenses and other liabilities
|
41,328 | 46,776 | ||||||
|
Total liabilities
|
2,629,527 | 2,730,355 | ||||||
|
Shareholders’ Equity:
|
||||||||
|
Common stock of $.0625 par value; authorized 30,000,000 shares;
|
||||||||
|
issued 16,061,748 shares in 2009 and 16,018,868 shares in 2008
|
1,004 | 1,001 | ||||||
|
Paid-in capital
|
82,592 | 82,095 | ||||||
|
Retained earnings
|
168,514 | 164,679 | ||||||
|
Accumulated other comprehensive income (loss)
|
3,337 | (10,458 | ) | |||||
|
Treasury stock, at cost; 19,185 shares in 2009 and 84,191 shares in 2008
|
(501 | ) | (2,206 | ) | ||||
|
Total shareholders’ equity
|
254,946 | 235,111 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,884,473 | $ | 2,965,466 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-64-
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars and shares in thousands,
|
|
|
except per share amounts)
|
|
Years ended December 31,
|
2009
|
2008
|
2007
|
||||||||||
|
Interest income:
|
|||||||||||||
|
Interest and fees on loans
|
$ | 96,796 | $ | 100,939 | $ | 98,720 | |||||||
|
Interest on securities:
|
Taxable
|
29,423 | 34,382 | 31,163 | |||||||||
|
Nontaxable
|
3,116 | 3,125 | 2,983 | ||||||||||
|
Dividends on corporate stock and Federal Home Loan Bank stock
|
245 | 1,882 | 2,737 | ||||||||||
|
Other interest income
|
50 | 334 | 831 | ||||||||||
|
Total interest income
|
129,630 | 140,662 | 136,434 | ||||||||||
|
Interest expense:
|
|||||||||||||
|
Deposits
|
32,638 | 41,195 | 52,422 | ||||||||||
|
Federal Home Loan Bank advances
|
28,172 | 30,894 | 21,641 | ||||||||||
|
Junior subordinated debentures
|
1,947 | 1,879 | 1,352 | ||||||||||
|
Other interest expense
|
981 | 1,181 | 1,075 | ||||||||||
|
Total interest expense
|
63,738 | 75,149 | 76,490 | ||||||||||
|
Net interest income
|
65,892 | 65,513 | 59,944 | ||||||||||
|
Provision for loan losses
|
8,500 | 4,800 | 1,900 | ||||||||||
|
Net interest income after provision for loan losses
|
57,392 | 60,713 | 58,044 | ||||||||||
|
Noninterest income:
|
|||||||||||||
|
Wealth management services:
|
|||||||||||||
|
Trust and investment advisory fees
|
18,128 | 20,316 | 21,124 | ||||||||||
|
Mutual fund fees
|
4,140 | 5,205 | 5,430 | ||||||||||
|
Financial planning, commissions and other service fees
|
1,518 | 2,752 | 2,462 | ||||||||||
|
Wealth management services
|
23,786 | 28,273 | 29,016 | ||||||||||
|
Service charges on deposit accounts
|
4,860 | 4,781 | 4,713 | ||||||||||
|
Merchant processing fees
|
7,844 | 6,900 | 6,710 | ||||||||||
|
Income from bank-owned life insurance
|
1,794 | 1,800 | 1,593 | ||||||||||
|
Net gains on loan sales and commissions on loans originated for others
|
4,352 | 1,396 | 1,493 | ||||||||||
|
Net realized gains on securities
|
314 | 2,224 | 455 | ||||||||||
|
Net gains (losses) on interest rate swap contracts
|
697 | (542 | ) | 27 | |||||||||
|
Other income
|
1,708 | 1,625 | 1,502 | ||||||||||
|
Noninterest income, excluding other-than-temporary impairment losses
|
45,355 | 46,457 | 45,509 | ||||||||||
|
Total other-than-temporary impairment losses on securities
|
(6,650 | ) | (5,937 | ) | – | ||||||||
|
Portion of loss recognized in other comprehensive income (before tax)
|
3,513 | – | – | ||||||||||
|
Net impairment losses recognized in earnings
|
(3,137 | ) | (5,937 | ) | – | ||||||||
|
Total noninterest income
|
42,218 | 40,520 | 45,509 | ||||||||||
|
Noninterest expense:
|
|||||||||||||
|
Salaries and employee benefits
|
41,917 | 41,037 | 39,986 | ||||||||||
|
Net occupancy
|
4,790 | 4,536 | 4,150 | ||||||||||
|
Equipment
|
3,917 | 3,838 | 3,473 | ||||||||||
|
Merchant processing costs
|
6,652 | 5,769 | 5,686 | ||||||||||
|
FDIC deposit insurance costs
|
4,397 | 1,044 | 213 | ||||||||||
|
Outsourced services
|
2,734 | 2,859 | 2,180 | ||||||||||
|
Legal, audit and professional fees
|
2,443 | 2,325 | 1,761 | ||||||||||
|
Advertising and promotion
|
1,687 | 1,729 | 2,024 | ||||||||||
|
Amortization of intangibles
|
1,209 | 1,281 | 1,383 | ||||||||||
|
Debt prepayment penalties
|
– | – | 1,067 | ||||||||||
|
Other expenses
|
7,422 | 7,324 | 6,983 | ||||||||||
|
Total noninterest expense
|
77,168 | 71,742 | 68,906 | ||||||||||
|
Income before income taxes
|
22,442 | 29,491 | 34,647 | ||||||||||
|
Income tax expense
|
6,346 | 7,319 | 10,847 | ||||||||||
|
Net income
|
$ | 16,096 | $ | 22,172 | $ | 23,800 | |||||||
|
Weighted average shares outstanding - basic
|
15,994.9 | 13,981.9 | 13,355.5 | ||||||||||
|
Weighted average shares outstanding - diluted
|
16,040.9 | 14,146.3 | 13,604.1 | ||||||||||
|
Per share information:
|
Basic earnings per share
|
$ | 1.01 | $ | 1.59 | $ | 1.78 | ||||||
|
Diluted earnings per share
|
$ | 1.00 | $ | 1.57 | $ | 1.75 | |||||||
|
Cash dividends declared per share
|
$ | 0.84 | $ | 0.83 | $ | 0.80 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
-65-
|
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, 2007
|
13,430 | $ | 843 | $ | 35,893 | $ | 141,548 | $ | (3,515 | ) | $ | (1,713 | ) | $ | 173,056 | |||||||||||||
|
Net income for 2007
|
23,800 | 23,800 | ||||||||||||||||||||||||||
|
Unrealized gains on securities, net
|
||||||||||||||||||||||||||||
|
of $427 income tax expense
|
793 | 793 | ||||||||||||||||||||||||||
|
Reclassification adjustments for net
|
||||||||||||||||||||||||||||
|
realized gains included in net income,
|
||||||||||||||||||||||||||||
|
net of $190 income tax expense
|
(265 | ) | (265 | ) | ||||||||||||||||||||||||
|
Defined benefit plan obligation adjustment,
|
||||||||||||||||||||||||||||
|
net of $1,330 income tax expense
|
2,469 | 2,469 | ||||||||||||||||||||||||||
|
Reclassification adjustments for net periodic
|
||||||||||||||||||||||||||||
|
pension cost, net of $149 income tax expense
|
279 | 279 | ||||||||||||||||||||||||||
|
Comprehensive income
|
27,076 | |||||||||||||||||||||||||||
|
Cash dividends declared
|
(10,701 | ) | (10,701 | ) | ||||||||||||||||||||||||
|
Share-based compensation
|
508 | 508 | ||||||||||||||||||||||||||
|
Deferred compensation plan
|
(14 | ) | (4 | ) | (354 | ) | (358 | ) | ||||||||||||||||||||
|
Exercise of stock options, issuance of other
|
||||||||||||||||||||||||||||
|
other compensation-related equity instruments
|
||||||||||||||||||||||||||||
|
and related tax benefit
|
123 | (1,523 | ) | 3,302 | 1,779 | |||||||||||||||||||||||
|
Shares repurchased
|
(185 | ) | (4,847 | ) | (4,847 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2007
|
13,354 | $ | 843 | $ | 34,874 | $ | 154,647 | $ | (239 | ) | $ | (3,612 | ) | $ | 186,513 | |||||||||||||
|
Net income for 2008
|
22,172 | 22,172 | ||||||||||||||||||||||||||
|
Unrealized losses on securities, net
|
||||||||||||||||||||||||||||
|
of $2,899 income tax benefit
|
(5,222 | ) | (5,222 | ) | ||||||||||||||||||||||||
|
Reclassification adjustments for net
|
||||||||||||||||||||||||||||
|
realized losses included in net income,
|
||||||||||||||||||||||||||||
|
net of $1,335 income tax benefit
|
2,377 | 2,377 | ||||||||||||||||||||||||||
|
Defined benefit plan obligation adjustment,
|
||||||||||||||||||||||||||||
|
net of $4,230 income tax benefit
|
(7,615 | ) | (7,615 | ) | ||||||||||||||||||||||||
|
Reclassification adjustments for net periodic
|
||||||||||||||||||||||||||||
|
pension cost, net of $91 income tax expense
|
169 | 169 | ||||||||||||||||||||||||||
|
Unrealized gains on cash flow hedges, net
|
||||||||||||||||||||||||||||
|
of $2 income tax expense
|
4 | 4 | ||||||||||||||||||||||||||
|
Reclassification adjustments for net realized
|
||||||||||||||||||||||||||||
|
gains on cash flow hedges included in net
|
||||||||||||||||||||||||||||
|
income, net of $14 income tax expense
|
26 | 26 | ||||||||||||||||||||||||||
|
Comprehensive income
|
10,261 | |||||||||||||||||||||||||||
|
Adjustment to initially apply SFAS No. 158,
|
||||||||||||||||||||||||||||
|
net of $229 income tax benefit
|
(468 | ) | 42 | (426 | ) | |||||||||||||||||||||||
|
Cash dividends declared
|
(11,672 | ) | (11,672 | ) | ||||||||||||||||||||||||
|
Share-based compensation
|
630 | 630 | ||||||||||||||||||||||||||
|
Deferred compensation plan
|
2 | (7 | ) | 43 | 36 | |||||||||||||||||||||||
|
Exercise of stock options, issuance of other
|
||||||||||||||||||||||||||||
|
other compensation-related equity instruments
|
||||||||||||||||||||||||||||
|
and related tax benefit
|
41 | (687 | ) | 1,068 | 381 | |||||||||||||||||||||||
|
Shares issued
|
2,500 | 156 | 46,718 | 46,874 | ||||||||||||||||||||||||
|
Shares issued – dividend reinvestment plan
|
38 | 2 | 567 | 295 | 864 | |||||||||||||||||||||||
|
Balance at December 31, 2008
|
15,935 | $ | 1,001 | $ | 82,095 | $ | 164,679 | $ | (10,458 | ) | $ | (2,206 | ) | $ | 235,111 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars and shares in thousands)
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
|
||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Common
|
Other
|
|||||||||||||||||||||||||||
|
Shares
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|||||||||||||||||||||||
|
(Dollars and shares in thousands)
|
Outstanding
|
Stock
|
Capital
|
Earnings
|
Income (Loss)
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance at January 1, 2009
|
15,935 | $ | 1,001 | $ | 82,095 | $ | 164,679 | $ | (10,458 | ) | $ | (2,206 | ) | $ | 235,111 | |||||||||||||
|
Cumulative effect adjustment of change in
|
||||||||||||||||||||||||||||
|
accounting principle, net of $663 income
|
||||||||||||||||||||||||||||
|
tax benefit
|
1,196 | (1,196 | ) | – | ||||||||||||||||||||||||
|
Net income for 2009
|
16,096 | 16,096 | ||||||||||||||||||||||||||
|
Unrealized gains on securities, net
|
||||||||||||||||||||||||||||
|
of $5,724 income tax expense
|
10,334 | 10,334 | ||||||||||||||||||||||||||
|
Noncredit-related losses on securities
|
||||||||||||||||||||||||||||
|
not expected to be sold, net of $1,252
|
||||||||||||||||||||||||||||
|
income tax benefit
|
(2,261 | ) | (2,261 | ) | ||||||||||||||||||||||||
|
Reclassification adjustments for net
|
||||||||||||||||||||||||||||
|
realized losses included in net income,
|
||||||||||||||||||||||||||||
|
net of $2,258 income tax benefit
|
4,077 | 4,077 | ||||||||||||||||||||||||||
|
Defined benefit plan obligation adjustment,
|
||||||||||||||||||||||||||||
|
net of $1,489 income tax expense
|
2,669 | 2,669 | ||||||||||||||||||||||||||
|
Reclassification adjustments for net periodic
|
||||||||||||||||||||||||||||
|
pension cost, net of $116 income tax expense
|
209 | 209 | ||||||||||||||||||||||||||
|
Unrealized losses on cash flow hedges, net
|
||||||||||||||||||||||||||||
|
of $7 income tax expense
|
13 | 13 | ||||||||||||||||||||||||||
|
Reclassification adjustments for net realized
|
||||||||||||||||||||||||||||
|
gains on cash flow hedges included in net
|
||||||||||||||||||||||||||||
|
income, net of $28 income tax benefit
|
(50 | ) | (50 | ) | ||||||||||||||||||||||||
|
Comprehensive income
|
31,087 | |||||||||||||||||||||||||||
|
Cash dividends declared
|
(13,457 | ) | (13,457 | ) | ||||||||||||||||||||||||
|
Share-based compensation
|
708 | 708 | ||||||||||||||||||||||||||
|
Deferred compensation plan
|
3 | (40 | ) | 93 | 53 | |||||||||||||||||||||||
|
Exercise of stock options, issuance of other
|
||||||||||||||||||||||||||||
|
other compensation-related equity instruments
|
||||||||||||||||||||||||||||
|
and related tax benefit
|
44 | 1 | (504 | ) | 841 | 338 | ||||||||||||||||||||||
|
Shares issued – dividend reinvestment plan
|
61 | 2 | 333 | 771 | 1,106 | |||||||||||||||||||||||
|
Balance at December 31, 2009
|
16,043 | $ | 1,004 | $ | 82,592 | $ | 168,514 | $ | 3,337 | $ | (501 | ) | $ | 254,946 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
(Dollars in thousands)
|
|
|
|
Years ended December 31,
|
2009
|
2008
|
2007
|
||||||||||
|
Cash flows from operating activities:
|
|||||||||||||
|
Net income
|
$ | 16,096 | $ | 22,172 | $ | 23,800 | |||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||||||
|
Provision for loan losses
|
8,500 | 4,800 | 1,900 | ||||||||||
|
Depreciation of premises and equipment
|
3,113 | 3,043 | 2,951 | ||||||||||
|
Net amortization of premium and discount
|
335 | 691 | 631 | ||||||||||
|
Net amortization of intangibles
|
1,209 | 1,281 | 1,383 | ||||||||||
|
Non–cash charitable contribution
|
– | 397 | 520 | ||||||||||
|
Share–based compensation
|
708 | 630 | 508 | ||||||||||
|
Deferred income tax benefit
|
(1,500 | ) | (5,308 | ) | (2,311 | ) | |||||||
|
Earnings from bank-owned life insurance
|
(1,794 | ) | (1,800 | ) | (1,593 | ) | |||||||
|
Net gains on loan sales and commissions on loans originated for others
|
(4,352 | ) | (1,396 | ) | (1,493 | ) | |||||||
|
Net realized gains on securities
|
(314 | ) | (2,224 | ) | (455 | ) | |||||||
|
Net impairment losses recognized in earnings
|
3,137 | 5,937 | - | ||||||||||
|
Net (gains) losses on interest rate swap contracts
|
(697 | ) | 542 | (27 | ) | ||||||||
|
Proceeds from sales of loans
|
250,467 | 56,905 | 59,013 | ||||||||||
|
Loans originated for sale
|
(253,442 | ) | (56,588 | ) | (57,926 | ) | |||||||
|
Decrease in accrued interest receivable, excluding purchased interest
|
1,918 | 649 | 43 | ||||||||||
|
(Increase) decrease in other assets
|
(13,736 | ) | (4,477 | ) | 1,472 | ||||||||
|
(Decrease) increase in accrued expenses and other liabilities
|
(3,045 | ) | 3,797 | 1,502 | |||||||||
|
Other, net
|
– | 20 | 55 | ||||||||||
|
Net cash provided by operating activities
|
6,603 | 29,071 | 29,973 | ||||||||||
|
Cash flows from investing activities:
|
|||||||||||||
|
Purchases of:
|
Mortgage-backed securities available for sale
|
– | (296,187 | ) | (258,737 | ) | |||||||
|
Other investment securities available for sale
|
(304 | ) | (13,996 | ) | (39,290 | ) | |||||||
|
Mortgage-backed securities held to maturity
|
– | – | – | ||||||||||
|
Other investment securities held to maturity
|
– | – | (12,882 | ) | |||||||||
|
Proceeds from sales of:
|
Mortgage-backed securities available for sale
|
– | 14,000 | 47,938 | |||||||||
|
Other investment securities available for sale
|
1,604 | 67,321 | 43,015 | ||||||||||
|
Mortgage-backed securities held to maturity
|
– | – | 38,501 | ||||||||||
|
Other investment securities held to maturity
|
– | – | 21,698 | ||||||||||
|
Maturities and principal payments of:
|
Mortgage-backed securities available for sale
|
171,330 | 89,500 | 65,443 | |||||||||
|
Other investment securities available for sale
|
17,475 | 15,680 | 22,967 | ||||||||||
|
Mortgage-backed securities held to maturity
|
– | – | 3,191 | ||||||||||
|
Other investment securities held to maturity
|
– | – | 20,490 | ||||||||||
|
Purchase of Federal Home Loan Bank stock
|
– | (10,283 | ) | (2,998 | ) | ||||||||
|
Net increase in loans
|
(79,661 | ) | (229,703 | ) | (23,054 | ) | |||||||
|
Proceeds from sale of loans
|
– | 18,047 | – | ||||||||||
|
Purchases of loans, including purchased interest
|
(5,421 | ) | (54,931 | ) | (90,988 | ) | |||||||
|
Proceeds from the sale of property acquired through foreclosure or repossession
|
607 | – | – | ||||||||||
|
Proceeds from sale of premises and equipment, net of selling costs
|
– | 1,433 | – | ||||||||||
|
Purchases of premises and equipment
|
(5,535 | ) | (4,183 | ) | (4,122 | ) | |||||||
|
Equity investment in real estate limited partnership
|
(295 | ) | – | – | |||||||||
|
Equity investment in capital trusts
|
– | (310 | ) | – | |||||||||
|
Payment of deferred acquisition obligation
|
(2,509 | ) | (15,159 | ) | (6,720 | ) | |||||||
|
Net cash provided by (used in) investing activities
|
97,291 | (418,771 | ) | (175,548 | ) | ||||||||
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,
|
2009
|
2008
|
2007
|
|||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net increase (decrease) in deposits
|
132,142 | 144,663 | (31,792 | ) | ||||||||
|
Net (decrease) increase in other borrowings
|
(2,733 | ) | 1,707 | 18,675 | ||||||||
|
Proceeds from Federal Home Loan Bank advances
|
276,670 | 1,112,856 | 803,513 | |||||||||
|
Repayment of Federal Home Loan Bank advances
|
(498,960 | ) | (899,621 | ) | (661,617 | ) | ||||||
|
Issuance (purchase) of treasury stock, including net deferred compensation plan activity
|
53 | 36 | (5,200 | ) | ||||||||
|
Proceeds from the issuance of common stock under dividend reinvestment plan
|
1,106 | 864 | – | |||||||||
|
Proceeds from the issuance of common stock
|
– | 46,874 | – | |||||||||
|
Net proceeds from the exercise of stock options and issuance of other
|
||||||||||||
|
compensation-related equity instruments
|
364 | 182 | 1,052 | |||||||||
|
Tax (expense) benefit from stock option exercises and issuance of other
|
||||||||||||
|
compensation-related equity instruments
|
(26 | ) | 199 | 727 | ||||||||
|
Proceeds from the issuance of junior subordinated debentures, net of debt issuance costs
|
– | 10,016 | – | |||||||||
|
Cash dividends paid
|
(13,440 | ) | (10,998 | ) | (10,580 | ) | ||||||
|
Net cash (used in) provided by financing activities
|
(104,824 | ) | 406,778 | 114,778 | ||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(930 | ) | 17,078 | (30,797 | ) | |||||||
|
Cash and cash equivalents at beginning of year
|
58,190 | 41,112 | 71,909 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 57,260 | $ | 58,190 | $ | 41,112 | ||||||
|
Noncash Investing and Financing Activities:
|
||||||||||||
|
Loans charged off
|
$ | 5,162 | $ | 1,593 | $ | 778 | ||||||
|
Net transfers from loans to property acquired through foreclosure or repossession
|
2,210 | 392 | – | |||||||||
|
Deferred acquisition obligation incurred
|
– | 7,635 | 5,921 | |||||||||
|
Cumulative effect of change in accounting principle (see Note 4)
|
1,859 | – | – | |||||||||
|
Held to maturity securities transferred to available for sale
|
– | – | 162,997 | |||||||||
|
Supplemental Disclosures:
|
||||||||||||
|
Interest payments
|
61,561 | 75,661 | 76,264 | |||||||||
|
Income tax payments
|
9,776 | 13,587 | 11,440 | |||||||||
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, 2009 and 2008
|
General
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded
in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and southeastern Connecticut.
