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, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
-------------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
-------------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
(401) 348-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of common stock of the registrant outstanding as of May 7,
1999 was10,120,257.
Page 1
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended March 31, 1999
TABLE OF CONTENTS
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Condensed Notes to Consolidated Financial Statements 8
Independent Auditors' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information 19
Signatures 20
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general national or regional economic conditions, changes in interest rates,
reductions in 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.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $13,889 $18,475
Federal funds sold and other short-term investments 11,598 10,300
Mortgage loans held for sale 4,386 5,944
Securities:
Available for sale, at fair value 343,686 315,265
Held to maturity, at cost; fair value $96,918
in 1999 and $96,548 in 1998 96,744 95,647
- --------------------------------------------------------------------------------
Total securities 440,430 410,912
Federal Home Loan Bank stock, at cost 16,444 16,444
Loans 461,092 449,502
Less allowance for loan losses 10,768 10,416
- --------------------------------------------------------------------------------
Net loans 450,324 439,086
Premises and equipment, net 23,556 22,985
Accrued interest receivable 6,169 5,540
Other assets 5,965 5,383
- --------------------------------------------------------------------------------
Total assets $972,761 $935,069
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $84,306 $87,383
Savings 208,702 210,093
Time 272,963 277,847
- --------------------------------------------------------------------------------
Total deposits 565,971 575,323
Dividends payable 1,113 1,005
Short-term borrowings 19,197 15,033
Federal Home Loan Bank advances 303,955 262,106
Accrued expenses and other liabilities 8,553 8,536
- --------------------------------------------------------------------------------
Total liabilities 898,789 862,003
- --------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 10,119,093 shares
in 1999 and 10,010,962 shares in 1998 632 626
Paid-in capital 3,578 2,855
Retained earnings 63,696 62,196
Accumulated other comprehensive income 6,066 7,389
- --------------------------------------------------------------------------------
Total shareholders' equity 73,972 73,066
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $972,761 $935,069
- --------------------------------------------------------------------------------
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
(Unaudited)
------------------------
Three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $9,665 $10,072
Interest on securities 6,044 4,571
Dividends on corporate stock
and Federal Home Loan Bank stock 532 509
Interest on federal funds sold and
other short-term investments 141 169
- --------------------------------------------------------------------------------
Total interest income 16,382 15,321
- --------------------------------------------------------------------------------
Interest expense:
Savings deposits 852 827
Time deposits 3,460 3,890
Federal Home Loan Bank advances 3,831 3,072
Other 220 232
- --------------------------------------------------------------------------------
Total interest expense 8,363 8,021
- --------------------------------------------------------------------------------
Net interest income 8,019 7,300
Provision for loan losses 450 450
- --------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,569 6,850
- --------------------------------------------------------------------------------
Noninterest income:
Trust revenue 1,419 1,224
Service charges on deposit accounts 725 633
Merchant processing fees 249 155
Net gains on sales of securities 262 41
Net gains on loan sales 328 329
Other income 349 282
- --------------------------------------------------------------------------------
Total noninterest income 3,332 2,664
- --------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 3,783 3,419
Net occupancy 504 459
Equipment 672 566
Merchant processing costs 141 111
Office supplies 156 159
Advertising and promotion 172 112
Other 1,754 1,364
- --------------------------------------------------------------------------------
Total noninterest expense 7,182 6,190
- --------------------------------------------------------------------------------
Income before income taxes 3,719 3,324
Income tax expense 1,106 931
- --------------------------------------------------------------------------------
Net income $2,613 $2,393
- --------------------------------------------------------------------------------
Per share information:
Earnings per share - basic $.26 $.24
Earnings per share - diluted $.25 $.23
Cash dividends declared per share $.11 $.10
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $626 $2,855 $62,196 $7,389 $- $73,066
Net income 2,613 2,613
Other comprehensive income net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (1,323) (1,323)
--------
Comprehensive income 1,290
Cash dividends declared (1,113) (1,113)
Shares issued 6 723 729
- ----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $632 $3,578 $63,696 $6,066 $- $73,972
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $413 $3,705 $56,360 $7,059 $(333) $67,204
Net income 2,393 2,393
Other comprehensive income net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 910 910
--------
Comprehensive income 3,303
Cash dividends declared (998) (998)
Shares issued 5 501 1,003 1,509
Shares repurchased (1,684) (1,684)
- ----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $418 $4,206 $57,755 $7,969 $(1,014) $69,334
- ----------------------------------------------------------------------------------------------------------------------
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, 1999 1998
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $2,613 $2,393
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 450 450
Depreciation of premises and equipment 693 573
Amortization of premium in excess of accretion of
discount on debt securities 23 284
Net gains on sales of securities (262) (41)
Net gains on loan sales (328) (329)
Proceeds from sales of loans 19,527 22,265
Loans originated for sale (17,676) (24,016)
Increase in accrued interest receivable (629) (441)
Increase in other assets (540) (325)
Increase (decrease) in accrued expenses and other liabilities 698 (79)
Other, net (56) (53)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,513 681
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (56,511) (95,619)
Proceeds from sales 12,890 19,532
Maturities and principal repayments 13,412 11,663
Securities held to maturity:
Purchases (7,043) (1,567)
Maturities and principal repayments 5,967 370
Principal collected on loans (under) over loan originations (11,787) 5,276
Proceeds from sales of other real estate owned 151 340
Purchases of premises and equipment (1,265) (858)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,186) (60,863)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (9,352) 16,852
Net increase (decrease) in other short-term borrowings 4,164 (610)
Proceeds from Federal Home Loan Bank advances 147,336 168,400
Repayment of Federal Home Loan Bank advances (105,487) (124,591)
Purchase of treasury stock - (1,684)
Proceeds from issuance of common stock 729 1,509
Cash dividends paid (1,005) (927)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 36,385 58,949
- -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,288) (1,233)
Cash and cash equivalents at beginning of year 28,775 25,500
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $25,487 $24,267
- -----------------------------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three months ended March 31, 1999 1998
- -----------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $194 $44
Loans charged off 142 55
(Decrease) increase in net unrealized gain on
securities available for sale (1,323) 910
Supplemental Disclosures:
Interest payments $8,148 $4,541
Income tax payments 1 2
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accounting and reporting policies of Washington Trust Bancorp, Inc. (the
"Corporation") are in accordance with generally accepted accounting principles
and conform to general practices of the banking industry. In the opinion of
management, the accompanying consolidated financial statements present fairly
the Corporation's financial position as of March 31, 1999 and December 31, 1998
and the results of operations and cash flows for the interim periods presented.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, The Washington Trust Company. All significant
intercompany balances and transactions have been eliminated.
The unaudited consolidated financial statements of Washington Trust Bancorp,
Inc. presented herein have been prepared pursuant to the rules of the Securities
and Exchange Commission for quarterly reports on Form 10-Q and do not include
all of the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998
(2) Securities Available for Sale
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 1999
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $116,116 $1,146 $(184) $117,078
Mortgage-backed securities 166,405 513 (445) 166,473
Corporate bonds 37,733 103 (265) 37,571
Corporate stocks 13,211 9,638 (285) 22,564
- ---------------------------------------------------------------------------------------------------------------------
Total 333,465 11,400 (1,179) 343,686
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 113,757 1,782 (12) 115,527
Mortgage-backed securities 143,906 666 (495) 144,077
Corporate bonds 27,533 179 (209) 27,503
Corporate stocks 17,842 10,408 (92) 28,158
- ---------------------------------------------------------------------------------------------------------------------
Total $303,038 $13,035 $(808) $315,265
- ---------------------------------------------------------------------------------------------------------------------
Securities available for sale with a fair value of $31,837 and $27,800 were
pledged to secure Treasury Tax and Loan deposits, short-term borrowings and
public deposits at March 31, 1999 and December 31, 1998, respectively.
For the three months ended March 31, 1999, proceeds from sales of securities
available for sale amounted to $12,890 while net realized gains on these sales
amounted to $262.
(3) Securities Held to Maturity
The amortized cost and fair value of securities held to maturity are summarized
as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
March 31, 1999
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $25,984 $67 $(27) $26,024
Mortgage-backed securities 43,586 267 (480) 43,373
States and political subdivisions 27,174 361 (14) 27,521
- ---------------------------------------------------------------------------------------------------------------------
Total 96,744 695 (521) 96,918
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 21,987 133 (1) 22,119
Mortgage-backed securities 46,088 335 (96) 46,327
States and political subdivisions 27,572 531 (1) 28,102
- ---------------------------------------------------------------------------------------------------------------------
Total $95,647 $999 $(98) $96,548
- ---------------------------------------------------------------------------------------------------------------------
There were no sales or transfers of securities held to maturity during the three
months ended March 31, 1999.
(4) Loan Portfolio The following is a summary of loans:
March 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Commercial:
Mortgages $78,396 $70,468
Construction and development 608 612
Other (1) 114,187 111,477
- --------------------------------------------------------------------------------
Total commercial 193,191 182,557
Residential real estate:
Mortgages 181,918 179,589
Homeowner construction 9,125 10,046
- --------------------------------------------------------------------------------
Total residential real estate 191,043 189,635
Consumer (2) 76,858 77,310
- --------------------------------------------------------------------------------
Total loans $461,092 $449,502
- --------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
(2) Includes credit card loans totaling $5.0 million and $5.4 million at
March 31, 1999 and December 31, 1998, respectively.
(5) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of period $10,416 $8,835
Provision charged to expense 450 450
Recoveries 44 79
Loans charged off (142) (55)
- --------------------------------------------------------------------------------
Balance at end of period $10,768 $9,309
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheet of Washington Trust
Bancorp, Inc. and subsidiary (the "Corporation") as of March 31, 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the three-month periods ended March 31, 1999 and 1998. These
consolidated financial statements are the responsibility of the Corporation's
management.
We conduct our reviews in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, 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 reviews, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Corporation as of December 31,
1998, 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 21, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998, is fairly stated, in all material respects.
KPMG LLP
Providence, Rhode Island
April 15, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - Quarters Ended March 31, 1999 and 1998
The Corporation recorded net income of $2.6 million for the three months ended
March 31, 1999, an increase of 9.2 % over the $2.4 million of net income
recorded in the first quarter of 1998. Diluted earnings per share for the
quarter ended March 31, 1999 amounted to $.25, up from $.23 per share on net
income earned in the comparable 1998 quarter.
The Corporation's rates of return on average assets and average equity for the
quarter ended March 31, 1999 were 1.10% and 14.17%, respectively. Comparable
amounts for the first quarter of 1998 were 1.14% and 13.88%, respectively.
Net interest income (the difference between interest earned on loans and
investments and interest paid on deposits and borrowings) for the first quarter
of 1999 amounted to $8.0 million, an increase of 9.8% from the $7.3 million
reported for the three months ended March 31, 1998. This increase was primarily
attributable to net interest income generated by investment securities. (See
additional discussion under the caption "Net Interest Income".)
The provision for loan losses for the three months ended March 31, 1999 amounted
to $450 thousand, unchanged from the prior year period.
Other noninterest income (noninterest income excluding net gains on sales of
securities available for sale) amounted to $3.1 million for the first quarter of
1999, up 17.0% over the comparable 1998 amount. This increase was primarily due
to growth in revenues for trust services and increases in other service charges.
For the three months ended March 31, 1999 and 1998, net gains on sales of
securities amounted to approximately $262 thousand and $41 thousand,
respectively.
Total noninterest expense for the quarter ended March 31, 1999 amounted to $7.2
million, an increase of 16.0% from the comparable 1998 amount. This increase was
primarily attributable to higher salaries and benefits expense and increases in
equipment and occupancy expenses resulting from the Corporation's expansion of
its market area. Equipment and net occupancy costs rose 18.7% and 10.0%,
respectively, over the prior year period due primarily to depreciation of
premises and equipment incurred in connection with the Corporation's market area
expansion efforts. Included in other noninterest expenses for the three months
ended March 31, 1999 was a contribution to the Corporation's charitable
foundation amounting to approximately $270 thousand. This transaction resulted
in the realized securities gains of $262 thousand mentioned previously.
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, 1999 amounted to
$8.3 million, up by 10.4% over the same 1998 period due primarily to the growth
in interest-earning assets. The net interest margin (FTE net interest income as
a percentage of average interest-earning assets) declined slightly from 3.81% in
the first quarter of 1998 to 3.73% in 1999.
For the three months ended March 31, 1999, average interest-earning assets
amounted to $902.6 million, an increase of $112.2 million, or 14.2%, over the
comparable 1998 amount. The growth in average interest-earning assets was due to
growth in the securities portfolio. Total average securities rose $113.5 million
or 33.9% over the comparable prior year period, mainly due to purchases of debt
securities. The FTE rate of return on securities was 6.31% for the first quarter
of 1999, down from 6.50% for the same 1998 period. The decrease in yields
reflects lower marginal rates on investment purchases. The FTE rate of return on
average interest-earning assets was 7.49% for the three months ended March 31,
1999, down from 7.87% for the same 1998 period due to reduction in yields on
loans and taxable debt securities.
The yield on average total loans amounted to 8.66% for the three months ended
March 31, 1999, down from 8.87% in the comparable 1998 period due primarily to
lower yields on new loan originations. Average total loans for the three months
ended March 31, 1999 declined slightly from the prior year and amounted to
$454.2 million. Average consumer loans and residential real estate loans rose by
2.9% and 1.1% over the prior year, respectively, while average commercial loans
decreased by 3.0%. As a result of prime rate decreases during the fourth quarter
of 1998, the yields on consumer and residential real estate loans declined 44
basis points and 42 basis points to 8.66% and 7.79%, respectively. The yield on
commercial loans increased 12 basis points from the first quarter of 1998 to
9.55%. The increase in yields on commercial loans was mainly due to the
recognition of interest income relating to payoffs of nonaccrual loans.
The Corporation's total cost of funds on interest-bearing liabilities amounted
to 4.29% for the three months ended March 31, 1999, down from 4.63% for the
comparable 1998 period. This decrease was due primarily to reduced rates paid on
both borrowed funds and deposits. Average FHLB advances amounted to $288.9
million, up 37.3% from the $210.5 million average balance for the comparable
1998 period. The average rate paid on FHLB advances for the three months ended
March 31, 1999 was 5.38%, an decrease of 46 basis points from the prior year
rate. Average time deposits declined $3.3 million to $280.5 million with a
decrease of 48 basis points in the rate paid. Average savings deposits for the
three months ended March 31, 1999 increased 12.1% from the comparable 1998
amount to $204.2 million. The rate paid on these deposits was 1.69% for the
first three months of 1999, down from 1.82% for the same 1998 period. For the
three months ended March 31, 1999, average demand deposits, an interest-free
funding source, were up by $8.6 million, or 12.0%, from the same prior year
period.
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
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. 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, 1999 1998
- ---------------------------------------- ------------------------------------ --------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------- ------------- ----------- ---------- -------------- ------------ ----------
Assets:
Residential real estate loans $191,615 3,683 7.79% $189,444 3,891 8.21%
Commercial and other loans 186,464 4,390 9.55% 192,136 4,532 9.43%
Consumer loans 76,089 1,625 8.66% 73,970 1,682 9.10%
- --------------------------------------------------------------------------------------------------------------------
Total loans 454,168 9,698 8.66% 455,550 10,105 8.87%
Federal funds sold and other
short-term investments 12,079 141 4.75% 12,405 168 5.43%
Taxable debt securities 378,376 5,729 6.14% 275,253 4,380 6.37%
Nontaxable debt securities 27,178 476 7.11% 17,774 290 6.52%
Corporate stocks and FHLB stock 30,782 628 8.27% 29,448 607 8.25%
- --------------------------------------------------------------------------------------------------------------------
Total securities 448,415 6,974 6.31% 334,880 5,445 6.50%
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 902,583 16,672 7.49% 790,430 15,550 7.87%
- --------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 49,522 49,231
- --------------------------------------------------------------------------------------------------------------------
Total assets $952,105 $839,661
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $204,160 852 1.69% $182,156 827 1.82%
Time deposits 280,537 3,460 5.00% 283,880 3,890 5.48%
FHLB advances 288,876 3,831 5.38% 210,466 3,072 5.84%
Other 17,727 220 5.04% 16,649 232 5.57%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 791,300 8,363 4.29% 693,151 8,021 4.63%
Demand deposits 79,717 71,149
Non interest-bearing liabilities 7,316 8,539
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 878,333 772,839
Total shareholders' equity 73,772 66,822
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $952,105 $839,661
- --------------------------------------------------------------------------------------------------------------------
Net interest income $8,309 $7,529
- --------------------------------------------------------------------------------------------------------------------
Net interest spread 3.20% 3.24%
Net interest margin 3.73% 3.81%
- --------------------------------------------------------------------------------------------------------------------
<FN>
Interest income amounts presented in the table above include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Commercial and other loans $33 $33
Nontaxable debt securities 161 98
Corporate stocks 96 98
</FN>
Financial Condition and Liquidity
Total assets amounted to $972.8 million at March 31, 1999, an increase of $37.7
million, or 4.0%, from the December 31, 1998 amount of $935.1 million. Average
assets totaled $952.1 million for the three months ended March 31, 1999, up by
13.4% over the comparable 1998 period.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $5.0 million or .51% of total assets at March 31, 1999,
down from $5.9 million or .63% of total assets at December 31, 1998.
Securities Available for Sale - The carrying value of securities available for
sale at March 31, 1999 amounted to $343.7 million, an increase of 9.0% over the
December 31, 1998 amount of $315.3 million. This increase is attributable to
purchases of debt securities. The net unrealized gain on securities available
for sale amounted to $10.2 million, down 16.4% from the December 31, 1998
balance of $12.2 million. This decrease was attributable to the effect of
increases in Treasury rates that occurred in the first quarter of 1999 and a
decline in net unrealized gains on corporate stocks.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $96.7 million at March 31, 1999, up from $95.6 million at December
31, 1998. The net unrealized gain on securities held to maturity amounted to
approximately $174 thousand at March 31, 1999, down from $901 thousand at
December 31, 1998. This decline was primarily due to the effects of increases in
Treasury rates that occurred in the first quarter of 1999.
Loans - Total loans amounted to $461.1 million at March 31, 1999, an increase of
$11.6 million, or 2.6%, from the December 31, 1998 balance of $449.5 million.
Growth in the loan portfolio was led by increases in the commercial loan
portfolio. Commercial loans increased $10.6 million or 5.8% to $193.2 million at
March 31, 1999. Total residential real estate loans increased by $1.4 million
over the December 31, 1998 balance to $191.0 million.
Deposits - Total deposits amounted to $566.0 million at March 31, 1999, down by
1.6% from the December 31, 1998 amount of $575.3 million. In the first quarter
of 1999, time deposits declined $4.9 million and amounted to $273.0 million.
Demand deposits totaled $84.3 million at March 31, 1999, compared to the
December 31, 1998 balance of $87.4 million. Savings deposits decreased by $1.4
million from the December 31, 1998 balance to $210.1 million.
Borrowings - The Corporation utilizes advances from the Federal Home Loan Bank
as well as other short-term borrowings as part of its overall funding strategy.
The additional FHLB advances and short-term borrowings were used to meet
short-term liquidity needs, to fund loan growth and to purchase securities. FHLB
advances amounted to $304.0 million at March 31, 1999, up by $41.8 million from
the December 31, 1998 amount. In addition, short-term borrowings outstanding at
March 31, 1999 amounted to $19.2 million.
For the three months ended March 31, 1999, net cash provided by operations
amounted to $4.5 million, the majority of which was generated by net income and
loan sale activity. A lower interest rate environment led to volume growth in
loans sold into the secondary market. Proceeds from sales of loans in the three
months ended March 31, 1999 amounted to $19.5 million, while loans originated
for sale in the first three months of 1999 amounted to $17.7 million. Net cash
used in investing activities amounted to $44.2 million and was primarily used to
purchase securities available for sale. Net cash provided by financing
activities of $36.4 million was generated mainly by a net increase in FHLB
advances of $41.8 million. (See Consolidated Statements of Cash Flows for
additional information.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
March 31, December 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,458 $2,421
Nonaccrual loans less than 90 days past due 2,220 3,192
- --------------------------------------------------------------------------------
Total nonaccrual loans 4,678 5,613
Other real estate owned 285 243
- --------------------------------------------------------------------------------
Total nonperforming assets $4,963 $5,856
- --------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans 1.01% 1.25%
Nonperforming assets as a percentage of total assets .51% .63%
Allowance for loan losses to nonaccrual loans 230.18% 185.58%
Not included in the analysis of nonperforming assets at March 31, 1999 and
December 31, 1998 above are approximately $172 thousand and $150 thousand,
respectively, of loans greater than 90 days past due and still accruing. These
loans consist primarily of residential mortgages which are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
Impaired loans consist of all nonaccrual commercial loans. At March 31, 1999,
the recorded investment in impaired loans was $3.0 million, which had a related
allowance amounting to $694 thousand. The balance of impaired loans which did
not require an allowance at March 31, 1999 amounted to $7 thousand. During the
three months ended March 31, 1999, the average recorded investment in impaired
loans was $3.0 million. Also during this period, interest income recognized on
impaired loans amounted to approximately $124 thousand. Interest income on
impaired loans is recognized on a cash basis only.
The following is an analysis of nonaccrual loans by loan category:
March 31, December 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Residential mortgages $1,392 $1,417
Commercial:
Mortgages 979 1,522
Other (1) 1,974 2,141
Consumer 333 533
- --------------------------------------------------------------------------------
Total nonaccrual loans $4,678 $5,613
- --------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
Capital Resources
Total equity capital amounted to $74.0 million, or 7.6% of total assets at March
31, 1999. This compares to $73.1 million, or 7.8% at December 31, 1998. The
reduction in this ratio is due primarily to the growth in assets resulting from
purchases of investment securities. Total equity increased by approximately $906
thousand from December 31, 1998. The increase in equity resulting from earnings
retention was reduced by a $1.3 million decline in net unrealized gains on
securities. (See the Consolidated Statements of Changes in Shareholders' Equity
for additional information.)
At March 31, 1999, the Corporation's Tier 1 capital ratio was 12.82% and the
total risk-adjusted capital ratio was 14.91%. These ratios were both above the
ratios required to be categorized as well-capitalized.
Dividends payable at March 31, 1999 totaled approximately $1.1 million,
representing $.11 per share paid on April 15, 1999, an increase of 10.0% over
the $.10 per share declared in the fourth quarter of 1998. The source of funds
for dividends paid by the Corporation is dividends received from its subsidiary
bank. The subsidiary bank is a regulated enterprise, and as such its ability to
pay dividends to the parent is subject to regulatory review and restriction.
Book value per share as of March 31, 1999 and 1998 amounted to $7.31 and $6.94,
respectively.
On April 15, 1999, the Corporation announced that its Board of Directors voted
to terminate the Corporation's stock repurchase program which had been
previously announced on December 22, 1997. The repurchase program permitted the
acquisition of up to 225,000 shares (adjusted to reflect a 3-for-2 stock split
in August 1998) in the open market or in private transactions, based upon market
conditions. Approximately 139,000 shares were repurchased under this program.
Acquisition of PierBank
On February 23, 1999, the Corporation announced that it had signed a definitive
agreement to acquire PierBank, a Rhode Island-chartered community bank with
assets of $59.4 million, which has its headquarters in South Kingstown, Rhode
Island. Under the terms of the agreement, the Corporation will exchange shares
of its common stock for shares of PierBank common stock. Each PierBank share
will initially be valued at approximately $8.60, for a total transaction value
of $13.8 million. The actual number and value of the Corporation's common shares
to be issued to PierBank shareholders will be based on an exchange formula using
the average closing price of the Corporation's common stock during the 15
trading days prior to receiving final regulatory approval. Based on the initial
exchange ratio, the Corporation will exchange .452 shares of its common stock
for each share of common stock held by a PierBank shareholder. In accordance
with the agreement, PierBank granted the Corporation an option to acquire under
certain terms and conditions up to 319,810 shares at $7.48 per share. The option
was granted as an inducement to the Corporation's willingness to enter into the
agreement. The purchase, which is expected to be completed in the second half of
1999, is subject to approval by PierBank's shareholders as well as state and
federal banking regulators. The transaction is expected to be a tax-free
reorganization and accounted for as a pooling of interests. On April 28, 1999,
the Corporation filed with the Securities and Exchange Commission a Proxy
Statement/Prospectus and Registration Statement on Form S-4 in connection with
the Corporation's proposed acquisition of PierBank. On May 10, 1999, the
Corporation filed an amendment to the Registration Statement. Also on May 10,
1999, the Registration Statement was declared effective by the Securities and
Exchange Commission.
Year 2000
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
The following "Year 2000" discussion contains forward-looking statements which
represent the Corporation's beliefs or expectations regarding future events.
When used in the Year 2000 discussion, the words "believes," "expects,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, the
Corporation's expectations as to when it will complete the phases of the Plan,
its estimated costs, and its belief that its statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources, the ability to identify and remediate all date
sensitive lines of computer code, and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
The Corporation has developed a Year 2000 Project Plan (the "Plan") to address
the computer-related issues concerning the century date change (the transition
from the year 1999 to the year 2000). The Corporation's information technology
(IT) and non-information technology (non-IT) systems have been included in the
Plan. The Corporation uses internal computer systems, data communications
systems and telecommunications systems as well as outside service providers
(including hardware and software) to support and account for loans, deposits,
fiduciary services and other purposes. Substantially all of the application
software used by the Corporation is provided by outside vendors, under license
or through outside service bureaus. The Corporation has distinguished between
mission-critical and other, less critical, systems in assessing the needs of the
Plan.
The Plan includes five phases: awareness, assessment, renovation, validation and
testing, and contingency planning. The Plan calls for validation and testing of
all IT and non-IT systems to be completed by June 30, 1999. The Corporation's
evaluation is subject to on-going verification and review by its internal audit
staff.
The Corporation expects that the total costs associated with the project will
amount to approximately $500 thousand. The Corporation plans to account for most
of these costs as expense items. In some cases, acquired hardware and software
items will be capitalized and amortized in accordance with the Corporation's
existing accounting policy. Total costs incurred for through March 31, 1999
amounted to approximately $300 thousand. These costs consisted primarily of
system testing and modification, internal staffing and consulting, and were
primarily recorded in noninterest expenses. The remaining project costs will be
incurred throughout 1999. The costs of the project and the date on which the
Corporation plans to complete Year 2000 testing are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors.
There can be no guarantee that the systems of other companies, or outside
vendors on which the Corporation's systems rely, will be remedied on a timely
basis. Therefore, the Corporation could possibly experience a negative impact to
the extent other entities not affiliated with the Corporation are not Year 2000
compliant.
The Corporation is in the process of evaluating the risk of customer failure to
prepare for the century date change, any associated effect on the ability of
customers to repay outstanding loans, and impact on the adequacy of the level of
the allowance for loan losses. Because these efforts are now on-going, the
Corporation is unable to assess the likelihood of any material adverse effect at
this time.
The Corporation's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
These procedures will be expanded to include specific procedures for potential
Year 2000 issues, and contingency plans to protect against Year 2000-related
interruptions. These plans will include development of backup procedures and
identification of alternative suppliers. Business resumption contingency
planning is expected to be complete by June 30, 1999.
While the Corporation believes that it is taking reasonable steps with respect
to the Year 2000 issue, if the phases of the Plan are not completed on time, the
costs associated with becoming Year 2000 compliant exceed the Corporation's
estimates, third party providers are not Year 2000 compliant on a timely basis,
or customers with material loan obligations are unable to meet their repayment
obligations due to Year 2000 problems, the Year 2000 issue could have a material
impact on the Corporation's financial results. In addition, the Corporation's
efforts to address the Year 2000 issue are being monitored by its federal
banking regulators. Failure to be Year 2000 compliant on a timely basis could
subject the Corporation to formal supervisory or enforcement actions.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 requires a corporation to
recognize all derivatives as either assets or liabilities in the balance sheet
and to measure those instruments at fair value. This Statement defines
conditions and criteria to be used in designating a derivative as a specific
type of hedging instrument. SFAS No. 133 also explains the accounting for
changes in the fair value of a derivative which depends on the intended use and
the resulting designation. Under this Statement, a corporation is required to
establish at the inception of the hedge the method to be used for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the corporation's approach to managing risk. SFAS No. 133 is
effective for all fiscal quarters beginning after June 15, 1999 and is not to be
applied retroactively to financial statements of prior periods. The Corporation
has not yet determined what the effect of the adoption of this pronouncement
will have on the financial position and earnings of the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's objective is to manage assets and funding sources to produce
results which are consistent with its liquidity, capital adequacy, growth, risk
and profitability goals.
The Corporation manages interest rate risk using income simulation to measure
interest rate risk inherent in its on-balance sheet and off-balance sheet
financial instruments at a given point in time by showing the effect of interest
rate shifts on net interest income over a 60 month period. The simulation
results are reviewed to determine whether the negative exposure of net interest
income to changes in interest rates remains within established tolerance levels
over a 24-month horizon, and to develop appropriate strategies to manage this
exposure. In addition, the ALCO reviews 60-month horizon results to assess
longer-term risk inherent in the balance sheet, although no 60-month horizon
tolerance levels are specified. As of March 31, 1999, the Corporation's
estimated exposure as a percentage of net interest income for the next 12 month
period and the subsequent 12 month period thereafter (months 13 - 24),
respectively, is as follows:
Months 1 - 12 Months 13 - 24
------------------------------------ ------------------- ------------------
200 basis point increase in rates -2.6% -5.1%
200 basis point decrease in rates +1.7% -0.9%
Since this simulation assumes the Corporation's balance sheet will remain static
over the 24-month simulation horizon, the results do not reflect adjustments in
strategy that the Corporation could implement in response to rate shifts, and
should therefore not be relied upon as a projection of net interest income.
For a complete discussion of interest rate sensitivity and liquidity, including
simulation assumptions, see the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998.
The Corporation also monitors the potential change in market value of its
available for sale debt securities using both parallel rate shifts of up to 200
basis points and "value at risk" analysis. The purpose is to determine market
value exposure which may not be captured by income simulation, but which might
result in changes to the Corporation's capital position. Results are calculated
using industry-standard modeling analytics and securities data. The Corporation
uses the results to manage the effect of market value changes on the
Corporation's capital position. As of March 31, 1999, an immediate 200 basis
point rise in rates would result in a 4.2% decline in the value of the
Corporation's available for sale debt securities. Conversely, a 200 basis point
fall in rates would result in a 1.9% 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 bank's available for sale securities
portfolio at March 31, 1999, including both debt and equity securities, was
4.5%, assuming a one-year time horizon and a 5% probability of occurrence for
"value at risk" analysis.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
No material changes since the filing of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
10 Changes in Control Agreement
11 Statement re Computation of Per Share Earnings
(b) On March 2, 1999, a Form 8-K was filed which reported that the
Corporation had signed a definitive agreement to acquire
PierBank, a Rhode-Island-chartered community bank with assets of
$59.4 million as of December 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
(Registrant)
May 14, 1999 By: John C. Warren
-----------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
May 14, 1999 By: David V. Devault
-------------------------
David V. Devault
Executive Vice President, Treasurer and
Chief Financial Officer
(principal financial and accounting officer)