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 JUNE 30, 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 July 31, 2001 was 12,053,512. Page 1
FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended June 30, 2001 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets June 30, 2001 and December 31, 2000 Consolidated Statements of Income Three Months and Six Months Ended June 30, 2001 and 2000 Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 2001 and 2000 Consolidated Statements of Cash Flows Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders 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) June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $21,782 $22,460 Federal funds sold and other short-term investments 17,100 21,400 Mortgage loans held for sale 4,332 1,639 Securities: Available for sale, at fair value 475,947 386,611 Held to maturity, at cost; fair value $123,626 in 2001 and $125,368 in 2000 122,433 124,915 - -------------------------------------------------------------------------------- Total securities 598,380 511,526 Federal Home Loan Bank stock, at cost 23,491 19,558 Loans 610,023 597,155 Less allowance for loan losses 13,630 13,135 - -------------------------------------------------------------------------------- Net loans 596,393 584,020 Premises and equipment, net 23,163 21,710 Accrued interest receivable 7,678 7,800 Other assets 29,133 27,954 - -------------------------------------------------------------------------------- Total assets $1,321,452 $1,218,067 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $115,643 $113,012 Savings 291,465 259,309 Time 347,251 363,363 - -------------------------------------------------------------------------------- Total deposits 754,359 735,684 Dividends payable 1,571 1,445 Federal Home Loan Bank advances 458,813 377,362 Other borrowings 6,088 3,227 Accrued expenses and other liabilities 8,960 11,163 - -------------------------------------------------------------------------------- Total liabilities 1,229,791 1,128,881 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 12,043,191 shares in 2001 and 12,006,809 shares in 2000 753 750 Paid-in capital 10,446 10,144 Retained earnings 75,090 74,265 Accumulated other comprehensive income 5,372 4,027 - -------------------------------------------------------------------------------- Total shareholders' equity 91,661 89,186 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,321,452 $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 Six Months Periods ended June 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $12,659 $12,132 $25,820 $23,781 Interest from securities 8,691 7,898 17,081 15,306 Dividends on corporate stock and Federal Home Loan Bank stock 582 670 1,199 1,341 Interest on federal funds sold and other short-term investments 180 218 383 378 - ---------------------------------------------------------------------------------------------------------------------- Total interest income 22,112 20,918 44,483 40,806 - ---------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 1,386 998 2,754 1,995 Time deposits 4,872 4,778 10,048 9,227 Federal Home Loan Bank advances 6,529 5,772 12,753 11,023 Other 25 41 53 64 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 12,812 11,589 25,608 22,309 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 9,300 9,329 18,875 18,497 Provision for loan losses 150 350 350 700 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,150 8,979 18,525 17,797 - ---------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 2,735 2,805 5,308 5,319 Service charges on deposit accounts 920 806 1,785 1,602 Merchant processing fees 650 536 992 808 Mortgage banking activities 627 259 836 256 Income from bank-owned life insurance 279 134 551 501 Net gains on sales of securities 403 374 408 758 Other income 355 240 678 671 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest income 5,969 5,154 10,558 9,915 - ---------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 5,168 5,050 10,359 10,005 Net occupancy 629 630 1,352 1,265 Equipment 809 937 1,634 1,737 Legal, audit and professional fees 524 405 837 883 Merchant processing costs 530 421 800 646 Advertising and promotion 275 348 479 706 Office supplies 164 185 328 358 Litigation settlement - - 4,800 - Acquisition related expenses - 1,035 - 1,035 Other 1,675 1,422 2,933 2,707 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest expense 9,774 10,433 23,522 19,342 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 5,345 3,700 5,561 8,370 Income tax expense 1,545 1,308 1,607 2,546 - ---------------------------------------------------------------------------------------------------------------------- Net income $3,800 $2,392 $3,954 $5,824 - ---------------------------------------------------------------------------------------------------------------------- Per share information: Basic earnings per share $.32 $.20 $.33 $.49 Diluted earnings per share $.31 $.20 $.32 $.48 Cash dividends declared per share $.13 $.12 $.26 $.24 </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 Six months ended June 30, 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 5,824 5,824 Other comprehensive loss, net of tax: Net unrealized losses on securities (473) (473) Reclassification adjustment (758) (758) ------------ Comprehensive income 4,593 Cash dividends declared (3,750) (3,750) Shares issued 5 83 88 - ---------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2000 $750 $10,010 $69,760 $(1,422) $- $79,098 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 $750 $10,144 $74,265 $4,027 $- $89,186 Net income 3,954 3,954 Cumulative effect of change in accounting principle, net of tax (391) (391) Other comprehensive income, net of tax: Net unrealized gains on securities 2,138 2,138 Reclassification adjustments (402) (402) ------------ Comprehensive income 5,299 Cash dividends declared (3,129) (3,129) Shares issued 3 302 305 - ---------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2001 $753 $10,446 $75,090 $5,372 $- $91,661 - ---------------------------------------------------------------------------------------------------------------------- </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) Six months ended June 30, 2001 2000 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $3,954 $5,824 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 350 700 Depreciation of premises and equipment 1,464 1,589 Amortization of premium in excess of (less than) accretion of discount on debt securities 59 (47) Increase in bank-owned life insurance (551) (501) Appreciation of derivative instruments (285) - Net gains on sales of securities (408) (758) Net gains on loan sales (679) (143) Proceeds from sales of loans 40,967 6,520 Loans originated for sale (42,981) (5,847) Decrease (increase) in accrued interest receivable 122 (1,485) (Increase) decrease in other assets (1,962) 567 Decrease in accrued expenses and other liabilities (1,377) (40) Other, net 344 786 - -------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (983) 7,165 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (115,035) (89,589) Proceeds from sales 238 25,375 Maturities and principal repayments 71,425 16,766 Securities held to maturity: Purchases (53,257) (14,900) Maturities and principal repayments 12,157 6,897 Purchase of Federal Home Loan Bank stock (3,933) (1,931) Principal collected on loans under loan originations (12,918) (25,118) Proceeds from sales of other real estate owned 150 68 Purchases of premises and equipment (2,917) (750) - -------------------------------------------------------------------------------- Net cash used in investing activities (104,090) (83,182) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 18,675 39,237 Net increase in other short-term borrowings 2,912 1,219 Proceeds from Federal Home Loan Bank advances 490,000 249,500 Repayment of Federal Home Loan Bank advances (408,549) (215,600) Repayment of obligations under capital leases (51) - Net effect of common stock transactions 111 (280) Cash dividends paid (3,003) (3,511) - -------------------------------------------------------------------------------- Net cash provided by financing activities 100,095 70,565 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (4,978) (5,452) Cash and cash equivalents at beginning of year 43,860 44,520 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $38,882 $39,068 - -------------------------------------------------------------------------------- (Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Six months ended June 30, 2001 2000 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned (OREO) $168 $106 Loans charged off 122 384 Loans made to facilitate the sale of OREO - 60 Increase (decrease) in net unrealized gain on securities available for sale, net of tax 1,345 (1,231) Increase in paid-in capital resulting from tax benefits on stock option exercises 194 368 Supplemental Disclosures: Interest payments $26,203 $21,715 Income tax payments 2,932 2,854 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 accounting principles generally accepted in the United States of America and conform to general practices of the banking industry. In the opinion of management, the accompanying consolidated financial statements present fairly the Corporation's financial position as of June 30, 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 of Westerly (the "Bank"). All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The Corporation has not changed its accounting and reporting policies from those disclosed in the 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. Included in interest income for the six months ended June 30, 2001 was $270 thousand of appreciation in value of the interest rate floor contract. The Corporation also has recognized commitments to originate and commitments to sell fixed rate mortgage loans. At the date of adoption, these derivatives had 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: (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> June 30, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 73,151 $1,431 $ (54) $ 74,528 Mortgage-backed securities 316,374 3,412 (1,284) 318,502 Corporate and other bonds 61,254 610 (1,144) 60,720 Corporate stocks 16,521 6,327 (651) 22,197 - --------------------------------------------------------------------------------------------------------------------- Total 467,300 11,780 (3,133) 475,947 - --------------------------------------------------------------------------------------------------------------------- December 31, 2000 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 84,163 1,150 (241) 85,072 Mortgage-backed securities 240,436 1,462 (1,042) 240,856 Corporate and other bonds 41,086 360 (869) 40,577 Corporate stocks 14,314 6,494 (702) 20,106 - --------------------------------------------------------------------------------------------------------------------- Total $379,999 $9,466 $(2,854) $386,611 - --------------------------------------------------------------------------------------------------------------------- <FN> For the six months ended June 30, 2001, proceeds from sales of securities available for sale amounted to $238 thousand while net realized gains on these sales amounted to $408 thousand. </FN> </TABLE> <TABLE> <CAPTION> Securities held to maturity are summarized as follows: (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> June 30, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 15,689 $ 388 $ - $ 16,077 Mortgage-backed securities 84,568 888 (480) 84,976 States and political subdivisions 22,176 404 (7) 22,573 - --------------------------------------------------------------------------------------------------------------------- Total 122,433 1,680 (487) 123,626 - --------------------------------------------------------------------------------------------------------------------- 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 six months ended June 30, 2001. </FN> </TABLE>
Securities available for sale and held to maturity with a fair value of $15.5 million and $14.5 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits and public deposits at June 30, 2001 and December 31, 2000, respectively. In addition, securities available for sale and held to maturity with a fair value of $30.6 million and $31.2 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2001 and December 31, 2000, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale and held to maturity with a fair value of $406.8 million and $50.8 million were pledged to secure borrowings from the Federal Home Loan Bank of Boston ("FHLB") at June 30, 2001 and December 31, 2000, respectively. (See footnote 5 for additional information.) (3) Loan Portfolio The following is a summary of loans: (Dollars in thousands) June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- Commercial: Mortgages (1) $115,107 $121,817 Construction and development (2) 9,341 2,809 Other (3) 131,097 115,202 - -------------------------------------------------------------------------------- Total commercial 255,545 239,828 Residential real estate: Mortgages 233,326 236,595 Homeowner construction 14,293 14,344 - -------------------------------------------------------------------------------- Total residential real estate 247,619 250,939 Consumer 106,859 106,388 - -------------------------------------------------------------------------------- Total loans $610,023 $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: (Dollars in thousands) Three Months Six Months --------------------------------------------------- Periods ended June 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------- Balance at beginning of period $13,431 $12,540 $13,135 $12,349 Provision charged to expense 150 350 350 700 Recoveries 134 180 267 258 Loans charged off (85) (147) (122) (384) - -------------------------------------------------------------------------------- Balance at end of period $13,630 $12,923 $13,630 $12,923 - --------------------------------------------------------------------------------
(5) Borrowings Federal Home Loan Bank advances outstanding are summarized below: (Dollars in thousands) June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- FHLB advances $458,813 $377,362 - -------------------------------------------------------------------------------- In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2001 and December 31, 2000. Under agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances ("FHLB borrowings"). The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages, most marketable debt securities, FHLB capital stock and amounts maintained on deposit at the FHLB. The Corporation maintained qualified collateral in excess of the amount required to secure FHLB borrowings at June 30, 2001 and December 31, 2000. Included in the collateral were securities available for sale and held to maturity with a fair value of $406.8 million and $50.8 million that were specifically pledged to secure FHLB borrowings at June 30, 2001 and December 31, 2000, respectively. Unless there is an event of default under the agreement, the Corporation may use encumber or dispose any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral which has been specifically pledged. The following is a summary of other borrowings: (Dollars in thousands) June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- Treasury, Tax and Loan demand note balance $5,569 $2,813 Other 519 414 - -------------------------------------------------------------------------------- Other borrowings $6,088 $3,227 - -------------------------------------------------------------------------------- (6) Litigation 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 agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was 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 Bank has received notification from its insurance carrier that it will pay a settlement to the Bank in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter, subject to the execution of an agreement. Washington Trust expects to record this recovery when received in the third quarter 2001. 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.
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 June 30, 2001, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2001 and 2000, changes in shareholders' equity and cash flows for the six-month periods ended June 30, 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 accompanying consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects. KPMG LLP Providence, Rhode Island July 19, 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 $3.8 million, or $.31 per diluted share, for the three months ended June 30, 2001. Net income for the second quarter of 2000 amounted to $2.4 million, or $.20 per diluted share. The Corporation defines operating earnings to exclude a first quarter 2001 litigation settlement of $3.3 million, net of tax ($.28 per share). It also excludes costs of $1.1 million, net of tax ($.09 per share) recorded in connection with an acquisition in the second quarter of 2000 and includes an adjustment for pro forma income taxes on the pre-acquisition earnings of the acquired company. Operating earnings for the second quarter of 2001 increased by 15.7% from the $3.3 million, or $.27 per diluted share, of operating earnings reported for the second quarter of 2000. The Corporation's rates of return on average assets and average equity for the three months ended June 30, 2001 were 1.18% and 16.72%, respectively. Comparable amounts for the second quarter of 2000, on an operating basis, were 1.14% and 16.47%. Net income for the six months ended June 30, 2001 and 2000 amounted to $4.0 million and $5.8 million, respectively. Operating earnings for the first six months of 2001 amounted to $7.3 million, or $.60 per diluted share, up by 12.1% over the $6.5 million, or $.54 per diluted share earned in the first six months of 2000. The Corporation's rates of return on average assets and average equity for the six months ended June 30, 2001, on an operating basis, were 1.16% and 16.01%, respectively. Comparable amounts for the first six months of 2000, on an operating basis, were 1.15% and 16.42%. Net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) amounted to $9.3 million for the three months ended June 30, 2001 and 2000. Net interest income for the six months ended June 30, 2001 amounted to $18.9 million, compared to $18.5 million for the corresponding 2000 period. (See additional discussion under the caption "Net Interest Income.") The Corporation's provision for loan losses was $150 thousand and $350 thousand in the second quarter of 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, the provision for loan losses amounted to $350 thousand and $700 thousand, respectively. The allowance for loan losses increased from $13.1 million at December 31, 2000 to $13.6 million at June 30, 2001 due to the year to date 2001 provision and recoveries, net of charge-offs. The provision for the six months ended June 30, 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 $5.6 million for the three months ended June 30, 2001, up 16.4% from the $4.8 million reported for the second quarter of 2000. For the six months ended June 30, 2001, other noninterest income amounted to $10.2 million, up 10.8% from the comparable 2000 amount of $9.2 million. 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 $836 thousand for the six months ended June 30, 2001, an increase of $580 thousand from the corresponding 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. The Corporation does not expect this level of mortgage banking revenues to continue in the second half of 2001. Trust and investment management revenue totaled $5.3 million for the six months ended June 30, 2001 and 2000, respectively. Revenue growth has slowed primarily as a result of financial market declines affecting the market value of trust and investment management assets under administration. The value of such assets amounted to $1.6 billion and $1.7 billion at June 30, 2001 and December 31, 2000, respectively. Net realized securities gains for the three months ended June 30, 2001 amounted to $403 thousand, compared to $374 thousand for the comparable period in 2000. Included in net realized gains for the second quarter of 2001 and 2000 were gains totaling $351 thousand and $310 thousand, respectively, related to annual contributions of appreciated equity securities to the Corporation's charitable foundation. The costs associated with the contributions amounted to $353 thousand and $424 thousand and were included in other noninterest expenses in the second quarter of 2001 and 2000, respectively. For the six months ended June 30, 2001, net realized securities gains totaled $408 thousand, compared to $758 thousand for the corresponding 2000 period. Other noninterest expense (noninterest expense excluding a first quarter 2001 litigation settlement and second quarter 2000 acquisition costs) amounted to $9.8 million and $9.4 million for the second quarter of 2001 and 2000, respectively. For the six months ended June 30, 2001, other noninterest expense totaled $18.7 million, compared to $18.3 million for the comparable period on 2000. Salaries and benefit expense amounted to $10.4 million for the six months ended June 30, 2001, up $354 thousand, or 3.5%, from the $10.0 million reported for the six months ended June 30, 2000. Income tax expense amounted to $1.6 million and $2.5 million for the six months ended June 30, 2001 and 2000, respectively. The Corporation's effective tax rate for the first six months of 2001 was 28.9%, compared to 30.4% for the corresponding 2000 period. The decrease in the effective tax rate was primarily due the effect of the first quarter 2001 litigation settlement. 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 six months ended June 30, 2001 and 2000 amounted to $19.4 million and $19.1 million, respectively. For the six months ended June 30, 2001, average interest-earning assets amounted to $1.191 billion, up $119.4 million, or 11.1%, over the comparable 2000 amount due to growth in securities and loans. Deposit growth and 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 six months ended June 30, 2001 and 2000 were 3.28% and 3.58%, respectively. The interest rate spread declined 29 basis points to 2.74% for the six months ended June 30, 2001. Earning asset yields declined 14 basis points, while the cost of interest-bearing liabilities increased 15 basis points, thereby narrowing the net interest spread. The decline in yields on securities and higher funding costs associated with savings and time deposits were primarily responsible for the decrease in the net interest margin. Total average securities rose $71.1 million, or 13.8%, over the comparable prior year period, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.57% for the six months ended June 30, 2001, compared to 6.84% for the same 2000 period. The decrease in yields on securities reflects a combination of lower yields on variable rate securities tied to short-term interest rates and lower marginal rates on investment purchases. The yield on average total loans amounted to 8.63% for the six months ended June 30, 2001 compared to 8.62% for the comparable 2000 period. Average loans for the six months ended June 30, 2001 rose $48.3 million, or 8.7%, over the prior year and amounted to $604.6 million. Average residential real estate loans amounted to $253.0 million, up 8.9% from the prior year level. The yield on residential real estate loans increased slightly from the prior year period, amounting to 7.83%. Average commercial loans rose 7.3% to $246.5 million. The yield on commercial loans amounted to 9.54%, up 16 basis points from the prior year yield of 9.38%. Included in interest income on commercial loans, for the six months ended June 30, 2001, was $270 thousand of appreciation in value of the interest rate floor contract. Average consumer loans rose 11.6% over the prior year and amounted to $105.0 million. The yield on consumer loans amounted to 8.45%, a decrease of 36 basis points from the prior year yield of 8.81%, primarily due to a decline in yield on home equity lines. Average interest-bearing liabilities increased 11.5% to $1.057 billion at June 30, 2001. Due to higher rates paid on deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 4.88% for the six months ended June 30, 2001, up from 4.73% for the comparable 2000 period. Average savings deposits for the six months ended June 30, 2001 increased 17.5% to $272.7 million from the comparable 2000 amount. The rate paid on savings deposits for the first six months of 2001 was 2.04%, compared to 1.73% for the same 2000 period. Average time deposits increased $13.6 million to $356.9 million with an increase of 27 basis points in the rate paid. For the six months ended June 30, 2001, average demand deposits, an interest-free funding source, increased $4.0 million to $102.7 million. Average FHLB advances for the six months ended June 30, 2001 amounted to $425.7 million, up 14.8% from the comparable 2000 amount. This increase was used primarily to fund growth in the portfolios of available for sale securities and held to maturity securities. The average rate paid on FHLB advances for the six months ended June 30, 2001 was 6.04%, up slightly from the prior year rate of 5.98%. 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> Six months ended June 30, 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 $253,039 $9,821 7.83% $232,348 $8,999 7.79% Commercial and other loans 246,509 11,662 9.54% 229,829 10,719 9.38% Consumer loans 105,048 4,404 8.45% 94,124 4,124 8.81% - -------------------------------------------------------------------------------------------------------------------- Total loans 604,596 25,887 8.63% 556,301 23,842 8.62% Federal funds sold and other short-term investments 15,436 383 5.00% 12,555 378 6.06% Taxable debt securities 512,207 16,597 6.53% 443,478 14,751 6.69% Nontaxable debt securities 22,588 744 6.64% 25,815 852 6.64% Corporate stocks and FHLB stock 36,260 1,376 7.66% 33,517 1,538 9.23% - -------------------------------------------------------------------------------------------------------------------- Total securities 586,491 19,100 6.57% 515,365 17,519 6.84% - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,191,087 44,987 7.62% 1,071,666 41,361 7.76% - -------------------------------------------------------------------------------------------------------------------- Non interest-earning assets 69,740 61,544 - -------------------------------------------------------------------------------------------------------------------- Total assets $1,260,827 $1,133,210 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $272,662 $2,754 2.04% $231,994 $1,995 1.73% Time deposits 356,866 10,048 5.68% 343,286 9,227 5.41% FHLB advances 425,678 12,753 6.04% 370,933 11,023 5.98% Other 2,134 53 4.99% 2,239 64 5.77% - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,057,340 25,608 4.88% 948,452 22,309 4.73% Demand deposits 102,707 98,749 Non interest-bearing liabilities 9,624 6,681 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,169,671 1,053,882 Total shareholders' equity 91,156 79,328 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,260,827 $1,133,210 - -------------------------------------------------------------------------------------------------------------------- Net interest income $19,379 $19,052 - -------------------------------------------------------------------------------------------------------------------- Net interest spread 2.74% 3.03% - -------------------------------------------------------------------------------------------------------------------- Net interest margin 3.28% 3.58% - -------------------------------------------------------------------------------------------------------------------- </TABLE> Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Six months ended June 30, 2001 2000 - -------------------------------------------------------------------------------- Commercial and other loans $ 67 $ 61 Nontaxable debt securities 260 297 Corporate stocks 177 197
Financial Condition and Liquidity Total assets rose 8.5% from $1.218 billion at December 31, 2000 to $1.321 billion at June 30, 2001. Average assets totaled $1.261 billion for the six months ended June 30, 2001, up 11.3% over the comparable 2000 period. Securities Available for Sale - The carrying value of securities available for sale at June 30, 2001 amounted to $475.9 million, an increase of $89.3 million, or 23.1%, 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 $8.6 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 six months of 2001. Securities Held to Maturity - The carrying value of securities held to maturity amounted to $122.4 million at June 30, 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 $1.2 million at June 30, 2001, compared to $453 thousand at December 31, 2000. Loans - At June 30, 2001, total loans amounted to $610.0 million. During the six months ended June 30, 2001, total loans increased $12.9 million. Commercial loans amounted to $255.5 million at June 30, 2001, an increase of $15.7 million from the December 31, 2000 balance of $239.8 million. Total residential real estate loans decreased $3.3 million from December 31, 2000 and amounted to $247.6 million. Total consumer loans amounted to $106.9 million at June 30, 2001 compared to $106.4 million at December 31, 2000. Deposits - Total deposits amounted to $754.4 million at June 30, 2001, up $18.7 million from $735.7 million at December 31, 2000. For the six months ended June 30, 2001, savings deposits increased $32.2 million. Time deposits decreased $16.1 million from December 31, 2000 due to maturity of commercial and consumer certificates of deposit and amounted to $347.3 million at June 30, 2001. Demand deposits amounted to $115.6 million at June 30, 2001, up $2.6 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 $458.8 million at June 30, 2001, up $81.5 million from the December 31, 2000 amount. In addition, other borrowings outstanding at June 30, 2001 and December 31, 2000 amounted to $6.1 million and $3.2 million, respectively. For the six months ended June 30, 2001, net cash used in operations amounted to $983 thousand. Proceeds from sales of loans in the first six months of 2001 amounted to $41.0 million, while loans originated for sale amounted to $43.0 million. Net cash used in investing activities amounted to $104.1 million and was primarily used to purchase securities. Net cash provided by financing activities of $100.1 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: June 30, December 31, (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,981 $1,608 Nonaccrual loans less than 90 days past due 1,623 1,826 - -------------------------------------------------------------------------------- Total nonaccrual loans 3,604 3,434 Other real estate owned 17 9 - -------------------------------------------------------------------------------- Total nonperforming assets $3,621 $3,443 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .59% .58% Nonperforming assets as a percentage of total assets .27% .28% Allowance for loan losses to nonaccrual loans 378.19% 382.50% Allowance for loan losses to total loans 2.23% 2.20% Not included in the analysis of nonperforming assets at June 30, 2001 and December 31, 2000 above are approximately $174 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 June 30, 2001, the recorded investment in impaired loans was $2.5 million, which had a related allowance amounting to $373 thousand. During the six months ended June 30, 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 $46 thousand. Interest income on impaired loans is recognized on a cash basis only. The following is an analysis of nonaccrual loans by loan category: June 30, December 31, (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Residential mortgages $584 $ 796 Commercial: Mortgages 1,083 1,076 Other (1) 1,368 1,018 Consumer 569 544 - -------------------------------------------------------------------------------- Total nonaccrual loans $3,604 $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 $91.7 million, or 6.9% of total assets, at June 30, 2001. This compares to $89.2 million, or 7.3%, at December 31, 2000. Current year results include a first quarter litigation settlement amounting to $3.3 million, net of income taxes. (See additional information under the caption Litigation for additional information.) At June 30, 2001, the Corporation's Tier 1 risk-based capital ratio was 12.05% and the total risk-adjusted capital ratio was 13.67%. The Corporation's Tier 1 leverage ratio amounted to 6.67% at June 30, 2001. These ratios were above the ratios required to be categorized as well-capitalized. Dividends payable at June 30, 2001 amounted to approximately $1.6 million, representing $.13 per share payable on July 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 the Bank. The Bank is a regulated enterprise, and as such its ability to pay dividends to the parent is subject to regulatory review and restriction. Book value per share as of June 30, 2001 and December 31, 2000 amounted to $7.61 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 agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was 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 Bank has received notification from its insurance carrier that it will pay a settlement to the Bank in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter, subject to the execution of an agreement. Washington Trust expects to record this recovery when received in the third quarter 2001. Recent Accounting Developments In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations". SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations", and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All business combinations in the scope of this Statement are to be accounted for using one method - the purchase method. Therefore, this Statement eliminates the use of the pooling-of-interests method for accounting for business combinations. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001, and also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements. Also in June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements.
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 June 30, 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 -0.90% -4.28% 200 basis point decrease in rates -0.95% -2.07% 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 June 30, 2001, an immediate 200 basis point rise in rates would result in a 4.9% 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 1.7% 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 June 30, 2001, including both debt and equity securities, was 3.2%, 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 June 30, 2001 the carrying value of the interest rate floor contract amounted to $368 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 agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was 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 Bank has received notification from its insurance carrier that it will pay a settlement to the Bank in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter, subject to the execution of an agreement. Washington Trust expects to record this recovery when received in the third quarter 2001. 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 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on April 24, 2001. (b) The results of matters voted upon are presented below. i. A proposal to elect Alcino G. Almeida, Katherine W. Hoxsie, Edward W. Mazze, Joyce O. Resnikoff, John F. Treanor and John C. Warren as directors of the Corporation for staggered terms, each to serve until their successors are duly elected and qualified, passed as follows: <TABLE> <CAPTION> Abstentions Votes Votes and Broker Term In Favor Withheld Non-votes ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Alcino G. Almeida 3 years 9,687,642 339,339 0 Katherine W. Hoxsie 3 years 9,693,393 333,589 0 Edward M. Mazze 3 years 9,902,401 124,581 0 Joyce O. Resnikoff 3 years 9,781,394 245,588 0 John F. Treanor 2 years 9,758,910 268,072 0 John C. Warren 3 years 9,732,787 294,195 0 </TABLE> ii. A proposal for the ratification of KPMG LLP to serve as independent auditors of the Corporation for the current fiscal year ending December 31, 2001 was passed by a vote of 9,827,167 shares in favor; 155,437 shares against, with 44,379 abstentions and broker non-votes. 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 June 30, 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) August 9, 2001 By: John C. Warren --------------------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) August 9, 2001 By: David V. Devault --------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer)