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 SEPTEMBER 30, 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 October
31, 2003 was 13,163,133.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended September 30, 2003
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 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
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
(Unaudited)
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $42,858 $39,298
Federal funds sold and other short-term investments 12,600 11,750
Mortgage loans held for sale 5,740 4,566
Securities:
Available for sale, at fair value; amortized cost
$647,610 in 2003 and $539,109 in 2002 658,732 553,556
Held to maturity, at cost; fair value $190,429
in 2003 and $250,446 in 2002 185,758 242,277
- --------------------------------------------------------------------------------
Total securities 844,490 795,833
Federal Home Loan Bank stock, at cost 29,628 24,582
Loans 918,355 795,126
Less allowance for loan losses 15,813 15,487
- --------------------------------------------------------------------------------
Net loans 902,542 779,639
Premises and equipment, net 25,145 24,415
Accrued interest receivable 7,969 7,773
Goodwill and other intangibles 24,724 25,260
Other assets 35,494 32,545
- --------------------------------------------------------------------------------
Total assets $1,931,190 $1,745,661
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $196,952 $157,539
Savings 492,322 471,354
Time 495,594 481,600
- --------------------------------------------------------------------------------
Total deposits 1,184,868 1,110,493
Dividends payable 2,105 1,825
Federal Home Loan Bank advances 590,675 480,080
Other borrowings 1,859 9,183
Accrued expenses and other liabilities 15,677 15,359
- --------------------------------------------------------------------------------
Total liabilities 1,795,184 1,616,940
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 13,159,959 shares 822 818
in 2003 and 13,086,795 in 2002
Paid-in capital 29,495 28,767
Retained earnings 98,745 90,717
Unamortized employee restricted stock (28) (24)
Accumulated other comprehensive income 7,095 9,294
Treasury stock, at cost; 6,281 shares in 2003 and
44,361 in 2002 (123) (851)
- --------------------------------------------------------------------------------
Total shareholders' equity 136,006 128,721
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,931,190 $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 Nine Months
Periods ended September 30, 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $12,568 $12,958 $38,067 $36,762
Interest on securities 7,592 9,342 24,480 26,837
Dividends on corporate stock and Federal Home Loan Bank stock 528 500 1,546 1,480
Interest on federal funds sold and other short-term investments 35 63 111 171
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 20,723 22,863 64,204 65,250
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 724 1,773 2,554 3,926
Time deposits 3,740 4,161 11,473 12,624
Federal Home Loan Bank advances 4,514 4,963 14,184 15,692
Other 18 28 55 65
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,996 10,925 28,266 32,307
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 11,727 11,938 35,938 32,943
Provision for loan losses 100 100 360 300
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,627 11,838 35,578 32,643
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,692 2,468 7,969 7,700
Service charges on deposit accounts 1,242 986 3,690 2,788
Net gains on loan sales 1,383 608 4,062 1,522
Merchant processing fees 1,412 1,221 2,731 2,443
Income from bank-owned life insurance 298 291 845 864
Net realized (losses) gains on securities - (52) 630 620
Other income 420 507 908 1,105
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,447 6,029 20,835 17,042
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 6,974 6,047 20,127 17,630
Net occupancy 671 675 2,169 1,970
Equipment 830 887 2,504 2,470
Merchant processing costs 1,139 965 2,184 1,936
Legal, audit and professional fees 394 815 990 1,209
Advertising and promotion 261 271 1,073 947
Outsourced services 328 244 1,024 772
Debt prepayment penalties - - 941 -
Amortization of intangibles 180 220 539 441
Acquisition related expenses - - - 605
Other 1,413 1,205 4,465 3,987
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 12,190 11,329 36,016 31,967
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,884 6,538 20,397 17,718
Income tax expense 2,144 2,027 6,333 5,439
- ------------------------------------------------------------------------------------------------------------------------
Net income $4,740 $4,511 $14,064 $12,279
- ------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 13,133.8 13,032.9 13,094.5 12,635.9
Weighted average shares outstanding - diluted 13,486.8 13,254.3 13,341.8 12,833.7
Per share information:
Basic earnings per share $.36 $.35 $1.07 $.97
Diluted earnings per share $.35 $.34 $1.05 $.96
Cash dividends declared per share $.16 $.14 $.46 $.42
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
Nine months ended September 30, 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 12,279 12,279
Other comprehensive income, net of tax:
Net unrealized gains on securities 2,858 2,858
Reclassification adjustments (607) (607)
------------
Comprehensive income 14,530
Cash dividends declared (5,329) (5,329)
Shares issued (169) 585 416
Shares issued for acquisition 64 18,255 18,319
Shares repurchased (538) (538)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $818 $28,782 $88,064 $- $8,667 $(996) $125,335
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721
Net income 14,064 14,064
Other comprehensive income, net of tax:
Net unrealized gains on securities (1,789) (1,789)
Reclassification adjustments (410) (410)
------------
Comprehensive income 11,865
Cash dividends declared (6,036) (6,036)
Issuance of employee restricted stock,
net of amortization (4) (4)
Shares issued 4 728 851 1,583
Shares repurchased (123) (123)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $822 $29,495 $98,745 $(28) $7,095 $(123) $136,006
- ----------------------------------------------------------------------------------------------------------------------------------
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)
Nine months ended September 30, 2003 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $14,064 $12,279
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 360 300
Depreciation of premises and equipment 2,333 2,220
Amortization of premium in excess of accretion of
discount on debt securities 3,675 951
Increase in bank-owned life insurance cash
surrender value (845) (864)
Depreciation of derivative instruments - 229
Net amortization of intangibles 539 441
Net realized gains on securities (630) (620)
Net gains on loan sales (4,062) (1,522)
Proceeds from sales of loans 166,392 66,001
Loans originated for sale (163,883) (66,392)
Increase in accrued interest receivable (196) (453)
Decrease (increase) in other assets 1,729 (2,045)
Increase (decrease) in accrued expenses and
other liabilities 318 (1,230)
Other, net 276 111
- --------------------------------------------------------------------------------
Net cash provided by operating activities 20,070 9,406
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (395,953) (236,233)
Proceeds from sales 42,858 28,911
Maturities and principal repayments 245,641 112,483
Securities held to maturity:
Purchases (62,347) (92,477)
Maturities and principal repayments 117,474 50,658
Purchase of Federal Home Loan Bank stock (5,046) -
Principal collected on loans under
loan originations (19,223) (12,410)
Purchases of loans (104,465) (23,892)
Proceeds from sales of other real estate owned 136 36
Proceeds from sales of premises and equipment - 638
Purchases of premises and equipment (3,063) (2,609)
Purchases of bank owned life insurance (4,900) -
Cash acquired, net of payment made for acquisition - 34,506
- --------------------------------------------------------------------------------
Net cash used in investing activities (188,888) (140,389)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 74,566 155,240
Net (decrease) increase in other borrowings (7,324) 2,750
Proceeds from Federal Home Loan Bank advances 1,035,241 476,700
Repayment of Federal Home Loan Bank advances (924,503) (504,634)
Purchase of treasury stock (123) (538)
Net effect of common stock transactions 1,131 301
Issuance of restricted stock, net of amortization (4) -
Cash dividends paid (5,756) (5,398)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 173,228 124,421
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,410 (6,562)
Cash and cash equivalents at beginning of year 51,048 50,899
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $55,458 $44,337
- --------------------------------------------------------------------------------
(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)
Nine months ended September 30, 2003 2002
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $266 $ -
Loans charged off 212 229
Loans made to facilitate the sale of other real
estate owned 322 -
(Decrease) increase in unrealized gain on
securities available for sale, net of tax (2,199) 2,251
Increase in paid-in capital resulting from tax
benefits on stock option exercises 452 115
In conjunction with the April 16, 2002 acquisition of First Financial Corp.,
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 $28,380 $31,922
Income tax payments, net 5,584 6,603
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 September
30, 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 Nine Months
-----------------------------------------------------
Periods ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net income As reported $4,740 $4,511 $14,064 $12,279
Less:
Total stock-based compensation
determined under fair value
method for all awards, net of tax (269) (229) (725) (901)
- --------------------------------------------------------------------------------------------------------------------
Pro forma $4,471 $4,282 $13,339 $11,378
Basic earnings per share As reported $.36 $.35 $1.07 $.97
Pro forma $.34 $.33 $1.02 $.90
Diluted earnings per share As reported $.35 $.34 $1.05 $.96
Pro forma $.33 $.32 $1.00 $.89
There were 235,755 and 210,610 options granted for the nine-month periods ended
September 30, 2003 and 2002, respectively.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Securities
Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
September 30, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 87,851 $ 2,100 $ (55) $ 89,896
Mortgage-backed securities 454,934 5,026 (1,832) 458,128
Corporate bonds 81,690 1,834 (1,242) 82,282
Corporate stocks 23,135 6,295 (1,004) 28,426
- ---------------------------------------------------------------------------------------------------------------------
Total 647,610 15,255 (4,133) 658,732
- ---------------------------------------------------------------------------------------------------------------------
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 nine months ended September 30, 2003, proceeds from sales of securities
available for sale amounted to $42.9 million while net realized gains on these
sales amounted to $630 thousand.
</FN>
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
September 30, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 8,000 $ 63 $ - $ 8,063
Mortgage-backed securities 162,316 3,780 (10) 166,086
States and political subdivisions 15,442 838 - 16,280
- ---------------------------------------------------------------------------------------------------------------------
Total 185,758 4,681 (10) 190,429
- ---------------------------------------------------------------------------------------------------------------------
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 nine months ended
September 30, 2003.
</FN>
Securities available for sale and held to maturity with a fair value of $548.3
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 September 30, 2003 and December 31, 2002,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $24.3 million and $27.6 million were collateralized for the
discount window at the Federal Reserve Bank at September 30, 2003 and December
31, 2002, respectively. There were no borrowings with the Federal Reserve Bank
at either date.
At September 30, 2003, securities available for sale with a fair value of $2.4
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) September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Commercial:
Mortgages (A) $214,412 $197,814
Construction and development (B) 13,352 10,337
Other (C) 167,747 174,018
- --------------------------------------------------------------------------------
Total commercial 395,511 382,169
Residential real estate:
Mortgages (D) 358,489 269,548
Homeowner construction 13,616 11,338
- --------------------------------------------------------------------------------
Total residential real estate 372,105 280,886
Consumer
Home equity lines 106,075 81,503
Other 44,664 50,568
- --------------------------------------------------------------------------------
Total consumer 150,739 132,071
- --------------------------------------------------------------------------------
Total loans (E) $918,355 $795,126
- --------------------------------------------------------------------------------
(A)Amortizing mortgages, primarily secured by income producing property.
(B)Loans for construction of residential and commercial properties and for land
development.
(C)Loans to businesses and individuals, a substantial portion of which are
fully or partially collateralized by real estate.
(D)A substantial portion of these loans is used as qualified collateral for
FHLB borrowings (See Note 8 for additional discussion of FHLB borrowings).
(E)Net of unearned income and unamortized loan origination fees, net of costs
totaling $692 thousand and $478 thousand at September 30, 2003 and December
31, 2002, respectively. Includes $670 thousand and $1.1 million of net
purchased premium at September 30, 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 Nine Months
------------------------------------------------
Periods ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Balance at beginning of period $15,742 $15,466 $15,487 $13,593
Allowance on acquired loans - - - 1,829
Provision charged to expense 100 100 360 300
Recoveries of loans previously
charged off 61 114 178 167
Loans charged off (90) (20) (212) (229)
- --------------------------------------------------------------------------------
Balance at end of period $15,813 $15,660 $15,813 $15,660
- --------------------------------------------------------------------------------
(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. Goodwill and
intangible assets are reviewed for impairment, based on their fair values, at
least annually.
At September 30, 2003 and December 31, 2002, the Corporation had other
intangible assets with carrying values of $2.1 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 $220 thousand for the
third quarter of 2003 and 2002, respectively. Comparable amounts for the nine
months ended September 30, 2003 and 2002 were $539 thousand and $441 thousand,
respectively.
The changes in the carrying value of goodwill and other intangible assets for
the nine months ended September 30, 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 - (326) (213) (539)
Impairment recognized - - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance September 30, 2003 $22,591 $1,683 $450 $24,724
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Core Deposit Other Total
Estimated amortization expense Intangibles Intangibles Intangibles
- --------------------------------------------------------------------------------
October 1 through December 31, 2003 $109 $71 $180
2004 359 284 643
2005 303 95 398
2006 262 - 262
2007 140 - 140
The components of intangible assets as of September 30, 2003 are as follows:
(Dollars in thousands)
Gross Carrying Accumulated Net Carrying
Intangible assets Amount Amortization Amount
- --------------------------------------------------------------------------------
Core deposit intangibles $3,096 $1,413 $1,683
Other intangibles 852 402 450
- --------------------------------------------------------------------------------
Total $3,948 $1,815 $2,133
- --------------------------------------------------------------------------------
(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 September 30, 2003 and December 31, 2002, the carrying value
of these commitments amounted to $(46) thousand and $(45) thousand,
respectively. Changes in fair value are recorded in current earnings and
amounted to $106 thousand and $74 thousand of depreciation in value for the
three months ended September 30, 2003 and 2002, respectively. Included in
earnings for the nine months ended September 30, 2003 and 2002, was $2 thousand
of appreciation and $(169) thousand of depreciation in value, respectively.
(8) Borrowings
Federal Home Loan Bank ("FHLB") advances outstanding are summarized below:
(Dollars in thousands) September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
FHLB advances $590,675 $480,080
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at September 30, 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
September 30, 2003 and December 31, 2002. Included in the collateral were
securities available for sale and held to maturity with a fair value of $525.7
million and $540.0 million that were specifically pledged to secure FHLB
borrowings at September 30, 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) September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $1,086 $8,283
Other 773 900
- --------------------------------------------------------------------------------
Other borrowings $1,859 $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 against
First Bank 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 company
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 Action 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 the
Action. Consequently, no loss provision has been recorded.
A second claim ancillary to the Action 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 the third quarter of 2002,
judgment against the Bank was rendered on this motion requiring the Bank to make
the funds available for attachment by the Plaintiffs and the Bank recorded a
liability for the judgment award of $273 thousand in connection with this
matter. This judgment is under appeal to the Rhode Island Supreme Court.
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.
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 October 2003, an agreement among all parties to the suit and the related
cross-claim was executed in settlement of these matters. The settlement did not
result in any loss to the Bank. In November 2003, the District Court dismissed
the suit and related cross-claim.
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 September 30, 2003 and for the nine
month periods ended September 30, 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 November
13, 2003 appearing below. 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 September 30, 2003, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the three-month and nine-month periods ended September 30, 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 shareholders' 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 December 31, 2002, is fairly stated, in all
material respects.
KPMG LLP
Providence, Rhode Island
November 13, 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 expanded the Bank's market
area into Kent County.
Results of Operations
The Corporation reported net income of $4.7 million for the three months ended
September 30, 2003, up 5.1% from the $4.5 million reported for the third quarter
of 2002. On a diluted earnings per share basis, the Corporation earned $.35 per
diluted share for the three months ended September 30, 2003, compared to $.34
per diluted share for the third quarter of 2002. Net income for the nine months
ended September 30, 2003 amounted to $14.1 million, or $1.05 per diluted share,
as compared to $12.3 million, or $.96 per diluted share, for the same period in
2002.
Current year to date results include an after tax charge of $649 thousand, or
$.05 per diluted share, related to the prepayment of certain higher interest
rate FHLB advances in June 2003. Prior year to date results include merger
related charges of $417 thousand after tax, or $.03 per diluted share, in
connection with the acquisition of First Financial Corp in the second quarter of
2002.
The return on average assets and average equity for the three months ended
September 30, 2003 were 1.02% and 14.30%, compared to 1.09% and 14.47%,
respectively, for the three months ended September 30, 2002. The return on
average assets for the nine months ended September 30, 2003 was 1.03% as
compared to 1.08% for the same period last year, while the return on average
equity declined to 14.14% for the nine months ended September 30, 2003, as
compared to 14.33% for the corresponding period a year ago.
Net interest income (the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings) for the third
quarter of 2003 amounted to $11.7 million, compared to the $11.9 million earned
in the third quarter of 2002. The decrease is attributable to a narrowed net
interest margin, which declined from 3.16% in the third quarter of 2002 to 2.75%
in the same period of 2003. The most significant reason for the net interest
margin decline is the low level of market interest rates experienced in 2003,
which has resulted in a high level of refinancing activity in mortgage loans and
commercial loans as well as prepayments of mortgage-backed securities. Net
interest income for the nine months ended September 30, 2003 amounted to $35.9
million, up by 9.1% from the $32.9 million reported for the corresponding period
in 2002. The year to date increase in net interest income was due to
interest-earning asset growth including assets acquired through the April 2002
acquisition of First Financial Corp. For the nine months ended September 30,
2003, average-earning assets increased $277.5 million, or 19.6%, compared to the
same period last year. Although higher interest-earning asset balances have
increased net interest income, the net interest margin has declined. The net
interest margin for the first nine months of 2003 amounted to 2.89%, down 29
basis points from the 3.18% reported for the same period a year ago. The net
interest margin 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
third quarter of 2003 and 2002. The year to date 2003 provision was $360
thousand, compared to last year's amount of $300 thousand. 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 $15.5
million at December 31, 2002 to $15.8 million at September 30, 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 1.72% at September 30, 2003.
Other noninterest income (noninterest income excluding net realized gains on
securities) amounted to $7.4 million for the quarter ended September 30, 2003,
up by 22.5% from the $6.1 million reported for the third quarter of 2002. For
the nine months ended September 30, 2003, noninterest income amounted to $20.2
million, an increase of 23.0% from the comparable 2002 amount of $16.4 million.
The growth in noninterest income was mainly attributable to increases in gains
on loan sales and service charges on deposits. For the first nine months of
2003, gains on loan sales totaled $4.1 million, up $2.5 million, or 166.9%, from
the same period in 2002. As a result of the decline in interest rates during
most of 2003, the Corporation experienced heavy residential mortgage activity,
predominately refinancing, which increased the amount of loans sold into the
secondary market. The Corporation has recently experienced a decline in the
level of residential mortgage origination activity and expects to realize a
lower level of gains on loan sales in the fourth quarter of 2003. In addition to
selling residential mortgage loans, the Corporation sells the guaranteed portion
of SBA loan originations. Included in gains on loan sales for the first nine
months of 2003 and 2002 are approximately $252 thousand and $119 thousand,
respectively, in gains on sales of SBA loans. For the nine months ended
September 30, 2003, service charges on deposit accounts amounted to $3.7
million, up $902 thousand, or 32.4%, from the corresponding period a year ago.
Growth in deposits and changes in the fee structure of various deposit products
were contributing factors in the increase. Revenue from trust and investment
management services continues to be the largest component of noninterest income.
Trust and investment management income, which is closely tied to the performance
of the financial markets, totaled $8.0 million for the nine months ended
September 30, 2003, up $269 thousand, or 3.5% from the amount reported for the
corresponding period in 2002. The market value of trust and investment
management assets under administration amounted to $1.618 billion and $1.524
billion at September 30, 2003 and December 31, 2002, respectively.
There were no net realized gains on sales of securities in the third quarter of
2003. In the quarter ended September 30, 2002, the Corporation recognized net
realized losses on securities amounting to $52 thousand. This included $251
thousand in gains on sales of securities offset by $303 thousand in loss
write-downs on certain equity securities deemed to be other than temporarily
impaired based on an analysis of the financial condition and operating outlook
of the issuers. For the nine months ended September 30, 2003, net realized
securities gains totaled $630 thousand, compared to $620 thousand for the
corresponding 2002 period.
For the third quarter of 2003, total noninterest expense amounted to $12.2
million, up $861 thousand from the amount reported for the third quarter of
2002. For the nine months ended September 30, 2003, noninterest expenses
amounted to $36.0 million, up $4.0 million from the comparable 2002 amount.
Included in year to date 2003 noninterest expenses was $941 thousand in
prepayment penalty charges associated with the prepayment of certain FHLB
advances totaling $23 million. The prepayment of certain higher interest rate
borrowings was consummated in June 2003 to reduce future funding costs. As
calculated at the time of restructuring, the Corporation expected that this debt
restructuring would result in future interest expense savings of approximately
$510 thousand on an annualized basis over the remaining term of the prepaid
debt. Included in noninterest expenses for the nine months ended September 30,
2002 were $605 thousand of acquisition costs incurred in connection with the
acquisition of First Financial Corp. Exclusive of the debt prepayment penalties
in 2003 and the acquisition costs in 2002, the increase in noninterest expenses
was primarily due to normal growth and higher operating costs resulting from the
acquisition of First Financial Corp. Salaries and benefits, the largest
component of total noninterest expense, amounted to $20.1 million for the nine
months ended September 30, 2003, compared to the $17.6 million reported for the
first nine months of 2002.
Income tax expense amounted to $6.3 million and $5.4 million for the nine months
ended September 30, 2003 and 2002, respectively. The Corporation's effective tax
rate for the first nine months of 2003 was 31.0%, compared to 30.7% 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 nine months ended September 30, 2003 amounted to
$36.7 million, up $3.0 million, or 8.8%, from the same 2002 period. This
increase in net interest income was due to earning asset growth, including
assets acquired from the April 2002 acquisition of First Financial Corp. For the
nine months ended September 30, 2003, average interest-earning assets amounted
to $1.696 billion, up $277.5 million, or 19.6%, 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 nine months ended September 30, 2003 and 2002
were 2.89% and 3.18%, respectively. The most significant reason for the net
interest margin decline is the low level of market interest rates experienced in
2003, which has resulted in a high level of refinancing activity in mortgage
loans and commercial loans as well as prepayments of mortgage-backed securities.
The decreased net interest margin 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 decreased 17 basis points to 2.59%
for the nine months ended September 30, 2003. The yield on total
interest-earnings assets declined 110 basis points to 5.12%, while the cost of
interest-bearing liabilities decreased 93 basis points to 2.53%.
The yield on average total loans amounted to 6.12% for the nine months ended
September 30, 2003, down 106 basis points from 7.18% for the comparable 2002
period. This decline is primarily due to lower marginal yields on floating and
adjustable rate loans for the nine months of 2003 as compared to the prior year
period and a decline in yields on new loan originations. Average loans for the
nine months ended September 30, 2003 amounted to $833.6 million, an increase of
$146.5 million compared to the same period last year, of which approximately
$115.3 million related to the April 2002 First Financial Corp. acquisition.
Average residential real estate loans amounted to $301.4 million, up 25.1% from
the prior year level. The yield on residential real estate loans decreased 128
basis points from the prior year period, amounting to 5.78%. Average commercial
loans rose 19.6% to $392.9 million while the yield on commercial loans declined
81 basis points to 6.86%. Included in interest income on commercial loans for
the nine months ended September 30, 2002, was $229 thousand of depreciation in
value of the interest rate floor contract that was terminated in May 2002.
Average consumer loans rose 18.2% over the prior year and amounted to $139.3
million. The yield on consumer loans decreased 127 basis points from the prior
year to 4.78%, mainly due to a decline in yield on home equity loans.
Total average investments rose $131.0 million, or 17.9%, over the comparable
prior year period mainly due to purchases of taxable debt securities. The FTE
rate of return on investments was 4.15% for the nine months ended September 30,
2003, compared to 5.33% 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 reinvestment of
cash flows in 2003 relative to the prior year. Increased prepayments on
mortgage-related securities contributed to the decline in yields due to both
rapid premium amortization and the increased level of cash flow available for
reinvestment.
Average interest-bearing liabilities increased $246.8 million, or 19.8%, to
$1.496 billion at September 30, 2003, of which approximately $162.9 million
related to the April 2002 First Financial Corp. 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 2.53% for the nine
months ended September 30, 2003, down from 3.46% for the comparable 2002 period.
Average savings deposits for the nine months ended September 30, 2003 increased
$97.3 million, or 25.8%, to $474.7 million from the comparable 2002 amount. The
rate paid on savings deposits for the first nine months of 2003 was 0.72%,
compared to 1.39% for the same 2002 period. Average time deposits increased
$35.8 million to $479.5 million with a decrease of 60 basis points in the rate
paid. For the nine months ended September 30, 2003, average demand deposits, an
interest-free funding source, were up by $27.2 million, or 18.7%, from the same
prior year period. Average FHLB advances for the nine months ended September 30,
2003 amounted to $539.8 million, up from the comparable 2002 amount of $424.8
million. The average rate paid on FHLB advances for the nine months ended
September 30, 2003 was 3.51%, a decrease of 143 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.
Nine months ended September 30, 2003 2002
- -------------------------------------------- ------------------------------------ ----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $301,402 $13,027 5.78% $240,858 $12,710 7.06%
Commercial and other loans 392,926 20,173 6.86% 328,408 18,839 7.67%
Consumer loans 139,321 4,984 4.78% 117,905 5,337 6.05%
- --------------------------------------------------------------------------------------------------------------------
Total loans 833,649 38,184 6.12% 687,171 36,886 7.18%
Federal funds sold and other
short-term investments 16,293 111 0.91% 14,188 172 1.61%
Taxable debt securities 778,815 23,961 4.11% 654,018 26,211 5.36%
Nontaxable debt securities 16,515 797 6.45% 19,790 961 6.49%
Corporate stocks and FHLB stock 50,573 1,879 4.97% 43,214 1,782 5.51%
- --------------------------------------------------------------------------------------------------------------------
Total investments 862,196 26,748 4.15% 731,210 29,126 5.33%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,695,845 64,932 5.12% 1,418,381 66,012 6.22%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 120,667 102,861
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,816,512 $1,521,242
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $474,725 $2,554 0.72% $377,464 $3,926 1.39%
Time deposits 479,490 11,472 3.20% 443,690 12,624 3.80%
FHLB advances 539,799 14,184 3.51% 424,828 15,692 4.94%
Other 2,418 56 3.05% 3,639 65 2.36%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,496,432 28,266 2.53% 1,249,621 32,307 3.46%
Demand deposits 172,141 144,965
Non interest-bearing liabilities 15,305 12,440
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,683,878 1,407,026
Total shareholders' equity 132,634 114,216
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,816,512 $1,521,242
- --------------------------------------------------------------------------------------------------------------------
Net interest income $36,666 $33,705
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 2.59% 2.76%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 2.89% 3.18%
- --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Nine months ended September 30, 2003 2002
- --------------------------------------------------------------------------------
Commercial and other loans $117 $124
Nontaxable debt securities 278 336
Corporate stocks 333 302
Financial Condition and Liquidity
Total assets rose from $1.746 billion at December 31, 2002 to $1.931 billion at
September 30, 2003. Average assets totaled $1.817 billion for the nine months
ended September 30, 2003, up 19.4% 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 September 30, 2003 amounted to $658.7 million, an increase of 19.0% from
the December 31, 2002 balance of $553.6 million. This increase was mainly due to
purchases of mortgage-backed securities, corporate bonds and U.S. government
agency securities. The net unrealized gains on securities available for sale
amounted to $11.1 million at September 30, 2003 and $14.4 million at December
31, 2002.
Securities Held to Maturity - Primarily as a result of principal paydowns on
mortgage-backed securities, the carrying value of securities held to maturity
decreased 23.3% from $242.3 million at December 31, 2002 to $185.8 million at
September 30, 2003. The net unrealized gain on securities held to maturity
amounted to $4.7 million at September 30, 2003, compared to $8.2 million at
December 31, 2002.
Loans - In the first nine months of 2003, total loans increased $123.2 million
to $918.4 million at September 30, 2003. Total residential real estate loans
amounted to $372.1 million, up $91.2 million, or 32.5%, from the balance of
$280.9 million at December 31, 2002. The Corporation purchased a total of $104.5
million of mainly fixed rate residential mortgages from other institutions. The
purchases were funded with a combination of FHLB advances and brokered
certificates of deposit. Total consumer loans amounted to $150.7 million at
September 30, 2003, an increase of $18.7 million, or 14.1%, from December 31,
2002 primarily due to growth in home equity lines. Commercial loans amounted to
$395.5 million at September 30, 2003, up $13.3 million, or 3.5%, from $382.2
million at December 31, 2002.
Deposits - Total deposits amounted to $1.185 billion at September 30, 2003, up
$74.4 million from the December 31, 2002 balance of $1.110 billion, due in part
to the Bank's new Warwick, Rhode Island branch that opened in April 2003. Demand
deposits rose $39.4 million, or 25.0%, in the first nine months of 2003 and
totaled $197.0 million at September 30, 2003. Savings deposits increased $21.0
million from December 31, 2002 and amounted to $492.3 million at September 30,
2003. Time deposits amounted to $495.6 million at September 30, 2003, up $14.0
million, from the December 31, 2002 balance of $481.6 million primarily due to
increases in brokered certificates of deposit. Total brokered certificates of
deposit amounted to $106.7 million at September 30, 2003, compared to $56.5
million at December 31, 2002.
Borrowings - The Corporation utilizes advances from the FHLB as well as other
borrowings as part of its overall funding strategy. FHLB advances were used to
meet short-term liquidity needs, to purchase securities and to purchase loans
from other financial institutions. In the nine months ended September 30, 2003,
FHLB advances increased $110.6 million to $590.7 million at September 30, 2003.
Other borrowings outstanding at September 30, 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 nine months ended September 30, 2003, net cash provided by operations
amounted to $20.1 million, the majority of which was generated by net income.
Proceeds from sales of loans in the first nine months of 2003 amounted to $166.4
million, while loans originated for sale amounted to $163.9 million. Net cash
used in investing activities amounted to $188.9 million and was primarily used
to purchase securities and to purchase loans from other financial institutions.
Net cash provided by financing activities was $173.2 million, the majority of
which was derived from FHLB advances and growth in deposits. (See Consolidated
Statements of Cash Flows for additional information.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
(Dollars in thousands) September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,843 $2,198
Nonaccrual loans less than 90 days past due 1,502 1,979
- --------------------------------------------------------------------------------
Total nonaccrual loans 3,345 4,177
Other real estate owned 23 86
- --------------------------------------------------------------------------------
Total nonperforming assets $3,368 $4,263
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .36% .53%
Nonperforming assets as a percentage of total assets .17% .24%
Allowance for loan losses to nonaccrual loans 472.74% 370.78%
Allowance for loan losses to total loans 1.72% 1.95%
There were no accruing loans 90 days or more past due at September 30, 2003 or
December 31, 2002.
Impaired loans consist of all nonaccrual commercial loans. At September 30,
2003, the recorded investment in impaired loans was $2.2 million, which had a
related allowance amounting to $185 thousand. During the nine months ended
September 30, 2003, the average recorded investment in impaired loans was $2.4
million. Also during this period, interest income recognized on impaired loans
amounted to approximately $125 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) September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Residential real estate $899 $1,202
Commercial:
Mortgages 1,306 1,356
Other 890 1,354
Consumer 250 265
- --------------------------------------------------------------------------------
Total nonaccrual loans $3,345 $4,177
- --------------------------------------------------------------------------------
Capital Resources
Total equity capital increased $7.3 million during the first nine months of 2003
and amounted to $136.0 million. This increase was principally attributable to an
$8.0 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 7.04% at September 30,
2003, compared to 7.37% at December 31, 2002. Book value per share as of
September 30, 2003 and December 31, 2002 amounted to $10.34 and $9.87,
respectively.
At September 30, 2003, the Corporation's Tier 1 risk-based capital ratio was
10.00% and the total risk-adjusted capital ratio was 11.49%. The Corporation's
Tier 1 leverage ratio amounted to 5.72% at September 30, 2003. These ratios were
above the ratios required to be categorized as well-capitalized.
Dividends payable at September 30, 2003 amounted to $2.1 million, representing
$.16 per share payable on October 15, 2003, an increase of $.01 from the
dividend declared in the previous two quarters of 2003. 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.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States and conform to general practices within
the banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. The financial position and results of operations can be
affected by these estimates and assumptions, which are important to
understanding reported results. Management has discussed the development and the
selection of critical accounting policies with the Audit Committee of our board
of directors. As discussed in our 2002 Annual Report on Form 10-K, we have
identified the allowance for loan losses and review of goodwill for impairment
as critical accounting policies. Accounting policies involving significant
judgments and assumptions by management, which have, or could have, a material
impact on the carrying value of certain assets and impact income, are considered
critical accounting policies. There have been no significant changes in the
methods or assumptions used in the accounting policies that require material
estimates and assumptions.
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 did
not 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 tentatively 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 in the first quarter of 2004, which could become
effective in 2005. 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
did not have a material impact on the Corporation's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this pronouncement did not have a material impact on the
Corporation's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
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 September 30, 2003. Interest
rates are assumed to shift upward by 200 basis points or downward by 50 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 3.1% 3.5% 1.9%
50 basis point decrease in rates -1.9% -3.7% -3.7%
At September 30, 2003, income simulation results assume that changes in core
deposit rates are linked to short-term market interest rates. The assumed
relationship and correlation between short-term interest rate changes and core
deposit rate changes used in income simulation may fluctuate over time based on
the Corporation's assessment of market conditions.
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.
The Corporation estimates that the negative exposure of net interest income to
falling rates results from the difficulty of reducing rates paid on core savings
deposits significantly below current levels. If rates were to fall and remain
low for a sustained period, core savings deposit rates would likely not fall as
fast as other market rates, while asset yields would decline as current asset
holdings mature or reprice. The pace of asset cash flows would also be likely to
increase in a falling rate environment due to more rapid mortgage-related
prepayments and redemption of callable securities. While the Corporation reviews
simulation assumptions to ensure that they are reasonable and current, income
simulation may not always prove to be an accurate indicator of interest rate
risk since the repricing, maturity and prepayment characteristics of financial
instruments may change to a different degree than estimated. Specifically,
mortgage-backed securities and mortgage loans involve a level of risk that
unforeseen changes in prepayment speeds may cause related cash flows to vary
significantly in differing rate environments. Such changes could increase or
decrease the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income. Changes in prepayment speeds can
also affect the level of reinvestment risk associated with cash flow from these
instruments, as well as their market value. The sensitivity of core savings
deposits to fluctuations in interest rates could also differ from simulation
assumptions, and could result in changes in both liability mix and interest
expense that differ from those used to estimate interest rate risk exposure.
The Corporation also monitors the potential change in market value of its
available for sale debt securities using both rate shifts 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 September 30, 2003, an immediate 200 basis point rise in rates would
result in a 4.3% 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
0.9% 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 September 30,
2003, including both debt and equity securities, was 6.8%, 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
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") the Corporation carried out an evaluation under the
supervision and with the participation of the Corporation's management,
including the Corporation's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures as of the end of the quarter ended September 30, 2003.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures are
adequate and designed to ensure that information required to be disclosed by the
Corporation in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. The Corporation
will continue to review and document its disclosure controls and procedures and
consider such changes in future evaluations of the effectiveness of such
controls and procedures, as it deems appropriate. There has been no change in
our internal control over financial reporting during the period ended September
30, 2003 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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.
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 October 2003, an agreement among all parties to the suit and the
related cross-claim was executed in settlement of these matters. The
settlement did not result in any loss to the Bank. In November 2003,
the District Court dismissed the suit and related cross-claim.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
-----------
11 Statement re Computation of Per Share Earnings
15 Letter re Unaudited Interim Financial Information
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32** Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
** These certifications are not "filed" for purposes of Section
18 of the Exchange Act or incorporated by reference into any
filing under the Securities Act or the Exchange Act.
(b) On July 17, 2003, a Form 8-K, which reported the Corporation's
earnings for the quarter ended June 30, 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)
November 13, 2003 By: John C. Warren
--------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
November 13, 2003 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)