UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNE 30, 2001 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
-------------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
-------------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
(401) 348-1200
(Registrant's telephone number, including area code)
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 [ ] No
The number of shares of common stock of the registrant outstanding as of July
31, 2001 was 12,053,512.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended June 30, 2001
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000
Condensed Notes to Consolidated Financial Statements
Independent Auditors' Review Report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general national or regional economic conditions, changes in interest rates,
reductions in the market value of trust and investment management assets under
administration, reductions in deposit levels necessitating increased borrowing
to fund loans and investments, changes in the size and nature of the
Corporation's competition, changes in loan default and charge-off rates and
changes in the assumptions used in making such forward-looking statements.
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $21,782 $22,460
Federal funds sold and other short-term investments 17,100 21,400
Mortgage loans held for sale 4,332 1,639
Securities:
Available for sale, at fair value 475,947 386,611
Held to maturity, at cost; fair value $123,626
in 2001 and $125,368 in 2000 122,433 124,915
- --------------------------------------------------------------------------------
Total securities 598,380 511,526
Federal Home Loan Bank stock, at cost 23,491 19,558
Loans 610,023 597,155
Less allowance for loan losses 13,630 13,135
- --------------------------------------------------------------------------------
Net loans 596,393 584,020
Premises and equipment, net 23,163 21,710
Accrued interest receivable 7,678 7,800
Other assets 29,133 27,954
- --------------------------------------------------------------------------------
Total assets $1,321,452 $1,218,067
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $115,643 $113,012
Savings 291,465 259,309
Time 347,251 363,363
- --------------------------------------------------------------------------------
Total deposits 754,359 735,684
Dividends payable 1,571 1,445
Federal Home Loan Bank advances 458,813 377,362
Other borrowings 6,088 3,227
Accrued expenses and other liabilities 8,960 11,163
- --------------------------------------------------------------------------------
Total liabilities 1,229,791 1,128,881
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued
12,043,191 shares in 2001
and 12,006,809 shares in 2000 753 750
Paid-in capital 10,446 10,144
Retained earnings 75,090 74,265
Accumulated other comprehensive income 5,372 4,027
- --------------------------------------------------------------------------------
Total shareholders' equity 91,661 89,186
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,321,452 $1,218,067
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands,
CONSOLIDATED STATEMENTS OF INCOME except per share data)
(Unaudited)
Three Months Six Months
Periods ended June 30, 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $12,659 $12,132 $25,820 $23,781
Interest from securities 8,691 7,898 17,081 15,306
Dividends on corporate stock and Federal Home Loan Bank stock 582 670 1,199 1,341
Interest on federal funds sold and other short-term investments 180 218 383 378
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 22,112 20,918 44,483 40,806
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,386 998 2,754 1,995
Time deposits 4,872 4,778 10,048 9,227
Federal Home Loan Bank advances 6,529 5,772 12,753 11,023
Other 25 41 53 64
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 12,812 11,589 25,608 22,309
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 9,300 9,329 18,875 18,497
Provision for loan losses 150 350 350 700
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,150 8,979 18,525 17,797
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,735 2,805 5,308 5,319
Service charges on deposit accounts 920 806 1,785 1,602
Merchant processing fees 650 536 992 808
Mortgage banking activities 627 259 836 256
Income from bank-owned life insurance 279 134 551 501
Net gains on sales of securities 403 374 408 758
Other income 355 240 678 671
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,969 5,154 10,558 9,915
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,168 5,050 10,359 10,005
Net occupancy 629 630 1,352 1,265
Equipment 809 937 1,634 1,737
Legal, audit and professional fees 524 405 837 883
Merchant processing costs 530 421 800 646
Advertising and promotion 275 348 479 706
Office supplies 164 185 328 358
Litigation settlement - - 4,800 -
Acquisition related expenses - 1,035 - 1,035
Other 1,675 1,422 2,933 2,707
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,774 10,433 23,522 19,342
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,345 3,700 5,561 8,370
Income tax expense 1,545 1,308 1,607 2,546
- ----------------------------------------------------------------------------------------------------------------------
Net income $3,800 $2,392 $3,954 $5,824
- ----------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.32 $.20 $.33 $.49
Diluted earnings per share $.31 $.20 $.32 $.48
Cash dividends declared per share $.13 $.12 $.26 $.24
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Six months ended June 30, Stock Capital Earnings Income (Loss) Stock Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $745 $9,927 $67,686 $(191) $- $78,167
Net income 5,824 5,824
Other comprehensive loss, net of tax:
Net unrealized losses on securities (473) (473)
Reclassification adjustment (758) (758)
------------
Comprehensive income 4,593
Cash dividends declared (3,750) (3,750)
Shares issued 5 83 88
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $750 $10,010 $69,760 $(1,422) $- $79,098
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $750 $10,144 $74,265 $4,027 $- $89,186
Net income 3,954 3,954
Cumulative effect of change in
accounting principle, net of tax (391) (391)
Other comprehensive income, net of tax:
Net unrealized gains on securities 2,138 2,138
Reclassification adjustments (402) (402)
------------
Comprehensive income 5,299
Cash dividends declared (3,129) (3,129)
Shares issued 3 302 305
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $753 $10,446 $75,090 $5,372 $- $91,661
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, 2001 2000
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $3,954 $5,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 350 700
Depreciation of premises and equipment 1,464 1,589
