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, 2002 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, 2002 was 13,030,610. Page 1
FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended March 31, 2002 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets March 31, 2002 and December 31, 2001 Consolidated Statements of Income Three Months Ended March 31, 2002 and 2001 Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows Three Months Ended March 31, 2002 and 2001 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 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 management, 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, unanticipated difficulties in integrating First Financial Corp.'s operations, unanticipated costs relating to the merger and changes in the assumptions used in making such forward-looking statements.
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, 2002 2001 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $25,735 $30,399 Federal funds sold and other short-term investment 13,350 20,500 Mortgage loans held for sale 2,445 7,710 Securities: Available for sale, at fair value 455,269 453,956 Held to maturity, at cost; fair value $201,403 in 2002 and $177,595 in 2001 200,326 175,105 - -------------------------------------------------------------------------------- Total securities 655,595 629,061 Federal Home Loan Bank stock, at cost 23,491 23,491 Loans 596,808 605,645 Less allowance for loan losses 13,665 13,593 - -------------------------------------------------------------------------------- Net loans 583,143 592,052 Premises and equipment, net 21,733 22,102 Accrued interest receivable 7,119 7,124 Other assets 30,039 29,790 - -------------------------------------------------------------------------------- Total assets $1,362,650 $1,362,229 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $119,904 $134,783 Savings 322,729 316,953 Time 390,353 365,140 - -------------------------------------------------------------------------------- Total deposits 832,986 816,876 Dividends payable 1,688 1,569 Federal Home Loan Bank advances 414,067 431,490 Other borrowings 4,407 2,087 Accrued expenses and other liabilities 10,339 12,270 - -------------------------------------------------------------------------------- Total liabilities 1,263,487 1,264,292 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 12,065,283 shares in 2002 and 2001 754 754 Paid-in capital 10,613 10,696 Retained earnings 83,178 81,114 Accumulated other comprehensive income 5,886 6,416 Treasury stock, at cost; 66,347 shares in 2002 and 54,102 shares in 2001 (1,268) (1,043) - -------------------------------------------------------------------------------- Total shareholders' equity 99,163 97,937 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,362,650 $1,362,229 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share data) (Unaudited) Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest income: Interest and fees on loans $10,981 $13,161 Interest from securities 8,188 8,390 Dividends on corporate stock and Federal Home Loan Bank stock 483 617 Interest on federal funds sold and other short-term investments 62 203 - -------------------------------------------------------------------------------------------------------------------- Total interest income 19,714 22,371 - -------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 971 1,368 Time deposits 4,123 5,175 Federal Home Loan Bank advances 5,219 6,225 Other 17 28 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 10,330 12,796 - -------------------------------------------------------------------------------------------------------------------- Net interest income 9,384 9,575 Provision for loan losses 100 200 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,284 9,375 - -------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 2,565 2,573 Service charges on deposit accounts 827 866 Merchant processing fees 446 341 Mortgage banking activities 516 209 Income from bank-owned life insurance 288 272 Net gains on sales of securities 291 5 Other income 295 323 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 5,228 4,589 - -------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 5,575 5,191 Net occupancy 625 723 Equipment 785 825 Legal, audit and professional fees 173 312 Merchant processing costs 357 270 Advertising and promotion 240 204 Office supplies 120 164 Litigation settlement cost - 4,800 Other 1,289 1,259 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 9,164 13,748 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 5,348 216 Income tax expense 1,604 62 - -------------------------------------------------------------------------------------------------------------------- Net income $3,744 $154 - -------------------------------------------------------------------------------------------------------------------- Per share information: Basic earnings per share $.31 $.01 Diluted earnings per share $.31 $.01 Cash dividends declared per share $.14 $.13 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Accumulated Other Common Paid-in Retained Comprehensive Treasury Three months ended March 31, Stock Capital Earnings Income Stock Total - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 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 - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2002 $754 $10,696 $81,114 $6,416 $(1,043) $97,937 Net income 3,744 3,744 Other comprehensive loss, net of tax: Net unrealized losses on securities (241) (241) Reclassification adjustments (289) (289) -------- Comprehensive income 3,214 Cash dividends declared (1,680) (1,680) Shares issued (83) 149 66 Shares repurchased (374) (374) - ----------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2002 $754 $10,613 $83,178 $5,886 $(1,268) $99,163 - ----------------------------------------------------------------------------------------------------------------------- </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, 2002 2001 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $3,744 $154 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 100 200 Depreciation of premises and equipment 727 747 Amortization of premium in excess of accretion of discount on debt securities 255 9 Increase in bank-owned life insurance (288) (272) Depreciation (appreciation) of derivative instruments 322 (241) Net gains on sales of securities (291) (5) Net gains on loan sales (517) (153) Proceeds from sales of loans 24,422 9,652 Loans originated for sale (18,640) (11,400) Decrease (increase) in accrued interest receivable 5 (316) Increase in other assets (26) (345) (Decrease) increase in accrued expenses and other liabilities (1,911) 3,132 Other, net 52 94 - -------------------------------------------------------------------------------- Net cash provided by operating activities 7,954 1,256 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (73,486) (65,235) Proceeds from sales 28,195 238 Maturities and principal repayments 43,189 16,018 Securities held to maturity: Purchases (39,459) (21,235) Maturities and principal repayments 14,211 5,985 Purchase of Federal Home Loan Bank stock - (3,783) Principal collected on loans over (under) loan originations 8,844 (9,661) Purchases of premises and equipment (355) (2,365) - -------------------------------------------------------------------------------- Net cash used in investing activities (18,861) (80,038) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 16,110 7,456 Net increase (decrease) in other borro 2,320 (1,771) Proceeds from Federal Home Loan Bank advances 170,500 179,000 Repayment of Federal Home Loan Bank advances (187,923) (89,537) Purchase of treasury stock (374) - Net effect of common stock transaction 21 99 Cash dividends paid (1,561) (1,440) - -------------------------------------------------------------------------------- Net cash (used) provided by financing (907) 93,807 - -------------------------------------------------------------------------------- Net (decrease) increase in cash and cash (11,814) 15,025 Cash and cash equivalents at beginn 50,899 43,860 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $39,085 $58,885 - -------------------------------------------------------------------------------- (Continued)
WASHINGTON TRUST BANCORP, INC. AND S (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned (OREO) $- $157 Loans charged off 57 37 (Decrease) increase in unrealized gain on securities available for sale, net of tax (530) 2,060 Increase in paid-in capital resulting from tax benefits on stock option exercises 45 57 Supplemental Disclosures: Interest payments $10,509 $12,629 Income tax payments 100 14 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, 2002 and December 31, 2001 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, 2001. (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, 2002 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 35,514 $ 1,283 $ (119) $ 36,678 Mortgage-backed securities 329,139 3,820 (642) 332,317 Corporate bonds 62,145 816 (1,998) 60,963 Corporate stocks 19,153 6,993 (835) 25,311 - --------------------------------------------------------------------------------------------------------------------- Total 445,951 12,912 (3,594) 455,269 - --------------------------------------------------------------------------------------------------------------------- December 31, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 64,368 2,348 (1) 66,715 Mortgage-backed securities 296,729 4,411 (1,090) 300,050 Corporate bonds 64,934 1,130 (1,915) 64,149 Corporate stocks 17,752 5,938 (648) 23,042 - --------------------------------------------------------------------------------------------------------------------- Total $443,783 $13,827 $(3,654) $453,956 - --------------------------------------------------------------------------------------------------------------------- <FN> For the three months ended March 31, 2002, proceeds from sales of securities available for sale amounted to $28.2 million while net realized gains on these sales amounted to $291 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, 2002 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 8,000 $190 $ - $ 8,190 Mortgage-backed securities 172,507 1,155 (673) 172,989 States and political subdivisions 19,819 413 (8) 20,224 - --------------------------------------------------------------------------------------------------------------------- Total 200,326 1,758 (681) 201,403 - --------------------------------------------------------------------------------------------------------------------- December 31, 2001 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 8,311 307 - 8,618 Mortgage-backed securities 146,702 1,753 (48) 148,407 States and political subdivisions 20,092 485 (7) 20,570 - --------------------------------------------------------------------------------------------------------------------- Total $175,105 $2,545 $(55) $177,595 - --------------------------------------------------------------------------------------------------------------------- <FN> There were no sales of securities held to maturity during the three months ended March 31, 2002. </FN> </TABLE> Securities available for sale and held to maturity with a fair value of $481.1 million and $394.4 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and public deposits at March 31, 2002 and December 31, 2001, respectively. In addition, securities available for sale and held to maturity with a fair value of $28.0 million and $28.4 million were collateralized for the discount window at the Federal Reserve Bank at March 31, 2002 and December 31, 2001, 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, 2002 2001 - -------------------------------------------------------------------------------- Commercial: Mortgages (1) $110,347 $118,999 Construction and development (2) 4,690 1,930 Other (3) 144,330 139,704 - -------------------------------------------------------------------------------- Total commercial 259,367 260,633 Residential real estate: Mortgages (4) 215,032 223,681 Homeowner construction 10,899 11,678 - -------------------------------------------------------------------------------- Total residential real estate 225,931 235,359 Consumer 111,510 109,653 - -------------------------------------------------------------------------------- Total loans $596,808 $605,645 - -------------------------------------------------------------------------------- (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) A substantial portion of these loans is used as qualified collateral for FHLB borrowings (See Note 6 to the Consolidated Financial Statements for additional discussion of FHLB borrowings) (4) Allowance For Loan Losses The following is an analysis of the allowance for loan losses: Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------- Balance at beginning of period $13,593 $13,135 Provision charged to expense 100 200 Recoveries of loans previously charged off 29 133 Loans charged off (57) (37) - -------------------------------------------------------------------------------- Balance at end of period $13,665 $13,431 - -------------------------------------------------------------------------------- (5) Derivative Financial Instruments The Corporation is party to a five-year interest rate floor contract with a notional amount of $20 million that matures in February 2003. The floor contract entitles the Corporation to receive payment from counter parties if the three-month LIBOR rate falls below 5.50%. The 3-month LIBOR applicable to the outstanding floor contract at March 31, 2002 was 2.03%. The Corporation recognizes the fair value of this derivative as an asset on the balance sheet. At March 31, 2002 and March 31, 2001, the carrying value of the interest rate floor contract amounted to $518 thousand and $351 thousand, respectively. Changes in fair value of the interest rate contract are recorded in current earnings. Included in interest income for the quarters ended March 31, 2002 and March 31, 2001 was ($221) thousand and $254 thousand of (depreciation) appreciation in value of the interest rate floor contract. The Corporation recognizes commitments to originate and commitments to sell fixed rate mortgage loans as derivative financial instruments. Accordingly, the Corporation recognizes the fair value of these commitments as an asset on the balance sheet. At March 31, 2002 and March 31, 2001, the carrying value of these commitments amounted to ($11) thousand and ($9) thousand and is reported in other assets. Changes in the fair value are recorded in current earnings and amounted to ($97) thousand and ($9) thousand for the quarters ended March 31, 2002 and March 31, 2001, respectively. (6) Borrowings Federal Home Loan Bank advances outstanding are summarized below: (Dollars in thousands) March 31, December 31, 2002 2001 - -------------------------------------------------------------------------------- FHLB advances $414,067 $431,490 - -------------------------------------------------------------------------------- In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at March 31, 2002 and December 31, 2001. Under agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances ("FHLB borrowings"). The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages loans, U.S. government or agency securities, U.S. government-sponsored agency securities and amounts maintained on deposit at the FHLB. The Corporation maintained qualified collateral in excess of the amount required to secure FHLB borrowings at March 31, 2002 and December 31, 2001. Included in the collateral were securities available for sale and held to maturity with a fair value of $458.6 million and $376.5 million that were specifically pledged to secure FHLB borrowings at March 31, 2002 and December 31, 2001, 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) March 31, December 31, 2002 2001 - -------------------------------------------------------------------------------- Treasury, Tax and Loan demand note balance $3,956 $1,583 Other 451 504 - -------------------------------------------------------------------------------- Other borrowings $4,407 $2,087 - -------------------------------------------------------------------------------- (7) Subsequent Event On April 16, 2002, the Corporation completed its acquisition of First Financial Corp., the parent company of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp. was headquartered in Providence, Rhode Island and its subsidiary, First Bank and Trust Company, operated banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The Corporation intends to close the Richmond and North Kingstown offices and consolidate them into existing Washington Trust banking offices in May 2002. As of April 16, 2002, First Financial Corp. had total assets of $179 million, total loans of $113 million, deposits of $137 million, equity capital of $16 million and 1,213,741 shares outstanding. Pursuant to the Agreement and Plan of Merger, dated November 12, 2001, the acquisition was effected by means of the merger of First Financial Corp. with and into Washington Trust Bancorp, Inc. and the merger of First Bank and Trust Company with and into The Washington Trust Company. Under the merger, shareholders of First Financial common stock received 0.842 of a Washington Trust share plus $16.00 in cash for each share of First Financial common stock, with cash paid in lieu of fractional shares. The Corporation issued approximately 1,022,000 common shares in connection with the acquisition. This acquisition will be accounted for under the purchase method and the provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets" will be applied.
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, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the three-month periods ended March 31, 2002 and 2001. 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, 2001, 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, 2002, 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, 2001, is fairly stated, in all material respects. KPMG LLP Providence, Rhode Island April 18, 2002
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 management, 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, unanticipated difficulties in integrating First Financial Corp.'s operations, unanticipated costs relating to the merger 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, 2001 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. Recent Events On April 16, 2002, the Corporation completed its acquisition of First Financial Corp., the parent company of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp. was headquartered in Providence, Rhode Island and its subsidiary, First Bank and Trust Company, operated banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The Corporation intends to close the Richmond and North Kingstown offices and consolidate them into existing Washington Trust banking offices in May 2002. As of April 16, 2002, First Financial Corp. had total assets of $179 million, total loans of $113 million, deposits of $137 million, equity capital of $16 million and 1,213,741 shares outstanding. Pursuant to the Agreement and Plan of Merger, dated November 12, 2001, the acquisition was effected by means of the merger of First Financial Corp. with and into Washington Trust Bancorp, Inc. and the merger of First Bank and Trust Company with and into The Washington Trust Company. Under the merger, shareholders of First Financial common stock received 0.842 of a Washington Trust share plus $16.00 in cash for each share of First Financial common stock, with cash paid in lieu of fractional shares. The Corporation issued approximately 1,022,000 common shares in connection with the acquisition. This acquisition will be accounted for under the purchase method and the provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets" will be applied. Results of Operations The Corporation reported net income of $3.7 million, or $.31 per diluted share, for the three months ended March 31, 2002. Net income for first quarter of 2001 amounted to $154 thousand, or $.01 per diluted share. First quarter 2001 earnings 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. Operating earnings, which exclude the 2001 litigation settlement, amounted to $3.5 million, or $.29 cent per diluted share for the three months ended March 31, 2001. The Corporation's rates of return on average assets and average equity for the three months ended March 31, 2002 were 1.11% and 14.98%, respectively. The Corporation's return on average assets and average equity for the quarter ended March 31, 2001 were .05% and .67%. Comparable amounts, on an operating basis, for the first quarter of 2001 were 1.14% and 15.30%, respectively. For the three months ended March 31, 2002, net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) amounted to $9.4 million, down from the $9.6 million earned in the first quarter of 2001. This decrease was primarily attributable to a decline in the net interest margin due to lower yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits, FHLB advances, and other borrowed funds. (See additional discussion under the caption "Net Interest Income".) The Corporation's provision for loan losses was $100 thousand and $200 thousand in the first quarter of 2002 and 2001, respectively. The allowance for loan losses increased from $13.6 million at December 31, 2001 to $13.7 million at March 31, 2002 due to the year to date 2002 provision and recoveries, net of charge-offs. The provision for the three months ended March 31, 2002 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 $4.9 million for the quarter ended March 31, 2002, an increase of $353 thousand, or 7.7%, from the comparable 2001 period. This increase is mainly attributable to increases in mortgage banking revenues and merchant processing fees. Revenue from mortgage banking activities associated with originations of loans to be sold in the secondary market amounted to $516 thousand for the three months ended March 31, 2002, an increase of $307 thousand from the mortgage banking revenue earned for the same period in 2001. Due to a low interest rate environment, mortgage loan origination volume and refinancing activity have increased, resulting in an increase in the number of loans sold in the secondary market. Merchant processing fees for the quarter ended March 31, 2002 amounted to $446 thousand, up from $341 thousand for the first quarter of 2001 due to increased merchant transaction volume and new merchant accounts. Trust and investment management revenue totaled $2.6 million for the quarters ended March 31, 2002 and 2001, respectively. Revenue growth has slowed reflecting financial market declines. The market value of trust and investment management assets under administration amounted to $1.6 billion at March 31, 2002 and December 31, 2001, respectively. Net realized securities gains for the three months ended March 31, 2002 and 2001 amounted to $291 thousand and $5 thousand, respectively. For the quarter ended March 31, 2002, other noninterest expense amounted to $9.2 million compared to other noninterest expense of $8.9 million (noninterest expense excluding the first quarter 2001 litigation settlement) reported for the quarter ended March 31, 2001. Salaries and benefit expense amounted to $5.6 million for the three months ended March 31, 2002, up $384 thousand, or 7.4%, from the $5.2 million reported for the first quarter of 2001. The increase in salaries and benefit expense was offset somewhat by lower legal, audit and professional fees, occupancy costs and equipment expenses. 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, 2002 amounted to $9.6 million, down 2.0% from the same 2001 period. For the three months ended March 31, 2002, average interest-earning assets amounted to $1.272 billion, up $111.8 million, or 9.6%, over the comparable 2001 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, 2002 and 2001 were 3.07% and 3.44%, respectively. The interest rate spread declined 23 basis points to 2.63% for the three months ended March 31, 2002. Earning asset yields declined 154 basis points, while the cost of interest-bearing liabilities decreased 131 basis points, thereby narrowing the net interest spread. The decline in yields on loans and securities offset somewhat by lower funding costs associated with interest-bearing deposits, FHLB advances and other borrowed funds was primarily responsible for the decrease in the net interest margin. Total average securities rose $108.4 million, or 19.4%, over the comparable prior year period, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 5.44% for the three months ended March 31, 2002, compared to 6.85% for the same 2001 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 in 2002 relative to the prior year. The yield on average total loans amounted to 7.39% for the three months ended March 31, 2002, down 150 basis points from 8.89% for the comparable 2001 period. This decline is primarily due to lower marginal yields on floating and adjustable rate loans for the first quarter of 2002 as compared to the prior year period and a decline in yields on new loan originations. Average loans for the three months ended March 31, 2002 rose $3.4 million over the prior year and amounted to $605.1 million. Average commercial loans rose 5.8% to $260.3 million. The yield on commercial loans amounted to 7.88%, down 200 basis points from the prior year yield of 9.88%. Included in interest income on commercial loans for the quarter ended March 31, 2002, was $221 thousand of depreciation in value of the interest rate floor contract, as compared to $254 thousand of appreciation in the value of the interest rate contract for the prior year period. Average residential real estate loans amounted to $234.4 million, down 7.3% from the prior year level. The yield on residential real estate loans decreased 57 basis points from the prior year period, amounting to 7.38%. Average consumer loans rose 7.2% over the prior year. The yield on consumer loans amounted to 6.25%, a decrease of 261 basis points from the prior year yield of 8.86% mainly due to a decline in yield on home equity lines. Average interest-bearing liabilities increased 9.0% to $1.121 billion at March 31, 2002. Due to lower rates paid on both borrowed funds and deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 3.74% for the three months ended March 31, 2001, down from 5.05% for the comparable 2001 period. Average savings deposits for the three months ended March 31, 2002 increased $50.3 million, or 19.1%, to $313.6 million from the comparable 2001 amount. The rate paid on savings deposits for the first three months of 2002 was 1.26%, compared to 2.11% for the same 2001 period. Average time deposits increased $20.8 million to $381.3 million with a decrease of 143 basis points in the rate paid. For the three months ended March 31, 2002, average demand deposits, an interest-free funding source, were up by $20.6 million, or 20.4%, from the same prior year period. Average FHLB advances for the three months ended March 31, 2002 amounted to $422.8 million, up 5.2% from the comparable 2001 amount. This increase was used primarily to purchase securities. The average rate paid on FHLB advances for the three months ended March 31, 2002 was 5.01%, a decrease of 127 basis points from the prior year rate.
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis (FTE) The following table sets forth average balance and interest rate information. 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, 2002 2001 - -------------------------------------------- ------------------------------------ ---------------------------------- 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 $234,395 $4,264 7.38% $252,720 $4,953 7.95% Commercial and other loans 260,320 5,060 7.88% 245,996 5,993 9.88% Consumer loans 110,413 1,703 6.25% 102,988 2,249 8.86% - -------------------------------------------------------------------------------------------------------------------- Total loans 605,128 11,027 7.39% 601,704 13,195 8.89% Federal funds sold and other short-term investments 15,005 62 1.69% 14,259 203 5.78% Taxable debt securities 590,107 7,978 5.48% 487,125 8,145 6.78% Nontaxable debt securities 19,999 323 6.56% 22,868 377 6.68% Corporate stocks and FHLB stock 41,981 582 5.62% 34,486 712 8.38% - -------------------------------------------------------------------------------------------------------------------- Total securities 667,092 8,945 5.44% 558,738 9,437 6.85% - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,272,220 19,972 6.37% 1,160,442 22,632 7.91% - -------------------------------------------------------------------------------------------------------------------- Non interest-earning assets 79,167 68,711 - -------------------------------------------------------------------------------------------------------------------- Total assets $1,351,387 $1,229,153 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $313,578 $971 1.26% $263,309 $1,368 2.11% Time deposits 381,311 4,123 4.39% 360,550 5,175 5.82% FHLB advances 422,769 5,219 5.01% 402,021 6,225 6.28% Other 2,916 17 2.37% 1,991 28 5.73% - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,120,574 10,330 3.74% 1,027,871 12,796 5.05% 1 Demand deposits 121,530 100,966 Non interest-bearing liabilities 9,331 8,905 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,251,435 1,137,742 Total shareholders' equity 99,952 91,411 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,351,387 $1,229,153 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Net interest income $9,642 $9,836 - -------------------------------------------------------------------------------------------------------------------- Net interest spread 2.63% 2.86% - -------------------------------------------------------------------------------------------------------------------- Net interest margin 3.07% 3.44% - -------------------------------------------------------------------------------------------------------------------- </TABLE>
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------- Commercial and other loans $ 46 $ 35 Nontaxable debt securities 112 131 Corporate stocks 100 95 Financial Condition and Liquidity Total assets rose from $1.362 billion at December 31, 2001 to $1.363 billion at March 31, 2002. Average assets totaled $1.351 billion for the three months ended March 31, 2002, up 9.9% over the comparable 2001 period. Securities Available for Sale - The carrying value of securities available for sale at March 31, 2002 amounted to $455.3 million, compared to the December 31, 2001 amount of $454.0 million. The net unrealized gain on securities available for sale amounted to $9.3 million, compared to $10.2 million at December 31, 2001. Securities Held to Maturity - The carrying value of securities held to maturity amounted to $200.3 million at March 31, 2002, up 14.4% from $175.1 million at December 31, 2001. This increase was due to purchases of mortgage-backed securities. The net unrealized gain on securities held to maturity amounted to $1.1 million at March 31, 2002, compared to $2.5 million at December 31, 2001. This decrease was attributable to the effects of increases in medium and long-term interest rates that occurred during the first quarter of 2002. Loans - At March 31, 2002, total loans amounted to $596.8 million, down from the December 31, 2001 balance of $605.6 million. This decline was primarily a result of the refinancing of fixed rate mortgages being sold into the secondary market. Total residential real estate loans decreased $9.4 million from December 31, 2001 and amounted to $225.9 million. Commercial loans amounted to $259.4 million at March 31, 2002, compared to the December 31, 2001 balance of $260.6 million. Total consumer loans amounted to $111.5 million at March 31, 2002, an increase of $1.9 million from December 31, 2001 due mainly to growth in home equity lines. Deposits - Total deposits amounted to $833.0 million at March 31, 2002, up $16.1 million from $816.9 million at December 31, 2001. Savings deposits amounted to $322.7 million at March 31,2002, an increase of $5.8 million from December 31, 2001. Time deposits increased $25.2 million, or 6.9%, from December 31, 2001 and amounted to $390.4 million at March 31, 2002. Demand deposits amounted to $119.9 million at March 31, 2002, down $14.9 million from the December 31, 2001 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 and to purchase securities. FHLB advances amounted to $414.1 million at March 31, 2002, down $17.4 million from the December 31, 2001 amount mainly due to the increased deposit balances. In addition, other borrowings outstanding at March 31, 2002 and December 31, 2001 amounted to $4.4 million and $2.1 million, respectively. For the three months ended March 31, 2002, net cash provided by operations amounted to $8.0 million. Proceeds from sales of loans in the first quarter of 2002 amounted to $24.4 million, while loans originated for sale amounted to $18.6 million. Net cash used in investing activities amounted to $18.9 million and was primarily used to purchase securities. Net cash used in financing activities was $907 thousand, the majority of which was used to pay cash dividends. (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) 2002 2001 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,659 $2,195 Nonaccrual loans less than 90 days past due 1,532 1,632 - -------------------------------------------------------------------------------- Total nonaccrual loans 3,191 3,827 Other real estate owned 30 30 - -------------------------------------------------------------------------------- Total nonperforming assets $3,221 $3,857 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .53% .63% Nonperforming assets as a percentage of total assets .24% .28% Allowance for loan losses to nonaccrual loans 428.24% 355.20% Allowance for loan losses to total loans 2.29% 2.24% As of March 31, 2002 and December 31, 2001, no accruing loans were 90 days or more past due. Impaired loans consist of all nonaccrual commercial loans. At March 31, 2002, the recorded investment in impaired loans was $1.5 million, which had a related allowance amounting to $126 thousand. During the three months ended March 31, 2002, the average recorded investment in impaired loans was $1.8 million. Also during this period, interest income recognized on impaired loans amounted to approximately $16 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) 2002 2001 - -------------------------------------------------------------------------------- Residential real estate $ 882 $1,161 Commercial: Mortgages 1,163 1,472 Other 310 509 Consumer 836 685 - -------------------------------------------------------------------------------- Total nonaccrual loans $3,191 $3,827 - -------------------------------------------------------------------------------- Capital Resources Total equity capital increased $1.2 million during the first quarter of 2002 and amounted to $99.2 million. This increase was principally attributable to a $2.1 million increase in retained earnings. (See the Consolidated Statements of Changes in Shareholders' Equity for additional information.) The ratio of total equity to total assets amounted to 7.3% at March 31, 2002, compared to 7.2% at December 31, 2001. Book value per share as of March 31, 2002 and December 31, 2001 amounted to $8.26 and $8.15, respectively. At March 31, 2002, the Corporation's Tier 1 risk-based capital ratio was 12.69% and the total risk-adjusted capital ratio was 14.33%. The Corporation's Tier 1 leverage ratio amounted to 6.91% at March 31, 2002. These ratios were above the ratios required to be categorized as well-capitalized. Dividends payable at March 31, 2002 amounted to $1.7 million, representing $.14 per share payable on April 15, 2002, an increase of 7.7% over the $.13 per share declared in the fourth quarter of 2001. 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. 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 that are consistent with its liquidity, capital adequacy, growth, risk and profitability goals. The Corporation manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income 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, 2002, the Corporation's estimated exposure as a percentage of net interest income for the next 12-month period and the subsequent 12-month period thereafter (months 13 - 24), respectively, is as follows: Months 1 - 12 Months 13 - 24 - ---------------------------------------------- --------------- --------------- 200 basis point increase in rates 1.83% 3.76% 200 basis point decrease in rates -4.39% -14.19% It should be noted that an interest rate decrease of 200 basis points is extremely unlikely in the current interest rate environment, as it would bring many interest rates to at or near zero. 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, 2001. 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, 2002, an immediate 200 basis point rise in rates would result in a 4.8% 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 1.2% 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, 2002, including both debt and equity securities, was 5.9%, 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, 2002 the carrying value of the interest rate floor contract amounted to $518 thousand and is reported in other assets. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit index Exhibit No. 10.a Change in Control Agreement 10.b Amendment to Trust Agreement Under Supplemental Pension and Profit Sharing Plan 11 Statement re Computation of Per Share Earnings (b) There were no reports on Form 8-K filed during the quarter ended March 31, 2002.
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, 2002 By: John C. Warren ----------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) May 14, 2002 By: David V. Devault ----------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer)