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 MARCH 31, 2002 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 April
30, 2002 was 13,030,610.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended March 31, 2002
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
Consolidated Statements of Income
Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001
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 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
management, 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, unanticipated
difficulties in integrating First Financial Corp.'s operations, unanticipated
costs relating to the merger and changes in the assumptions used in making such
forward-looking statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $25,735 $30,399
Federal funds sold and other short-term investment 13,350 20,500
Mortgage loans held for sale 2,445 7,710
Securities:
Available for sale, at fair value 455,269 453,956
Held to maturity, at cost; fair value $201,403
in 2002 and $177,595 in 2001 200,326 175,105
- --------------------------------------------------------------------------------
Total securities 655,595 629,061
Federal Home Loan Bank stock, at cost 23,491 23,491
Loans 596,808 605,645
Less allowance for loan losses 13,665 13,593
- --------------------------------------------------------------------------------
Net loans 583,143 592,052
Premises and equipment, net 21,733 22,102
Accrued interest receivable 7,119 7,124
Other assets 30,039 29,790
- --------------------------------------------------------------------------------
Total assets $1,362,650 $1,362,229
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $119,904 $134,783
Savings 322,729 316,953
Time 390,353 365,140
- --------------------------------------------------------------------------------
Total deposits 832,986 816,876
Dividends payable 1,688 1,569
Federal Home Loan Bank advances 414,067 431,490
Other borrowings 4,407 2,087
Accrued expenses and other liabilities 10,339 12,270
- --------------------------------------------------------------------------------
Total liabilities 1,263,487 1,264,292
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 12,065,283 shares in 2002
and 2001 754 754
Paid-in capital 10,613 10,696
Retained earnings 83,178 81,114
Accumulated other comprehensive income 5,886 6,416
Treasury stock, at cost; 66,347 shares in 2002
and 54,102 shares in 2001 (1,268) (1,043)
- --------------------------------------------------------------------------------
Total shareholders' equity 99,163 97,937
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,362,650 $1,362,229
- --------------------------------------------------------------------------------
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 ended March 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $10,981 $13,161
Interest from securities 8,188 8,390
Dividends on corporate stock and Federal Home Loan Bank stock 483 617
Interest on federal funds sold and other short-term investments 62 203
- --------------------------------------------------------------------------------------------------------------------
Total interest income 19,714 22,371
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 971 1,368
Time deposits 4,123 5,175
Federal Home Loan Bank advances 5,219 6,225
Other 17 28
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 10,330 12,796
- --------------------------------------------------------------------------------------------------------------------
Net interest income 9,384 9,575
Provision for loan losses 100 200
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,284 9,375
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,565 2,573
Service charges on deposit accounts 827 866
Merchant processing fees 446 341
Mortgage banking activities 516 209
Income from bank-owned life insurance 288 272
Net gains on sales of securities 291 5
Other income 295 323
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,228 4,589
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,575 5,191
Net occupancy 625 723
Equipment 785 825
Legal, audit and professional fees 173 312
Merchant processing costs 357 270
Advertising and promotion 240 204
Office supplies 120 164
Litigation settlement cost - 4,800
Other 1,289 1,259
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,164 13,748
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,348 216
Income tax expense 1,604 62
- --------------------------------------------------------------------------------------------------------------------
Net income $3,744 $154
- --------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.31 $.01
Diluted earnings per share $.31 $.01
Cash dividends declared per share $.14 $.13
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
Three months ended March 31, Stock Capital Earnings Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $750 $10,144 $74,265 $4,027 $- $89,186
Net income 154 154
Cumulative effect of change in
accounting principle, net of tax (391) (391)
Other comprehensive income, net of tax:
Net unrealized gains on securities 2,432 2,432
Reclassification adjustments (2) (2)
--------
Comprehensive income 2,193
Cash dividends declared (1,563) (1,563)
Shares issued 1 98 99
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $751 $10,242 $72,856 $6,066 $- $89,915
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $754 $10,696 $81,114 $6,416 $(1,043) $97,937
Net income 3,744 3,744
Other comprehensive loss, net of tax:
Net unrealized losses on securities (241) (241)
Reclassification adjustments (289) (289)
--------
Comprehensive income 3,214
Cash dividends declared (1,680) (1,680)
Shares issued (83) 149 66
Shares repurchased (374) (374)
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $754 $10,613 $83,178 $5,886 $(1,268) $99,163
- -----------------------------------------------------------------------------------------------------------------------
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)
Three months ended March 31, 2002 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $3,744 $154
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 200
Depreciation of premises and equipment 727 747
Amortization of premium in excess of accretion of
discount on debt securities 255 9
Increase in bank-owned life insurance (288) (272)
Depreciation (appreciation) of derivative
instruments 322 (241)
Net gains on sales of securities (291) (5)
Net gains on loan sales (517) (153)
Proceeds from sales of loans 24,422 9,652
Loans originated for sale (18,640) (11,400)
Decrease (increase) in accrued interest receivable 5 (316)
Increase in other assets (26) (345)
(Decrease) increase in accrued expenses and
other liabilities (1,911) 3,132
Other, net 52 94
- --------------------------------------------------------------------------------
Net cash provided by operating activities 7,954 1,256
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (73,486) (65,235)
Proceeds from sales 28,195 238
Maturities and principal repayments 43,189 16,018
Securities held to maturity:
Purchases (39,459) (21,235)
Maturities and principal repayments 14,211 5,985
Purchase of Federal Home Loan Bank stock - (3,783)
Principal collected on loans over (under)
loan originations 8,844 (9,661)
Purchases of premises and equipment (355) (2,365)
- --------------------------------------------------------------------------------
Net cash used in investing activities (18,861) (80,038)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 16,110 7,456
Net increase (decrease) in other borro 2,320 (1,771)
Proceeds from Federal Home Loan Bank advances 170,500 179,000
Repayment of Federal Home Loan Bank advances (187,923) (89,537)
Purchase of treasury stock (374) -
Net effect of common stock transaction 21 99
Cash dividends paid (1,561) (1,440)
- --------------------------------------------------------------------------------
Net cash (used) provided by financing (907) 93,807
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and cash (11,814) 15,025
Cash and cash equivalents at beginn 50,899 43,860
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $39,085 $58,885
- --------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND S (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three months ended March 31, 2002 2001
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $- $157
Loans charged off 57 37
(Decrease) increase in unrealized gain on securities
available for sale, net of tax (530) 2,060
Increase in paid-in capital resulting from tax
benefits on stock option exercises 45 57
Supplemental Disclosures:
Interest payments $10,509 $12,629
Income tax payments 100 14
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 generally accepted
accounting principles 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 March 31, 2002 and
December 31, 2001 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. 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 generally accepted accounting
principles. 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, 2001.
(2) Securities
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 35,514 $ 1,283 $ (119) $ 36,678
Mortgage-backed securities 329,139 3,820 (642) 332,317
Corporate bonds 62,145 816 (1,998) 60,963
Corporate stocks 19,153 6,993 (835) 25,311
- ---------------------------------------------------------------------------------------------------------------------
Total 445,951 12,912 (3,594) 455,269
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2001
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 64,368 2,348 (1) 66,715
Mortgage-backed securities 296,729 4,411 (1,090) 300,050
Corporate bonds 64,934 1,130 (1,915) 64,149
Corporate stocks 17,752 5,938 (648) 23,042
- ---------------------------------------------------------------------------------------------------------------------
Total $443,783 $13,827 $(3,654) $453,956
- ---------------------------------------------------------------------------------------------------------------------
<FN>
For the three months ended March 31, 2002, proceeds from sales of securities
available for sale amounted to $28.2 million while net realized gains on these
sales amounted to $291 thousand.
</FN>
Securities held to maturity are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 8,000 $190 $ - $ 8,190
Mortgage-backed securities 172,507 1,155 (673) 172,989
States and political subdivisions 19,819 413 (8) 20,224
- ---------------------------------------------------------------------------------------------------------------------
Total 200,326 1,758 (681) 201,403
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2001
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 8,311 307 - 8,618
Mortgage-backed securities 146,702 1,753 (48) 148,407
States and political subdivisions 20,092 485 (7) 20,570
- ---------------------------------------------------------------------------------------------------------------------
Total $175,105 $2,545 $(55) $177,595
- ---------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales of securities held to maturity during the three months ended
March 31, 2002.
</FN>
Securities available for sale and held to maturity with a fair value of $481.1
million and $394.4 million were pledged in compliance with state regulations
concerning trust powers and to secure Treasury Tax and Loan deposits,
borrowings, and public deposits at March 31, 2002 and December 31, 2001,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $28.0 million and $28.4 million were collateralized for the
discount window at the Federal Reserve Bank at March 31, 2002 and December 31,
2001, respectively. There were no borrowings with the Federal Reserve Bank at
either date.
(3) Loan Portfolio
The following is a summary of loans:
March 31, December 31,
2002 2001
- --------------------------------------------------------------------------------
Commercial:
Mortgages (1) $110,347 $118,999
Construction and development (2) 4,690 1,930
Other (3) 144,330 139,704
- --------------------------------------------------------------------------------
Total commercial 259,367 260,633
Residential real estate:
Mortgages (4) 215,032 223,681
Homeowner construction 10,899 11,678
- --------------------------------------------------------------------------------
Total residential real estate 225,931 235,359
Consumer 111,510 109,653
- --------------------------------------------------------------------------------
Total loans $596,808 $605,645
- --------------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and for land
development
(3) Loans to businesses and individuals, a substantial portion of which are
fully or partially collateralized by real estate
(4) A substantial portion of these loans is used as qualified collateral for
FHLB borrowings (See Note 6 to the Consolidated Financial Statements
for additional discussion of FHLB borrowings)
(4) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three months ended March 31, 2002 2001
- --------------------------------------------------------------------------------
Balance at beginning of period $13,593 $13,135
Provision charged to expense 100 200
Recoveries of loans previously charged off 29 133
Loans charged off (57) (37)
- --------------------------------------------------------------------------------
Balance at end of period $13,665 $13,431
- --------------------------------------------------------------------------------
(5) Derivative Financial Instruments
The Corporation is party to a five-year interest rate floor contract with a
notional amount of $20 million that matures in February 2003. The floor contract
entitles the Corporation to receive payment from counter parties if the
three-month LIBOR rate falls below 5.50%. The 3-month LIBOR applicable to the
outstanding floor contract at March 31, 2002 was 2.03%. The Corporation
recognizes the fair value of this derivative as an asset on the balance sheet.
At March 31, 2002 and March 31, 2001, the carrying value of the interest rate
floor contract amounted to $518 thousand and $351 thousand, respectively.
Changes in fair value of the interest rate contract are recorded in current
earnings. Included in interest income for the quarters ended March 31, 2002 and
March 31, 2001 was ($221) thousand and $254 thousand of (depreciation)
appreciation in value of the interest rate floor contract.
The Corporation recognizes commitments to originate and commitments to sell
fixed rate mortgage loans as derivative financial instruments. Accordingly, the
Corporation recognizes the fair value of these commitments as an asset on the
balance sheet. At March 31, 2002 and March 31, 2001, the carrying value of these
commitments amounted to ($11) thousand and ($9) thousand and is reported in
other assets. Changes in the fair value are recorded in current earnings and
amounted to ($97) thousand and ($9) thousand for the quarters ended March 31,
2002 and March 31, 2001, respectively.
(6) Borrowings
Federal Home Loan Bank advances outstanding are summarized below:
(Dollars in thousands) March 31, December 31,
2002 2001
- --------------------------------------------------------------------------------
FHLB advances $414,067 $431,490
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at March 31, 2002 and December
31, 2001. 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 loans, U.S.
government or agency securities, U.S. government-sponsored agency securities and
amounts maintained on deposit at the FHLB. The Corporation maintained qualified
collateral in excess of the amount required to secure FHLB borrowings at March
31, 2002 and December 31, 2001. Included in the collateral were securities
available for sale and held to maturity with a fair value of $458.6 million and
$376.5 million that were specifically pledged to secure FHLB borrowings at March
31, 2002 and December 31, 2001, 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) March 31, December 31,
2002 2001
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $3,956 $1,583
Other 451 504
- --------------------------------------------------------------------------------
Other borrowings $4,407 $2,087
- --------------------------------------------------------------------------------
(7) Subsequent Event
On April 16, 2002, the Corporation completed its 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 Corporation intends to close the Richmond and North Kingstown
offices and consolidate them into existing Washington Trust banking offices in
May 2002. As of April 16, 2002, First Financial Corp. had total assets of $179
million, total loans of $113 million, deposits of $137 million, equity capital
of $16 million and 1,213,741 shares outstanding. 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 Washington Trust Bancorp,
Inc. and the merger of First Bank and Trust Company with and into The Washington
Trust Company. Under the merger, shareholders of First Financial common stock
received 0.842 of a Washington Trust share plus $16.00 in cash for each share of
First Financial common stock, with cash paid in lieu of fractional shares. The
Corporation issued approximately 1,022,000 common shares in connection with the
acquisition.
This acquisition will be accounted for under the purchase method and the
provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets" will be applied.
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 March 31, 2002, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three-month periods ended March 31, 2002 and 2001. 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, 2001, 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, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the consolidated balance sheet as of December 31, 2001, is fairly stated, in all
material respects.
KPMG LLP
Providence, Rhode Island
April 18, 2002
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 management, 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,
unanticipated difficulties in integrating First Financial Corp.'s operations,
unanticipated costs relating to the merger 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, 2001 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.
Recent Events
On April 16, 2002, the Corporation completed its 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 Corporation intends to close the Richmond and North Kingstown
offices and consolidate them into existing Washington Trust banking offices in
May 2002. As of April 16, 2002, First Financial Corp. had total assets of $179
million, total loans of $113 million, deposits of $137 million, equity capital
of $16 million and 1,213,741 shares outstanding. 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 Washington Trust Bancorp,
Inc. and the merger of First Bank and Trust Company with and into The Washington
Trust Company. Under the merger, shareholders of First Financial common stock
received 0.842 of a Washington Trust share plus $16.00 in cash for each share of
First Financial common stock, with cash paid in lieu of fractional shares. The
Corporation issued approximately 1,022,000 common shares in connection with the
acquisition.
This acquisition will be accounted for under the purchase method and the
provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets" will be applied.
Results of Operations
The Corporation reported net income of $3.7 million, or $.31 per diluted share,
for the three months ended March 31, 2002. Net income for first quarter of 2001
amounted to $154 thousand, or $.01 per diluted share. First quarter 2001
earnings were significantly affected by a one-time litigation settlement
amounting to $3.3 million, or $.28 per diluted share, net of the related income
tax effect. Operating earnings, which exclude the 2001 litigation settlement,
amounted to $3.5 million, or $.29 cent per diluted share for the three months
ended March 31, 2001. The Corporation's rates of return on average assets and
average equity for the three months ended March 31, 2002 were 1.11% and 14.98%,
respectively. The Corporation's return on average assets and average equity for
the quarter ended March 31, 2001 were .05% and .67%. Comparable amounts, on an
operating basis, for the first quarter of 2001 were 1.14% and 15.30%,
respectively.
For the three months ended March 31, 2002, net interest income (the difference
between interest earned on loans and investments and interest paid on deposits
and other borrowings) amounted to $9.4 million, down from the $9.6 million
earned in the first quarter of 2001. This decrease was primarily attributable to
a decline in the net interest margin due to lower yields on loans and securities
offset somewhat by lower funding costs of interest-bearing deposits, FHLB
advances, and other borrowed funds. (See additional discussion under the caption
"Net Interest Income".)
The Corporation's provision for loan losses was $100 thousand and $200 thousand
in the first quarter of 2002 and 2001, respectively. The allowance for loan
losses increased from $13.6 million at December 31, 2001 to $13.7 million at
March 31, 2002 due to the year to date 2002 provision and recoveries, net of
charge-offs. The provision for the three months ended March 31, 2002 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 $4.9 million for the quarter ended March 31, 2002, an
increase of $353 thousand, or 7.7%, from the comparable 2001 period. This
increase is mainly attributable to increases in mortgage banking revenues and
merchant processing fees. Revenue from mortgage banking activities associated
with originations of loans to be sold in the secondary market amounted to $516
thousand for the three months ended March 31, 2002, an increase of $307 thousand
from the mortgage banking revenue earned for the same period in 2001. Due to a
low interest rate environment, mortgage loan origination volume and refinancing
activity have increased, resulting in an increase in the number of loans sold in
the secondary market. Merchant processing fees for the quarter ended March 31,
2002 amounted to $446 thousand, up from $341 thousand for the first quarter of
2001 due to increased merchant transaction volume and new merchant accounts.
Trust and investment management revenue totaled $2.6 million for the quarters
ended March 31, 2002 and 2001, respectively. Revenue growth has slowed
reflecting financial market declines. The market value of trust and investment
management assets under administration amounted to $1.6 billion at March 31,
2002 and December 31, 2001, respectively.
Net realized securities gains for the three months ended March 31, 2002 and 2001
amounted to $291 thousand and $5 thousand, respectively.
For the quarter ended March 31, 2002, other noninterest expense amounted to $9.2
million compared to other noninterest expense of $8.9 million (noninterest
expense excluding the first quarter 2001 litigation settlement) reported for the
quarter ended March 31, 2001. Salaries and benefit expense amounted to $5.6
million for the three months ended March 31, 2002, up $384 thousand, or 7.4%,
from the $5.2 million reported for the first quarter of 2001. The increase in
salaries and benefit expense was offset somewhat by lower legal, audit and
professional fees, occupancy costs and equipment expenses.
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 three months ended March 31, 2002 amounted to
$9.6 million, down 2.0% from the same 2001 period. For the three months ended
March 31, 2002, average interest-earning assets amounted to $1.272 billion, up
$111.8 million, or 9.6%, over the comparable 2001 amount due to growth in
securities and loans. Deposit growth and Federal Home Loan Bank ("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 three months ended March 31, 2002 and 2001 were 3.07% and 3.44%,
respectively. The interest rate spread declined 23 basis points to 2.63% for the
three months ended March 31, 2002. Earning asset yields declined 154 basis
points, while the cost of interest-bearing liabilities decreased 131 basis
points, thereby narrowing the net interest spread. The decline in yields on
loans and securities offset somewhat by lower funding costs associated with
interest-bearing deposits, FHLB advances and other borrowed funds was primarily
responsible for the decrease in the net interest margin.
Total average securities rose $108.4 million, or 19.4%, over the comparable
prior year period, mainly due to purchases of taxable debt securities. The FTE
rate of return on securities was 5.44% for the three months ended March 31,
2002, compared to 6.85% for the same 2001 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 in 2002 relative to the prior year.
The yield on average total loans amounted to 7.39% for the three months ended
March 31, 2002, down 150 basis points from 8.89% for the comparable 2001 period.
This decline is primarily due to lower marginal yields on floating and
adjustable rate loans for the first quarter of 2002 as compared to the prior
year period and a decline in yields on new loan originations. Average loans for
the three months ended March 31, 2002 rose $3.4 million over the prior year and
amounted to $605.1 million. Average commercial loans rose 5.8% to $260.3
million. The yield on commercial loans amounted to 7.88%, down 200 basis points
from the prior year yield of 9.88%. Included in interest income on commercial
loans for the quarter ended March 31, 2002, was $221 thousand of depreciation in
value of the interest rate floor contract, as compared to $254 thousand of
appreciation in the value of the interest rate contract for the prior year
period. Average residential real estate loans amounted to $234.4 million, down
7.3% from the prior year level. The yield on residential real estate loans
decreased 57 basis points from the prior year period, amounting to 7.38%.
Average consumer loans rose 7.2% over the prior year. The yield on consumer
loans amounted to 6.25%, a decrease of 261 basis points from the prior year
yield of 8.86% mainly due to a decline in yield on home equity lines.
Average interest-bearing liabilities increased 9.0% to $1.121 billion at March
31, 2002. Due to lower rates paid on both borrowed funds and deposits, the
Corporation's total cost of funds on interest-bearing liabilities amounted to
3.74% for the three months ended March 31, 2001, down from 5.05% for the
comparable 2001 period. Average savings deposits for the three months ended
March 31, 2002 increased $50.3 million, or 19.1%, to $313.6 million from the
comparable 2001 amount. The rate paid on savings deposits for the first three
months of 2002 was 1.26%, compared to 2.11% for the same 2001 period. Average
time deposits increased $20.8 million to $381.3 million with a decrease of 143
basis points in the rate paid. For the three months ended March 31, 2002,
average demand deposits, an interest-free funding source, were up by $20.6
million, or 20.4%, from the same prior year period. Average FHLB advances for
the three months ended March 31, 2002 amounted to $422.8 million, up 5.2% from
the comparable 2001 amount. This increase was used primarily to purchase
securities. The average rate paid on FHLB advances for the three months ended
March 31, 2002 was 5.01%, a decrease of 127 basis points from the prior year
rate.
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis (FTE)
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.
Three months ended March 31, 2002 2001
- -------------------------------------------- ------------------------------------ ----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------- ------------- ----------- ----------- -------------- ----------- ----------
Assets:
Residential real estate loans $234,395 $4,264 7.38% $252,720 $4,953 7.95%
Commercial and other loans 260,320 5,060 7.88% 245,996 5,993 9.88%
Consumer loans 110,413 1,703 6.25% 102,988 2,249 8.86%
- --------------------------------------------------------------------------------------------------------------------
Total loans 605,128 11,027 7.39% 601,704 13,195 8.89%
Federal funds sold and other
short-term investments 15,005 62 1.69% 14,259 203 5.78%
Taxable debt securities 590,107 7,978 5.48% 487,125 8,145 6.78%
Nontaxable debt securities 19,999 323 6.56% 22,868 377 6.68%
Corporate stocks and FHLB stock 41,981 582 5.62% 34,486 712 8.38%
- --------------------------------------------------------------------------------------------------------------------
Total securities 667,092 8,945 5.44% 558,738 9,437 6.85%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,272,220 19,972 6.37% 1,160,442 22,632 7.91%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 79,167 68,711
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,351,387 $1,229,153
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $313,578 $971 1.26% $263,309 $1,368 2.11%
Time deposits 381,311 4,123 4.39% 360,550 5,175 5.82%
FHLB advances 422,769 5,219 5.01% 402,021 6,225 6.28%
Other 2,916 17 2.37% 1,991 28 5.73%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,120,574 10,330 3.74% 1,027,871 12,796 5.05%
1
Demand deposits 121,530 100,966
Non interest-bearing liabilities 9,331 8,905
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,251,435 1,137,742
Total shareholders' equity 99,952 91,411
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,351,387 $1,229,153
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net interest income $9,642 $9,836
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 2.63% 2.86%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 3.07% 3.44%
- --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Three months ended March 31, 2002 2001
- --------------------------------------------------------------------------------
Commercial and other loans $ 46 $ 35
Nontaxable debt securities 112 131
Corporate stocks 100 95
Financial Condition and Liquidity
Total assets rose from $1.362 billion at December 31, 2001 to $1.363 billion at
March 31, 2002. Average assets totaled $1.351 billion for the three months ended
March 31, 2002, up 9.9% over the comparable 2001 period.
Securities Available for Sale - The carrying value of securities available for
sale at March 31, 2002 amounted to $455.3 million, compared to the December 31,
2001 amount of $454.0 million. The net unrealized gain on securities available
for sale amounted to $9.3 million, compared to $10.2 million at December 31,
2001.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $200.3 million at March 31, 2002, up 14.4% from $175.1 million at
December 31, 2001. This increase was due to purchases of mortgage-backed
securities. The net unrealized gain on securities held to maturity amounted to
$1.1 million at March 31, 2002, compared to $2.5 million at December 31, 2001.
This decrease was attributable to the effects of increases in medium and
long-term interest rates that occurred during the first quarter of 2002.
Loans - At March 31, 2002, total loans amounted to $596.8 million, down from the
December 31, 2001 balance of $605.6 million. This decline was primarily a result
of the refinancing of fixed rate mortgages being sold into the secondary market.
Total residential real estate loans decreased $9.4 million from December 31,
2001 and amounted to $225.9 million. Commercial loans amounted to $259.4 million
at March 31, 2002, compared to the December 31, 2001 balance of $260.6 million.
Total consumer loans amounted to $111.5 million at March 31, 2002, an increase
of $1.9 million from December 31, 2001 due mainly to growth in home equity
lines.
Deposits - Total deposits amounted to $833.0 million at March 31, 2002, up $16.1
million from $816.9 million at December 31, 2001. Savings deposits amounted to
$322.7 million at March 31,2002, an increase of $5.8 million from December 31,
2001. Time deposits increased $25.2 million, or 6.9%, from December 31, 2001 and
amounted to $390.4 million at March 31, 2002. Demand deposits amounted to $119.9
million at March 31, 2002, down $14.9 million from the December 31, 2001
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 and to purchase
securities. FHLB advances amounted to $414.1 million at March 31, 2002, down
$17.4 million from the December 31, 2001 amount mainly due to the increased
deposit balances. In addition, other borrowings outstanding at March 31, 2002
and December 31, 2001 amounted to $4.4 million and $2.1 million, respectively.
For the three months ended March 31, 2002, net cash provided by operations
amounted to $8.0 million. Proceeds from sales of loans in the first quarter of
2002 amounted to $24.4 million, while loans originated for sale amounted to
$18.6 million. Net cash used in investing activities amounted to $18.9 million
and was primarily used to purchase securities. Net cash used in financing
activities was $907 thousand, the majority of which was used to pay cash
dividends. (See Consolidated Statements of Cash Flows for additional
information.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
March 31, December 31,
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,659 $2,195
Nonaccrual loans less than 90 days past due 1,532 1,632
- --------------------------------------------------------------------------------
Total nonaccrual loans 3,191 3,827
Other real estate owned 30 30
- --------------------------------------------------------------------------------
Total nonperforming assets $3,221 $3,857
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .53% .63%
Nonperforming assets as a percentage of total assets .24% .28%
Allowance for loan losses to nonaccrual loans 428.24% 355.20%
Allowance for loan losses to total loans 2.29% 2.24%
As of March 31, 2002 and December 31, 2001, no accruing loans were 90 days or
more past due.
Impaired loans consist of all nonaccrual commercial loans. At March 31, 2002,
the recorded investment in impaired loans was $1.5 million, which had a related
allowance amounting to $126 thousand. During the three months ended March 31,
2002, the average recorded investment in impaired loans was $1.8 million. Also
during this period, interest income recognized on impaired loans amounted to
approximately $16 thousand. Interest income on impaired loans is recognized on a
cash basis only.
The following is an analysis of nonaccrual loans by loan category:
March 31, December 31,
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Residential real estate $ 882 $1,161
Commercial:
Mortgages 1,163 1,472
Other 310 509
Consumer 836 685
- --------------------------------------------------------------------------------
Total nonaccrual loans $3,191 $3,827
- --------------------------------------------------------------------------------
Capital Resources
Total equity capital increased $1.2 million during the first quarter of 2002 and
amounted to $99.2 million. This increase was principally attributable to a $2.1
million increase in retained earnings. (See the Consolidated Statements of
Changes in Shareholders' Equity for additional information.)
The ratio of total equity to total assets amounted to 7.3% at March 31, 2002,
compared to 7.2% at December 31, 2001. Book value per share as of March 31, 2002
and December 31, 2001 amounted to $8.26 and $8.15, respectively.
At March 31, 2002, the Corporation's Tier 1 risk-based capital ratio was 12.69%
and the total risk-adjusted capital ratio was 14.33%. The Corporation's Tier 1
leverage ratio amounted to 6.91% at March 31, 2002. These ratios were above the
ratios required to be categorized as well-capitalized.
Dividends payable at March 31, 2002 amounted to $1.7 million, representing $.14
per share payable on April 15, 2002, an increase of 7.7% over the $.13 per share
declared in the fourth quarter of 2001. The source of funds for dividends paid
by the Corporation is dividends received from its subsidiary bank. The
subsidiary bank is a regulated enterprise, and as such its ability to pay
dividends to the parent is subject to regulatory review and restriction.
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 that 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 March 31, 2002, 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 1.83% 3.76%
200 basis point decrease in rates -4.39% -14.19%
It should be noted that an interest rate decrease of 200 basis points is
extremely unlikely in the current interest rate environment, as it would bring
many interest rates to at or near zero. 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, 2001.
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 March 31, 2002, an immediate 200 basis
point rise in rates would result in a 4.8% 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 1.2% 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 March 31, 2002, including both debt and equity
securities, was 5.9%, 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 March 31, 2002 the carrying value of the interest rate floor contract
amounted to $518 thousand and is reported in other assets.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
10.a Change in Control Agreement
10.b Amendment to Trust Agreement Under Supplemental
Pension and Profit Sharing Plan
11 Statement re Computation of Per Share Earnings
(b) There were no reports on Form 8-K filed during the quarter ended
March 31, 2002.
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)
May 14, 2002 By: John C. Warren
-----------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
May 14, 2002 By: David V. Devault
-----------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting
officer)