Amortization of premium in excess of (less than)
accretion of discount on debt securities 59 (47)
Increase in bank-owned life insurance (551) (501)
Appreciation of derivative instruments (285) -
Net gains on sales of securities (408) (758)
Net gains on loan sales (679) (143)
Proceeds from sales of loans 40,967 6,520
Loans originated for sale (42,981) (5,847)
Decrease (increase) in accrued interest receivable 122 (1,485)
(Increase) decrease in other assets (1,962) 567
Decrease in accrued expenses and other liabilities (1,377) (40)
Other, net 344 786
- --------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (983) 7,165
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (115,035) (89,589)
Proceeds from sales 238 25,375
Maturities and principal repayments 71,425 16,766
Securities held to maturity:
Purchases (53,257) (14,900)
Maturities and principal repayments 12,157 6,897
Purchase of Federal Home Loan Bank stock (3,933) (1,931)
Principal collected on loans under loan originations (12,918) (25,118)
Proceeds from sales of other real estate owned 150 68
Purchases of premises and equipment (2,917) (750)
- --------------------------------------------------------------------------------
Net cash used in investing activities (104,090) (83,182)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 18,675 39,237
Net increase in other short-term borrowings 2,912 1,219
Proceeds from Federal Home Loan Bank advances 490,000 249,500
Repayment of Federal Home Loan Bank advances (408,549) (215,600)
Repayment of obligations under capital leases (51) -
Net effect of common stock transactions 111 (280)
Cash dividends paid (3,003) (3,511)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 100,095 70,565
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,978) (5,452)
Cash and cash equivalents at beginning of year 43,860 44,520
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $38,882 $39,068
- --------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six months ended June 30, 2001 2000
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $168 $106
Loans charged off 122 384
Loans made to facilitate the sale of OREO - 60
Increase (decrease) in net unrealized gain on
securities available for sale, net of tax 1,345 (1,231)
Increase in paid-in capital resulting from tax
benefits on stock option exercises 194 368
Supplemental Disclosures:
Interest payments $26,203 $21,715
Income tax payments 2,932 2,854
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accounting and reporting policies of Washington Trust Bancorp, Inc. and
subsidiary (the "Corporation") are in accordance with accounting principles
generally accepted in the United States of America and conform to general
practices of the banking industry. In the opinion of management, the
accompanying consolidated financial statements present fairly the Corporation's
financial position as of June 30, 2001 and December 31, 2000 and the results of
operations and cash flows for the interim periods presented.
The consolidated financial statements include the accounts of the Washington
Trust Bancorp, Inc. and its wholly-owned subsidiary, The Washington Trust
Company of Westerly (the "Bank"). All significant intercompany balances and
transactions have been eliminated.
The unaudited consolidated financial statements of the Corporation presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. The Corporation has not changed its
accounting and reporting policies from those disclosed in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 and SFAS No. 138, on January 1, 2001. SFAS No. 133 requires a
corporation to recognize all derivatives as either assets or liabilities on the
balance sheet and to measure those instruments at fair value. Changes in fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Under this
Statement, a corporation is required to establish at the inception of the hedge
the method to be used for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. Those methods must be consistent with the corporation's approach to
managing risk. The ineffective portion of all hedges will be recognized in
current period earnings.
The Corporation has an interest rate floor contract that is intended to function
as a hedge against reductions in interest income realized from prime-based
loans. At initial adoption, the transition adjustment on this derivative was a
loss, net of tax, of $24 thousand and was reported in other comprehensive
income. Changes in fair value of the interest rate floor contract are recorded
in current earnings. Included in interest income for the six months ended June
30, 2001 was $270 thousand of appreciation in value of the interest rate floor
contract.
The Corporation also has recognized commitments to originate and commitments to
sell fixed rate mortgage loans. At the date of adoption, these derivatives had
an immaterial impact on net income. Changes in fair value of the commitments
since the date of adoption are recorded in current earnings and also have an
immaterial impact on net income.
The transition provisions of SFAS No. 133 also provide that at the date of
initial application an entity may transfer any security classified as "held to
maturity" to "available for sale" or "trading." On January 1, 2001, the
Corporation transferred held to maturity securities with an amortized cost of
$43.6 million and an estimated fair value of $42.6 million into the available
for sale category. The transition adjustment amounted to an unrealized loss, net
of tax, of $367 thousand and was reported in other comprehensive income.
(2) Securities
Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2001
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 73,151 $1,431 $ (54) $ 74,528
Mortgage-backed securities 316,374 3,412 (1,284) 318,502
Corporate and other bonds 61,254 610 (1,144) 60,720
Corporate stocks 16,521 6,327 (651) 22,197
- ---------------------------------------------------------------------------------------------------------------------
Total 467,300 11,780 (3,133) 475,947
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 84,163 1,150 (241) 85,072
Mortgage-backed securities 240,436 1,462 (1,042) 240,856
Corporate and other bonds 41,086 360 (869) 40,577
Corporate stocks 14,314 6,494 (702) 20,106
- ---------------------------------------------------------------------------------------------------------------------
Total $379,999 $9,466 $(2,854) $386,611
- ---------------------------------------------------------------------------------------------------------------------
<FN>
For the six months ended June 30, 2001, proceeds from sales of securities
available for sale amounted to $238 thousand while net realized gains on these
sales amounted to $408 thousand.
</FN>
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2001
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 15,689 $ 388 $ - $ 16,077
Mortgage-backed securities 84,568 888 (480) 84,976
States and political subdivisions 22,176 404 (7) 22,573
- ---------------------------------------------------------------------------------------------------------------------
Total 122,433 1,680 (487) 123,626
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 35,135 265 (121) 35,279
Mortgage-backed securities 66,715 685 (467) 66,933
States and political subdivisions 23,065 121 (30) 23,156
- ---------------------------------------------------------------------------------------------------------------------
Total $124,915 $1,071 $(618) $125,368
- ---------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales of securities held to maturity during the six months ended
June 30, 2001.
</FN>
Securities available for sale and held to maturity with a fair value of $15.5
million and $14.5 million were pledged in compliance with state regulations
concerning trust powers and to secure Treasury Tax and Loan deposits and public
deposits at June 30, 2001 and December 31, 2000, respectively. In addition,
securities available for sale and held to maturity with a fair value of $30.6
million and $31.2 million were collateralized for the discount window at the
Federal Reserve Bank at June 30, 2001 and December 31, 2000, respectively. There
were no borrowings with the Federal Reserve Bank at either date. Securities
available for sale and held to maturity with a fair value of $406.8 million and
$50.8 million were pledged to secure borrowings from the Federal Home Loan Bank
of Boston ("FHLB") at June 30, 2001 and December 31, 2000, respectively. (See
footnote 5 for additional information.)
(3) Loan Portfolio
The following is a summary of loans:
(Dollars in thousands) June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
Commercial:
Mortgages (1) $115,107 $121,817
Construction and development (2) 9,341 2,809
Other (3) 131,097 115,202
- --------------------------------------------------------------------------------
Total commercial 255,545 239,828
Residential real estate:
Mortgages 233,326 236,595
Homeowner construction 14,293 14,344
- --------------------------------------------------------------------------------
Total residential real estate 247,619 250,939
Consumer 106,859 106,388
- --------------------------------------------------------------------------------
Total loans $610,023 $597,155
- --------------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and for
land development
(3) Loans to businesses and individuals, a substantial portion of which are
fully or partially collateralized by real estate
(4) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Three Months Six Months
---------------------------------------------------
Periods ended June 30, 2001 2000 2001 2000
- --------------------------------------------------------------------------------
Balance at beginning of period $13,431 $12,540 $13,135 $12,349
Provision charged to expense 150 350 350 700
Recoveries 134 180 267 258
Loans charged off (85) (147) (122) (384)
- --------------------------------------------------------------------------------
Balance at end of period $13,630 $12,923 $13,630 $12,923
- --------------------------------------------------------------------------------
(5) Borrowings
Federal Home Loan Bank advances outstanding are summarized below:
(Dollars in thousands) June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
FHLB advances $458,813 $377,362
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at June 30, 2001 and December
31, 2000. Under agreement with the FHLB, the Corporation is required to maintain
qualified collateral, free and clear of liens, pledges, or encumbrances that,
based on certain percentages of book and market values, has a value equal to the
aggregate amount of the line of credit and outstanding advances ("FHLB
borrowings"). The FHLB maintains a security interest in various assets of the
Corporation including, but not limited to, residential mortgages, most
marketable debt securities, FHLB capital stock and amounts maintained on deposit
at the FHLB. The Corporation maintained qualified collateral in excess of the
amount required to secure FHLB borrowings at June 30, 2001 and December 31,
2000. Included in the collateral were securities available for sale and held to
maturity with a fair value of $406.8 million and $50.8 million that were
specifically pledged to secure FHLB borrowings at June 30, 2001 and December 31,
2000, respectively. Unless there is an event of default under the agreement, the
Corporation may use encumber or dispose any portion of the collateral in excess
of the amount required to secure FHLB borrowings, except for that collateral
which has been specifically pledged.
The following is a summary of other borrowings:
(Dollars in thousands) June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $5,569 $2,813
Other 519 414
- --------------------------------------------------------------------------------
Other borrowings $6,088 $3,227
- --------------------------------------------------------------------------------
(6) Litigation
In January 1997, a suit was filed against the Bank in the Superior Court of
Washington County, Rhode Island by Maxson Automatic Machinery Company
("Maxson"), a former corporate customer, and Maxson's shareholders for damages
which the plaintiffs allegedly incurred as a result of an embezzlement by
Maxson's former president, treasurer and fifty percent shareholder, which
allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred
in permitting this individual, while an officer of Maxson, to transfer funds
from Maxson's account at the Bank for his personal benefit.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to
settle the suit. Under the terms of the agreement, which does not involve an
admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs.
The cost of this settlement was recorded in the consolidated financial
statements as of and for the quarter ended March 31, 2001. Net of the related
income tax effect, the cost of the settlement amounted to $3.3 million. The Bank
has received notification from its insurance carrier that it will pay a
settlement to the Bank in the amount of $775 thousand ($553 thousand net of tax)
in connection with this matter, subject to the execution of an agreement.
Washington Trust expects to record this recovery when received in the third
quarter 2001.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have reviewed the consolidated balance sheet of Washington Trust Bancorp,
Inc. and subsidiary (the "Corporation") as of June 30, 2001, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2001 and 2000, changes in shareholders' equity and cash flows for
the six-month periods ended June 30, 2001 and 2000. These consolidated financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2000, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated January 15, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2000, is fairly
stated, in all material respects.
KPMG LLP
Providence, Rhode Island
July 19, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Securities and Exchange Commission, 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 which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Corporation. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Corporation to be materially different from the
anticipated future results, performance or achievements expressed or implied by
the forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general national or regional economic conditions, changes in interest
rates, reductions in the market value of trust and investment management assets
under administration, reductions in deposit levels necessitating increased
borrowing to fund loans and investments, changes in the size and nature of the
Corporation's competition, changes in loan defaults and charge-off rates and
changes in the assumptions used in making such forward-looking statements. In
addition, the factors described under "Risk Factors" in Item 1 of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2000
may result in these differences. You should carefully review all of these
factors, and you should be aware that there may be other factors that could
cause these differences. These forward-looking statements were based on
information, plans and estimates at the date of this report, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Results of Operations
The Corporation reported net income of $3.8 million, or $.31 per diluted share,
for the three months ended June 30, 2001. Net income for the second quarter of
2000 amounted to $2.4 million, or $.20 per diluted share. The Corporation
defines operating earnings to exclude a first quarter 2001 litigation settlement
of $3.3 million, net of tax ($.28 per share). It also excludes costs of $1.1
million, net of tax ($.09 per share) recorded in connection with an acquisition
in the second quarter of 2000 and includes an adjustment for pro forma income
taxes on the pre-acquisition earnings of the acquired company. Operating
earnings for the second quarter of 2001 increased by 15.7% from the $3.3
million, or $.27 per diluted share, of operating earnings reported for the
second quarter of 2000.
The Corporation's rates of return on average assets and average equity for the
three months ended June 30, 2001 were 1.18% and 16.72%, respectively. Comparable
amounts for the second quarter of 2000, on an operating basis, were 1.14% and
16.47%.
Net income for the six months ended June 30, 2001 and 2000 amounted to $4.0
million and $5.8 million, respectively. Operating earnings for the first six
months of 2001 amounted to $7.3 million, or $.60 per diluted share, up by 12.1%
over the $6.5 million, or $.54 per diluted share earned in the first six months
of 2000.
The Corporation's rates of return on average assets and average equity for the
six months ended June 30, 2001, on an operating basis, were 1.16% and 16.01%,
respectively. Comparable amounts for the first six months of 2000, on an
operating basis, were 1.15% and 16.42%.
Net interest income (the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings) amounted to $9.3
million for the three months ended June 30, 2001 and 2000. Net interest income
for the six months ended June 30, 2001 amounted to $18.9 million, compared to
$18.5 million for the corresponding 2000 period. (See additional discussion
under the caption "Net Interest Income.")
The Corporation's provision for loan losses was $150 thousand and $350 thousand
in the second quarter of 2001 and 2000, respectively. For the six months ended
June 30, 2001 and 2000, the provision for loan losses amounted to $350 thousand
and $700 thousand, respectively. The allowance for loan losses increased from
$13.1 million at December 31, 2000 to $13.6 million at June 30, 2001 due to the
year to date 2001 provision and recoveries, net of charge-offs. The provision
for the six months ended June 30, 2001 decreased compared to the same period
last year, due to management's belief that the allowance for loan losses is at a
reasonable level based on its current evaluation. The allowance for loan losses
is management's best estimate of the probable loan losses incurred as of the
balance sheet date. The allowance is increased by provisions charged to earnings
and by recoveries of amounts previously charged off, and is reduced by
charge-offs on loans.
Other noninterest income (noninterest income excluding net gains on sales of
securities) amounted to $5.6 million for the three months ended June 30, 2001,
up 16.4% from the $4.8 million reported for the second quarter of 2000. For the
six months ended June 30, 2001, other noninterest income amounted to $10.2
million, up 10.8% from the comparable 2000 amount of $9.2 million. Primary
sources of noninterest income are trust and investment management fees, service
charges on deposit accounts, merchant processing fees and mortgage banking
activities. Revenue from mortgage banking activities associated with origination
of loans for the secondary market amounted to $836 thousand for the six months
ended June 30, 2001, an increase of $580 thousand from the corresponding period
in 2000. Due to falling interest rates, mortgage loan origination volume and
refinancing activity have increased, resulting in an increase in the number of
loans sold in the secondary market. The Corporation does not expect this level
of mortgage banking revenues to continue in the second half of 2001. Trust and
investment management revenue totaled $5.3 million for the six months ended June
30, 2001 and 2000, respectively. Revenue growth has slowed primarily as a result
of financial market declines affecting the market value of trust and investment
management assets under administration. The value of such assets amounted to
$1.6 billion and $1.7 billion at June 30, 2001 and December 31, 2000,
respectively.
Net realized securities gains for the three months ended June 30, 2001 amounted
to $403 thousand, compared to $374 thousand for the comparable period in 2000.
Included in net realized gains for the second quarter of 2001 and 2000 were
gains totaling $351 thousand and $310 thousand, respectively, related to annual
contributions of appreciated equity securities to the Corporation's charitable
foundation. The costs associated with the contributions amounted to $353
thousand and $424 thousand and were included in other noninterest expenses in
the second quarter of 2001 and 2000, respectively. For the six months ended June
30, 2001, net realized securities gains totaled $408 thousand, compared to $758
thousand for the corresponding 2000 period.
Other noninterest expense (noninterest expense excluding a first quarter 2001
litigation settlement and second quarter 2000 acquisition costs) amounted to
$9.8 million and $9.4 million for the second quarter of 2001 and 2000,
respectively. For the six months ended June 30, 2001, other noninterest expense
totaled $18.7 million, compared to $18.3 million for the comparable period on
2000. Salaries and benefit expense amounted to $10.4 million for the six months
ended June 30, 2001, up $354 thousand, or 3.5%, from the $10.0 million reported
for the six months ended June 30, 2000.
Income tax expense amounted to $1.6 million and $2.5 million for the six months
ended June 30, 2001 and 2000, respectively. The Corporation's effective tax rate
for the first six months of 2001 was 28.9%, compared to 30.4% for the
corresponding 2000 period. The decrease in the effective tax rate was primarily
due the effect of the first quarter 2001 litigation settlement.
Net Interest Income
(The accompanying schedule entitled "Average Balances / Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" should be read in conjunction with this
discussion.)
FTE net interest income for the six months ended June 30, 2001 and 2000 amounted
to $19.4 million and $19.1 million, respectively. For the six months ended June
30, 2001, average interest-earning assets amounted to $1.191 billion, up $119.4
million, or 11.1%, over the comparable 2000 amount due to growth in securities
and loans. Deposit growth and FHLB advances funded the growth in securities and
loans. The net interest margins (FTE net interest income as a percentage of
average interest-earning assets) for the six months ended June 30, 2001 and 2000
were 3.28% and 3.58%, respectively. The interest rate spread declined 29 basis
points to 2.74% for the six months ended June 30, 2001. Earning asset yields
declined 14 basis points, while the cost of interest-bearing liabilities
increased 15 basis points, thereby narrowing the net interest spread. The
decline in yields on securities and higher funding costs associated with savings
and time deposits were primarily responsible for the decrease in the net
interest margin.
Total average securities rose $71.1 million, or 13.8%, over the comparable prior
year period, mainly due to purchases of taxable debt securities. The FTE rate of
return on securities was 6.57% for the six months ended June 30, 2001, compared
to 6.84% for the same 2000 period. The decrease in yields on securities reflects
a combination of lower yields on variable rate securities tied to short-term
interest rates and lower marginal rates on investment purchases.
The yield on average total loans amounted to 8.63% for the six months ended June
30, 2001 compared to 8.62% for the comparable 2000 period. Average loans for the
six months ended June 30, 2001 rose $48.3 million, or 8.7%, over the prior year
and amounted to $604.6 million. Average residential real estate loans amounted
to $253.0 million, up 8.9% from the prior year level. The yield on residential
real estate loans increased slightly from the prior year period, amounting to
7.83%. Average commercial loans rose 7.3% to $246.5 million. The yield on
commercial loans amounted to 9.54%, up 16 basis points from the prior year yield
of 9.38%. Included in interest income on commercial loans, for the six months
ended June 30, 2001, was $270 thousand of appreciation in value of the interest
rate floor contract. Average consumer loans rose 11.6% over the prior year and
amounted to $105.0 million. The yield on consumer loans amounted to 8.45%, a
decrease of 36 basis points from the prior year yield of 8.81%, primarily due to
a decline in yield on home equity lines.
Average interest-bearing liabilities increased 11.5% to $1.057 billion at June
30, 2001. Due to higher rates paid on deposits, the Corporation's total cost of
funds on interest-bearing liabilities amounted to 4.88% for the six months ended
June 30, 2001, up from 4.73% for the comparable 2000 period. Average savings
deposits for the six months ended June 30, 2001 increased 17.5% to $272.7
million from the comparable 2000 amount. The rate paid on savings deposits for
the first six months of 2001 was 2.04%, compared to 1.73% for the same 2000
period. Average time deposits increased $13.6 million to $356.9 million with an
increase of 27 basis points in the rate paid. For the six months ended June 30,
2001, average demand deposits, an interest-free funding source, increased $4.0
million to $102.7 million. Average FHLB advances for the six months ended June
30, 2001 amounted to $425.7 million, up 14.8% from the comparable 2000 amount.
This increase was used primarily to fund growth in the portfolios of available
for sale securities and held to maturity securities. The average rate paid on
FHLB advances for the six months ended June 30, 2001 was 6.04%, up slightly from
the prior year rate of 5.98%.
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
The following table sets forth average balance and interest rate information.
Income is presented on a fully taxable equivalent basis (FTE). For dividends on
corporate stocks, the 70% federal dividends received deduction is also used in
the calculation of tax equivalency. Loans held for sale, 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. Customer overdrafts are excluded from amounts presented for
loans. Average balances for securities are presented at cost, with any
unrealized gains and losses of securities available for sale included in
noninterest-earning assets.
Six months ended June 30, 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $253,039 $9,821 7.83% $232,348 $8,999 7.79%
Commercial and other loans 246,509 11,662 9.54% 229,829 10,719 9.38%
Consumer loans 105,048 4,404 8.45% 94,124 4,124 8.81%
- --------------------------------------------------------------------------------------------------------------------
Total loans 604,596 25,887 8.63% 556,301 23,842 8.62%
Federal funds sold and other
short-term investments 15,436 383 5.00% 12,555 378 6.06%
Taxable debt securities 512,207 16,597 6.53% 443,478 14,751 6.69%
Nontaxable debt securities 22,588 744 6.64% 25,815 852 6.64%
Corporate stocks and FHLB stock 36,260 1,376 7.66% 33,517 1,538 9.23%
- --------------------------------------------------------------------------------------------------------------------
Total securities 586,491 19,100 6.57% 515,365 17,519 6.84%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,191,087 44,987 7.62% 1,071,666 41,361 7.76%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 69,740 61,544
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,260,827 $1,133,210
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $272,662 $2,754 2.04% $231,994 $1,995 1.73%
Time deposits 356,866 10,048 5.68% 343,286 9,227 5.41%
FHLB advances 425,678 12,753 6.04% 370,933 11,023 5.98%
Other 2,134 53 4.99% 2,239 64 5.77%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,057,340 25,608 4.88% 948,452 22,309 4.73%
Demand deposits 102,707 98,749
Non interest-bearing liabilities 9,624 6,681
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,169,671 1,053,882
Total shareholders' equity 91,156 79,328
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,260,827 $1,133,210
- --------------------------------------------------------------------------------------------------------------------
Net interest income $19,379 $19,052
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 2.74% 3.03%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 3.28% 3.58%
- --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Six months ended June 30, 2001 2000
- --------------------------------------------------------------------------------
Commercial and other loans $ 67 $ 61
Nontaxable debt securities 260 297
Corporate stocks 177 197
Financial Condition and Liquidity
Total assets rose 8.5% from $1.218 billion at December 31, 2000 to $1.321
billion at June 30, 2001. Average assets totaled $1.261 billion for the six
months ended June 30, 2001, up 11.3% over the comparable 2000 period.
Securities Available for Sale - The carrying value of securities available for
sale at June 30, 2001 amounted to $475.9 million, an increase of $89.3 million,
or 23.1%, over the December 31, 2000 amount of $386.6 million. As previously
disclosed, pursuant to the transition provisions of SFAS No. 133, on January 1,
2001, the Corporation reclassified held to maturity securities with an estimated
fair value of $42.6 million into the available for sale category. The increase
in carrying value of securities available for sale was primarily attributable to
purchases of debt securities and the reclassification of securities in
accordance with SFAS No. 133. The net unrealized gain on securities available
for sale amounted to $8.6 million, compared to $6.6 million at December 31,
2000. This increase was attributable to the effects of reductions in medium and
long-term interest rates that occurred during the six months of 2001.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $122.4 million at June 30, 2001, down from $124.9 million at
December 31, 2000. This decrease was due to the aforementioned reclassification
of held-to-maturity securities to the available-for sale category offset in part
by purchases of mortgage-backed securities. The net unrealized gain on
securities held to maturity amounted to $1.2 million at June 30, 2001, compared
to $453 thousand at December 31, 2000.
Loans - At June 30, 2001, total loans amounted to $610.0 million. During the six
months ended June 30, 2001, total loans increased $12.9 million. Commercial
loans amounted to $255.5 million at June 30, 2001, an increase of $15.7 million
from the December 31, 2000 balance of $239.8 million. Total residential real
estate loans decreased $3.3 million from December 31, 2000 and amounted to
$247.6 million. Total consumer loans amounted to $106.9 million at June 30, 2001
compared to $106.4 million at December 31, 2000.
Deposits - Total deposits amounted to $754.4 million at June 30, 2001, up $18.7
million from $735.7 million at December 31, 2000. For the six months ended June
30, 2001, savings deposits increased $32.2 million. Time deposits decreased
$16.1 million from December 31, 2000 due to maturity of commercial and consumer
certificates of deposit and amounted to $347.3 million at June 30, 2001. Demand
deposits amounted to $115.6 million at June 30, 2001, up $2.6 million from the
December 31, 2000 balance.
Borrowings - The Corporation utilizes advances from the Federal Home Loan Bank
as well as other borrowings as part of its overall funding strategy. FHLB
advances were used to meet short-term liquidity needs, to fund loan growth and
to purchase securities. FHLB advances amounted to $458.8 million at June 30,
2001, up $81.5 million from the December 31, 2000 amount. In addition, other
borrowings outstanding at June 30, 2001 and December 31, 2000 amounted to $6.1
million and $3.2 million, respectively.
For the six months ended June 30, 2001, net cash used in operations amounted to
$983 thousand. Proceeds from sales of loans in the first six months of 2001
amounted to $41.0 million, while loans originated for sale amounted to $43.0
million. Net cash used in investing activities amounted to $104.1 million and
was primarily used to purchase securities. Net cash provided by financing
activities of $100.1 million was generated mainly by a net increase in FHLB
advances and an increase in total deposits. (See Consolidated Statements of Cash
Flows for additional information.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
June 30, December 31,
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,981 $1,608
Nonaccrual loans less than 90 days past due 1,623 1,826
- --------------------------------------------------------------------------------
Total nonaccrual loans 3,604 3,434
Other real estate owned 17 9
- --------------------------------------------------------------------------------
Total nonperforming assets $3,621 $3,443
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .59% .58%
Nonperforming assets as a percentage of total assets .27% .28%
Allowance for loan losses to nonaccrual loans 378.19% 382.50%
Allowance for loan losses to total loans 2.23% 2.20%
Not included in the analysis of nonperforming assets at June 30, 2001 and
December 31, 2000 above are approximately $174 thousand and $393 thousand,
respectively, of loans greater than 90 days past due and still accruing. These
loans consist primarily of residential mortgages that are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
Impaired loans consist of all nonaccrual commercial loans. At June 30, 2001, the
recorded investment in impaired loans was $2.5 million, which had a related
allowance amounting to $373 thousand. During the six months ended June 30, 2001,
the average recorded investment in impaired loans was $2.2 million. Also during
this period, interest income recognized on impaired loans amounted to
approximately $46 thousand. Interest income on impaired loans is recognized on a
cash basis only.
The following is an analysis of nonaccrual loans by loan category:
June 30, December 31,
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Residential mortgages $584 $ 796
Commercial:
Mortgages 1,083 1,076
Other (1) 1,368 1,018
Consumer 569 544
- --------------------------------------------------------------------------------
Total nonaccrual loans $3,604 $3,434
- --------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
Capital Resources
Total equity capital amounted to $91.7 million, or 6.9% of total assets, at June
30, 2001. This compares to $89.2 million, or 7.3%, at December 31, 2000. Current
year results include a first quarter litigation settlement amounting to $3.3
million, net of income taxes. (See additional information under the caption
Litigation for additional information.)
At June 30, 2001, the Corporation's Tier 1 risk-based capital ratio was 12.05%
and the total risk-adjusted capital ratio was 13.67%. The Corporation's Tier 1
leverage ratio amounted to 6.67% at June 30, 2001. These ratios were above the
ratios required to be categorized as well-capitalized.
Dividends payable at June 30, 2001 amounted to approximately $1.6 million,
representing $.13 per share payable on July 13, 2001, an increase of 8.3% over
the $.12 per share declared in the fourth quarter of 2000. The source of funds
for dividends paid by the Corporation is dividends received from the Bank. The
Bank is a regulated enterprise, and as such its ability to pay dividends to the
parent is subject to regulatory review and restriction.
Book value per share as of June 30, 2001 and December 31, 2000 amounted to $7.61
and $7.43, respectively.
Litigation
In January 1997, a suit was filed against the Washington Trust Bancorp Inc.'s
bank subsidiary (the "Bank") in the Superior Court of Washington County, Rhode
Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate
customer, and Maxson's shareholders for damages which the plaintiffs allegedly
incurred as a result of an embezzlement by Maxson's former president, treasurer
and fifty percent shareholder, which allegedly occurred between 1986 and 1995.
The suit alleged that the Bank erred in permitting this individual, while an
officer of Maxson, to transfer funds from Maxson's account at the Bank for his
personal benefit.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to
settle the suit. Under the terms of the agreement, which does not involve an
admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs.
The cost of this settlement was recorded in the consolidated financial
statements as of and for the quarter ended March 31, 2001. Net of the related
income tax effect, the cost of the settlement amounted to $3.3 million. The Bank
has received notification from its insurance carrier that it will pay a
settlement to the Bank in the amount of $775 thousand ($553 thousand net of tax)
in connection with this matter, subject to the execution of an agreement.
Washington Trust expects to record this recovery when received in the third
quarter 2001.
Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations". SFAS 141
addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations", and FASB Statement No.
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All
business combinations in the scope of this Statement are to be accounted for
using one method - the purchase method. Therefore, this Statement eliminates the
use of the pooling-of-interests method for accounting for business combinations.
The provisions of SFAS 141 apply to all business combinations initiated after
June 30, 2001, and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
The adoption of this pronouncement is not expected to have a material impact on
the Corporation's financial statements.
Also in June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets". This Statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets". It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of this
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001. The adoption of this pronouncement is not expected to have a
material impact on the Corporation's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's objective is to manage assets and funding sources to produce
results which are consistent with its liquidity, capital adequacy, growth, risk
and profitability goals.
The Corporation manages interest rate risk using income simulation to measure
interest rate risk inherent in its 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 60-month period. The simulation
results are reviewed to determine whether the negative exposure of net interest
income to changes in interest rates remains within established tolerance levels
over a 24-month horizon, and to develop appropriate strategies to manage this
exposure. In addition, the ALCO reviews 60-month horizon results to assess
longer-term risk inherent in the balance sheet, although no 60-month horizon
tolerance levels are specified. As of June 30, 2001, the Corporation's estimated
exposure as a percentage of net interest income for the next 12 month period and
the subsequent 12 month period thereafter (months 13 - 24), respectively, is as
follows:
Months 1 - 12 Months 13 - 24
-----------------------------------------------------------------------
200 basis point increase in rates -0.90% -4.28%
200 basis point decrease in rates -0.95% -2.07%
Since this simulation assumes the Corporation's balance sheet will remain static
over the 24-month simulation horizon, the results do not reflect adjustments in
strategy that the Corporation could implement in response to rate shifts, and
should therefore not be relied upon as a projection of net interest income.
For a complete discussion of interest rate sensitivity and liquidity, including
simulation assumptions, see the Corporation's Annual Report on Form 10-K for the
year ended December 31, 2000.
The Corporation also monitors the potential change in market value of its
available for sale debt securities using both parallel rate shifts of up to 200
basis points and "value at risk" analysis. The purpose is to determine market
value exposure which 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 modeling analytics and securities data. The Corporation
uses the results to manage the effect of market value changes on the
Corporation's capital position. As of June 30, 2001, an immediate 200 basis
point rise in rates would result in a 4.9% decline in the value of the
Corporation's available for sale debt securities. Conversely, a 200 basis point
fall in rates would result in a 1.7% increase in the value of the Corporation's
available for sale debt securities. "Value at risk" analysis measures the
theoretical maximum market value loss over a given time period based on recent
historical price activity of different classes of securities. The anticipated
maximum market value reduction for the Corporation's available for sale
securities portfolio at June 30, 2001, including both debt and equity
securities, was 3.2%, assuming a one-year time horizon and a 5% probability of
occurrence for "value at risk" analysis.
During 1998, the Corporation entered into an interest rate floor contract with a
notional principal amount of $20 million and a five-year term maturing in March
2003. The contract is intended to function as a hedge against reductions in
interest income realized from prime-based loans. The Corporation receives
payment for the contract if certain interest rates fall below specified levels.
Effective January 1, 2001 with the adoption of SFAS No. 133, the Corporation
recognized the fair value of this derivative as an asset on the balance sheet.
At June 30, 2001 the carrying value of the interest rate floor contract amounted
to $368 thousand and is reported in other assets.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On January 28, 1997, a suit was filed against the Bank in the Superior
Court of Washington County, Rhode Island by Maxson Automatic Machinery
Company ("Maxson"), a former corporate customer, and Maxson's
shareholders for damages which the plaintiffs allegedly incurred as a
result of an embezzlement by Maxson's former president, treasurer and
fifty percent shareholder, which allegedly occurred between 1986 and
1995. The suit alleged that the Bank erred in permitting this
individual, while an officer of Maxson, to transfer funds from
Maxson's account at the Bank for his personal benefit. The claims
against the Bank were based upon theories of breach of fiduciary duty,
negligence, breach of contract, unjust enrichment, conversion, failure
to act in a commercially reasonable manner, and constructive fraud.
On May 11, 2001, the Bank entered into an agreement with the
plaintiffs to settle the suit. Under the terms of the agreement, which
does not involve an admission of wrongdoing, the Bank agreed to pay
$4.8 million to the plaintiffs. The cost of this settlement was
recorded in the consolidated financial statements as of and for the
quarter ended March 31, 2001. Net of the related income tax effect,
the cost of the settlement amounted to $3.3 million. The Bank has
received notification from its insurance carrier that it will pay a
settlement to the Bank in the amount of $775 thousand ($553 thousand
net of tax) in connection with this matter, subject to the execution
of an agreement. Washington Trust expects to record this recovery when
received in the third quarter 2001.
The Corporation is involved in various other claims and legal
proceedings arising out of the ordinary course of business. Management
is of the opinion, based on its review with counsel of the development
of such matters to date, that the ultimate disposition of such other
matters will not materially affect the consolidated financial position
or results of operations of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual
Meeting of Shareholders was held on April 24, 2001.
(b) The results of matters voted upon are presented below.
i. A proposal to elect Alcino G. Almeida, Katherine W. Hoxsie, Edward W.
Mazze, Joyce O. Resnikoff, John F. Treanor and John C. Warren as directors
of the Corporation for staggered terms, each to serve until their
successors are duly elected and qualified, passed as follows:
Abstentions
Votes Votes and Broker
Term In Favor Withheld Non-votes
------------------------------------------------------------------------------------------
Alcino G. Almeida 3 years 9,687,642 339,339 0
Katherine W. Hoxsie 3 years 9,693,393 333,589 0
Edward M. Mazze 3 years 9,902,401 124,581 0
Joyce O. Resnikoff 3 years 9,781,394 245,588 0
John F. Treanor 2 years 9,758,910 268,072 0
John C. Warren 3 years 9,732,787 294,195 0
ii. A proposal for the ratification of KPMG LLP to serve as independent
auditors of the Corporation for the current fiscal year ending December
31, 2001 was passed by a vote of 9,827,167 shares in favor; 155,437
shares against, with 44,379 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
11 Statement re Computation of Per Share Earnings
(b) There were no reports on Form 8-K filed during the quarter ended June 30,
2001.
SIGNATURES
Pursuant to the requirements 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)
August 9, 2001 By: John C. Warren
---------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
August 9, 2001 By: David V. Devault
---------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)