2023-10-30 01:02:01 ET
Summary
- Shares of Washington Trust Bancorp dropped nearly 10% after Q3 financial results before falling further after that, presenting a buying opportunity.
- The bank has shown growth in deposits and loans, with minimal exposure to high-risk assets.
- Despite challenges with interest rates, the bank's valuation is attractive, making it an interesting prospect for investors.
It's always a great feeling to be able to buy shares of an attractive company immediately after those shares have plunged in price. A good example of this kind of opportunity that recently crossed my radar involves Washington Trust Bancorp ( WASH ). On October 24th, shares of the company dropped nearly 10% after management announced financial results covering the third quarter of the company's 2023 fiscal year. Since then, shares have declined a bit further. While it is clear that there were some issues that investors should be aware of, the company showed growth where it matters most and the stock still looks quite attractive in the grand scheme of things. This is clearly not a home run prospect. But for investors who do you want a small bank with upside, this is definitely one to keep in mind.
Buying when there’s blood in the street
With a market capitalization of $380.9 million, Washington Trust Bancorp is a very small player in the banking industry. But the company has been around for a little while. It can actually trace its roots back to the year 1800. But it wasn't until 1984 that the firm as we know it today was organized. Contrary to the company's name, it is not centered in either Washington, DC, or in the state of Washington. Rather, it traces its name back to Washington County, Rhode Island. As of the end of last year, the firm had 10 branch offices located across southern Rhode Island, 14 branch offices in the greater Providence area of Rhode Island, and a single branch office located in southeastern Connecticut.
It's from these physical branches that the bank provides its services to its customers. By accepting deposits from consumers and commercial entities alike, it is able to lend out significant amounts of capital. This includes commercial loans such as those dedicated to commercial real estate and commercial and industrial activities. It includes residential real estate loans, consumer loans, and more. But the company also provides other banking related services as well. For instance, as of the end of last year, it had an investment securities portfolio that was worth $1 billion. As of the end of the most recent quarter, it's slightly lower than that at $969 million. In addition to this, it engages in wealth management services. These services include financial planning services, personal trust and estate services, and more. By the end of last year, it had amassed assets under advisory of $6 billion.
As I mentioned already, shares of the bank dropped around 10% on October 24th. To be perfectly honest with you, I don't know why this decline occurred. Revenue exceeded expectations by $0.23 million, while earnings per share of $0.65 beat expectations by $0.07. Furthermore, the bank demonstrated growth where it really matters. But to do that, let's shift a bit and talk about some of its assets over the years and how they have changed. For starters, let's touch on deposits. Technically a liability, deposits do allow the bank to lend out capital. Back in 2020, deposits were $4.38 billion. By the end of 2022, they had grown to $5.02 billion. You would think, given the banking crisis that occurred earlier this year, that deposits would have declined after that time. But that's not correct. In each of the past three quarters, the value of deposits has grown further, hitting $5.42 billion as of the end of the third quarter that was just announced. That third quarter reading is actually $101.1 million above what the company achieved in the second quarter. One thing that I will say that is also positive is the fact that only 25% of the bank's deposits are uninsured. This is not as low as I would like it to be, but I do set a threshold of 30% when looking at these banks to see which ones are higher risk and which ones are lower risk. Sorry number 30% or lower I consider to be neutral to positive.
This growth resulted in the value of loans expanding from $4.20 billion in 2020 to $5.11 billion in 2022. As of the end of the most recent quarter, loans were even higher at $5.61 billion. That is $230 million above what the company reported in the second quarter. I do understand that investors right now are worried about banks that have exposure to office properties. But the good news is that management has never been dedicated all that much to that kind of real estate. As of the end of the most recent quarter, only 5.2% of the company's loan portfolio, by value, is dedicated to the office category. In fact, its greatest exposure is to the multifamily dwelling category at $552.8 million, or 9.9% of overall portfolio value.
There are other metrics that we should be paying attention to as well. The value of securities, for instance, has bounced around in a fairly narrow range in recent years with a low point of the $969 million just reported and a high point of $1.10 billion at the end of 2021. But there is no clear trend as to the direction it is moving. The value of cash, meanwhile, has behaved very similarly. Between 2020 and 2022, it fell from $202.2 million to $118.4 million. But today, it's a bit lower at $113 million. Debt at the bank has increased, but it is not at a level that I would be terribly concerned with. Today, it's at roughly $1.14 billion. That's up from the $1 billion reported for the end of 2022.
The overall growth that the bank saw between 2020 and 2022 allowed its revenue and profits to climb. Net interest income increased from $115.1 million to $157.3 million. It did see a decline in non-interest income from $99.4 million to $62.6 million. But that was because of a plunge in mortgage banking revenue from $47.4 million to $8.7 million. A rise in interest rates, combined with lower spreads on mortgages, can be blamed for this drop. The former of these issues resulted in fewer mortgages being approved. That didn't stop net income from increasing modestly from $69.7 million to $71.5 million. But this is where some of the issue comes in. Net interest income, non-interest income, and net profits, all drop year over year. Even though assets are higher, the company is dealing with higher interest rates that it has to pay out, not only on its debt but also on its deposits. This caused its net interest margin to shrink from 2.71% in the first three quarters of last year to the first three quarters of this year. For as long as interest rates remain elevated, this will prove problematic and it is likely why the market responded so negatively even though management exceeded expectations.
This does make pricing the company a bit of a challenge. If we use financial results covering last year, we see that the bank is trading at a price to earnings multiple of 5.3. A good solution is to annualize the results experienced so far for the year. That would give us net profits for 2023 of $45.7 million. But even in that case, the price to earnings multiple of the bank is quite low at 8.3. It's also trading at a price to book value of only 0.88 and at a price to tangible book value of 1.05. These are perfectly reasonable levels that I would consider to be fairly attractive.
Takeaway
As far as banks go, Washington Trust Bancorp looks to be an interesting prospect that does have upside potential to it. My biggest problem with it is that bottom line results have worsened this year because of interest rate issues. And that is something investors will have to deal with for some time. But even accounting for that, shares don't look unreasonably priced and pretty much everything else regarding the bank looks bullish. I am especially enthusiastic about the continued growth in its deposits during what is a difficult time. And in the long run, this will be sure to pay dividends.
For further details see:
Washington Trust Bancorp: A Small Bank With Some Potential To It