Washington Trust sees setback, BankRI rebounds

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First-quarter results issued last week by Rhode Island’s two largest independent banks show interest rate trends continue to cut into profits. But while extensive cost-cutting helped Bank Rhode Island still make net income gains, The Washington Trust Co. saw its first decline in years.
BankRI reported first-quarter earnings of $2.2 million, up $653,000, or 43 percent, from a year earlier, though Chief Financial Officer Linda Simmons noted that the 2006 figure included a one-time pre-tax loss of $868,000, without which the jump would be smaller.
BankRI’s net interest margin for the first quarter was 2.97 percent, compared with 2.91 percent for the previous quarter and 3.25 percent a year earlier. Net interest income was $10.23 million, down 7.4 percent from a year earlier.
Non-interest income was up 11.1 percent to $2.56 million, with growth driven primarily by fees on leases originated by third parties, Simmons said. But the biggest factor that allowed BankRI to show a year-over-year improvement was that it trimmed its non-interest expenses to $9.5 million, a 4-percent or $445,000 drop, not counting the one-time loss a year ago.
“Clearly our initiative to reduce expenses is working,” Simmons said on a conference call with analysts and investors on Thursday. Added President and CEO Merrill W. Sherman: “We’ve gone through some very rational and deliberate processes to contain the expense growth, and these numbers show that.”
Washington Trust, meanwhile, which has reported record earnings for four years in a row and hasn’t seen a year-over-year drop in quarterly earnings since at least 2003, saw the tide turn for the first time due to rising expenses and continuing interest-rate concerns.
Net income was $5.98 million, down 1.6 percent from a year earlier. Net interest income was down 3.5 percent to $14.9 million, and the net interest margin was 2.81 percent, down from 2.84 percent a year earlier, but up from 2.74 percent in the fourth quarter of 2006.
Non-interest income, which has bolstered Washington Trust’s earnings even as interest income growth was dampened, continued its strong growth, gaining 18 percent on the 2006 first quarter to $11.2 million. Excluding net gains realized on sales of securities, however, the rise was $751,000, or 8 percent – primarily from wealth management services.
Wealth management revenue was $6.9 million, up 6.7 percent year over year. Wealth management assets under administration totaled $3.81 billion as of March 31, 11 percent higher year over year. The bank attributed this growth to both business development efforts and financial market appreciation.
Non-interest expenses shot up 8.9 percent to $17.1 million from a year earlier, but a one-time expense was to blame for most of that jump: The bank prepaid $26.5 million in higher-cost advances from Federal Home Loan Bank of Boston, and it was assessed a prepayment penalty of $1.1 million.
In a news release, Chairman and CEO John C. Warren said Washington Trust’s results were “solid,” especially considering what he called “a difficult banking environment highlighted by unfavorable interest rates and soft consumer and residential loan demand.”
Despite the slowdown in the loan market, both Washington Trust and BankRI managed to grow their overall loan portfolios in the first quarter. Both saw small declines in consumer loans, against commercial lending increases. But while BankRI showed a decline in mortgages, Washington Trust saw a slight increase.
Washington Trust’s commercial loan portfolio grew by 2 percent in the first quarter to $599.2 million, while BankRI, which has always defined itself as a business-oriented bank but has been taking that focus even further, grew commercial loans by 2.4 percent to $532.5 million.
Year over year, BankRI’s commercial loan portfolio has grown by 20.6 percent, Simmons noted on the conference call. “What we’re trying to do is change the orientation of this balance sheet to a commercial base,” she said.
Looking at BankRI’s overall outlook, Sherman told analysts and investors: “I believe that we have posted strong results in a tough environment. The commercial pipeline remains solid; you can see our expenses are down, and we continue to examine opportunities for further efficiency.”
The improvement seemed to reduce the tension between BankRI executives and their nemesis in recent months, PL Capital LLC, an Illinois investment firm that has said it will seek two seats on the bank’s board of directors at the annual meeting May 16.
In January, a PL Capital principal complained that he hadn’t been allowed to ask any questions during the fourth-quarter conference call. This time, though the tension could still be felt, Richard Lashley was allowed to ask several questions about revenue and expenses.
Among other things, Lashley asked whether BankRI perceived itself as “asset-sensitive or liability-sensitive.” Simmons replied: “We are still liability-sensitive.”
Given the generally dour mood at small and midsize banks across the nation right now, however, Sherman was upbeat about BankRI’s relative performance. Having seen others’ financial reports, she said, BankRI’s “are probably some of the better results I’ve seen posted.”
Still, while Sherman said the bank continues to trim expenses, and streamlining efforts and technology improvements could still yield more savings, Simmons said she’s not ready to revise her prediction that expenses will grow by 5 to 7 percent this year.
And BankRI is still not ready to open its long-delayed Pawtucket branch.
“We continue to monitor that situation,” Sherman said. The two branches opened in 2005 are “taking a bit longer” than expected to become profitable, she noted, even though they’re performing well, so with the Pawtucket site, “there are no present plans to open it.”

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