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, 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 July 31, 2002 was 13,032,570.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended June 30, 2002
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
Consolidated Statements of Income
Three and Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 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
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 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)
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $36,450 $30,399
Federal funds sold and other short-term investments 21,000 20,500
Mortgage loans held for sale 1,944 7,710
Securities:
Available for sale, at fair value 503,992 453,956
Held to maturity, at cost; fair value $236,121
in 2002 and $177,595 in 2001 230,655 175,105
- --------------------------------------------------------------------------------
Total securities 734,647 629,061
Federal Home Loan Bank stock, at cost 24,582 23,491
Loans 742,987 605,645
Less allowance for loan losses 15,466 13,593
- --------------------------------------------------------------------------------
Net loans 727,521 592,052
Premises and equipment, net 24,478 22,102
Accrued interest receivable 8,035 7,124
Goodwill 22,695 -
Other assets 33,101 29,790
- --------------------------------------------------------------------------------
Total assets $1,634,453 $1,362,229
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $160,130 $134,783
Savings 428,942 316,953
Time 468,372 365,140
- --------------------------------------------------------------------------------
Total deposits 1,057,444 816,876
Dividends payable 1,824 1,569
Federal Home Loan Bank advances 432,731 431,490
Other borrowings 6,660 2,087
Accrued expenses and other liabilities 13,776 12,270
- --------------------------------------------------------------------------------
Total liabilities 1,512,435 1,264,292
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 13,086,795 shares
in 2002 and 12,065,283 shares in 2001 818 754
Paid-in capital 28,798 10,696
Retained earnings 85,378 81,114
Accumulated other comprehensive income 8,183 6,416
Treasury stock, at cost; 60,167 shares in 2002
and 54,102 shares in 2001 (1,159) (1,043)
- --------------------------------------------------------------------------------
Total shareholders' equity 122,018 97,937
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,634,453 $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 Six Months
Periods ended June 30, 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $12,823 $12,659 $23,804 $25,820
Interest from securities 9,307 8,691 17,495 17,081
Dividends on corporate stock and Federal Home Loan Bank stock 497 582 980 1,199
Interest on federal funds sold and other short-term investments 46 180 108 383
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 22,673 22,112 42,387 44,483
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,182 1,386 2,153 2,754
Time deposits 4,340 4,872 8,463 10,047
Federal Home Loan Bank advances 5,510 6,529 10,729 12,754
Other 20 25 37 53
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 11,052 12,812 21,382 25,608
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 11,621 9,300 21,005 18,875
Provision for loan losses 100 150 200 350
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,521 9,150 20,805 18,525
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,667 2,735 5,232 5,308
Service charges on deposit accounts 975 920 1,802 1,786
Merchant processing fees 776 650 1,222 991
Net gains on loan sales 398 627 914 836
Income from bank-owned life insurance 285 279 573 551
Net gains on sales of securities 381 403 672 408
Other income 303 355 598 678
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,785 5,969 11,013 10,558
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 6,008 5,168 11,583 10,359
Net occupancy 670 629 1,295 1,352
Equipment 798 809 1,583 1,634
Legal, audit and professional fees 221 524 394 836
Merchant processing costs 614 530 971 800
Advertising and promotion 436 275 676 479
Office supplies 166 164 286 328
Acquisition related expenses 605 - 605 -
Litigation settlement cost - - - 4,800
Other 1,956 1,675 3,245 2,934
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 11,474 9,774 20,638 23,522
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,832 5,345 11,180 5,561
Income tax expense 1,808 1,545 3,412 1,607
- -----------------------------------------------------------------------------------------------------------------------
Net income $4,024 $3,800 $7,768 $3,954
- -----------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.31 $.32 $.62 $.33
Diluted earnings per share $.31 $.31 $.62 $.32
Cash dividends declared per share $.14 $.13 $.28 $.26
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 Stock Total
- ------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $754 $10,696 $81,114 $6,416 $(1,043) $97,937
Net income 7,768 7,768
Other comprehensive income, net of tax:
Net unrealized gains on securities 2,426 2,426
Reclassification adjustments (659) (659)
--------
Comprehensive income 9,535
Cash dividends declared (3,504) (3,504)
Shares issued (153) 420 267
Shares issued for acquisition 64 18,255 18,319
Shares repurchased (536) (536)
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $818 $28,798 $85,378 $8,183 $(1,159) $122,018
- ------------------------------------------------------------------------------------------------------------------------
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, 2002 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $7,768 $3,954
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 200 350
Depreciation of premises and equipment 1,459 1,470
Amortization of premium in excess of accretion of
discount on debt securities 508 59
Increase in bank-owned life insurance (573) (551)
Depreciation (appreciation) of derivative
instruments 324 (285)
Net accretion of intangibles (8) -
Net gains on sales of securities (672) (408)
Net gains on loan sales (914) (836)
Proceeds from sales of loans 39,297 40,967
Loans originated for sale (32,740) (42,981)
(Increase) decrease in accrued interest receivable (437) 122
Increase in other assets (594) (1,968)
Decrease in accrued expenses and other liabilities(2,362) (1,377)
Other, net 350 501
- --------------------------------------------------------------------------------
Net cash provided (used) by operating activities 11,606 (983)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (145,737) (115,035)
Proceeds from sales 28,603 238
Maturities and principal repayments 76,505 71,425
Securities held to maturity:
Purchases (84,828) (53,257)
Maturities and principal repayments 29,189 12,157
Purchase of Federal Home Loan Bank stock - (3,933)
Principal collected on loans under loan
originations (22,175) (12,918)
Proceeds from sales of other real estate owned 13 150
Purchases of premises and equipment (1,293) (2,917)
Cash acquired, net of payment made for acquisition 34,506 -
- --------------------------------------------------------------------------------
Net cash used in investing activities (85,217) (104,090)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 103,054 18,675
Net increase in other borrowings 1,719 2,861
Proceeds from Federal Home Loan Bank advances 366,000 490,000
Repayment of Federal Home Loan Bank advances (387,007) (408,549)
Purchase of treasury stock (536) -
Net effect of common stock transactions 181 111
Cash dividends paid (3,249) (3,003)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 80,162 100,095
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 6,551 (4,978)
Cash and cash equivalents at beginning of year 50,899 43,860
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $57,450 $38,882
- --------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $ - $168
Loans charged off 209 122
Increase in unrealized gain on securities available
for sale, net of tax 1,767 1,345
Increase in paid-in capital resulting from tax
benefits on stock option exercises 86 194
In conjunction with the purchase acquisition detailed in Note 3 to the
Consolidated Financial Statements, assets were acquired and liabilities were
assumed as follows:
Fair value of assets acquired $204,807 $-
Less liabilities assumed 166,753 -
Supplemental Disclosures:
Interest payments $21,218 $26,203
Income tax payments 4,600 2,932
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 June 30, 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 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, 2001.
(2) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued 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 eliminated 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 apply
to all business combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001 or later.
Also in June 2001, the FASB 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 were required to be
applied starting with fiscal years beginning after December 15, 2001.
The adoption of the foregoing pronouncements did not have a material impact on
the Corporation's financial statements with respect to any business combinations
that occurred prior to 2002. SFAS Nos. 141 and 142 were applied to the
acquisition of First Financial Corp., which was completed on April 16, 2002. See
Note 3 to the Consolidated Financial Statements for discussion of the First
Financial Corp. acquisition.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This Statement established a single
accounting model to be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, broadened the presentation
of discontinued operations to include more disposal transactions, and resolves
significant implementation issues related to SFAS No. 121. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The provisions of this Statement are to be applied prospectively. The adoption
of this pronouncement did not have a material impact on the Corporation's
financial statements.
(3) Acquisition
On April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. The results of First Financial Corp.'s
operations have been included in the Corporation's Consolidated Statements of
Income since that date. 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 closed the Richmond and North Kingstown offices and consolidated
them into existing Washington Trust banking offices in May 2002. Pursuant to the
Agreement and Plan of Merger dated November 12, 2001, the acquisition was
effected by means of the merger of First Financial Corp. with and into
Washington Trust Bancorp, Inc. and the merger of First Bank and Trust Company
with and into The Washington Trust Company. The acquisition was accounted for as
a purchase in accordance with SFAS No. 141 "Business Combinations" and the
provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" were also
applied.
The Corporation issued 1,021,512 common shares and paid $19.4 million in cash to
the First Financial Corp. shareholders in connection with the acquisition. The
total purchase price of First Financial Corp. was $38.1 million. 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 following table summarizes the fair values of the assets acquired and
liabilities assumed for First Financial Corp. at the date of acquisition. The
Corporation expects that some adjustments of the fair values assigned to the
assets acquired and liabilities assumed at April 16, 2002 may be subsequently
recorded, although such adjustments are not expected to be material. A
substantial portion of the First Financial Corp. investment portfolio was
liquidated prior to April 16, 2002.
(Dollars in thousands) April 16,
2002
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $43,034
Short-term investments 11,208
Investments 6,521
Federal Home Loan Bank stock 1,091
Net loans 113,703
Premises and equipment, net 2,539
Accrued interest receivable 474
Goodwill 21,866
Other assets 4,371
- --------------------------------------------------------------------------------
Total assets acquired $204,807
- --------------------------------------------------------------------------------
Liabilities:
Deposits $137,729
Federal Home Loan Bank advances 22,303
Other borrowings 2,854
Accrued expenses and other liabilities 3,867
- --------------------------------------------------------------------------------
Total liabilities acquired $166,753
- --------------------------------------------------------------------------------
Net assets acquired $38,054
- --------------------------------------------------------------------------------
Other assets included core deposit intangibles of $1.8 million with an average
useful life of 10 years.
(4) Securities
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 53,147 $ 2,152 $ - $ 55,299
Mortgage-backed securities 356,779 6,630 (325) 363,084
Corporate bonds 62,145 1,206 (1,445) 61,906
Corporate stocks 19,118 5,693 (1,108) 23,703
- ---------------------------------------------------------------------------------------------------------------------
Total 491,189 15,681 (2,878) 503,992
- ---------------------------------------------------------------------------------------------------------------------
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 six months ended June 30, 2002, proceeds from sales of securities
available for sale amounted to $28.6 million while net realized gains on these
sales amounted to $672 thousand.
</FN>
Securities held to maturity are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 6,000 $112 $ - $ 6,112
Mortgage-backed securities 204,838 4,569 - 209,407
States and political subdivisions 19,817 785 - 20,602
- ---------------------------------------------------------------------------------------------------------------------
Total 230,655 5,466 - 236,121
- ---------------------------------------------------------------------------------------------------------------------
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 six months ended
June 30, 2002.
</FN>
Securities available for sale and held to maturity with a fair value of $458.0
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 June 30, 2002 and December 31, 2001,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $28.6 million and $28.4 million were collateralized for the
discount window at the Federal Reserve Bank at June 30, 2002 and December 31,
2001, respectively. There were no borrowings with the Federal Reserve Bank at
either date.
(5) Loan Portfolio
The following is a summary of loans:
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Commercial:
Mortgages (1) $185,918 $118,999
Construction and development (2) 11,432 1,930
Other (3) 175,245 139,704
- --------------------------------------------------------------------------------
Total commercial 372,595 260,633
Residential real estate:
Mortgages (4) 236,652 223,681
Homeowner construction 12,439 11,678
- --------------------------------------------------------------------------------
Total residential real estate 249,091 235,359
Consumer 121,301 109,653
- --------------------------------------------------------------------------------
Total loans $742,987 $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 9 to the Consolidated Financial Statements for
additional discussion of FHLB borrowings)
(6) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three Months Six Months
------------------------------------------------------
Periods ended June 30, 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $13,665 $13,431 $13,593 $13,135
Allowance on acquired loans 1,829 - 1,829 -
Provision charged to expense 100 150 200 350
Recoveries of loans previously charged off 24 134 53 267
Loans charged off (152) (85) (209) (122)
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $15,466 $13,630 $15,466 $13,630
- ---------------------------------------------------------------------------------------------------------------------
(7) Goodwill and other intangibles
The second quarter 2002 acquisition of First Financial Corp. resulted in the
recording of goodwill of $22.7 million. Included in this amount were $829
thousand of business combination costs (primarily legal, accounting and
investment advisor fees) capitalized in accordance with accounting principles
generally accepted in the United States of America. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
acquired in business combinations after June 30, 2001 will not be amortized.
Included in other assets at June 30, 2002 and December 31, 2001, were core
deposit intangibles with carrying values of $2.3 million and $669 thousand,
respectively. In conjunction with the 2002 First Financial Corp. acquisition,
the Corporation recorded core deposit intangibles of $1.8 million. Amortization
of core deposit intangibles, included in other noninterest expense, amounted to
$141 thousand and $32 thousand for the second quarter of 2002 and 2001,
respectively. Comparable amounts for the six months ended June 30, 2002 and 2001
were $174 thousand and $65 thousand, respectively.
(8) Derivative Financial Instruments
The Corporation was party to a five-year interest rate floor contract with a
notional amount of $20 million that was to mature in February 2003. The floor
contract entitled the Corporation to receive payment from a counterparty if the
three-month LIBOR rate fell below 5.50%. The Corporation and the counterparty
agreed to an early termination date of May 7, 2002 and the Corporation received
a final payment from the counterparty of $606 thousand.
The Corporation recognized the fair value of this derivative as an asset on the
balance sheet and changes in fair value were recorded in current earnings. The
carrying value of the interest rate floor contract amounted to $739 thousand at
December 31, 2001. Included in interest income in the second quarter of 2002 and
2001, was appreciation in value amounting to $8 thousand and $16 thousand,
respectively. Included in interest income for the six months ended June 30, 2002
was $229 thousand of depreciation in value through the termination date.
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 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 June 30, 2002 and December 31, 2001, the carrying value of
these commitments amounted to ($9) thousand and $86 thousand, respectively.
Changes in fair value are recorded in current earnings and amounted to $2
thousand and $33 thousand of appreciation in value for the three months ended
June 30, 2002 and 2001, respectively. Included in earnings for the six months
ended June 30, 2002 and 2001, was ($95) thousand of depreciation and $24
thousand of appreciation in value, respectively.
(9) Borrowings
Federal Home Loan Bank advances outstanding are summarized below:
(Dollars in thousands) June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
FHLB advances $432,731 $431,490
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at June 30, 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 June
30, 2002 and December 31, 2001. Included in the collateral were securities
available for sale and held to maturity with a fair value of $433.2 million and
$376.5 million that were specifically pledged to secure FHLB borrowings at June
30, 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) June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $3,345 $1,583
Securities sold under repurchase agreements 2,862 -
Other 453 504
- --------------------------------------------------------------------------------
Other borrowings $6,660 $2,087
- --------------------------------------------------------------------------------
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, 2002, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2002 and 2001, changes in shareholders' equity and cash flows for
the six-month periods ended June 30, 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
July 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 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.
Acquisition
On April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank, headquartered in Providence, Rhode Island.
First Bank and Trust Company operated banking offices in Providence, Cranston,
Richmond and North Kingstown, Rhode Island. The Richmond and North Kingstown
offices were closed and consolidated into existing Washington Trust banking
offices in May 2002. The Corporation issued 1,021,512 common shares and paid
$19.4 million in cash to First Financial Corp. shareholders in connection with
the acquisition. The total purchase price of First Financial Corp. was $38.1
million. The Corporation recorded $22.7 million of goodwill and $1.8 million of
core deposit intangibles in connection with this acquisition. In addition, the
Corporation incurred special charges relating to the acquisition of $605
thousand ($417 thousand, net of tax). See Note 3 to the Consolidated Financial
Statements for additional information concerning the acquisition.
Results of Operations
The Corporation reported net income of $4.0 million, or $.31 per diluted share,
for the three months ended June 30, 2002. Net income for second quarter of 2001
amounted to $3.8 million, or $.31 per diluted share. In the second quarter of
2002, the Corporation completed the acquisition of First Financial Corp., parent
company of First Bank and Trust Company. Second quarter 2002 results included
special charges relating to the acquisition of $605 thousand ($417 thousand, net
of tax). On an operating basis, exclusive of these special charges, earnings for
the three months ended June 30, 2002 amounted to $4.4 million, or $.34 per
diluted share, up 16.9% on a dollar basis and 9.7% on a diluted per share basis
from the earnings reported for the same quarter a year ago. The Corporation's
rates of return on average assets and average equity for the three months ended
June 30, 2002 were 1.03% and 13.68%, respectively. On an operating basis, the
Corporation's return on average assets and average equity for the quarter ended
June 30, 2002 were 1.14% and 15.09%. Comparable amounts for the second quarter
of 2001 were 1.18% and 16.72%, respectively.
Net income for the six months ended June 30, 2002 amounted to $7.8 million, or
$.62 per diluted share. Operating earnings for the first six months of 2002
amounted to $8.2 million, or $.65 per diluted share, up 12.2% on a dollar basis
and 8.3% on a diluted per share basis from the $7.3 million, or $.60 per diluted
share earned in the comparable 2001 period. Operating earnings exclude 2002
acquisition costs of $417 thousand, net of tax and a 2001 litigation settlement
of $3.3 million, net of tax. The Corporation's rates of return on average assets
and average equity for the six months ended June 30, 2002 were 1.07% and 14.27%,
respectively. On an operating basis, the Corporation's return on average assets
and average equity for the first six months of 2002 were 1.12% and 15.04%.
Comparable amounts for the 2001 period, on an operating basis, were 1.16% and
16.01%, respectively.
For the three months ended June 30, 2002, net interest income (the difference
between interest earned on loans and investments and interest paid on deposits
and other borrowings) amounted to $11.6 million, up 25% from the $9.3 million
earned in the second quarter of 2001. Net interest income for the six months
ended June 30, 2002 amounted to $21.0 million, up 11.3% from the $18.9 million
earned in the corresponding 2001 period. These increases are primarily
attributable to the purchase of First Financial Corp. in the second quarter of
2002. (See additional discussion under the caption "Net Interest Income".)
The Corporation's provision for loan losses was $100 thousand and $150 thousand
in the second quarter of 2002 and 2001, respectively. For the six months ended
June 30, 2002 and 2001, the provision for loan losses amounted to $200 thousand
and $350 thousand, respectively. The allowance for loan losses increased from
$13.6 million at December 31, 2001 to $15.5 million at June 30, 2002 due to the
$1.8 million allowance on acquired First Bank and Trust Company loans and the
year to date 2002 provision and recoveries, net of charge-offs. The provision
for the three-month and six-month periods ended June 30, 2002 decreased compared
to the same periods 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 $5.4 million for the quarter ended June 30, 2002,
compared to $5.6 million for the second quarter of 2001. For the six months
ended June 30, 2002, other noninterest income amounted to $10.3 million, up by
$191 thousand from the comparable 2001 period. This increase is mainly
attributable to increases in merchant processing fees, offset in part by lower
trust and investment management revenues. Merchant processing fees for the six
months ended June 30, 2002 amounted to $1.2 million, up $231 thousand or 23.3%,
from $991 thousand earned for the six months ended June 30, 2001. Increases in
merchant transaction volume, as well as the addition of new merchant accounts in
2002, are primarily responsible for the increase in merchant processing fees.
Trust and investment management revenue totaled $5.2 million for the six months
ended June 30, 2002, compared to $5.3 million for the corresponding 2001 period.
Revenue growth has slowed reflecting financial market declines. The market value
of trust and investment management assets under administration amounted to $1.5
billion and $1.6 billion at June 30, 2002 and December 31, 2001, respectively.
Net realized securities gains for the three months ended June 30, 2002 amounted
to $381 thousand, compared to $403 thousand for the comparable 2001 period.
Included in net realized gains for the second quarter of 2002 and 2001 were
gains totaling $381 thousand and $351 thousand, respectively, related to annual
contributions of appreciated equity securities to the Corporation's charitable
foundation. The costs associated with the contributions amounted to $403
thousand and $353 thousand and were included in other noninterest expenses in
the second quarter of 2002 and 2001, respectively. For the six months ended June
30, 2002, net realized securities gains totaled $672 million, compared to $408
million for the same period in 2001.
For the quarter ended June 30, 2002, total operating noninterest expense (total
noninterest expense excluding the second quarter acquisition-related expenses of
$605 thousand and the 2001 litigation settlement of $4.8 million) amounted to
$10.9 million, an increase of 11.2% from the comparable 2001 amount. For the six
months ended June 30, 2002, total operating noninterest expense amounted to
$20.0 million, up 7.0% from $18.7 million for the first six months of 2001.
Salaries and benefit expense amounted to $11.6 million for the six months ended
June 30, 2002, up $1.2 million or 11.8%, from the $10.4 million reported for the
comparable period in 2001. In addition, advertising and promotion expenses were
up $197 thousand for the six months ended June 30, 2002 compared to the same
period in 2001.
Income tax expense amounted to $3.4 million and $1.6 million for the six months
ended June 30, 2002 and 2001, respectively. The Corporation's effective tax rate
for the first six months of 2002 was 30.5%, compared to 28.9% for the
corresponding 2001 period. The increase in the effective tax rate was primarily
due to the effect of the 2001 litigation settlement on the 2001 effective tax
rate.
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, 2002 amounted to $21.5
million, up $2.1 million or 11.0% from the same 2001 period. For the six months
ended June 30, 2002, average interest-earning assets amounted to $1.360 billion,
up $169.4 million, or 14.2%, 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 six months ended June 30, 2002 and 2001 were 3.19% and 3.28%, respectively.
The interest rate spread increased slightly to 2.77% for the six months ended
June 30, 2002. The yield on total interest-earnings assets declined 126 basis
points to 6.36%, while the cost of interest-bearing liabilities decreased 129
basis points to 3.59%. The increase in average interest-earnings assets was
primarily responsible for the decrease in the net interest margin.
Total average securities rose $117.5 million, or 20.0%, 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 six months ended June 30, 2002,
compared to 6.57% 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 7.34% for the six months ended June
30, 2002, down 129 basis points from 8.63% for the comparable 2001 period. This
decline is primarily due to lower marginal yields on floating and adjustable
rate loans for the first half of 2002 as compared to the prior year period and a
decline in yields on new loan originations. Average loans for the six months
ended June 30, 2002 rose $51.8 million over the prior year and amounted to
$656.4 million. Average commercial loans rose 22.4% to $304.5 million while the
yield on commercial loans declined 165 basis points to 7.89%. Included in
interest income on commercial loans for the six months ended June 30, 2002, was
$229 thousand of depreciation in value of the interest rate floor contract
through the termination of the contract in May 2002 (See additional discussion
in Note 8 "Derivative Financial Instruments"). Appreciation in the value of the
interest rate contract for the same prior year period amounted to $270 thousand.
Average residential real estate loans amounted to $237.6 million, down 6.1% from
the prior year level. The yield on residential real estate loans decreased 64
basis points from the prior year period, amounting to 7.19%. Average consumer
loans rose 11.3% over the prior year. The yield on consumer loans amounted to
6.17%, a decrease of 227 basis points from the prior year yield of 8.44% mainly
due to a decline in yield on home equity lines.
Average interest-bearing liabilities increased 13.7% to $1.203 billion at June
30, 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
3.59% for the six months ended June 30, 2002, down from 4.88% for the comparable
2001 period. Average savings deposits for the six months ended June 30, 2002
increased $69.9 million, or 25.6%, to $342.6 million from the comparable 2001
amount. The rate paid on savings deposits for the first six months of 2002 was
1.27%, compared to 2.04% for the same 2001 period. Average time deposits
increased $68.6 million to $425.5 million with a decrease of 167 basis points in
the rate paid. For the six months ended June 30, 2002, average demand deposits,
an interest-free funding source, were up by $30.4 million, or 29.6%, from the
same prior year period. Average FHLB advances for the six months ended June 30,
2002 amounted to $431.2 million, up 1.3% from the comparable 2001 amount. The
average rate paid on FHLB advances for the six months ended June 30, 2002 was
5.02%, a decrease of 102 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.
Six months ended June 30, 2002 2001
- -------------------------------------------- ------------------------------------ ----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------- ------------- ----------- ----------- -------------- ----------- ----------
Assets:
Residential real estate loans $237,551 $8,467 7.19% $253,039 $9,821 7.83%
Commercial and other loans 304,534 11,922 7.89% 248,876 11,768 9.54%
Consumer loans 114,323 3,496 6.17% 102,681 4,298 8.44%
- --------------------------------------------------------------------------------------------------------------------
Total loans 656,408 23,885 7.34% 604,596 25,887 8.63%
Federal funds sold and other
short-term investments 13,233 108 1.64% 15,436 383 5.00%
Taxable debt securities 628,022 17,077 5.48% 512,207 16,597 6.53%
Nontaxable debt securities 19,908 644 6.53% 22,588 744 6.64%
Corporate stocks and FHLB stock 42,871 1,180 5.55% 36,260 1,376 7.66%
- --------------------------------------------------------------------------------------------------------------------
Total securities 704,034 19,009 5.44% 586,491 19,100 6.57%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,360,442 42,894 6.36% 1,191,087 44,987 7.62%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 95,475 69,740
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,455,9177 $1,260,827
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $342,591 $2,153 1.27% $272,662 $2,754 2.04%
Time deposits 425,452 8,463 4.01% 356,866 10,048 5.68%
FHLB advances 431,161 10,729 5.02% 425,678 12,753 6.04%
Other 3,393 37 2.22% 2,134 53 4.99%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,202,597 21,382 3.59% 1,057,340 25,608 4.88%
Demand deposits 133,150 102,707
Non interest-bearing liabilities 11,303 9,624
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,347,050 1,169,671
Total shareholders' equity 108,867 91,156
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,455,917 $1,260,827
- --------------------------------------------------------------------------------------------------------------------
Net interest income $21,512 $19,379
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 2.77% 2.74%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 3.19% 3.28%
- --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Six months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Commercial and other loans $ 81 $ 67
Nontaxable debt securities 225 260
Corporate stocks 201 177
Financial Condition and Liquidity
Total assets rose from $1.362 billion at December 31, 2001 to $1.634 billion at
June 30, 2002. This increase was primarily attributable to the purchase of First
Financial Corp. in the second quarter of 2002. Average assets totaled $1.456
billion for the six months ended June 30, 2002, up 15.5% over the comparable
2001 period.
Securities Available for Sale - The carrying value of securities available for
sale at June 30, 2002 amounted to $504.0 million, compared to the December 31,
2001 amount of $454.0 million. The net unrealized gains on securities available
for sale amounted to $12.8 million at June 30, 2002 and $10.2 million at
December 31, 2001.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $230.7 million at June 30, 2002, up 31.7% 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
$5.5 million at June 30, 2002, compared to $2.5 million at December 31, 2001.
This increase was attributable to the effects of decreases in medium and
long-term interest rates that occurred during the second quarter of 2002.
Loans - At June 30, 2002, total loans amounted to $743.0 million, up by $137.3
million from the December 31, 2001 balance of $605.6 million. This increase was
primarily a result of the acquisition of First Financial Corp. Residential real
estate loans were also impacted by the refinancing of fixed rate residential
loans being sold into the secondary market. For the six months ended June 30,
2002, average residential real estate loans decreased $15.5 million from the
prior year. Total residential real estate loans amounted to $249.1 million at
June 30, 2002, up from the December 31, 2001 balance of $235.4 million.
Commercial loans increased $112.0 million from December 31, 2001 to $372.6
million at June 30, 2002. Total consumer loans amounted to $121.3 million at
June 30, 2002, an increase of $11.6 million from December 31, 2001 due mainly to
growth in home equity lines.
Deposits - Total deposits amounted to $1.057 billion at June 30, 2002, up $240.6
million or 29.4% from December 31, 2001. Included in this amount are $137.7
million of deposits acquired from First Financial Corp. Savings deposits
amounted to $428.9 million at June 30, 2002, an increase of $112.0 million from
December 31, 2001. Time deposits increased $103.2 million, or 28.3%, from
December 31, 2001 and amounted to $468.4 million at June 30, 2002. Demand
deposits amounted to $160.1 million at June 30, 2002, up $25.3 million from the
December 31, 2001 balance. Excluding the amounts acquired, the most significant
area of deposit growth in 2002 was in savings accounts.
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 $432.7 million at June 30, 2002, compared
to $431.5 million at December 31, 2001. In addition, other borrowings
outstanding at June 30, 2002 and December 31, 2001 amounted to $6.7 million and
$2.1 million, respectively.
For the six months ended June 30, 2002, net cash provided by operations amounted
to $11.6 million. Proceeds from sales of loans in the first six months of 2002
amounted to $39.3 million, while loans originated for sale amounted to $32.7
million. Net cash used in investing activities amounted to $85.2 million and was
primarily used to purchase securities. Included in net cash used in investing
activities for the six months ended June 30, 2002 was $34.5 million of cash
acquired, net of payment made for the acquisition of First Financial Corp. A
substantial portion of the First Financial Corp. investment portfolio was
liquidated prior to the date of acquisition. Net cash provided by financing
activities was $80.2 million, the majority of which was derived from 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) 2002 2001
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,024 $2,195
Nonaccrual loans less than 90 days past due 2,018 1,632
- --------------------------------------------------------------------------------
Total nonaccrual loans 4,042 3,827
Other real estate owned 30 30
- --------------------------------------------------------------------------------
Total nonperforming assets $4,072 $3,857
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .54% .63%
Nonperforming assets as a percentage of total assets .25% .28%
Allowance for loan losses to nonaccrual loans 382.63% 355.20%
Allowance for loan losses to total loans 2.08% 2.24%
Not included in the analysis of nonperforming assets at June 30, 2002 above are
approximately $20 thousand of loans greater than 90 days past due and still
accruing. These loans consist primarily of commercial loans secured by real
estate. As of December 31, 2001, no accruing loans were 90 days or more past
due.
Impaired loans consist of all nonaccrual commercial loans. At June 30, 2002, the
recorded investment in impaired loans was $2.3 million, which had a related
allowance amounting to $95 thousand. During the six months ended June 30, 2002,
the average recorded investment in impaired loans was $2.1 million. Also during
this period, interest income recognized on impaired loans amounted to
approximately $41 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) 2002 2001
- --------------------------------------------------------------------------------
Residential real estate $ 993 $1,161
Commercial:
Mortgages 784 1,472
Other 1,483 509
Consumer 782 685
- --------------------------------------------------------------------------------
Total nonaccrual loans $4,042 $3,827
- --------------------------------------------------------------------------------
Capital Resources
Total equity capital increased $24.1 million, or 24.6%, during the first six
months of 2002 and amounted to $122.0 million. This increase was principally
attributable to common stock issued in connection with the acquisition of First
Financial Corp. (See the Consolidated Statements of Changes in Shareholders'
Equity and Note 3 to the Consolidated Financial Statements for additional
information.)
The ratio of total equity to total assets amounted to 7.5% at June 30, 2002,
compared to 7.2% at December 31, 2001. Book value per share as of June 30, 2002
and December 31, 2001 amounted to $9.37 and $8.15, respectively.
At June 30, 2002, the Corporation's Tier 1 risk-based capital ratio was 10.21%
and the total risk-adjusted capital ratio was 11.70%. The Corporation's Tier 1
leverage ratio amounted to 5.83% at June 30, 2002. These ratios were above the
ratios required to be categorized as well-capitalized.
Dividends payable at June 30, 2002 amounted to $1.8 million, representing $.14
per share payable on July 15, 2002, consistent with the dividend declared in the
first quarter of 2002. 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.
Recent Accounting Developments
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and is
effective for financial statements issued for all fiscal years beginning after
June 15, 2002. 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 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 12-month, 24-month and 60-month horizon, and to develop appropriate
strategies to manage this exposure. As of June 30, 2002, the Corporation's
estimated exposure as a percentage of net interest income for the first 12-month
period, the subsequent 12-month period thereafter (months 13 - 24), and months
1-60, respectively, is as follows:
Months Months Months
1 - 12 13-24 1 - 60
------------------------------------------------------------------------------
200 basis point increase in rates 3.09% 3.27% 4.04%
200 basis point decrease in rates -5.55% -13.15% -15.65%
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 60-month simulation
horizon, the results do not reflect adjustments in strategy that the Corporation
could implement in response to rate shifts, and should not be relied upon as a
estimate of future 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 rate shifts of up to 400 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, 2002, an immediate 200 basis point rise in
rates would result in a 3.6% 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 1.4% 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, 2002, including both debt and equity securities, was 4.1%, assuming a
one-year time horizon and a 5% probability of occurrence for "value at risk"
analysis.
On May 7, 2002, the Corporation terminated a five-year interest rate floor
contract with a notional amount of $20 million that was to mature in February
2003. The floor contract was intended to function as a hedge against reductions
in interest income realized from prime-based loans and entitled the Corporation
to receive payment from a counterparty if the three-month LIBOR rate fell below
5.50%. In connection with the early termination, the Corporation agreed to a
final payment from the counterparty of $606 thousand. The Corporation recognized
the fair value of this derivative as an asset on the balance sheet and changes
in fair value were recorded in current earnings.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 23, 2002.
(b) The results of matters voted upon are presented below.
i. Election of Directors to Serve Until 2005 Annual Meeting: Gary P. Bennett, Larry J. Hirsch, Esq., Mary E. Kennard,
Esq., H. Douglas Randall, III and John F. Treanor were nominated and duly elected to hold office as Directors
of Washington Trust Bancorp, Inc., each to serve a term of three years and until their successors are duly elected
and qualified, by the number of votes set forth opposite each person's name as follows:
Abstentions
Votes Votes and Broker
Term In Favor Withheld Non-votes
---------------------------------- ---------- ---------------- -------------- -----------------
Gary P. Bennett 3 years 10,096,427 144,260 0
Larry J. Hirsch, Esq. 3 years 10,205,644 35,043 0
Mary E. Kennard, Esq. 3 years 10,038,181 202,506 0
H. Douglas Randall, III 3 years 10,191,749 48,938 0
John F. Treanor 3 years 10,099,045 141,642 0
The following persons continued as Directors of Washington Trust Bancorp, Inc. following the Annual Meeting:
Gary P. Bennett
Larry J. Hirsch, Esq.
Mary E. Kennard, Esq.
H. Douglas Randall, III
John F. Treanor
Alcino G. Almeida
Katherine W. Hoxsie, CPA
Edward M. Mazze, Ph.D.
Joyce O. Resnikoff
John C. Warren
Steven J. Crandall
Richard A. Grills
Victor J. Orsinger, II
Patrick J. Shanahan, Jr.
James P. Sullivan, CPA
Neil H. Thorp
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, 2002 was passed by a vote of 9,966,235 shares in favor; 219,206 shares against, with
55,246 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
4.a Amended and Restated Rights Agreement
10.a Noncompetition Agreement
11 Statement re Computation of Per Share Earnings
(b) On April 19, 2002, a Form 8-K was filed which reported that the
Corporation completed the acquisition of First Financial Corp.,
parent of First Bank and Trust Company.
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 13, 2002 By: John C. Warren
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John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
August 13, 2002 By: David V. Devault
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David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)