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, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
-------------------------------------
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
-------------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
(401) 348-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of common stock of the registrant outstanding as of July
31, 2000 was 11,991,253.
Page 1
<PAGE>
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended June 30, 2000
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
Condensed Notes to Consolidated Financial Statements
Independent Auditors' Review Report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. Other Information
Signatures
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general national or regional economic conditions, changes in interest rates,
reductions in deposit levels necessitating increased borrowing to fund loans and
investments, changes in the size and nature of the Corporation's competition,
changes in loan default and charge-off rates, and changes in the assumptions
used in making such forward-looking statements.
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Assets:
Cash and due from banks $21,168 $27,091
Federal funds sold and other short-term investments 17,900 17,429
Mortgage loans held for sale 1,068 1,647
Securities:
Available for sale, at fair value 376,752 330,431
Held to maturity, at cost; fair value $120,765
in 2000 and $112,868 in 1999 124,383 116,372
--------------------------------------------------------------------------------
Total securities 501,135 446,803
Federal Home Loan Bank stock, at cost 19,558 17,627
Loans 573,929 549,025
Less allowance for loan losses 12,923 12,349
--------------------------------------------------------------------------------
Net loans 561,006 536,676
Premises and equipment, net 22,603 23,442
Accrued interest receivable 7,495 6,010
Other assets 29,159 28,880
--------------------------------------------------------------------------------
Total assets $1,181,092 $1,105,605
--------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $109,937 $102,384
Savings 238,869 235,395
Time 351,184 322,974
--------------------------------------------------------------------------------
Total deposits 699,990 660,753
Dividends payable 1,441 1,202
Short-term borrowings 5,428 4,209
Federal Home Loan Bank advances 386,448 352,548
Accrued expenses and other liabilities 8,687 8,727
--------------------------------------------------------------------------------
Total liabilities 1,101,994 1,027,439
--------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares; issued 11,989,566 shares
in 2000 and 11,925,571 shares in 1999 750 745
Paid-in capital 10,010 9,926
Retained earnings 69,760 67,686
Accumulated other comprehensive loss (1,422) (191)
--------------------------------------------------------------------------------
Total shareholders' equity 79,098 78,166
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,181,092 $1,105,605
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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, 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $12,132 $11,078 $23,781 $21,886
Interest on securities 7,898 6,207 15,306 12,316
Dividends on corporate stock and Federal Home Loan Bank stock 670 518 1,341 1,052
Interest on federal funds sold and other short-term investments 218 128 378 288
---------------------------------------------------------------------------------------------------------------------
Total interest income 20,918 17,931 40,806 35,542
---------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 998 1,004 1,995 1,950
Time deposits 4,778 3,945 9,227 7,833
Federal Home Loan Bank advances 5,772 4,027 11,023 7,872
Other 41 254 64 475
---------------------------------------------------------------------------------------------------------------------
Total interest expense 11,589 9,230 22,309 18,130
---------------------------------------------------------------------------------------------------------------------
Net interest income 9,329 8,701 18,497 17,412
Provision for loan losses 350 458 700 940
---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,979 8,243 17,797 16,472
---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,805 2,322 5,319 4,564
Service charges on deposit accounts 806 794 1,602 1,552
Merchant processing fees 536 393 808 642
Mortgage banking activities 134 378 256 876
Income from bank-owned life insurance 259 196 501 196
Net gains on sales of securities 374 122 758 383
Other income 240 478 671 838
---------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,154 4,683 9,915 9,051
---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,050 4,552 10,005 8,992
Net occupancy 630 624 1,265 1,225
Equipment 937 792 1,737 1,533
Legal, audit and professional fees 405 258 883 474
Advertising and promotion 348 328 706 523
Merchant processing costs 421 299 646 458
Office supplies 185 171 358 342
Acquisition related expenses 1,035 - 1,035 -
Other 1,422 1,313 2,707 3,009
---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,433 8,337 19,342 16,556
---------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,700 4,589 8,370 8,967
Income tax expense 1,308 1,244 2,546 2,449
---------------------------------------------------------------------------------------------------------------------
Net income $2,392 $3,345 $5,824 $6,518
---------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.20 $.28 $.49 $.55
Diluted earnings per share $.20 $.28 $.48 $.54
Cash dividends declared per share $.12 $.11 $.24 $.22
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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 $9,926 $67,686 $(191) $- $78,166
Net income 5,824 5,824
Other comprehensive loss net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (1,231) (1,231)
--------
Comprehensive income 4,593
Cash dividends declared (3,750) (3,750)
Shares issued 5 84 89
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $750 $10,010 $69,760 $(1,422) $- $79,098
----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $737 $8,986 $61,581 $7,401 $(354) $78,351
Net income 6,518 6,518
Other comprehensive loss net of tax:
Net unrealized gains on securities,
net of reclassification adjustment (2,957) (2,957)
--------
Comprehensive income 3,561
Cash dividends declared (3,127) (3,127)
Shares issued 8 1,074 1,082
Shares repurchased (24) (24)
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $745 $10,060 $64,972 $4,444 $(378) $79,843
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,824 $6,518
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 700 940
Depreciation of premises and equipment 1,589 1,500
Amortization of premium in excess of accretion of
discount on debt securities (47) 283
Net gains on sales of securities (758) (383)
Net gains on loan sales (143) (481)
Proceeds from sales of loans 6,520 33,275
Loans originated for sale (5,847) (30,894)
Increase in accrued interest receivable (1,485) (338)
Decrease (increase) in other assets 567 (986)
Decrease in accrued expenses and other liabilities (40) (661)
Other, net (84) (24)
--------------------------------------------------------------------------------
Net cash provided by operating activities 6,796 8,749
--------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (89,589) (84,012)
Proceeds from sales 25,375 16,175
Maturities and principal repayments 16,766 35,672
Securities held to maturity:
Purchases (14,900) (31,477)
Maturities and principal repayments 6,897 22,210
Purchase of Federal Home Loan Bank stock (1,931) (58)
Principal collected on loans under loan originations (25,118) (30,301)
Proceeds from sales of other real estate owned 68 196
Purchases of premises and equipment (750) (1,562)
Purchase of bank-owned life insurance - (18,000)
--------------------------------------------------------------------------------
Net cash used in investing activities (83,182) (91,157)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 39,237 25,202
Net increase in other short-term borrowings 1,219 4,629
Proceeds from Federal Home Loan Bank advances 249,500 293,336
Repayment of Federal Home Loan Bank advances (215,600) (240,549)
Proceeds from issuance of common stock 89 1,082
Purchase of treasury stock - (24)
Cash dividends paid (3,511) (3,018)
--------------------------------------------------------------------------------
Net cash provided by financing activities 70,934 80,658
--------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (5,452) (1,750)
Cash and cash equivalents at beginning of year 44,520 34,654
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $39,068 $32,904
--------------------------------------------------------------------------------
(Continued)
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $106 $301
Loans charged off 384 431
Loans made to facilitate the sale of OREO 60 144
Decrease in net unrealized gain on securities
available for sale (1,231) (2,957)
Supplemental Disclosures:
Interest payments 21,715 17,796
Income tax payments 2,854 2,406
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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 June 30, 2000 and
December 31, 1999 and the results of operations and cash flows for the interim
periods presented.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, The Washington Trust Company. All significant
intercompany balances and transactions have been eliminated.
On June 26, 2000, the Corporation completed its acquisition of Phoenix
Investment Management Company, Inc. of Providence, Rhode Island. Phoenix, an
independent investment advisory firm, had assets under management of
approximately $750 million at June 26, 2000. The acquisition was accounted for
under the pooling of interests method and accordingly, the consolidated
financial statements of the Corporation have been restated to reflect the
acquisition at the beginning of each period presented.
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, 1999.
(2) Securities Available for Sale
<TABLE>
<CAPTION>
Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 95,516 $317 $(1,331) $ 94,502
Mortgage-backed securities 227,870 337 (3,183) 225,024
Corporate bonds 40,223 28 (1,114) 39,137
Corporate stocks 14,326 4,912 (1,149) 18,089
---------------------------------------------------------------------------------------------------------------------
Total 377,935 5,594 (6,777) 376,752
---------------------------------------------------------------------------------------------------------------------
December 31, 1999
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 87,558 347 (1,595) 86,310
Mortgage-backed securities 191,934 70 (2,918) 189,086
Corporate bonds 34,364 31 (711) 33,684
Corporate stocks 15,833 6,582 (1,064) 21,351
---------------------------------------------------------------------------------------------------------------------
Total $329,689 $7,030 $(6,288) $330,431
---------------------------------------------------------------------------------------------------------------------
<FN>
Securities available for sale with a fair value of $63.8 million and $47.2
million were pledged to secure Treasury Tax and Loan deposits, borrowings and
public deposits at June 30, 2000 and December 31, 1999, respectively.
For the six months ended June 30, 2000, proceeds from sales of securities
available for sale amounted to $25.4 million while net realized gains on these
sales amounted to $758 thousand.
</FN>
</TABLE>
<PAGE>
(3) Securities Held to Maturity
<TABLE>
<CAPTION>
The amortized cost and fair value of securities held to maturity are summarized
as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 33,635 $8 $(954) $ 32,689
Mortgage-backed securities 65,316 32 (2,249) 63,099
States and political subdivisions 25,432 7 (462) 24,977
---------------------------------------------------------------------------------------------------------------------
Total 124,383 47 (3,665) 120,765
---------------------------------------------------------------------------------------------------------------------
December 31, 1999
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 28,231 - (895) 27,336
Mortgage-backed securities 62,209 54 (2,189) 60,074
States and political subdivisions 25,932 23 (497) 25,458
---------------------------------------------------------------------------------------------------------------------
Total $116,372 $77 $(3,581) $112,868
---------------------------------------------------------------------------------------------------------------------
<FN>
There were no sales or transfers of securities held to maturity during the six
months ended June 30, 2000.
</FN>
</TABLE>
(4) Loan Portfolio
The following is a summary of loans:
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Commercial:
Mortgages $116,384 $113,719
Construction and development 1,146 2,902
Other (1) 113,454 115,739
--------------------------------------------------------------------------------
Total commercial 230,984 232,360
Residential real estate:
Mortgages 228,126 212,719
Homeowner construction 14,483 12,995
--------------------------------------------------------------------------------
Total residential real estate 242,609 225,714
Consumer 100,336 90,951
--------------------------------------------------------------------------------
Total loans $573,929 $549,025
--------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate
<PAGE>
(5) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three Months Six Months
---------------------------------------------
Periods ended June 30, 2000 1999 2000 1999
--------------------------------------------------------------------------------
Balance at beginning of period $12,540 $11,333 $12,349 $10,966
Provision charged to expense 350 458 700 940
Recoveries 180 250 258 295
Loans charged off (147) (271) (384) (431)
--------------------------------------------------------------------------------
Balance at end of period $12,923 $11,770 $12,923 $11,770
--------------------------------------------------------------------------------
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, 2000, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2000 and 1999, and the changes in shareholders' equity and cash
flows for the six-month periods ended June 30, 2000 and 1999. These consolidated
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1999, is fairly stated, in all material
respects.
KPMG LLP
Providence, Rhode Island
July 20, 2000
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Corporation reported net income of $2.4 million, or $.20 per diluted share,
for the three months ended June 30, 2000. Net income for the second quarter of
1999 amounted to $3.3 million, or $.28 per diluted share. In the second quarter
of 2000, the Corporation completed the acquisition of Phoenix Investment
Management Company, Inc., which was accounted for under the pooling of interests
method. Accordingly, the consolidated financial statements for the Corporation
have been restated to reflect the acquisition at the beginning of each period
presented. Second quarter 2000 results included one-time acquisition-related
expenses of $1.1 million, including related income taxes. Results excluding
these nonrecurring costs and including a pro forma tax provision for
pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior
to the acquisition, are referred to herein as "operating".
Operating earnings for the three months ended June 30, 2000 amounted to $3.3
million, or $.27 per diluted share, an increase of 4.3% from the $3.1 million,
or $.26 per diluted share, earned in the three months ended June 30, 1999. The
Corporation's rates of return on average assets and average equity for the
second quarter of 2000, on an operating basis, were 1.14% and 16.47%,
respectively. Comparable amounts for the second quarter of 1999 were 1.20% and
15.70%.
Operating earnings for the six months ended June 30, 2000 amounted to $6.5
million, an increase of 5.9% from $6.2 million reported for the same 1999
period. Diluted earnings per share for the six months ended June 30, 2000, on an
operating basis, amounted to $.54, up from $.51 per share earned in the six
months ended June 30, 1999. The Corporation's rates of return on average assets
and average equity for the six months ended June 30, 2000, on an operating
basis, were 1.15% and 16.42%, respectively. Comparable amounts for the 1999
period were 1.19% and 15.44%.
For the second quarter of 2000, 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, an increase of 7.2% from the $8.7 million
reported for second quarter of 1999. Net interest income for the six months
ended June 30, 2000 rose 6.2% over the corresponding 1999 period. This increase
was primarily attributable to growth in interest-earning assets. (See additional
discussion under the caption "Net Interest Income".)
The Corporation's provision for loan losses was $350 thousand and $458 thousand
in the second quarter of 2000 and 1999, respectively. For the six months ended
June 30, 2000 and 1999, the provision for loan losses amounted to $700 thousand
and $940 thousand, respectively.
Other noninterest income (noninterest income excluding net gains on sales of
securities) amounted to $4.8 million for the quarter ended June 30, 2000, up
4.8% from the corresponding 1999 period. For the six months ended June 30, 2000,
other noninterest income amounted to $9.2 million, up 5.6% from the same 1999
period. The increase was primarily due to growth in revenues for trust and
investment management services and income from bank-owned life insurance
("BOLI"), offset in part by a decline in revenue from mortgage banking
activities. Trust and investment management revenue totaled $5.3 million for the
six months ended June 30, 2000, up 16.5% from the same 1999 period due primarily
to an increase in assets under management. During the second quarter of 1999,
the Corporation purchased BOLI as a financing tool for employee benefits.
Revenue from mortgage banking activities associated with the originations of
loans for the secondary market amounted to $256 thousand for the six months
ended June 30, 2000, a decrease of 70.8% from the $876 thousand reported for the
same 1999 period. Due to rising interest rates, mortgage refinancing activity
has decreased, resulting in a decline of loans sold in the secondary market.
Net realized securities gains for the three months ended June 30, 2000 amounted
to $374 thousand, including $310 thousand related to a contribution of
appreciated equity securities to the Corporation's charitable foundation. The
cost of this contribution amounted to approximately $424 thousand and was
included in noninterest expenses in the second quarter of 2000. For the three
months ended June 30, 1999, net realized securities gains totaled $122 thousand.
Net realized securities gains for the six months ended June 30, 2000 and 1999
amounted to $758 thousand and $383 thousand, respectively.
For the quarter ended June 30, 2000, total operating noninterest expense (total
noninterest expense excluding one-time acquisition-related expenses of $1.0
million) amounted to $9.4 million, an increase of 12.7% from the corresponding
1999 amount. Total operating noninterest expense for the six months ended June
30, 2000 amounted to $18.3 million, an increase of 10.6% over the comparable
1999 amount. The increase was primarily attributable to higher salaries and
benefits expense, increases in legal, audit and professional fees, higher
equipment costs, and increases in advertising and promotion costs. For the six
months ended June 30, 2000, legal, audit and professional fees totaled $883
thousand, up $409 thousand from the corresponding 1999 period. The increase was
primarily due to legal costs associated with an ongoing litigation matter. These
costs are expected to continue through the third quarter of 2000. At this time,
management of the Corporation is not able to determine whether such costs will
continue beyond the third quarter.
<PAGE>
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, 2000 amounted to $19.1
million, up 6.0% over the same 1999 period due primarily to growth in
interest-earning assets. For the six months ended June 30, 2000, average
interest-earning assets amounted to $1.072 billion, up $101.8 million, or 10.5%,
over the comparable 1999 amount due to growth in both the securities portfolio
and in total loans. This growth in securities and loans was funded by Federal
Home Loan Bank ("FHLB") advances and to a lesser extent, deposit growth. The net
interest margins (FTE net interest income as a percentage of average
interest-earning assets) for the six months ended June 30, 2000 and 1999 were
3.58% and 3.74%, respectively. The interest rate spread declined 20 basis points
to 3.03% for the first half of 2000. Earning asset yields rose 25 basis points,
while the cost of interest-bearing liabilities increased 45 basis points,
thereby narrowing the net interest spread. Higher funding costs associated with
time deposits and FHLB advances were primarily responsible for the decrease in
the net interest margin.
Total average securities rose $56.5 million, or 12.3%, over the comparable prior
year period, mainly due to purchases of taxable debt securities. The FTE rate of
return on securities was 6.84% for the six months ended June 30, 2000, up from
6.22% for the same 1999 period. The increase in yields reflects higher marginal
rates on investment purchases.
The yield on average total loans amounted to 8.62% for the six months ended June
30, 2000, compared to 8.66% in the comparable 1999 period. Average loans for the
six months ended June 30, 2000 rose $45.3 million, or 8.9%, over the prior year
and amounted to $556.3 million. Average residential real estate loans amounted
to $232.3 million, up 10.4% from the prior year level. The yield on residential
real estate loans declined 10 basis points from the prior year, amounting to
7.79%. The decrease in yield on residential real estate loans resulted from 1999
mortgage refinancing activity. Average commercial loans rose 8.3% to $229.8
million. The yield on commercial loans amounted to 9.38%, down from the prior
year yield of 9.44%. Average consumer loans rose 6.7% over the prior year. The
yield on consumer loans amounted to 8.81%, an increase of 16 basis points from
the prior year yield of 8.65%.
As a result of higher levels of FHLB advances and increases in time and savings
deposits, average interest-bearing liabilities increased 11.0% to $948.5 million
at June 30, 2000. Due to higher rates paid on both borrowed funds and time
deposits, the Corporation's total cost of funds on interest-bearing liabilities
amounted to 4.73% for the six months ended June 30, 2000, up from 4.28% for the
comparable 1999 period. Average FHLB advances for the six months ended June 30,
2000 amounted to $370.9 million, up 25.0% from the $296.7 million average
balance for the same 1999 period. The average rate paid on FHLB advances for the
six months ended June 30, 2000 was 5.98%, an increase of 63 basis points from
the prior year rate. Average time deposits increased $26.1 million to $343.3
million with an increase of 43 basis points in the rate paid. Average savings
deposits for the six months ended June 30, 2000 increased 4.8% to $232.0 million
from the comparable 1999 amount. The rate paid on these deposits for the first
six months of 2000 was 1.73%, unchanged from the same 1999 period. For the six
months ended June 30, 2000, average demand deposits, an interest-free funding
source, were up by $9.4 million, or 10.5%, from the same prior year period.
<PAGE>
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, 2000 1999
-------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Residential real estate loans $232,348 $8,999 7.79% $210,504 $8,234 7.89%
Commercial and other loans 229,829 10,719 9.38% 212,294 9,936 9.44%
Consumer loans 94,124 4,124 8.81% 88,221 3,782 8.65%
--------------------------------------------------------------------------------------------------------------------
Total loans 556,301 23,842 8.62% 511,019 21,952 8.66%
Federal funds sold and other
short-term investments 12,555 378 6.06% 12,399 288 4.68%
Taxable debt securities 443,478 14,751 6.69% 389,003 11,709 6.07%
Nontaxable debt securities 25,815 852 6.64% 27,122 916 6.81%
Corporate stocks and FHLB stock 33,517 1,538 9.23% 30,333 1,243 8.26%
--------------------------------------------------------------------------------------------------------------------
Total securities 515,365 17,519 6.84% 458,857 14,156 6.22%
--------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,071,666 41,361 7.76% 969,876 36,108 7.51%
--------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 61,810 60,788
--------------------------------------------------------------------------------------------------------------------
Total assets $1,133,476 $1,030,664
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $231,994 $1,995 1.73% $221,270 $1,950 1.73%
Time deposits 343,286 9,227 5.41% 317,215 7,833 4.98%
FHLB advances 370,933 11,023 5.98% 296,691 7,872 5.35%
Other 2,239 64 5.77% 19,162 475 4.99%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 948,452 22,309 4.73% 854,338 18,130 4.28%
Demand deposits 98,749 89,383
Non interest-bearing liabilities 6,947 7,266
--------------------------------------------------------------------------------------------------------------------
Total liabilities 1,054,148 950,987
Total shareholders' equity 79,328 79,677
--------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,133,476 $1,030,664
--------------------------------------------------------------------------------------------------------------------
Net interest income $19,052 $17,977
--------------------------------------------------------------------------------------------------------------------
Net interest spread 3.03% 3.23%
--------------------------------------------------------------------------------------------------------------------
Net interest margin 3.58% 3.74%
--------------------------------------------------------------------------------------------------------------------
<FN>
Interest income amounts presented in the table above include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Six months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Commercial and other loans $ 61 $ 65
Nontaxable debt securities 297 310
Corporate stocks 197 190
</FN>
</TABLE>
<PAGE>
Financial Condition and Liquidity
Total assets rose 6.8% from $1.106 billion at December 31, 1999 to $1.181
billion at June 30, 2000. Average assets totaled $1.133 billion for the six
months ended June 30, 2000, up 10.0% over the comparable 1999 period.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $3.4 million, or .29% of total assets, at June 30, 2000
compared to $3.8 million, or .35% of total assets, at December 31, 1999. The
allowance for loan losses amounted to $12.9 million, or 2.25% of total loans, at
June 30, 2000, compared to $12.3 million, or 2.25%, at December 31, 1999.
Securities Available for Sale - The carrying value of securities available for
sale at June 30, 2000 amounted to $376.8 million, an increase of 14.0% over the
December 31, 1999 amount of $330.4 million. This increase was attributable to
purchases of debt securities. The net unrealized loss on securities available
for sale amounted to $1.2 million, compared to a net unrealized gain of $742
thousand at December 31, 1999. This decline was attributable to the effects of
higher interest rates.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $124.4 million at June 30, 2000, up from $116.4 million at December
31, 1999. This increase was due to purchases of obligations of U.S.
government-sponsored agencies and mortgage-backed securities. The net unrealized
loss on securities held to maturity amounted to approximately $3.6 million at
June 30, 2000, compared to $3.5 million at December 31, 1999.
Loans - Total loans amounted to $573.9 million at June 30, 2000. During the
first six months of 2000, total loans increased $24.9 million, or 4.5% (9.1% on
an annualized basis). The increase in total loans was led by growth in the
residential and home equity products. Total residential real estate loans
amounted to $242.6 million, an increase of $16.9 million, or 7.5%, from the
December 31, 1999 balance of $225.7 million. Total consumer loans increased $9.4
million, or 10.3%, from December 31, 1999 and amounted to $100.3 million.
Commercial loans amounted to $231.0 million at June 30, 2000, compared to $232.4
million at December 31,1999.
Deposits - Total deposits amounted to $700.0 million at June 30, 2000, up $39.2
million, or 5.9% (11.9% on an annualized basis), from $660.8 million at December
31, 1999. In the first half of 2000, time deposits increased $28.2 million and
amounted to $351.2 million at June 30, 2000. Demand and savings deposits
increased by $7.6 million and $3.5 million, respectively, due to normal seasonal
deposit inflow.
Borrowings - The Corporation utilizes advances from the Federal Home Loan Bank
as well as other short-term borrowings as part of its overall funding strategy.
In addition to deposit growth, additional FHLB advances were used to meet
short-term liquidity needs, to fund loan growth and to purchase securities. FHLB
advances amounted to $386.4 million at June 30, 2000, up $33.9 million from the
December 31, 1999 amount. In addition, short-term borrowings outstanding at June
30, 2000 and December 31, 1999 amounted to $5.4 million and $4.2 million,
respectively.
For the six months ended June 30, 2000, net cash provided by operations amounted
to $6.8 million, the majority of which was generated by net income. Net cash
used in investing activities amounted to $83.2 million and was primarily used to
purchase securities. Net cash provided by financing activities of $70.9 million
was generated mainly by an increase in total deposits and a net increase in FHLB
advances. (See Consolidated Statements of Cash Flows for additional
information.)
<PAGE>
Nonperforming Assets
Nonperforming assets are summarized in the following table:
June 30, December 31,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,611 $1,902
Nonaccrual loans less than 90 days past due 1,785 1,896
--------------------------------------------------------------------------------
Total nonaccrual loans 3,396 3,798
Other real estate owned 38 49
--------------------------------------------------------------------------------
Total nonperforming assets $3,434 $3,847
--------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .59% .69%
Nonperforming assets as a percentage of total assets .29% .35%
Allowance for loan losses to nonaccrual loans 380.55% 325.15%
Allowance for loan losses to total loans 2.25% 2.25%
Not included in the analysis of nonperforming assets at June 30, 2000 and
December 31, 1999 above are approximately $214 thousand and $120 thousand,
respectively, of loans greater than 90 days past due and still accruing. These
loans consist primarily of residential mortgages that are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
Impaired loans consist of all nonaccrual commercial loans. At June 30, 2000, the
recorded investment in impaired loans was $1.9 million, which had a related
allowance amounting to $261 thousand. During the six months ended June 30, 2000,
the average recorded investment in impaired loans was $2.0 million. Also during
this period, interest income recognized on impaired loans amounted to
approximately $101 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) 2000 1999
--------------------------------------------------------------------------------
Residential mortgages $ 776 $1,015
Commercial:
Mortgages 869 797
Other (1) 1,065 1,242
Consumer 686 744
--------------------------------------------------------------------------------
Total nonaccrual loans $3,396 $3,798
--------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate.
Capital Resources
Total equity capital amounted to $79.1 million, or 6.7% of total assets, at June
30, 2000. This compares to $78.2 million, or 7.1%, at December 31, 1999. Total
equity increased by approximately $932 thousand from December 31, 1999. The
increase in equity resulting from earnings retention was reduced by a $1.2
million decline in net unrealized gains on securities. (See the Consolidated
Statements of Changes in Shareholders' Equity for additional information.)
At June 30, 2000, the Corporation's Tier 1 risk-based capital ratio was 12.35%
and the total risk-adjusted capital ratio was 13.88%. These ratios were both
above the ratios required to be categorized as well-capitalized.
Dividends payable at June 30, 2000 amounted to approximately $1.4 million,
representing $.12 per share payable on July 14, 2000, an increase of 9.1% over
the $.11 per share declared in the fourth quarter of 1999. Dividends declared
per share represent historical per share dividends declared by the Corporation
and have not been restated as a result of the acquisition of Phoenix. The source
of funds for dividends paid by the Corporation is dividends received from its
subsidiary bank. The subsidiary bank is a regulated enterprise, and as such its
ability to pay dividends to the parent is subject to regulatory review and
restriction.
Book value per share as of June 30, 2000 and December 31, 1999 amounted to $6.60
and $6.55, respectively.
Litigation
The Bank is party to a lawsuit filed by a former corporate customer and the
customer's shareholders for damages which the plaintiffs allegedly incurred as a
result of an embezzlement by an officer of the customer. Management believes,
based on its review with counsel of the development of this matter to date that
the Bank has asserted meritorious affirmative defenses in this litigation.
Additionally, the Bank has filed counterclaims against the customer and its
principal shareholder, as well as claims against the officer allegedly
responsible for the embezzlement. The Bank is vigorously asserting its defenses
and affirmative claims. The discovery phase of the case has effectively been
completed and the case is currently scheduled for trial on October 23, 2000.
During discovery, the plaintiffs have indicated that their total asserted
damages are approximately $5.0 to $5.5 million, plus interest thereon. Because
of the numerous uncertainties that surround the litigation, management and legal
counsel are unable to estimate the amount of loss, if any, that the Bank may
incur with respect to this litigation. Consequently, no loss provision for this
lawsuit has been recorded.
Recent Accounting Developments
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires a corporation to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
This Statement defines conditions and criteria to be used in designating a
derivative as a specific type of hedging instrument. SFAS No. 133 also explains
the accounting for changes in the fair value of a derivative, which depends on
the intended use and the resulting designation. Under this Statement, a
corporation is required to establish at the inception of the hedge the method to
be used for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the corporation's approach to managing risk. In
June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". This Statement addresses a limited number of issues causing
implementation difficulties for entities that apply Statement 133. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000 and is not to be applied retroactively to the financial statements of
prior periods. The Corporation has not yet determined what the effect of the
adoption of this pronouncement will have on the financial position and earnings
of the Corporation.
<PAGE>
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, 2000, the Corporation's estimated
exposure as a percentage of net interest income for the next 12 month period and
the subsequent 12 month period thereafter (months 13 - 24), respectively, is as
follows:
Months 1 - 12 Months 13 - 24
------------------------------------------- ------------------- ----------------
200 basis point increase in rates -1.5% -7.4%
200 basis point decrease in rates -0.1% +0.1%
Since this simulation assumes the Corporation's balance sheet will remain static
over the 24-month simulation horizon, the results do not reflect adjustments in
strategy that the Corporation could implement in response to rate shifts, and
should therefore not be relied upon as a projection of net interest income.
For a complete discussion of interest rate sensitivity and liquidity, including
simulation assumptions, see the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1999.
The Corporation also monitors the potential change in market value of its
available for sale debt securities using both parallel rate shifts of up to 200
basis points and "value at risk" analysis. The purpose is to determine market
value exposure which may not be captured by income simulation, but which might
result in changes to the Corporation's capital position. Results are calculated
using industry-standard modeling analytics and securities data. The Corporation
uses the results to manage the effect of market value changes on the
Corporation's capital position. As of June 30, 2000, an immediate 200 basis
point rise in rates would result in a 4.4% decline in the value of the
Corporation's available for sale debt securities. Conversely, a 200 basis point
fall in rates would result in a 2.7% 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 bank's available for sale securities
portfolio at June 30, 2000, including both debt and equity securities, was 4.0%,
assuming a one-year time horizon and a 5% probability of occurrence for "value
at risk" analysis.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On January 28, 1997, a suit was filed against the Bank in the
Superior Court of Washington County, Rhode Island by Maxson
Automatic Machinery Company ("Maxson"), a former corporate
customer, and Maxson's shareholders for damages which the
plaintiffs allegedly incurred as a result of an embezzlement by
Maxson's former president and treasurer. The suit alleges that the
Bank wrongly permitted this individual, while an officer of
Maxson, to divert funds from Maxson's account at the Bank for his
personal benefit. The claims against the Bank are based upon
theories of breach of fiduciary duty, negligence, breach of
contract, unjust enrichment, conversion, failure to act in a
commercially reasonable manner, and constructive fraud.
Management believes, based on its review with counsel of the
development of this matter to date, that the Bank has asserted
meritorious affirmative defenses in this litigation. Additionally,
the Bank has filed counterclaims against Maxson and its principal
shareholder as well as claims against the officer allegedly
responsible for the embezzlement. The Bank is vigorously asserting
its defenses and affirmative claims. The discovery phase of the
case has effectively been completed and the case is currently
scheduled for trial on October 23, 2000. During discovery, the
plaintiffs have indicated that their total asserted damages are
approximately $5.0 to $5.5 million, plus interest thereon. Because
of the numerous uncertainties that surround the litigation,
management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this
litigation. Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal
proceedings arising out of the ordinary course of business.
Management is of the opinion, based on its review with counsel of
the development of such matters to date, that the ultimate
disposition of such other matters will not materially affect the
consolidated financial position or results of operations of the
Corporation.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 25, 2000.
(b) The results of matters voted upon are presented below.
i. A proposal to elect Steven J. Crandall, Richard A. Grills, Edward M. Mazze,
James W. McCormick, Jr., Victor J. Orsinger II, H. Douglas Randall III,
Joyce O. Resnikoff, James P. Sullivan and Neil H. Thorp as directors of the
Corporation for staggered terms, each to serve until their successors are
duly elected and qualified, passed as follows:
Abstentions
Votes Votes and Broker
Term In Favor Withheld Non-votes
------------------------ ---------- ------------- ------------ ----------------
Steven J. Crandall 3 years 8,589,037 158,963 0
Richard A. Grills 3 years 8,588,091 159,909 0
Edward M. Mazze 1 year 8,570,810 177,189 0
James W. McCormick, Jr. 3 years 8,558,662 189,338 0
Victor J. Orsinger II 3 years 8,380,569 367,430 0
H. Douglas Randall III 2 years 8,587,653 160,347 0
Joyce O. Resnikoff 1 year 8,582,812 165,187 0
James P. Sullivan 3 years 8,578,384 169,615 0
Neil H. Thorp 3 years 8,585,101 162,898 0
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,
2000 was passed by a vote of 8,658,920 shares in favor; 85,227 shares
against, with 3,853 abstentions and broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
10.a Change in Control Agreement with Executive Officer (1)
10.b Amendment to the Registrant's 1997 Equity Incentive Plan (1)
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) On July 3, 2000, a Form 8-K was filed which reported that the
Corporation completed the acquisition of Phoenix Investment
Management Company, Inc., an independent investment advisory firm
located in Providence, Rhode Island.
(1) Management contract or compensatory plan or arrangement.
<PAGE>
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, 2000 By: John C. Warren
---------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
August 9, 2000 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
