Washington Trust Bancorp Inc (WASH) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Quarter One 2007 Washington Trust Bancorp Incorporated earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Elizabeth B. Eckel, Senior Vice President of Marketing. Thank you. Ms. Eckel, you may begin.

Thank you and good afternoon, everyone. Welcome to the quarterly earnings conference call for Washington Trust Bancorp, Inc., NASDAQ global market symbol WASH.

Today's conference call is being recorded. It is also being webcast and a live webcast replay of this conference call will be available shortly after the conclusion of the call through the Corporation's Web site, www.washtrust.com, in our Investor Relations section under the subhead "Presentation." However, the information we provide during this call is accurate only as if this date, and you should not rely on any statements after the conclusion of this call.

Hosting today's discussions are John C. Warren, Chairman and Chief Executive Officer, David V. Devault, Executive Vice President, Secretary, Treasurer and Chief Financial Officer. Now, I'm pleased to introduce Washington Trust's Chairman and CEO, John C. Warren. John?

Thank you, Beth. Good afternoon and welcome to Washington Trust's quarterly earnings review. Earlier today, we release our earnings for the first quarter ended March 31, 2007.

Let me take just a moment to discuss the results. We recorded net income of approximately $6 million, which is consistent with the earnings in the first quarter of 2006. The Corporation earned $0.44 per diluted share, which is also the same as the first quarter a year ago.

We are pleased with our first-quarter earnings. As you know, we are faced with a very challenging operating environment, from an inverted yield curve, a slow economy, to ultra-competitive lending and deposit markets. However, our strategic business model has enabled us to continue generating revenues from various sources. On an overall basis and compared to our peers, we are very pleased with the results.

We had several bright spots in the first quarter. Noninterest income, excluding net realized gains on sales of securities, amounted to 10.2 million, up 8% from year ago. Wealth Management services continue to do well and to be the major source of noninterest income for the Corporation. For the first quarter, Wealth Management revenues amounted to 6.9 million, representing 67% of noninterest income, excluding gains on sales of securities. Wealth Management revenues are primarily related to the level of assets under administration, which as of March 31 this year amounted to 3.8 billion compared to 3.4 billion a year earlier. We have earned a reputation as one of the premier wealth management firms in the region, and these numbers reflect this.

Our business development efforts have been very successful, and we've attracted new individual and institutional clients.

Loan growth was modest in the first quarter. Total loans were up 10.2 million from year end, due to the growth in our commercial loan portfolio. We are very encouraged by this commercial loan growth, particularly in this operating environment.

Growth of consumer loan and our residential real estate loan portfolio were flat for the quarter.

Some competitors continue to offer incredible pricing and terms in the commercial market. We may compete on price but we will not take unnecessary risk for the sake of making a deal.

Asset quality is extremely important to us and we continue to maintain excellent ratios. While some institutions have had problems with subprime lending, Washington Trust never offered a subprime or Alt-A residential mortgage loan program. David will go into more detail shortly.

Our loan results indicate that we are getting our share of what's out there in the marketplace. We have a talented team of commercial bankers and have proven we can do deals with businesses of all sizes and types. Last month, we held a grand opening for our new commercial lending office in downtown Providence. It was a great event and was well attended by Providence area customers, attorneys, accountants and business leaders.

Finally, we increased or cash dividend to $0.20 per share during the quarter. This represents our 15th consecutive year of dividend increases.

With that, I will now turn the discussion over to David Devault for an overview of our financial performance. David?

Thank you, John. Good afternoon, everyone, and thank you for joining us on our call today. I will be reviewing the first-quarter operating results and financial position as described in our press release earlier today.

Net income for the first quarter of this year was $6.0 million, down slightly from the $6.1 million earned in the first quarter last year. Earnings per diluted share was $0.44 in both quarterly periods. The quarterly return on average equity was 13.66% compared to 15.09% for the first quarter last year, and our return on average assets for the latest quarter was 1.0% compared to 1.01% for the same quarter a year earlier.

They were two significant noncore items that occurred in the first quarter this year. First, we prepaid $26.5 million of higher-cost Federal Home Loan Bank advances that resulted in the prepayment penalty of $1.067 million and that's recorded in non-interest expense. Second, we also recognized realized gains of $1.036 million from the sale of equity securities.

Our taxable equivalent net interest margin was 2.81%. Net interest income did include an interest recovery on a previously charged off loan in the amount of $322,000. Excluding that interest recovery, the margin would have been 2.75%. This was down 9 basis points from the same period last year, but is up 1 basis point from the most recent quarter at the end of 2006. Deposit pricing and deposit mix in the face of an inverted yield curve, significant competitive pressure in commercial lending, and the lack of any attractive spread in the investment area continue to affect the ability to improve margin.

Loans grew by $10.2 million in the first quarter, all in commercial and commercial real estate, which combined grew by 2% or 8% at an annualized rate. Demand for residential mortgages has been modest and consumer balances experienced some run-off as borrowers seem to be refinancing out of consumer loans and into first mortgages.

Our investment securities portfolio totals are essentially unchanged from the end of 2006.

Deposit growth was also modest in the first quarter. We saw in-market deposits rise by 1.2% in the quarter. Although this is not unexpected for this time of the year, last year we had 0 growth and two years ago, 2.6% in the first quarter. We continue to experience the shift towards higher-cost categories, and we will continue to be disciplined in deposit pricing in the foreseeable future.

Noninterest income in total was $11.2 million in the most recent quarter and on a core basis, excluding the realized securities gain, it was $10.2 million, up 8% over the same quarter in 2006. Noninterest income on this basis comprised 41% of total revenues in the first quarter. The largest increase in noninterest income was in Wealth Management services, which were up by 6.7%. Wealth Management assets under administration, as John mentioned, were $3.8 billion at the end of the first quarter this year, an increase of $111 million in the first quarter and up $363 million or 11% in the last 12 months. Successful business development efforts as well as financial market appreciation have contributed to this growth.

Turning to expense management on a core basis, excluding the debt prepayment penalty, non-interest expenses were up only 2.2% over the same quarter a year ago.

Our effective tax rate for the quarter was 31.4%. We believe that effective rate is generally representative of what we will incur in 2007.

Our asset quality indicators continue to be favorable. Nonperforming assets, all of which are non-accrual loans with no property acquired through foreclosure, stood at $3.1 million or 0.13% of total assets at the end of March, up modestly from $2.7 million at the beginning of the quarter and $2.3 million a year earlier.

As John mentioned, we have never offered any subprime or Alt-A residential mortgage loan programs. We have not experienced any recent significant deterioration of asset quality as measured by delinquencies in residential and consumer loans. The allowance for loan losses was $19.4 million, or 1.3% of total loans at the end of the first quarter. It was also 1.3% of total loans at the end of 2006 and a year earlier.

Loan loss recoveries exceeded charge-offs by $166,000 in the most recent quarter. The loan loss provision charged to earnings remained at $300,000 in the first quarter this year, which is the amount we expensed in each of the quarters throughout 2006.

Total shareholders equity was $175.5 million at March 31, 2007, compared to 173.1 million at December 31, 2006. During the first quarter, we repurchased a little over 61,000 shares at a total cost of $1.7 million. In March, we declared a dividend of $0.20 per share, which was paid on April 12. That dividend rate was $0.01 higher than the 2006 quarterly rate, and we have now increased the dividend for 15 consecutive years.

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

Thank you, David.

In conclusion, Washington Trust had a good first quarter with a solid performance. It is still too early to depict what will happen in the quarters ahead. This environment is as difficult as any I've seen in the past 16 years, certainly in banking in New England.

We will continue moving forward and taking advantage of opportunities that are out there. Next month, we will open our new branch office on Oaklawn Avenue in Cranston, Rhode Island. This will be our 2nd Cranston office and our 17th branch overall. Cranston ranks third in the state in population and has one of the highest concentrations of businesses, so we are very excited about the opportunities this office presents for all lines of businesses. The branch opening reaffirms our strategic initiative to grow the Corporation by expanding our presence in the Greater Providence area.

As stated previously, we intend to open an additional branch in Warwick, Rhode Island in 2008.

Tomorrow morning, we will host our annual meeting of shareholders here in Westerly. As always, we look forward to reviewing our annual and first-quarter performance with them. It's always a nice event and we would be more than pleased if any of you listening in would join us tomorrow for the event.

So, I thank you for taking the time to join us today. At this point, David and I would be more than happy to answer any questions you have. Thank you.

Thank you, ladies and gentlemen. At this time, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Michael [DeCinto], TCW.

Michael?

It appears Mr. [DeCinto] has removed his question from the queue. Frank Schiraldi, Sandler O'Neill.

Good afternoon, Frank.

(technical difficulty) straight-forward. I just had a couple of quick questions for you for modeling purposes, basically. Assets under administration, sequentially, the growth sequentially -- is there any way you could share with us what sort of percentage was new business and what sort of percentage was market appreciation?

It's -- well, there are several things going on. You have new business; you have normal outflows of customer dollars that occur regularly; and then you also have market appreciation occurring in the first quarter. It's not possible other than in a strong general sense to say that both new business and market appreciation contributed to the growth in assets under management.

Okay. I was just -- thought with the first quarter and with the equity markets where they were, sort of flattish, that more of it would have been new business.

It was absolutely very successful business-development efforts during the quarter. It did overcome some of that market turmoil that you did see in the markets.

Okay. Dave, I know you talked, I believe last quarter's call, when you talked about the margin, you did say you guys were cautiously optimistic that it would stabilize at those levels. Basically, if you look at the core margin, it came in 1 basis point better than the previous quarter. Do you have any sort of guidance that you can give for the margin going forward here? Are you still under the same sort of cautiously optimistic viewpoint that it might have stabilized here?

Yes, I am cautiously optimistic that it has stabilized. You know, it's very competitive with respect to deposit pricing. We are going to continue to focus our efforts on being disciplined in deposit pricing, but with the shape of the yield curve and really the lack of any reinvestment opportunity, combined with pretty competitive pricing in the commercial and commercial real estate lending, it's difficult to grow margin.

Right. Okay, that's all I have. Thank you.

Damon DelMonte, Keefe Bruyette & Woods.

Good afternoon. I apologize; I jumped on a little bit late, so hopefully this isn't a redundant question. But could you just kind of give an outlook on the economy and what you guys are seeing in your marketplace and also what your view is on loan growth going forward?

Yes, I think a couple of things that we are seeing on the economy overall, it's, you know, it's a slow economy. We obviously saw some activity on the commercial and commercial real estate side in the first quarter, which pleased us. But the consumer -- that's true on the consumer side as well as the residential side -- continues to be slow. I think David may have mentioned that some of the residential activity appears to be the consumer consolidating some of his debts and basically paying off equity credit lines or equity credit loans. But it's still very quiet and it hasn't gotten exciting yet. I'm not sure when it will.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Alper Sungur, Sidoti & Company.

Good afternoon, guys. My question is going to be regarding the FHLBB prepayment of 27 million. I'm looking at the earnings release. The average yield that was paid was 431 as of the first quarter. When did that prepayment take place exactly during the quarter? How much will be the projected interest-expense savings going forward?

What I can tell you is that the weighted average cost of the prepaid advances was higher than that. That prepayment occurred somewhere in early March. So, there was really little benefit from it in the first quarter.

Okay. Also, my second question is regarding the share buyback. You guys bought back 60,000 shares, versus 50,000 throughout the whole year last year. Any type of color going forward, like what percentage of that 400,000 shares will you be repurchasing this year?

I think something in the 60 to 80% range of that number would be a reasonable expectation by the end of the year. Now, that obviously we look at it every quarter in terms of the economics of it, but right now, that would make sense for us.

60 to 80% of that 400, right?

Yes.

Okay, all right. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Do you have any closing comments?

Just our thanks to everybody that participated and look forward to seeing them all soon.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.