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, 2001 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, 2001 was 12,026,666. Page 1
FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended March 31, 2001 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets March 31, 2001 and December 31, 2000 Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 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 Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures This report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's 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 the market value of trust and investment management assets under administration, 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.
ITEM 1. FINANCIAL STATEMENTS WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $17,535 $22,460 Federal funds sold and other short-term investments 41,350 21,400 Mortgage loans held for sale 3,549 1,639 Securities: Available for sale, at fair value 482,313 386,611 Held to maturity, at cost; fair value $98,482 in 2001 and $125,368 in 2000 96,575 124,915 - -------------------------------------------------------------------------------- Total securities 578,888 511,526 Federal Home Loan Bank stock, at cost 23,341 19,558 Loans 606,709 597,155 Less allowance for loan losses 13,431 13,135 - -------------------------------------------------------------------------------- Net loans 593,278 584,020 Premises and equipment, net 23,332 21,710 Accrued interest receivable 8,116 7,800 Other assets 27,860 27,954 - -------------------------------------------------------------------------------- Total assets $1,317,249 $1,218,067 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $101,582 $113,012 Savings 294,451 259,309 Time 347,107 363,363 - -------------------------------------------------------------------------------- Total deposits 743,140 735,684 Dividends payable 1,568 1,445 Federal Home Loan Bank advances 466,825 377,362 Other borrowings 1,506 3,227 Accrued expenses and other liabilities 14,295 11,163 - -------------------------------------------------------------------------------- Total liabilities 1,227,334 1,128,881 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 12,020,271 shares in 2001 and 12,006,809 shares in 2000 751 750 Paid-in capital 10,242 10,144 Retained earnings 72,856 74,265 Accumulated other comprehensive income 6,066 4,027 - -------------------------------------------------------------------------------- Total shareholders' equity 89,915 89,186 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,317,249 $1,218,067 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share data) <TABLE> <CAPTION> (Unaudited) Three months ended March 31, 2001 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest income: Interest and fees on loans $13,161 $11,650 Interest from securities 8,390 7,407 Dividends on corporate stock and Federal Home Loan Bank stock 617 671 Interest on federal funds sold and other short-term investments 203 160 - -------------------------------------------------------------------------------------------------------------------- Total interest income 22,371 19,888 - -------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 1,368 996 Time deposits 5,175 4,448 Federal Home Loan Bank advances 6,225 5,251 Other 28 25 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 12,796 10,720 - -------------------------------------------------------------------------------------------------------------------- Net interest income 9,575 9,168 Provision for loan losses 200 350 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,375 8,818 - -------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 2,573 2,514 Service charges on deposit accounts 866 796 Merchant processing fees 341 272 Income from bank-owned life insurance 272 242 Mortgage banking activities 209 121 Net gains on sales of securities 5 384 Other income 323 432 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 4,589 4,761 - -------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 5,191 4,956 Net occupancy 723 636 Equipment 825 800 Legal, audit and professional fees 312 478 Merchant processing costs 270 225 Advertising and promotion 204 357 Office supplies 164 173 Litigation settlement 4,800 - Other 1,259 1,284 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 13,748 8,909 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 216 4,670 Income tax expense 62 1,238 - -------------------------------------------------------------------------------------------------------------------- Net income $154 $3,432 - -------------------------------------------------------------------------------------------------------------------- Per share information: Basic earnings per share $.01 $.29 Diluted earnings per share $.01 $.28 Cash dividends declared per share $.13 $.12 </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 CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Accumulated Other Common Paid-in Retained Comprehensive Treasury Three months ended March 31, Stock Capital Earnings Income (Loss) Stock Total - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2000 $745 $9,927 $67,686 $(191) $- $78,167 Net income 3,432 3,432 Other comprehensive loss, net of tax: Net unrealized losses on securities (814) (814) Reclassification adjustment 384 384 ---------- Comprehensive income 3,002 Cash dividends declared (1,472) (1,472) Shares issued 2 (2) - - ---------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2000 $747 $9,925 $69,646 $(621) $- $79,697 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 $750 $10,144 $74,265 $4,027 $- $89,186 Net income 154 154 Cumulative effect of change in accounting principle, net of tax (391) (391) Other comprehensive income, net of tax: Net unrealized gains on securities 2,432 2,432 Reclassification adjustments (2) (2) ---------- Comprehensive income 2,193 Cash dividends declared (1,563) (1,563) Shares issued 1 98 99 - ---------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $751 $10,242 $72,856 $6,066 $- $89,915 - ---------------------------------------------------------------------------------------------------------------------- </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, 2001 2000 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $154 $3,432 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 200 350 Depreciation of premises and equipment 743 743 Accretion of discount less than (in excess of) amortization of premium on debt securities 9 (25) Increase in bank-owned life insurance (272) (242) Appreciation of derivative instruments (241) - Net gains on sales of securities (5) (384) Net gains on loan sales (153) (56) Proceeds from sales of loans 9,652 3,271 Loans originated for sale (11,400) (1,742) Increase in accrued interest receivable (316) (997) (Increase) decrease in other assets (341) 274 Increase in accrued expenses and other liabilities 3,132 1,225 Other, net 94 89 - -------------------------------------------------------------------------------- Net cash provided by operating activities 1,256 5,938 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (65,235) (49,263) Proceeds from sales 238 3,412 Maturities and principal repayments 16,018 7,508 Securities held to maturity: Purchases (21,235) (8,963) Maturities and principal repayments 5,985 4,243 Purchase of Federal Home Loan Bank stock (3,783) (1,044) Principal collected on loans under loan originations (9,661) (6,282) Proceeds from sales of other real estate owned - 8 Purchases of premises and equipment (2,365) (539) - -------------------------------------------------------------------------------- Net cash used in investing activities (80,038) (50,920) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 7,456 17,157 Net decrease in other short-term borrowings (1,746) (2,567) Proceeds from Federal Home Loan Bank advances 179,000 117,000 Repayment of Federal Home Loan Bank advances (89,537) (96,125) Repayment of obligations under capital leases (25) - Net effect of common stock transactions 99 - Cash dividends paid (1,440) (1,360) - -------------------------------------------------------------------------------- Net cash provided by financing activities 93,807 34,105 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 15,025 (10,877) Cash and cash equivalents at beginning of year 43,860 44,520 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $58,885 $33,643 - -------------------------------------------------------------------------------- (Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Three months ended March 31, 2001 2000 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned (OREO) $157 $106 Loans charged off 37 237 Increase (decrease) in net unrealized gain on securities available for sale, net of tax 2,060 (430) Increase in paid-in capital resulting from tax benefits on stock option exercises 57 109 Supplemental Disclosures: Interest payments $12,629 $10,178 Income tax payments 14 53 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, 2001 and December 31, 2000 and the results of operations and cash flows for the interim periods presented. The consolidated financial statements include the accounts of the Washington Trust Bancorp, Inc. and its wholly-owned subsidiary, The Washington Trust Company. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by 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, 2000. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, on January 1, 2001. SFAS No. 133 requires a corporation to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. 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. The ineffective portion of all hedges will be recognized in current period earnings. The Corporation has an interest rate floor contract that is intended to function as a hedge against reductions in interest income realized from prime-based loans. At initial adoption, the transition adjustment on this derivative was a loss, net of tax, of $24 thousand and was reported in other comprehensive income. Changes in fair value of the interest rate floor contract are recorded in current earnings and amounted to $254 thousand for the first quarter of 2001. The Corporation also has recognized commitments to originate and commitments to sell fixed rate mortgage loans. At the date of adoption, these derivatives have an immaterial impact on net income. Changes in fair value of the commitments since the date of adoption are recorded in current earnings and also have an immaterial impact on net income. The transition provisions of SFAS No. 133 also provide that at the date of initial application an entity may transfer any security classified as "held to maturity" to "available for sale" or "trading." On January 1, 2001, the Corporation transferred held to maturity securities with an amortized cost of $43.6 million and an estimated fair value of $42.6 million into the available for sale category. The transition adjustment amounted to an unrealized loss, net of tax, of $367 thousand and was reported in other comprehensive income.
(2) Securities <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, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $100,966 $1,712 $ (67) $102,611 Mortgage-backed securities 306,766 3,171 (716) 309,221 Corporate bonds 50,758 717 (1,158) 50,317 Corporate stocks 14,073 6,660 (569) 20,164 - --------------------------------------------------------------------------------------------------------------------- Total 472,563 12,260 (2,510) 482,313 - --------------------------------------------------------------------------------------------------------------------- December 31, 2000 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 86,163 1,162 (241) 87,084 Mortgage-backed securities 240,436 1,462 (1,042) 240,856 Corporate bonds 39,086 348 (869) 38,565 Corporate stocks 14,314 6,494 (702) 20,106 - --------------------------------------------------------------------------------------------------------------------- Total $379,999 $9,466 $(2,854) $386,611 - --------------------------------------------------------------------------------------------------------------------- <FN> For the three months ended March 31, 2001, proceeds from sales of securities available for sale amounted to $238 thousand while net realized gains on these sales amounted to $5 thousand. </FN> </TABLE> <TABLE> <CAPTION> Securities held to maturity are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> March 31, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 17,394 $ 436 $ (1) $17,829 Mortgage-backed securities 56,688 1,103 (37) 57,754 States and political subdivisions 22,493 406 - 22,899 - --------------------------------------------------------------------------------------------------------------------- Total 96,575 1,945 (38) 98,482 - --------------------------------------------------------------------------------------------------------------------- December 31, 2000 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 35,135 265 (121) 35,279 Mortgage-backed securities 66,715 685 (467) 66,933 States and political subdivisions 23,065 121 (30) 23,156 - --------------------------------------------------------------------------------------------------------------------- Total $124,915 $1,071 $(618) $125,368 - --------------------------------------------------------------------------------------------------------------------- <FN> There were no sales of securities held to maturity during the three months ended March 31, 2001. </FN> </TABLE>
Securities available for sale and held to maturity with a fair value of $117.1 million and $65.3 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and public deposits at March 31, 2001 and December 31, 2000, respectively. In addition, securities available for sale and held to maturity with a fair value of $31.3 million and $31.2 million were collateralized for the discount window at the Federal Reserve Bank at March 31, 2001 and December 31, 2000, respectively. There were no borrowings with the Federal Reserve Bank at either date. (3) Loan Portfolio The following is a summary of loans: March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------- Commercial: Mortgages (1) $108,576 $121,817 Construction and development (2) 11,083 2,809 Other (3) 127,779 115,202 - -------------------------------------------------------------------------------- Total commercial 247,438 239,828 Residential real estate: Mortgages 239,426 236,595 Homeowner construction 15,060 14,344 - -------------------------------------------------------------------------------- Total residential real estate 254,486 250,939 Consumer 104,785 106,388 - -------------------------------------------------------------------------------- Total loans $606,709 $597,155 - -------------------------------------------------------------------------------- (1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate (4) Allowance For Loan Losses The following is an analysis of the allowance for loan losses: Three months ended March 31, 2001 2000 - -------------------------------------------------------------------------------- Balance at beginning of period $13,135 $12,349 Provision charged to expense 200 350 Recoveries 133 78 Loans charged off (37) (237) - -------------------------------------------------------------------------------- Balance at end of period $13,431 $12,540 - --------------------------------------------------------------------------------
(5) Litigation As more fully described in Note 6, on May 11, 2001 Washington Trust Bancorp, Inc.'s bank subsidiary (the "Bank") entered into an agreement to settle a suit filed against it in 1997. 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. (6) Subsequent Event In January 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, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. On May 11, 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which does not involve an admission of wrongdoing, the Bank will pay $4.8 million to the plaintiffs. The liability and related cost of this settlement amount have been recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. 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, 2001, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the three-month periods ended March 31, 2001 and 2000. 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 auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2000, 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 15, 2001, 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, 2000, is fairly stated, in all material respects. KPMG LLP Providence, Rhode Island April 19, 2001, except as to Note 6 which is dated May 11, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under administration, 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 defaults and charge-off rates and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Results of Operations The Corporation reported net income of $154 thousand, or $.01 per diluted share, for the three months ended March 31, 2001. These results were significantly affected by a one-time litigation settlement amounting to $3.3 million or $.28 per diluted share, net of the related income tax effect. (See additional information under the caption Litigation.) Net income for the first quarter of 2000 amounted to $3.4 million, or $.28 per diluted share. The Corporation's rates of return on average assets and average equity for the three months ended March 31, 2001 were .05% and .67%, respectively. Comparable amounts for the first quarter of 2000 were 1.23% and 17.40%. Results excluding the effect of the one-time litigation settlement in 2001 and including a pro forma tax provision for pre-acquisition earnings of Phoenix Investment Management Company, Inc. (which operated as a sub-S corporation prior to the second quarter 2000 acquisition) are referred to herein as operating basis results. Operating basis earnings for the first quarter of 2001 amounted to $3.5 million, or $.29 per diluted share, up by 8.3% over the $3.2 million, or $.27 per diluted share earned in the first quarter of 2000. The Corporation's rates of return on average assets and average equity for the three months ended March 31, 2001, on an operating basis, were 1.14% and 15.30%, respectively. Comparable amounts for the first quarter of 2000, on an operating basis, were 1.16% and 16.37%. For the three months ended March 31, 2001, net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) amounted to $9.6 million, an increase of 4.4% from the $9.2 million earned in the first quarter of 2000. 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 $200 thousand and $350 thousand in the first quarter of 2001 and 2000, respectively. The allowance for loan losses increased from $13.1 million at December 31, 2000 to $13.4 million at March 31, 2001 due to the first quarter 2001 provision and recoveries, net of charge-offs.
The provision for the three months ended March 31, 2001 decreased compared to the same period last year, due to management's belief that the allowance for loan losses is at a reasonable level based on its current evaluation. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. Other noninterest income (noninterest income excluding net gains on sales of securities) amounted to $4.6 million for the quarter ended March 31, 2001, up 4.7% from the comparable 2000 period. Primary sources of noninterest income are trust and investment management fees, service charges on deposit accounts, merchant processing fees and mortgage banking activities. Revenue from mortgage banking activities associated with origination of loans for the secondary market amounted to $209 thousand for the three months ended March 31, 2001, and increase of 71.0% from the $121 thousand reported for the same period in 2000. Due to falling interest rates, mortgage loan origination volume and refinancing activity have increased, resulting in an increase in the number of loans sold in the secondary market. Trust and investment management revenue totaled $2.6 million for the three months ended March 31, 2001, compared to the $2.5 million reported for the same 2000 period. Revenue growth has slowed reflecting financial market declines. The market value of trust and investment management assets under administration amounted to $1.5 billion and $1.7 billion at March 31, 2001 and December 31, 2000, respectively. Net realized securities gains for the three months ended March 31, 2001 and 2000 amounted to $5 thousand and $384 thousand, respectively. For the quarters ended March 31, 2001 and 2000, other noninterest expense (noninterest expense excluding the first quarter 2001 litigation settlement) amounted to $8.9 million. Salaries and benefit expense amounted to $5.2 million for the three months ended March 31, 2001, up $235 thousand, or 4.7%, from the $5.0 million reported for the first quarter of 2000. The increase in salaries and benefit expense was offset by lower legal, audit and professional fees and advertising and promotion costs. 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, 2001 amounted to $9.8 million, up 4.2% over the same 2000 period due primarily to growth in interest-earning assets. For the three months ended March 31, 2001, average interest-earning assets amounted to $1.160 billion, up $106.7 million, or 10.1%, over the comparable 2000 amount due to growth in securities and loans. Deposit growth and Federal Home Loan Bank ("FHLB") advances funded the growth in securities and loans. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for the three months ended March 31, 2001 and 2000 were 3.44% and 3.60%, respectively. The interest rate spread declined 22 basis points to 2.86% for the three months ended March 31, 2001. Earning asset yields rose 21 basis points, while the cost of interest-bearing liabilities increased 43 basis points, thereby narrowing the net interest spread. Higher funding costs associated with savings and time deposits and FHLB advances were primarily responsible for the decrease in the net interest margin. Total average securities rose $55.4 million, or 11.0%, over the comparable prior year period, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.85% for the three months ended March 31, 2001, compared to 6.84% for the same 2000 period. The yield on average total loans amounted to 8.89% for the three months ended March 31, 2001, up 36 basis points from 8.53% for the comparable 2000 period. The increase in yield on loans was primarily attributable to the impact of loans originated at higher interest rates in 2000 after the first quarter. Average loans for the three months ended March 31, 2001 rose $51.3 million, or 9.3%, over the prior year and amounted to $601.7 million. Average commercial loans rose 5.8% to $243.6 million. The yield on commercial loans amounted to 9.89%, up 61 basis points from the prior year yield of 9.28%. Included in interest income on commercial loans, for the three months ended March 31, 2001, was $254 thousand of appreciation in value of the interest rate floor contract. Average residential real estate loans amounted to $252.7 million, up 10.7% from the prior year level. The yield on residential real estate loans increased 22 basis points from the prior year period, amounting to 7.95%. Average consumer loans rose 14.9% over the prior year. The yield on consumer loans amounted to 8.86%, an increase of 18 basis points from the prior year yield of 8.68%. Average interest-bearing liabilities increased 10.2% to $1.028 billion at March 31, 2001. Due to higher rates paid on both borrowed funds and deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 5.05% for the three months ended March 31, 2001, up from 4.62% for the comparable 2000 period. Average savings deposits for the three months ended March 31, 2001 increased 14.6% to $263.3 million from the comparable 2000 amount. The rate paid on savings deposits for the first three months of 2001 was 2.11%, compared to 1.74% for the same 2000 period. Average time deposits increased $21.7 million to $360.6 million with an increase of 54 basis points in the rate paid. For the three months ended March 31, 2001, average demand deposits, an interest-free funding source, were up by $4.8 million, or 5.0%, from the same prior year period. Average FHLB advances for the three months ended March 31, 2001 amounted to $402.0 million, up 11.0% from the comparable 2000 amount. The average rate paid on FHLB advances for the three months ended March 31, 2001 was 6.28%, an increase of 45 basis points from the prior year rate. 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, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- 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 $252,720 $4,953 7.95% $228,362 $4,387 7.73% Commercial and other loans 243,620 5,940 9.89% 230,326 5,312 9.28% Consumer loans 105,364 2,302 8.86% 91,667 1,979 8.68% - ------------------------------------------------------------------------------------------------------------------- Total loans 601,704 13,195 8.89% 550,355 11,678 8.53% Federal funds sold and other short-term investments 14,259 203 5.78% 11,243 161 5.75% Taxable debt securities 487,125 8,145 6.78% 432,870 7,128 6.62% Nontaxable debt securities 22,868 377 6.68% 25,928 422 6.54% Corporate stocks and FHLB stock 34,486 712 8.38% 33,332 773 9.33% - ------------------------------------------------------------------------------------------------------------------- Total securities 558,738 9,437 6.85% 503,373 8,484 6.84% - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,160,442 22,632 7.91% 1,053,728 20,162 7.70% - ------------------------------------------------------------------------------------------------------------------- Non interest-earning assets 68,711 60,274 - ------------------------------------------------------------------------------------------------------------------- Total assets $1,229,153 $1,114,002 - ------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $263,309 $1,368 2.11% $229,856 $997 1.74% Time deposits 360,550 5,175 5.82% 338,894 4,448 5.28% FHLB advances 402,021 6,225 6.28% 362,327 5,252 5.83% Other 1,991 28 5.73% 1,820 23 5.10% - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,027,871 12,796 5.05% 932,897 10,720 4.62% Demand deposits 100,966 96,158 Non interest-bearing liabilities 8,905 6,046 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,137,742 1,035,101 Total shareholders' equity 91,411 78,901 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,229,153 $1,114,002 - ------------------------------------------------------------------------------------------------------------------- Net interest income $9,836 $9,442 - ------------------------------------------------------------------------------------------------------------------- Net interest spread 2.86% 3.08% - ------------------------------------------------------------------------------------------------------------------- Net interest margin 3.44% 3.60% - ------------------------------------------------------------------------------------------------------------------- </TABLE> Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Three months ended March 31, 2001 2000 - -------------------------------------------------------------------------------- Commercial and other loans $ 35 $ 29 Nontaxable debt securities 131 143 Corporate stocks 95 102
Financial Condition and Liquidity Total assets rose 8.1% from $1.218 billion at December 31, 2000 to $1.317 billion at March 31, 2001. Average assets totaled $1.229 billion for the three months ended March 31, 2001, up 10.3% over the comparable 2000 period. Securities Available for Sale - The carrying value of securities available for sale at March 31, 2001 amounted to $482.3 million, an increase of $95.7 million, or 24.8%, over the December 31, 2000 amount of $386.6 million. As previously disclosed, pursuant to the transition provisions of SFAS No. 133, on January 1, 2001, the Corporation reclassified held to maturity securities with an estimated fair value of $42.6 million into the available for sale category. The increase in carrying value of securities available for sale was primarily attributable to purchases of debt securities and the reclassification of securities in accordance with SFAS No. 133. The net unrealized gain on securities available for sale amounted to $9.8 million, compared to $6.6 million at December 31, 2000. This increase was attributable to the effects of reductions in medium and long-term interest rates that occurred during the first quarter of 2001. Securities Held to Maturity - The carrying value of securities held to maturity amounted to $96.6 million at March 31, 2001, down from $124.9 million at December 31, 2000. This decrease was due to the aforementioned reclassification of held-to-maturity securities to the available-for sale category offset in part by purchases of mortgage-backed securities. The net unrealized gain on securities held to maturity amounted to $1.9 million at March 31, 2001, compared to $453 thousand at December 31, 2000. Loans - At March 31, 2001, total loans amounted to $606.7 million. During the three months ended March 31, 2001, total loans increased $9.5 million. Commercial loans amounted to $247.4 million at March 31, 2001, an increase of $7.6 million from the December 31, 2000 balance of $239.8 million. Total residential real estate loans increased $3.5 million from December 31, 2000 and amounted to $254.5 million. Total consumer loans amounted to $104.8 million at March 31, 2001 compared to $106.4 million at December 31, 2000. Deposits - Total deposits amounted to $743.1 million at March 31, 2001, up $7.4 million from $735.7 million at December 31, 2000. For the three months ended March 31, 2001, savings deposits increased $35.1 million, including a temporary placement of approximately $23 million in money market deposits that were withdrawn by mid-April. As a result of the unanticipated growth in savings deposits, federal funds sold and other short-term investments amounted to $41.4 million, up $20.0 million from December 31, 2000. Time deposits decreased $16.3 million from December 31, 2000 due to maturity of commercial and consumer CD's and amounted to $347.1 million at March 31, 2001. Demand deposits amounted to $101.6 million at March 31, 2001, down $11.4 million from the December 31, 2000 balance. Borrowings - The Corporation utilizes advances from the Federal Home Loan Bank as well as other borrowings as part of its overall funding strategy. FHLB advances were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. FHLB advances amounted to $466.8 million at March 31, 2001, up $89.4 million from the December 31, 2000 amount. In addition, other borrowings outstanding at March 31, 2001 and December 31, 2000 amounted to $1.5 million and $3.2 million, respectively. For the three months ended March 31, 2001, net cash provided by operations amounted to $1.3 million. Proceeds from sales of loans in the first quarter of 2001 amounted to $9.7 million, while loans originated for sale amounted to $11.4 million. Net cash used in investing activities amounted to $80.0 million and was primarily used to purchase securities. Net cash provided by financing activities of $93.8 million was generated mainly by a net increase in FHLB advances and 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) 2001 2000 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,701 $1,608 Nonaccrual loans less than 90 days past due 1,615 1,826 - -------------------------------------------------------------------------------- Total nonaccrual loans 3,316 3,434 Other real estate owned 163 9 - -------------------------------------------------------------------------------- Total nonperforming assets $3,479 $3,443 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .55% .58% Nonperforming assets as a percentage of total assets .26% .28% Allowance for loan losses to nonaccrual loans 405.04% 382.50% Allowance for loan losses to total loans 2.21% 2.20% Not included in the analysis of nonperforming assets at March 31, 2001 and December 31, 2000 above are approximately $296 thousand and $393 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, 2001, the recorded investment in impaired loans was $2.2 million, which had a related allowance amounting to $245 thousand. During the three months ended March 31, 2001, the average recorded investment in impaired loans was $2.2 million. Also during this period, interest income recognized on impaired loans amounted to approximately $28 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) 2001 2000 - -------------------------------------------------------------------------------- Residential mortgages $ 588 $ 796 Commercial: Mortgages 1,015 1,076 Other (1) 1,159 1,018 Consumer 554 544 - -------------------------------------------------------------------------------- Total nonaccrual loans $3,316 $3,434 - -------------------------------------------------------------------------------- (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 $89.9 million, or 6.8% of total assets, at March 31, 2001. This compares to $89.2 million, or 7.3%, at December 31, 2000. First quarter 2001 includes a one-time litigation settlement amounting to $3.3 million, net of income taxes. (See additional information under the caption Litigation and the Consolidated Statements of Changes in Shareholders' Equity for additional information.) At March 31, 2001, the Corporation's Tier 1 risk-based capital ratio was 11.87% and the total risk-adjusted capital ratio was 13.52%. The Corporation's Tier 1 leverage ratio amounted to 6.81% at March 31, 2001. These ratios were above the ratios required to be categorized as well-capitalized. Dividends payable at March 31, 2001 amounted to approximately $1.6 million, representing $.13 per share payable on April 13, 2001, an increase of 8.3% over the $.12 per share declared in the fourth quarter of 2000. 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, 2001 and December 31, 2000 amounted to $7.48 and $7.43, respectively. Litigation In January 1997, a suit was filed against the Washington Trust Bancorp Inc.'s bank subsidiary (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, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. On May 11, 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which does not involve an admission of wrongdoing, the Bank will pay $4.8 million to the plaintiffs and the suit will be dismissed. The liability and related expense of this settlement amount have been recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity and Liquidity Interest rate risk is one of the major market risks faced by the Corporation. The Corporation's objective is to manage assets and funding sources to produce results 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, 2001, 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 0.81% -2.77% 200 basis point decrease in rates -2.37% -2.33% 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, 2000. 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, 2001, an immediate 200 basis point rise in rates would result in a 4.5% decline in the value of the Corporation's available for sale debt securities. Conversely, a 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 Corporation's available for sale securities portfolio at March 31, 2001, 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. During 1998, the Corporation entered into an interest rate floor contract with a notional principal amount of $20 million and a five-year term maturing in March 2003. The contract is intended to function as a hedge against reductions in interest income realized from prime-based loans. The Corporation receives payment for the contract if certain interest rates fall below specified levels. Effective January 1, 2001 with the adoption of SFAS No. 133, the Corporation recognized the fair value of this derivative as an asset on the balance sheet. At March 31, 2001 the carrying value of the interest rate floor contract amounted to $351 thousand and is reported in other assets.
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, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank were 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. On May 11, 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which does not involve an admission of wrongdoing, the Bank will pay $4.8 million to the plaintiffs and the suit will be dismissed. The liability and related expense of this settlement amount have been recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. 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 6. Exhibits and Reports on Form 8-K (a) Exhibit index Exhibit No. 11 Statement re Computation of Per Share Earnings (b) There were no reports on Form 8-K filed during the quarter ended March 31, 2001.
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, 2001 By: John C. Warren -------------------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) May 14, 2001 By: David V. Devault -------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer)