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, 2004 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, 2004 was 13,226,552.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended March 31, 2004
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
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 loan demand, reductions in deposit levels necessitating increased
borrowing to fund loans and investments, changes in loan default and charge-off
rates, changes in the size and nature of the Corporation's competition, changes
in legislation or regulation and accounting principles, policies and guidelines
and changes in the assumptions used in making such forward-looking statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $35,303 $40,710
Federal funds sold and other short-term investments 17,630 20,400
Mortgage loans held for sale 2,405 2,486
Securities:
Available for sale, at fair value;amortized cost
$722,247 in 2004 and $663,529 in 2003 737,985 673,845
Held to maturity, at cost; fair value $150,834
in 2004 and $169,401 in 2003 146,607 165,576
- --------------------------------------------------------------------------------
Total securities 884,592 839,421
Federal Home Loan Bank stock, at cost 32,789 31,464
Loans 1,004,348 960,981
Less allowance for loan losses 16,174 15,914
- --------------------------------------------------------------------------------
Net loans 988,174 945,067
Premises and equipment, net 25,014 24,941
Accrued interest receivable 8,282 7,911
Goodwill 22,591 22,591
Identifiable intangible assets 1,792 1,953
Other assets 35,660 36,863
- --------------------------------------------------------------------------------
Total assets $2,054,232 $1,973,807
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $179,468 $194,144
Savings 522,477 493,878
Time 542,814 518,119
- --------------------------------------------------------------------------------
Total deposits 1,244,759 1,206,141
Dividends payable 2,247 2,113
Federal Home Loan Bank advances 644,203 607,104
Other borrowings 1,625 2,311
Accrued expenses and other liabilities 16,827 18,083
- --------------------------------------------------------------------------------
Total liabilities 1,909,661 1,835,752
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 13,219,949 shares
in 2004 and 13,204,024 in 2003 826 825
Paid-in capital 30,090 29,868
Retained earnings 104,200 101,492
Unamortized employee restricted stock (16) (22)
Accumulated other comprehensive income 9,773 6,101
Treasury stock, at cost; 13,052 shares in 2004
and 9,463 in 2003 (302) (209)
- --------------------------------------------------------------------------------
Total shareholders' equity 144,571 138,055
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,054,232 $1,973,807
- --------------------------------------------------------------------------------
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, 2004 2003
- --------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $13,641 $12,646
Interest on securities 8,255 8,555
Dividends on corporate stock and
Federal Home Loan Bank stock 474 487
Interest on federal funds sold and
other short-term investments 20 37
- --------------------------------------------------------------------------------
Total interest income 22,390 21,725
- --------------------------------------------------------------------------------
Interest expense:
Savings deposits 729 950
Time deposits 4,018 3,934
Federal Home Loan Bank advances 4,545 4,893
Other 15 19
- --------------------------------------------------------------------------------
Total interest expense 9,307 9,796
- --------------------------------------------------------------------------------
Net interest income 13,083 11,929
Provision for loan losses 120 100
- --------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,963 11,829
- --------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 3,055 2,533
Service charges on deposit accounts 1,170 1,100
Net gains on loan sales 349 1,238
Merchant processing fees 597 457
Income from bank-owned life insurance 299 284
Net realized gains on securities - 230
Other income 470 191
- --------------------------------------------------------------------------------
Total noninterest income 5,940 6,033
- --------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 6,977 6,534
Net occupancy 816 762
Equipment 770 837
Merchant processing costs 466 362
Legal, audit and professional fees 258 305
Advertising and promotion 466 270
Outsourced services 376 371
Amortization of intangibles 161 180
Other 1,390 1,357
- --------------------------------------------------------------------------------
Total noninterest expense 11,680 10,978
- --------------------------------------------------------------------------------
Income before income taxes 7,223 6,884
Income tax expense 2,268 2,134
- --------------------------------------------------------------------------------
Net income $4,955 $4,750
- --------------------------------------------------------------------------------
Weighted average shares outstanding - basic 13,202.6 13,059.3
Weighted average shares outstanding - diluted 13,513.3 13,230.2
Per share information:
Basic earnings per share $.38 $.36
Diluted earnings per share $.37 $.36
Cash dividends declared per share $.17 $.15
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, 2003 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721
Net income 4,750 4,750
Unrealized losses on securities, net of
$324 income tax benefit (542) (542)
Reclassification adjustments, net of
$80 income tax expense (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
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 $825 $29,868 $101,492 $(22) $6,101 $(209) $138,055
Net income 4,955 4,955
Unrealized gains on securities, net of
$1,849 income tax expense 3,573 3,573
Reclassification adjustments, net of tax - -
Minimum pension liability adjustment, net
of $54 income tax expense 99 99
------------
Comprehensive income 8,627
Cash dividends declared (2,247) (2,247)
Amortization of employee restricted 6 6
stock
Shares issued 1 222 39 262
Shares repurchased (132) (132)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $826 $30,090 $104,200 $(16) $9,773 $(302) $144,571
- ----------------------------------------------------------------------------------------------------------------------------------
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, 2004 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $4,955 $4,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 100
Depreciation of premises and equipment 709 775
Amortization of premium in excess of accretion
of discount on debt securities 557 1,178
Net amortization of intangibles 161 180
Amortization of restricted stock 6 4
Net realized gains on securities - (230)
Net gains on loan sales (349) (1,238)
Earnings from bank-owned life insurance (299) (284)
Proceeds from sales of loans 11,382 49,410
Loans originated for sale (11,041) (55,362)
Increase in accrued interest receivable,
excluding purchased interest (358) (670)
(Increase) decrease in other assets (217) 3,973
(Decrease) increase in accrued expenses and
other liabilities (1,157) 475
Other, net 246 259
- --------------------------------------------------------------------------------
Net cash provided by operating activities 4,715 3,320
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (118,330) (138,049)
Proceeds from sales - 42,430
Maturities and principal repayments 59,218 69,307
Securities held to maturity:
Purchases (1,396) (62,347)
Maturities and principal repayments 20,204 40,141
Purchase of Federal Home Loan Bank stock (1,325) (4,018)
Principal collected on loans under
loan originations (28,896) (8,500)
Purchases of loans, including purchased interest (14,486) (7,677)
Proceeds from sales of other real estate owned - 128
Purchases of premises and equipment (784) (1,845)
- --------------------------------------------------------------------------------
Net cash used in investing activities (85,795) (70,430)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 38,627 10,436
Net decrease in other borrowings (686) (7,257)
Proceeds from Federal Home Loan Bank advances 348,350 362,100
Repayment of Federal Home Loan Bank advances (311,206) (297,746)
Purchase of treasury stock (132) (118)
Proceeds from issuance of common stock 63 106
Cash dividends paid (2,113) (1,825)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 72,903 65,696
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,177) (1,414)
Cash and cash equivalents at beginning of year 61,110 51,048
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $52,933 $49,634
- --------------------------------------------------------------------------------
(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, 2004 2003
- --------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $ - $242
Loans charged off 68 101
Loans made to facilitate the sale of other real
estate owned - 322
Supplemental Disclosures:
Interest payments $9,472 $9,722
Income tax payments (refunds), net 2 (205)
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 preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
revenues and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change are
the determination of the allowance for loan losses, the review of goodwill and
other intangible assets for impairment, other-than-temporary impairment,
interest income recognition and tax estimates. 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, 2004 and
December 31, 2003 and the results of operations and cash flows for the interim
period 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 ("SEC") 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, 2003. Certain prior period
amounts have been reclassified to conform to the current year classification.
Such reclassifications have no effect on previously reported net income or
shareholders' equity.
(2) New Accounting Pronouncements
On April 22, 2003, the Financial Accounting Standards Board ("FASB") decided to
require all companies to expense the value of employee stock options. At this
point, it has been tentatively decided in principle to measure employee
equity-based awards at their date of grant and to 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. On March 31, 2004, the FASB
issued Exposure Draft "Share-Based Payment an amendment to FASB Statement No.
123 and 95". The draft of the proposed statement concluded that all companies
should expense the fair value of employee stock options using the modified
prospective grant-date measurement approach as defined in Statement of Financial
Accounting Standard ("SFAS") 123. Compensation cost would be recognized in the
financial statement over the requisite service period. A final statement is
expected in the second half 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 December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
requires additional disclosures to those in the original Statement 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. Except as noted
below, this Statement is effective for financial statements with fiscal years
ending after December 15, 2003. The interim period disclosures required by this
Statement are effective for interim periods beginning after December 15, 2003.
Disclosure of estimated future benefit payments required by this Statement is
effective for fiscal years ending after June 15, 2004. The Corporation has
provided the disclosure required under SFAS No. 132 in Note 9 to the
Consolidated Financial Statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin ("ARB") No. 51." This Interpretation addresses consolidation
by business enterprises of variable interest entities having certain
characteristics as detailed in the Interpretation. ARB No. 51 requires that an
enterprise's consolidated financial statements include subsidiaries in which the
enterprise has a controlling financial interest. The voting interest approach is
not effective in identifying controlling financial interests in entities that
are not controllable through voting interests or in which the equity investors
do not bear the residual economic risks. The objective of this Interpretation is
not to restrict the use of variable interest entities but to improve financial
reporting by enterprises involved with variable interest entities. The
application of this Interpretation is required in financial statements of public
entities that have interests in variable interest entities or potential variable
interest entities commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities for all other
types of entities is required in financial statements for periods ending after
March 15, 2004. The adoption of this Interpretation did not have any impact on
the Corporation's financial statements.
In March 2004, the SEC issued SEC Staff Accounting Bulletin ("SAB") No. 105 -
"Application of Accounting Principles to Loan Commitments" which summarizes the
views of the SEC regarding the application GAAP loan commitments accounted for
as derivatives. The guidance requires the measurement of the fair value of the
loan commitment to include only the differences between the guaranteed interest
rate and the market interest rate. The SAB prohibits recognizing expected future
cash flows related to the servicing of a loan. Servicing assets are to be
recognized only once the servicing asset has been contractually separated from
the underlying loan by sale or securitization of the loan with servicing
retained. SAB No. 105 is effective for loan commitments accounted for as
derivatives entered into after March 31, 2004. The adoption of this SAB is not
expected to have a material impact on the Corporation's financial statements.
(3) 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, 2004 2003
- --------------------------------------------------------------------------------
Net income As reported $4,955 $4,750
Less:
Total stock-based compensation
determined under fair value
method for all awards, net of tax (284) (226)
- --------------------------------------------------------------------------------
Pro forma $4,671 $4,524
Basic earnings per share As reported $.38 $.36
Pro forma $.35 $.35
Diluted earnings per share As reported $.37 $.36
Pro forma $.35 $.34
There were 3,050 options granted for the three months ended March 31, 2004. No
options were granted for the three months ended March 31, 2003.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Securities
Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
March 31, 2004
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $106,883 $ 1,716 $ (47) $108,552
Mortgage-backed securities 512,897 5,552 (1,312) 517,107
Corporate bonds 80,133 1,952 (356) 81,729
Corporate stocks 22,334 8,849 (586) 30,597
- ------------------------------------------------------------------------------------------------------------------
Total 722,247 18,039 (2,301) 737,985
- ------------------------------------------------------------------------------------------------------------------
December 31, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 97,876 1,480 (262) 99,094
Mortgage-backed securities 464,138 3,964 (3,277) 464,825
Corporate bonds 79,175 1,487 (724) 79,938
Corporate stocks 22,340 8,262 (614) 29,988
- ------------------------------------------------------------------------------------------------------------------
Total $663,529 $15,193 $(4,877) $673,845
- ------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales of securities available for sale during the three-months
ended March 31, 2004.
</FN>
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
March 31, 2004
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ - $ - $ - $ -
Mortgage-backed securities 131,410 3,653 - 135,063
States and political subdivisions 15,197 614 (40) 15,771
- ------------------------------------------------------------------------------------------------------------------
Total 146,607 4,267 (40) 150,834
- ------------------------------------------------------------------------------------------------------------------
December 31, 2003
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 8,000 13 - 8,013
Mortgage-backed securities 143,162 3,256 (118) 146,300
States and political subdivisions 14,414 674 - 15,088
- ------------------------------------------------------------------------------------------------------------------
Total $165,576 $3,943 $(118) $169,401
- ------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales of securities held to maturity during the three months ended
March 31, 2004.
</FN>
Securities available for sale and held to maturity with a fair value of $556.3
million and $548.4 million were pledged in compliance with state regulations
concerning trust powers and to secure Treasury Tax and Loan deposits,
borrowings, and public deposits at March 31, 2004 and December 31, 2003,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $22.1 million and $23.0 million were collateralized for the
discount window at the Federal Reserve Bank at March 31, 2004 and December 31,
2003, respectively. There were no borrowings with the Federal Reserve Bank at
either date.
At March 31, 2004 and December 31, 2003, securities available for sale with a
fair value of $2.8 million were designated in a rabbi trust for a nonqualified
retirement plan.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes, for all securities in an unrealized loss
position at March 31, 2004, the aggregate fair value and gross unrealized loss
by length of time those securities have been continuously in an unrealized loss
position.
Less than 12 Months 12 Months or Longer Total
-------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
At March 31, 2004 Value Losses Value Losses Value Losses
- -------------------------------------------------------------------------------------------------------
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies $23,310 $87 $- $- $23,310 $87
Mortgage-backed securities 169,322 1,311 22 1 169,344 1,312
- -------------------------------------------------------------------------------------------------------
Corporate bonds - - 19,394 356 19,394 356
- -------------------------------------------------------------------------------------------------------
Subtotal, debt securities 192,632 1,398 19,416 357 212,048 1,755
Corporate stocks 1,481 36 3,312 550 4,793 586
- -------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $194,113 $1,434 $22,728 $907 $216,841 $2,341
- -------------------------------------------------------------------------------------------------------
For those debt securities whose amortized cost exceeds fair value, the primary
cause is related to interest rates. The majority of debt securities reported in
an unrealized loss position at March 31, 2004 were purchased during 2003, during
which interest rates were at or near historical lows. The relative increase in
interest rates since the time of purchase has resulted in a decline in market
value for these debt securities. Other contributing factors for debt securities
reported in an unrealized loss position at March 31, 2004 include widening of
investment spreads on certain variable rate asset classes, which have resulted
in relative declines in market value compared to amortized cost. The Corporation
believes that the nature and duration of impairment on its debt security
holdings are primarily a function of interest rate movements and changes in
investment spreads, and does not consider full repayment of principal on the
reported debt obligations to be at risk. The debt securities in an unrealized
loss position at March 31, 2004 consisted of forty-four debt security holdings.
The largest loss percentage of any single holding was 4.0% of its amortized
cost.
Causes of conditions whereby the fair value of corporate stock equity securities
is less than cost include both the general decline in equity markets over the
past several years, timing of purchases, and changes in valuation specific to
individual industries or issuers. The relationship between the level of market
interest rates and the dividend rates paid on individual equity securities may
also be a contributing factor. The Corporation believes that the nature and
duration of impairment on its equity securities holdings are a function of
general financial market movements and industry conditions. The equity
securities in an unrealized loss position at March 31, 2004 consisted of ten
holdings of financial and commercial entities. The largest loss percentage
position of any single holding was 19.8% of its cost.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Loan Portfolio
The following is a summary of loans:
(Dollars in thousands) March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Commercial:
Mortgages (A) $227,367 $227,334
Construction and development (B) 14,463 12,486
Other (C) 179,610 168,657
- --------------------------------------------------------------------------------
Total commercial 421,440 408,477
Residential real estate:
Mortgages (D) 388,843 375,706
Homeowner construction 11,721 14,149
- --------------------------------------------------------------------------------
Total residential real estate 400,564 389,855
Consumer
Home equity lines 126,701 116,458
Other (E) 55,643 46,191
- --------------------------------------------------------------------------------
Total consumer 182,344 162,649
- --------------------------------------------------------------------------------
Total loans (F) $1,004,348 $960,981
- --------------------------------------------------------------------------------
(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) Fixed rate home equity loans and other consumer installment loans.
(F) Net of unearned income and unamortized loan origination fees, net of costs
totaling $492 thousand and $687 thousand at March 31, 2004 and December 31,
2003, respectively. Includes $746 thousand and $685 thousand of net
purchased premiums at March 31, 2004 and December 31, 2003, respectively.
(6) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Three months ended March 31, 2004 2003
- --------------------------------------------------------------------------------
Balance at beginning of period $15,914 $15,487
Provision charged to expense 120 100
Recoveries of loans previously charged off 208 9
Loans charged off (68) (101)
- --------------------------------------------------------------------------------
Balance at end of period $16,174 $15,495
- --------------------------------------------------------------------------------
(7) Goodwill and other intangibles
The 2002 acquisition of First Financial Corp. resulted in the recording of
goodwill of $22.6 million. Goodwill and intangible assets are reviewed for
impairment, based on their fair values, at least annually.
At March 31, 2004 and December 31, 2003, the carrying value of other intangible
assets amounted to $1.8 million and $2.0 million, respectively. In conjunction
with the 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
$161 thousand and $180 thousand for the first quarter of 2004 and 2003,
respectively.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in the carrying value of goodwill and other intangible assets for
the three months ended March 31, 2004 are as follows:
(Dollars in thousands) Core Deposit Other Total
Goodwill Intangibles Intangibles Intangibles
- --------------------------------------------------------------------------------
Balance, December 31, 2003 $22,591 $1,574 $379 $24,544
Amortization expense - (90) (71) (161)
Impairment recognized - - - -
- --------------------------------------------------------------------------------
Balance March 31, 2004 $22,591 $1,484 $308 $24,383
- --------------------------------------------------------------------------------
Estimated annual amortization expense is as follows:
(Dollars in thousands)
Core Deposit Other Total
Estimated amortization expense Intangibles Intangibles Intangibles
- --------------------------------------------------------------------------------
April 1 through December 31, 2004 $269 $213 $482
2005 303 95 398
2006 261 - 261
2007 140 - 140
2008 120 - 120
The components of intangible assets as of March 31, 2004 are as follows:
(Dollars in thousands)
Gross Carrying Accumulated Net Carrying
Intangible assets Amount Amortization Amount
- --------------------------------------------------------------------------------
Core deposit intangibles $2,997 $(1,513) $1,484
Other intangibles 852 (544) 308
- --------------------------------------------------------------------------------
Total $3,849 $(2,057) $1,792
- --------------------------------------------------------------------------------
(8) Borrowings
Federal Home Loan Bank ("FHLB") advances outstanding are summarized below:
(Dollars in thousands) March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
FHLB advances $644,203 $607,104
- --------------------------------------------------------------------------------
In addition to outstanding advances, the Corporation also has access to an
unused line of credit amounting to $8.0 million at March 31, 2004 and December
31, 2003. 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 collateralize the line of credit
and outstanding advances at March 31, 2004 and December 31, 2003. Included in
the collateral were securities available for sale and held to maturity with a
fair value of $530.8 million and $526.0 million that were specifically pledged
to secure FHLB borrowings at March 31, 2004 and December 31, 2003, 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.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a summary of other borrowings:
(Dollars in thousands) March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $951 $1,567
Other 674 744
- --------------------------------------------------------------------------------
Other borrowings $1,625 $2,311
- --------------------------------------------------------------------------------
(9) Defined Benefit Pension Plans
The Corporation's noncontributory tax-qualified defined benefit pension plan
covers substantially all employees. Benefits are based on an employee's years of
service and highest 3-year compensation. The plan is funded on a current basis,
in compliance with the requirements of the Employee Retirement Income Security
Act.
The Corporation has a non-qualified retirement plan to provide supplemental
retirement benefits to certain employees, as defined in the plan. The primary
purpose of this plan is to restore benefits which would otherwise be provided by
the level of the tax-qualified defined benefit pension plan but which are
limited by the Internal Revenue Code. Additionally, in July 2001 the Corporation
initiated a non-qualified retirement plan to provide supplemental retirement
benefits to certain executives, as defined by the plan.
As a result of the second quarter 2002 acquisition of First Financial Corp., the
Corporation assumed a non-qualified executive retirement plan to provide
supplemental retirement benefits to a former First Financial Corp. executive.
The actuarial assumptions used for the non-qualified retirement plans are the
same as those used for the Corporation's tax-qualified pension plan. The
non-qualified retirement plans provide for the designation of assets in rabbi
trusts. At March 31, 2004 and December 31, 2003, securities available for sale
and other assets designated for this purpose with a carrying value of $3.2
million are included in the Corporation's Consolidated Balance Sheet.
Components of Net Periodic Benefit Costs:
(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
- --------------------------------------------------------------------------------
Three months ended March 31, 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $398 $318 $72 $46
Interest cost 342 306 97 92
Expected return on plan assets (391) (354) - -
Amortization of transition asset (1) (1) - -
Amortization of prior service cost 7 9 20 27
Recognized net actuarial loss 9 - 16 7
- --------------------------------------------------------------------------------
Net periodic benefit cost $364 $278 $205 $172
- --------------------------------------------------------------------------------
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assumptions:
The measurement date and weighted-average assumptions used to determine net
periodic benefit cost for the three months ended March 31, 2004 and 2003 were as
follows:
Qualified Non-Qualified
Pension Plan Retirement Plans
- ----------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Measurement date September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
Discount rate 6.10% 6.75% 6.10% 6.75%
Expected long-term return
on plan assets 8.25% 8.00% - -
Rate of compensation increase 4.25% 4.25% 4.25% 4.25%
Employer Contributions:
The Corporation previously disclosed in its financial statements for the year
ended December 31, 2003 that it expected to contribute $1.5 million to its
qualified pension plan and $314 thousand in benefit payments to its
non-qualified retirement plans in 2004. As of March 31, 2004, $1.5 million of
contributions have been made to the qualified pension plan and $79 thousand in
benefit payments have been made to the non-qualified retirement plans. The
Corporation presently anticipates contributing an additional $236 thousand in
benefit payments to the non-qualified retirement plans in 2004 for a total of
$315 thousand.
(10) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial
Instruments
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage the Corporation's exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, financial guarantees, and commitments to originate and
commitments to sell fixed rate mortgage loans. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the Consolidated Balance Sheets. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. The contractual and notional amounts of financial instruments
with off-balance sheet risk are as follows:
(Dollars in thousands) March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit:
Commercial loans $68,686 $78,555
Home equity lines 118,159 109,182
Other loans 17,240 14,965
Standby letters of credit 9,475 9,448
Financial instruments whose notional amounts
exceed the amount of credit risk:
Forward loan commitments:
Commitments to originate fixed rate mortgage
loans to be sold 9,543 1,328
Commitments to sell fixed rate mortgage loans 11,946 3,340
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each borrower's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the borrower.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer's failure to perform
under the terms of the underlying contract with the beneficiary. Standby letters
of credit extend up to five years. At March 31, 2004 and December 31, 2003,
there was no liability to beneficiaries resulting from standby letters of
credit.
At March 31, 2004, a substantial portion of the standby letters of credit were
supported by pledged collateral. The collateral obtained is determined based on
management's credit evaluation of the customer. Should the Corporation be
required to make payments to the beneficiary, repayment from the customer to the
Corporation is required.
Forward Loan Commitments
Commitments to originate and commitments to sell fixed rate mortgage loans are
derivative financial instruments. Accordingly, the Corporation recognizes the
fair value of these commitments as an asset on the balance sheet. At March 31,
2004 and December 31, 2003, the carrying value of these commitments amounted to
$(3) thousand and $(15) thousand, respectively, and was reported in other
assets. Changes in the fair value were recorded in current earnings and amounted
to income of $13 thousand $59 thousand and for the quarters ended March 31, 2004
and 2003, respectively.
(11) Litigation
The Corporation is involved in various 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 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, 2004 and for the three months
ended March 31, 2004 and 2003, 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 7, 2004 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 March 31, 2004, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three months ended March 31, 2004 and 2003. 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, 2003, 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 February 27, 2004, 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, 2003, is fairly stated, in all
material respects.
KPMG LLP
Providence, Rhode Island
May 7, 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may
also make written or oral forward-looking statements in other documents we file
with the SEC, 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 assets under
management, reductions in loan demand, reductions in deposit levels
necessitating increased borrowing to fund loans and investments, changes in loan
defaults and charge-off rates, changes in the size and nature of the
Corporation's competition, changes in legislation or regulation and accounting
principles, policies and guidelines 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, 2003 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.
Overview
The Bancorp provides a broad range of banking and financial services through its
subsidiary, the Bank. The Bank's primary source of income is net interest
income. The Bank's lending business includes commercial, residential mortgage
and consumer loans. The Bank's loan portfolio is concentrated among borrowers in
southern New England, primarily in southern Rhode Island, and to a lesser extent
in Connecticut and Massachusetts. The Bank also offers a full range of retail
and commercial deposit products through its seventeen banking offices located in
Rhode Island and southeastern Connecticut. Noninterest income is an important
source of revenue for Washington Trust. Primary sources of noninterest income
are trust and investment management revenues, servicing of deposit accounts, net
gains on loan sales and merchant credit card processing. Revenue from trust and
investment management services continues to be the largest component of
noninterest income.
The Bank faces strong competition from branches of major Rhode Island and
regional commercial banks, local branches of certain Connecticut banks, as well
as various credit unions, savings institutions and, to some extent, finance
companies. The principal methods of competition are through interest rates,
financing terms and other customer conveniences. Among the external factors
affecting Washington Trust's operating results are market rates of interest, the
condition of the financial markets, and both national and regional economic
conditions.
Results of Operations
The Corporation reported net income of $5.0 million for the three months ended
March 31, 2004, up 4.3% from the $4.75 million reported for the first quarter of
2003. On a diluted earnings per share basis, the Corporation earned $.37 per
diluted share for the three months ended March 31, 2004, compared to $.36 per
diluted share for the first quarter of 2003. The return on average assets and
average equity for the three months ended March 31, 2004 were 1.00% and 13.90%,
respectively, compared to 1.07% and 14.56%, respectively, for the three months
ended March 31, 2003.
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 2004 amounted to $13.1 million, up 9.7% from $11.9 million earned in
the first quarter of 2003. The increase in net interest income was due to a
12.2% increase in average interest-earning assets. The net interest margin for
the first quarter of 2004 was 2.87%, unchanged from the fourth quarter of 2003,
but lower than the 2.97% level reported for the first quarter of 2003. The
decrease 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 $120 thousand in the
first quarter of 2004 compared to $100 thousand for the same period in 2003. 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 $15.9 million at December 31, 2003 to $16.2 million at March 31,
2004 due to the first quarter provision and recoveries, net of charge-offs. The
Corporation's ratio of the allowance for loan losses to total loans decreased
from 1.66% at December 31, 2003 to 1.61% at March 31, 2004.
Other noninterest income (noninterest income excluding net realized gains on
securities) amounted to $5.9 million for the quarter ended March 31, 2004, up
from $5.8 million reported for the same quarter of 2003. Increases were
recognized in trust and investment management income, service charges on
deposits, merchant processing fees and other income. Revenue from trust and
investment management services, the largest component of noninterest income,
totaled $3.1 million for the quarter ended March 31, 2004, up $522 thousand, or
20.6%, from comparable period in 2003. The market value of trust and investment
management assets under administration amounted to $1.782 billion and $1.742
billion at March 31, 2004 and December 31, 2003, respectively. Meanwhile, gains
on loan sales declined from $1.2 million in the first quarter of 2003 to $349
thousand in the first quarter of 2004, primarily due to a drop off in mortgage
origination activity. During the first three quarters of 2003, the Corporation
experienced heavy residential mortgage activity, predominately refinancing,
which increased the amount of loans sold into the secondary market. This
activity was attributable to relatively low interest rates in effect during the
period. During the fourth quarter of 2003 and the first quarter of 2004, the
level of residential mortgage origination activity declined with a resulting
decline in gains on loan sales. The increase in other income was primarily due
to a non-routine item of $150 thousand unrelated to the Corporation's normal
course of earnings.
There were no net realized gains on sales of securities in the first quarter of
2004. In the quarter ended March 31, 2003, the Corporation recognized net
realized gains on securities amounting to $230 thousand. The 2003 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 first quarter of 2004, total noninterest expense amounted to $11.7
million, up $702 thousand, or 6.4%, from the amount reported for the first
quarter of 2003. The increase in noninterest expenses occurred primarily in the
category of salaries and benefits. Salaries and benefits, the largest component
of total noninterest expense, amounted to $7.0 million for the three months
ended March 31, 2004, compared to the $6.5 million reported for the first three
months of 2003. The increase in salaries and benefits was attributable to normal
salary progression, as well as, positions resulting from normal growth and the
opening of a new branch in 2003.
Income tax expense amounted to $2.3 million and $2.1 million for the three
months ended March 31, 2004 and 2003, respectively. The Corporation's effective
tax rate for the first three months of 2004 was 31.4%, compared to 31.0% for the
corresponding 2003 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, 2004 amounted to
$13.3 million, up $1.1 million, or 9.4%, from the same 2003 period. This
increase in net interest income was due to an increase in average
interest-earning assets. For the three months ended March 31, 2004, average
interest-earning assets amounted to $1.863 billion, up $203.2 million, or 12.2%,
compared to the same period last year.
The net interest margins (FTE net interest income as a percentage of average
interest-earning assets) for the three months ended March 31, 2004 and 2003 were
2.87% and 2.97%, respectively. The decrease in 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. The interest rate spread
decreased 6 basis points from the quarter ended March 31, 2003 and amounted to
2.62% for the first quarter of 2004. The yield on total interest-earnings assets
declined 49 basis points to 4.88%, while the cost of interest-bearing
liabilities decreased 43 basis points to 2.26%.
Average loans amounted to $974.1 million for the three months ended March 31,
2004, up $159.2 million, or 19.5%, from the same period in 2003. The yield on
average total loans amounted to 5.65% for the three months ended March 31, 2004,
down 66 basis points from 6.31% for the comparable 2003 period. This decline is
primarily due to lower marginal yields on loans and investments as compared to
the prior year period and a decline in yields on new loan originations. Average
residential real estate loans amounted to $390.8 million for the quarter ended
March 31, 2004, up $98.6 million, or 33.7%, from the same period a year ago. The
yield on residential real estate loans decreased 72 basis points from the prior
year period, amounting to 5.29% for the first quarter of 2004. Average
commercial loans rose $23.1 million, or 5.9%, to $412.6 million for the three
months ended March 31, 2004 while the yield on commercial loans declined 44
basis points to 6.53%. Average consumer loans rose $37.5 million, or 28.2%, over
the same period a year ago and amounted to $170.6 million for the first quarter
of 2004. The yield on consumer loans decreased 73 basis points from the prior
year period to 4.33% for the three months ended March 31, 2004.
Total average securities amounted to $889.4 million for the first quarter of
2004, an increase of $44.0 million, or 5.2%, over the comparable prior year
period mainly due to purchases of taxable debt securities. The FTE rate of
return on investments was 4.04% for the three months ended March 31, 2004,
compared to 4.45% for the same 2003 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 relative to the same period in the prior year.
Average interest-bearing liabilities for the first quarter of 2004 increased
$183.1 million, or 12.4%, to $1.660 billion. Due to lower rates paid on both
borrowed funds and deposits, the Corporation's total cost of funds on
interest-bearing liabilities amounted to 2.26% for the three months ended March
31, 2004, down from 2.69% for the comparable 2003 period.
Average savings deposits for the three months ended March 31, 2004 increased
$37.3 million, or 8.1%, to $497.0 million from the comparable 2003 amount. The
rate paid on savings deposits for the first three months of 2004 was 0.59%,
compared to .84% for the same 2003 period. Average time deposits increased $45.8
million to $527.5 million for the first quarter of 2004 with a decrease of 25
basis points in the rate paid to 3.06%. For the three months ended March 31,
2004, average demand deposits, an interest-free funding source, were $170.3
million up by $14.3 million, or 9.2%, from the same prior year period. Average
FHLB advances for the three months ended March 31, 2004 amounted to $633.2
million, up $100.5 million from the comparable 2003 amount of $532.7 million.
The average rate paid on FHLB advances for the three months ended March 31, 2004
was 2.89%, a decrease of 84 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.
Tax-exempt income is converted to a fully taxable equivalent basis (FTE) using
the statutory federal income tax rate. For dividends on corporate stocks, the
70% federal dividends received deduction is also used in the calculation of tax
equivalency. 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.
Three months ended March 31, 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $390,834 $5,137 5.29% $292,276 $4,329 6.01%
Commercial and other loans 412,642 6,703 6.53% 389,545 6,696 6.97%
Consumer loans 170,589 1,838 4.33% 133,050 1,660 5.06%
- -------------------------------------------------------------------------------------------------------------------
Total loans 974,065 13,678 5.65% 814,871 12,685 6.31%
Federal funds sold and other
short-term investments 11,155 19 0.71% 14,946 37 1.01%
Taxable debt securities 809,505 8,104 4.03% 764,975 8,373 4.44%
Nontaxable debt securities 14,235 233 6.59% 17,462 280 6.51%
Corporate stocks and FHLB stock 54,518 588 4.34% 48,025 589 4.98%
- -------------------------------------------------------------------------------------------------------------------
Total securities 889,413 8,944 4.04% 845,408 9,279 4.45%
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,863,478 22,622 4.88% 1,660,279 21,964 5.37%
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks 35,255 31,328
Allowance for loan losses (15,995) (15,525)
Premises and equipment, net 25,028 24,978
Other 80,376 77,278
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,988,142 $1,778,338
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $497,033 $729 0.59% $459,777 $950 .84%
Time deposits 527,531 4,018 3.06% 481,766 3,934 3.31%
FHLB advances 633,195 4,545 2.89% 532,698 4,893 3.73%
Other 1,837 15 3.30% 2,227 19 3.45%
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,659,596 9,307 2.26% 1,476,468 9,796 2.69%
Demand deposits 170,289 155,944
Other liabilities 15,675 15,420
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,845,560 1,647,832
Total shareholders' equity 142,582 130,506
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,988,142 $1,778,338
- -------------------------------------------------------------------------------------------------------------------
Net interest income $13,315 $12,168
- -------------------------------------------------------------------------------------------------------------------
Net interest spread 2.62% 2.68%
- -------------------------------------------------------------------------------------------------------------------
Net interest margin 2.87% 2.97%
- -------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Three months ended March 31, 2004 2003
- --------------------------------------------------------------------------------
Commercial and other loans $37 $39
Nontaxable debt securities 82 98
Corporate stocks 113 102
Financial Condition and Liquidity
Total assets increased $80.4 million from $1.974 billion at December 31, 2003 to
$2.054 billion at March 31, 2004. Average assets totaled $1.988 billion at March
31, 2004, up 11.8% over the comparable 2003 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, 2004 amounted to $738.0 million, an increase of $64.1 million,
or 9.5%, from the December 31, 2003 balance of $673.8 million. This increase was
mainly due to purchases of mortgage-backed securities and U.S. government agency
securities. The net unrealized gains on securities available for sale amounted
to $15.7 million at March 31, 2004, compared to $10.3 million at December 31,
2003. The increase was primarily attributable to the decline in interest rates
between December 31, 2003 and March 31, 2004, resulting in higher market values
for the majority of debt security holdings.
Securities Held to Maturity - As a result of principal paydowns on
mortgage-backed securities and a callable FHLB security, the carrying value of
securities held to maturity decreased $19.0 million from $165.6 million at
December 31, 2003 to $146.6 million at March 31, 2004. The net unrealized gain
on securities held to maturity amounted to $4.2 million at March 31, 2004,
compared to $3.8 million at December 31, 2003.
Loans - In the first three months of 2004, total loans increased $43.4 million,
or 4.5%, to $1.004 billion at March 31, 2004 with the largest increase in
consumer loans. Consumer loans amounted to $182.3 million at March 31, 2004, up
$19.7 million, or 12.1%, from December 31, 2003 primarily due to growth in home
equity lines and loans. Commercial loans totaled $421.4 million at March 31,
2004, up $13.0 million, or 3.2%, from December 31, 2003. Residential real estate
loans amounted to $400.6 million, up $10.7 million, or 2.7%, from the December
31, 2003 balance of $389.9 million. The Corporation purchased a total of $13.2
million of adjustable rate residential mortgages from other institutions. The
purchases were funded with a combination of FHLB advances and increases in
deposits.
Deposits - Total deposits amounted to $1.245 billion at March 31, 2004, up $38.6
million from the December 31, 2003 balance of $1.206 billion. Savings deposits,
including money market deposits, increased $28.6 million, or 5.8%, from December
31, 2003 and amounted to $522.5 million at March 31, 2004. Time deposits
amounted to $542.8 million at March 31, 2004, up $24.7 million from the December
31, 2003 balance of $518.1 million primarily due to increases in consumer
accounts and brokered certificates of deposit. Consumer certificates of deposit
amounted to $402.1 million at March 31, 2004, up $16.9 million from December 31,
2003. Brokered certificates of deposit amounted to $126.2 million at March 31,
2004, up $8.0 million from December 31, 2003. Demand deposits declined $14.7
million, or 7.6%, in the first three months of 2004 and totaled $179.5 million
at March 31, 2004. However, demand deposits at December 31, 2003 included a
temporary placement of approximately $18.6 million in funds on deposit that were
withdrawn in January 2004.
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 first three months of 2004, FHLB
advances increased $37.1 million to $644.2 million at March 31, 2004. Other
borrowings outstanding at March 31, 2004 amounted to $1.6 million, down $686
thousand from the December 31, 2003 balance of $2.3 million.
For the three months ended March 31, 2004, net cash provided by operations
amounted to $4.7 million, the majority of which was generated by net income.
Proceeds from sales of loans in the first three months of 2004 amounted to $11.4
million, while loans originated for sale amounted to $11.0 million. Net cash
used in investing activities amounted to $85.8 million and was primarily used to
purchase securities. Net cash provided by financing activities was $72.9
million, due to growth in deposits and increases in 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,
2004 2003
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,732 $1,721
Nonaccrual loans less than 90 days past due 1,188 1,022
- --------------------------------------------------------------------------------
Total nonaccrual loans 2,920 2,743
Other real estate owned, net 11 11
- --------------------------------------------------------------------------------
Total nonperforming assets $2,931 $2,754
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .29% .29%
Nonperforming assets as a percentage of total assets .14% .14%
Allowance for loan losses to nonaccrual loans 553.90% 580.17%
Allowance for loan losses to total loans 1.61% 1.66%
There were no accruing loans 90 days or more past due at March 31, 2004 or
December 31, 2003.
Impaired loans consist of all nonaccrual commercial loans. At March 31, 2004,
the recorded investment in impaired loans was $1.9 million, which had a related
allowance amounting to $122 thousand. Also during this period, interest income
recognized on impaired loans amounted to approximately $53 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,
2004 2003
- --------------------------------------------------------------------------------
Residential real estate $771 $946
Commercial:
Mortgages 449 342
Other 1,452 1,236
Consumer 248 219
- --------------------------------------------------------------------------------
Total nonaccrual loans $2,920 $2,743
- --------------------------------------------------------------------------------
Capital Resources
Total equity capital increased $6.5 million during the first three months of
2004 and amounted to $144.6 million. This increase was primarily attributable to
$2.7 million earnings retention and $3.6 million net unrealized gains on
securities. (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 March 31, 2004,
compared to 6.99% at December 31, 2003. Book value per share as of March 31,
2004 and December 31, 2003 amounted to $10.95 and $10.46, respectively.
At March 31, 2004, the Corporation's Tier 1 risk-based capital ratio was 9.84%
and the total risk-adjusted capital ratio was 11.42%. The Corporation's Tier 1
leverage ratio amounted to 5.66% at March 31, 2004. These ratios were above the
ratios required to be categorized as well-capitalized.
Dividends payable at March 31, 2004 amounted to $2.2 million, representing $.17
per share payable on April 15, 2004, 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.
Off-Balance Sheet Arrangement
See Note 10 of the Consolidated Financial Statements for additional information
regarding the Corporation's off-balance sheet arrangements.
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. The Corporation's 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 in understanding the 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 2003 Annual Report on
Form 10-K, we have identified the allowance for loan losses, review of goodwill
and intangible assets for impairment, other-than-temporary impairment, interest
income recognition, and tax estimates as 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
See Note 2 of the Consolidated Financial Statements for additional information
regarding recent accounting developments affecting the Corporation.
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 March 31, 2004. 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 given the current
level of interest rates, the likelihood of a decline in interest rates in excess
of 50 basis points is considered remote.
Months 1 - 12 Months 13-24 Months 1 - 60
------------------------------------------------------------------------------
200 basis point increase in rates 2.7% 2.0% 1.8%
50 basis point decrease in rates -1.6% -2.9% -3.2%
At March 31, 2004, 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 an 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 March 31, 2004, an immediate 200 basis point rise in rates would result in
a 4.5% 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 1.1%
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, 2004,
including both debt and equity securities, was 5.7%, 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 March 31, 2004. 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 March 31,
2004 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
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table provides information as of and for the quarter ended March
31, 2004 regarding shares of common stock of the Corporation that were
repurchased under the Deferred Compensation Plan and the Stock Repurchase Plan.
Total number of
shares purchased Maximum number
as part of of shares that
Total number publicly may yet be
of shares Average price announced purchased under
purchased paid per share plan(s) the plan(s)
- ------------------------------------------------------------------------------------------------
Deferred Compensation Plan (A)
1/1/2004 to 1/31/2004 215 $26.68 215 14,881
2/1/2004 to 2/29/2004 41 25.12 41 14,840
3/1/2004 to 3/31/2004 20 25.22 20 14,820
- ------------------------------------------------------------------------------------------------
Total Deferred Compensation Plan 276 26.34 276 14,820
- ------------------------------------------------------------------------------------------------
Stock Repurchase Plan (B)
1/1/2004 to 1/31/2004 - - - -
2/1/2004 to 2/29/2004 - - - -
3/1/2004 to 3/31/2004 5,000 25.00 5,000 162,000
- ------------------------------------------------------------------------------------------------
Total Stock Repurchase Plan 5,000 25.00 5,000 162,000
- ------------------------------------------------------------------------------------------------
Total Purchases of Equity Securities 5,276 $25.07 5,276 176,820
- ------------------------------------------------------------------------------------------------
<FN>
(A) The Deferred Compensation Plan was established on January 1, 1999. A
maximum of 25,000 shares were authorized under the plan. This plan allows
directors and officers to defer a portion of their compensation. The
deferred compensation is contributed to a rabbi trust that invests the
assets of the trust into selected mutual funds as well as shares of the
Bancorp's common stock pursuant to the direction of the plan participants.
All shares are purchased in the open market.
(B) The Stock Repurchase Plan was established in September 2001. A maximum of
250,000 shares were authorized under the plan. The Bancorp plans to hold
the repurchased shares as treasury stock for general corporate purposes.
</FN>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
-------------
10 Third Amendment to the Nonqualified Deferred Compensation
Plan
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 January 22, 2004, a Form 8-K, which reported the Corporation's
earnings for the quarter ended December 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 7, 2004 By: John C. Warren
--------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
May 7, 2004 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)