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 SEPTEMBER 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 October
31, 2000 was 11,994,317.
Page 1
<PAGE>
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
For The Quarter Ended September 30, 2000
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows
Nine Months Ended September 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)
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Assets:
Cash and due from banks $17,284 $27,091
Federal funds sold and other short-term investments 20,500 17,429
Mortgage loans held for sale 1,815 1,647
Securities:
Available for sale, at fair value 383,340 330,431
Held to maturity, at cost; fair value $126,751
in 2000 and $112,868 in 1999 128,656 116,372
--------------------------------------------------------------------------------
Total securities 511,996 446,803
Federal Home Loan Bank stock, at cost 19,558 17,627
Loans 584,298 549,025
Less allowance for loan losses 13,145 12,349
--------------------------------------------------------------------------------
Net loans 571,153 536,676
Premises and equipment, net 21,862 23,442
Accrued interest receivable 8,029 6,010
Other assets 28,086 28,880
--------------------------------------------------------------------------------
Total assets $1,200,283 $1,105,605
--------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $122,592 $102,384
Savings 248,938 235,395
Time 362,068 322,974
--------------------------------------------------------------------------------
Total deposits 733,598 660,753
Dividends payable 1,443 1,202
Short-term borrowings 2,864 4,209
Federal Home Loan Bank advances 368,437 352,548
Accrued expenses and other liabilities 9,706 8,727
--------------------------------------------------------------------------------
Total liabilities 1,116,048 1,027,439
--------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value;
authorized 30 million shares;
issued 11,994,309 shares in 2000
and 11,925,571 shares in 1999 750 745
Paid-in capital 10,063 9,926
Retained earnings 72,064 67,686
Accumulated other comprehensive gain (loss) 1,358 (191)
--------------------------------------------------------------------------------
Total shareholders' equity 84,235 78,166
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,200,283 $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 Nine Months
----------------------------------------------
Periods ended September 30, 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $12,669 $11,420 $36,451 $33,306
Interest on securities 8,322 6,518 23,628 18,834
Dividends on corporate stock and Federal Home Loan Bank stock 715 486 2,056 1,539
Interest on federal funds sold and other short-term investments 252 131 630 419
---------------------------------------------------------------------------------------------------------------------
Total interest income 21,958 18,555 62,765 54,098
---------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,087 1,053 3,082 3,003
Time deposits 5,187 3,986 14,414 11,820
Federal Home Loan Bank advances 5,886 4,257 16,909 12,129
Other 30 121 95 596
---------------------------------------------------------------------------------------------------------------------
Total interest expense 12,190 9,417 34,500 27,548
---------------------------------------------------------------------------------------------------------------------
Net interest income 9,768 9,138 28,265 26,550
Provision for loan losses 250 450 950 1,390
---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,518 8,688 27,315 25,160
---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,657 2,324 7,976 6,888
Service charges on deposit accounts 842 777 2,444 2,329
Merchant processing fees 906 599 1,714 1,242
Income from bank-owned life insurance 271 238 772 434
Mortgage banking activities 139 295 395 1,171
Net gains (losses) on sales of securities - (4) 758 380
Net gain on sale of credit card portfolio - 438 - 438
Other income 594 405 1,265 1,242
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Total noninterest income 5,409 5,072 15,324 14,124
---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,885 4,608 14,891 13,601
Net occupancy 617 652 1,882 1,877
Equipment 1,082 801 2,819 2,334
Legal, audit and professional fees 434 292 1,317 766
Advertising and promotion 278 205 983 728
Merchant processing costs 712 537 1,358 994
Office supplies 140 164 499 506
Acquisition related expenses - 1,552 1,035 1,552
Other 1,450 1,218 4,156 4,228
---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,598 10,029 28,940 26,586
---------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,329 3,731 13,699 12,698
Income tax expense 1,585 1,229 4,131 3,678
---------------------------------------------------------------------------------------------------------------------
Net income $3,744 $2,502 $9,568 $9,020
---------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $.31 $.21 $.80 $.76
Diluted earnings per share $.31 $.21 $.79 $.75
Cash dividends declared per share $.12 $.11 $.36 $.33
</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
Nine months ended September 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 9,568 9,568
Other comprehensive gain net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 1,549 1,549
------------
Comprehensive income 11,117
Cash dividends declared (5,190) (5,190)
Shares issued 5 137 142
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $750 $10,063 $72,064 $1,358 $- $84,235
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $737 $8,986 $61,581 $7,401 $(354) $78,351
Net income 9,020 9,020
Other comprehensive loss net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (4,582) (4,582)
------------
Comprehensive income 4,438
Cash dividends declared (4,725) (4,725)
Shares issued 7 742 284 1,033
Shares repurchased (1) (1)
----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $744 $9,728 $65,876 $2,819 $(71) $79,096
----------------------------------------------------------------------------------------------------------------------
</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)
Nine months ended September 30, 2000 1999
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $9,568 $9,020
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 950 1,390
Depreciation of premises and equipment 2,614 2,261
Accretion of discount in excess of (less than)
amortization of premium on debt securities (105) 416
Net gains on sales of securities (758) (380)
Net gains on loan sales (184) (313)
Net gain on sale of credit card portfolio - (438)
Proceeds from sale of credit card portfolio - 5,192
Proceeds from sales of loans 13,592 42,903
Loans originated for sale (13,576) (37,791)
Increase in accrued interest receivable (2,019) (636)
Decrease (increase) in other assets 535 (260)
Increase in accrued expenses and other liabilities 979 648
Other, net (417) (346)
--------------------------------------------------------------------------------
Net cash provided by operating activities 11,179 21,666
--------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (103,724) (134,466)
Proceeds from sales 25,375 44,490
Maturities and principal repayments 28,607 54,480
Securities held to maturity:
Purchases (22,745) (44,040)
Maturities and principal repayments 10,478 29,756
Purchase of Federal Home Loan Bank stock (1,931) (58)
Principal collected on loans under loan originations (35,615) (43,043)
Proceeds from sales of other real estate owned 95 513
Purchases of premises and equipment (1,037) (1,916)
Purchase of bank-owned life insurance - (18,000)
--------------------------------------------------------------------------------
Net cash used in investing activities (100,497) (112,284)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 72,845 34,529
Net decrease in other short-term borrowings (1,345) (9,647)
Proceeds from Federal Home Loan Bank advances 322,000 435,336
Repayment of Federal Home Loan Bank advances (306,111) (372,904)
Proceeds from issuance of common stock 142 1,033
Purchase of treasury stock - (1)
Cash dividends paid (4,949) (4,533)
--------------------------------------------------------------------------------
Net cash provided by financing activities 82,582 83,813
--------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (6,736) (6,805)
Cash and cash equivalents at beginning of year 44,520 34,654
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $37,784 $27,849
--------------------------------------------------------------------------------
(Continued)
<PAGE>
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine months ended September 30, 2000 1999
--------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate
owned (OREO) $106 $550
Loans charged off 439 573
Loans made to facilitate the sale of OREO 60 180
Increase (decrease) in net unrealized gain
on securities available for sale 1,549 (4,582)
Supplemental Disclosures:
Interest payments 33,358 27,114
Income tax payments 4,230 3,457
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) (a) 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 September 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 Washington
Trust Bancorp, Inc. 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.
(1) (b) Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the portfolio for purposes of
establishing a sufficient allowance for loan losses (ALL). The methodology
includes three elements: identification of specific loan losses, general loss
allocations for certain loan types based on credit grade and loss experience
factors, and general loss allocations for other environmental factors. The
methodology includes an analysis of individual loans deemed to be impaired in
accordance with the terms of SFAS 114. Other individual commercial and
commercial mortgage loans are evaluated using an internal rating system and the
application of loss allocation factors. The loan rating system and the related
loss allocation factors take into consideration the borrower's financial
condition, the borrower's performance with respect to loan terms and the
adequacy of collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as groups taking
into account delinquency ratios and other indicators, the Corporation's
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an additional
allowance is maintained based on a judgmental process whereby management
considers qualitative and quantitative assessments of other factors including
regional credit concentration, industry concentration, results of regulatory
examinations, historical loss ranges, portfolio composition, economic conditions
such as interest rates and energy costs and other changes in the portfolio. 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.
While management believes that the allowance for loan losses is adequate, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses. Such agencies may require additions to
the allowance based on their judgments about information available to them at
the time of their examination.
<PAGE>
(2) (a) 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>
September 30, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 91,132 $556 $(812) $ 90,876
Mortgage-backed securities 233,092 549 (2,171) 231,470
Corporate bonds 41,236 75 (840) 40,471
Corporate stocks 14,819 6,541 (837) 20,523
---------------------------------------------------------------------------------------------------------------------
Total 380,279 7,721 (4,660) 383,340
---------------------------------------------------------------------------------------------------------------------
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>
For the nine months ended September 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>
(2) (b) 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>
September 30, 2000
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $ 35,404 $ 43 $(545) $ 34,902
Mortgage-backed securities 68,880 211 (1,361) 67,730
States and political subdivisions 24,372 6 (259) 24,119
---------------------------------------------------------------------------------------------------------------------
Total 128,656 260 (2,165) 126,751
---------------------------------------------------------------------------------------------------------------------
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 nine
months ended September 30, 2000.
</FN>
</TABLE>
Securities available for sale and held to maturity with a fair value of $63.4
million and $46.9 million were pledged to secure Treasury Tax and Loan deposits,
borrowings and public deposits at September 30, 2000 and December 31, 1999,
respectively. In addition, securities available for sale and held to maturity
with a fair value of $49.8 million and $52.0 million were collateralized for the
discount window at the Federal Reserve Bank at September 30, 2000 and December
31, 1999, respectively. There were no borrowings with the Federal Reserve Bank
at either date.
<PAGE>
(3) Loan Portfolio
The following is a summary of loans:
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Commercial:
Mortgages $120,137 $113,719
Construction and development 1,935 2,902
Other (1) 109,943 115,739
--------------------------------------------------------------------------------
Total commercial 232,015 232,360
Residential real estate:
Mortgages 233,866 212,719
Homeowner construction 15,535 12,995
--------------------------------------------------------------------------------
Total residential real estate 249,401 225,714
Consumer 102,882 90,951
--------------------------------------------------------------------------------
Total loans $584,298 $549,025
--------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which is fully
or partially collateralized by real estate
(4) Allowance For Loan Losses
The following is an analysis of the allowance for loan losses:
Three Months Nine Months
-------------------------------------------------
Periods ended September 30, 2000 1999 2000 1999
--------------------------------------------------------------------------------
Balance at beginning of period $12,923 $11,770 $12,349 $10,966
Provision charged to expense 250 450 950 1,390
Recoveries 26 101 285 396
Loans charged off (54) (142) (439) (573)
--------------------------------------------------------------------------------
Balance at end of period $13,145 $12,179 $13,145 $12,179
--------------------------------------------------------------------------------
(5) Litigation
On January 28, 1997, a suit was filed against the Corporation's bank subsidiary
("the Bank") in the Superior Court of Washington County, Rhode Island by Maxson
Automatic Machinery Company ("Maxson"), a former corporate customer, and
Maxson's shareholders for damages which the plaintiffs allegedly incurred as a
result of an embezzlement by Maxson's former president and treasurer, which
allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred
in permitting this individual, while an officer of Maxson, to transfer funds
from Maxson's account at the Bank for his personal benefit. The claims against
the Bank 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 shareholders as well as claims against the former Maxson officer
allegedly responsible for the embezzlement. The Bank is vigorously asserting its
defenses and affirmative claims. The discovery phase of the case has nearly been
completed and the case is currently scheduled for trial on April 10, 2001.
During discovery, the plaintiffs have offered various theories and amounts of
alleged damages, ranging from $5.0 million to $12.7 million, plus interest
thereon. The plaintiffs have also filed a motion to amend the complaint to add a
claim for punitive damages. The court has deferred ruling on whether to permit
this amendment. 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.
<PAGE>
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 September 30, 2000, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 2000 and 1999, and the changes in shareholders'
equity and cash flows for the nine-month periods ended September 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
October 19, 2000
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
In the second quarter of 2000, the Corporation completed its acquisition of
Phoenix Investment Management Company, Inc. and recorded one-time
acquisition-related expenses of $1.1 million, net of related income taxes.
During the third quarter of 1999, the Corporation completed its acquisition of
PierBank, Inc. and also recognized a nonrecurring gain on the sale of its credit
card loan portfolio. Third quarter 1999 results included one-time acquisition
related expenses of $1.3 million, net of tax, and the loan sale gain, net of
expenses and related income taxes, of $285 thousand. The acquisitions were
accounted for under the pooling of interests method and accordingly, the
consolidated financial statements for the Corporation have been restated to
reflect the acquisition at the beginning of each period presented. Substantially
all of Phoenix related revenues have been recorded as trust and investment
management revenue in noninterest income. Results excluding one-time
acquisition-related expenses, net of taxes, and the loan sale gain, net of
taxes, are referred to herein as "operating". Operating basis earnings also
include a pro forma tax provision for pre-acquisition earnings of Phoenix, which
operated as a sub-S corporation prior to the acquisition.
The Corporation reported net income of $3.7 million, or $.31 per diluted share,
for the three months ended September 30, 2000. Net income for the third quarter
of 1999 amounted to $2.5 million, or $.21 per diluted share. Excluding
nonrecurring items recorded in connection with the acquisition and loan sale
gain, earnings on an operating basis for the third quarter of 1999 were $3.3
million, or $.27 per diluted share.
The Corporation's rates of return on average assets and average equity for the
third quarter of 2000 were 1.27% and 18.32%, respectively. Comparable amounts
for the third quarter of 1999, on an operating basis, were 1.24% and 16.78%.
Net income for the nine months ended September 30, 2000 amounted to $9.6
million, or $.79 per diluted share, compared to $9.0 million, or $.75 per
diluted share, for the same 1999 period. Excluding nonrecurring items, earnings
on an operating basis for the nine months ended September 30, 2000 amounted to
$10.3 million, an increase of 8.2% over the $9.5 million of operating earnings
reported for the same period in 1999. Diluted earnings per share on an operating
basis for the nine months ended September 30, 2000 amounted to $.85, up from
$.78 per share earned in the nine months ended September 30, 1999.
The Corporation's rates of return on average assets and average equity for the
nine months ended September 30, 2000, on an operating basis, were 1.19% and
17.06%, respectively. Comparable amounts for the 1999 period were 1.21% and
15.89%.
For the third 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 $9.8 million, an increase of 6.9% from the $9.1 million
earned in the third quarter of 1999. Net interest income for the nine months
ended September 30, 2000 rose 6.5% 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 $250 thousand and $450 thousand
in the third quarter of 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, the provision for loan losses amounted to $950
thousand and $1.4 million, respectively.
Other noninterest income (noninterest income excluding net gains and losses on
sales of securities and the nonrecurring 1999 loan sale gain) amounted to $5.4
million for the quarter ended September 30, 2000, up 16.6% from the comparable
1999 quarter. For the nine months ended September 30, 2000, other noninterest
income amounted to $14.6 million, up 9.5% from the corresponding 1999 amount of
$13.3 million. 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 $8.0 million for the
nine months ended September 30, 2000, up 15.8% from the $6.9 million reported
for the same 1999 period. Trust and investment management assets under
administration amounted to $1.7 billion at September 30, 2000. During the second
quarter of 1999, the Corporation purchased BOLI as a financing tool for employee
benefits.
<PAGE>
Revenue from mortgage banking activities associated with the originations of
loans for the secondary market amounted to $395 thousand for the nine months
ended September 30, 2000, a decrease of 66.3% from the $1.2 million reported for
the same period in 1999. Due to rising interest rates, mortgage refinancing
activity has decreased, resulting in a decline in the number of loans sold in
the secondary market.
Net realized securities gains for the nine months ended September 30, 2000 and
1999 amounted to $758 thousand and $380 thousand, respectively.
