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, 2000 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 April 30, 2000 was 10,975,055. Page 1
FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended March 31, 2000 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets March 31, 2000 and December 31, 1999 Consolidated Statements of Income Three Months Ended March 31, 2000 and 1999 Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 2000 and 1999 Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 1999 Condensed Notes to Consolidated Financial Statements Independent Auditors' Review Report Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. Other Information Signatures This report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in 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, 2000 1999 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $17,208 $26,960 Federal funds sold and other short-term investments 15,900 17,300 Mortgage loans held for sale 175 1,647 Securities: Available for sale, at fair value 368,519 330,431 Held to maturity, at cost; fair value $117,019 in 2000 and $112,868 in 1999 121,096 116,372 - -------------------------------------------------------------------------------- Total securities 489,615 446,803 Federal Home Loan Bank stock, at cost 18,671 17,627 Loans 555,017 549,025 Less allowance for loan losses 12,540 12,349 - -------------------------------------------------------------------------------- Net loans 542,477 536,676 Premises and equipment, net 23,149 23,409 Accrued interest receivable 7,007 6,010 Other assets 28,453 28,232 - -------------------------------------------------------------------------------- Total assets $1,142,655 $1,104,664 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $99,952 $102,384 Savings 231,779 235,395 Time 346,179 322,974 - -------------------------------------------------------------------------------- Total deposits 677,910 660,753 Dividends payable 1,315 1,202 Short-term borrowings 1,642 4,209 Federal Home Loan Bank advances 373,423 352,548 Accrued expenses and other liabilities 9,938 8,705 - -------------------------------------------------------------------------------- Total liabilities 1,064,228 1,027,417 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 10,939,557 shares in 2000 and 10,914,763 shares in 1999 684 682 Paid-in capital 9,988 9,990 Retained earnings 68,376 66,766 Accumulated other comprehensive income (621) (191) - -------------------------------------------------------------------------------- Total shareholders' equity 78,427 77,247 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,142,655 $1,104,664 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share data) (Unaudited) Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------------------------ <S> <C> <C> Interest income: Interest and fees on loans $11,649 $10,809 Interest on securities 7,407 6,109 Dividends on corporate stock and Federal Home Loan Bank stock 672 534 Interest on federal funds sold and other short-term investments 158 160 - ------------------------------------------------------------------------------------------------ Total interest income 19,886 17,612 - ------------------------------------------------------------------------------------------------ Interest expense: Savings deposits 997 947 Time deposits 4,448 3,888 Federal Home Loan Bank advances 5,252 3,845 Other 23 220 - ------------------------------------------------------------------------------------------------ Total interest expense 10,720 8,900 - ------------------------------------------------------------------------------------------------ Net interest income 9,166 8,712 Provision for loan losses 350 482 - ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 8,816 8,230 - ------------------------------------------------------------------------------------------------ Noninterest income: Trust revenue 1,629 1,419 Service charges on deposit accounts 796 758 Merchant processing fees 271 249 Mortgage banking activities 122 498 Income from bank-owned life insurance 242 - Net gains (losses) on sales of securities 384 262 Other income 433 360 - ------------------------------------------------------------------------------------------------ Total noninterest income 3,877 3,546 - ------------------------------------------------------------------------------------------------ Noninterest expense: Salaries and employee benefits 4,676 4,138 Net occupancy 607 566 Equipment 773 717 Legal, audit and professional fees 455 209 Advertising and promotion 356 192 Merchant processing costs 225 159 Office supplies 168 168 Other 1,272 1,677 - ------------------------------------------------------------------------------------------------ Total noninterest expense 8,532 7,826 - ------------------------------------------------------------------------------------------------ Income before income taxes 4,161 3,950 Income tax expense 1,238 1,206 - ------------------------------------------------------------------------------------------------ Net income $2,923 $2,744 - ------------------------------------------------------------------------------------------------ Per share information: Basic earnings per share $.27 $.25 Diluted earnings per share $.26 $.25 Cash dividends declared per share $.12 $.11 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> 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 Three months ended March 31, Stock Capital Earnings Income Stock Total - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2000 $682 $9,990 $66,766 $(191) $- $77,247 Net income 2,923 2,923 Other comprehensive income net of tax: Net unrealized losses on securities, net of reclassification adjustment (430) (430) ------------- Comprehensive income 2,493 Cash dividends declared (1,313) (1,313) Shares issued 2 (2) - - ---------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2000 $684 $9,988 $68,376 $(621) $- $78,427 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1999 $674 $9,050 $60,803 $7,400 $(354) $77,573 Net income 2,744 2,744 Other comprehensive income net of tax: Net unrealized gains on securities, net of reclassification adjustment (1,336) (1,336) ------------ Comprehensive income 1,408 Cash dividends declared (1,113) (1,113) Shares issued 7 759 766 Shares repurchased (24) (24) - ---------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1999 $681 $9,809 $62,434 $6,064 $(378) $78,610 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> 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, 2000 1999 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $2,923 $2,744 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 350 482 Depreciation of premises and equipment 740 726 Amortization of premium in excess of accretion of discount on debt securities (25) 103 Net gains on sales of securities (384) (262) Net gains on loan sales (56) (288) Proceeds from sales of loans 3,271 19,527 Loans originated for sale (1,742) (17,676) Increase in accrued interest receivable (997) (604) Decrease (increase) in other assets 89 (615) Increase in accrued expenses and other liabilities 1,245 620 Other, net 89 (15) - -------------------------------------------------------------------------------- Net cash provided by operating activities 5,503 4,742 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (49,263) (56,594) Proceeds from sales 3,412 12,890 Maturities and principal repayments 7,508 14,052 Securities held to maturity: Purchases (8,963) (7,043) Maturities and principal repayments 4,243 5,967 Purchase of Federal Home Loan Bank stock (1,044) (58) Principal collected on loans under loan originations (6,282) (14,348) Proceeds from sales of other real estate owned 8 154 Purchases of premises and equipment (539) (1,280) - -------------------------------------------------------------------------------- Net cash used in investing activities (50,920) (46,260) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits 17,157 (8,945) Net (decrease) increase in other short-term borrowings (2,567) 4,164 Proceeds from Federal Home Loan Bank advances 117,000 151,836 Repayment of Federal Home Loan Bank advances (96,125) (109,987) Purchase of treasury stock - (24) Proceeds from issuance of common stock - 766 Cash dividends paid (1,200) (1,005) - -------------------------------------------------------------------------------- Net cash provided by financing activities 34,265 36,805 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (11,152) (4,713) Cash and cash equivalents at beginning of year 44,260 34,477 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $33,108 $29,764 - -------------------------------------------------------------------------------- (Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Three months ended March 31, 2000 1999 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned $106 $243 Loans charged off 237 394 Decrease in net unrealized gain on securities available for sale (430) (1,336) Supplemental Disclosures: Interest payments $10,178 $8,689 Income tax payments 53 154 The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accounting and reporting policies of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") are in accordance with generally accepted accounting principles and conform to general practices of the banking industry. In the opinion of management, the accompanying consolidated financial statements present fairly the Corporation's financial position as of March 31, 2000 and December 31, 1999 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. The Corporation has not changed its accounting and reporting policies from those disclosed in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. (2) Securities Available for Sale <TABLE> <CAPTION> Securities available for sale are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> March 31, 2000 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $103,441 $288 $(1,467) $102,262 Mortgage-backed securities 212,305 392 (3,093) 209,604 Corporate bonds 38,221 11 (869) 37,363 Corporate stocks 14,470 5,873 (1,053) 19,290 - --------------------------------------------------------------------------------------------------------------------- Total 368,437 6,564 (6,482) 368,519 - --------------------------------------------------------------------------------------------------------------------- December 31, 1999 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 87,558 347 (1,595) 86,310 Mortgage-backed securities 191,934 70 (2,918) 189,086 Corporate bonds 34,364 31 (711) 33,684 Corporate stocks 15,833 6,582 (1,064) 21,351 - --------------------------------------------------------------------------------------------------------------------- Total $329,689 $7,030 $(6,288) $330,431 - --------------------------------------------------------------------------------------------------------------------- <FN> Securities available for sale with a fair value of $64,720 and $47,152 were pledged to secure Treasury Tax and Loan deposits, borrowings and public deposits at March 31, 2000 and December 31, 1999, respectively. For the three months ended March 31, 2000, proceeds from sales of securities available for sale amounted to $3,412 while net realized gains on these sales amounted to $384. </FN> </TABLE>
(3) Securities Held to Maturity <TABLE> <CAPTION> The amortized cost and fair value of securities held to maturity are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> March 31, 2000 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $31,817 $- $(990) $30,827 Mortgage-backed securities 63,358 29 (2,571) 60,816 States and political subdivisions 25,921 10 (555) 25,376 - --------------------------------------------------------------------------------------------------------------------- Total 121,096 39 (4,116) 117,019 - --------------------------------------------------------------------------------------------------------------------- December 31, 1999 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 28,231 - (895) 27,336 Mortgage-backed securities 62,209 54 (2,189) 60,074 States and political subdivisions 25,932 23 (497) 25,458 - --------------------------------------------------------------------------------------------------------------------- Total $116,372 $77 $(3,581) $112,868 - --------------------------------------------------------------------------------------------------------------------- <FN> There were no sales or transfers of securities held to maturity during the three months ended March 31, 2000. </FN> </TABLE> (4) Loan Portfolio The following is a summary of loans: March 31, December 31, 2000 1999 - -------------------------------------------------------------------------------- Commercial: Mortgages $116,498 $113,719 Construction and development 2,142 2,902 Other (1) 110,082 115,739 - -------------------------------------------------------------------------------- Total commercial 228,722 232,360 Residential real estate: Mortgages 220,008 212,719 Homeowner construction 12,498 12,995 - -------------------------------------------------------------------------------- Total residential real estate 232,506 225,714 Consumer 93,789 90,951 - -------------------------------------------------------------------------------- Total loans $555,017 $549,025 - -------------------------------------------------------------------------------- (1) Loans to businesses and individuals, a substantial portion of which is fully or partially collateralized by real estate (5) Allowance For Loan Losses The following is an analysis of the allowance for loan losses: Three months ended March 31, 2000 1999 - -------------------------------------------------------------------------------- Balance at beginning of period $12,349 $10,966 Provision charged to expense 350 482 Recoveries 78 45 Loans charged off (237) (160) - -------------------------------------------------------------------------------- Balance at end of period $12,540 $11,333 - -------------------------------------------------------------------------------- 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, 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the three-month periods ended March 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with 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 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 17, 2000, 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, 1999, is fairly stated, in all material respects. KPMG LLP Providence, Rhode Island April 20, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Corporation reported net income of $2.9 million, or $.26 per diluted share, for the three months ended March 31, 2000. Net income for the first quarter of 2000 was 6.5% higher than the $2.7 million, or $.25 per diluted share, earned in the first quarter of 1999. The Corporation's rates of return on average assets and average equity for the three months ended March 31, 2000 were 1.05% and 15.01%, respectively. Comparable amounts for the first quarter of 1999 were 1.09% and 14.01%. For the three months ended March 31, 2000, net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) amounted to $9.2 million, an increase of 5.2% from the $8.7 million reported for the three months ended March 31, 1999. This increase was primarily attributable to growth in interest-earning assets. (See additional discussion under the caption "Net Interest Income".) The Corporation's provision for loan losses was $350 thousand and $482 thousand in the first quarter of 2000 and 1999, respectively. Other noninterest income (noninterest income excluding net gains on sales of securities) amounted to $3.5 million for the three months ended March 31, 2000, up 6.4% from the corresponding 1999 period. The increase was primarily due to growth in revenues for trust services and income from bank-owned life insurance ("BOLI"), offset in part by a decline in revenue from mortgage banking activities. Trust revenue totaled $1.6 million for the first quarter of 2000, up 14.8% from the first quarter of 1999 due primarily to an increase in assets under management. During the second quarter of 1999, the Corporation purchased BOLI as a financing tool for employee benefits. Revenue from mortgage banking activities associated with the originations of loans for the secondary market amounted to $122 thousand for the first quarter of 2000, down $376 thousand from the same 1999 period. Due to rising interest rates, mortgage refinancing activity has decreased, resulting in a decline of loans sold in the secondary market. Net realized securities gains totaled $384 thousand for the three months ended March 31, 2000. In the first quarter of 1999, net realized securities gains amounted to $270 thousand, including $262 thousand related to a contribution of appreciated equity securities to the Corporation's charitable foundation. The cost of this contribution amounted to approximately $270 thousand and was included in noninterest expenses in the first quarter of 1999. For the quarter ended March 31, 2000, total noninterest expense amounted to $8.5 million, an increase of 9.0% from the comparable 1999 amount. The increase was primarily attributable to higher salaries and benefits expense, increases in legal, audit and professional fees, and increases in advertising and promotion costs. For the three months ended March 31, 2000, legal, audit and professional fees totaled $455 thousand, up $246 thousand from the corresponding 1999 period. The increase was primarily due to legal costs associated with an ongoing litigation matter. These costs are expected to continue through the second quarter of 2000. At this time, management of the Corporation is not able to determine whether such costs will continue beyond the second quarter. As mentioned above, included in other noninterest expense for the first quarter of 1999 was the cost of a charitable contribution to the Corporation's charitable foundation.
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, 2000 amounted to $9.5 million, up 5.0% over the same 1999 period due primarily to growth in interest-earning assets. For the three months ended March 31, 2000, average interest-earning assets amounted to $1.053 billion, up $96.4 million, or 10.1%, over the comparable 1999 amount due to growth in both the securities portfolio and in total loans. This growth in securities and loans was funded by Federal Home Loan Bank ("FHLB") advances and to a lesser extent, deposit growth. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for the three months ended March 31, 2000 and 1999 were 3.61% and 3.81%, respectively. The interest rate spread declined 21 basis points to 3.08% for the first quarter of 2000. Earning asset yields rose 11 basis points, while the cost of interest-bearing liabilities increased 32 basis points, thereby narrowing the net interest spread. Higher funding costs associated with time deposits and FHLB advances were primarily responsible for the decrease in the net interest margin. Total average securities rose $48.6 million, or 10.7%, over the comparable prior year period, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.79% for the three months ended March 31, 2000, up from 6.25% for the same 1999 period. The increase in yields reflects higher marginal rates on investment purchases. The yield on average total loans amounted to 8.54% for the three months ended March 31, 2000, down from 8.75% in the comparable 1999 period. The decrease in yield on loans was primarily attributable to new loan originations, after the first quarter of 1999, at relatively lower rates. Average loans for the three months ended March 31, 2000 rose $47.9 million, or 9.5%, over the prior year and amounted to $550.4 million. Average commercial loans rose 11.0% to $230.3 million. The yield on commercial loans amounted to 9.28%, down from the prior year yield of 9.56%. Average residential real estate loans amounted to $228.4 million, up 9.5% from the prior year level. The yield on residential real estate loans declined 23 basis points from the prior year, amounting to 7.73%. Average consumer loans rose 6.0% over the prior year. The yield on consumer loans amounted to 8.68%, compared to the prior year yield of 8.71%. As a result of higher levels of FHLB advances and increases in time and savings deposits, average interest-bearing liabilities increased 11.2% to $932.9 million at March 31, 2000. Due to higher rates paid on both borrowed funds and time deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 4.62% for the three months ended March 31, 2000, up from 4.30% for the comparable 1999 period. Average FHLB advances for the three months ended March 31, 2000 amounted to $362.3 million, up 24.9% from the $290.0 million average balance for the same 1999 period. The average rate paid on FHLB advances for the three months ended March 31, 2000 was 5.83%, an increase of 45 basis points from the prior year rate. Average time deposits increased $24.6 million to $338.9 million with an increase of 26 basis points in the rate paid. Average savings deposits for the three months ended March 31, 2000 increased 6.0% from the comparable 1999 amount to $216.9 million. The rate paid on these deposits was 1.74% for the first three months of 2000, compared to 1.77% for the same 1999 period. For the three months ended March 31, 2000, average demand deposits, an interest-free funding source, were up by $11.2 million, or 13.1%, 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. Loans held for sale, nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans. Customer overdrafts are excluded from amounts presented for loans. Average balances for securities are presented at cost, with any unrealized gains and losses of securities available for sale included in noninterest-earning assets. <TABLE> <CAPTION> Three months ended March 31, 2000 1999 - ---------------------------------------- ------------------------------------- ------------------------------------- Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------- ------------- ----------- ----------- -------------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Assets: Residential real estate loans $228,363 $4,388 7.73% $208,537 $4,095 7.96% Commercial and other loans 230,326 5,313 9.28% 207,439 4,889 9.56% Consumer loans 91,667 1,979 8.68% 86,517 1,857 8.71% - -------------------------------------------------------------------------------------------------------------------- Total loans 550,356 11,680 8.54% 502,493 10,841 8.75% Federal funds sold and other short-term investments 10,968 158 5.81% 13,867 160 4.67% Taxable debt securities 432,870 7,128 6.62% 382,522 5,794 6.14% Nontaxable debt securities 25,928 428 6.64% 27,178 476 7.11% Corporate stocks and FHLB stock 33,332 778 8.55% 30,950 631 8.27% - -------------------------------------------------------------------------------------------------------------------- Total securities 503,098 8,492 6.79% 454,517 7,061 6.25% - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,053,454 20,172 7.70% 957,010 17,902 7.59% - -------------------------------------------------------------------------------------------------------------------- Non interest-earning assets 59,687 52,838 - -------------------------------------------------------------------------------------------------------------------- Total assets $1,113,141 $1,009,848 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $229,856 $997 1.74% $216,857 $947 1.77% Time deposits 338,894 4,448 5.28% 314,318 3,888 5.02% FHLB advances 362,327 5,252 5.83% 290,031 3,845 5.38% Other 1,821 23 5.10% 17,490 220 5.11% - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 932,898 10,720 4.62% 838,696 8,900 4.30% Demand deposits 96,158 85,003 Non interest-bearing liabilities 6,198 7,803 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,035,254 931,502 Total shareholders' equity 77,887 78,346 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,113,141 $1,009,848 - -------------------------------------------------------------------------------------------------------------------- Net interest income $9,452 $9,001 - -------------------------------------------------------------------------------------------------------------------- Net interest spread 3.08% 3.29% - -------------------------------------------------------------------------------------------------------------------- Net interest margin 3.61% 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, 2000 1999 - -------------------------------------------------------------------------------- Commercial and other loans $30 $32 Nontaxable debt securities 149 161 Corporate stocks 107 96 </FN> </TABLE>
Financial Condition and Liquidity Total assets rose 3.4% from $1.105 billion at December 31, 1999 to $1.143 billion at March 31, 2000. Average assets totaled $1.113 billion for the three months ended March 31, 2000, up 10.2% over the comparable 1999 period. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $3.9 million, or .34% of total assets, at March 31, 2000 compared to $3.8 million, or .35% of total assets, at December 31, 1999. The allowance for loan losses amounted to $12.5 million, or 2.26% of total loans, at March 31, 2000, compared to $12.3 million, or 2.25%, at December 31, 1999. Securities Available for Sale - The carrying value of securities available for sale at March 31, 2000 amounted to $368.5 million, an increase of 11.8% over the December 31, 1999 amount of $329.7 million. This increase was attributable to purchases of debt securities. The net unrealized gain on securities available for sale amounted to $82 thousand, down from the December 31, 1999 balance of $742 thousand. This decrease was attributable to the effects of higher interest rates. Securities Held to Maturity - The carrying value of securities held to maturity amounted to $121.1 million at March 31, 2000, up from $116.4 million at December 31, 1999. This increase was due to purchases of obligations of U.S. government-sponsored agencies and mortgage-backed securities. The net unrealized loss on securities held to maturity amounted to approximately $4.1 million at March 31, 2000, compared to $3.5 million at December 31, 1999. This decrease was attributable to the effects of higher interest rates. Loans - Total loans amounted to $555.0 million at March 31, 2000. During the first three months of 2000, total loans increased $6.0 million, with increases in the residential real estate and consumer loan portfolios. Total residential real estate loans amounted to $232.5 million, an increase of $6.8 million, or 3.01%, from the December 31, 1999 balance of $225.7. Total consumer loans increased $2.8 million, or 3.1%, from December 31, 1999 and amounted to $93.8 million. Commercial loans decreased $3.6 million, or 1.6%, to $228.7 million at March 31, 2000. Deposits - Total deposits amounted to $677.9 million at March 31, 2000, up $17.2 million from $660.8 million at December 31, 1999. In the first quarter of 2000, time deposits increased $23.2 million and amounted to $346.2 million at March 31, 2000. Savings deposits declined $3.6 million from the December 31, 1999 balance to $231.8 million at March 31, 2000. Demand deposits totaled $100.0 million at March 31, 2000, compared to $102.4 million at December 31, 1999. 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. In addition to deposit growth, additional FHLB advances were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. FHLB advances amounted to $373.4 million at March 31, 2000, up $20.9 million from the December 31, 1999 amount. In addition, short-term borrowings outstanding at March 31, 2000 amounted to $1.6 million. For the three months ended March 31, 2000, net cash provided by operations amounted to $5.5 million, the majority of which was generated by net income. Net cash used in investing activities amounted to $50.9 million and was primarily used to purchase securities. Net cash provided by financing activities of $34.3 million was generated mainly by a net increase in FHLB advances and by an increase in total deposits. (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) 2000 1999 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,889 $1,902 Nonaccrual loans less than 90 days past due 1,828 1,896 - -------------------------------------------------------------------------------- Total nonaccrual loans 3,717 3,798 Other real estate owned 142 49 - -------------------------------------------------------------------------------- Total nonperforming assets $3,859 $3,847 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .67% .69% Nonperforming assets as a percentage of total assets .34% .35% Allowance for loan losses to nonaccrual loans 337.36% 325.15% Allowance for loan losses to total loans 2.26% 2.25% Not included in the analysis of nonperforming assets at March 31, 2000 and December 31, 1999 above are approximately $179 thousand and $120 thousand, respectively, of loans greater than 90 days past due and still accruing. These loans consist primarily of residential mortgages that 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, 2000, the recorded investment in impaired loans was $2.0 million, which had a related allowance amounting to $341 thousand. During the three months ended March 31, 2000, the average recorded investment in impaired loans was $2.1 million. Also during this period, interest income recognized on impaired loans amounted to approximately $55 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) 2000 1999 - -------------------------------------------------------------------------------- Residential mortgages $1,103 $1,015 Commercial: Mortgages 719 797 Other (1) 1,203 1,242 Consumer 692 744 - -------------------------------------------------------------------------------- Total nonaccrual loans $3,717 $3,798 - -------------------------------------------------------------------------------- (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 $78.4 million, or 6.9% of total assets, at March 31, 2000. This compares to $77.2 million, or 7.0%, at December 31, 1999. Total equity increased by approximately $1.2 million from December 31, 1999. The increase in equity resulting from earnings retention was reduced by $430 thousand decline in net unrealized gains on securities. (See the Consolidated Statements of Changes in Shareholders' Equity for additional information.) At March 31, 2000, the Corporation's Tier 1 capital ratio was 12.46% and the total risk-adjusted capital ratio was 14.07%. These ratios were both above the ratios required to be categorized as well-capitalized. Dividends payable at March 31, 2000 amounted to approximately $1.3 million, representing $.12 per share payable on April 14, 2000, an increase of 9% over the $.11 per share declared in the fourth quarter of 1999. Dividends declared per share represent historical per share dividends declared by the Corporation and have not been restated as a result of the acquisition of Pier Bank. 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, 2000 and December 31, 1999 amounted to $7.17 and $7.08, respectively. Subsequent Event On April 25, 2000, the Corporation announced that it had signed a definitive agreement to acquire Phoenix Investment Management Company of Providence, Rhode Island. Phoenix is an independent investment advisory firm, with assets under management in excess of $1 billion. Pursuant to the terms of the Agreement and Plan of Merger, dated April 24, 2000, the acquisition will be effected by means of the merger of Phoenix with and into The Washington Trust Company, the wholly-owned subsidiary of the Corporation. Under the terms of the agreement, the Corporation will acquire 100% of Phoenix for 1,150,000 shares of Washington Trust Bancorp, Inc.'s common stock. Based on the Corporation's closing stock price on April 24, 2000, the transaction would be valued at approximately $17,250,000. The transaction, which is subject to regulatory approval, is expected to be a tax-free reorganization and accounted for as a pooling of interests. Litigation The Bank is party to a lawsuit filed by a former corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by an officer of the customer. Management believes, based on its review with counsel of the development of this mater to date that the Bank has asserted meritorious defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed and the case is currently scheduled for trial on May 30, 2000. During discovery, the plaintiffs have acknowledged that their total asserted damages are no more than $5.0 to $5.5 million, plus an unspecified amount of interest thereon. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded. 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. During 1999, the Corporation completed a detailed assessment of all its information technology (IT) and non-information technology (non-IT) systems with respect to the century date change (the transition from the year 1999 to 2000), with special emphasis on mission-critical systems. IT and non-IT hardware and software were inventoried and those not Year 2000 ready were identified, remediated and tested. While the Corporation's assessment of Year 2000 issues was ongoing and subject to on-going regulatory mandated verification and review through March 31, 2000, the Corporation did not experience any effects from Year 2000 issues. Total costs associated with the project will amount to approximately $526 thousand. The Corporation has accounted for most of these costs as expense items. In some cases, acquired hardware and software items were capitalized and amortized in accordance with the Corporation's existing accounting policy. Total costs incurred through March 31, 2000 amounted to approximately $513 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 in the second quarter of 2000. There can be no guarantee that the systems of other companies, or outside vendors, on which the Corporation's systems rely, have been fully remedied. Therefore, the Corporation could possibly experience a negative impact to the extent other entities not affiliated with the Corporation are not Year 2000 compliant. Recent Accounting Developments Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" 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. In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 and is not to be applied retroactively to the 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, 2000, 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 -1.7% -6.3% 200 basis point decrease in rates +0.8% +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, 1999. 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, 2000, 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 2.4% increase in the value of the Corporation's available for sale debt securities. "Value at risk" analysis measures the theoretical maximum market value loss over a given time period based on recent historical price activity of different classes of securities. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at March 31, 2000, including both debt and equity securities, was 3.9%, 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 On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president and treasurer. The suit alleges that the Bank wrongly permitted this individual, while an officer of Maxson, to divert funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its principal shareholder as well as claims against the officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed and the case is currently scheduled for trial on May 30, 2000. During discovery, the plaintiffs have acknowledged that their total asserted damages are no more than $5.0 to $5.5 million, plus an unspecified amount of interest thereon. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. 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 Change in Control Agreements (1) 11 Statement re Computation of Per Share Earnings (b) There were no reports on Form 8-K filed during the quarter ended March 31, 2000. (1) Management contract or compensatory plan or arrangement.
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 12, 2000 By: John C. Warren ------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) May 12, 2000 By: David V. Devault --------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer)