Despite 1Q CDO write-off, WashTrust shows strength

After several years of momentum with increased earnings and expansion, Westerly-based Washington Trust Bancorp Inc. hit a $2.8 million pothole in the first quarter of 2013, but helped balance that dip with solid growth in commercial loans and strong mortgage production in a three-state region.
Washington Trust Bancorp, parent company of The Washington Trust Co., reported net income of $7.4 million for the first quarter of 2013, or 45 cents per diluted share, a decline of 12.1 percent from the first three months of 2012. The bank had first quarter 2012 net income of $8.4 million, or 51 cents per diluted share. Fourth quarter 2012 net income was $9 million, or 55 cents per diluted share.
The bank reported an increase of $25.5 million, or 2 percent, in its commercial loan portfolio, which helped offset a decline in interest-earning assets from a year earlier. As a result, however, total interest and noninterest income amounted to $44.7 million, a decline of 0.5 percent.
“We’ve been very successful in penetrating the commercial market in Connecticut, Massachusetts and Rhode Island,” Washington Trust Chairman, President and CEO Joseph J. MarcAurele said in a review of first quarter 2013 earnings.
Despite that success, the bank could not escape some of the lingering effects of the Great Recession, as it took a $2.8 million impairment charge on a collateralized debt obligation that was liquidated. The net after-tax impact was $1.9 million or 11 cents per diluted share.
“We were affected this quarter by one specific write-down of a nonrecurring nature with one security within our securities portfolio,” said MarcAurele. “The write-down we experienced this quarter was not the result of core earnings changes. Net of that event, we would have made more money this quarter than we made last quarter. “I think you have to think of that particular event as a one-timer and it will not affect our earnings going forward,” MarcAurele said.
The bank has one remaining pool trust preferred CDO holding, Washington Trust Senior Vice President, Secretary and Chief Financial Officer David V. Devault said in an April 22 telephone press conference.
“The risk profile for that security, while it is in nonaccrual status, is not anywhere near the kind of event that led to what’s happening with the one we took the impairment charge on,” said Devault.” The carrying value on the one that remains is about $1.3 million.”
The fair value of that CDO on March 31 is $404,000, he said.
“If there were a loss, the charge would be that number tax-affected, so about $300,000,” Devault said. “Our outlook on the cash flow generating capacity of that entity appears to be in decent shape.”
Wealth-management assets under administration were up from the year end, said MarcAurele, with wealth management revenue totaling $7.5 million for the first quarter.
“A stronger and more consistent financial market will benefit our wealth-management returns,” MarcAurele said.
While he acknowledged that the bank’s stiffest challenge is the slow economic recovery nationwide, and the even more sluggish economy in Rhode Island, MarcAurele said the bank continues to make inroads in the highly competitive marketplace.
A key to the bank’s growth in noninterest income has been the expansion of mortgage-origination offices, adding out-of-state locations, with Massachusetts offices in Burlington and Sharon and a Connecticut office in Glastonbury. “If you went back three years ago, we had less than 10 mortgage originators. Now we have more than 50,” MarcAurele said of the mortgage origination in the three states. “We have another 10 or 15 employees in the back offices.”
Washington Trust has continued to generate consistent mortgage origination production in Massachusetts, where home values have held up and the economy has rebounded faster than Rhode Island, he said.
“We have an experienced team of originators covering the Rhode Island, Massachusetts and Connecticut markets and are confident that we will get our fair share of the mortgage business in 2013,” said MarcAurele.
Reviewing the bank’s expansion while admitting to tough competition from national and local banks, particularly in the past year, MarcAurele said he doesn’t think Washington Trust has grown too much or too fast.
“In recent years we’ve opened new branches and mortgage offices, hired talent from larger competitors and enhanced technology,” said MarcAurele. “These investments paid off for us in 2012 and provided momentum going into the first quarter of 2013.”
The bank is always looking to do branch expansions, although no announcements are imminent, MarcAurele said.
“We have what we need to have in the southern part of the state, so that would be Providence and north,” he said of expansion possibilities.
MarcAurele emphasized the bank’s solid foundation, despite the slow economic recovery and increasing competition for a somewhat limited pool of business in the Rhode Island, and nearby Massachusetts and Connecticut markets.
“We all understand the kind of situation we’re operating in,” MarcAurele said. “We do continue to feel well-positioned to take advantage of opportunities in this market.” •

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