Washington Trust Bancorp Inc., parent of The Washington Trust Co., last week said its third-quarter net income was $6.6 million, 13 percent higher than in the same period last year, with most of the growth attributable to non-interest income, especially from the company’s wealth management and trust business.
The news came just five days after Bank Rhode Island, which relies far more heavily on net interest income – it’s about 87 percent of BankRI’s total income, compared with 59 percent for Washington Trust – reported a 33.4-percent drop in earnings, to $1.6 million for the quarter.
Washington Trust’s non-interest income, excluding net realized gains and losses on securities, amounted to $11.1 million for the third quarter, an increase of 33 percent from the same quarter last year, when the bank acquired Weston Financial Group Inc. in a deal effective Aug. 31, 2005.
Wealth management and trust services revenue for the third quarter was $6 million, up 49 percent from a year earlier, the company said, and assets under administration rose $126 million in the quarter, to $3.551 billion as of Sept. 30, a rise attributed to market appreciation and business development efforts.
But while net interest income was also higher than a year ago, it grew only by $506,000, or 3.3 percent, squeezed by a narrowing net interest margin, the bank said. Moreover, loan growth has been meager, only 1.9 percent in the first nine months of 2006, including a $2.8 million (0.2 percent) decline in the third quarter.
Residential mortgages are up only 0.8 percent since Dec. 31, the bank said, while homeowner construction loans and commercial real estate and construction loans are down as well.
In a conference call with analysts, investors and the media, John C. Warren, the bank’s chairman and CEO, made it clear that the outlook isn’t rosy, even for Rhode Island’s largest and oldest independent bank.
“Washington Trust had a solid third quarter, but we’re concerned about what lies ahead for the remainder of 2006 and beyond,” Warren said. “The yield curve has been unfriendly for some period of time, and we don’t anticipate it changing much in the near future.”
Warren also noted that economic reports suggest “continued slow growth” in this market, and he stressed the bank wouldn’t its asset quality to grow loan volume, or wage costly “price wars” to grow its deposits.
Washington Trust is the fourth-largest bank by deposits in Rhode Island – not counting the MetLife Bank, which has only a call center in the state – and it has grown those deposits steadily: from $1.61 billion as of Sept. 30, 2005, to $1.64 billion on Dec. 31, to $1.67 billion as of June 30, to $1.70 billion as of Sept. 30.
Warren said the bank had a “very successful deposit campaign” in the last quarter, but he also acknowledged that the mix of deposits has changed, with customers now favoring money market accounts and certificates of deposit, which pay higher interest rates – and thus cost the bank more.
In the third quarter, Washington Trust’s net interest margin – the difference between interest income and expense, expressed as a percentage of average earning assets – was 2.86 percent, the company said, but eight basis points of that were attributable to a delayed $305,000 payout by the Federal Home Loan Bank of Boston, of dividends due in the second quarter.
Without that payout, the third-quarter margin would have been 2.78 percent, the same as a year ago and down 5 basis points from the second quarter of 2006, the company said. And for the fourth quarter, David V. Devault, executive vice president and chief financial officer, predicted a further decline, to 2.73 to 2.75 percent. (Bancorp Rhode Island, BankRI’s parent, has generally enjoyed far better net interest margins, 3.08 percent in the last quarter.)
“Washington Trust has always relied on a balanced stream of earnings,” Warren said in the conference call, “and we are fortunate that a significant portion of our revenue comes from our wealth management business.” Although the bank cannot predict “what will happen in the markets,” he added, “our business development teams are working hard to bring in new clients in all of our business lines.”
Asked in an interview whether there might be further acquisitions, given the positive impact of Weston Financial, Warren said the bank would consider such opportunities as they arise.
Washington Trust had been planning to open two new branches next year, in Cranston and Warwick, but now – in a move reminiscent of BankRI’s decision to postpone some branch openings of its own – the Warwick opening has been delayed until about the spring of 2008.
Lest too much be read into the delay, Devault said it was caused by issues with land acquisition, as well as other factors, “and the business environment coincidentally supports that strategy as well.” Warren noted that a groundbreaking for the Cranston branch will be held this week, with the opening expected in the second quarter of next year.
Washington Trust’s first Warwick branch, opened at a time of rapid growth in deposits and consumer loans, was profitable within just over a year, Devault recalled. In today’s tougher environment, he said, “I’m not predicting that is what will happen with the next one.”
Asked when they expect the climate to become more favorable again, Warren replied:
“I wish the crystal ball were quite that clear. We’ll have to see. We’ll have to see if the problems in the residential real estate market keep slowing the economy down. We’ll have to watch the oil prices. … The decision-making on the residential side and the decision-making on the commercial side have been slowed by the uncertainty.”
The full third-quarter report, and a recording of the conference call, are available at www.washtrust.com.