For the quarter ended September 30, 2000, total noninterest expense amounted to
$9.6 million, an increase of 13.2% from the $8.5 million of operating
noninterest expense (total noninterest expense excluding one-time
acquisition-related expenses of $1.6 million) reported for the third quarter of
1999. Total operating noninterest expense for the nine months ended September
30, 2000 amounted to $27.9 million, an increase of 11.5% over the comparable
1999 amount. The increase was primarily attributable to higher salaries and
benefits expense, increases in legal, audit and professional fees, and higher
equipment costs. For the nine months ended September 30, 2000, legal, audit and
professional fees totaled $1.3 million, up $551 thousand from the corresponding
1999 period. The increase was primarily due to legal costs associated with an
ongoing litigation matter. These costs are expected to continue through the
second quarter of 2001. At this time, management of the Corporation is not able
to determine whether such costs will continue beyond the second quarter of 2001.
Total equipment costs for the nine months ended September 30, 2000 amounted to
$2.8 million, up $485 thousand from the same 1999 period. During the third
quarter of 2000, the Corporation recorded an impairment adjustment of $293
thousand resulting from a remeasurement of the useful lives of technology
equipment.
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 nine months ended September 30, 2000 amounted to
$29.1 million, up 6.3% over the same 1999 period due primarily to growth in
interest-earning assets. For the nine months ended September 30, 2000, average
interest-earning assets amounted to $1.088 billion, up $105.6 million, or 10.7%,
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 nine months ended September 30, 2000 and 1999
were 3.57% and 3.73%, respectively. The interest rate spread declined 21 basis
points to 3.00% for the nine months ended September 30, 2000. Earning asset
yields rose 33 basis points, while the cost of interest-bearing liabilities
increased 54 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 $60.0 million, or 12.9%, over the comparable prior
year period, mainly due to purchases of taxable debt securities. The FTE rate of
return on securities was 6.89% for the nine months ended September 30, 2000, up
from 6.19% for the same 1999 period. The increase in yields reflects higher
marginal rates on investment purchases.
The yield on average total loans amounted to 8.67% for the nine months ended
September 30, 2000, compared to 8.63% in the comparable 1999 period. Average
loans for the nine months ended September 30, 2000 rose $45.5 million, or 8.8%,
over the prior year and amounted to $563.2 million. Average residential real
estate loans amounted to $236.9 million, up 11.8% from the prior year level. The
yield on residential real estate loans declined 5 basis points from the prior
year, amounting to 7.80%. The decrease in yield on residential real estate loans
resulted from 1999 mortgage refinancing activity. Average commercial loans rose
6.1% to $229.7 million. The yield on commercial loans amounted to 9.46%, up from
the prior year yield of 9.39%. Average consumer loans rose 8.0% over the prior
year. The yield on consumer loans amounted to 8.91%, an increase of 29 basis
points from the prior year yield of 8.62%.
As a result of higher levels of FHLB advances and increases in time and savings
deposits, average interest-bearing liabilities increased 11.0% to $957.3 million
at September 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 4.81% for the nine months ended September 30, 2000, up from 4.27%
for the comparable 1999 period. Average FHLB advances for the nine months ended
September 30, 2000 amounted to $370.9 million, up 23.0% from the $301.5 million
average balance for the same 1999 period. The average rate paid on FHLB advances
for the nine months ended September 30, 2000 was 6.09%, an increase of 71 basis
points from the prior year rate. Average time deposits increased $30.1 million
to $348.3 million with an increase of 56 basis points in the rate paid. Average
savings deposits for the nine months ended September 30, 2000 increased 4.1% to
$236.0 million from the comparable 1999 amount. The rate paid on these deposits
for the first nine months of 2000 was 1.74%, compared to 1.77% for the same 1999
period. For the nine months ended September 30, 2000, average demand deposits,
an interest-free funding source, were up by $9.0 million, or 9.4%, from the same
prior year period.
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
The following table sets forth average balance and interest rate information.
Income is presented on a fully taxable equivalent basis (FTE). For dividends on
corporate stocks, the 70% federal dividends received deduction is also used in
the calculation of tax equivalency. Loans held for sale, nonaccrual and
renegotiated loans, as well as interest earned on these loans (to the extent
recognized in the Consolidated Statements of Income) are included in amounts
presented for loans. Customer overdrafts are excluded from amounts presented for
loans. Average balances for securities are presented at cost, with any
unrealized gains and losses of securities available for sale included in
noninterest-earning assets.
<TABLE>
<CAPTION>
Nine months ended September 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 $236,865 $13,840 7.80% $211,818 $12,438 7.85%
Commercial and other loans 229,742 16,262 9.46% 216,440 15,197 9.39%
Consumer loans 96,602 6,442 8.91% 89,449 5,769 8.62%
--------------------------------------------------------------------------------------------------------------------
Total loans 563,209 36,544 8.67% 517,707 33,404 8.63%
Federal funds sold and other
short-term investments 13,450 629 6.26% 11,830 419 4.73%
Taxable debt securities 451,583 22,805 6.75% 395,219 17,935 6.07%
Nontaxable debt securities 25,523 1,263 6.61% 27,127 1,357 6.69%
Corporate stocks and FHLB stock 33,738 2,348 9.29% 30,107 1,808 8.03%
--------------------------------------------------------------------------------------------------------------------
Total securities 524,294 27,045 6.89% 464,283 21,519 6.19%
--------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,087,503 63,589 7.81% 981,990 54,923 7.48%
--------------------------------------------------------------------------------------------------------------------
Non interest-earning assets 62,275 62,888
--------------------------------------------------------------------------------------------------------------------
Total assets $1,149,778 $1,044,878
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings deposits $236,041 $3,082 1.74% $226,686 $3,003 1.77%
Time deposits 348,281 14,414 5.53% 318,225 11,819 4.97%
FHLB advances 370,901 16,909 6.09% 301,545 12,129 5.38%
Other 2,102 95 6.03% 15,793 596 5.04%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 957,325 34,500 4.81% 862,249 27,547 4.27%
Demand deposits 105,322 96,303
Non interest-bearing liabilities 6,988 6,748
--------------------------------------------------------------------------------------------------------------------
Total liabilities 1,069,635 965,300
Total shareholders' equity 80,143 79,578
--------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,149,778 $1,044,878
--------------------------------------------------------------------------------------------------------------------
Net interest income $29,089 $27,376
--------------------------------------------------------------------------------------------------------------------
Net interest spread 3.00% 3.21%
--------------------------------------------------------------------------------------------------------------------
Net interest margin 3.57% 3.73%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency:
(Dollars in thousands)
Nine months ended September 30, 2000 1999
--------------------------------------------------------------------------------
Commercial and other loans $ 93 $ 98
Nontaxable debt securities 440 459
Corporate stocks 291 269
Financial Condition and Liquidity
Total assets rose 8.6% from $1.106 billion at December 31, 1999 to $1.200
billion at September 30, 2000. Average assets totaled $1.150 billion for the
nine months ended September 30, 2000, up 10.0% over the comparable 1999 period.
Securities Available for Sale - The carrying value of securities available for
sale at September 30, 2000 amounted to $383.3 million, an increase of 16.0% over
the December 31, 1999 amount of $330.4 million. This increase was attributable
to purchases of debt securities. The net unrealized gain on securities available
for sale amounted to $3.1 million, compared to $742 thousand at December 31,
1999. This increase was attributable to the effects of reductions in medium and
long-term bond rates that occurred during the third quarter of 2000.
Securities Held to Maturity - The carrying value of securities held to maturity
amounted to $128.7 million at September 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 $1.9 million at
September 30, 2000, compared to $3.5 million at December 31, 1999.
Loans - At September 30, 2000, total loans amounted to $584.3 million. During
the nine months ended September 30, 2000, total loans increased $35.3 million,
or 6.4%. The increase in total loans was led by growth in the residential and
home equity products. Total residential real estate loans amounted to $249.4
million, an increase of $23.7 million, or 10.5%, from the December 31, 1999
balance of $225.7 million. Total consumer loans increased $11.9 million, or
13.1%, from December 31, 1999 and amounted to $102.9 million. Commercial loans
amounted to $232.0 million at September 30, 2000, compared to $232.4 million at
December 31,1999.
Allowance for Loan Losses - The Corporation uses a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses (ALL). The
methodology includes three elements: identification of specific loan losses,
general loss allocations for certain loan types based on credit grade and loss
experience factors, and general loss allocations for other environmental
factors. The methodology includes an analysis of individual loans deemed to be
impaired in accordance with the terms of SFAS 114. Other individual commercial
and commercial mortgage loans are evaluated using an internal rating system and
the application of loss allocation factors. The loan rating system and the
related loss allocation factors take into consideration the borrower's financial
condition, the borrower's performance with respect to loan terms and the
adequacy of collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as groups taking
into account delinquency ratios and other indicators, the Corporation's
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an additional
unallocated allowance is maintained based on a judgmental process whereby
management considers qualitative and quantitative assessments of other
environmental factors. For example, most of the loan portfolio is concentrated
among borrowers in southern Rhode Island and southeastern Connecticut and a
substantial portion of the portfolio is collateralized by real estate in this
area, including most consumer loans and those commercial loans not specifically
classified as commercial mortgages. A portion of the commercial and commercial
mortgage loans are to borrowers in the hospitality and tourism industry and this
concentration has been increasing in recent years. Economic conditions which may
affect the ability of borrowers to meet debt service requirements are considered
including interest rates and energy costs. Results of regulatory examinations,
historical loss ranges, portfolio composition including a trend toward somewhat
larger credit relationships, and other changes in the portfolio are also
considered.
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.
The allowance for loan losses amounted to $13.1 million, or 2.25% of total
loans, at September 30, 2000, compared to $12.3 million, or 2.25%, at December
31, 1999.
Deposits - Total deposits amounted to $733.6 million at September 30, 2000, up
$72.8 million, or 11.0%, from $660.8 million at December 31, 1999. Time deposits
increased $39.1 million from the December 31, 1999 balance and amounted to
$362.1 million at September 30, 2000. Demand and savings deposits increased by
$20.2 million and $13.5 million, respectively.
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 $368.4 million at September 30, 2000, up $15.9 million from
the December 31, 1999 amount. In addition, short-term borrowings outstanding at
September 30, 2000 and December 31, 1999 amounted to $2.9 million and $4.2
million, respectively.
For the nine months ended September 30, 2000, net cash provided by operations
amounted to $11.2 million, the majority of which was generated by net income.
Net cash used in investing activities amounted to $100.5 million and was
primarily used to purchase securities. Net cash provided by financing activities
of $82.6 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.)
Nonperforming Assets
Nonperforming assets are summarized in the following table:
September 30, December 31,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,602 $1,902
Nonaccrual loans less than 90 days past due 1,805 1,896
--------------------------------------------------------------------------------
Total nonaccrual loans 3,407 3,798
Other real estate owned 6 49
--------------------------------------------------------------------------------
Total nonperforming assets $3,413 $3,847
--------------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .58% .69%
Nonperforming assets as a percentage of total assets .28% .35%
Allowance for loan losses to nonaccrual loans 385.84% 325.15%
Allowance for loan losses to total loans 2.25% 2.25%
Not included in the analysis of nonperforming assets at September 30, 2000 and
December 31, 1999 above are approximately $563 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 September 30,
2000, the recorded investment in impaired loans was $2.0 million, which had a
related allowance amounting to $332 thousand. During the nine months ended
September 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 $232 thousand. Interest income on impaired loans is
recognized on a cash basis only.
The following is an analysis of nonaccrual loans by loan category:
September 30, December 31,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
Residential mortgages $ 742 $1,015
Commercial:
Mortgages 1,108 797
Other (1) 912 1,242
Consumer 645 744
--------------------------------------------------------------------------------
Total nonaccrual loans $3,407 $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 $84.2 million, or 7.0% of total assets, at
September 30, 2000. This compares to $78.2 million, or 7.1%, at December 31,
1999. Total equity increased by approximately $6.1 million from December 31,
1999. The increase in equity was principally attributable to a $4.4 million
increase in retained earnings. (See the Consolidated Statements of Changes in
Shareholders' Equity for additional information.)
At September 30, 2000, the Corporation's Tier 1 risk-based capital ratio was
12.53% and the total risk-adjusted capital ratio was 14.18%. The Corporation's
Tier 1 leverage ratio amounted to 6.94% at September 30, 2000. These ratios were
above the ratios required to be categorized as well-capitalized.
Dividends payable at September 30, 2000 amounted to approximately $1.4 million,
representing $.12 per share payable on October 13, 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 September 30, 2000 and December 31, 1999 amounted to
$7.02 and $6.55, respectively.
Litigation
The Corporation's bank subsidiary ("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 shareholders, as well as claims
against the individual allegedly responsible for the embezzlement. The Bank is
vigorously asserting its defenses and affirmative claims. The discovery phase of
the case has nearly been completed and the case is currently scheduled for trial
on April 10, 2001. During discovery, the plaintiffs have offered various
theories and amounts of alleged damages, ranging from $5.0 million to $12.7
million, plus interest thereon. The plaintiffs have also filed a motion to amend
the complaint to add a claim for punitive damages. The court has deferred ruling
on whether to permit this amendment. 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 on 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 does not believe that the effect of the adoption
of this pronouncement will have a material impact on the financial position and
earnings of the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
Interest rate risk is one of the major market risks faced by the Corporation.
The Corporation's objective is to manage assets and funding sources to produce
results which are consistent with its liquidity, capital adequacy, growth, risk
and profitability goals.
The Corporation manages interest rate risk using income simulation to measure
interest rate risk inherent in its on-balance sheet and off-balance sheet
financial instruments at a given point in time by showing the effect of interest
rate shifts on net interest income over a 60 month period. The simulation
results are reviewed to determine whether the negative exposure of net interest
income to changes in interest rates remains within established tolerance levels
over a 24-month horizon, and to develop appropriate strategies to manage this
exposure. In addition, the ALCO reviews 60-month horizon results to assess
longer-term risk inherent in the balance sheet, although no 60-month horizon
tolerance levels are specified. As of September 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 -0.38% -4.00%
200 basis point decrease in rates -2.59% -3.68%
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 September 30, 2000, an immediate 200 basis
point rise in rates would result in a 4.3% 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 2.6% 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 September 30, 2000, including both debt and equity
securities, was 3.8%, 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 Corporation's
bank subsidiary ("the Bank") in the Superior Court of Washington
County, Rhode Island by Maxson Automatic Machinery Company
("Maxson"), a former corporate customer, and Maxson's shareholders
for damages which the plaintiffs allegedly incurred as a result
of an embezzlement by Maxson's former president and treasurer,
which allegedly occurred between 1986 and 1995. The suit alleges
that the Bank erred in permitting this individual, while an
officer of Maxson, to transfer funds from Maxson's account at
the Bank for his personal benefit. The claims against the Bank
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
shareholders as well as claims against the former Maxson officer
allegedly responsible for the embezzlement. The Bank is vigorously
asserting its defenses and affirmative claims. The discovery phase
of the case has nearly been completed and the case is currently
scheduled for trial on April 10, 2001. During discovery, the
plaintiffs have offered various theories and amounts of alleged
damages, ranging from $5.0 million to $12.7 million, plus interest
thereon. The plaintiffs have also filed a motion to amend the
complaint to add a claim for punitive damages. The court has
deferred ruling on whether to permit this amendment. Because of
the numerous uncertainties that surround the litigation,
management and legal counsel are unable to estimate the amount
of loss, if any, that the Bank may incur with respect to this
litigation. Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal
proceedings arising out of the ordinary course of business.
Management is of the opinion, based on its review with counsel of
the development of such matters to date, that the ultimate
disposition of such other matters will not materially affect the
consolidated financial position or results of operations of the
Corporation.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index
Exhibit No.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended September
30, 2000.
<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)
November 13, 2000 By: John C. Warren
--------------------------------------------
John C. Warren
Chairman and Chief Executive Officer
(principal executive officer)
November 13, 2000 By: David V. Devault
--------------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
