Washington Trust Bancorp Inc (WASH) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the quarter 2 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. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder this conference it s being recorded. It is my pleasure to introduce your host, Ms. Elizabeth B. Eckel, Senior Vice President Marketing and Investors Relations. 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 webcast live and is being webcast live and a webcast replay of the conference call will be available shortly after the conclusion of today's call through the Corporation's website, www.washtrust.com in our investors relations section under the sub-head presentations. 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. And now I'm pleased to introduce Washington Trust Chairman and CEO, John Warren.

Thank you, Beth and welcome, everyone. Earlier today we released our results for the second quarter ended June 30, 2007. We're pleased to discuss these results with you now. For the second quarter, Washington Trust recorded net income of 6.3 million which is up slightly from second quarter earnings in 2006 where we earned 6.2 million. Our Corporation earned $0.46 per diluted share compared to $0.45 earned a year ago. Washington Trust had a good quarter and we're pleased with the results, especially in light of a difficult environment. Like other New England banks we've continue to face the challenges of a slow growth economy in an unfavorable interest rate environment. Not to mention the competition. Our core lines of business, Wealth Management, business banking, retail banking and mortgage banking continue to generate a healthy balance stream of earnings for the Corporation.

We successfully increased our non-interest income to 44% of revenues in the first half of 2007, which helped offset some of the challenges of the -- on the net interest income front. Our commercial vending area had good growth in the first half the year with a 6% increase since December 3st of 2006. We've put some good credits on the books, financed some major commercial real estate deals and continue to be one of the top SBA lenders in the state. We have a healthy pipeline of loans but the long-term demand is still in question. We'll have to see how the economy performs. Our Wealth Management area continues to perform well and benefited from the strong performance of the financial markets. At June 30, 2007 Wealth Management assets under administration totaled 3.9 billion and were up 7% from year-end 2006. Our Wealth Management assets under administration are double what they were three years ago, which can be attributed to our acquisition of Western Financial as well as financial market appreciation in our strong business development.

Asset quality is extremely important to us and we continue to maintain excellent ratios. We create a culture where both our lenders and our credit administration team work together to achieve this level of asset quality. Competition for deposits remain strong in our market. For the first half of 2007, in-market deposits were up slightly but actually decreased during the most recent quarter. We have not yet seen the seasonality in deposits that we have experienced in the past. We have seen deposit growth in the greater Providence market where we've expanded in recent years. In May, we opened our second office in Cranston, Rhode Island , and it's proven to be a success already with 13 million in deposits. It's located in a great spot and has a terrific team working there. So we have high expectations for the branch. With that brief intro I'll 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'll review the second quarter operating results and financial position as described in our press release earlier today. Net income for the second quarter of 2007 was $6.3 million or $0.46 per diluted share, up from $6.2 million or $0.45 earned for the second quarter last year. The quarterly return on average equity was 14.37% compared to 15.28% for the second quarter of 2006. The return on average assets for the latest quarter was 1.06%, up from 1.02% in the same quarter a year earlier. Net interest income for the second quarter this year was $14.8 million, essentially flat in comparison to the first quarter of 2007, but down 2.4% from the second quarter a year ago. The net interest margin for the second quarter of 2007 was 2.75%, down 6 basis points from the first quarter and unchanged from the second quarter of 2006. There were some unusual items that require some expansion.

The decline in net interest margin on a linked quarter basis was primarily due to an additional $322,000 interest recovery received in the first quarter on a previously charged off loan. That interest recovery accounted for 6 basis points of the first quarter's net interest margin. While the net interest margin was unchanged from the second quarter of 2006, in that quarter last year no dividend income was recognized on our stock investment of Federal Home Loan Bank of Boston due to a timing change by the FHLB. We estimated at that time that the loss of that dividend income in that quarter negatively effected the margin by 8 basis points. So after accounting for these unusual items, the margin was down by about 8 basis points from a year ago but held steady with the first quarter. Deposit pricing and deposit mix in the face of a fairly flat yield curve, significant pressure in commercial loan pricing and the lack of any attractive spread in the investment area continued to effect the ability to improve margin.

Turning to loan growth, we saw $19 million of total loan growth in the quarter, including $23.8 million, or 4%, in commercial and commercial real estate growth. Consumer loans rose slightly by 0.5% and residential mortgages showed a net decline of just over $6 million or 1% for the quarter. The investment securities portfolio totals declined by $26.5 million or, 3.8%, in the second quarter due to sales and maturities. Total deposits decreased by $14.5 million in the quarter, including a $10.7 million, or 0.7% decline of in-market deposits during the second quarter. Non-interest income in total was $12.5 million in the most recent quarter. On a core basis excluding the net realized securities gains, it was $11.8 million, up 10.7% over the same quarter a year earlier. Non-interest income on this basis comprised 44% of total revenues for the quarter. The largest increase was in Wealth Management services, which were up by 11.2% over the second quarter a year ago. Wealth Management assets under administration stood at $3.9 billion at June 30th, up $142 million in the quarter and $254 million, or 15%, in the last 12 months. As John mentioned, financial market appreciation as well as customer cash flows have contributed to this growth.

In the second quarter, we recognized $705,000 in realized gains on sales of securities, this amount included $397,000 of gains resulting from the contribution of appreciated equity securities to our charitable foundation. In that transaction, securities with a fair value of $520,000 were contributed and the $397,000 gain represents the excess of the market value over the cost basis of the donated securities. The cost of that contribution equal to the $520,000 fair value was included in other non-interest expense. A similar contribution is generally made once a year by Washington Trust. Last year's contribution, which also occurred in the second quarter of that year, resulted in gains of $381,000 and non-interest expense of $513,000. The remainder of the net realized securities gains in the second quarter of 2007 includes $195,000 attributable to certain securities that were called by the issuers prior to maturity and $113,000 of net realized gains on the sale of debt and equity securities.

With respect to expense management, non-interest expenses were $17.9 million in the second quarter, up 3.4% over the same quarter a year ago. Our effective income tax rate for the quarter was 31.4%. We believe that effective rate is fairly representative of what we will incur in 2007. Our asset quality indicators remained strong. Non-performing assets, all of which are non-accrual loans with no property acquired through foreclosure, were $3 million, or 0.12%, of total assets at June 30th, down slightly from $3.1 million at the beginning of the quarter and it was $2.4 million a year earlier.

As we mentioned last quarter, we've never had a sub-prime or Alt-A residential mortgage loan program. We have not experienced any recent significant deterioration of asset quality as measured by delinquencies in residential or consumer loans. Total residential mortgage and consumer loan 30 day delinquencies were $1.8 million, or 0.21%, of those loans at the end of the second quarter this year compared to $1.1 million, or 0.12%, at the beginning of the quarter and $1.4 million at the end of 2006. The allowance for loan losses is $19.3 million, 1.3% of total loans. It was also 1.3% of total loans at the end of 2006 and also a year ago. Net charge-offs were $333,000 in the most recent quarter. Our loan loss provision charged to earnings in the second quarter this year was $300,000, the same level recorded in the first quarter and throughout all four quarters of 2006. Total shareholders' equity is $173.6 million at June 30th, compared to $173.1 million at the end of 2006. We did repurchase 88,600 shares during the second quarter at a total cost of $2.3 million. In June, we declared a dividend of $0.20 per share paid on July 12th and that $0.20 per share rate was announced in the first quarter making 2007 the 15th consecutive year with dividend increases for our shareholders. And at this time I'll turn the call back to John Warren.

Thank you, David. Washington Trust as we said had a solid second quarter but we're still very cautious about what's ahead in the second half of the year and into '08. While we anxiously await some positive changes in the economy, and the yield curve for that matter, we obviously can't predict what will happen. We will continue to manage the Corporation to sustained earnings growth, maintain asset quality, capitalize on growth opportunities, and enhance the value of our Corporation for the shareholders. We thank you for taking the time to be with us today and hear more about Washington Trust and now David and I would be happy to take any questions you might have. Thank you, all, very much.

Thank you, sir. Ladies and gentlemen, at this time we will now be conducting our question-answer session. (OPERATOR INSTRUCTIONS) A confirmation tone will indicate you're line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star key. We'll pause for a moment while we poll for questions. Once again, ladies and gentlemen, to ask a question please press star 1 from your telephone keypad. Our first question is from the line of Alper Sungur with Sidoti & Company. Please proceed with your question.

Hi. Good afternoon, John and David.

Hi, good afternoon, Alper, how are you.?

Good, how are you.

Good, thanks.

It looks like the emerging portfolio deleveraging continues, it was a 4% sequential decline in the investment securities. What kind of outlook do you have for the the margin going forward?

Well, there was some deleveraging through sales and also some runoff of maturities during the quarter. The margin, we don't see it moving dramatically over the next couple of quarters under the current interest rate scenario?

Okay. And also the tangible book value declined sequentially again, roughly 1% from 8.86 to 8.79. What is the nature of the increase in the accumulative other comprehensive loss to 6.5 million?

Well that would be because of higher interest rates pushing the value of available for sale securities down somewhat in the equity portion of the balance sheet.

Is that coming mostly from the NBS?

Yes, that's the biggest component there so that's where you would see that.

I see. And also the share repurchases, will it continue at the current pace for the rest of the year?

Something along those lines. Not necessarily the exact all around but you will see some share repurchases in the second half of the year.

Okay. All right. Thank you very much.

Thank you, Alper.

Our next question is from the line of Frank Schiraldi with Sandler O'Neill & Partners. Pleas proceed with your question.

Good afternoon, guys.

Hey, Frank, good afternoon.

Just a couple of quick questions. First I was just wondering on the compensation line. Is growth in that line from the sequential quarter, is that driven by the strength in the investment management business?

Yes, there would be some incentives that are tied to the results in that business that would be in that line. We also added some employees for the new branch that was opened in the second quarter. So it's a variety of things.

Okay. And then just curious on the new branch opening in May. John, you referred to the 13 million in deposits. Do you have some sort of breakdown on that?

We don't at this time. The majority of it is no doubt in time deposits and some savings accounts. We've had some successful promotions in that area that would make up that balance.

Okay, are you currently running any promotions at that branch for demand deposits or what sort of promotions are you running for transaction accounts?

We are conducting strong business development and promotional efforts for business demand deposits in that area.

Okay. Okay. Thank you.

Thanks, Frank.

Our next question is from the line of Damon DelMonte with Keefe, Bruyette & Woods. Please proceed with your question.

Hi, Good afternoon, guys, nice quarter.

Thanks, Damon, appreciate it.

One quick question here. Could you just talk a little bit about your Wealth Management and what you guys are doing to continue to grow that? Kind of what groups you're targeting and what areas you're targeting?

Well I think the thing that you see that stands out is the bulk of our client base is high net worth individuals. So we -- each one of the areas, our 1,800 asset management, Washington Trust investors and the Western operation up in Massachusetts, are all targeting individuals and a lot of it's referrals. We do a good job and the referrals are coming in and it's really been good.

Okay, great. And have you guys given any more thoughts of trying to cross sell and do some banking up there, maybe open up a branch or two?

Certainly looking at the cross-sell aspect and we are seeing pieces of mortgage activity, equity credit line and loan activity as well as some trust activity where we're helping them on their estate planning.

Great. Thank you.

You bet.

Our next question is from the Frank Barkocy with Mendon Capital Advisors. Please proceed with your question.

Thank you. In your comments you suggested that you had not yet seen the seasonality in deposits. Do you still expect that and will that be more focused on -- or is the trend likely to be in demand deposits or other high request funds?

Well, frequently we would see some element of seasonality in demand and NOW account balances driven by the tourism industry in our region. That's the seasonal impact that John was referring to and over time we've seen a strong correlation between summer tourism business and growth in deposits.

Yes, if we can keep the tourist industry, if we can keep the weather good through the rest of July and August and the tourist coming we should see a little bit of activity there.

Good luck in the divining run.

Exactly.

Thank you.

You're welcome.

Once again, ladies and gentlemen, if you'd like to ask a question, please press star 1 from your telephone keypad. We'll pause a moment to poll for questions. There are no further questions at this time. I'd like to turn the floor back top management for any closing comments.

I just want to thank everyone for taking the time to join us here for the afternoon. Look forward to chatting with you all soon and seeing you perhaps even before the end of the next quarter. Thank you, all, very much. Have a good day.

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