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”). All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified
to conform to the current year classification.
The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses and the review of goodwill, other intangible assets and investments for impairment. The current economic environment has increased the degree of uncertainty inherent in such estimates
and assumptions.
Short-term Investments
Short-term investments consist of highly liquid investments with a maturity date of three months or less when purchased and are considered to be cash equivalents. The Corporation’s short-term investments may be comprised of overnight federal funds sold, securities purchased under resale agreements
and money market mutual funds.
Securities
Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Management determines the appropriate classification of securities at the time of purchase.
Investments not classified as held to maturity are classified as available for sale. Securities available for sale consist of debt and equity securities that are available for sale to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These
assets are specifically identified and are carried at fair value. Changes in fair value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity. Washington Trust does not have a trading portfolio.
Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the level yield method. The amortization and accretion is included in interest income on securities. Dividend and interest income are recognized when earned. 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.
The fair values of securities are based on either quoted market prices, third party pricing services or third party valuation specialists. When the fair value of an investment security is less than its amortized cost basis, the Corporation assesses whether the decline in value is other-than-temporary. The
Corporation considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in the value subsequent to the reporting date, forecasted performance of the issuer, changes in the dividend or interest payment practices of the issuer, changes in the credit rating of the issuer or the specific security, and the general market
condition in the geographic area or industry the issuer operates in.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
In April 2009, the FASB issued FASB Staff Position Nos. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP Nos. FAS 115-2 and FAS 124-2”). FSP Nos. FAS 115-2 and FAS 124-2 is now
a sub-topic within ASC 320, “Investments – Debt and Equity Securities.” FSP Nos. FAS 115-2 and FAS 124-2 amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether
the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is not more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment
related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable income taxes.
The Corporation elected to early adopt the provisions of FSP Nos. FAS 115-2 and FAS 124-2. These provisions applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted. As
a result, the Corporation’s Consolidated Statement of Income reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis. For available for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely-than-not will not be required
to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value loss is recognized in accumulated other comprehensive income, net of applicable income taxes. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using the Corporation’s cash flow projections using its base assumptions.
See Note 4 for further discussion on the Corporation’s investment securities portfolio.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB
stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate
its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 the suspension of its quarterly dividends. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment
related to the carrying amount of the Corporation’s FHLBB stock as of December 31, 2009. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Corporation will continue to monitor its investment in FHLBB stock.
Mortgage Banking Activities
Mortgage Loans Held for Sale
- Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and are carried at the lower of aggregate cost, net of unamortized deferred loan
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
origination fees and costs, or fair value. Gains or losses on sales of loans are included in noninterest income and are recognized at the time of sale
.
Loan Servicing Rights
- Rights to service loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated loans that are sold with servicing rights retained
is allocated between the loan servicing rights and the loans without servicing rights based on their relative fair values. Capitalized loan servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair
value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance.
Loans
Portfolio Loans
- Loans held in the portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred
loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans.
Nonaccrual Loans
- Loans, with the exception of certain well-secured residential mortgage loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue
with respect to principal and/or interest or sooner if considered appropriate by management. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans
is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s
opinion, the loans are considered to be fully collectible.
Restructured Loans
- Restructured loans include those for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower’s
financial condition. Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the
restructured terms.
Impaired Loans
- Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired
loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral
less costs to sell if it is determined that foreclosure is probable.
Allowance for Loan Losses
The allowance for loan losses is management’s best estimate of the probable loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs
on loans (or portions thereof) deemed to be
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
uncollectible. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely.
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 deemed
to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar economic indicators, and (3) general loss allocations for other environmental factors, which is classified as “unallocated”.
The level of the allowance is based on management’s ongoing review of the growth and composition of the loan portfolio, historical loss experience, current economic conditions, analysis of current levels and asset quality and delinquency trends, the performance of individual loans in relation to contract
terms and other pertinent factors.
The adequacy of the allowance for loan losses is regularly evaluated by management. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in assumptions and 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.
The allowance is an estimate, and ultimate losses may vary from management’s estimate. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance
and repairs are charged to operating expenses. The estimated useful lives of premises and improvements range from three to forty years. For furniture, fixtures and equipment, the estimated useful lives range from two to twenty years.
Goodwill and Other Identifiable Intangible Assets
The Corporation allocates the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Other intangible assets identified in acquisitions generally consist of wealth management advisory contracts, core deposit intangibles,
and non-compete agreements. The value attributed to advisory contracts is based on the time period over which they are expected to generate economic benefits. Core deposit intangibles are valued based on the expected longevity of the core deposit accounts and the expected cost savings associated with the use of the existing core deposit base rather than alternative funding sources. Non-compete agreements are valued based on the expected receipt of future economic benefits protected
by clauses in the non-compete agreements that restrict competitive behavior.
The Corporation tests other intangible assets with definite lives for impairment at least annually or more frequently whenever events or circumstances occur that indicate that their carrying amount may not be fully recoverable. The carrying value of the intangible assets is compared to the sum of undiscounted
cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value.
The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is reported as goodwill. Goodwill is not amortized but is tested for impairment at the segment level at least annually or more frequently whenever events or circumstances
occur that indicate that it is more likely than not that an impairment loss has occurred. The impairment test includes a review of discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”) for both the commercial banking and the wealth management segments of the Corporation. The income approach measures the value of an
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
interest in a business by discounting expected future cash flows to a present value. The market approach takes into consideration values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered
reasonable investment alternatives. The results of the income approach and the market approach are weighted equally. If the fair value is determined to be less than the carrying value, an additional analysis is performed to determine if carrying amount of the goodwill exceeds its estimated fair value. The excess goodwill is recognized as an impairment loss.
Impairment of Long
-
Lived Assets Other than Goodwill
Long-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist,
any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Property Acquired through Foreclosure or Repossession
Property acquired through foreclosure or repossession is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to this status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any
write-down to fair value at the time of foreclosure or repossession is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs.
Loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings.
Bank-Owned Life Insurance (“BOLI”)
The investment in BOLI represents the cash surrender value of life insurance policies on the lives of certain Bank employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received,
are recorded in other noninterest income, and are not subject to income taxes. The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.
Investment in Real Estate Limited Partnership
As of December 31, 2009 Washington Trust has a 99.9% ownership interest in a real estate limited partnership to renovate and operate a low-income housing complex. Washington Trust neither actively participates nor has a controlling interest in this limited partnership and accounts for its investments
under the equity method of accounting. The carrying value of this investment is recorded in other assets on the Consolidated Balance Sheet. Losses generated by the partnership are recorded as a reduction to Washington Trust’s' investment and as a reduction of noninterest income in the Consolidated Statements of Income. Tax credits generated by the partnership are recorded as a reduction in the income tax provision in the year they are allowed for tax reporting purposes.
The results of operations of the real estate limited partnership are periodically reviewed to determine if the partnership generates sufficient operating cash flow to fund its current obligations. In addition, the current value of the underlying property is compared to the outstanding debt obligations. If
it is determined that the investment is permanently impaired, the carrying value will be written down to the estimated realizable value. The maximum exposure on these investments is the current carrying amount plus amounts obligated to be funded in the future.
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
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with
a pledge of collateral.
Fee Revenue
Trust and investment advisory fees and mutual fund fees are primarily accrued as earned based upon a percentage of asset values under administration. Financial planning commissions and other wealth management service fee revenue is recognized to the extent that services have been completed. Fee
revenue from deposit service charges is generally recognized when earned. Fee revenue for merchant processing services is generally accrued as earned.
Pension Costs
Pension benefits are accounted for using the net periodic benefit cost method, which recognizes the compensation cost of an employee’s pension benefit over that employee’s approximate service period. Pension benefit cost calculations incorporate various actuarial and other assumptions,
including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. Washington Trust reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to so do. The effect of modifications to those assumptions is recorded in other comprehensive income and amortized to net periodic cost over future periods. Washington Trust believes that the assumptions utilized in
recording its obligations under its plans are reasonable based on its experience and market conditions.
The funded status of defined benefit pension plans, measured as the difference between the fair value of plan assets and the projected benefit obligation, is recognized in the Consolidated Balance Sheet. The changes in the funded status of the defined benefit plans, including actuarial gains and losses
and prior service costs and credits, are recognized in comprehensive income in the year in which the changes occur.
Effective January 1, 2008, Washington Trust adopted the measurement date provisions of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). These
provisions required the Corporation to change its measurement date for plan assets and benefit obligations to December 31. Prior to 2008, Washington Trust measured its plan assets and benefit obligations as of September 30 of each year. As a result of the adoption of the measurement date provisions of SFAS No. 158, the Corporation recognized the following adjustments in individual line items of its Consolidated Balance Sheet as of January 1, 2008:
|
(Dollars in thousands)
|
Prior to Adoption of Measurement Date Provisions of SFAS No. 158
|
Effect of Adopting Measurement Date Provisions of SFAS No. 158
|
As of January 1, 2008
|
|||||||||
|
Net deferred tax asset
|
$ | 7,705 | $ | 229 | $ | 7,934 | ||||||
|
Defined benefit pension liabilities
|
11,801 | 655 | 12,456 | |||||||||
|
Retained earnings
|
154,647 | (468 | ) | 154,179 | ||||||||
|
Accumulated other comprehensive loss
|
(239 | ) | 42 | (197 | ) | |||||||
The adoption of the measurement date provisions of SFAS No. 158 had no effect on the Corporation’s Consolidated Statements of Income or Cash Flows for the periods presented.
Stock-Based Compensation
Stock-based compensation is recognized as an expense in the financial statements and for equity-classified awards such cost is measured at the grant date fair value of the award. The Corporation estimates grant date fair value using the Black-Scholes option-pricing model.
Excess tax benefits related to stock option exercises are reflected as financing cash inflows.
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Income Taxes
Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Corporation recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
The Corporation records interest related to unrecognized tax benefits in income tax expense. To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Penalties, if incurred,
would be recognized as a component of income tax expense.
Earnings Per Share (“EPS”)
Diluted EPS is computed by dividing net income by the average number of common shares and common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents
from the denominator.
ASC 260, “Earnings Per Share,” incorporates former FASB Staff Position No. Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” which required unvested share-based payments that contain nonforfeitable
rights and dividends or dividend equivalents to be treated as participating securities and be included in the calculation of Earnings Per Share (“EPS”) pursuant to the two-class method. The January 1, 2009 adoption of these provisions of ASC 260 did not have a material impact on the Corporation’s financial position or results of operations.
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
Standby letters of credit are considered a guarantee of the Corporation. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. The fair value of standby letters of credit is considered immaterial to the Corporation’s Consolidated Financial Statements.
Derivative Instruments and Hedging Activities
All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Derivatives used to hedge the exposure
to changes in fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected cash flows, or other types of forecasted transactions, are considered cash flow hedges.
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
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|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
For derivatives designated as fair value hedges, changes in the fair value of the derivative are recognized in earnings together with the changes in the fair value of the related hedged item. The net amount, if any, representing hedge ineffectiveness, is reflected in earnings. For derivatives
designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in noninterest income.
From time to time, interest rate swap contracts are used as part of interest rate risk management strategy. Interest rate swap agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities.
We also utilize interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. When we enter into an interest rate
swap contract with a commercial loan borrower, we simultaneously enter into a mirror swap contract with a third party. The third party exchanges the client’s fixed rate loan payments for floating rate loan payments.
The accrued net settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Changes in fair value of derivatives including accrued net settlements that do not qualify for hedge accounting are reported in noninterest
income.
When hedge accounting is discontinued, the future changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted
over the remaining life of the asset or liability. When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions will affect earnings.
By using derivative financial instruments, the Corporation exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Corporation,
which creates credit risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is minimized by entering into transactions with highly rated counterparties that management believes to be creditworthy.
Effective January 1, 2009, Washington Trust adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is now a sub-topic within ASC 815, “Derivatives and Hedging.” These
provisions amended the disclosure requirements for derivative instruments and hedging activities. The amended disclosures require entities to provide information to enable users of financial statements to understand how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under ASC Topic 815 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The
adoption of these provisions did not have a material impact on the Corporation’s consolidated financial statement. The Corporation complied with this guidance and has provided the required disclosures in Note 13.
Fair Value Measurements
On January 1, 2008, the Corporation adopted the provisions SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), included in ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements
of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
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|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
about fair value measurements. On January 1, 2009, the Corporation adopted the provisions of ASC Topic 820 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The
adoption of these provisions of ASC Topic 820 did not have a material impact on the Corporation’s financial position or results of operations. The required disclosures about fair value measurements have been included in Note 14.
On April 9, 2009 the FASB issued FASB Staff Position No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. FAS 157-4”). FSP
No. FAS 157-4 is now a sub-topic within ASC 820. The Corporation elected to early adopt these provisions of ASC 820 effective January 1, 2009 and complied with this guidance in determining the fair value of its securities during 2009.
(2) Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
TM
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS
No. 168”). The FASB Accounting Standards Codification
TM
(“Codification” or “ASC”) was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities and replaced all then-existing non-SEC
accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative.
ASC 855, “Subsequent Events,” (formerly SFAS No. 165, “Subsequent Events”) was issued in May 2009 and was effective for interim and annual financial periods ending after June 15, 2009. ASC 855 established general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, ASC 855 set forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements
and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of ASC 855 did not have a material impact on the Corporation’s financial position or results of operations.
ASC 860, “Transfers and Servicing,” incorporates former SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” which was issued in June 2009 and will be effective for interim and annual periods beginning after January 1,
2010. These pending provisions of ASC 860 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to the transferred financial assets. The concept of a “qualifying special-purpose entity” is eliminated under these pending provisions of ASC 860, which also changes the requirements for derecognizing financial assets and requires additional disclosures. The
Corporation expects that the adoption of these provisions of ASC 260 will not have a material impact on its consolidated financial statements.
ASC 810, “Consolidations,” incorporates former SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” which was issued in June 2009 and will be effective for interim and annual periods beginning after January 1, 2010. These pending provisions of ASC 810 revise
former FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) and therefore should be consolidated. Consolidation of variable interest entities would be based on the target entity’s purpose and design as well as the reporting entity’s ability to direct the target’s activities, among
other criteria. The Corporation expects that the adoption of these provisions of ASC 810 will not have a material impact on its consolidated financial statements.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(3) Cash and Due from Banks
The Bank is required to maintain certain average reserve balances with the Board of Governors of the Federal Reserve System (“FRB”). Such reserve balances amounted to $4.0 million at December 31, 2009 and 2008.
(4) Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities by major security type and class of security at December 31, 2009 and 2008 were as follows:
|
(Dollars in thousands)
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
December 31, 2009
|
Cost
(1)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Securities Available for Sale:
|
||||||||||||||||
|
Obligations of U.S. government-sponsored enterprises
|
$ | 41,565 | $ | 3,675 | $ | – | $ | 45,240 | ||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
503,115 | 20,808 | (477 | ) | 523,446 | |||||||||||
|
States and political subdivisions
|
80,183 | 2,093 | (214 | ) | 82,062 | |||||||||||
|
Trust preferred securities:
|
||||||||||||||||
|
Individual name issuers
|
30,563 | – | (9,977 | ) | 20,586 | |||||||||||
|
Collateralized debt obligations
|
4,966 | – | (3,901 | ) | 1,065 | |||||||||||
|
Corporate bonds
|
13,272 | 1,434 | – | 14,706 | ||||||||||||
|
Common stocks
|
658 | 111 | – | 769 | ||||||||||||
|
Perpetual preferred stocks
(2)
|
3,354 | 396 | (140 | ) | 3,610 | |||||||||||
|
Total securities available for sale
|
$ | 677,676 | $ | 28,517 | $ | (14,709 | ) | $ | 691,484 | |||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
December 31, 2008
|
Cost
(1)
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Securities Available for Sale:
|
||||||||||||||||
|
Obligations of U.S. government-sponsored enterprises
|
$ | 59,022 | $ | 5,355 | $ | – | $ | 64,377 | ||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
675,159 | 12,543 | (4,083 | ) | 683,619 | |||||||||||
|
States and political subdivisions
|
80,680 | 1,348 | (815 | ) | 81,213 | |||||||||||
|
Trust preferred securities:
|
||||||||||||||||
|
Individual name issuers
|
30,525 | – | (13,732 | ) | 16,793 | |||||||||||
|
Collateralized debt obligations
|
5,633 | – | (3,693 | ) | 1,940 | |||||||||||
|
Corporate bonds
|
12,973 | 603 | – | 13,576 | ||||||||||||
|
Common stocks
|
942 | 50 | – | 992 | ||||||||||||
|
Perpetual preferred stocks
(2)
|
4,499 | 2 | (792 | ) | 3,709 | |||||||||||
|
Total securities available for sale
|
$ | 869,433 | $ | 19,901 | $ | (23,115 | ) | $ | 866,219 | |||||||
|
(1)
|
Net of other-than-temporary impairment losses recognized in earnings, other than such noncredit-related amounts reversed on January 1, 2009.
|
|
(2)
|
Callable at the discretion of the issuer. The balance as of December 31, 2009 includes 4 stocks that are callable at any time and 2 stocks that will be callable no later than November 2010.
|
Securities available for sale with a fair value of $558 million and $713 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, 2009 and 2008, respectively. (See
Note 11 to the Consolidated Financial Statements for additional discussion of FHLBB borrowings). In addition, securities available for sale with a fair value of $22.2 million and $16.1 million were pledged for potential use at the Federal Reserve Bank discount window at December 31, 2009 and 2008, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $7.2 million and $9.0 million
were designated in rabbi trusts for
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
nonqualified retirement plans at December 31, 2009 and 2008, respectively. Securities available for sale with a fair value of $2.6 million and $569 thousand were pledged as collateral to secure certain interest rate swap agreements as of December 31, 2009 and 2008, respectively.
Washington Trust elected to early adopt the provisions of FSP Nos. FAS 115-2 and FAS 124-2, which is now a sub-topic within ASC 320, “Investments – Debt and Equity Securities.” These provisions applied to existing and new debt securities held by the Corporation
as of January 1, 2009, the beginning of the interim period in which it was adopted. As a result of adopting these provisions of ASC 320, “Investments – Debt and Equity Securities” Washington Trust reclassified the noncredit-related portion of an other-than-temporary impairment loss previously recognized in earnings in the fourth quarter of 2008 on the Corporation’s other pooled trust preferred debt security. This reclassification was reflected as a cumulative
effect adjustment of $1.2 million after taxes ($1.9 million before taxes) that increased retained earnings and decreased accumulated other comprehensive loss. The amortized cost basis of this debt security for which an other-than-temporary impairment loss was recognized in the fourth quarter of 2008 was adjusted by the amount of the cumulative effect adjustment before taxes. Had the adoption of these provisions in 2009 not been required, the Corporation estimates that net income
and diluted earnings per share could have been lower by $1.3 million and 8 cents per diluted share, respectively. Had these provisions been required to have been adopted retrospectively, the Corporation estimates that net income and diluted earnings per share would have been higher in 2008 by $1.2 million and 8 cents per diluted share, respectively, with no impact on amounts reported for 2007.
The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Trust preferred securities
|
||||||||||||
|
Collateralized debt obligations
|
$ | 2,496 | $ | 1,859 | $ | – | ||||||
|
Common and perpetual preferred stocks
|
||||||||||||
|
Fannie Mae and Freddie Mac perpetual preferred stocks
|
– | 1,470 | – | |||||||||
|
Other perpetual preferred stocks (financials)
|
495 | 2,173 | – | |||||||||
|
Other common stocks (financials)
|
146 | 435 | – | |||||||||
|
Other-than-temporary impairment losses recognized in earnings
|
$ | 3,137 | $ | 5,937 | $ | – | ||||||
The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at December 31, 2009 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:
|
(Dollars in thousands)
|
||||
|
For the year ended December 31,
|
2009
|
|||
|
Balance at beginning of period
|
$ | – | ||
|
Credit-related impairment loss on debt securities for which an other-than-temporary impairment
|
||||
|
was not previously recognized
|
1,817 | |||
|
Additional increases to the amount of credit-related impairment loss on debt securities for which
|
||||
|
an other-than-temporary impairment was previously recognized
|
679 | |||
|
Balance at end of period
|
$ | 2,496 | ||
For the year ended December 31, 2009, credit-related impairment losses of $2.5 million were recognized in earnings on pooled trust preferred debt securities not intended to be sold and where it is not more likely than not that the Corporation will be required to sell these securities before recovery
of the cost basis, which may be maturity. The anticipated cash flows expected to be collected from these debt securities were discounted at the rate equal to the
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
yield used to accrete the current and prospective beneficial interest for each security. Significant inputs included estimated cash flows and prospective deferrals, defaults and recoveries. Estimated cash flows are generated based on the underlying seniority status and subordination structure
of the pooled trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on analysis of the underlying financial condition of individual issuers, and took into account capital adequacy, credit quality, lending concentrations, and other factors. All cash flow estimates were based on the underlying security’s tranche structure and contractual rate and maturity terms. The present value
of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche. This ratio was then multiplied by the principal balance of Washington Trust’s holding to determine the credit-related impairment loss. The estimates used in the determination of the present value of the expected cash flows are susceptible to changes in future periods, which
could result in additional credit-related impairment losses.
The following table summarizes temporarily impaired investment securities at December 31, 2009, segregated by length of time the securities have been continuously in an unrealized loss position.
|
(Dollars in thousands)
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
|||||||||||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
At December 31, 2009
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
|||||||||||||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
issued by U.S. government agencies and U.S. government-sponsored enterprises
|
3 | $ | 2,218 | $ | 5 | 25 | $ | 38,023 | $ | 472 | 28 | $ | 40,241 | $ | 477 | |||||||||||||||||||||
|
States and
|
||||||||||||||||||||||||||||||||||||
|
political subdivisions
|
4 | 3,836 | 45 | 3 | 2,097 | 169 | 7 | 5,933 | 214 | |||||||||||||||||||||||||||
|
Trust preferred securities:
|
||||||||||||||||||||||||||||||||||||
|
Individual name issuers
|
– | – | – | 11 | 20,586 | 9,977 | 11 | 20,586 | 9,977 | |||||||||||||||||||||||||||
|
Collateralized debt obligations
|
– | – | – | 2 | 1,065 | 3,901 | 2 | 1,065 | 3,901 | |||||||||||||||||||||||||||
|
Subtotal, debt securities
|
7 | 6,054 | 50 | 41 | 61,771 | 14,519 | 48 | 67,825 | 14,569 | |||||||||||||||||||||||||||
|
Perpetual preferred stocks
|
1 | 427 | 73 | 3 | 933 | 67 | 4 | 1,360 | 140 | |||||||||||||||||||||||||||
|
Total temporarily
|
||||||||||||||||||||||||||||||||||||
|
impaired securities
|
8 | $ | 6,481 | $ | 123 | 44 | $ | 62,704 | $ | 14,586 | 52 | $ | 69,185 | $ | 14,709 | |||||||||||||||||||||
The following table summarizes temporarily impaired investment securities at December 31, 2008, segregated by length of time the securities have been continuously in an unrealized loss position.
|
(Dollars in thousands)
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
|||||||||||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
At December 31, 2008
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
# |
Value
|
Losses
|
|||||||||||||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||||||||||||||||||||||
|
issued by U.S. government agencies and U.S. government-sponsored enterprises
|
64 | $ | 124,387 | $ | 2,140 | 22 | $ | 34,350 | $ | 1,943 | 86 | $ | 158,737 | $ | 4,083 | |||||||||||||||||||||
|
States and
|
||||||||||||||||||||||||||||||||||||
|
political subdivisions
|
25 | 18,846 | 523 | 7 | 7,423 | 292 | 32 | 26,269 | 815 | |||||||||||||||||||||||||||
|
Trust preferred securities:
|
||||||||||||||||||||||||||||||||||||
|
Individual name issuers
|
– | – | – | 11 | 16,793 | 13,732 | 11 | 16,793 | 13,732 | |||||||||||||||||||||||||||
|
Collateralized debt obligations
|
– | – | – | 1 | 1,307 | 3,693 | 1 | 1,307 | 3,693 | |||||||||||||||||||||||||||
|
Subtotal, debt securities
|
89 | 143,233 | 2,663 | 41 | 59,873 | 19,660 | 130 | 203,106 | 22,323 | |||||||||||||||||||||||||||
|
Perpetual preferred stocks
|
– | – | – | 5 | 2,062 | 792 | 5 | 2,062 | 792 | |||||||||||||||||||||||||||
|
Total temporarily
|
||||||||||||||||||||||||||||||||||||
|
impaired securities
|
89 | $ | 143,233 | $ | 2,663 | 46 | $ | 61,935 | $ | 20,452 | 135 | $ | 205,168 | $ | 23,115 | |||||||||||||||||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Unrealized losses on debt securities generally occur as a result of increases in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer. Management evaluates impairments in value whether caused by adverse interest rates
or credit movements to determine if they are other-than-temporary.
Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional
declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur additional write-downs.
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises:
The unrealized losses on mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises amounted to $477 thousand at December 31, 2009 and were attributable to a combination of factors, including relative changes in interest rates since the time of purchase and
decreased liquidity for investment securities in general. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis
of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Debt securities issued by states and political subdivisions:
The unrealized losses on debt securities issued by states and political subdivisions amounted to $214 thousand at December 31, 2009. The unrealized losses on state and municipal holdings included in this analysis are attributable to a combination of factors, including a general decrease in
liquidity and an increase in risk premiums for credit-sensitive securities since the time of purchase. Based on its assessment of these factors, management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and liquidity and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is
not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Trust preferred debt securities of individual name issuers:
Included in debt securities in an unrealized loss position at December 31, 2009 were 11 trust preferred security holdings issued by seven individual name companies (reflecting, where applicable, the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking
industry. The aggregate unrealized losses on these debt securities amounted to $10.0 million at December 31, 2009. Management believes the decline in fair value of these trust preferred securities primarily reflected increased investor concerns about recent and potential future losses in the financial services industry related to subprime lending and other credit related exposure. These concerns resulted in a substantial decrease in market liquidity and increased risk
premiums for securities in this sector. Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to decline. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of December 31, 2009, trust preferred
debt securities with a carrying value of $7.5 million and unrealized losses of $4.3 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the
reporting period date and the filing date of this report and other information. We noted one additional
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
downgrade to below investment grade between the reporting period date and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these
securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Trust preferred debt securities in the form of collateralized debt obligations:
At December 31, 2009, Washington Trust had two pooled trust preferred holdings in the form of collateralized debt obligations with unrealized losses of $3.9 million. These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser
extent, insurance industry companies. For both of these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure. Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers. Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities. Management believes
the unrealized losses on these pooled trust preferred securities primarily reflect increased investor concerns about recent and potential future losses in the financial services industry related to subprime lending and other credit related exposure, and the increased possibility of further incremental deferrals of or defaults on interest payments on trust preferred debentures by financial institutions participating in these pools. These concerns have resulted in a substantial decrease in market liquidity and
increased risk premiums for securities in this sector. Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to remain at low levels.
During the three months ended March 31, 2009, an adverse change occurred in the expected cash flows for one of the trust preferred collateralized debt obligation securities indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments,
default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of this security. In the first quarter of 2009, the Corporation recognized a $1.4 million credit-related impairment loss in earnings for this trust preferred collateralized debt security, with a commensurate adjustment to reduce the amortized cost of this security. This security was downgraded to a below investment grade rating
of “Caa3” by Moody’s Investors Service Inc. (“Moody’s”) on March 27, 2009. On October 30, 2009, Moody’s downgraded this security to a rating of “Ca.” This credit rating status was considered by management in its assessment of the impairment status of this security. Through the filing date of this report, there have been no further rating changes on this security. This investment security was placed on nonaccrual
status as of March 31, 2009 and was current with respect to its quarterly debt service (interest) payments as of the most recent quarterly payment date of January 15, 2010.
During the fourth quarter of 2008, the Corporation’s other trust preferred collateralized debt obligation security began deferring interest payments until future periods and the Corporation recognized an other-than-temporary impairment charge in the fourth quarter of 2008 on this security in the amount
of $1.9 million. This investment security was also placed on nonaccrual status as of December 31, 2008. In connection with the early adoption of provisions of ASC 320, “Investments – Debt and Equity Securities” and based on Washington Trust’s assessment of the facts associated with this instrument, the Corporation concluded that there was no credit loss portion of the other-than-temporary impairment charge as of December 31, 2008. Washington
Trust reclassified the noncredit-related other-than-temporary impairment loss for this security previously recognized in earnings in the fourth quarter of 2008 as a cumulative effect adjustment as of January 1, 2009 in the amount of $1.2 million after taxes ($1.9 million before taxes) with an increase in retained earnings and a decrease in accumulated other comprehensive loss. In addition, the amortized cost basis of this security was increased by $1.9 million, the amount of the
cumulative effect adjustment before taxes. This security was downgraded to a below investment grade rating of “Ca” by Moody’s on March 27, 2009. Through the filing date of this report, there have been no further rating changes on this security. This credit rating status was considered by management in its assessment of the impairment status of this security. During the third quarter of 2009, an adverse change occurred in the expected cash flows
for this instrument indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
and will not recover the entire cost basis of the security. The Corporation concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of September 30, 2009 and recognized a $467 thousand credit-related impairment loss in earnings, with a
commensurate adjustment to reduce the amortized cost of this security in the third quarter of 2009. The analysis of the expected cash flows for this security as of December 31, 2009 resulted in an additional credit-related impairment loss of $679 thousand being recognized in earnings in the fourth quarter of 2009.
Based on information available through the filing date of this report, there have been no further adverse changes in the deferral or default status of the underlying issuer institutions within either of these trust preferred collateralized debt obligations. Based on cash flow forecasts for these securities,
management expects to recover the remaining amortized cost of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on these investments to be other-than-temporary at December 31, 2009.
Perpetual preferred stocks:
In October 2008, the SEC’s Office of the Chief Accountant, after consultation and concurrence with the FASB, concluded that the assessment of other-than-temporary impairment of perpetual preferred securities for filings made after October 14, 2008 can be made using an impairment model (including an
anticipated recovery period) similar to a debt security, provided there has been no evidence of a deterioration in credit of the issuer. Washington Trust has complied with this guidance in its evaluation of other-than-temporary impairment of perpetual preferred stocks.
As of December 31, 2009, the Corporation had four perpetual preferred stock holdings of financial and utility companies with a total fair value of $1.4 million and unrealized losses of $140 thousand, or 9% of their aggregate cost. Causes of conditions whereby the fair value of equity
securities is less than cost include the timing of purchases and changes in valuation specific to individual industries or issuers. The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor. Based on its assessment of these market conditions, management believes that the decline in fair value of its perpetual preferred equity securities was not a function of the financial condition and operating
outlook of the issuers but, rather, reflected increased investor concerns about recent losses in the financial services industry related to subprime lending and other credit related exposure. These concerns resulted in greater volatility in market prices for perpetual preferred stocks in this market sector. Management evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that analysis, management expects to recover
the entire cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis. Therefore, management does not consider these perpetual preferred equity securities to be other-than-temporarily impaired at December 31, 2009.
-84-
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
As of December 31, 2009, the amortized cost of debt securities by maturity is 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, 2009 were debt securities with an amortized cost balance of $102 million and a fair value of $90 million that are callable at the discretion of the issuers. Final maturities of
the callable securities range from five to twenty-seven years, with call features ranging from one month to eight years.
|
(Dollars in thousands)
|
Due in
|
After 1 Year
|
After 5 Years
|
|||||||||||||||||
|
1 Year
|
but within
|
but within
|
After
|
|||||||||||||||||
|
or Less
|
5 Years
|
10 Years
|
10 Years
|
Totals
|
||||||||||||||||
|
Securities Available for Sale:
|
||||||||||||||||||||
|
U.S. Treasury obligations and obligations
|
||||||||||||||||||||
|
of U.S. government-sponsored enterprises:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 12,161 | $ | 29,404 | $ | – | $ | – | $ | 41,565 | ||||||||||
|
Weighted average yield
|
4.69 | % | 5.42 | % | – | % | – | % | 5.21 | % | ||||||||||
|
Mortgage-backed securities issued by U.S.
|
||||||||||||||||||||
|
government agencies & U.S.
|
||||||||||||||||||||
|
government-sponsored enterprises:
|
||||||||||||||||||||
|
Amortized cost
|
125,350 | 250,860 | 91,215 | 35,690 | 503,115 | |||||||||||||||
|
Weighted average yield
|
4.66 | % | 4.35 | % | 3.72 | % | 2.47 | % | 4.18 | % | ||||||||||
|
State and political subdivisions:
|
||||||||||||||||||||
|
Amortized cost
|
– | 22,961 | 50,110 | 7,112 | 80,183 | |||||||||||||||
|
Weighted average yield
|
– | % | 3.87 | % | 3.90 | % | 3.83 | % | 3.89 | % | ||||||||||
|
Trust preferred securities:
|
||||||||||||||||||||
|
Amortized cost (1)
|
– | – | – | 35,529 | 35,529 | |||||||||||||||
|
Weighted average yield
|
– | % | – | % | – | % | 1.75 | % | 1.75 | % | ||||||||||
|
Corporate bonds:
|
||||||||||||||||||||
|
Amortized cost
|
– | 13,172 | 100 | – | 13,272 | |||||||||||||||
|
Weighted average yield
|
– | % | 6.53 | % | 3.29 | % | – | % | 6.50 | % | ||||||||||
|
Total debt securities:
|
||||||||||||||||||||
|
Amortized cost
|
$ | 137,511 | $ | 316,397 | $ | 141,425 | $ | 78,331 | $ | 673,664 | ||||||||||
|
Weighted average yield
|
4.66 | % | 4.50 | % | 3.78 | % | 1.47 | % | 4.03 | % | ||||||||||
|
Fair value
|
$ | 143,653 | $ | 317,321 | $ | 146,191 | $ | 79,940 | $ | 687,105 | ||||||||||
|
(1)
|
Net of other-than-temporary impairment losses recognized in earnings.
|
The following is a summary of amounts relating to sales of securities:
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Proceeds from sales
(1)
|
$ | 1,604 | $ | 81,718 | $ | 151,672 | ||||||
|
Gross realized gains
(1)
|
$ | 318 | $ | 2,382 | $ | 2,181 | ||||||
|
Gross realized losses
|
(4 | ) | (158 | ) | (1,726 | ) | ||||||
|
Net realized gains on securities
|
$ | 314 | $ | 2,224 | $ | 455 | ||||||
|
(1)
|
Includes annual contributions of appreciated equity securities to the Corporation’s charitable foundation in 2008 and 2007. The cost of the annual contributions, included in noninterest expenses, amounted to $397 thousand and $520 thousand in 2008 and 2007, respectively. These transactions resulted in realized
securities gains of $315 thousand and $397 thousand, respectively, for the same periods.
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(5) Loans
The following is a summary of loans:
|
(Dollars in thousands)
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||
|
Commercial:
|
|||||||||||||||||
|
Mortgages
(1)
|
$ | 496,996 | 26 | % | $ | 407,904 | 22 | % | |||||||||
|
Construction and development
(2)
|
72,293 | 4 | % | 49,599 | 3 | % | |||||||||||
|
Other
(3)
|
415,261 | 21 | % | 422,810 | 23 | % | |||||||||||
|
Total commercial
|
984,550 | 51 | % | 880,313 | 48 | % | |||||||||||
|
Residential real estate:
|
|||||||||||||||||
|
Mortgages
(4)
|
593,981 | 31 | % | 626,663 | 34 | % | |||||||||||
|
Homeowner construction
|
11,594 | 1 | % | 15,389 | 1 | % | |||||||||||
|
Total residential real estate
|
605,575 | 32 | % | 642,052 | 35 | % | |||||||||||
|
Consumer
|
|||||||||||||||||
|
Home equity lines
(5)
|
209,801 | 11 | % | 170,662 | 9 | % | |||||||||||
|
Home equity loans
(5)
|
62,430 | 3 | % | 89,297 | 5 | % | |||||||||||
|
Other
(6)
|
57,312 | 3 | % | 56,830 | 3 | % | |||||||||||
|
Total consumer
|
329,543 | 17 | % | 316,789 | 17 | % | |||||||||||
|
Total loans
(7)
|
$ | 1,919,668 | 100 | % | $ | 1,839,154 | 100 | % | |||||||||
|
(1)
|
Amortizing mortgages and lines of credit, primarily secured by income producing property. $135 million of these loans at December 31, 2009 were pledged as collateral for Federal Home Loan Bank borrowings (see Note 11).
|
|
(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. At December 31, 2009, $40 million of these loans were pledged as collateral for Federal Home Loan Bank borrowings and $83 million of these loans were collateralized for the discount window at the Federal Reserve Bank (see Note 11).
|
|
(4)
|
A substantial portion of these loans is used as qualified collateral for FHLBB borrowings (see Note 11 for additional discussion of FHLBB borrowings).
|
|
(5)
|
A significant portion of these loans was pledged as collateral for Federal Home Loan Bank borrowings (see Note 11).
|
|
(6)
|
Fixed rate consumer installment loans.
|
|
(7)
|
Net of unamortized loan origination costs, net of fees, totaling $103 thousand at December 31, 2009 and net of unamortized loan origination fees, net of costs totaling $2 thousand at December 31, 2008. Also includes $140 thousand and $259 thousand of net discounts on purchased loans at December 31, 2009 and December 31, 2008, respectively.
|
Concentrations of Credit Risk
A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. In addition, a portion of the commercial loans and commercial mortgage loans are to borrowers in the hospitality,
tourism and recreation industries. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation’s market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 2009 and 2008 was $27.5 million and $7.8 million, respectively. Interest income that would have been recognized had these loans been current in accordance with their original terms was approximately $1.8 million, $583 thousand
and $341 thousand in 2009, 2008 and 2007, respectively. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $931 thousand, $469 thousand and $318 thousand in 2009, 2008 and 2007, respectively.
There were no accruing loans 90 days or more past due at December 31, 2009 and 2008.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Impaired Loans
Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. The following is a summary of impaired loans:
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Nonaccrual commercial loans, excluding troubled debt restructured loans:
|
||||||||
|
Commercial mortgages
|
$ | 11,588 | $ | 1,942 | ||||
|
Other commercial
|
8,847 | 3,845 | ||||||
|
Total nonaccrual commercial loans, excluding troubled debt restructured loans
|
20,435 | 5,787 | ||||||
|
Nonaccrual troubled debt restructured loans:
|
||||||||
|
Other commercial
|
228 | – | ||||||
|
Residential real estate mortgages
|
336 | – | ||||||
|
Consumer
|
45 | – | ||||||
|
Nonaccrual troubled debt restructured loans
|
609 | – | ||||||
|
Accruing troubled debt restructured loans:
|
||||||||
|
Commercial mortgages
|
5,566 | – | ||||||
|
Other commercial
|
540 | – | ||||||
|
Residential real estate mortgages
|
2,736 | 263 | ||||||
|
Consumer
|
858 | 607 | ||||||
|
Accruing troubled debt restructured loans
|
9,700 | 870 | ||||||
|
Total troubled debt restructured loans
|
10,309 | 870 | ||||||
|
Other
:
|
||||||||
|
Nonaccrual residential real estate mortgages
|
772 | – | ||||||
|
Accruing consumer
|
38 | – | ||||||
|
Total other
|
810 | – | ||||||
|
Total recorded investment in impaired loans
|
$ | 31,554 | $ | 6,657 | ||||
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Impaired loans requiring an allowance
|
$ | 19,480 | $ | 3,492 | ||||
|
Impaired loans not requiring an allowance
|
12,074 | 3,165 | ||||||
|
Total recorded investment in impaired loans
|
$ | 31,554 | $ | 6,657 | ||||
|
Loss allocation on impaired loans
|
$ | 2,459 | $ | 698 | ||||
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Average recorded investment in impaired loans
|
$ | 19,389 | $ | 6,161 | $ | 2,903 | ||||||
|
Interest income recognized on impaired loans
|
$ | 1,084 | $ | 507 | $ | 457 | ||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
At December 31, 2009, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status or had been restructured.
Loan Servicing Activities
An analysis of loan servicing rights for the years ended December 31, 2009, 2008 and 2007 follows:
|
(Dollars in thousands)
|
Loan
|
|||||||||||
|
Servicing
|
Valuation
|
|||||||||||
|
Rights
|
Allowance
|
Total
|
||||||||||
|
Balance at December 31, 2006
|
$ | 1,182 | $ | (224 | ) | $ | 958 | |||||
|
Loan servicing rights capitalized
|
246 | – | 246 | |||||||||
|
Amortization
(1)
|
(361 | ) | – | (361 | ) | |||||||
|
Decrease in impairment reserve
(2)
|
– | 40 | 40 | |||||||||
|
Balance at December 31, 2007
|
1,067 | (184 | ) | 883 | ||||||||
|
Loan servicing rights capitalized
|
167 | – | 167 | |||||||||
|
Amortization
(1)
|
(273 | ) | – | (273 | ) | |||||||
|
Increase in impairment reserve
(2)
|
– | (59 | ) | (59 | ) | |||||||
|
Balance at December 31, 2008
|
961 | (243 | ) | 718 | ||||||||
|
Loan servicing rights capitalized
|
231 | – | 231 | |||||||||
|
Amortization
(1)
|
(223 | ) | – | (223 | ) | |||||||
|
Decrease in impairment reserve
(2)
|
– | 76 | 76 | |||||||||
|
Balance at December 31, 2009
|
$ | 969 | $ | (167 | ) | $ | 802 | |||||
|
(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:
|
2010
|
$ | 191 | ||
|
2011
|
154 | ||||
|
2012
|
123 | ||||
|
2013
|
97 | ||||
|
2014
|
75 | ||||
|
Thereafter
|
329 | ||||
|
Total estimated amortization expense
|
$ | 969 | |||
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,
|
2009
|
2008
|
||||||
|
Residential mortgages
|
$ | 87,015 | $ | 82,961 | ||||
|
Commercial loans
|
41,099 | 43,094 | ||||||
|
Total
|
$ | 128,114 | $ | 126,055 | ||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(6) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Balance at beginning of year
|
$ | 23,725 | $ | 20,277 | $ | 18,894 | ||||||
|
Provision charged to expense
|
8,500 | 4,800 | 1,900 | |||||||||
|
Recoveries of loans previously charged off
|
337 | 241 | 261 | |||||||||
|
Loans charged off
|
(5,162 | ) | (1,593 | ) | (778 | ) | ||||||
|
Balance at end of year
|
$ | 27,400 | $ | 23,725 | $ | 20,277 | ||||||
Included in the allowance for loan losses at December 31, 2009, 2008 and 2007 was an allowance for impaired loans amounting to $2.5 million, $698 thousand and $183 thousand, respectively.
The allowance for loan losses is management’s best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of
factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses and may cause us to increase the allowance in the future. Among the factors that could affect our ability to collect our loans and require us to increase the allowance in the future are: general real estate and economic conditions; regional credit concentration; industry concentration, for example in the hospitality, tourism and recreation industries. 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.
(7) Premises and Equipment
The following is a summary of premises and equipment:
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Land and improvements
|
$ | 5,265 | $ | 5,021 | ||||
|
Premises and improvements
|
33,467 | 30,957 | ||||||
|
Furniture, fixtures and equipment
|
20,936 | 20,269 | ||||||
| 59,668 | 56,247 | |||||||
|
Less accumulated depreciation
|
32,144 | 31,145 | ||||||
|
Total premises and equipment, net
|
$ | 27,524 | $ | 25,102 | ||||
Depreciation of premises and equipment amounted to $3.1 million in 2009. Depreciation expense totaled $3.0 million for each of the years ended December 31, 2008, and 2007.
At December 31, 2009, the Corporation was committed to rent premises used in banking operations under non-cancellable operating leases. Rental expense under the operating leases amounted to $1.4 million, $1.3 million and $1.1 million for 2009, 2008 and 2007, respectively. The
minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows:
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
|
(Dollars in thousands)
|
|||||
|
Years ending December 31:
|
2010
|
$ | 1,384 | ||
|
2011
|
1,280 | ||||
|
2012
|
699 | ||||
|
2013
|
608 | ||||
|
2014
|
592 | ||||
|
2015 and thereafter
|
1,881 | ||||
|
Total minimum lease payments
|
$ | 6,444 | |||
Lease expiration dates range from sixteen months to thirteen years, with renewal options on certain leases of two to fifteen years.
(8) Goodwill and Other Intangibles
The changes in the carrying value of goodwill and other intangible assets for the years ended December 31, 2009 and 2008 were as follows:
Goodwill
|
Wealth
|
||||||||||||
|
(Dollars in thousands)
|
Commercial
|
Management
|
||||||||||
|
Banking
|
Service
|
|||||||||||
|
Segment
|
Segment
|
Total
|
||||||||||
|
Balance at December 31, 2007
|
$ | 22,591 | $ | 27,888 | $ | 50,479 | ||||||
|
Additions to goodwill during the period
|
- | 7,635 | 7,635 | |||||||||
|
Impairment recognized
|
- | - | - | |||||||||
|
Balance at December 31, 2008
|
22,591 | 35,523 | 58,114 | |||||||||
|
Additions to goodwill during the period
|
- | - | - | |||||||||
|
Impairment recognized
|
- | - | - | |||||||||
|
Balance at December 31, 2009
|
$ | 22,591 | $ | 35,523 | $ | 58,114 | ||||||
Other Intangible Assets
|
(Dollars in thousands)
|
Core Deposit
|
Advisory
|
Non-compete
|
|||||||||||||
|
Intangible
|
Contracts
|
Agreements
|
Total
|
|||||||||||||
|
Balance at December 31, 2007
|
$ | 510 | $ | 10,743 | $ | 180 | $ | 11,433 | ||||||||
|
Amortization
|
120 | 1,112 | 49 | 1,281 | ||||||||||||
|
Balance at December 31, 2008
|
390 | 9,631 | 131 | 10,152 | ||||||||||||
|
Amortization
|
120 | 1,040 | 49 | 1,209 | ||||||||||||
|
Balance at December 31, 2009
|
$ | 270 | $ | 8,591 | $ | 82 | $ | 8,943 | ||||||||
The Stock Purchase Agreement dated March 18, 2005, as amended December 24, 2008, by and among the Corporation, Weston Financial and Weston Financial’s shareholders, provides for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out
period ending December 31, 2008. During 2008, the Corporation recognized a liability of $7.6 million, with a corresponding addition to goodwill, representing the 2008 and final portion of the earn-out period. Goodwill is not deductible for tax purposes. See additional disclosure regarding deferred acquisition obligations in Note 11 to the Consolidated Financial Statements.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The value attributable to the core deposit intangible (“CDI”) is a function of the estimated attrition of the core deposit accounts, and the expected cost savings associated with the use of the existing core deposit base rather than alternative funding sources.
The value attributed to the wealth management advisory contracts was based on the time period over which the advisory contracts are expected to generate economic benefits. The intangible values of advisory contracts are being amortized over a 20-year life using a declining balance method, based on expected
attrition for Weston Financial’s current customer base derived from historical runoff data. The amortization schedule is based on the anticipated future customer runoff rate. This schedule will result in amortization of approximately 50% of the intangible asset after six years, and approximately 70% amortization of the balance after ten years.
The value attributable to the Weston Financial non-compete agreements was based on the expected receipt of future economic benefits related to provisions in the non-compete agreements that restrict competitive behavior. The intangible value of non-compete agreements is being amortized on a straight-line basis over
the six-year contractual lives of the agreements.
Estimated annual amortization expense is as follows:
|
(Dollars in thousands)
|
||||||||||||||||
|
Core
|
Advisory
|
Non-compete
|
||||||||||||||
|
Estimated amortization expense
|
Deposits
|
Contracts
|
Agreements
|
Total
|
||||||||||||
|
2010
|
$ | 120 | $ | 922 | $ | 49 | $ | 1,091 | ||||||||
|
2011
|
120 | 768 | 33 | 921 | ||||||||||||
|
2012
|
30 | 727 | – | 757 | ||||||||||||
|
2013
|
– | 680 | – | 680 | ||||||||||||
|
2014
|
– | 644 | – | 644 | ||||||||||||
The components of intangible assets at December 31, 2009 and 2008 were as follows:
|
(Dollars in thousands)
|
||||||||||||||||
|
Core
|
Advisory
|
Non-compete
|
||||||||||||||
|
Deposits
|
Contracts
|
Agreements
|
Total
|
|||||||||||||
|
December 31, 2009:
|
||||||||||||||||
|
Gross carrying amount
|
$ | 2,997 | $ | 13,657 | $ | 1,147 | $ | 17,801 | ||||||||
|
Accumulated amortization
|
2,727 | 5,066 | 1,065 | 8,858 | ||||||||||||
|
Net amount
|
$ | 270 | $ | 8,591 | $ | 82 | $ | 8,943 | ||||||||
|
December 31, 2008:
|
||||||||||||||||
|
Gross carrying amount
|
$ | 2,997 | $ | 13,657 | $ | 1,147 | $ | 17,801 | ||||||||
|
Accumulated amortization
|
2,607 | 4,026 | 1,016 | 7,649 | ||||||||||||
|
Net amount
|
$ | 390 | $ | 9,631 | $ | 131 | $ | 10,152 | ||||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(9) Net Deferred Tax Asset and Income Taxes
The components of income tax expense were as follows:
|
(Dollars in thousands)
|
||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Current tax expense (benefit):
|
||||||||||||
|
Federal
|
$ | 7,595 | $ | 12,900 | $ | 12,512 | ||||||
|
State
|
251 | (273 | ) | 646 | ||||||||
|
Total current tax expense
|
7,846 | 12,627 | 13,158 | |||||||||
|
Deferred tax benefit:
|
||||||||||||
|
Federal
|
(1,510 | ) | (3,830 | ) | (2,179 | ) | ||||||
|
State
|
10 | (1,478 | ) | (132 | ) | |||||||
|
Total deferred tax benefit
|
(1,500 | ) | (5,308 | ) | (2,311 | ) | ||||||
|
Total income tax expense
|
$ | 6,346 | $ | 7,319 | $ | 10,847 | ||||||
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,
|
2009
|
2008
|
2007
|
|||||||||
|
Tax expense at Federal statutory rate
|
$ | 7,855 | $ | 10,322 | $ | 12,127 | ||||||
|
(Decrease) increase in taxes resulting from:
|
||||||||||||
|
Tax-exempt income
|
(1,110 | ) | (1,094 | ) | (1,014 | ) | ||||||
|
Dividends received deduction
|
(60 | ) | (138 | ) | (217 | ) | ||||||
|
BOLI
|
(628 | ) | (630 | ) | (557 | ) | ||||||
|
Adjustment to net deferred tax assets for enacted changes in state
|
||||||||||||
|
tax law and rates, net of Federal income tax
|
– | (841 | ) | – | ||||||||
|
Net decrease related to uncertain state tax positions, net of
|
||||||||||||
|
Federal income tax
|
– | (556 | ) | – | ||||||||
|
State income tax expense, net of Federal income tax benefit
|
163 | 380 | 420 | |||||||||
|
Other
|
126 | (124 | ) | 88 | ||||||||
|
Total income tax expense
|
$ | 6,346 | $ | 7,319 | $ | 10,847 | ||||||
On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rate on net income applicable to financial institutions and requiring combined income tax reporting. The rate will be reduced from the rate of 10.5% to 10.0% for 2010, 9.5% for 2011 and 9.0% for 2012
and thereafter. Previously, certain Washington Trust subsidiaries were subject to Massachusetts income tax on a separate return basis. Under this legislation, effective January 1, 2009, Washington Trust, as a consolidated tax group, is subject to income tax in the Commonwealth of Massachusetts. Washington Trust analyzed the impact of this law and, as a result of revaluing its net deferred tax asset, recognized an income tax benefit of $841 thousand in 2008.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2009 and 2008 are as follows:
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Gross deferred tax assets:
|
||||||||
|
Allowance for loan losses
|
$ | 9,744 | $ | 8,456 | ||||
|
Defined benefit pension obligations
|
7,451 | 8,757 | ||||||
|
Losses on write-downs of securities to fair value
|
1,530 | 2,627 | ||||||
|
Net unrealized losses on securities available for sale
|
– | 1,146 | ||||||
|
Deferred compensation
|
1,618 | 1,186 | ||||||
|
Deferred loan origination fees
|
988 | 973 | ||||||
|
Other
|
1,577 | 1,939 | ||||||
|
Gross deferred tax assets
|
22,908 | 25,084 | ||||||
|
Gross deferred tax liabilities:
|
||||||||
|
Net unrealized gains on securities available for sale
|
(4,922 | ) | – | |||||
|
Amortization of intangibles
|
(3,114 | ) | (3,522 | ) | ||||
|
Deferred loan origination costs
|
(2,269 | ) | (2,135 | ) | ||||
|
Other
|
(634 | ) | (643 | ) | ||||
|
Gross deferred tax liabilities
|
(10,939 | ) | (6,300 | ) | ||||
|
Net deferred tax asset
|
$ | 11,969 | $ | 18,784 | ||||
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.
A reconciliation of the beginning and ending amount of total unrecognized tax benefit is as follows:
|
(Dollars in thousands)
|
||||||||
|
Years ended December 31,
|
2009
|
2008
|
||||||
|
Balance at beginning of year
|
$ | 545 | $ | 1,358 | ||||
|
Increase related to current year tax positions
|
– | 87 | ||||||
|
Decrease related to prior period tax positions
|
(157 | ) | – | |||||
|
Reductions relating to settlements with taxing authorities
|
(261 | ) | (892 | ) | ||||
|
Reductions as a result of lapse of statute of limitations
|
– | (8 | ) | |||||
|
Balance at end of year
|
$ | 127 | $ | 545 | ||||
As of December 31, 2009, the Corporation had gross tax affected unrecognized tax benefits of $127 thousand. If recognized, this amount would be recorded as a component of income tax expense.
The Corporation files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2006. The Corporation is no longer subject to state income tax examinations
by tax authorities for years before 2003. In 2008, a state income tax examination commenced for the tax years 2002 through 2006 and was settled in 2009. As a result, previously unrecognized tax benefits of $261 thousand and $892 thousand, respectively were recognized in 2009 and 2008. Also in 2009, $157 thousand of unrecognized tax benefits were reversed relating to tax positions taken during prior periods.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Total accrued interest related to uncertain tax positions was $12 thousand and $80 thousand as of December 31, 2009 and 2008, respectively. Interest amounts related to uncertain tax positions recognized as a component of income tax expense in 2009 and 2008 were immaterial.
To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
(10) Time Certificates of Deposit
Scheduled maturities of time certificates of deposit at December 31, 2009 were as follows:
|
(Dollars in thousands)
|
|||||
|
Years ending December 31:
|
2010
|
$ | 676,087 | ||
|
2011
|
91,608 | ||||
|
2012
|
56,047 | ||||
|
2013
|
47,810 | ||||
|
2014
|
59,127 | ||||
|
2015 and thereafter
|
1,005 | ||||
|
Balance at December 31, 2009
|
$ | 931,684 | |||
The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $415 million and $294 million at December 31, 2009 and 2008, respectively.
The following table represents the amount of certificates of deposit of $100 thousand or more at December 31, 2009 maturing during the periods indicated:
|
(Dollars in thousands)
|
|||||
|
Maturing:
|
January 1, 2010 to March 31, 2010
|
$ | 197,868 | ||
|
April 1, 2010 to June 30, 2010
|
70,262 | ||||
|
July 1, 2010 to December 31, 2010
|
64,459 | ||||
|
January 1, 2011 and beyond
|
82,489 | ||||
|
Balance at December 31, 2009
|
$ | 415,078 | |||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(11) Borrowings
Federal Home Loan Bank Advances
The following table presents maturities and weighted average interest rates paid on FHLBB advances outstanding at December 31, 2009 and 2008:
|
(Dollars in thousands)
|
|||||||||||||||||||||||||
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||||||||||||
|
Scheduled
|
Redeemed at
|
Weighted
|
Scheduled
|
Redeemed at
|
Weighted
|
||||||||||||||||||||
|
Maturity
|
Call Date
(1)
|
Average Rate (2) |
Maturity
|
Call Date
(1)
|
Average Rate
(2)
|
||||||||||||||||||||
|
2009
|
$ | – | $ | – | – | % | $ | 286,232 | $ | 299,232 | 2.17 | % | |||||||||||||
|
2010
|
121,104 | 134,104 | 4.11 | % | 115,638 | 115,638 | 4.29 | % | |||||||||||||||||
|
2011
|
135,040 | 127,040 | 3.94 | % | 124,559 | 116,559 | 4.09 | % | |||||||||||||||||
|
2012
|
102,365 | 102,365 | 4.58 | % | 94,372 | 94,372 | 4.76 | % | |||||||||||||||||
|
2013
|
108,534 | 103,534 | 4.09 | % | 101,472 | 96,472 | 4.16 | % | |||||||||||||||||
|
2014
|
53,562 | 53,562 | 3.85 | % | 20,630 | 20,630 | 4.58 | % | |||||||||||||||||
|
2015 and after
|
86,723 | 86,723 | 4.87 | % | 86,723 | 86,723 | 4.87 | % | |||||||||||||||||
| $ | 607,328 | $ | 607,328 | $ | 829,626 | $ | 829,626 | ||||||||||||||||||
|
(1)
|
Callable FHLBB 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 connection with the Corporation’s ongoing interest rate risk management efforts, in January 2010, the Corporation modified the terms to extend the maturity dates of $50 million of its FHLBB advances with original maturity dates in 2011 and 2012. The table below presents the original and
revised terms associated with these FHLBB advances as of December 31, 2009.
|
(Dollars in thousands)
|
|||||||||||||||||
|
Original Terms
|
Revised Terms
|
||||||||||||||||
|
Scheduled
|
Weighted
|
Scheduled
|
Weighted
|
||||||||||||||
|
Maturity
|
Average Rate
(1)
|
Maturity
|
Average Rate
(1)
|
||||||||||||||
|
2011
|
$ | 40,000 | 4.27 | % | $ | – | – | % | |||||||||
|
2012
|
10,000 | 5.19 | % | 25,000 | 3.56 | % | |||||||||||
|
2013
|
– | – | 15,000 | 4.15 | % | ||||||||||||
|
2014
|
– | – | 10,000 | 5.06 | % | ||||||||||||
| $ | 50,000 | $ | 50,000 | ||||||||||||||
|
(1)
|
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 with the FHLBB amounting to $8.0 million at December 31, 2009. Under agreement with the FHLBB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances
that, based on certain percentages of book and fair values, has a value equal to the aggregate amount of the line of credit and outstanding advances. The FHLBB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgage loans, commercial mortgages and other commercial loans, U.S. government agency securities, U.S. government-sponsored enterprise securities, and amounts maintained on deposit at the FHLBB. The Corporation maintained
qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 2009. Included in the collateral were securities available for sale with a fair value of $370.2 million and $512.3 million that were specifically pledged to secure FHLBB borrowings at December 31, 2009 and December 31, 2008, respectively. See Note 5 for discussion on loans pledged as collateral for FHLBB borrowings. 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 FHLBB borrowings, except for that collateral which has been specifically pledged.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The following table sets forth certain information concerning short-term FHLBB advances as of the dates for the years indicated:
|
(Dollars in thousands)
|
||||||||||||
|
As of and for the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Average amount outstanding during the period
|
$ | 49,808 | $ | 92,915 | $ | 36,640 | ||||||
|
Amount outstanding at end of period
|
5,000 | 170,000 | 70,000 | |||||||||
|
Highest month end balance during period
|
150,000 | 170,000 | 70,000 | |||||||||
|
Weighted-average interest rate at end of period
|
0.15 | % | 0.73 | % | 4.70 | % | ||||||
|
Weighted-average interest rate during the period
|
0.57 | % | 2.45 | % | 5.25 | % | ||||||
Junior Subordinated Debentures
Junior subordinated debentures amounted to $33 million at December 31, 2009 and 2008.
The Bancorp sponsored the creation of WT Capital Trust I (“Trust I”), WT Capital Trust II (“Trust II”) and Washington Preferred Capital Trust (“Washington Preferred”). Trust I, Trust II and Washington Preferred are Delaware statutory trusts created for the sole purpose
of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp. The Bancorp is the owner of all of the common securities of Trust I, Trust II and Washington Preferred. In accordance with GAAP, Trust I, Trust II and Washington Preferred are treated as unconsolidated subsidiaries. The common stock investment in the statutory trusts is included in “Other Assets” in the Consolidated Balance Sheet.
On August 29, 2005, Trust
I issued $8 million of capital securities
(“Trust I Capital Securities”) in a private placement of trust preferred securities. The Trust I 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 Trust I 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 Trust I Capital Securities and, to the extent not paid by Trust I, accrued and unpaid distributions on the Trust I Capital Securities, as well as the redemption price payable to the Trust I Capital Securities holders. The
proceeds of the Trust I 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 Trust I 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 (“Trust II Capital Securities”) in a private placement of trust preferred securities. The Trust II 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 Trust II 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 Trust II Capital Securities and, to the extent not paid by Trust II, accrued and unpaid distributions on the Trust II Capital Securities, as well as the redemption price payable to the Trust II Capital Securities holders. The proceeds
of the Trust II 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 Trust II Capital Securities, the Trust II Debentures bear interest at a rate of 5.96% until November 23, 2010, and thereafter at a rate equal to the three-month LIBOR rate plus
1.45%. The Trust II Debentures mature on November 23, 2035, but may be redeemed at par at the Bancorp's option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies, at any time on or after November 23, 2010, or upon the occurrence of certain special qualifying events.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
On April 7, 2008, Washington Preferred issued $10 million of trust preferred securities (“Capital Securities”) in a private placement to two institutional investors pursuant to an applicable exemption from registration. The Capital Securities mature in June 2038, are redeemable
at the Bancorp’s option beginning after five years, and required quarterly distributions by Washington Preferred to the holder of the Capital Securities, at a rate of 6.2275% until June 15, 2008, and reset quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%. The Bancorp has guaranteed the Capital Securities and, to the extent not paid by Washington Preferred, accrued and unpaid distributions on the Capital Securities, as well as the redemption price payable to the
Capital Securities holders. The proceeds of the Capital Securities, along with the proceeds of $310 thousand from the issuance of common securities by Washington Preferred to the Bancorp, were used to purchase $10,310,000 of the Bancorp's junior subordinated deferrable interest notes (the “Washington Preferred Debentures”) and constitute the primary asset of Washington Preferred. The Bancorp will use the proceeds from the sale of the Washington Preferred Debentures for general
corporate purposes. Like the Capital Securities, the Washington Preferred Debentures bear interest at a rate of 6.2275% until June 15, 2008, and reset quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%. The Washington Preferred Debentures mature on June 15, 2038, but may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies, at any time
on or after June 15, 2013, or upon the occurrence of certain special qualifying events.
Other Borrowings
The following is a summary of other borrowings:
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Treasury, Tax and Loan demand note balance
|
$ | 1,676 | $ | 4,382 | ||||
|
Deferred acquisition obligations
|
– | 2,506 | ||||||
|
Securities sold under repurchase agreements
|
19,500 | 19,500 | ||||||
|
Other
|
325 | 355 | ||||||
|
Other borrowings
|
$ | 21,501 | $ | 26,743 | ||||
The Stock Purchase Agreement, as amended, for the 2005 acquisition of Weston Financial provided for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008. Contingent payments were added to goodwill
and recorded as deferred acquisition liabilities at the time the payments were determinable beyond a reasonable doubt. See additional disclosure on goodwill in Note 8 to the Consolidated Financial Statements. During 2008, the Corporation recognized a liability of $7.6 million and paid a total of $15.2 million under the terms of the acquisition agreement. During the first quarter of 2009, the Corporation paid $2.5 million, which represented the final payment
pursuant to the Stock Purchase Agreement, as amended.
Securities sold under repurchase agreements amounted to $19.5 million at December 31, 2009 and 2008. The securities sold under agreements to repurchase were executed in March 2007 and mature in March 2012. The securities underlying the agreements are held in safekeeping by the
counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability.
(12) Shareholders' Equity
2006 Stock Repurchase Plan
In December 2006, the Bancorp’s Board of Directors approved the 2006 Stock Repurchase Plan authorizing the repurchase of up to 400,000 shares, or approximately 3%, of the Corporation’s common stock in open market transactions. This authority may be exercised from time to time and in such
amounts as market conditions warrant, and subject to regulatory considerations. The Bancorp plans to hold the repurchased shares as treasury stock to be
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
used for general corporate purposes. Under this plan, no shares were repurchased in 2009 and 2008. A total of 185,400 shares of stock were repurchased in 2007 at a total cost of $4.8 million. As of December 31, 2009, a cumulative total of 185,400 shares have been repurchased.
Shareholder Rights Plan
In August 2006, the Bancorp’s Board of Directors adopted a shareholder rights plan, as set forth in the Shareholders Rights Agreement, dated August 17, 2006 (the “2006 Rights Agreement”). Pursuant to the terms of the 2006 Rights Agreement, the Bancorp declared a dividend distribution
of one common share purchase right (a “Right”) for each outstanding share of common stock to shareholders of record on August 31, 2006. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $100.00 per share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an “Acquiring Person”) acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on
August 31, 2016, may be redeemed by the Bancorp at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.01 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that,
at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right.
Dividends
The primary source of liquidity for the Bancorp is dividends received from the Bank. The Bancorp and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends,
loans, and advances from the Bank to the Bancorp. Generally, the Bank has the ability to pay dividends to the Bancorp subject to minimum regulatory capital requirements. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. In addition, the Rhode Island Division of Banking may also restrict the declaration of dividends if a bank would not be
able to pay its debts as they become due in the usual course of business or the bank’s total assets would be less than the sum of its total liabilities. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $106 million as of December 31, 2009.
Dividend Reinvestment
Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500 shares of the Corporation’s common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan.
Reserved Shares
As of December 31, 2009, a total of 2,026,308 common stock shares were reserved for issuance under the 1997 Plan, 2003 Plan, the Amended and Restated Dividend Reinvestment, the 2006 Stock Repurchase Plan and the Nonqualified Deferred Compensation Plan.
Regulatory Capital Requirements
The Bancorp and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure
to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
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 that, as of December 31, 2009, the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2009, 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, 2009 and 2008, 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, 2009:
|
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 244,382 | 12.40 | % | $ | 157,615 | 8.00 | % | $ | 197,019 | 10.00 | % | ||||||||||||
|
Bank
|
$ | 242,536 | 12.32 | % | $ | 157,470 | 8.00 | % | $ | 196,838 | 10.00 | % | ||||||||||||
|
Tier 1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 219,552 | 11.14 | % | $ | 78,808 | 4.00 | % | $ | 118,212 | 6.00 | % | ||||||||||||
|
Bank
|
$ | 217,729 | 11.06 | % | $ | 78,735 | 4.00 | % | $ | 118,103 | 6.00 | % | ||||||||||||
|
Tier 1 Capital (to Average Assets):
(1)
|
||||||||||||||||||||||||
|
Corporation
|
$ | 219,552 | 7.82 | % | $ | 112,269 | 4.00 | % | $ | 140,336 | 5.00 | % | ||||||||||||
|
Bank
|
$ | 217,729 | 7.76 | % | $ | 112,165 | 4.00 | % | $ | 140,206 | 5.00 | % | ||||||||||||
|
As of December 31, 2008:
|
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 235,728 | 12.54 | % | $ | 150,339 | 8.00 | % | $ | 187,923 | 10.00 | % | ||||||||||||
|
Bank
|
$ | 237,023 | 12.62 | % | $ | 150,201 | 8.00 | % | $ | 187,751 | 10.00 | % | ||||||||||||
|
Tier 1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Corporation
|
$ | 212,231 | 11.29 | % | $ | 75,169 | 4.00 | % | $ | 112,754 | 6.00 | % | ||||||||||||
|
Bank
|
$ | 213,547 | 11.37 | % | $ | 75,101 | 4.00 | % | $ | 112,651 | 6.00 | % | ||||||||||||
|
Tier 1 Capital (to Average Assets):
(1)
|
||||||||||||||||||||||||
|
Corporation
|
$ | 212,231 | 7.53 | % | $ | 112,799 | 4.00 | % | $ | 140,999 | 5.00 | % | ||||||||||||
|
Bank
|
$ | 213,547 | 7.58 | % | $ | 112,724 | 4.00 | % | $ | 140,905 | 5.00 | % | ||||||||||||
|
(1)
|
Leverage ratio
|
As of December 31, 2009, Bancorp has sponsored the creation of three statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp. In accordance with the provisions of ASC 810, “Consolidations,”
(formerly FASB Interpretation 46-R, “Consolidation of Variable Interest Entities – Revised,”) these statutory trusts created by Bancorp are not consolidated into the Corporation’s financial statements; however, the Corporation reflects the amounts of junior subordinated debentures payable to the preferred shareholders of statutory trusts as debt in its financial statements. The trust preferred securities qualify as Tier 1 capital.
In October 2008, Bancorp issued $50.0 million of is Common Stock in a private placement with select institutional investors. Net proceeds were approximately $46.9 million after deducting offering-related fees and expenses. The
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
closing took place on October 7, 2008. Bancorp issued a total of 2.5 million shares of Common Stock at a price of $20 per share in the private placement. On October 20, 2008, Bancorp filed a registration statement with the SEC to register these shares for resale. The
net proceeds from the capital raise were for general corporate purposes and to support strategic growth initiatives in its commercial and wealth management business lines.
The Corporation’s capital ratios at December 31, 2009 place the Corporation in the “well-capitalized” category according to regulatory standards. On March 1, 2005, the FRB 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. On March 17, 2009, the FRB announced the adoption of a final rule that delays until March 31, 2011, the effective date of new limits whereby the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill. The Corporation has evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment
of the trust preferred securities in the Corporation’s total capital ratio would be unchanged.
(13) Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit,
standby letters of credit, an equity commitment to an affordable housing partnership, interest rate swap agreements 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’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and financial guarantees are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
|
(Dollars in thousands)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Financial instruments whose contract amounts represent credit risk:
|
||||||||
|
Commitments to extend credit:
|
||||||||
|
Commercial loans
|
$ | 186,943 | $ | 206,515 | ||||
|
Home equity lines
|
185,892 | 178,371 | ||||||
|
Other loans
|
25,691 | 22,979 | ||||||
|
Standby letters of credit
|
8,712 | 7,679 | ||||||
|
Equity commitment to an affordable housing partnership
|
690 | – | ||||||
|
Financial instruments whose notional amounts exceed the amount of credit risk:
|
||||||||
|
Forward loan commitments:
|
||||||||
|
Commitments to originate fixed rate mortgage loans to be sold
|
15,898 | 25,662 | ||||||
|
Commitments to sell fixed rate mortgage loans
|
25,791 | 28,192 | ||||||
|
Customer related derivative contracts:
|
||||||||
|
Interest rate swaps with customers
|
53,725 | 13,981 | ||||||
|
Mirror swaps with counterparties
|
53,725 | 13,981 | ||||||
|
Interest rate risk management contract:
|
||||||||
|
Interest rate swap
|
10,000 | 10,000 | ||||||
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower’s
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Under the standby letters of
credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit extend up to five years. At December 31, 2009 and 2008, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $8.7 million and $7.7 million,
respectively. At December 31, 2009 and 2008, there was no liability to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit totaled $95 thousand in 2009, essentially unchanged from 2008 and 2007.
At December 31, 2009, 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.
Equity Commitment
Equity commitment to an affordable housing partnership represents funding commitments by Washington Trust to a limited partnership.
This partnership was created for the purpose of renovating and operating a low-income housing project. The funding
of these commitments is generally contingent upon substantial completion of the project.
Forward Loan Commitments
Interest rate lock commitments are extended to borrowers that relate to the origination of readily marketable mortgage loans held for sale. To mitigate the interest rate risk inherent in these rate locks, as well as closed mortgage loans held for sale, best efforts forward commitments are established
to sell individual mortgage loans. Commitments to originate and commitments to sell fixed rate mortgage loans are derivative financial instruments and, therefore, changes in fair value of these commitments are recognized in earnings.
Interest Rate Risk Management Agreements
Interest rate swaps are used from time to time as part of the Corporation’s interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal
amount. The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.
In April 2008, the Bancorp entered into an interest rate swap contract with Lehman Brothers Special Financing, Inc. to hedge the interest rate risk associated with $10 million of the variable rate junior subordinated debentures. The interest rate swap contract has a notional amount of $10 million
and matures in 2013. At inception, the swap was intended to convert the debt from variable rate to fixed rate and qualify for cash flow hedge accounting. In September 2008, Lehman Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for bankruptcy protection, followed in October 2008 by the swap counterparty itself. Due to the change in the creditworthiness of the derivative counterparty, the hedging relationship was deemed to be not highly effective. As
a result, cash flow hedge accounting was discontinued prospectively and all subsequent changes in fair value of the interest rate swap were recognized directly in earnings as noninterest income. As of the date of discontinuance in September 2008, Washington Trust had a net unrealized gain on the swap contract of $30 thousand, which was recorded in accumulated other comprehensive loss, net of taxes. This amount was subsequently reclassified into earnings through amortization during the
first quarter of 2009. On March 31, 2009, this interest rate swap contract was reassigned to a new creditworthy counterparty, unrelated to the prior counterparty. On May 1, 2009, this interest rate
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
swap contract qualified for cash flow hedge accounting to hedge the interest rate risk associated with $10 million of the variable rate junior subordinated debentures. Effective May 1, 2009, the effective portion of changes in fair value of the swap was recorded in other comprehensive income
and subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the variable rate debentures affect earnings. The ineffective portion of changes in fair value was recognized directly in earnings as interest expense.
The Corporation has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. When we enter into
an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed rate loan payments for floating rate loan payments. We retain the risk that is associated with the potential failure of counterparties and inherent in making loans. At December 31, 2009 and 2008, Washington Trust had interest rate swap contracts with commercial loan borrowers
with notional amounts of $53.7 million and $14.0 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings.
The following table presents the fair values of derivative instruments in the Corporation’s Consolidated Balance Sheets as of the dates indicated.
|
(Dollars in thousands)
|
Asset Derivatives |
Liability Derivatives
|
|||||||||||||||||
|
Fair Value
|
Fair Value
|
||||||||||||||||||
|
Balance Sheet Location
|
Dec. 31, 2009
|
Dec. 31, 2008
|
Balance Sheet Location
|
Dec. 31, 2009
|
Dec. 31, 2008
|
||||||||||||||
|
Derivatives designated as cash
flow hedging instruments:
|
|||||||||||||||||||
|
Interest rate risk management contract:
|
|||||||||||||||||||
|
Interest rate swap
|
Accrued expenses | ||||||||||||||||||
|
|
$ | – | $ | – |
& other liabilities
|
$ | 434 | $ | – | ||||||||||
|
Derivatives not designated
as hedging instruments:
|
|||||||||||||||||||
|
Forward loan commitments:
|
|||||||||||||||||||
|
Commitments to originate fixed rate mortgage
|
Accrued expenses | ||||||||||||||||||
|
loans to be sold
|
Other assets
|
22 | 152 |
& other liabilities
|
180 | 18 | |||||||||||||
|
Commitments to sell fixed rate mortgage
|
Accrued expenses | ||||||||||||||||||
|
loans
|
Other assets
|
342 | 18 |
& other liabilities
|
31 | 177 | |||||||||||||
|
Customer related derivative contracts:
|
|||||||||||||||||||
|
Interest rate swaps with customers
|
Other assets
|
1,704 | 1,413 | – | – | ||||||||||||||
|
Mirror swaps with counterparties
|
Accrued expenses | ||||||||||||||||||
|
|
– | – |
& other liabilities
|
1,691 | 1,479 | ||||||||||||||
|
Interest rate risk management contract:
|
|||||||||||||||||||
|
Interest rate swap
|
Accrued expenses | ||||||||||||||||||
|
|
– | – |
& other liabilities
|
– | 601 | ||||||||||||||
|
Total
|
$ | 2,068 | $ | 1,583 | $ | 2,336 | $ | 2,275 | |||||||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The following tables present the effect of derivative instruments in the Corporations’ Consolidated Statements of Income and Changes in Shareholders’ Equity for the periods indicated.
|
(Dollars in thousands)
|
Location of Gain
|
||||||
|
Gain (Loss)
|
(Loss) Recognized in
|
||||||
|
Recognized in Other
|
Income on Derivative
|
Gain Recognized
|
|||||
|
Comprehensive
|
(Ineffective Portion
|
in Income
|
|||||
|
Income
|
and Amount
|
on Derivative
|
|||||
|
(Effective Portion)
|
Excluded from
|
(Ineffective Portion)
|
|||||
|
Years ended Dec. 31,
|
2009
|
2008
|
2007
|
Effectiveness Testing)
|
2009
|
2008
|
2007
|
|
Derivatives in cash flow hedging relationships:
|
|||||||
|
Interest rate risk management contract:
|
|||||||
|
Interest rate swap (1)
|
$(7)
|
$30
|
$ –
|
Interest Expense
|
$78
|
$ –
|
$ –
|
|
Total
|
$(7)
|
$30
|
$ –
|
$78
|
$ –
|
$ –
|
|
|
(1)
|
In addition to the amounts reported in the table above, a $30 thousand gain was reclassified from accumulated other comprehensive income into net unrealized gains on interest rate swaps in the first quarter of 2009.
|
|
(Dollars in thousands)
|
Location of Gain
|
Amount of Gain (Loss)
|
||||||||||||
|
(Loss) Recognized in
|
Recognized in Income on Derivative
|
|||||||||||||
|
Years ended December 31,
|
Income on Derivative
|
2009
|
2008
|
2007
|
||||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||
|
Forward loan commitments:
|
||||||||||||||
|
Commitments to originate fixed rate
mortgage
loans to be sold
|
Net gains on loan sales & commissions on loans
originated for others
|
$ | (325 | ) | $ | 132 | $ | (199 | ) | |||||
|
Commitments to sell fixed rate
mortgage
loans
|
Net gains on loan sales & commissions on loans
originated for others
|
503 | (155 | ) | 189 | |||||||||
|
Customer related derivative contracts:
|
||||||||||||||
|
Interest rate swaps with customers
|
Net gains (losses) on interest rate swaps
|
1,130 | (603 | ) | 60 | |||||||||
|
Mirror swaps with counterparties
|
Net gains (losses) on interest rate swaps
|
(550 | ) | 700 | (33 | ) | ||||||||
|
Interest rate risk management contract:
|
||||||||||||||
|
Interest rate swap
|
Net gains (losses) on interest rate swaps
|
117 | (639 | ) | – | |||||||||
|
Total
|
$ | 875 | $ | (565 | ) | $ | 17 | |||||||
(14) Fair Value Measurements
The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may
be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether
the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:
|
·
|
Level 1 – Quoted prices for
identical
assets or liabilities in active markets.
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
|
·
|
Level 2 – Quoted prices for
similar
assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
·
|
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable
in the markets and which reflect the Corporation’s market assumptions
|
Determination of Fair Value
Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Corporation uses quoted market prices to determine fair value. If quoted prices are
not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Corporation uses unobservable inputs to determine appropriate valuation adjustments using methodologies applied consistently over time.
The following is a description of valuation methodologies for assets and liabilities recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Items Measured at Fair Value on a Recurring Basis
Securities Available for Sale
Securities available for sale are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes exchange-traded equity securities.
Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This
category generally includes obligations of U.S. government-sponsored enterprises, mortgage-backed securities issued by U.S. government agencies and U.S government-sponsored enterprises, municipal bonds, trust preferred securities, corporate bonds and certain preferred equity securities.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of December 31, 2009 and December 31, 2008, level 3 securities were comprised of two pooled trust preferred debt securities, in the form of collateralized
debt obligations, which were not actively traded. As of December 31, 2009, the Corporation concluded that there has been a significant decrease in the volume and level of activity for its Level 3 pooled trust preferred debt securities and, therefore, quoted market prices are not indicative of fair value. The Corporation obtained valuations including broker quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned
a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected highly limited sales evidenced by an inactive market. The cash flow scenarios were prepared using discounted cash flow methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used
to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions.
As of December 31, 2008, for these two pooled trust preferred collateralized debt obligations, the Corporation utilized valuations provided by broker dealer/investment banking firms, a third party pricing service and also engaged a third party valuation firm to provide additional detailed cash flow and credit
analysis of the pooled securities. Management concluded that the valuations provided from each source were based on sound methodologies and were reasonable and, therefore, a simple average of the values provided from these sources was used for financial reporting purposes. The Corporation did not adjust the above prices obtained from these sources. In addition, pricing information from one other source was provided to us on a third hand basis from an outside
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
party. We were unable to verify factors used in determining the prices obtained for both pooled trust preferred holdings and found the pricing indications to be significantly below the range of price indications provided by the other pricing sources described above, and for these reasons we excluded
this source from our valuation analysis.
Our internal review procedures have confirmed that the fair values provided by the aforementioned third party valuation sources utilized by the Corporation are consistent with GAAP. Our fair values assumed liquidation in an orderly market and not under distressed circumstances. Due to the
continued market illiquidity and credit risk for securities in the financial sector, the fair value of these securities is highly sensitive to assumption changes and market volatility.
Derivatives
Substantially all of our derivatives are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR
rates and, accordingly, are classified as Level 2. Examples include interest rate swap contracts. Our internal review procedures have confirmed that the fair values determined with independent pricing models and utilized by the Corporation are consistent with GAAP. Any derivative for which we measure fair value using significant assumptions that are unobservable are classified as Level 3. Level 3 derivatives include commitments to sell fixed rate residential
mortgages and interest rate lock commitments written for our residential mortgage loans that we intend to sell. The valuation of these items is determined by management based on internal calculations using external market inputs.
For purposes of potential valuation adjustments to its interest rate swap contracts, the Corporation evaluates the credit risk of its counterparties as well as that of the Corporation. Accordingly, Washington Trust considers factors such as the likelihood of default by the Corporation and its counterparties,
its net exposures and remaining contractual life, among other factors, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.
Items Measured at Fair Value on a Nonrecurring Basis
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried on an aggregate basis at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify loans subjected to nonrecurring
fair value adjustments as Level 2.
Collateral Dependent Impaired Loans
Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For those collateral dependent loans for which the inputs used in
the appraisals of the collateral are observable, such loans are categorized as Level 2. For other collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, or use internal valuations for other business assets utilizing significant assumptions that are unobservable, and such loans are categorized as Level 3.
Property acquired through foreclosure or repossession
Property acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised
values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.
Loan Servicing Rights
Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of loan servicing rights using a valuation model that calculates the present value of the estimated future net
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
servicing income. The model incorporates assumptions used in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service and contractual servicing fee income. Loan servicing rights are subject to fair value measurements on a nonrecurring
basis. Fair value measurements of our loan servicing rights use significant unobservable inputs and, accordingly, are classified as Level 3.
Items Recorded at Fair Value on a Recurring Basis
The table below presents the balances of assets and liabilities reported at fair value on a recurring basis.
|
(Dollars in thousands)
|
Assets/
|
|||||||||||||||
|
Fair Value Measurements Using
|
Liabilities at
|
|||||||||||||||
|
December 31, 2009
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
Obligations of U.S. government-sponsored enterprises
|
$ | – | $ | 45,240 | $ | – | $ | 45,240 | ||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
– | 523,446 | – | 523,446 | ||||||||||||
|
States and political subdivisions
|
– | 82,062 | – | 82,062 | ||||||||||||
|
Trust preferred securities:
|
||||||||||||||||
|
Individual name issuers
|
– | 20,586 | – | 20,586 | ||||||||||||
|
Collateralized debt obligations
|
– | – | 1,065 | 1,065 | ||||||||||||
|
Corporate bonds
|
– | 14,706 | – | 14,706 | ||||||||||||
|
Common stocks
|
769 | – | – | 769 | ||||||||||||
|
Perpetual preferred stocks
|
3,183 | 427 | – | 3,610 | ||||||||||||
|
Derivative assets (1)
|
– | 1,704 | 364 | 2,068 | ||||||||||||
|
Total assets at fair value on a recurring basis
|
$ | 3,952 | $ | 688,171 | $ | 1,429 | $ | 693,552 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities (1)
|
$ | – | $ | 2,125 | $ | 211 | $ | 2,336 | ||||||||
|
Total liabilities at fair value on a recurring basis
|
$ | – | $ | 2,125 | $ | 211 | $ | 2,336 | ||||||||
|
(1)
|
Derivative assets are included in other assets and derivative liabilities are reported in accrued expenses and other liabilities in the Consolidated Balance Sheets.
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
|
(Dollars in thousands)
|
Assets/
|
|||||||||||||||
|
Fair Value Measurements Using
|
Liabilities at
|
|||||||||||||||
|
December 31, 2008
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
Obligations of U.S. government-sponsored enterprises
|
$ | – | $ | 64,377 | $ | – | $ | 64,377 | ||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
– | 683,619 | – | 683,619 | ||||||||||||
|
States and political subdivisions
|
– | 81,213 | – | 81,213 | ||||||||||||
|
Trust preferred securities:
|
||||||||||||||||
|
Individual name issuers
|
– | 16,793 | – | 16,793 | ||||||||||||
|
Collateralized debt obligations
|
– | – | 1,940 | 1,940 | ||||||||||||
|
Corporate bonds
|
– | 13,576 | – | 13,576 | ||||||||||||
|
Common stocks
|
992 | – | – | 992 | ||||||||||||
|
Perpetual preferred stocks
|
3,208 | 501 | – | 3,709 | ||||||||||||
|
Derivative assets (1)
|
– | 1,413 | 170 | 1,583 | ||||||||||||
|
Total assets at fair value on a recurring basis
|
$ | 4,200 | $ | 861,492 | $ | 2,110 | $ | 867,802 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities (1)
|
$ | – | $ | 2,080 | $ | 195 | $ | 2,275 | ||||||||
|
Total liabilities at fair value on a recurring basis
|
$ | – | $ | 2,080 | $ | 195 | $ | 2,275 | ||||||||
|
(1)
|
Derivatives assets are included in other assets and derivative liabilities are reported in accrued expenses and other liabilities in the Consolidated Balance Sheets.
|
It is the Corporation’s policy to review and reflect transfers either into or out of “Level 3” as of the financial statement reporting date. The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis during the periods indicated.
|
Years ended December 31,
|
2009
|
2008
|
|||||||||||||||||||||||
|
Securities
|
Derivative
|
Securities
|
Derivative
|
||||||||||||||||||||||
|
Available
|
Assets /
|
Available
|
Assets /
|
||||||||||||||||||||||
|
(Dollars in thousands)
|
for Sale (1)
|
(Liabilities)
|
Total
|
for Sale
|
(Liabilities)
|
Total
|
|||||||||||||||||||
|
Balance at beginning of period
|
$ | 1,940 | $ | (25 | ) | $ | 1,915 | $ | – | $ | (2 | ) | $ | (2 | ) | ||||||||||
|
Gains and losses (realized and unrealized):
|
|||||||||||||||||||||||||
|
Included in earnings (2)
|
(2,496 | ) | 178 | (2,318 | ) | (1,859 | ) | (23 | ) | (1,882 | ) | ||||||||||||||
|
Included in other comprehensive income
|
1,621 | – | 1,621 | (1,949 | ) | – | (1,949 | ) | |||||||||||||||||
|
Purchases, issuances and settlements (net)
|
– | – | – | 13 | – | 13 | |||||||||||||||||||
|
Transfers in and/or out of Level 3
|
– | – | – | 5,735 | – | 5,735 | |||||||||||||||||||
|
Balance at end of period
|
$ | 1,065 | $ | 153 | $ | 1,218 | $ | 1,940 | $ | (25 | ) | $ | 1,915 | ||||||||||||
|
(1)
|
During the periods indicated, Level 3 securities available for sale were comprised of two pooled trust preferred debt securities, in the form of collateralized debt obligations.
|
|
(2)
|
Losses included in earnings for Level 3 securities available for sale consisted of credit-related impairment losses on the two Level 3 pooled trust preferred debt securities. Credit-related impairment losses of $2.5 million and $1.9 million were recognized in 2009 and 2008, respectively. See Note 4 for additional
disclosure regarding the reclassification of the 2008 impairment losses. The losses included in earnings for Level 3 derivative assets and liabilities, which were comprised of interest rate lock commitments written for our residential mortgage loans that we intend to sell, were included in net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.
|
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Items Recorded at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. The valuation methodologies used to measure these
fair value adjustments are described above.
The following table presents the carrying value of certain assets measured at fair value on a nonrecurring basis during the year ended December 31, 2009.
|
(Dollars in thousands)
|
Carrying Value at December 31, 2009
|
|||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Collateral dependent impaired loans
|
$ | – | $ | 2,026 | $ | 11,560 | $ | 13,586 | ||||||||
|
Property acquired through foreclosure or repossession
|
– | – | 1,974 | 1,974 | ||||||||||||
|
Total assets at fair value on a nonrecurring basis
|
$ | – | $ | 2,026 | $ | 13,534 | $ | 15,560 | ||||||||
At December 31, 2009, collateral dependent impaired loans had a carrying value of $13.6 million and related allowance for loan losses allocation of $2.1 million.
For the year ended December 31, 2009, property acquired through foreclosure or repossession with a fair value of $2.0 million was transferred from loans. Valuation adjustments at the time of transfer from loans resulted in a charge to the allowance for loan losses of $173 thousand in
the year ended December 31, 2009. There were no subsequent valuation adjustments to property acquired through foreclosure or repossession for the year ended December 31, 2009.
The following table presents the carrying value of certain assets measured at fair value on a nonrecurring basis during the year ended December 31, 2008.
|
(Dollars in thousands)
|
Carrying Value at December 31, 2008
|
|||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Collateral dependent impaired loans
|
$ | – | $ | 3,396 | $ | – | $ | 3,396 | ||||||||
|
Loan servicing rights
|
– | – | 385 | 385 | ||||||||||||
|
Total assets at fair value on a nonrecurring basis
|
$ | – | $ | 3,396 | $ | 385 | $ | 3,781 | ||||||||
At December 31, 2008, collateral dependent impaired loans had a carrying value of $3.4 million and related allowance for loan losses allocation of $274 thousand.
In 2008, certain loan servicing rights were written down to their fair value resulting in a valuation allowance increase of $59 thousand, which was recorded as a component of other income in the Corporation’s Consolidated Statements of Income.
Effective June 30, 2009, the Corporation adopted FASB Staff Position No. 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1 and APB No. 28-1”). FSP No. 107-1 and APB
No. 28-1 is now a sub-topic within ASC 820, “Fair Value Measurements and Disclosures.” These provisions require interim and annual disclosures made by publicly traded companies to include the fair value of its financial instruments, whether recognized or not recognized in the statement of financial position, as required by former SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The methodologies for estimating the fair value of financial
instruments that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial instruments are discussed below.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
FHLBB Stock
No market exists for shares of the FHLBB. Subject to certain limitations, such stock may be redeemed at par upon termination of FHLBB membership and is, therefore, valued at par, which equals cost.
Loans
Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans
is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 2009 and 2008 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, 2009 and 2008. 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.
Federal Home Loan Bank Advances
Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances.
Junior Subordinated Debentures
The fair value of the junior subordinated debentures is estimated using rates currently available to the Corporation for debentures with similar terms and maturities.
Securities Sold Under Agreements to Repurchase
The carrying amount of securities sold under repurchase agreements is estimated based on bid quotations received from brokers.
Standby Letters of Credit
The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Letters of credit contain provisions for fees, conditions and term periods that are consistent with customary
market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The following table presents the fair values of financial instruments:
|
December 31,
|
2009
|
2008
|
||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
(Dollars in thousands)
|
Amount
|
Fair Value
|
Amount
|
Fair Value
|
||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 57,260 | $ | 57,260 | $ | 58,190 | $ | 58,190 | ||||||||
|
Mortgage loans held for sale
|
9,909 | 10,107 | 2,543 | 2,604 | ||||||||||||
|
Securities available for sale
|
691,484 | 691,484 | 866,219 | 866,219 | ||||||||||||
|
FHLBB stock
|
42,008 | 42,008 | 42,008 | 42,008 | ||||||||||||
|
Loans, net of allowance for loan losses
|
1,892,268 | 1,936,997 | 1,815,429 | 1,857,433 | ||||||||||||
|
Accrued interest receivable
|
9,137 | 9,137 | 10,980 | 10,980 | ||||||||||||
|
Bank-owned life insurance
|
44,957 | 44,957 | 43,163 | 43,163 | ||||||||||||
|
Customer related interest rate swap contracts
|
1,704 | 1,704 | 1,413 | 1,413 | ||||||||||||
|
Forward loan commitments
(1)
|
364 | 364 | 170 | 170 | ||||||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Noninterest-bearing demand deposits
|
$ | 194,046 | $ | 194,046 | $ | 172,771 | $ | 172,771 | ||||||||
|
NOW accounts
|
202,367 | 202,367 | 171,306 | 171,306 | ||||||||||||
|
Money market accounts
|
403,333 | 403,333 | 305,879 | 305,879 | ||||||||||||
|
Savings accounts
|
191,580 | 191,580 | 173,485 | 173,485 | ||||||||||||
|
Time deposits
|
931,684 | 941,090 | 967,427 | 975,255 | ||||||||||||
|
FHLBB advances
|
607,328 | 638,269 | 829,626 | 863,884 | ||||||||||||
|
Junior subordinated debentures
|
32,991 | 20,126 | 32,991 | 17,386 | ||||||||||||
|
Securities sold under repurchase agreements
|
19,500 | 21,041 | 19,500 | 21,310 | ||||||||||||
|
Other borrowings
|
2,001 | 2,001 | 7,243 | 7,243 | ||||||||||||
|
Accrued interest payable
|
5,818 | 5,818 | 7,995 | 7,995 | ||||||||||||
|
Customer related interest rate swap contracts
|
1,691 | 1,691 | 1,479 | 1,479 | ||||||||||||
|
Interest rate risk management contract
|
434 | 434 | 601 | 601 | ||||||||||||
|
Forward loan commitments
(1)
|
211 | 211 | 195 | 195 | ||||||||||||
(1) Interest rate lock commitments written for our residential mortgage loans that we intend to sell.
(15) Employee Benefits
Defined Benefit Pension Plans
The Corporation offers a tax-qualified defined benefit pension plan for the benefit of certain eligible employees. During 2007, the Corporation reviewed its retirement program, benefit trends, and best practices, and made a strategic decision to shift retirement benefits from the pension plan to the 401(k) Plan. Effective
October 1, 2007, the pension plan was amended to freeze plan entry to new hires and rehires. Existing employees hired prior to October 1, 2007 continue to accrue benefits under the plan. Benefits are based on an employee’s years of service and compensation earned during the years of service. The plan is funded on a current basis, in compliance with the requirements of ERISA.
The Corporation also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The supplemental retirement plans provide eligible participants with an additional retirement benefit.
The non-qualified retirement plans provide for the designation of assets in rabbi trusts. Securities available for sale and other short-term investments designated for this purpose, with the carrying value of $9.7 million and $9.5 million are included in the Consolidated Balance Sheets at
December 31, 2009 and 2008, respectively.
Pension benefit cost and benefit obligations are developed from actuarial valuations. Two critical assumptions in determining pension expense and obligations are the discount rate and the expected long-term rate of return on plan assets. We evaluate these assumptions at least annually. The
discount rate is used to calculate the present value of
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
the expected future cash flows for benefit obligations under our pension plans. Future decreases in discount rates would increase the present value of pension obligations and increase our pension costs. Future decreases in the long-term rate of return assumption on plan assets would increase
pension costs and, in general, increase the requirement to make funding contributions to the plans.
The following table sets forth the plans’ benefit obligations, fair value of plan assets and funded status as of December 31, 2009 and 2008.
|
(Dollars in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||
|
Pension Plan
|
Retirement Plans
|
|||||||||||||||
|
At December 31,
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Change in Benefit Obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of period
|
$ | 39,529 | $ | 33,028 | $ | 9,581 | $ | 9,223 | ||||||||
|
Service cost
|
2,371 | 2,046 | 106 | 250 | ||||||||||||
|
Interest cost
|
2,292 | 2,027 | 564 | 571 | ||||||||||||
|
Adjustment for change in measurement date
|
- | 771 | - | 121 | ||||||||||||
|
Actuarial (gain) loss
|
(679 | ) | 2,645 | (105 | ) | (249 | ) | |||||||||
|
Benefits paid
|
(977 | ) | (878 | ) | (341 | ) | (335 | ) | ||||||||
|
Administrative expenses
|
(122 | ) | (110 | ) | - | - | ||||||||||
|
Curtailment loss
|
- | - | (309 | ) | - | |||||||||||
|
Benefit obligation at end of period
|
$ | 42,414 | $ | 39,529 | $ | 9,496 | $ | 9,581 | ||||||||
|
Change in Plan Assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of period
|
$ | 24,527 | $ | 30,450 | $ | - | $ | - | ||||||||
|
Actual return (loss) on plan assets
|
5,418 | (5,350 | ) | - | - | |||||||||||
|
Employer contribution
|
2,100 | 2,000 | 91 | 335 | ||||||||||||
|
Benefits paid
|
(977 | ) | (878 | ) | (91 | ) | (335 | ) | ||||||||
|
Administrative expenses
|
(122 | ) | (110 | ) | - | - | ||||||||||
|
Adjustment for change in measurement date
|
- | (1,585 | ) | - | - | |||||||||||
|
Fair value of plan assets at end of period
|
$ | 30,946 | $ | 24,527 | $ | - | $ | - | ||||||||
|
Funded status at end of period
|
$ | (11,468 | ) | $ | (15,002 | ) | $ | (9,496 | ) | $ | (9,581 | ) | ||||
The funded status of the qualified pension plan and non-qualified retirement plans has been recognized in accrued expenses and other liabilities in the Consolidated Balance Sheets at December 31, 2009 and 2008.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The components of accumulated other comprehensive income related to the qualified pension plan and non-qualified retirement plans, on a pre-tax basis, are summarized below:
|
(Dollars in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||
|
Pension Plan
|
Retirement Plans
|
|||||||||||||||
|
At December 31,
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net actuarial loss
|
$ | 8,082 | $ | 12,031 | $ | 838 | $ | 1,280 | ||||||||
|
Prior service (credit) cost
|
(321 | ) | (353 | ) | 1 | 125 | ||||||||||
|
Total pre-tax amounts recognized in
|
||||||||||||||||
|
accumulated other comprehensive income
|
$ | 7,761 | $ | 11,678 | $ | 839 | $ | 1,405 | ||||||||
The accumulated benefit obligation for the qualified pension plan was $32.7 million and $30.1 million at December 31, 2009 and 2008, respectively. The accumulated benefit obligation for the non-qualified retirement plans amounted to $9.1 million and $8.4 million at December 31,
2009 and 2008, 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,
|
2009
|
2008
|
||||||
|
Projected benefit obligation
|
$ | 9,496 | $ | 9,581 | ||||
|
Accumulated benefit obligation
|
9,090 | 8,361 | ||||||
|
Fair value of plan assets
|
- | - | ||||||
The components of net periodic benefit cost and other amounts recognized in other comprehensive income, on a pre-tax basis, were as follows:
|
(Dollars in thousands)
|
Qualified
|
Non-Qualified
|
||||||||||||||||||||||
|
Pension Plan
|
Retirement Plans
|
|||||||||||||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Net Periodic Benefit Cost:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 2,371 | $ | 2,046 | $ | 2,010 | $ | 106 | $ | 250 | $ | 345 | ||||||||||||
|
Interest cost
|
2,292 | 2,027 | 1,848 | 564 | 571 | 519 | ||||||||||||||||||
|
Expected return on plan assets
|
(2,451 | ) | (2,276 | ) | (1,984 | ) | - | - | - | |||||||||||||||
|
Amortization of transition asset
|
- | (1 | ) | (6 | ) | - | - | - | ||||||||||||||||
|
Amortization of prior service (credit) cost
|
(33 | ) | (33 | ) | (33 | ) | 27 | 63 | 63 | |||||||||||||||
|
Recognized net actuarial loss
|
303 | 15 | 187 | 28 | 217 | 218 | ||||||||||||||||||
|
Curtailment loss
|
- | - | - | 97 | - | - | ||||||||||||||||||
|
Net periodic benefit cost
|
$ | 2,482 | $ | 1,778 | $ | 2,022 | $ | 822 | $ | 1,101 | $ | 1,144 | ||||||||||||
|
Other Changes in Plan Assets and
|
||||||||||||||||||||||||
|
Benefit Obligations Recognized in Other
|
||||||||||||||||||||||||
|
Comprehensive Income (on a pre-tax basis):
|
||||||||||||||||||||||||
|
Net (gain) loss
|
$ | (3,949 | ) | $ | 12,160 | $ | (3,735 | ) | $ | (133 | ) | $ | (605 | ) | $ | (468 | ) | |||||||
|
Prior service cost (credit)
|
33 | 41 | 33 | (27 | ) | (78 | ) | (63 | ) | |||||||||||||||
|
Net transition asset
|
– | 1 | 6 | – | – | – | ||||||||||||||||||
|
Curtailment loss
|
– | (406 | ) | |||||||||||||||||||||
|
Recognized in other comprehensive income
|
$ | (3,916 | ) | $ | 12,202 | $ | (3,696 | ) | $ | (566 | ) | $ | (683 | ) | $ | (531 | ) | |||||||
|
Total recognized in net periodic benefit
|
||||||||||||||||||||||||
|
cost and other comprehensive income
|
$ | (1,434 | ) | $ | 13,980 | $ | (1,674 | ) | $ | 256 | $ | 418 | $ | 613 | ||||||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The estimated prior service credit and net loss for the qualified pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2010 are $(33) thousand and $320 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 2010 are $8 thousand and $19 thousand, respectively.
Assumptions:
The measurement date and weighted-average assumptions used to determine benefit obligations at December 31, 2009 and 2008 were as follows:
|
Qualified Pension Plan
|
Non-Qualified Retirement Plans
|
|||
|
2009
|
2008
|
2009
|
2008
|
|
|
Measurement date
|
Dec. 31, 2009
|
Dec. 31, 2008
|
Dec. 31, 2009
|
Dec. 31, 2008
|
|
Discount rate
|
6.00%
|
5.875%
|
5.50%
|
6.25%
|
|
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, 2009, 2008 and 2007 were as follows:
|
Qualified Pension Plan
|
Non-Qualified Retirement Plans
|
|||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|
|
Measurement date
|
Dec. 31, 2008
|
Sept. 30, 2007
|
Sept. 30, 2006
|
Dec. 31, 2008
|
Sept. 30, 2007
|
Sept. 30, 2006
|
|
Discount rate
|
5.875%
|
6.25%
|
5.90%
|
6.125%
|
6.25%
|
5.90%
|
|
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 December 31, 2008, the measurement date used in the determination of net periodic benefit cost for 2009, the Corporation determined that a revision to the assumption was not necessary based upon expected market performance and the expected long-term rate of return assumption remained at 8.25%.
The discount rate assumption for defined benefit pension plans is reset annually. For measurement dates prior to December 31, 2008, the Corporation’s discount rate was based on the published yield index for “AA” long-term corporate bonds. Beginning with measurement date
December 31, 2008, the Corporation utilized the Citigroup Pension Discount Curve and Liability Index to identify the discount rates for defined benefit plan obligations. A discount rate is selected for each plan by matching expected future benefit payments stream to the Citigroup Pension Discount Curve and Liability Index as of the measurement date.
Plan Assets:
Effective December 31, 2009, the Corporation adopted FASB Staff Position No. 132(R)-1, “Employer’ Disclosures Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”). FSP No. 132(R)-1 is now a sub-topic within ASC 715, “Compensation – Retirement
Benefits.” FSP No. 132(R)-1 provided guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosures required are included below.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The following table presents the fair values of the qualified pension plan’s assets at December 31, 2009:
|
(Dollars in thousands)
|
||||||||||||||||
|
Fair Value Measurements Using
|
Assets at
|
|||||||||||||||
|
December 31, 2009
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 1,284 | $ | – | $ | – | $ | 1,284 | ||||||||
|
Obligations of U.S. government agencies
|
||||||||||||||||
|
and U.S. government-sponsored enterprises
|
– | 2,214 | – | 2,214 | ||||||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
– | 1 | – | 1 | ||||||||||||
|
Corporate bonds
|
– | 8,937 | – | 8,937 | ||||||||||||
|
Common stocks
|
12,198 | – | – | 12,198 | ||||||||||||
|
Mutual funds
|
6,312 | – | – | 6,312 | ||||||||||||
|
Total plan assets
|
$ | 19,794 | $ | 11,152 | $ | – | $ | 30,946 | ||||||||
The following table presents the fair values of the qualified pension plan’s assets at December 31, 2008:
|
(Dollars in thousands)
|
||||||||||||||||
|
Fair Value Measurements Using
|
Assets at
|
|||||||||||||||
|
December 31, 2008
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 2,763 | $ | – | $ | – | $ | 2,763 | ||||||||
|
Obligations of U.S. government agencies
|
||||||||||||||||
|
and U.S. government-sponsored enterprises
|
– | 1,083 | – | 1,083 | ||||||||||||
|
Mortgage-backed securities issued by U.S. government
|
||||||||||||||||
|
agencies and U.S. government-sponsored enterprises
|
– | 1 | – | 1 | ||||||||||||
|
Corporate bonds
|
– | 7,891 | – | 7,891 | ||||||||||||
|
Common stocks
|
8,252 | – | – | 8,252 | ||||||||||||
|
Mutual funds
|
4,537 | – | – | 4,537 | ||||||||||||
|
Total plan assets
|
$ | 15,552 | $ | 8,975 | $ | – | $ | 24,527 | ||||||||
The qualified pension plan uses fair value measurements to record fair value adjustments to the securities held in its investment portfolio.
When available, the qualified pension plan uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes cash equivalents, common stock and mutual funds which are exchange-traded.
Level 2 securities in the qualified pension plan include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose values are determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by
observable market data. This category includes corporate bonds, obligations of U.S. government agencies and U.S. government-sponsored enterprises and mortgage backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of December 31, 2009 and 2008, the qualified pension plan did not have any securities in the Level 3 category.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The asset allocations of the qualified pension plan at December 31, 2009 and 2008, by asset category were as follows:
|
December 31,
|
2009
|
2008
|
||||||
|
Asset Category:
|
||||||||
|
Equity securities
|
59.8 | % | 52.1 | % | ||||
|
Debt securities
|
36.0 | % | 36.6 | % | ||||
|
Other
|
4.2 | % | 11.3 | % | ||||
|
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 benefit payments and maintain a funded status that exceeds the regulatory requirements for tax-qualified defined benefit plans.
The investment philosophy used for the Pension Trust emphasizes consistency of results over an extended market cycle, while reducing the impact of the volatility of the security markets upon investment results. The assets of the Pension Trust should be protected by substantial diversification of investments,
providing exposure to a wide range of quality investment opportunities in various asset classes.
The investment objective with respect to the Pension Trust assets is to provide capital appreciation with a current income component. At any time, the portfolio will typically be invested in the following ranges: 50% to 70% in equities; 30% to 50% in fixed income; and 0% to 10% in cash and
cash equivalents. The trustee investment manager will have authorization to invest within these ranges, making decisions based upon market conditions.
At December 31, 2008, the holdings in the Other category, primarily cash equivalents (short-term investments), represented 11.3% of total assets versus the 0-10% target range in response to the unprecedented market volatility and illiquid conditions in the fixed income market during the final quarter of
2008. At December 31, 2009, the balance of holdings in the Other category was within the target range.
Fixed income bond investments should be limited to those in the top four categories used by the major credit rating agencies.
High yield bond funds may be used to provide exposure to this asset class as a diversification tool provided they do not exceed
15% of the portfolio. In order to reduce the volatility of the annual rate of return of the bond portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts. The assets of the Pension Trust will typically have a laddered maturity structure, avoiding large concentrations in any single year. Common stock and equity holdings provide opportunities for dividend and capital appreciation returns. Holdings
will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities. Concentration in small-cap, mid-cap and international equities is limited to 20%, 20% and 30% of the equity portfolio, respectively. Investment selection and mix of equity holdings should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification. The
fair value of equity securities of any one issuer will not be permitted to exceed 10% of the total fair value of equity holdings of the Pension Trust. Investments in publicly traded real estate investment trust securities and low-risk derivatives securities such as callable securities, floating rate notes, mortgage backed securities and treasury inflation protected securities, are permitted.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
Cash Flows:
Contributions
The Internal Revenue Code permits flexibility in plan contributions so that normally a range of contributions is possible. The Corporation’s current funding policy has been generally to contribute the minimum required contribution and additional amounts up to the maximum deductible contribution. The
Corporation expects to contribute $2.0 million to the qualified pension plan in 2010. In addition, the Corporation expects to contribute $676 thousand in benefit payments to the non-qualified retirement plans in 2010.
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
|
||||||
|
2010
|
$ | 1,278 | $ | 667 | ||||
|
2011
|
1,425 | 727 | ||||||
|
2012
|
1,544 | 727 | ||||||
|
2013
|
1,808 | 734 | ||||||
|
2014
|
1,948 | 735 | ||||||
|
Years 2015 - 2019
|
12,209 | 3,732 | ||||||
401(k) Plan
The Corporation’s 401(k) Plan provides a specified match of employee contributions for substantially all employees. In addition, substantially all employees hired after September 30, 2007, who are ineligible for participation in the qualified defined benefit pension plan, will receive a
non-elective employer contribution of 4%. Total employer matching contributions under this plan amounted to $837 thousand, $749 thousand and $685 thousand in 2009, 2008 and 2007, respectively.
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 $6.3 million, $7.1 million and $7.6 million in 2009, 2008 and 2007, respectively. In general, the terms of incentive plans are subject to annual renewal and may be terminated at any time by the Board of Directors.
Deferred Compensation Plan
The Amended and Restated Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The assets and liabilities of the Deferred Compensation
Plan are recorded at fair value in the Corporation’s Consolidated Balance Sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $4.7 million and $3.3 million at December 31, 2009 and 2008, respectively, and is included in other liabilities on the accompanying Consolidated Balance Sheets. The corresponding invested assets are reported in other assets.
(16) Share-Based Compensation Arrangements
Washington Trust has two share-based compensation plans, which are described below.
In 2009, the Bancorp’s 2003 Stock Incentive Plan (the “2003 Plan”) was amended and restated and was also approved by shareholders in April 2009. The 2003 Plan amendments included increasing the maximum number of shares of Bancorp’s common stock to be issued under the 2003 Plan
from 600,000 shares to 1,200,000 shares and increasing the number of shares that can be issued in the form of awards other than share options or stock
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which was shareholder approved, provided for the granting of share options and other equity incentives to key employees, directors, advisors, and consultants. The 1997 Plan permitted share options and other equity
incentives to be granted at any time until April 29, 2007. The 1997 Plan provided for shares of the Bancorp’s common stock to be used from authorized but unissued shares, treasury stock, shares reacquired by the Corporation, or shares available from expired or terminated awards. Share options are designated as either non-qualified or incentive share options.
The 1997 Plan and the 2003 Plan (collectively, “the Plans”) permit options to be granted with stock appreciation rights ("SARs"), however, no share options have been granted with SARs. Pursuant to the Plans, the exercise price of each share option may not be less than fair market value
of the Bancorp’s common stock on the date of the grant. In general, the share option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof. The fair value of share options on the date of grant is estimated using the Black-Scholes Option-Pricing Model. Nonvested share units and shares are valued at the fair market value of the Bancorp’s common stock as of the award date. Vesting of share
option and share awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death (as defined in the Plans).
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,
|
2009
|
2008
|
2007
|
|||||||||
|
Share-based compensation expense
|
$ | 708 | $ | 630 | $ | 508 | ||||||
|
Related income tax benefit
|
$ | 252 | $ | 225 | $ | 178 | ||||||
During 2009, the Corporation granted to certain key employees 21,000 non-qualified share options with five-year cliff vesting terms. During 2008, the Corporation granted to certain key employees 94,382 non-qualified share options with three-year cliff vesting terms. No share options were
awarded during 2007.
The fair value of the share option awards granted in 2009 and 2008 were estimated on the date of grant using the Black-Scholes Option-Pricing Model based on assumptions noted in the following table. Washington Trust uses historical data to estimate share option exercise and employee departure behavior
used in the option-pricing model; groups of employees that have similar historical behavior are considered separately for valuation purposes. The expected term of options granted was derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. Expected volatility was based on historical volatility of Washington Trust shares. The risk-free rate for periods within the contractual life of the share option
was based on the U.S. Treasury yield curve in effect at the date of grant.
|
2009
|
2008
|
|||||||
|
Expected term (years)
|
6.7 | 9.0 | ||||||
|
Expected dividend yield
|
3.05 | % | 2.86 | % | ||||
|
Weighted average expected volatility
|
44.26 | 33.75 | ||||||
|
Expected forfeiture rate
|
– | – | ||||||
|
Weighted average risk-free interest rate
|
3.28 | % | 4.51 | % | ||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The weighted average grant-date fair value of the share options awarded during 2009 and 2008 was $6.39 and $7.96, respectively.
A summary of share option activity under the Plans as of December 31, 2009, and changes during the year ended December 31, 2009, 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, 2009
|
987,418 | $ | 21.60 | – | – | |||||||||||
|
Granted
|
21,000 | 17.91 | – | – | ||||||||||||
|
Exercised
|
64,648 | 16.79 | – | – | ||||||||||||
|
Forfeited or expired
|
42,211 | 19.12 | – | – | ||||||||||||
|
Outstanding at December 31, 2009
|
901,559 | $ | 21.98 |
3.9 years
|
$ | 24 | ||||||||||
|
Exercisable at December 31, 2009
|
786,177 | $ | 21.87 |
3.2 years
|
$ | 24 | ||||||||||
|
Options expected to vest as of December 31, 2009
|
115,382 | $ | 22.70 |
8.7 years
|
$ | – | ||||||||||
The total intrinsic value, which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date, of share options exercised during the years ended December 31, 2009, 2008 and 2007 was $115 thousand, $431 thousand and $1.3 million,
respectively.
During 2009, the Corporation granted to directors and certain key employees 7,000 nonvested share units with five-year cliff vesting terms. During 2008, the Corporation granted to directors and certain key employees 34,407 nonvested share units with three-year cliff vesting terms.
A summary of the status of Washington Trust’s nonvested shares as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
|
Weighted
|
||||||||
|
Number
|
Average
|
|||||||
|
of
|
Grant Date
|
|||||||
|
Shares
|
Fair Value
|
|||||||
|
Nonvested at January 1, 2009
|
57,557 | $ | 24.97 | |||||
|
Granted
|
7,000 | 17.91 | ||||||
|
Vested
|
(18,108 | ) | 26.41 | |||||
|
Forfeited
|
(2,842 | ) | 24.14 | |||||
|
Nonvested at December 31, 2009
|
43,607 | $ | 23.30 | |||||
During 2008, performance share awards were granted providing certain executives the opportunity to earn shares of common stock of the Corporation, the number of which is determined pursuant to, and subject to the attainment of, performance goals during a specified measurement period. The performance
share awards were granted with vesting terms ranging from two to three years. The number of shares to be earned ranges from zero to 24,186 shares, subject to the attainment of specified performance goals discussed below.
The performance share awards are valued at $24.12, which was the fair market value at the date of grant. The number of shares awarded ranges from zero to 200% of the target number of shares (12,093 shares) dependent upon the Corporation’s core return on equity and core earnings per share growth
ranking at the end of the vesting term.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
The current assumption based on the most recent peer group information results in the shares vesting at 116% of the target, or 14,005 shares. The Corporation has recognized compensation expense based on this assumption and will make the necessary adjustments each time the percentage of the target shares
is adjusted. If the goals are not met, no compensation cost will be recognized and any recognized compensation costs will be reversed.
A summary of the status of Washington Trust’s performance share awards as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
|
Weighted
|
||||||||
|
Number
|
Average
|
|||||||
|
of
|
Grant Date
|
|||||||
|
Shares
|
Fair Value
|
|||||||
|
Performance shares at January 1, 2009
|
16,930 | $ | 24.12 | |||||
|
Granted
|
– | – | ||||||
|
Vested
|
(3,132 | ) | 24.12 | |||||
|
Forfeited
|
(6,566 | ) | 24.12 | |||||
|
Performance shares at December 31, 2009
|
7,232 | $ | 24.12 | |||||
As of December 31, 2009, there was $1.0 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share options, nonvested share awards and performance share awards) granted under the Plans. That cost is expected to be recognized
over a weighted average period of 2.2 years.
(17) Business Segments
Washington Trust segregates financial information in assessing its results among two operating segments: Commercial Banking and Wealth Management Services. The amounts in the Corporate column include activity not related to the segments, such as the investment securities portfolio, wholesale funding
activities and administrative units. The Corporate column is not considered to be an operating segment. The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. The following table presents the statement of operations and total assets for Washington Trust’s reportable segments.
|
(Dollars in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year ended December 31, 2009
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net interest income (expense)
|
$ | 64,627 | $ | (76 | ) | $ | 1,341 | $ | 65,892 | |||||||
|
Noninterest income (expense)
|
19,160 | 23,786 | (728 | ) | 42,218 | |||||||||||
|
Total income
|
83,787 | 23,710 | 613 | 108,110 | ||||||||||||
|
Provision for loan losses
|
8,500 | – | – | 8,500 | ||||||||||||
|
Depreciation and amortization expense
|
2,495 | 1,669 | 158 | 4,322 | ||||||||||||
|
Other noninterest expenses
|
46,447 | 17,324 | 9,075 | 72,846 | ||||||||||||
|
Total noninterest expenses
|
57,442 | 18,993 | 9,233 | 85,668 | ||||||||||||
|
Income (loss) before income taxes
|
26,345 | 4,717 | (8,620 | ) | 22,442 | |||||||||||
|
Income tax expense (benefit)
|
9,307 | 1,715 | (4,676 | ) | 6,346 | |||||||||||
|
Net income (loss)
|
$ | 17,038 | $ | 3,002 | $ | (3,944 | ) | $ | 16,096 | |||||||
|
Total assets at period end
|
$ | 2,017,616 | $ | 51,742 | $ | 815,115 | $ | 2,884,473 | ||||||||
|
Expenditures for long-lived assets
|
$ | 4,307 | $ | 957 | $ | 271 | $ | 5,535 | ||||||||
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
|
(Dollars in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year ended December 31, 2008
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net interest income (expense)
|
$ | 62,651 | $ | (27 | ) | $ | 2,889 | $ | 65,513 | |||||||
|
Noninterest income (expense)
|
14,457 | 28,273 | (2,210 | ) | 40,520 | |||||||||||
|
Total income
|
77,108 | 28,246 | 679 | 106,033 | ||||||||||||
|
Provision for loan losses
|
4,800 | – | – | 4,800 | ||||||||||||
|
Depreciation and amortization expense
|
2,506 | 1,640 | 178 | 4,324 | ||||||||||||
|
Other noninterest expenses
|
40,340 | 18,456 | 8,622 | 67,418 | ||||||||||||
|
Total noninterest expenses
|
47,646 | 20,096 | 8,800 | 76,542 | ||||||||||||
|
Income (loss) before income taxes
|
29,462 | 8,150 | (8,121 | ) | 29,491 | |||||||||||
|
Income tax expense (benefit)
|
10,309 | 3,237 | (6,227 | ) | 7,319 | |||||||||||
|
Net income (loss)
|
$ | 19,153 | $ | 4,913 | $ | (1,894 | ) | $ | 22,172 | |||||||
|
Total assets at period end
|
$ | 1,895,436 | $ | 53,096 | $ | 1,016,934 | $ | 2,965,466 | ||||||||
|
Expenditures for long-lived assets
|
$ | 3,596 | $ | 389 | $ | 198 | $ | 4,183 | ||||||||
|
(Dollars in thousands)
|
Wealth
|
|||||||||||||||
|
Commercial
|
Management
|
Consolidated
|
||||||||||||||
|
Year ended December 31, 2007
|
Banking
|
Services
|
Corporate
|
Total
|
||||||||||||
|
Net interest income (expense)
|
$ | 53,927 | $ | (61 | ) | $ | 6,078 | $ | 59,944 | |||||||
|
Noninterest income
|
14,263 | 29,016 | 2,230 | 45,509 | ||||||||||||
|
Total income
|
68,190 | 28,955 | 8,308 | 105,453 | ||||||||||||
|
Provision for loan losses
|
1,900 | – | – | 1,900 | ||||||||||||
|
Depreciation and amortization expense
|
2,454 | 1,703 | 177 | 4,334 | ||||||||||||
|
Other noninterest expenses
|
37,530 | 17,942 | 9,100 | 64,572 | ||||||||||||
|
Total noninterest expenses
|
41,884 | 19,645 | 9,277 | 70,806 | ||||||||||||
|
Income (loss) before income taxes
|
26,306 | 9,310 | (969 | ) | 34,647 | |||||||||||
|
Income tax expense (benefit)
|
9,234 | 3,601 | (1,988 | ) | 10,847 | |||||||||||
|
Net income
|
$ | 17,072 | $ | 5,709 | $ | 1,019 | $ | 23,800 | ||||||||
|
Total assets at period end
|
$ | 1,643,200 | $ | 46,163 | $ | 850,577 | $ | 2,539,940 | ||||||||
|
Expenditures for long-lived assets
|
$ | 3,658 | $ | 264 | $ | 200 | $ | 4,122 | ||||||||
Management uses certain methodologies to allocate income and expenses to the business lines. A funds transfer pricing methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. Certain
indirect expenses are allocated to segments. These include support unit expenses such as technology and processing operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown.
Commercial Banking
The Commercial Banking segment includes commercial, commercial real estate, residential and consumer lending activities; mortgage banking, secondary market and loan servicing activities; deposit generation; merchant credit card services; cash management activities; and direct banking activities, which include
the operation of ATMs, telephone and internet banking services and customer support and sales.
Wealth Management Services
Wealth Management Services includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; institutional trust
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
services, including services as trustee for pension and profit sharing plans; and other financial planning and advisory services.
Corporate
Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from BOLI as well as administrative and executive expenses not allocated to the business lines and the residual impact of methodology allocations
such as funds transfer pricing offsets.
Included in the Corporate column above were income tax benefits of $1.4 million recognized in 2008 resulting from a change in state corporate income tax legislation and the resolution of certain state tax positions.
(18) Earnings per Share
|
(Dollars in thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
|||||||||||||||||||
|
Net income
|
$ | 16,096 | $ | 16,096 | $ | 22,172 | $ | 22,172 | $ | 23,800 | $ | 23,800 | ||||||||||||
|
Share amounts, in thousands:
|
||||||||||||||||||||||||
|
Average outstanding
|
15,994.9 | 15,994.9 | 13,981.9 | 13,981.9 | 13,355.5 | 13,355.5 | ||||||||||||||||||
|
Common stock equivalents
|
– | 46.0 | – | 164.4 | – | 248.6 | ||||||||||||||||||
|
Weighted average outstanding
|
15,994.9 | 16,040.9 | 13,981.9 | 14,146.3 | 13,355.5 | 13,604.1 | ||||||||||||||||||
|
Earnings per share
|
$ | 1.01 | $ | 1.00 | $ | 1.59 | $ | 1.57 | $ | 1.78 | $ | 1.75 | ||||||||||||
Weighted average stock options outstanding, not included in common stock equivalents above because they were anti-dilutive, totaled 846 thousand, 325 thousand and 283 thousand for 2009, 2008 and 2007, respectively.
(19) Litigation
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the
consolidated financial position or results of operations of the Corporation.
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
(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,
|
|||||||
|
except par value)
|
||||||||
|
December 31,
|
2009
|
2008
|
||||||
|
Assets:
|
||||||||
|
Cash on deposit with bank subsidiary
|
$ | 559 | $ | 803 | ||||
|
Interest-bearing balances due from banks
|
610 | – | ||||||
|
Investment in subsidiaries at equity value
|
286,785 | 270,076 | ||||||
|
Dividends receivable from subsidiaries
|
3,600 | 3,480 | ||||||
|
Other assets
|
341 | 395 | ||||||
|
Total assets
|
$ | 291,895 | $ | 274,754 | ||||
|
Liabilities:
|
||||||||
|
Junior subordinated debentures
|
$ | 32,991 | $ | 32,991 | ||||
|
Deferred acquisition obligations
|
– | 2,506 | ||||||
|
Dividends payable
|
3,369 | 3,351 | ||||||
|
Accrued expenses and other liabilities
|
589 | 795 | ||||||
|
Total liabilities
|
36,949 | 39,643 | ||||||
|
Shareholders’ Equity:
|
||||||||
|
Common stock of $.0625 par value; authorized 30,000,000 shares;
|
||||||||
|
issued 16,061,748 shares in 2009 and 16,018,868 shares in 2008
|
1,004 | 1,001 | ||||||
|
Paid-in capital
|
82,592 | 82,095 | ||||||
|
Retained earnings
|
168,514 | 164,679 | ||||||
|
Accumulated other comprehensive income (loss)
|
3,337 | (10,458 | ) | |||||
|
Treasury stock, at cost; 19,185 shares in 2009 and 84,191 shares in 2008
|
(501 | ) | (2,206 | ) | ||||
|
Total shareholders’ equity
|
254,946 | 235,111 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 291,895 | $ | 274,754 | ||||
|
Statements of Income
|
(Dollars in thousands)
|
|||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Income:
|
||||||||||||
|
Dividends from subsidiaries
|
$ | 16,760 | $ | 26,259 | $ | 21,093 | ||||||
|
Net gains (losses) on interest rate swap contracts
|
117 | (638 | ) | – | ||||||||
|
Other income
|
1 | 71 | – | |||||||||
|
Total income
|
16,878 | 25,692 | 21,093 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest on junior subordinated debentures
|
1,947 | 1,879 | 1,352 | |||||||||
|
Interest on deferred acquisition obligations
|
3 | 217 | 312 | |||||||||
|
Legal and professional fees
|
291 | 309 | 187 | |||||||||
|
Other
|
280 | 236 | 173 | |||||||||
|
Total expenses
|
2,521 | 2,641 | 2,024 | |||||||||
|
Income before income taxes
|
14,357 | 23,051 | 19,069 | |||||||||
|
Income tax benefit
|
820 | 1,104 | 691 | |||||||||
|
Income before equity in undistributed earnings of subsidiaries
|
15,177 | 24,155 | 19,760 | |||||||||
|
Equity in undistributed (over-distributed) earnings of subsidiaries
|
919 | (1,983 | ) | 4,040 | ||||||||
|
Net income
|
$ | 16,096 | $ | 22,172 | $ | 23,800 | ||||||
-122-
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
December 31, 2009 and 2008
|
|
Statements of Cash Flows
|
(Dollars in thousands)
|
|||||||||||
|
Years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Cash flow from operating activities:
|
||||||||||||
|
Net income
|
$ | 16,096 | $ | 22,172 | $ | 23,800 | ||||||
|
Adjustments to reconcile net income
|
||||||||||||
|
to net cash provided by operating activities:
|
||||||||||||
|
Equity in (undistributed) over-distributed earnings of subsidiary
|
(919 | ) | 1,983 | (4,040 | ) | |||||||
|
Net (gains) losses on interest rate swap contracts
|
(117 | ) | 638 | – | ||||||||
|
(Increase) decrease in dividend receivable
|
(120 | ) | (1,200 | ) | 2,520 | |||||||
|
Decrease (increase) in other assets
|
42 | (37 | ) | (8 | ) | |||||||
|
(Decrease) increase in accrued expenses and other liabilities
|
(112 | ) | 187 | 350 | ||||||||
|
Other, net
|
(52 | ) | (320 | ) | (375 | ) | ||||||
|
Net cash provided by operating activities
|
14,818 | 23,423 | 22,247 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Equity investment in subsidiary bank
|
– | (56,425 | ) | – | ||||||||
|
Equity investment in capital trust
|
– | (310 | ) | – | ||||||||
|
Payment of deferred acquisition obligation
|
(2,509 | ) | (15,159 | ) | (6,720 | ) | ||||||
|
Net cash used in investing activities
|
(2,509 | ) | (71,894 | ) | (6,720 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Issuance (purchase) of treasury stock, including net deferred compensation plan activity
|
53 | 36 | (5,200 | ) | ||||||||
|
Proceeds from the issuance of common stock under dividend reinvestment plan
|
1,106 | 864 | – | |||||||||
|
Proceeds from the issuance of common stock, net
|
– | 46,874 | – | |||||||||
|
Proceeds from the exercise of stock options and issuance of other equity instruments
|
364 | 182 | 1,052 | |||||||||
|
Tax (expense) benefit from stock option exercises and issuance of other
|
||||||||||||
|
equity instruments
|
(26 | ) | 199 | 727 | ||||||||
|
Proceeds from the issuance of junior subordinated debentures, net of issuance costs
|
– | 10,016 | – | |||||||||
|
Cash dividends paid
|
(13,440 | ) | (10,998 | ) | (10,580 | ) | ||||||
|
Net cash (used in) provided by financing activities
|
(11,943 | ) | 47,173 | (14,001 | ) | |||||||
|
Net increase (decrease) in cash
|
366 | (1,298 | ) | 1,526 | ||||||||
|
Cash at beginning of year
|
803 | 2,101 | 575 | |||||||||
|
Cash at end of year
|
$ | 1,169 | $ | 803 | $ | 2,101 | ||||||
None.
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, of the effectiveness of the Corporation’s
disclosure controls and procedures as of the end of the period ended December 31, 2009. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.
Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
The information required by this Item appears under the captions “Nominee and Director Information,” “Board of Directors and Committees – Audit Committee,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Bancorp’s
Proxy Statement dated March 11, 2010 prepared for the Annual Meeting of Shareholders to be held April 27, 2010, which is incorporated herein by reference.
The Corporation maintains a code of ethics that applies to all of the Corporation’s directors, officers and employees, including the Corporation’s principal executive officer, principal financial officer and principal accounting officer. This code of ethics is available on the Corporation’s
website at www.washtrust.com, under the heading Investor Relations. The Corporation intends to disclose any amendments to, or waivers from, our code of ethics that are required to be publicly disclosed pursuant to the rules of the SEC and the NASDAQ Global Select Market by filing such amendment or waiver with the SEC and by posting it on our website.
The information required by this Item appears under the captions “Compensation Discussion and Analysis,” “Directors Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”
in the Bancorp’s Proxy Statement dated March 11, 2010 prepared for the Annual Meeting of Shareholders to be held April 27, 2010, 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 11, 2010 prepared for the Annual Meeting of Shareholders to be held April 27, 2010,
which is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2009 regarding shares of common stock of the Bancorp that may be issued under our existing equity compensation plans, including the 1997 Plan, the 2003 Plan and the Amended and Restated Nonqualified Deferred Compensation Plan (the “Deferred
Compensation Plan”).
|
Equity Compensation Plan Information
|
|||
|
Plan category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)
|
Weighted average exercise price of outstanding options, warrants and rights
|
Number of securities remaining available for future issuance under equity compensation plan (excluding securities referenced in column (a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity compensation plans
approved by security holders (2)
|
1,041,741 (3) (4)
|
$21.97 (5)
|
660,575 (4) (6)
|
|
Equity compensation plans not
approved by security holders (7)
|
21,077
|
N/A (8)
|
N/A
|
|
Total
|
1,062,818
|
$21.97 (5) (8)
|
660,575
|
|
(1)
|
Does not include any nonvested shares as such shares are already reflected in the Bancorp’s outstanding shares.
|
|
(2)
|
Consists of the 1997 Plan and the 2003 Plan.
|
|
(3)
|
Includes 51,819 nonvested share units outstanding under the 1997 Plan and 52,157 nonvested share units and 24,186 performance shares outstanding under the 2003 Plan.
|
|
(4)
|
Includes the maximum amount of performance shares that could be issued under existing awards. The actual shares issued may differ based on the attainment of performance goals.
|
|
(5)
|
Does not include the effect of the nonvested share units awarded under the 1997 Plan and the 2003 Plan because these units do not have an exercise price.
|
|
(6)
|
Includes up to 660,575 securities that may be issued in the form of nonvested shares.
|
|
(7)
|
Consists of the Deferred Compensation Plan, which is described below.
|
|
(8)
|
Does not include information about the phantom stock units outstanding under the Deferred Compensation Plan, as such units do not have any exercise price.
|
The Deferred Compensation Plan
The Deferred Compensation Plan has not been approved by our shareholders.
The Deferred Compensation Plan allows our directors and officers to defer a portion of their compensation. The deferred compensation is contributed to a rabbi trust. The trustee of the rabbi trust invests the assets of the trust in shares of selected mutual funds as well as shares of
the Bancorp’s common stock. All shares of the Bancorp’s common stock were purchased in the open market. As of October 15, 2007, the Bancorp’s common stock was no longer available as a new benchmark investment under the plan. Further, directors and officers who had selected Bancorp’s common stock as a benchmark investment (the “Bancorp Stock Fund”) were allowed to transfer from that fund during a transition period that ended March 14,
2009. After March 14, 2009, directors and officers were no longer allowed to make transfers from the Bancorp Stock Fund and any distributions will be made in whole shares of Bancorp’s common stock to the extent of the benchmark investment election in the Bancorp Stock Fund.
The Deferred Compensation Plan was included as part of Exhibit 10.1 to the Bancorp’s Form S-8 Registration Statement (File No. 333-146388) filed with the SEC on September 28, 2007.
The information required by this Item is incorporated herein by reference to the captions “Indebtedness and Other Transactions,” “Policies and Procedures for Related Party Transactions” and “Board of Directors and Committees – Director Independence” in the Bancorp’s
Proxy Statement dated March 11, 2010 prepared for the Annual Meeting of Shareholders to be held April 27, 2010.
The information required by this Item is incorporated herein by reference to the caption “Independent Auditors” in the Bancorp’s Proxy Statement dated March 11, 2010 prepared for the Annual Meeting of Shareholders to be held April 27, 2010.
|
(a)
|
1. |
Financial Statements. The financial statements of the Corporation required in response to this Item are listed in response to Part II, Item 8 of this Annual Report on Form 10-K.
|
|
|
2. |
Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-X and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto.
|
|
|
3. |
Exhibits. The following exhibits are included as part of this Form 10-K.
|
|
Exhibit Number
|
|
|
2.1
|
Stock Purchase Agreement, dated March 18, 2005, by and between Washington Trust Bancorp, Inc., Weston Financial Group, Inc., and the shareholders of Weston Financial Group, Inc. – Filed as Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-13091), as filed with the
Securities and Exchange Commission on March 22, 2005.
(1)
|
|
2.2
|
Amendment to Stock Purchase Agreement, dated December 24, 2008, by and between Washington Trust Bancorp, Inc., Weston Financial Group, Inc., and the shareholders of Weston Financial Group, Inc. – Filed as Exhibit 2.2 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the
fiscal year ended December 31, 2008.
(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 3.1 to the Registrant’s Current Report on Form 8-K dated September 20, 2007.
(1)
|
|
4.1
|
Transfer Agency and Registrar Services Agreement, between Registrant and American Stock Transfer & Trust Company, dated February 15, 2006 – Filed as Exhibit 4.1 on the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006.
(1)
|
|
4.2
|
Agreement of Substitution and Amendment of Amended and Restated Rights Agreement, between Registrant and American Stock Transfer & Trust Company, dated February 15, 2006 – Filed as Exhibit 4.2 on the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2006.
(1)
|
|
4.3
|
Shareholder Rights Agreement, dated as of August 17, 2006, between Washington Trust Bancorp, Inc. and American Stock Transfer & Trust Company, as Rights Agent – Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated August 17, 2006.
(1)
|
|
10.1
|
Vote of the Board of Directors of the Registrant, which constitutes the 1996 Directors’ Stock Plan – Filed as Exhibit 10.e to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2002.
(1)
(2)
|
|
10.2
|
The Registrant’s 1997 Equity Incentive Plan – Filed as Exhibit 10.f to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2002.
(1)
(2)
|
|
10.3
|
Amendment to the Registrant’s 1997 Equity Incentive Plan – Filed as Exhibit 10.b to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the quarterly period ended June 30, 2000.
(1) (2)
|
|
10.4
|
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)
|
|
10.5
|
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)
|
|
10.6
|
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)
|
|
10.7
|
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)
|
|
10.8
|
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)
|
|
10.9
|
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)
|
|
10.10
|
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)
|
|
10.11
|
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)
|
|
10.12
|
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)
|
|
10.13
|
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)
|
|
10.14
|
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)
|
|
10.15
|
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)
|
|
10.16
|
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)
|
|
10.17
|
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)
|
|
10.18
|
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)
|
|
10.19
|
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)
|
|
10.20
|
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)
|
|
10.21
|
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)
|
|
10.22
|
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)
|
|
10.23
|
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)
|
|
10.24
|
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)
|
|
10.25
|
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)
|
|
10.26
|
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)
|
|
10.27
|
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)
|
|
10.28
|
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)
|
|
10.29
|
Amended and Restated Nonqualified Deferred Compensation Plan – Filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-146388) filed with the Securities and Exchange Commission on September 28, 2007.
(1)
(2)
|
|
10.30
|
Wealth Management Business Building Incentive Plan – Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the quarterly period ended March 31, 2007.
(1)
(2)
|
|
10.31
|
Amended and Restated Supplemental Pension Benefit and Profit Sharing Plan – Filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2007.
(1)
(2)
|
|
10.32
|
Amended and Restated Supplemental Executive Retirement Plan – Filed as Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2007.
(1)
(2)
|
|
10.33
|
Form of Executive Severance Agreement – Filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2007.
(1)
(2)
|
|
10.34
|
Amended and Restated Declaration of Trust of Washington Preferred Capital Trust dated April 7, 2008, by and among Wilmington Trust Company, as Delaware Trustee and Institutional Trustee, Washington Trust Bancorp, Inc., as sponsor, and the Administrators listed therein – Filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.35
|
Indenture dated as of April 7, 2008, between Washington Trust Bancorp, Inc., as Issuer, and Wilmington Trust Company, as Trustee – Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.36
|
Guarantee Agreement dated April 7, 2008, by and between Washington Trust Bancorp, Inc. and Wilmington Trust Company – Filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.37
|
Certificate Evidencing Floating Rate Capital Securities of Washington Preferred Capital Trust dated April 7, 2008 – Filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.38
|
Floating Rate Junior Subordinated Deferrable Interest Debenture of Washington Trust Bancorp, Inc. dated April 7, 2008 – Filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated April 7, 2008.
(1)
|
|
10.39
|
Form of Deferred Stock Unit Award Agreement under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) – Filed as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the quarterly period ended June 30, 2008.
(1)
(2)
|
|
10.40
|
First Amendment to The Washington Trust Company Nonqualified Deferred Compensation Plan As Amended and Restated– Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-13091) for the quarterly period ended September 30, 2008.
(1)
(2)
|
|
10.41
|
Share Purchase Agreement, dated October 2, 2008, by and among Washington Trust Bancorp, Inc. and the Purchasers – Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 2, 2008.
(1)
|
|
10.42
|
Registration Rights Agreement, dated October 2, 2008, by and among Washington Trust Bancorp, Inc. and the Purchasers – Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated October 2, 2008.
(1)
|
|
10.43
|
Annual Performance Plan, dated December 31, 2008 – Filed as Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2008.
(1) (2)
|
|
10.44
|
Amendment to the Registrant’s Wealth Management Business Building Incentive Plan, dated January 1, 2009 – Filed as Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2008.
(1)
(2)
|
|
10.45
|
2003 Stock Incentive Plan as Amended and Restated - Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 29, 2009.
(1) (2)
|
|
10.46
|
Form of Change in Control Agreement – Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-32991) for the quarterly period ended June 30, 2009.
(1)
(2)
|
|
10.47
|
Compensatory agreement with Joseph J. MarcAurele, dated July 16, 2009 – Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 24, 2009.
(1) (2)
|
|
10.48
|
Change in Control Agreement with Joseph J. MarcAurele, dated September 21, 2009 – Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-32991) for the quarterly period ended September 30, 2009.
(1) (2)
|
|
21.1
|
Subsidiaries of the Registrant – Filed as Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K (File No. 000-13091) for the fiscal year ended December 31, 2008.
(1)
|
|
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 1, 2010
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By
|
/s/
John C. Warren
|
|
John C. Warren
|
||
|
Chairman, Chief Executive Officer and Director
(principal executive officer)
|
||
|
Date: March 1, 2010
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By
|
/s/
David V. Devault
|
|
David V. Devault
Executive Vice President,
|
||
|
Chief Financial Officer and Secretary
|
||
|
(principal financial and principal accounting officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Date: March 1, 2010
|
/s/
Gary P. Bennett
|
|
|
Gary P. Bennett, Director
|
||
|
Date: March 1, 2010
|
/s/
Steven J. Crandall
|
|
|
Steven J. Crandall, Director
|
||
|
Date: March 1, 2010
|
/s/
Barry G. Hittner
|
|
|
Barry G. Hittner, Director
|
||
|
Date: March 1, 2010
|
/s/
Katherine W. Hoxsie
|
|
|
Katherine W. Hoxsie, Director
|
||
|
Date: March 1, 2010
|
/s/
Joseph J. MarcAurele
|
|
|
Joseph J. MarcAurele, Director
|
||
|
Date: March 1, 2010
|
/s/
Edward M. Mazze
|
|
|
Edward M. Mazze, Director
|
||
|
Date: March 1, 2010
|
/s/
Kathleen McKeough
|
|
|
Kathleen McKeough, Director
|
||
|
Date: March 1, 2010
|
/s/ Victor J. Orsinger II
|
|
|
Victor J. Orsinger II, Director
|
|
Date: March 1, 2010
|
/s/
H. Douglas Randall III
|
|
|
H. Douglas Randall, III, Director
|
||
|
Date: March 1, 2010
|
/s/
Patrick J. Shanahan, Jr.
|
|
|
Patrick J. Shanahan, Jr., Director
|
||
|
Date: March 1, 2010
|
/s/
Neil H. Thorp
|
|
|
Neil H. Thorp, Director
|
||
|
Date: March 1, 2010
|
/s/
John F. Treanor
|
|
|
John F. Treanor, Director
|
||
|
Date: March 1, 2010
|
/s/
John C. Warren
|
|
|
John C. Warren, Director
|
||
-131-
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases OfItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules