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, 2003 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X]Yes [ ]No
The number of shares of common stock of the registrant outstanding as of April
30, 2003 was 13,080,557.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended March 31, 2003
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
Consolidated Statements of Income
Three Months Ended March 31, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
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
Item 4. Controls and Procedures
PART II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
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 (as hereinafter defined) actual results, performance or
achievements 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
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $39,084 $39,298
Federal funds sold and other short-term investments 10,550 11,750
Mortgage loans held for sale 11,583 4,566
Securities:
Available for sale, at fair value 578,260 553,556
Held to maturity, at cost; fair value $271,849
in 2003 and $250,446 in 2002 264,047 242,277
- --------------------------------------------------------------------------------
Total securities 842,307 795,833
Federal Home Loan Bank stock, at cost 28,600 24,582
Loans 811,132 795,126
Less allowance for loan losses 15,495 15,487
- --------------------------------------------------------------------------------
Net loans 795,637 779,639
Premises and equipment, net 25,485 24,415
Accrued interest receivable 8,459 7,773
Goodwill and other intangibles 25,083 25,260
Other assets 28,839 32,545
- --------------------------------------------------------------------------------
Total assets $1,815,627 $1,745,661
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $169,636 $157,539
Savings 467,027 471,354
Time 484,183 481,600
- --------------------------------------------------------------------------------
Total deposits 1,120,846 1,110,493
Dividends payable 1,962 1,825
Federal Home Loan Bank advances 544,387 480,080
Other borrowings 1,926 9,183
Accrued expenses and other liabilities 15,496 15,359
- --------------------------------------------------------------------------------
Total liabilities 1,684,617 1,616,940
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 13,086,795 shares
in 2003 and 2002 818 818
Paid-in capital 28,411 28,767
Retained earnings 93,505 90,717
Unamortized employee restricted stock (20) (24)
Accumulated other comprehensive income 8,602 9,294
Treasury stock, at cost; 15,788 shares in 2003 and
and 44,361 in 2002 (306) (851)
- --------------------------------------------------------------------------------
Total shareholders' equity 131,010 128,721
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,815,627 $1,745,661
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands,
CONSOLIDATED STATEMENTS OF INCOME except per share amounts)
(Unaudited)
Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $12,646 $10,981
Interest on securities 8,555 8,188
Dividends on corporate stock and Federal Home Loan Bank stock 487 483
Interest on federal funds sold and other short-term investments 37 62
- --------------------------------------------------------------------------------------------------------------------
Total interest income 21,725 19,714
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 950 971
Time deposits 3,934 4,123
Federal Home Loan Bank advances 4,893 5,219
Other 19 17
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 9,796 10,330
- --------------------------------------------------------------------------------------------------------------------
Net interest income 11,929 9,384
Provision for loan losses 100 100
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,829 9,284
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,533 2,565
Service charges on deposit accounts 1,100 827
Merchant processing fees 457 446
Net gains on loan sales 1,238 516
Income from bank-owned life insurance 284 288
Net realized gains on securities 230 291
Other income 191 295
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,033 5,228
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 6,534 5,575
Net occupancy 762 625
Equipment 837 785
Merchant processing costs 362 357
Legal, audit and professional fees 305 173
Advertising and promotion 270 240
Outsourced services 371 261
Amortization of intangibles 180 32
Other 1,357 1,116
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,978 9,164
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,884 5,348
Income tax expense 2,134 1,604
- --------------------------------------------------------------------------------------------------------------------
Net income $4,750 $3,744
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 13,059.3 12,004.9
Weighted average shares outstanding - diluted 13,230.2 12,174.6
Per share information:
Basic earnings per share $.36 $.31
Diluted earnings per share $.36 $.31
Cash dividends declared per share $.15 $.14
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)
Unamortized Accumulated
Employee Other
Common Paid-in Retained Restricted Comprehensive Treasury
Three months ended March 31, Stock Capital Earnings Stock Income Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
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 (343) (343)
Reclassification adjustments (187) (187)
------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721
Net income 4,750 4,750
Other comprehensive income, net of tax:
Net unrealized losses on securities (542) (542)
Reclassification adjustments (150) (150)
------------
Comprehensive income 4,058
Cash dividends declared (1,962) (1,962)
Amortization of employee restricted 4 4
stock
Shares issued (356) 663 307
Shares repurchased (118) (118)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 $818 $28,411 $93,505 $(20) $8,602 $(306) $131,010
- ----------------------------------------------------------------------------------------------------------------------------------
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, 2003 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $4,750 $3,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 100
Depreciation of premises and equipment 775 727
Amortization of premium in excess of accretion of
discount on debt securities 1,178 255
Increase in bank-owned life insurance cash
surrender value (284) (288)
Net amortization of intangibles 180 32
Net realized gains on securities (230) (291)
Net gains on loan sales (1,238) (516)
Proceeds from sales of loans 49,410 24,422
Loans originated for sale (55,362) (18,640)
(Increase) decrease in accrued interest
receivable (686) 5
Decrease (increase) in other assets 3,973 39
Increase (decrease) in accrued expenses
and other liabilities 475 (1,911)
Other, net 259 276
- --------------------------------------------------------------------------------
Net cash provided by operating activities 3,300 7,954
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (138,049) (73,486)
Proceeds from sales 42,430 28,195
Maturities and principal repayments 69,307 43,189
Securities held to maturity:
Purchases (62,347) (39,459)
Maturities and principal repayments 40,141 14,211
Purchase of Federal Home Loan Bank stock (4,018) -
Principal collected on loans (under) over
loan originations (8,500) 8,844
Purchase of loans (7,661) -
Proceeds from sales of other real estate owned 128 -
Purchases of premises and equipment (1,845) (355)
- --------------------------------------------------------------------------------
Net cash used in investing activities (70,414) (18,861)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 10,436 16,110
Net (decrease) increase in other borrowings (7,257) 2,320
Proceeds from Federal Home Loan Bank advances 362,100 170,500
Repayment of Federal Home Loan Bank advances (297,746) (187,923)
Purchase of treasury stock (118) (374)
Net effect of common stock transactions 110 21
Cash dividends paid (1,825) (1,561)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 65,700 (907)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,414) (11,814)
Cash and cash equivalents at beginning of year 51,048 50,899
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $49,634 $39,085
- --------------------------------------------------------------------------------
(Continued)
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 (Continued)
(Unaudited)
Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $242 $-
Loans charged off 101 57
Loans made to facilitate the sale of other real
estate owned 322 -
Increase in unrealized gain on securities
available for sale, net of tax (692) (530)
Increase in paid-in capital resulting from tax
benefits on stock option exercises 201 45
Supplemental Disclosures:
Interest payments $9,722 $10,509
Income tax payments (refunds), net (205) 100
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accounting and reporting policies of Washington Trust Bancorp, Inc. (the
"Bancorp") and its wholly owned subsidiary, The Washington Trust Company (the
"Bank" or "Subsidiary") (together, the "Corporation") are in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices of the banking industry. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) and disclosures
necessary to present fairly the Corporation's financial position as of March 31,
2003 and December 31, 2002 and the results of operations and cash flows for the
interim periods presented.
The consolidated financial statements include the accounts of the Bancorp and
the Bank. All significant intercompany balances and transactions have been
eliminated.
The unaudited consolidated financial statements of the Corporation presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. The Corporation has not changed its
accounting and reporting policies from those disclosed in the Bancorp's Annual
Report on Form 10-K for the year ended December 31, 2002. Certain
reclassifications have been made to prior period financial statements to conform
to the 2003 presentation. Such reclassifications have no effect on previously
reported net income or shareholders' equity.
(2) Stock Based Compensation
The Corporation measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net
income and earnings per share computed using the fair value based method of
accounting for these plans as required by SFAS No. 123 and SFAS No. 148.
In determining the pro forma disclosures required by SFAS No. 123 and SFAS No.
148, the fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following table presents pro forma
net income and earnings per share assuming options granted were accounted for
using the fair value method prescribed by SFAS No. 123 and SFAS No. 148.
(Dollars in thousands, except per share amounts)
Three months ended March 31, 2003 2002
--------------------------------------------------------------------------
Net income As reported $4,750 $3,744
Less:
Total stock-based compensation
determined under fair value
method for all awards, net of tax (226) (178)
--------------------------------------------------------------------------
Pro forma $4,524 $3,566
Basic earnings per share As reported $.36 $.31
Pro forma $.35 $.30
Diluted earnings per share As reported $.36 $.31
Pro forma $.34 $.29
There were no options granted for the three-month periods ended March 31, 2003
and 2002.
(3) Securities
Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 88,846 $ 2,976 $ (1) $ 91,821
Mortgage-backed securities 370,291 7,738 (259) 377,770
Corporate bonds 82,599 1,500 (1,846) 82,253
Corporate stocks 23,173 4,479 (1,236) 26,416
- ---------------------------------------------------------------------------------------------------------------------
Total 564,909 16,693 (3,342) 578,260
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 74,852 3,121 - 77,973
Mortgage-backed securities 378,162 8,830 (245) 386,747
Corporate bonds 67,018 1,386 (1,969) 66,435
Corporate stocks 19,077 4,459 (1,135) 22,401
- ---------------------------------------------------------------------------------------------------------------------
Total $539,109 $17,796 $(3,349) $553,556
- ---------------------------------------------------------------------------------------------------------------------
<FN>
For the three months ended March 31, 2003, proceeds from sales of securities
available for sale amounted to $42.4 million while net realized gains on these
sales amounted to $230 thousand.
</FN>
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 8,000 $113 $ - $ 8,113
Mortgage-backed securities 239,909 6,765 - 246,674
States and political subdivisions 16,138 924 - 17,062
- ---------------------------------------------------------------------------------------------------------------------
Total 264,047 7,802 - 271,849
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2002
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 3,000 13 - 3,013
Mortgage-backed securities 220,711 7,199 - 227,910
States and political subdivisions 18,566 957 - 19,523
- ---------------------------------------------------------------------------------------------------------------------
Total $242,277 $8,169 $ - $250,446
- ---------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales of securities held to maturity during the three months ended
March 31, 2003.
</FN>
Securities available for sale and held to maturity with a fair value of $556.3
million and $559.7 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, 2003 and December 31, 2002,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $25.1 million and $27.6 million were collateralized for the
discount window at the Federal Reserve Bank at March 31, 2003 and December 31,
2002, respectively. There were no borrowings with the Federal Reserve Bank at
either date.
At March 31, 2003, securities available for sale with a fair value of $2.7
million were designated in a rabbi trust for a nonqualified retirement plan. At
December 31, 2002, assets with a carrying value of $2.8 million were designated
for this purpose and were classified in Other Assets in the Corporation's
Consolidated Balance Sheet.
(4) Loan Portfolio
The following is a summary of loans:
(Dollars in thousands) March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Commercial:
Mortgages (1) $202,525 $197,814
Construction and development (2) 12,150 10,337
Other (3) 176,483 174,018
- --------------------------------------------------------------------------------
Total commercial 391,158 382,169
Residential real estate:
Mortgages (4) 275,295 269,548
Homeowner construction 10,394 11,338
- --------------------------------------------------------------------------------
Total residential real estate 285,689 280,886
Consumer
Home equity lines 85,210 81,503
Other 49,075 50,568
- --------------------------------------------------------------------------------
Total consumer 134,285 132,071
- --------------------------------------------------------------------------------
Total loans (5) $811,132 $795,126
- --------------------------------------------------------------------------------
(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 8 for additional discussion of FHLB borrowings)
(5) Net of $800 thousand and $478 thousand of unearned income and unamortized
loan origination and other fees net of costs at March 31, 3003 and
December31, 2002, respectively. Includes $1.3 million and $1.1 million of
net purchased premium at March 31, 2003 and December 31, 2002,
respectively.
(5) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Three Months
-------------------------
Periods ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Balance at beginning of period $15,487 $13,593
Provision charged to expense 100 100
Recoveries of loans previously charged off 9 29
Loans charged off (101) (57)
- --------------------------------------------------------------------------------
Balance at end of period $15,495 $13,665
- --------------------------------------------------------------------------------
(6) Goodwill and other intangibles
The second quarter 2002 acquisition of First Financial Corp. resulted in the
recording of goodwill of $22.6 million. 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.
At March 31, 2003 and December 31, 2002, the Corporation had other intangible
assets with carrying values of $2.5 million and $2.7 million, respectively. In
conjunction with the 2002 First Financial Corp. acquisition, the Corporation
recorded core deposit intangibles of $1.8 million with an average useful life of
ten years. Amortization expense associated with these other intangible assets,
amounted to $180 thousand and $32 thousand for the first quarter of 2003 and
2002, respectively.
The changes in the carrying value of goodwill and other intangible assets for
the three months ended March 31, 2003 are as follows:
(Dollars in thousands) Core Deposit Other Total
Goodwill Intangibles Intangibles Intangibles
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $22,588 $2,009 $663 $25,260
Recorded during the period 3 - - 3
Amortization expense - (109) (71) (180)
Impairment recognized - - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance March 31, 2003 $22,591 $1,900 $592 $25,083
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Core Deposit Other Total
Estimated amortization expense Intangibles Intangibles Intangibles
- --------------------------------------------------------------------------------
April 1 through December 31, 2003 $255 $284 $719
2004 359 284 643
2005 303 95 398
2006 261 - 261
2007 140 - 140
The components of intangible assets as of March 31, 2003 are as follows:
(Dollars in thousands)
Gross Carrying Accumulated Net Carrying
Intangible assets Amount Amortization Amount
- --------------------------------------------------------------------------------
Core deposit intangibles $3,096 $1,196 $1,900
Other intangibles 852 260 592
- --------------------------------------------------------------------------------
Total $3,948 $1,456 $2,492
- --------------------------------------------------------------------------------
(7) Derivative Financial Instruments
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, 2003 and December 31, 2002, the carrying value of
these commitments amounted to $(70) thousand and $(45) thousand, respectively.
Changes in fair value are recorded in current earnings and amounted to $60
thousand of appreciation and $(97) thousand of depreciation in value for the
three months ended March 31, 2003 and 2002, respectively.
(8) Borrowings
Federal Home Loan Bank advances outstanding are summarized below:
(Dollars in thousands) March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
FHLB advances $544,387 $480,080
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at March 31, 2003 and December
31, 2002. 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, 2003 and December 31, 2002. Included in the collateral were securities
available for sale and held to maturity with a fair value of $538.1 million and
$540.0 million that were specifically pledged to secure FHLB borrowings at March
31, 2003 and December 31, 2002, respectively. Unless there is an event of
default under the agreement, the Corporation may use, encumber or dispose of 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,
2003 2002
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $1,095 $8,283
Other 831 900
- --------------------------------------------------------------------------------
Other borrowings $1,926 $9,183
- --------------------------------------------------------------------------------
(9) Litigation
Read & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
(the "Action") by Read & Lundy, Inc. and its principal, Cliff McFarland
(collectively, "the Plaintiffs"). The original complaint alleged claims for
breach of contract, tortious interference with contractual relations, and civil
conspiracy arising out of First Bank's 1996 loan to a third party company. The
Plaintiffs allege that the loan to the third party enabled that company to
compete unlawfully with Read & Lundy and thereby diminished Read & Lundy's
profitability. The complaint was amended in December 2001 to add a claim for
violation of the Rhode Island Trade Secrets Act. The Bank was substituted as
defendant in June 2002 following the acquisition of First Financial Corp., the
parent company of First Bank.
The Plaintiffs had previously filed a suit in the same court in 1996 against the
third party company and its founder. The Bank is not a party to this suit. In
September 2001, judgment was entered against the third party company and its
founder in favor of the Plaintiffs for approximately $1.6 million in
compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend in the Action that the Bank as an alleged co-conspirator
of the third party company is liable for this entire amount, none of which has
been collected from the third party company. The Plaintiffs are also seeking
additional compensatory damages and other costs allegedly arising after the
third party trial. Including interest, it is estimated that the amount of the
claim against the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has meritorious defenses in the Action. The Bank
vigorously defended the Action and in December 2002 obtained a judgment in its
favor and a dismissal of the Action on all counts by way of summary judgment
motion. Plaintiffs appealed the judgment to the Rhode Island Supreme Court in
December 2002. The appeal is pending. Because of the uncertainties surrounding
the outcome of the appeal no assurance can be given that the litigation will be
resolved in favor of the Bank. Management and legal counsel are unable to
estimate the amount of loss, if any, that may be incurred with respect to this
litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in
March 2002 in connection with their suit against the third party company. The
Bank has also been substituted for First Bank in these proceedings. In this
matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment
writ of attachment obtained in 1997 by the Plaintiffs against funds held by
First Bank as collateral for the loan to the third party company. First Bank had
applied these funds as an offset to that loan in 1999. In August 2002, judgment
against the Bank was rendered on this motion requiring the Bank to make the
funds available for attachment by the Plaintiffs. This judgment is under appeal
to the Rhode Island Supreme Court. During the quarter ended September 30, 2002,
the Bank recorded a liability for the judgment award of $273 thousand in
connection with this matter.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its
capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") as well as
Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") in the
United States District Court for the District of Rhode Island (the "District
Court") by Beverly Kiepler ("Kiepler"), a beneficiary of the Nyman Trust. The
claim is for damages which the Nyman Trust allegedly incurred as a result of the
Bank's alleged failure to file suit against the Co-Defendants for their wrongful
dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an
asset of the Nyman Trust. The amount of damages to the Nyman Trust caused by the
alleged dilution was approximately $1.3 million, based on the number of shares
of Nyman Mfg. that were held by the Nyman Trust. Kiepler has alleged that the
Bank breached its fiduciary duty by failing to join a separate suit brought by
Kiepler in 1998 in her individual capacity as a shareholder of Nyman Mfg.,
against the Co-Defendants.
In July 2002, the Bank, in its capacity as trustee of the Nyman Trust, filed a
cross-claim in the District Court against the Co-Defendants for the
above-described damages to the Nyman Trust. On April 16, 2003 the District Court
awarded the Nyman Trust a judgment against the Co-Defendants in the amount of
$1.3 million plus statutory interest of 12% per annum accruing since September
1997. The Bank, in its capacity as trustee of the Nyman Trust, is in the process
of finalizing its judgment in the District Court and pursuing collection of
same. The eventual outcome of this judgment may affect the outcome of the
Keipler suit against the Bank. Further, the amount of the judgment may be
affected by the outcome of a related suit to which the Bank is not a party.
Notwithstanding the award granted to the Nyman Trust by the District Court,
Keipler continues to move forward with her suit against the Bank.
This case is being vigorously contested by management. Management believes that
the Bank did not breach its fiduciary duty and that the allegations by Kiepler
are without merit. Because of the numerous uncertainties that surround the
litigation, management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision for this lawsuit has been recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
With respect to the unaudited consolidated financial statements of Washington
Trust Bancorp, Inc. and subsidiaries at March 31, 2003 and for the three month
periods ended March 31, 2003 and 2002, KPMG LLP has made a review (based on the
procedures adopted by the American Institute of Certified Public Accountants)
and not an audit, set forth in their separate report dated May 14, 2003
appearing on page 14. That report does not express an opinion on the interim
unaudited consolidated financial information. KPMG LLP has not carried out any
significant or additional audit tests beyond those which would have been
necessary if their report had not been included. Accordingly, such report is not
a "report" or "part of the Registration Statement" within the meaning of
Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
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, 2003, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three-month periods ended March 31, 2003 and 2002. 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 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, 2002, 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 14, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the consolidated balance sheet as of March 31, 2003, is fairly stated, in all
material respects.
KPMG LLP
Providence, Rhode Island
May 14, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements 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. 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 Bancorp's
Annual Report on Form 10-K for the year ended December 31, 2002 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
In April 2003, the Corporation opened its sixteenth branch office located in
Warwick, Rhode Island. The opening of this branch expands the Bank's market area
into Kent County.
Results of Operations
The Corporation reported net income of $4.75 million, or $.36 per diluted share,
for the three months ended March 31, 2003. Net income for the first quarter of
2002 amounted to $3.7 million, or $.31 per diluted share. For the quarter ended
March 31, 2003, the Corporation's rates of return on average assets and average
equity were 1.07% and 14.56%, respectively. Rates of return on average assets
and average equity for the first quarter of 2002 were 1.11% and 14.98%,
respectively.
Net interest income (the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings) for the first
quarter of 2003 increased by 27.1% to $11.9 million from the first quarter of
2002, largely due to the April 2002 acquisition of First Financial Corp. For the
quarter, average-earning assets increased $388.1 million, or 30.5%, compared to
the same period last year, of which approximately $178.5 million related to the
acquisition of First Financial Corp. Although net interest income has increased,
the net interest margin for the first quarter of 2003 was 2.97%, down from 3.07%
in the first quarter of 2002. The net interest margin has been affected by the
significant decline in market interest rates and reflects a decline in yields on
loans and securities offset somewhat by lower funding costs of interest-bearing
deposits and FHLB advances. (See additional discussion under the caption "Net
Interest Income.")
The Corporation's provision for loan losses amounted to $100 thousand in the
first quarter of 2003 and the first quarter of 2002. The year to date 2003
provision remained consistent with 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 for
loan losses increased from $15.487 million at December 31, 2002 to $15.495
million at March 31, 2003 due to the year to date 2003 provision and recoveries,
net of charge-offs. The Corporation's ratio of the allowance for loan losses to
total loans decreased from 1.95% at December 31, 2002 to 1.91% at March 31,
2003.
Other noninterest income (noninterest income excluding net realized gains on
securities) amounted to $5.8 million for the quarter ended March 31, 2003, up by
17.5% from the $4.9 million reported for the first quarter of 2002. The growth
in noninterest income was mainly attributable to increases in gains on loan
sales and service charges on deposits. For the first quarter of 2003, gains on
loan sales totaled $1.2 million, up $722 thousand from the comparable 2002
period. As a result of the decline in interest rates, the Corporation has
experienced heavy residential mortgage activity, predominately refinancing,
which increased the amount of loans sold into the secondary market. The
Corporation expects this activity to continue through the second quarter of
2003, however this level of activity may not be sustainable in future periods.
In addition to selling residential mortgages loans, the Corporation began
selling the guaranteed portion of SBA loan originations in 2002. Included in
gains on loan sales for the first quarter of 2003 are approximately $100
thousand in gains on sales of SBA loans. For the three months ended March 31,
2003, service charges on deposit accounts amounted to $1.1 million, up by 33.0%
from the $827 thousand reported for the same period a year ago. Growth in
deposits and changes in the fee structure of various deposit products were
contributing factors in the increase. Trust and investment management income,
the largest component of noninterest income, totaled $2.5 million for the three
months ended March 31, 2003, down 1.2% from the corresponding 2002 period,
reflecting the financial market declines. The market value of trust and
investment management assets under administration amounted to $1.479 billion and
$1.524 billion at March 31, 2003 and December 31, 2002, respectively.
Net realized securities gains for the three months ended March 31, 2003 and 2002
amounted to $230 thousand and $291 thousand, respectively. The gains resulted
primarily from the sale of certain U.S. government agency and mortgage-backed
securities to take advantage of market opportunities and to reposition the
securities portfolio.
For the quarter ended March 31, 2003, total noninterest expense amounted to
$11.0 million, up $1.8 million from the comparable 2002 amount. This increase
was primarily due to normal growth and higher operating costs resulting from the
April 2002 acquisition of First Financial Corp. Salaries and benefit expense,
the largest component of total noninterest expense, amounted to $6.5 million for
the three months ended March 31, 2003, compared to the $5.6 million reported for
the comparable period in 2002.
Income tax expense amounted to $2.1 million and $1.6 million for the three
months ended March 31, 2003 and 2002, respectively. The Corporation's effective
tax rate for the first three months of 2003 was 31.0%, compared to 30.0% for the
corresponding 2002 period.
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, 2003 amounted to
$12.2 million, up $2.5 million, or 26.2%, from the same 2002 period. The
increase in net interest income was largely due to the April 2002 acquisition of
First Financial Corp. For the quarter ended March 31, 2003, average
interest-earning assets amounted to $1.660 billion, up $388.1 million, or 30.5%,
compared to the same period last year, of which approximately $178.5 million
related to the acquisition of First Financial Corp.
The net interest margins (FTE net interest income as a percentage of average
interest-earning assets) for the three months ended March 31, 2003 and 2002 were
2.97% and 3.07%, respectively. The net interest margin has been affected by the
significant decline in market interest rates and reflects a decline in yields on
loans and securities offset somewhat by lower funding costs of interest-bearing
deposits and FHLB advances. The interest rate spread increased 5 basis points to
2.68% for the three months ended March 31, 2003. The yield on total
interest-earnings assets declined 100 basis points to 5.37%, while the cost of
interest-bearing liabilities decreased 105 basis points to 2.69%.
Total average investments rose $178.3 million, or 26.7%, over the comparable
prior year period mainly due to purchases of taxable debt securities. The FTE
rate of return on investments was 4.45% for the three months ended March 31,
2003, compared to 5.44% for the same 2002 period. The decrease in yields on
investments reflects a combination of lower yields on variable rate securities
tied to short-term interest rates and lower marginal rates on investment
purchases in 2003 relative to the prior year.
The yield on average total loans amounted to 6.31% for the three months ended
March 31, 2003, down 108 basis points from 7.39% for the comparable 2002 period.
This decline is primarily due to lower marginal yields on floating and
adjustable rate loans for the first three months of 2003 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, 2003 amounted to $814.9 million, an
increase of $209.7 million compared to the same period last year, of which
approximately $115.3 million related to the April 2002 First Financial Corp.
acquisition. Average commercial loans rose 49.6% to $389.5 million while the
yield on commercial loans declined 91 basis points to 6.97%. Included in
interest income on commercial loans for the three months ended March 31, 2002,
was $221 thousand of depreciation in value of the interest rate floor contract
that was terminated in May 2002. Average consumer loans rose 20.5% over the
prior year and amounted to $133.1 million. The yield on consumer loans decreased
119 basis points from the prior year to 5.06%, mainly due to a decline in yield
on home equity loans. Average residential real estate loans amounted to $292.3
million, up 24.7% from the prior year level. The yield on residential real
estate loans decreased 137 basis points from the prior year period, amounting to
6.01%.
Average interest-bearing liabilities increased $355.9 million, or 31.8%, to
$1.476 billion at March 31, 2003, of which approximately $162.9 million related
to the April 2002 First Financial acquisition. The increase in average
interest-bearing liabilities was mainly due to growth in deposits. Due to lower
rates paid on both borrowed funds and deposits, the Corporation's total cost of
funds on interest-bearing liabilities amounted to 2.69% for the three months
ended March 31, 2003, down from 3.74% for the comparable 2002 period.
Average savings deposits for the three months ended March 31, 2003 increased
$146.2 million, or 46.6%, to $459.8 million from the comparable 2002 amount. The
rate paid on savings deposits for the first three months of 2003 was 0.84%,
compared to 1.26% for the same 2002 period. Average time deposits increased
$100.5 million to $481.8 million with a decrease of 108 basis points in the rate
paid. For the three months ended March 31, 2003, average demand deposits, an
interest-free funding source, were up by $34.4 million, or 28.3%, from the same
prior year period. Average FHLB advances for the three months ended March 31,
2003 amounted to $532.7 million, up from the comparable 2002 amount of $422.8
million. The average rate paid on FHLB advances for the three months ended March
31, 2003 was 3.73%, a decrease of 128 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, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $292,276 $4,329 6.01% $234,395 $4,264 7.38%
Commercial and other loans 389,545 6,696 6.97% 260,320 5,060 7.88%
Consumer loans 133,050 1,660 5.06% 110,413 1,703 6.25%
- --------------------------------------------------------------------------------------------------------------------
Total loans 814,871 12,685 6.31% 605,128 11,027 7.39%
Federal funds sold and other
short-term investments 14,946 37 1.01% 15,005 62 1.69%
Taxable debt securities 764,975 8,373 4.44% 590,107 7,978 5.48%
Nontaxable debt securities 17,462 280 6.51% 19,999 323 6.56%
Corporate stocks and FHLB stock 48,025 589 4.98% 41,981 582 5.62%
- --------------------------------------------------------------------------------------------------------------------
Total investments 845,408 9,279 4.45% 667,092 8,945 5.44%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,660,279 21,964 5.37% 1,272,220 19,972 6.37%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 118,059 79,167
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,778,338 $1,351,387
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $459,777 $950 0.84% $313,578 $971 1.26%
Time deposits 481,766 3,934 3.31% 381,311 4,123 4.39%
FHLB advances 532,698 4,893 3.73% 422,769 5,219 5.01%
Other 2,227 19 3.45% 2,916 17 2.37%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,476,468 9,796 2.69% 1,120,574 10,330 3.74%
Demand deposits 155,944 121,530
Non interest-bearing liabilities 15,420 9,331
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,647,832 1,251,435
Total shareholders' equity 130,506 99,952
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,778,338 $1,351,387
- --------------------------------------------------------------------------------------------------------------------
Net interest income $12,168 $9,642
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 2.68% 2.63%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 2.97% 3.07%
- --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Commercial and other loans $39 $46
Nontaxable debt securities 98 112
Corporate stocks 102 100
Financial Condition and Liquidity
Total assets rose from $1.746 billion at December 31, 2002 to $1.816 billion at
March 31, 2003. Average assets totaled $1.778 billion for the three months ended
March 31, 2003, up 31.6% over the comparable 2002 period. (See additional
discussion under the caption "Net Interest Income").
Securities Available for Sale - The carrying value of securities available for
sale at March 31, 2003 amounted to $578.3 million, an increase of 4.5% from the
December 31, 2002 balance of $553.6 million. This increase was mainly due to
purchases of U.S. government agency securities and corporate bonds. The net
unrealized gains on securities available for sale amounted to $13.4 million at
March 31, 2003 and $14.4 million at December 31, 2002.
Securities Held to Maturity - Primarily as a result of purchases of
mortgage-backed securities, the carrying value of securities held to maturity
rose 9.0% from $242.3 million at December 31, 2002 to $264.0 million at March
31, 2003. The net unrealized gain on securities held to maturity amounted to
$7.8 million at March 31, 2003, compared to $8.2 million at December 31, 2002.
Loans - Total loans increased $16.0 million to $811.1 million at March 31, 2003,
led by a $9.0 million increase in the commercial and commercial real estate
portfolio. Commercial loans amounted to $391.2 million at March 31, 2003, up
from $382.2 million at December 31, 2002. As of March 31, 2003, total
residential real estate loans amounted to $285.7 million, up $4.8 million from
the balance of $280.9 million at December 31, 2002. Residential real estate
loans were impacted by the refinancing of fixed rate residential loans being
sold into the secondary market. In the first quarter of 2003, the Corporation
purchased a total of $7.7 million of residential mortgages from other financial
institutions. Total consumer loans amounted to $134.3 million at March 31, 2003,
an increase of $2.2 million from December 31, 2002.
Deposits - Total deposits amounted to $1.121 billion at March 31, 2003, up from
the December 31, 2002 balance of $1.110 million. Demand deposits amounted to
$169.6 million at March 31, 2003, up $12.1 million, or 7.7%, from December 31,
2002. Savings deposits amounted to $467.0 million at March 31, 2003, a decrease
of $4.3 million from December 31, 2002. Time deposits increased $2.6 million
from December 31, 2002 and amounted to $484.2 million at March 31, 2003.
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 $544.4 million at March 31, 2003, compared
to $480.1 million at December 31, 2002. In addition, other borrowings
outstanding at March 31, 2003 amounted to $1.9 million, down $7.3 million from
the December 31, 2002 balance of $9.2 million. The decrease in other borrowings
was primarily due to a lower Treasury, Tax and Loan demand note balance.
For the three months ended March 31, 2003, net cash provided by operations
amounted to $3.3 million, the majority of which was generated by net income.
Proceeds from sales of loans in the first quarter of 2003 amounted to $49.4
million, while loans originated for sale amounted to $55.4 million. Net cash
used in investing activities amounted to $70.4 million and was primarily used to
purchase securities. Net cash provided by financing activities was $65.7
million, the majority of which was derived from FHLB advances. (See Consolidated
Statements of Cash Flows for additional information.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
(Dollars in thousands) March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,094 $2,198
Nonaccrual loans less than 90 days past due 1,940 1,979
- --------------------------------------------------------------------------------
Total nonaccrual loans 4,034 4,177
Other real estate owned 4 86
- --------------------------------------------------------------------------------
Total nonperforming assets $4,038 $4,263
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .50% .53%
Nonperforming assets as a percentage of total assets .22% .24%
Allowance for loan losses to nonaccrual loans 384.11 370.78%
Allowance for loan losses to total loans 1.91 1.95%
There were no accruing loans 90 days or more past due at March 31, 2003 and
December 31, 2002.
Impaired loans consist of all nonaccrual commercial loans. At March 31, 2003,
the recorded investment in impaired loans was $2.4 million, which had a related
allowance amounting to $97 thousand. During the three months ended March 31,
2003, the average recorded investment in impaired loans was $2.6 million. Also
during this period, interest income recognized on impaired loans amounted to
approximately $47 thousand. Interest income on impaired loans is recognized on a
cash basis only.
The following is an analysis of nonaccrual loans by loan category:
(Dollars in thousands) March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Residential real estate $1,305 $1,202
Commercial:
Mortgages 1,228 1,356
Other 1,218 1,354
Consumer 283 265
- --------------------------------------------------------------------------------
Total nonaccrual loans $4,034 $4,177
- --------------------------------------------------------------------------------
Capital Resources
Total equity capital increased $2.3 million during the first three months of
2003 and amounted to $131.0 million. This increase was principally attributable
to a $2.8 million increase in earnings retention. (See the Consolidated
Statement of Changes in Shareholders' Equity for additional information.)
The ratio of total equity to total assets amounted to 7.22% at March 31, 2003,
compared to 7.37% at December 31, 2002. Book value per share as of March 31,
2003 and December 31, 2002 amounted to $10.02 and $9.87, respectively.
At March 31, 2003, the Corporation's Tier 1 risk-based capital ratio was 10.00%
and the total risk-adjusted capital ratio was 11.41%. The Corporation's Tier 1
leverage ratio amounted to 5.59% at March 31, 2003. These ratios were above the
ratios required to be categorized as well-capitalized.
Dividends payable at March 31, 2003 amounted to $2.0 million, representing $.15
per share payable on April 15, 2003, an increase of 7.1% over the $.14 per share
declared in the fourth quarter of 2002. The source of funds for dividends paid
by the Bancorp is dividends received from the Bank. The Bank is a regulated
enterprise, and as such its ability to pay dividends to the parent is subject to
regulatory review and restriction.
Litigation
See the description of Litigation in Footnote 9 to the Consolidated Financial
Statements in this quarterly report on Form 10-Q.
Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of this pronouncement is not
expected to have a material impact on the Corporation's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Additionally, this Statement amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The amendments to SFAS No. 123 are
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to Opinion No. 28 shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002 for transition guidance and annual disclosure provisions. The
Corporation has provided the disclosure required under SFAS No. 148 in Note 2 to
the Consolidated Financial Statements.
On April 22, 2003, the FASB decided to require all companies to expense the
value of employee stock options. It has also tenatively decided in principle to
measure employee equity-based awards at their date of grant and will later
decide the method for determining the cost of employee stock options, as well as
the extent to which a final Statement on this matter will permit adjustments for
actual forfeitures and actual performance outcomes, which will affect the amount
of compensation cost recognized over the employee service period. The FASB plans
to issue an exposure draft later this year, which could become effective in
2004. Until a new Statement is issued, the provisions of SFAS No. 123 and SFAS
No. 148 remain in effect.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities under SFAS No. 133. The changes in this Statement improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. Most of the provisions of SFAS No. 149 are effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. 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 for future periods. The simulation results
are reviewed to determine whether the exposure of net interest income to changes
in interest rates remains within established tolerance levels and to develop
appropriate strategies to manage this exposure. The Corporation's interest rate
risk modeling incorporates a wide range of interest rate scenarios, including
both parallel rate shifts and changes in the shape of the yield curve of varying
magnitudes in addition to those presented here. The following table presents the
Corporation's estimated net interest income 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, as of March 31, 2003. Interest
rates are assumed to shift upward by 200 basis points or downward by 100 basis
points. This asymmetric rate shift reflects the fact that interest rates are at
extremely low levels and the likelihood of a 200 basis point decline is
considered remote.
Months 1 - 12 Months 13-24 Months 1 - 60
------------------------------------------------------------------------------
200 basis point increase in rates 2.09% -0.54% -1.00%
100 basis point decrease in rates -2.47% -6.78% -6.95%
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 Bancorp's Annual Report on Form 10-K for the
year ended December 31, 2002.
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 March 31, 2003, an immediate 200 basis point rise in
rates would result in a 3.1% decline in the value of the Corporation's available
for sale debt securities. Conversely, a 100 basis point fall in rates would
result in a 0.8% 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, 2003, including both debt and equity securities, was 2.6%, assuming a
one-year time horizon and a 5% probability of occurrence for "value at risk"
analysis.
On occasion, the Corporation has supplemented its interest rate risk management
strategies with off-balance sheet transactions. Such transactions are intended
to hedge specifically identified risks inherent in the Corporation's balance
sheet, and not to produce speculative profits. The Corporation has written
policy guidelines that designate limits on the notional value of off-balance
sheet transactions and require periodic evaluation of risks associated with
these transactions, including counterparty credit risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the
90 days prior to the date of this report, the Corporation carried out an
evaluation under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Corporation in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. The Corporation regularly reviews its disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
None.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Read & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
(the "Action") by Read & Lundy, Inc. and its principal, Cliff McFarland
(collectively, "the Plaintiffs"). The original complaint alleged claims for
breach of contract, tortious interference with contractual relations, and civil
conspiracy arising out of First Bank's 1996 loan to a third party company. The
Plaintiffs allege that the loan to the third party enabled that company to
compete unlawfully with Read & Lundy and thereby diminished Read & Lundy's
profitability. The complaint was amended in December 2001 to add a claim for
violation of the Rhode Island Trade Secrets Act. The Bank was substituted as
defendant in June 2002 following the acquisition of First Financial Corp., the
parent company of First Bank.
The Plaintiffs had previously filed a suit in the same court in 1996 against the
third party company and its founder. The Bank is not a party to this suit. In
September 2001, judgment was entered against the third party company and its
founder in favor of the Plaintiffs for approximately $1.6 million in
compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend in the Action that the Bank as an alleged co-conspirator
of the third party company is liable for this entire amount, none of which has
been collected from the third party company. The Plaintiffs are also seeking
additional compensatory damages and other costs allegedly arising after the
third party trial. Including interest, it is estimated that the amount of the
claim against the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has meritorious defenses in the Action. The Bank
vigorously defended the Action and in December 2002 obtained a judgment in its
favor and a dismissal of the Action on all counts by way of summary judgment
motion. Plaintiffs appealed the judgment to the Rhode Island Supreme Court in
December 2002. The appeal is pending. Because of the uncertainties surrounding
the outcome of the appeal no assurance can be given that the litigation will be
resolved in favor of the Bank. Management and legal counsel are unable to
estimate the amount of loss, if any, that may be incurred with respect to this
litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in
March 2002 in connection with their suit against the third party company. The
Bank has also been substituted for First Bank in these proceedings. In this
matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment
writ of attachment obtained in 1997 by the Plaintiffs against funds held by
First Bank as collateral for the loan to the third party company. First Bank had
applied these funds as an offset to that loan in 1999. In August 2002, judgment
against the Bank was rendered on this motion requiring the Bank to make the
funds available for attachment by the Plaintiffs. This judgment is under appeal
to the Rhode Island Supreme Court. During the quarter ended September 30, 2002,
the Bank recorded a liability for the judgment award of $273 thousand in
connection with this matter.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its
capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") as well as
Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") in the
United States District Court for the District of Rhode Island (the "District
Court") by Beverly Kiepler ("Kiepler"), a beneficiary of the Nyman Trust. The
claim is for damages which the Nyman Trust allegedly incurred as a result of the
Bank's alleged failure to file suit against the Co-Defendants for their wrongful
dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an
asset of the Nyman Trust. The amount of damages to the Nyman Trust caused by the
alleged dilution was approximately $1.3 million, based on the number of shares
of Nyman Mfg. that were held by the Nyman Trust. Kiepler has alleged that the
Bank breached its fiduciary duty by failing to join a separate suit brought by
Kiepler in 1998 in her individual capacity as a shareholder of Nyman Mfg.,
against the Co-Defendants.
In July 2002, the Bank, in its capacity as trustee of the Nyman Trust, filed a
cross-claim in the District Court against the Co-Defendants for the
above-described damages to the Nyman Trust. On April 16, 2003 the District Court
awarded the Nyman Trust a judgment against the Co-Defendants in the amount of
$1.3 million plus statutory interest of 12% per annum accruing since September
1997. The Bank, in its capacity as trustee of the Nyman Trust, is in the process
of finalizing its judgment in the District Court and pursuing collection of
same. The eventual outcome of this judgment may affect the outcome of the
Keipler suit against the Bank. Further, the amount of the judgment may be
affected by the outcome of a related suit to which the Bank is not a party.
Notwithstanding the award granted to the Nyman Trust by the District Court,
Keipler continues to move forward with her suit against the Bank.
This case is being vigorously contested by management. Management believes that
the Bank did not breach its fiduciary duty and that the allegations by Kiepler
are without merit. Because of the numerous uncertainties that surround the
litigation, management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision for this lawsuit has been recorded.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
10 Amended and Restated Short Term Incentive Plan Description
11 Statement re Computation of Per Share Earnings
15 Letter regarding unaudited interim financial information
(b) On April 17, 2003, a Form 8-K, which reported the Corporation's
earnings for the quarter ended March 31, 2003, was furnished to the
securities and exchange commission.
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, 2003 By: John C. Warren
--------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
May 14, 2003 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATIONS
I, John C. Warren, Chairman and Chief Executive Officer of Washington Trust
Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q, for the quarterly
period ended March 31, 2003, of Washington Trust Bancorp, Inc. (the
"Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiary, is made known to us by others with that
entity, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 By: John C. Warren
--------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
CERTIFICATIONS
I, David V. Devault, Executive Vice President, Treasurer and Chief Financial
Officer of Washington Trust Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q, for the quarterly
period ended March 31, 2003, of Washington Trust Bancorp, Inc. (the
"Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiary, is made known to us by others with that
entity, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)