Washington Trust Bancorp Inc (WASH) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 2 2005 Washington Trust Bancorp, Inc. earnings conference call. My name is Audrey, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Elizabeth Eckel, Senior Vice President of Marketing.

Good afternoon everyone. Welcome to the quarterly earnings conference call for Washington Trust Bancorp, Inc., NASDAQ national symbol "WASH." Today's conference call is being recorded, is being webcast live, and a webcast replay of this conference call will be available shortly after conclusion of the call through the Corporation's website, www.washtrust.com in the Investor Relations section, under the subhead "Investor Information" in the category entitled "Webcast Archives." However, the information we provide during this call is accurate only as of this date, and you should not rely on these statements after the conclusion of this call.

Hosting today's discussions are John C. Warren, Chairman and Chief Executive Officer; and David V. Devault, Executive Vice President, Secretary, Treasurer and Chief Financial Officer.

Before we begin, I would like to make a special note of our Safe Harbor statement. During today's conference call, certain statements may be made that are considered forward-looking within the meaning of the federal securities laws. The Corporation's actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result of the risks and uncertainties described in our press releases and SEC filings.

And now, I'm pleased to introduce Washington Trust's Chairman and CEO, John C. Warren.

Good afternoon, and welcome to all of you to Washington Trust's quarterly earnings review. I'm pleased to announce that Washington Trust earned record earnings and earnings per share for the second quarter ended June 30, 2005. Earlier today, we issued our press release and reported net income of 5.6 million, a 12% increase over the second quarter of 2004. The Corporation earned $0.41 per diluted share, up 11% from the same quarter a year ago. Once again, our diversified business model helped produce a balanced stream of earnings for the Corporation.

Let me take just a minute to update you on the performance of our core lines of business. Total deposits were up by 5% in the first 6 months, led by growth in certificates of deposit, as you might expect, which have become more and more attractive to consumers as interest rates have increased. We also continued to have solid growth in both our demand and NOW account categories. With interest rates still low on the long-term end of the curve, mortgage activity remained healthy, and residential real estate loans grew by 10% during the first half of the year, approximately half of which were purchased mortgages. Consumer loan activity, which is primarily home equity loans and lines of credit, continued its growth with a 9% increase for the first 6 months of the year.

On the commercial lending and commercial real estate side, we've seen modest growth with a net increase of approximately 21 million in the first 6 months. We continued to see some good credits, and our pipeline remains healthy. Asset quality continues to be exceptional, as nonperforming assets were just 10 basis points compared to total assets as of June 30th. This is not only below the level we reported at December 31st but also a decline from a year ago, June 30, 2004.

The wealth management area is a key line of business for us, as trust and investment management service revenues contribute more than 50% of our non-interest income. For the first 6 months of the year, these revenues were up 5% compared to the same period in 2004. This fee revenue is dependent upon the value of assets under administration and is closely tied to both the performance of the financial markets, as well as new business development. At June 30th, trust assets under administration amounted to 1.85 billion, down slightly from the 1.87 billion at year end December 31, 2004.

As you may recall on March 21st, we announced our intention to acquire Weston Financial, a registered investment adviser located in Wellesley, Mass. We're excited about the opportunities this acquisition presents for our wealth management area. We continue to expect to complete the acquisition sometime later in the third quarter after all the regulatory approvals are received. Upon completion of the deal, we will have approximately 3.0 billion in assets under administration and rank as one of the leading wealth management groups in the area. We will have a broader line of financial planning products and services to offer our clients and have expanded our geographic reach into the Boston metropolitan area as well. Best of all, the acquisition will bring total non-interest revenues to the 38 to 39% of total revenues. The transaction will be immediately accretive to earnings on both the cash and a GAAP basis, excluding transaction-related expenses. The acquisition shows that Washington Trust continues to make smart, strategic decisions focused on the future and most significantly pay attention to our shareholders.

At this point, I would like to turn the discussion over to David Devault for an overview of our financial performance. David?

Good afternoon, everyone, and thank you for attending our earnings conference call today. Net income in the second quarter of 2005 was a record $5,639,000, an increase of 11.8% from the $5,043,000 earned in the second quarter last year. In earnings per share was $0.41 on a diluted basis, up $0.04 per share from the second quarter of 2004. The return on average equity in the second quarter this year was 14.58%, up from 14.46% reported last year, and the return on average assets in the most recent quarter was 0.97%, up slightly from 0.96% in the second quarter of '04.

The biggest factor in the higher profitability results was a 14.4% increase in net interest income compared to the second quarter last year. Net interest income in the second quarter of 2005 was 15.0 million, and the margin -- net interest margin was 2.76% on a taxable equivalent basis, up from 2.72% in the same quarter last year.

Net interest income also grew as a result of higher interest-earning asset balances. Average earning assets in the second quarter this year were 2.21 billion compared to 1.97 billion in the same quarter a year ago. In the second quarter this year, non-interest income excluding net realized gains and losses on securities totaled 7.0 million compared to 7.2 million reported in the same quarter of 2004. And included in the net interest income in the second quarter of 2004 was a $280,000 amount recovered as a result of a favorable litigation decision last year.

Continuing with a comparison of non-interest income results for the second quarter, we also saw a 5% increase in trust and investment management revenues, which are related to the level of trust and investment management assets. Those assets were at 1.85 billion at June 30th, down slightly from the year-end '04, primarily due to trends in the equity markets, but up $69 million from a year ago.

We recognized net realized gains on securities sales of $3,000 in the second quarter this year compared to net realized losses of $240,000 in the second quarter last year. Non-interest expenses totaled $13.4 million, up 6.6% over the same quarter a year ago. Salaries and employee benefit expense, the largest component of non-interest expenses, were $7.5 million in the second quarter, a 3% increase over the second quarter last year. In addition, expenses for legal, audit and professional fees in the second quarter were about $275,000 higher in the same quarter last year, partly attributable to the ongoing costs of audit and other related costs to Section 404 of the Sarbanes-Oxley Act.

Turning to the balance sheet, total assets at June 30th were 2.33 billion, essentially unchanged for the quarter, and up by $160 million from a year earlier. Total loan growth was $51 million, or 3.9%, in the second quarter, with growth in all three major categories of commercial, residential and consumer. And total loans are also 244 million, or 22%, higher than a year ago. The increase in commercial real estate loans was $18.1 million, or 3.6%, in the quarter, which is an increase -- an improvement over the level of growth we saw in the first quarter this year. Meanwhile, residential mortgages were up by 3.3% in the quarter, that was $18.4 million, about $6.5 million of which was in mortgages purchased from other financial institutions.

Finally, total consumer loans grew by 14.5 million, or 6.2%, during the quarter. Most of that was in-home equity lines and home equity loans. The investment securities portfolio was reduced by $40.8 million in the second quarter, and it's down by a total of $64 million since the beginning of the year. The relatively flat yield curve has made reinvestment for maturing balances unattractive during this period. Total deposits were little changed for the quarter, an increase of $1.7 million overall. And excluding broker deposits, end market deposits rose by about $6.5 million, or about 0.5%. We saw within the mix of deposits, both demand deposits and time deposits showed increases, while savings and money market accounts declined. Total deposits are $189 million, or 14%, higher than a year ago.

The loan loss provision charts to expense in the second quarter this year was $300,000. That compares to $120,000 for the same period last year, and it is the same amount that we recorded in the first quarter this year. The total year-to-date provision for the first 6 months is $600,000 compared to $240,000 last year, and the increase is associated with the growth that we've seen in the loan portfolio.

Nonperforming assets, nearly all of which are non-accrual loans, declined during the first 6 months and are below both the December 31, '04 and June 30, '04 levels. Nonperforming assets are $2.4 million, 0.1% of total assets at June 30th, and that level of nonperforming assets remains within a range that's very low by historical standards. Our actual loan loss experience continued at a very nominal level in the latest quarter; recoveries exceeded charge-offs by $84,000.

At June 30th, total shareholders' equity was $156.9 million, an increase of $5 million since the end of 2004 and up 18.3 million in the past year. Total book value per share is $11.79 at June 30th. We announced the declaration of a second-quarter cash dividend of $0.18 per share in June, which was paid on July 15th. The $0.18 dividend rate in each of the first 2 quarters this year is up from the $0.17 per share rate paid in each of the quarters last year. Washington Trust has recorded dividend increases in each of the last 13 years.

At this time, I will turn the call back to John Warren.

Thank you, David. As you can see, we had another great quarter with record earnings and are obviously very pleased about each of our areas of business. At this time, David and I will be happy to answer any questions any of you might have.

(OPERATOR INSTRUCTIONS). Ryan Kelly, FBR.

Good afternoon; good quarter. Just a couple of questions -- it was very straight-forward quarter. I actually don't have a lot of details to fill in. I wonder if you could just help us with a little bit with the net interest margin guidance for the rest of the year, where you stand on an assets -- on a sensitivity to interest rate type standpoint.

The profile that you've seen over the past few quarters where we have reported a slight level of asset sensitivity, we expect will continue. And that's what we would report in our second-quarter 10-Q for June 30th -- little change from the degree of sensitivity that we showed at the end of the first quarter.

Just to add to that and just to reiterate what was said for a number of quarters is -- we really try to remain as interest rate neutral as possible. And I think the success is sort of what you're seeing and have seen over the last couple quarters is that neutrality was a slight asset -- asset sensitivity is coming to bear, even with a shift in the yield curve.

I wonder if you could just go a little more into the loan purchases that you had this quarter. Maybe a little bit more on geographically where they come from? And then, do you have a breakdown for your whole portfolio on what's purchased and what's not?

The purchases for the quarter were about $6.5 million, primarily all ARMS, and we've got about $244 million in purchased residential mortgages at the end of the second quarter. Geographically, it tends to -- it's all concentrated in the Northeast and concentrated mainly in New England, not exclusively but primarily.

Geographies that you're familiar with at least.

Right.

Yes, and we underwrite each of those loans individually.

Okay. I think that covers all my questions. Thanks very much.

Tom Doheny (ph), Sandler O'Neill.

Good afternoon, guys. Just a few things, I guess. You mentioned the increase in assets under administration versus the first quarter. Is a lot of that just market related or are there -- is their new business wins in there as well? I wonder what's driving that number.

A little bit of both.

On the expense side, I think, Dave, you mentioned some of the legal and audit fees, professional fees related to SOX 404. It looks like there's a bit of an increase in the advertising expense as well. Is some of that seasonal? Is there any kind of push there on the advertising side?

There is a degree of seasonality there. We probably delayed some expenses in the first quarter that occurred in the second quarter. We manage that from quarter-to-quarter. And I think by the end of the year, you'll see an amount that is normal for us.

Finally, with regard to the commercial portfolio, John, maybe you can comment how you're feeling generally on growth net portfolio and what we might see going forward.

As Dave indicated, we saw a pickup in the second quarter compared to what we had seen the -- that first quarter had been a little bit of a lull. We continue to have a healthy pipeline. And watching -- we think the activity is going to continue. The pipeline is about equal to what it was a year ago, and we're very pleased with. And we will continue to monitor and tap on our customers' doors.

Finally, on the growth in the consumer portfolio -- and I think you addressed this -- the other line outside the home equity line, that's just -- essentially the growth there is home equity loans, correct?

The biggest piece of that is, yes.

(OPERATOR INSTRUCTIONS). At this time, there are no questions in the queue. I would like to turn it over to the managers for closing remarks.

Just a thank you for everyone for taking the time to join us on the conference call, and I hope you have a wonderful summer. We look forward to seeing you all soon. Take care.

Ladies and gentlemen, this does conclude your call. At this time, you may disconnect, and have a good day.