-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LXK7mimeMKsTfGTfJVaByvPwWGJOJMAfnR/uTuRUcXlRkLPGXChxuGwxxWlrwdNY m2T4ZK0mEos/NI/hoN9Uzw== 0000737468-04-000091.txt : 20040806 0000737468-04-000091.hdr.sgml : 20040806 20040806154309 ACCESSION NUMBER: 0000737468-04-000091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON TRUST BANCORP INC CENTRAL INDEX KEY: 0000737468 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050404671 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13091 FILM NUMBER: 04958030 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-Q 1 q22004.txt FORM 10-Q Q2-2004 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, 2004 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X]Yes [ ]No The number of shares of common stock of the registrant outstanding as of July 31, 2004 was 13,236,649. FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended June 30, 2004 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets June 30, 2004 and December 31, 2003 Consolidated Statements of Income Three and Six Months Ended June 30, 2004 and 2003 Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 2004 and 2003 Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003 Condensed Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures This report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's (as hereinafter defined) actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under management, reductions in loan demand, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in loan default and charge-off rates, changes in the size and nature of the Corporation's competition, changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $46,261 $40,710 Federal funds sold and other short-term investments 9,320 20,400 Mortgage loans held for sale 990 2,486 Securities: Available for sale, at fair value; amortized cost $767,674 in 2004 and $663,529 in 2003 769,328 673,845 Held to maturity, at cost; fair value $134,860 in 2004 and $169,401 in 2003 133,670 165,576 - ---------------------------------------------------------------- --------------- Total securities 902,998 839,421 Federal Home Loan Bank stock, at cost 34,373 31,464 Loans 1,101,039 960,981 Less allowance for loan losses 16,208 15,914 - -------------------------------------------------------------------------------- Net loans 1,084,831 945,067 Premises and equipment, net 24,805 24,941 Accrued interest receivable 8,411 7,911 Goodwill 22,591 22,591 Identifiable intangible assets 1,631 1,953 Other assets 42,779 36,863 - -------------------------------------------------------------------------------- Total assets $2,178,990 $1,973,807 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $200,923 $194,144 Savings 566,976 493,878 Time 574,004 518,119 - -------------------------------------------------------------------------------- Total deposits 1,341,903 1,206,141 Dividends payable 2,250 2,113 Federal Home Loan Bank advances 676,336 607,104 Other borrowings 2,947 2,311 Accrued expenses and other liabilities 17,012 18,083 - -------------------------------------------------------------------------------- Total liabilities 2,040,448 1,835,752 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 13,236,649 shares in 2004 and 13,204,024 in 2003 827 825 Paid-in capital 30,317 29,868 Retained earnings 106,994 101,492 Unamortized employee restricted stock (11) (22) Accumulated other comprehensive income 609 6,101 Treasury stock, at cost; 8,719 shares in 2004 and 9,463 in 2003 (194) (209) - -------------------------------------------------------------------------------- Total shareholders' equity 138,542 138,055 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,178,990 $1,973,807 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share amounts) (Unaudited) Three Months Six Months Periods ended June 30, 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $14,287 $12,853 $27,928 $25,499 Interest on securities 8,107 8,333 16,362 16,888 Dividends on corporate stock and Federal Home Loan Bank stock 506 531 980 1,018 Interest on federal funds sold and other short-term investments 20 39 40 76 - ------------------------------------------------------------------------------------------------------- Total interest income 22,920 21,756 45,310 43,481 - ------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 894 880 1,623 1,830 Time deposits 4,130 3,799 8,148 7,733 Federal Home Loan Bank advances 4,789 4,777 9,334 9,670 Other 15 18 30 37 - ------------------------------------------------------------------------------------------------------- Total interest expense 9,828 9,474 19,135 19,270 - ------------------------------------------------------------------------------------------------------- Net interest income 13,092 12,282 26,175 24,211 Provision for loan losses 120 160 240 260 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 12,972 12,122 25,935 23,951 - ------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 3,320 2,744 6,375 5,277 Service charges on deposit accounts 1,192 1,348 2,362 2,448 Merchant processing fees 1,095 862 1,692 1,319 Net gains on loan sales 560 1,441 909 2,679 Income from bank-owned life insurance 295 263 594 547 Net realized (losses) gains on securities (240) 400 (240) 630 Other income 702 297 1,172 488 - ------------------------------------------------------------------------------------------------------- Total noninterest income 6,924 7,355 12,864 13,388 - ------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 7,218 6,619 14,195 13,153 Net occupancy 796 736 1,612 1,498 Equipment 788 837 1,558 1,674 Merchant processing costs 882 683 1,348 1,045 Advertising and promotion 538 542 1,004 812 Outsourced services 467 325 843 696 Legal, audit and professional fees 245 281 503 586 Debt prepayment penalties - 941 - 941 Amortization of intangibles 161 179 322 359 Other 1,450 1,705 2,840 3,062 - ------------------------------------------------------------------------------------------------------- Total noninterest expense 12,545 12,848 24,225 23,826 - ------------------------------------------------------------------------------------------------------- Income before income taxes 7,351 6,629 14,574 13,513 Income tax expense 2,308 2,055 4,576 4,189 - ------------------------------------------------------------------------------------------------------- Net income $5,043 $4,574 $9,998 $9,324 - ------------------------------------------------------------------------------------------------------- Weighted average shares outstanding - basic 13,216.1 13,089.4 13,209.4 13,074.4 Weighted average shares outstanding - diluted 13,517.0 13,304.9 13,515.2 13,265.2 Per share information: Basic earnings per share $.38 $.35 $.76 $.71 Diluted earnings per share $.37 $.34 $.74 $.70 Cash dividends declared per share $.17 $.15 $.34 $.30
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Unamortized Accumulated Employee Other Common Paid-in Retained Restricted Comprehensive Treasury Six months ended June 30, Stock Capital Earnings Stock Income Stock Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2003 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721 Net income 9,324 9,324 Other comprehensive income, net of tax: Net unrealized gains on securities 649 649 Reclassification adjustments (410) (410) ---------- Comprehensive income 9,563 Cash dividends declared (3,930) (3,930) Amortization of employee restricted 8 8 stock Shares issued 2 98 851 951 Shares repurchased (122) (122) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2003 $820 $28,865 $96,111 $(16) $9,533 $(122) $135,191 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2004 $825 $29,868 $101,492 $(22) $6,101 $(209) $138,055 Net income 9,998 9,998 Other comprehensive income, net of tax: Net unrealized losses on securities (5,801) (5,801) Reclassification adjustments 156 156 Minimum pension liability adjustment 153 153 ------------ Comprehensive income 4,506 Cash dividends declared (4,496) (4,496) Amortization of employee restricted 11 11 stock Shares issued 2 449 154 605 Shares repurchased (139) (139) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2004 $827 $30,317 $106,994 $(11) $609 $(194) $138,542 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 2004 2003 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $9,998 $9,324 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 240 260 Depreciation of premises and equipment 1,428 1,560 Amortization of premium in excess of accretion of discount on debt securities 1,307 2,352 Net amortization of intangibles 322 359 Amortization of restricted stock 11 8 Net realized losses (gains) on securities 240 (630) Net gains on loan sales (909) (2,679) Earnings from bank-owned life insurance (594) (547) Proceeds from sales of loans 30,899 107,256 Loans originated for sale (27,910) (111,759) Increase in accrued interest receivable, excluding purchased interest (314) (286) (Increase) decrease in other assets (2,193) 904 (Decrease) increase in accrued expenses and other liabilities (918) (701) Other, net 526 237 - -------------------------------------------------------------------------------- Net cash provided by operating activities 12,133 5,658 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (241,893) (273,701) Proceeds from sales 760 42,858 Maturities and principal repayments 135,779 165,431 Securities held to maturity: Purchases (3,366) (62,347) Maturities and principal repayments 34,935 77,974 Purchase of Federal Home Loan Bank stock (2,909) (4,086) Principal collected on loans under loan originations (82,560) (20,012) Purchases of loans, including purchased interest (58,638) (7,661) Proceeds from sales of other real estate owned - 134 Purchases of premises and equipment (1,292) (2,667) - -------------------------------------------------------------------------------- Net cash used in investing activities (219,184) (84,077) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 135,777 25,860 Net increase (decrease) in other borrowings 636 (1,670) Proceeds from Federal Home Loan Bank advances 665,850 675,441 Repayment of Federal Home Loan Bank advances (596,538) (611,548) Purchase of treasury stock (139) (122) Proceeds from issuance of common stock 295 633 Cash dividends paid (4,359) (3,787) - -------------------------------------------------------------------------------- Net cash provided by financing activities 201,522 84,807 - -------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (5,529) 6,388 Cash and cash equivalents at beginning of year 61,110 51,048 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $55,581 $57,436 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned (OREO) $ - $253 Loans charged off 241 122 Loans made to facilitate the sale of other real estate owned - 322 Supplemental Disclosures: Interest payments 18,975 19,587 Income tax payments 5,002 4,234 The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accounting and reporting policies of Washington Trust Bancorp, Inc. (the "Bancorp") and its wholly owned subsidiary, The Washington Trust Company (the "Bank" or "Subsidiary") (together, the "Corporation") are in accordance with accounting principles generally accepted in the United States of America and conform to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses, the review of goodwill and other intangible assets for impairment, other-than-temporary impairment, interest income recognition and tax estimates. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation's financial position as of June 30, 2004 and December 31, 2003, and the results of operations and cash flows for the interim period presented. The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The Corporation has not changed its accounting and reporting policies from those disclosed in the Bancorp's Annual Report on Form 10-K for the year ended December 31, 2003. Certain prior period amounts have been reclassified to conform to the current year classification. Such reclassifications have no effect on previously reported net income or shareholders' equity. (2) New Accounting Pronouncements On April 22, 2003, the Financial Accounting Standards Board ("FASB") decided to require all companies to expense the value of employee stock options. At this point, it has been tentatively decided in principle to measure employee equity-based awards at their date of grant and to later decide the method for determining the cost of employee stock options, as well as the extent to which a final Statement on this matter will permit adjustments for actual forfeitures and actual performance outcomes, which will affect the amount of compensation cost recognized over the employee service period. On March 31, 2004, the FASB issued Exposure Draft "Share-Based Payment, an amendment to FASB Statement No. 123 and 95". The draft of the proposed statement concluded that all companies should expense the fair value of employee stock options using the modified prospective grant-date measurement approach as defined in Statement of Financial Accounting Standard ("SFAS") 123 "Accounting for Stock-Based Compensation". Compensation cost would be recognized in the financial statement over the requisite service period. A final statement is expected to be issued in the fourth quarter of 2004, which could become effective in 2005. Until a new Statement is issued, the provisions of SFAS No. 123 and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to FASB Statement 123" remain in effect. In December 2003, the FASB issued a revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Except as noted below, this Statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. Disclosure of estimated future benefit payments required by this Statement is effective for fiscal years ending after June 15, 2004. The Corporation has provided the disclosure required under SFAS No. 132 in Note 9 to the Consolidated Financial Statements. In December 2003, the FASB issued a revised Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No. 51." This Interpretation addresses WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) consolidation by business enterprises of variable interest entities having certain characteristics as detailed in the Interpretation. ARB No. 51 requires that an enterprise's consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest. The voting interest approach is not effective in identifying controlling financial interests in entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. The objective of this Interpretation is not to restrict the use of variable interest entities but to improve financial reporting by enterprises involved with variable interest entities. The application of this Interpretation is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this Interpretation did not have any impact on the Corporation's financial statements. In March 2004, the SEC issued SEC Staff Accounting Bulletin ("SAB") No. 105 - "Application of Accounting Principles to Loan Commitments" which summarizes the views of the SEC regarding the application of GAAP to loan commitments accounted for as derivatives. The guidance requires the measurement of the fair value of the loan commitment to include only the differences between the guaranteed interest rate and the market interest rate. SAB No. 105 prohibits recognizing expected future cash flows related to the servicing of a loan. Servicing assets are to be recognized only once the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB No. 105 was effective for loan commitments accounted for as derivatives entered into after March 31, 2004. The adoption of this SAB did not have a material impact on the Corporation's financial statements. (3) Stock Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123 and SFAS No. 148. In determining the pro forma disclosures required by SFAS No. 123 and SFAS No. 148, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming options granted were accounted for using the fair value method prescribed by SFAS No. 123 and SFAS No. 148. (Dollars in thousands, except per share amounts) Three Months Six Months ------------------------------------------------ Periods ended June 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Net income As reported $5,043 $4,574 $9,998 $9,324 Less: Total stock-based compensation determined under fair value method for all awards, net of tax $(201) $(238) (485) (462) - -------------------------------------------------------------------------------- Pro forma $4,842 $4,336 $9,513 $8,862 Basic earnings per share As reported $.38 $.35 $.76 $.71 Pro forma $.37 $.33 $.72 $.68 Diluted earnings per share As reported $.37 $.34 $.74 $.70 Pro forma $.36 $.33 $.70 $.67 There were 32,050 and 231,755 options granted during the six-month periods ended June 30, 2004 and 2003, respectively. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Securities Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- June 30, 2004 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $131,530 $1,257 $(1,258) $131,529 Mortgage-backed securities 536,852 2,753 (9,278) 530,327 Corporate bonds 77,963 778 (354) 78,387 Corporate stocks 21,329 8,410 (654) 29,085 - --------------------------------------------------------------------------------------------------------------------- Total 767,674 13,198 (11,544) 769,328 - --------------------------------------------------------------------------------------------------------------------- December 31, 2003 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 97,876 1,480 (262) 99,094 Mortgage-backed securities 464,138 3,964 (3,277) 464,825 Corporate bonds 79,175 1,487 (724) 79,938 Corporate stocks 22,340 8,262 (614) 29,988 - --------------------------------------------------------------------------------------------------------------------- Total $663,529 $15,193 $(4,877) $673,845 - --------------------------------------------------------------------------------------------------------------------- For the six months ended June 30, 2004, proceeds from sales of securities available for sale amounted to $760 thousand while net realized losses on these sales amounted to $240 thousand.
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- June 30, 2004 Mortgage-backed securities $116,908 $2,062 $(1,188) $117,782 States and political subdivisions 16,762 417 (101) 17,078 - --------------------------------------------------------------------------------------------------------------------- Total 133,670 2,479 (1,289) 134,860 - --------------------------------------------------------------------------------------------------------------------- December 31, 2003 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 8,000 13 - 8,013 Mortgage-backed securities 143,162 3,256 (118) 146,300 States and political subdivisions 14,414 674 - 15,088 - --------------------------------------------------------------------------------------------------------------------- Total $165,576 $3,943 $(118) $169,401 - --------------------------------------------------------------------------------------------------------------------- There were no sales of securities held to maturity during the six months ended June 30, 2004.
Securities available for sale and held to maturity with a fair value of $569.3 million and $548.4 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings and certain public deposits at June 30, 2004 and December 31, 2003, respectively. In addition, securities available for sale and held to maturity with a fair value of $24.0 million and $23.0 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2004 and December 31, 2003, respectively. There were no borrowings with the Federal Reserve Bank at either date. At June 30, 2004 and December 31, 2003, certain securities available for sale with a fair value of $2.5 million and $2.8 million, respectively, represented amounts held in rabbi trusts for nonqualified retirement plans. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes, for all securities in an unrealized loss position at June 30, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.
Less than 12 Months 12 Months or Longer Total ----------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized At June 30, 2004 Value Losses Value Losses Value Losses - ------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $63,060 $939 $11,681 $319 $74,741 $1,258 Mortgage-backed securities 390,133 8,088 67,676 2,378 457,809 10,466 States and political subdivisions 2,757 101 - - 2,757 101 Corporate bonds 10,852 85 17,504 269 28,356 354 - ------------------------------------------------------------------------------------------------------------- Subtotal, debt securities 466,802 9,213 96,861 2,966 563,663 12,179 Corporate stocks 3,936 139 3,045 515 6,981 654 - ----------------------------------------------------------------------- ------------------------------------- Total temporarily impaired $470,738 $9,352 $99,906 $3,481 $570,644 $12,833 securities - -------------------------------------------------------------------------------------------------------------
For those debt securities whose amortized cost exceeds fair value, the primary cause is related to interest rates. The majority of debt securities reported in an unrealized loss position at June 30, 2004 were purchased during 2003 and the first half of 2004, during which interest rates were at or near historical lows. The relative increase in interest rates since the time of purchase has resulted in a decline in market value for these debt securities. Other contributing factors for debt securities reported in an unrealized loss position at June 30, 2004 include widening of investment spreads on certain variable rate asset classes, which have resulted in relative declines in market value compared to amortized cost. Management believes that the nature and duration of impairment on its debt security holdings are primarily a function of interest rate movements and changes in investment spreads, and does not consider full repayment of principal on the reported debt obligations to be at risk. The debt securities in an unrealized loss position at June 30, 2004 consisted of 102 debt security holdings. The largest loss percentage of any single holding was 6.25% of its amortized cost. Causes of conditions whereby the fair value of corporate stock equity securities is less than cost include both the general decline in equity markets over the past several years, timing of purchases, and changes in valuation specific to individual industries or issuers. The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor. The nature and duration of impairment on the equity securities holdings are considered to be a function of general financial market movements and industry conditions. The equity securities in an unrealized loss position at June 30, 2004 consisted of 15 holdings of financial and commercial entities. The largest loss percentage position of any single holding was 19.89% of its cost. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) Loan Portfolio The following is a summary of loans: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Commercial: Mortgages (A) $239,651 $227,334 Construction and development (B) 20,376 12,486 Other (C) 188,314 168,657 - -------------------------------------------------------------------------------- Total commercial 448,341 408,477 Residential real estate: Mortgages (D) 433,976 375,706 Homeowner construction 17,079 14,149 - -------------------------------------------------------------------------------- Total residential real estate 451,055 389,855 Consumer Home equity lines 134,299 116,458 Other (E) 67,344 46,191 - -------------------------------------------------------------------------------- Total consumer 201,643 162,649 - -------------------------------------------------------------------------------- Total loans (F) $1,101,039 $960,981 - -------------------------------------------------------------------------------- (A) Amortizing mortgages, primarily secured by income producing property. (B) Loans for construction of residential and commercial properties and for land development. (C) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. (D) A substantial portion of these loans is used as qualified collateral for FHLB borrowings (See Note 8 for additional discussion of FHLB borrowings). (E) Fixed rate home equity loans and other consumer installment loans. (F) Net of unearned income and unamortized loan origination fees, net of costs totaling $575 thousand and $687 thousand at June 30, 2004 and December 31, 2003, respectively. Includes $676 thousand and $685 thousand of net purchased premiums at June 30, 2004 and December 31, 2003, respectively. (6) Allowance For Loan Losses The following is an analysis of the allowance for loan losses: (Dollars in thousands) Three Months Six Months ----------------------------------------------- Periods ended June 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Balance at beginning of period $16,174 $15,495 $15,914 $15,487 Provision charged to expense 120 160 240 260 Recoveries of loans previously charged off 87 108 295 117 Loans charged off (173) (21) (241) (122) - -------------------------------------------------------------------------------- Balance at end of period $16,208 $15,742 $16,208 $15,742 - -------------------------------------------------------------------------------- (7) Goodwill and other intangibles The 2002 acquisition of First Financial Corp. resulted in the recording of goodwill of $22.6 million. Goodwill and intangible assets are reviewed for impairment, based on their fair values, at least annually. At June 30, 2004 and December 31, 2003, the carrying value of other intangible assets amounted to $1.6 million and $2.0 million, respectively. In conjunction with the First Financial Corp. acquisition, the Corporation recorded core deposit intangibles of $1.8 million with an average useful life of ten years. Amortization expense associated with these other intangible assets amounted to $322 thousand and $359 thousand for the first half of 2004 and 2003, respectively. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The changes in the carrying value of goodwill and other intangible assets for the six months ended June 30, 2004 are as follows: (Dollars in thousands) Core Deposit Other Total Goodwill Intangibles Intangible Intangibles - -------------------------------------------------------------------------------- Balance at December 31, 2003 $22,591 $1,574 $379 $24,544 Amortization expense - (180) (142) (322) Impairment recognized - - - - - -------------------------------------------------------------------------------- Balance at June 30, 2004 $22,591 $1,394 $237 $24,222 - -------------------------------------------------------------------------------- Estimated annual amortization expense is as follows: (Dollars in thousands) Core Deposit Other Total Estimated amortization expense Intangibles Intangibles Intangibles - -------------------------------------------------------------------------------- July 1 through December 31, 2004 $179 $142 $321 2005 303 95 398 2006 261 - 261 2007 140 - 140 2008 120 - 120 The components of intangible assets as of June 30, 2004 are as follows: (Dollars in thousands) Gross Carrying Accumulated Net Carrying Intangible assets Amount Amortization Amount - -------------------------------------------------------------------------------- Core deposit intangibles $2,997 $(1,603) $1,394 Other intangibles 852 (615) 237 - -------------------------------------------------------------------------------- Total $3,849 $(2,218) $1,631 - -------------------------------------------------------------------------------- (8) Borrowings Federal Home Loan Bank ("FHLB") advances outstanding are summarized below: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- FHLB advances $676,336 $607,104 - -------------------------------------------------------------------------------- In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2004 and December 31, 2003. Under agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances ("FHLB borrowings"). The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages loans, U.S. government or agency securities, U.S. government-sponsored agency securities and amounts maintained on deposit at the FHLB. The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at June 30, 2004 and December 31, 2003. Included in the collateral were securities available for sale and held to maturity with a fair value of $521.6 million and $526.0 million that were specifically pledged to secure FHLB borrowings at June 30, 2004 and December 31, 2003, respectively. Unless there is an event of default under the agreement, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral which has been specifically pledged. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following is a summary of other borrowings: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Treasury, Tax and Loan demand note balance $2,305 $1,567 Other 642 744 - -------------------------------------------------------------------------------- Other borrowings $2,947 $2,311 - -------------------------------------------------------------------------------- (9) Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. The Corporation has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The actuarial assumptions used for the non-qualified retirement plans are the same as those used for the Corporation's tax-qualified pension plan. The non-qualified retirement plans provide for the designation of assets in rabbi trusts. At June 30, 2004 and December 31, 2003, securities available for sale and other assets designated for this purpose with a carrying value of $3.1 million and $3.2 million, respectively, are included in the Corporation's Consolidated Balance Sheet. Components of Net Periodic Benefit Costs: (Dollars in thousands) Qualified Non-Qualified Pension Plan Retirement Plans - -------------------------------------------------------------------------------- Six months ended June 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Service cost $796 $637 $144 $92 Interest cost 684 613 196 185 Expected return on plan assets (782) (708) - - Amortization of transition asset (3) (3) - - Amortization of prior service cost 15 16 40 56 Recognized net actuarial loss 18 - 31 14 - -------------------------------------------------------------------------------- Net periodic benefit cost $728 $555 $411 $347 - -------------------------------------------------------------------------------- WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Assumptions: The measurement date and weighted-average assumptions used to determine net periodic benefit cost for the six months ended June 30, 2004 and 2003 were as follows: Qualified Pension Plan Non Qualified Retirement Plans - -------------------------------------------------------------------------------- 2004 2003 2004 2003 - -------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, Measurement date 2003 2002 2003 2002 Discount rate 6.10% 6.75% 6.10% 6.75% Expected long-term return on plan assets 8.25% 8.00% - - Rate of compensation increase 4.25% 4.25% 4.25% 4.25% Employer Contributions: The Corporation previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $1.5 million to its qualified pension plan and $314 thousand in benefit payments to its non-qualified retirement plans in 2004. As of June 30, 2004, $1.5 million of contributions have been made to the qualified pension plan and $158 thousand in benefit payments have been made to the non-qualified retirement plans. The Corporation presently anticipates contributing an additional $163 thousand in benefit payments to the non-qualified retirement plans in 2004 for a total of $321 thousand. (10) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, and commitments to originate and commitments to sell fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $70,253 $78,555 Home equity lines 133,398 109,182 Other loans 17,979 14,965 Standby letters of credit 10,017 9,448 Financial instruments whose notional amounts exceed the amount of credit risk: Forward loan commitments: Commitments to originate fixed rate mortgage loans to be sold 2,557 1,328 Commitments to sell fixed rate mortgage loans 1,562 3,340 Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer's failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit extend up to five years. At June 30, 2004 and December 31, 2003, there was no liability to beneficiaries resulting from standby letters of credit. At June 30, 2004, a substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management's credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. Forward Loan Commitments Commitments to originate and commitments to sell fixed rate mortgage loans are derivative financial instruments. Accordingly, the Corporation recognizes the fair value of these commitments as an asset on the balance sheet. At June 30, 2004 and December 31, 2003, the carrying value of these commitments amounted to $(4) thousand and $(15) thousand, respectively, and was reported in other assets. Changes in the fair value were recorded in current earnings and amounted to income of $12 thousand and $108 thousand for the six months ended June 30, 2004 and 2003, respectively. (11) Litigation On June 22, 2004 a suit was filed by Galilee Hotel Associates, LLC ("plaintiff") in the United States Bankruptcy Court District of Rhode Island against Bank Rhode Island, The Washington Trust Company, Kahn, Litwin, Renza & Co. Ltd. and Thomas Furey. The suit alleges that the actions of the defendants contributed to and culminated in the bankruptcy filing of the plaintiff. The plaintiff had applied to The Washington Trust Company in 2003 for a commercial real estate loan in the amount of $3.5 million. No loan was made by Washington Trust in connection with that application. The most significant count against Washington Trust alleges breach of the covenant of good faith and fair dealing and seeks damages in the amount of at least $3.5 million. Other counts against Washington Trust are contained in the suit relating to allegations and claims that are not material. Washington Trust believes the claims against it have no merit and is vigorously opposing the suit. No loss provision for this lawsuit 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 matters will not materially affect the consolidated financial position or results of operations of the Corporation. With respect to the unaudited consolidated financial statements of Washington Trust Bancorp, Inc. and Subsidiaries at June 30, 2004 and for the six months ended June 30, 2004 and 2003, KPMG LLP has made a review (based on the standards of the Public Accounting Company Oversight Board) and not an audit, set forth in their separate report dated August 6, 2004 appearing below. That report does not express an opinion on the interim unaudited consolidated financial information. KPMG LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, such report is not a "report" or "part of the Registration Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004, the related consolidated statements of income for the three-month and six-month periods ended June 30, 2004 and 2003, and the related consolidated statements of changes in shareholders' equity and cash flows for the six months ended June 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated 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 U.S. generally accepted accounting principles. We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Washington Trust Bancorp, Inc. and Subsidiary as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Providence, Rhode Island August 6, 2004 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment assets under management, reductions in loan demand, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in loan defaults and charge-off rates, changes in the size and nature of the Corporation's competition, changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of the Bancorp's Annual Report on Form 10-K for the year ended December 31, 2003 may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Overview The Bancorp provides a broad range of banking and financial services through its subsidiary, the Bank. The Bank's primary source of income is net interest income. The Bank's lending business includes commercial, residential mortgage and consumer loans. The Bank's loan portfolio is concentrated among borrowers in southern New England, primarily in Rhode Island, and, to a lesser extent, in Connecticut and Massachusetts. The Bank also offers a full range of retail and commercial deposit products through its seventeen banking offices located in Rhode Island and southeastern Connecticut. Noninterest income is an important source of revenue for Washington Trust. Primary sources of noninterest income are trust and investment management revenues, servicing of deposit accounts, net gains on loan sales and merchant credit card processing. Revenue from trust and investment management services continues to be the largest component of noninterest income. The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. Among the external factors affecting Washington Trust's operating results are market rates of interest, the condition of the financial markets, and both national and regional economic conditions. Results of Operations The Corporation reported quarterly net income of $5.0 million for the second quarter ended June 30, 2004, an increase of 10.3% over net income of $4.6 million for the second quarter of 2003. On a diluted earnings per share basis, the Corporation earned $.37 for the second quarter of 2004, up from $.34 for the same quarter last year. The returns on average assets and average equity for the three months ended June 30, 2004 were 0.96% and 14.46%, respectively, compared to 1.01% and 13.57%, respectively, for the three months ended June 30, 2003. Last year, the Corporation's operating results for the second quarter were favorably impacted by gains on loan sales totaling $1.4 million, compared to $560 thousand in the second quarter of 2004. In addition, net income for the second quarter last year included a charge of $941 thousand (pre-tax) incurred on the early payoff of certain FHLB borrowings totaling $23 million. This debt restructuring has resulted in interest expense savings of approximately $510 thousand on an annualized basis over the remaining term of the prepaid debt. For the first six months of 2004, net income amounted to $10.0 million, up 7.2% over $9.3 million in the first half of 2003. On a diluted earnings per share basis, the Corporation earned $.74 for the first half of 2004, up 5.7% over $.70 for the same period a year ago. The returns on average assets and average equity for the six months ended June 30, 2004 were 0.98% and 14.18%, respectively, compared to 1.04% and 14.06%, respectively, for the six months ended June 30, 2003. Net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) for the second quarter of 2004 amounted to $13.1 million, up 6.6% from $12.3 million for the same quarter a year ago. The net interest margin for the second quarter of 2004 was 2.72%, down from 2.87% in the first quarter of 2004 and 2.96% in the second quarter of 2003. The decrease in the net interest margin from the first quarter of 2004 is largely attributable to lower marginal yields on new loans in comparison to overall portfolio yields and, to a lesser extent, to an increase in premium amortization on mortgage-backed securities earlier in the second quarter. For the six months ended June 30, 2004, net interest income amounted to $26.2 million, up 8.1% from the amount reported for the corresponding 2003 period. The net interest margin for the first half of 2004 amounted to 2.80%, down 17 basis points from the 2.97% reported for the same period a year ago, reflecting a decline in yields on loans and securities offset somewhat by lower funding costs of FHLB advances and interest-bearing deposits. (See additional discussion under the caption "Net Interest Income.") The Corporation's provision for loan losses for the second quarters of 2004 and 2003 amounted to $120 thousand and $160 thousand, respectively. The 2004 year-to-date provision totaled $240 thousand, compared to last year's amount of $260 thousand. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance for loan losses increased from $15.9 million at December 31, 2003 to $16.2 million at June 30, 2004 due to the year to date 2004 provision and recoveries, net of charge-offs. The Corporation's ratio of the allowance for loan losses to total loans decreased from 1.66% at December 31, 2003 to 1.47% at June 30, 2004, primarily due to the growth in the loan portfolio as well as the continuation of favorable loss experience. Total loan charge-offs for the first six months of 2004 were $241 thousand, or .02%, of average loans outstanding. Total recoveries for the same period amounted to $295 thousand. Other noninterest income (noninterest income excluding net realized gains and losses on securities) totaled $7.2 million for the second quarter of 2004, compared to $7.0 million for the same quarter a year ago. For the first half of 2004, noninterest income amounted to $13.1 million, up $346 thousand, or 2.7%, over the comparable 2003 amount. Trust and investment management revenues increased $1.1 million, or 20.8%, in the first half of 2004 compared to the same period in 2003. Trust assets under administration amounted to $1.784 billion at June 30, 2004, compared to $1.742 billion at December 31, 2003 and $1.576 billion at June 30, 2003. Net gains on loan sales for the six months ended June 30, 2004 amounted to $909 thousand, down from $2.7 million for the same period in 2003. Total second quarter 2004 net gains on loan sales were $560 thousand, down from $1.4 million for the same quarter a year ago. These decreases reflect a significant decline in fixed rate mortgage origination and sales activity. The Corporation has experienced a further decline in fixed rate mortgage origination activity beginning in the latter part of the second quarter. Meanwhile, the level of adjustable rate mortgages originated by Washington Trust has increased; these loans are retained in the Corporation's loan portfolio. Also included in loan sale gains are gains resulting from the sale of the guaranteed portion of SBA loans. Total such gains for the six months ended 2004 were $390 thousand, up from $181 thousand for the same period in 2003. Included in other noninterest income for the second quarter of 2004 was $280 thousand recovered as a result of a favorable litigation decision. In the first six months of 2004, the Corporation recognized net realized losses on securities amounting to $240 thousand. For the six months ended June 30, 2003, net realized gains on securities totaled $630 thousand, including approximately $400 thousand in gains resulting from the Corporation's contribution of appreciated equity securities to the Corporation's charitable foundation. The cost of this 2003 contribution amounted to approximately $433 thousand and was included in other noninterest expense for the six months ended June 30, 2003. The Corporation expects to make an annual contribution to its charitable foundation in the third quarter of 2004. Exclusive of the second quarter 2003 pre-tax debt prepayment penalty charge of $941 thousand, noninterest expenses for the second quarter of 2004 increased $638 thousand, or 5.4%, from the same period a year ago. Noninterest expenses amounted to $24.2 million for the first half of 2004, up 5.9% from the corresponding period in 2003 (exclusive of the debt prepayment penalty charge) with the largest increase in personnel related costs. Salaries and benefits, the largest component of total noninterest expense, amounted to $14.2 million for the six months ended June 30, 2004, compared to the $13.2 million reported for the first six months of 2003. In addition, included in noninterest expenses for the six months ended June 30, 2004 were costs associated with the conversion of certain technology systems amounting to $275 thousand, of which $140 thousand were included in the second quarter of 2004. Income tax expense amounted to $4.6 million and $4.2 million for the six months ended June 30, 2004 and 2003, respectively. The Corporation's effective tax rate for the first six months of 2004 was 31.4%, compared to 31.0% for the corresponding 2003 period. 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, 2004 amounted to $26.6 million, up 7.9% from the same period in 2003. This increase in net interest income was due to an increase in average interest-earning assets. For the six months ended June 30, 2004, average interest-earning assets amounted to $1.917 billion, up $237.6 million, or 14.2%, compared to the same period last year. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for the six months ended June 30, 2004 and 2003 were 2.80% and 2.97%, respectively. The decrease in the net interest margin reflects a decline in yields on loans and securities offset somewhat by lower funding costs of FHLB advances and interest-bearing deposits. The interest rate spread decreased 13 basis points from the six months ended June 30, 2003 and amounted to 2.54%. The yield on total interest-earnings assets declined 48 basis points to 4.80%, while the cost of interest-bearing liabilities decreased 35 basis points to 2.26%. Average loans amounted to $1.016 billion for the six months ended June 30, 2004, up $193.0 million, or 23.5%, from the same period in 2003. The yield on average total loans amounted to 5.54% for the six months ended June 30, 2004, down 73 basis points from 6.27% for the comparable 2003 period. This decline is primarily due to lower marginal yields on loans and investments as compared to the prior year period and a decline in yields on new loan originations. Average residential real estate loans amounted to $410.7 million for the six months ended June 30, 2004, up $116.3 million, or 39.5%, from the same period a year ago. The yield on residential real estate loans decreased 80 basis points from the prior year period, amounting to 5.15% for the first half of 2004. Average commercial loans rose $30.7 million, or 7.8%, to $423.5 million for the six months ended June 30, 2004 while the yield on commercial loans declined 50 basis points to 6.46%. Average consumer loans rose $46.1 million, or 34.0%, over the same period a year ago and amounted to $181.6 million for the first half of 2004. The yield on consumer loans decreased 63 basis points from the prior year period to 4.32% for the six months ended June 30, 2004. Total average securities amounted to $901.1 million for the six months ended June 30, 2004, an increase of $44.6 million, or 5.2%, over the comparable prior year period mainly due to purchases of taxable debt securities. The FTE rate of return on investments was 3.97% for the six months ended June 30, 2004, compared to 4.33% for the same 2003 period. The decrease in yields on investments reflects a combination of lower yields on variable rate securities tied to short-term interest rates and lower marginal rates on reinvestment of cash flows relative to the same period in the prior year. Average interest-bearing liabilities for the six months ended June 30, 2004 increased $214.0 million, or 14.4%, to $1.704 billion. Due to lower rates paid on both borrowed funds and deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 2.26% for the six months ended June 30, 2004, down from 2.61% for the comparable 2003 period. Average savings deposits for the six months ended June 30, 2004 increased $54.3 million, or 11.7%, to $520.5 million from the comparable 2003 amount. The rate paid on savings deposits for the first six months of 2004 was 0.63%, compared to ..79% for the same 2003 period. Average time deposits increased $55.9 million to $536.4 million for the quarter ended June 30, 2004 with a decrease of 20 basis points in the rate paid to 3.05%. For the six months ended June 30, 2004, average demand deposits, an interest-free funding source, were $180.6 million up by $19.5 million, or 12.1%, from the same prior year period. Average FHLB advances for the six months ended June 30, 2004 amounted to $645.0 million, up $104.0 million from the comparable 2003 amount of $541.0 million. The average rate paid on FHLB advances for the six months ended June 30, 2004 was 2.91%, down 69 basis points from the prior year rate. Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis (FTE) The following table sets forth average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis (FTE) using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. 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.
Six months ended June 30, 2004 2003 - ------------------------------------------------------------------------------- ----------------------------------- Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- Assets: Residential real estate loans $410,686 $10,511 5.15% $294,391 $8,686 5.95% Commercial and other loans 423,467 13,595 6.46% 392,774 13,564 6.96% Consumer loans 181,559 3,898 4.32% 135,503 3,328 4.95% - ------------------------------------------------------------------------------------------------------------------- Total loans 1,015,712 28,004 5.54% 822,668 25,578 6.27% Federal funds sold and other short-term investments 11,114 40 0.72% 15,198 75 1.00% Taxable debt securities 819,405 16,048 3.94% 774,624 16,536 4.30% Nontaxable debt securities 15,177 483 6.41% 16,796 542 6.51% Corporate stocks and FHLB stock 55,438 1,204 4.37% 49,920 1,235 4.99% - ------------------------------------------------------------------------------------------------------------------- Total securities 901,134 17,775 3.97% 856,538 18,388 4.33% - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,916,846 45,779 4.80% 1,679,206 43,966 5.28% - ------------------------------------------------------------------------------------------------------------------- Cash and due from banks 36,254 32,023 Allowance for loan losses (16,113) (15,554) Premises and equipment, net 24,975 25,332 Other 78,080 78,007 - ------------------------------------------------------------------------------------------------------------------- Total assets $2,040,042 $1,799,014 - ------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $520,451 $1,623 0.63% $466,102 $1,830 .79% Time deposits 536,398 8,148 3.05% 480,509 7,733 3.25% FHLB advances 644,999 9,334 2.91% 540,975 9,670 3.60% Other 2,079 30 2.89% 2,336 37 3.25% - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,703,927 19,135 2.26% 1,489,922 19,270 2.61% Demand deposits 180,598 161,078 Other liabilities 14,464 15,342 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,898,989 1,666,342 Total shareholders' equity 141,053 132,672 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,040,042 $1,799,014 - ------------------------------------------------------------------------------------------------------------------- Net interest income $26,644 $24,696 - ------------------------------------------------------------------------------------------------------------------- Net interest spread 2.54% 2.67% - ------------------------------------------------------------------------------------------------------------------- Net interest margin 2.80% 2.97% - -------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Six months ended June 30, 2004 2003 - -------------------------------------------------------------------------------- Commercial and other loans $76 $79 Nontaxable debt securities 169 189 Corporate stocks 224 217 Financial Condition and Liquidity Total assets amounted to $2.179 billion at June 30, 2004, up 10.4% from the balance reported at December 31, 2003. For the first six months of 2004, average assets totaled $2.040 billion, up 13.4% compared to the same period last year. (See additional discussion under the caption "Net Interest Income.") Securities Available for Sale - The carrying value of securities available for sale at June 30, 2004 amounted to $769.3 million, an increase of $95.5 million, or 14.2%, from the December 31, 2003 balance of $673.8 million. This increase was mainly due to purchases of mortgage-backed securities and U.S. government agency securities. The net unrealized gains on securities available for sale amounted to $1.7 million at June 30, 2004, compared to $10.3 million at December 31, 2003. The decrease was primarily attributable to the expectation of rising interest rates in the second quarter of 2004, resulting in lower market values for the majority of debt security holdings. Securities Held to Maturity - As a result of principal paydowns on mortgage-backed securities and a called FHLB security, the carrying value of securities held to maturity decreased $31.9 million from $165.6 million at December 31, 2003 to $133.7 million at June 30, 2004. As previously mentioned, the expectation of rising interest rates in the second quarter of 2004 resulted in lower market values for the majority of debt security holdings. As a result, the net unrealized gain on securities held to maturity amounted to $1.2 million at June 30, 2004, down from $3.8 million at December 31, 2003. Loans - Total loans at June 30, 2004 were 14.6% higher than at December 31, 2003. Residential real estate loans amounted to $451.1 million at June 30, 2004, up $61.2 million, or 15.7%, in the first six months of 2004, including an increase of $30.6 million in residential mortgages purchased from other institutions. Commercial and commercial real estate loans increased $39.9 million, or 9.8%, from the December 31, 2003 balance due to new business and additional business with existing customers and amounted to $448.3 million at June 30, 2004. Growth in consumer loans has been very favorable with an increase of $39.0 million, or 24.0%, in the first six months of 2004 primarily due to growth in home equity lines and home equity loans. Deposits - Total deposits amounted to $1.342 billion at June 30, 2004, up $135.8 million, or 11.3%, from the December 31, 2003 balance. Savings deposits were up $73.1 million, or 14.8%, in the first half of 2004, including $52.6 million in money market deposits. Time deposits increased $55.9 million, or 10.8%, from the December 31, 2004 balance, primarily due to increases of $35.1 million in brokered certificates of deposit and $18.1 million in consumer accounts. The Corporation utilizes brokered time deposits as a funding source, generally with maturities in the three to five year range. Demand deposits increased $6.8 million, or 3.5% from the balance at December 31, 2003. Borrowings - The Corporation utilizes advances from the FHLB as well as other borrowings as part of its overall funding strategy. FHLB advances were used to meet short-term liquidity needs, to purchase securities and to purchase loans from other institutions. In the first six months of 2004, FHLB advances increased $69.2 million to $676.3 million at June 30, 2004. Included in the June 30,2004 balance are $65.5 million of callable advances with call dates ranging from August 2004 through November 2007. Other borrowings outstanding at June 30, 2004 amounted to $2.9 million, down $636 thousand from the December 31, 2003 balance. For the six months ended June 30, 2004, net cash provided by operations amounted to $12.1 million, the majority of which was generated by net income. Proceeds from sales of loans in the first six months of 2004 amounted to $30.9 million, while loans originated for sale amounted to $27.9 million. Net cash used in investing activities amounted to $219.2 million and was primarily used to purchase securities. Net cash provided by financing activities was $201.5 million, due to growth in deposits and increases in FHLB advances. (See Consolidated Statements of Cash Flows for additional information.) Nonperforming Assets Nonperforming assets are summarized in the following table: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,469 $1,721 Nonaccrual loans less than 90 days past due 3,518 1,022 - -------------------------------------------------------------------------------- Total nonaccrual loans 4,987 2,743 Other real estate owned, net 8 11 - -------------------------------------------------------------------------------- Total nonperforming assets $4,995 $2,754 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .45% .29% Nonperforming assets as a percentage of total assets .23% .14% Allowance for loan losses to nonaccrual loans 325.01% 580.17% Allowance for loan losses to total loans 1.47% 1.66% Nonperforming assets amounted to $5.0 million, or .23% of total assets, at June 30, 2004, up from $2.7 million, or .14%, at December 31, 2003. This increase was largely due to a single $2.1 million commercial lending relationship classified as nonaccrual during the second quarter of 2004, a significant portion of which is collateralized by real estate. There were no accruing loans 90 days or more past due at June 30, 2004 or December 31, 2003. Impaired loans consist of all nonaccrual commercial loans. At June 30, 2004, the recorded investment in impaired loans was $3.8 million, which had a related allowance amounting to $624 thousand. Also during the six month period ended June 30, 2004, interest income recognized on impaired loans amounted to approximately $208 thousand. Interest income on impaired loans is recognized on a cash basis only. The following is an analysis of nonaccrual loans by loan category: (Dollars in thousands) June 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Residential real estate $927 $946 Commercial: Mortgages 2,701 342 Other 1,123 1,236 Consumer 236 219 - -------------------------------------------------------------------------------- Total nonaccrual loans $4,987 $2,743 - -------------------------------------------------------------------------------- Capital Resources Total equity capital increased $487 thousand during the six months ended June 30, 2004 and amounted to $138.5 million. The changes in shareholders' equity in the first half of 2004 included net income of $10.0 million offset by $5.8 million net unrealized losses on securities available for sale and $4.5 million in dividends to shareholders. In addition, stock option exercises increased shareholders' equity by $605 thousand in the first half of 2004. (See the Consolidated Statement of Changes in Shareholders' Equity for additional information.) The ratio of total equity to total assets amounted to 6.36% at June 30, 2004, compared to 6.99% at December 31, 2003. Book value per share as of June 30, 2004 and December 31, 2003 amounted to $10.47 and $10.46, respectively. At June 30, 2004, the Corporation's Tier 1 risk-based capital ratio was 9.41% and the total risk-adjusted capital ratio was 10.95%. The Corporation's Tier 1 leverage ratio amounted to 5.51% at June 30, 2004. These ratios were above the ratios required to be categorized as well-capitalized. Dividends payable at June 30, 2004 amounted to $2.3 million, representing $.17 per share payable on July 15, 2004, consistent with the dividend declared in the first quarter of 2004. The source of funds for dividends paid by the Bancorp is dividends received from the Bank. The Bank is a regulated enterprise, and as such its ability to pay dividends to the Bancorp is subject to regulatory review and restriction. Off-Balance Sheet Arrangement See Note 10 of the Consolidated Financial Statements for additional information regarding the Corporation's off-balance sheet arrangements. Critical Accounting Policies Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Corporation's accounting and reporting policies comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are important in understanding the reported results. Management has discussed the development and the selection of critical accounting policies with the Audit Committee of our board of directors. As discussed in our 2003 Annual Report on Form 10-K, we have identified the allowance for loan losses, review of goodwill and intangible assets for impairment, other-than-temporary impairment, interest income recognition, and tax estimates as critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions. Recent Accounting Developments See Note 2 of the Consolidated Financial Statements for additional information regarding recent accounting developments affecting the Corporation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity Interest rate risk is one of the major market risks faced by the Corporation. The Corporation's objective is to manage assets and funding sources to produce results that are consistent with its liquidity, capital adequacy, growth, risk and profitability goals. The Corporation manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income for future periods. The simulation results are reviewed to determine whether the exposure of net interest income to changes in interest rates remains within established tolerance levels and to develop appropriate strategies to manage this exposure. The Corporation's interest rate risk modeling incorporates a wide range of interest rate scenarios, including both parallel rate shifts and changes in the shape of the yield curve of varying magnitudes in addition to those presented here. The following table presents the Corporation's estimated net interest income exposure as a percentage of net interest income for the first 12-month period, the subsequent 12-month period thereafter (months 13 - 24), and months 1-60, as of June 30, 2004. Interest rates are assumed to shift upward by 200 basis points or downward by 50 basis points. This asymmetric rate shift reflects the fact that given the current level of interest rates, the likelihood of a decline in interest rates in excess of 50 basis points is considered unlikely. Months 1 - 12 Months 13-24 Months 1 - 60 ------------------------------------------------------------------------------ 200 basis point increase in rates +2.0% -0.7% -0.6% 50 basis point decrease in rates -1.2% -1.8% -2.0% At June 30, 2004, income simulation results assume that changes in core deposit rates are linked to short-term market interest rates. The assumed relationship and correlation between short-term interest rate changes and core deposit rate changes used in income simulation may fluctuate over time based on the Corporation's assessment of market conditions. Since this simulation assumes the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the Corporation has subsequently implemented or could implement in response to rate shifts, and should not be relied upon as an estimate of future net interest income. The Corporation estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on core savings deposits significantly below current levels. If rates were to fall and remain low for a sustained period, core savings deposit rates would likely not fall as fast as other market rates, while asset yields would decline as current asset holdings mature or reprice. The pace of asset cash flows would also be likely to increase in a falling rate environment due to more rapid mortgage-related prepayments and redemption of callable securities. While the Corporation reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments may change to a different degree than estimated. Specifically, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. Changes in prepayment speeds can also affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. The sensitivity of core savings deposits to fluctuations in interest rates could also differ from simulation assumptions, and could result in changes in both liability mix and interest expense that differ from those used to estimate interest rate risk exposure. The Corporation also monitors the potential change in market value of its available for sale debt securities using both rate shifts 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, 2004, an immediate 200 basis point rise in rates would result in a 5.5% decline in the value of the Corporation's available for sale debt securities. Conversely, a 100 basis point fall in rates would result in a 2.0% increase in the value of the Corporation's available for sale debt securities. "Value at risk" analysis measures the theoretical maximum market value loss over a given time period based on recent historical price activity of different classes of securities. The anticipated maximum market value reduction for the Corporation's available for sale securities portfolio at June 30, 2004, including both debt and equity securities, was 6.7%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis. On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") the Corporation carried out an evaluation under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures as of the end of the quarter ended June 30, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are adequate and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate. There has been no change in our internal control over financial reporting during the period ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal Proceedings On June 22, 2004 a suit was filed by Galilee Hotel Associates, LLC ("plaintiff") in the United States Bankruptcy Court District of Rhode Island against Bank Rhode Island, The Washington Trust Company, Kahn, Litwin, Renza & Co. Ltd. and Thomas Furey. The suit alleges that the actions of the defendants contributed to and culminated in the bankruptcy filing of the plaintiff. The plaintiff had applied to The Washington Trust Company in 2003 for a commercial real estate loan in the amount of $3.5 million. No loan was made by Washington Trust in connection with that application. The most significant count against Washington Trust alleges breach of the covenant of good faith and fair dealing and seeks damages in the amount of at least $3.5 million. Other counts against Washington Trust are contained in the suit relating to allegations and claims that are not material. Washington Trust believes the claims against it have no merit and is vigorously opposing the suit. No loss provision for this lawsuit has been recorded. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table provides information as of and for the quarter ended June 30, 2004 regarding shares of common stock of the Corporation that were repurchased under the Deferred Compensation Plan, the Stock Repurchase Plan, and the Stock Incentive Plans. Total number Maximum of shares number of Total purchased as shares that number Average part of may yet be of price publicly purchased shares paid per announced under purchased share plan(s) the plan(s) - -------------------------------------------------------------------------------- Deferred Compensation Plan (A) Balance at beginning of period 14,820 4/1/2004 to 4/30/2004 56 $25.44 56 14,764 5/1/2004 to 5/31/2004 160 25.95 160 14,604 6/1/2004 to 6/30/2004 40 25.58 40 14,564 - -------------------------------------------------------------------------------- Total Deferred Compensation Plan 256 $25.78 256 14,564 - -------------------------------------------------------------------------------- Stock Repurchase (B) Balance at beginning of period 162,000 4/1/2004 to 4/30/2004 - - - 162,000 5/1/2004 to 5/31/2004 - - - 162,000 6/1/2004 to 6/30/2004 - - - 162,000 - -------------------------------------------------------------------------------- Total Stock Repurchase Pla - - - 162,000 - -------------------------------------------------------------------------------- Other (C) Balance at beginning of period N/A 4/1/2004 to 4/30/2004 1,201 $27.07 1,201 N/A 5/1/2004 to 5/31/2004 - - - N/A 6/1/2004 to 6/30/2004 - - - N/A - -------------------------------------------------------------------------------- Total Other 1,201 $27.07 1,201 N/A - -------------------------------------------------------------------------------- Total Purchases of Equity Securities 1,457 $26.85 1,457 176,564 - -------------------------------------------------------------------------------- (A) The Deferred Compensation Plan was established on January 1, 1999. A maximum of 25,000 shares were authorized under the plan. This plan allows directors and officers to defer a portion of their compensation. The deferred compensation is contributed to a rabbi trust that invests the assets of the trust into selected mutual funds as well as shares of the Bancorp's common stock pursuant to the direction of the plan participants. All shares are purchased in the open market. (B) The Stock Repurchase Plan was established in September 2001. A maximum of 250,000 shares were authorized under the plan. The Bancorp plans to hold the repurchased shares as treasury stock for general corporate purposes. (C) Pursuant to the Corporation's stock incentive plans, employees may deliver back shares of stock previously issued in payment of the exercise price of stock options. While required to be reported in this table, such transactions are not reported as share repurchases in the Consolidated Statement of Changes in Shareholders' Equity. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on April 27, 2004. (b) The results of matters voted upon are presented below: i. Election of Directors to Serve Until 2007 Annual Meeting: Barry G. Hittner, Katherine W. Hoxsie, Edward M. Mazze, Ph. D., Kathleen McKeough, Joyce O. Resnikoff and John C. Warren were nominated and duly elected to hold office as Directors of Washington Trust Bancorp, Inc., each to serve a term of three years and until their successors are duly elected and qualified, by the number of votes set forth opposite each person's name as follows: Abstentions Votes Votes and Broker Term In Favor Withheld Non-votes --------------------------------------------------------------------- Barry G. Hittner 3 years 11,722,058 214,223 0 Katherine W. Hoxsie 3 years 11,730,707 205,574 0 Edward M. Mazze, Ph.D. 3 years 11,731,645 204,636 0 Kathleen McKeough 3 years 11,773,946 162,335 0 Joyce O. Resnikoff 3 years 11,723,329 212,952 0 John C. Warren 3 years 11,721,354 214,927 0 The following additional persons continued as Directors of Washington Trust Bancorp, Inc. following the Annual Meeting: Gary P. Bennett Steven J. Crandall Larry J. Hirsch, Esq. Mary E. Kennard, Esq. Victor J. Orsinger, II H. Douglas Randall, III Patrick J. Shanahan, Jr. James P. Sullivan, CPA Neil H. Thorp John F. Treanor 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, 2004 was passed by a vote of 11,655,267 shares in favor, 246,940 shares against, with 34,074 abstentions and broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit index Exhibit No. 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32** Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** These certifications are not "filed" for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act of the Exchange Act. (b) On April 15, 2004, a Form 8-K, which reported the Corporation's earnings for the quarter ended March 31, 2004, was furnished to the Securities and Exchange Commission. 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 6, 2004 By: John C. Warren ----------------------------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) August 6, 2004 By: David V. Devault ----------------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer) EX-11 2 q22004ex11.txt Q2-2004 EXHIBIT 11 EXHIBIT 11 Washington Trust Bancorp, Inc. Computation of Per Share Earnings For the Periods Ended June 30, 2004 and 2003 Three months ended June 30, 2004 2003 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Basic Diluted Basic Diluted ------------ --------- ---------- ---------- Net income $5,043 $5,043 $4,574 $4,574 Share amounts: Average outstanding 13,216.1 13,216.1 13,089.4 13,089.4 Common stock equivalents - 300.9 - 215.5 - -------------------------------------------------------------------------------- Weighted average outstanding 13,216.1 13,517.0 13,089.4 13,304.9 - -------------------------------------------------------------------------------- Earnings per share $.38 $.37 $.35 $.34 - -------------------------------------------------------------------------------- Six months ended June 30, 2004 2003 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Basic Diluted Basic Diluted ------------ --------- ---------- ---------- Net income $9,998 $9,998 $9,324 $9,324 Share amounts: Average outstanding 13,209.4 13,209.4 13,074.4 13,074.4 Common stock equivalents - 305.8 - 190.8 - -------------------------------------------------------------------------------- Weighted average outstanding 13,209.4 13,515.2 13,074.4 13,265.2 - -------------------------------------------------------------------------------- Earnings per share $.76 $.74 $.71 $.70 - -------------------------------------------------------------------------------- EX-15 3 q22004ex15.txt Q2-2004 EXHIBIT 15 EXHIBIT 15 Washington Trust Bancorp, Inc. Letter regarding unaudited interim financial information To the Board of Directors and Shareholders of Washington Trust Bancorp, Inc.: Re: Registration Statements on Form S-8 File No. 333-107141, 333-72277, 333-48315, 333-13167, and 033-23048 Registration Statements on Form S-3 File No. 333-13821, 033-28065, and 333-42502 With respect to the subject Registration Statements, we acknowledge our awareness of the use therein of our report dated August 6, 2004 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933 (the "Act"), such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. KPMG LLP Providence, Rhode Island August 6, 2004 EX-31 4 q22004ex31-1.txt Q2-2004 EXHIBIT 31-1 EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John C. Warren, Chairman and Chief Executive Officer of Washington Trust Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q, for the quarterly period ended June 30, 2004, of Washington Trust Bancorp, Inc. (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) for the Registrant and we have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within that entity, particularly during the period in which this quarterly report is being prepared; (b)evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c)disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors: (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: August 6, 2004 By: John C. Warren - --------------------- -------------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) EX-31 5 q2200431-2.txt Q2-2004 EXHIBIT 31-2 EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David V. Devault, Executive Vice President, Treasurer and Chief Financial Officer of Washington Trust Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q, for the quarterly period ended June 30, 2004, of Washington Trust Bancorp, Inc. (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) for the Registrant and we have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within that entity, particularly during the period in which this quarterly report is being prepared; (b)evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c)disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors: (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees wh o have a significant role in the Registrant's internal controls over financial reporting. Date: August 6, 2004 By: David V. Devault - --------------------- -------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer) EX-32 6 q22004ex32.txt Q2-2004 EXHIBIT 32 EXHIBIT 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officer of Washington Trust Bancorp, Inc. (the "Corporation"), hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: August 6, 2004 John C. Warren ------------------------------------ John C. Warren Chairman and Chief Executive Officer The undersigned officer of Washington Trust Bancorp, Inc. (the "Corporation"), hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: August 6, 2004 David V. Devault ------------------------------------ David V. Devault Executive Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----