Washington Trust Bancorp Inc (WASH) 2008 Q1 法說會逐字稿

Hello and welcome to the Q1 2008 Washington Trust Bancorp, Inc. earnings conference call.

All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded.

Now, I would like to turn the conference over to Ms. Elizabeth Eckel.

Thank you. Good afternoon and welcome to the quarterly earnings conference call for Washington Trust Bancorp Inc. NASDAQ global market 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 the conclusion of the call through the Corporation's Web site at www.washtrust.com in the Investor Relations section under the subhead "Presentations". However, the information we provide during today's call is accurate only as of this date and you should not rely on these statements after the conclusion of this call.

Hosting this afternoon's discussion is John C. Warren, Chairman and Chief Executive Officer, and David B. Devault, Executive Vice President, Secretary, Treasurer, and Chief Financial Officer.

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

Thank you for that and good afternoon, everyone. This morning, we released our earnings for the first quarter ended March 31, 2008. I'm pleased to report that Washington Trust earned $5.8 million for the first quarter. This is consistent with the amount earned for the fourth quarter of 2007 but down slightly from the $6 million reported for a year ago.

On a per-share basis, we earned $0.43 per diluted share, which is unchanged from the amount earned in the fourth quarter of 2007 but down from the $0.44 per diluted share earned in the first quarter of 2007.

These are very respectable numbers considering we are competing in a slow-growth economy with unstable financial markets and decreasing consumer confidence. There are daily stories coming across the wires about problems and issues within the financial markets. We've been through difficult times like these before and not only did we survive but we learned from the experience. We are a solid financial institution with an experienced management team.

In previous conference calls, I mentioned that we were concerned about what spillover there might be from the subprime crisis and what effect it would have on the economy in 2008. These worries and potential problems continue to exist. We have never had a subprime or Alt-A mortgage program, but the longer the economy stays weak, the more concerned we are. Food, gasoline and home heating oil prices just add to this. However, we have had strong loan demand, both commercial and residential, which may be the result of borrowers looking for a recordable lender with a solid foundation.

Commercial loans were up $46 million or 7% for the quarter and $127 million or 21% over the first quarter of 2007. This is our sixth straight quarter of solid commercial loan growth. We had good production in both the C&I area as well as the Commercial Real Estate Group. We continue to be one of the top SBA lenders in Rhode Island.

Washington Trust has earned a reputation as one of the top business banks in our area. We continue to get calls to bid on new quality credits and commercial products, many from non-customers. The disruption that has occurred at the larger banks has certainly benefited us. Best of all, we continue to maintain good asset quality, in fact very good asset quality.

Our Wealth Management area continues to contribute nicely to earnings. With the challenging first-quarter financial markets, we did experience a 3% decline in assets under administration, but revenues from the Wealth Management services were still $7.3 million, up 6% from the year earlier and accounted for 66% of non-interest income for the quarter. At March 31, Wealth Management assets stood at $3.9 billion, down $136 million or 3% in the quarter, representing the declines in the financial markets.

In the past year, we have added new talent to our Wealth Management team with expertise in investment management, trust and financial planning. Our business development and marketing efforts are bearing fruit, and we have added attractive new client relationships.

The consumer lending side has been fairly active considering overall concern about decreasing real estate values and a threat of a recession. For the first quarter, consumer loans, which are primarily home equity loans and lines, increased 4.6% over the first quarter of 2007. We are seeing a steady pickup of residential mortgage loan originations. We are benefiting from the exodus of so many mortgage brokers. Reverse mortgage activity remains healthy, and we were the number one lender for reverse mortgages in Rhode Island for both January and February this year.

Deposit generation continues to be a challenge, especially when there are competitors with irrational pricing. I have to shake my head when I pick up the New York Times and see full-page ads with high rate offers. We always have competitive offers for our customers, but we manage the spread.

At this point, I will turn over the discussion to David Devault for a more detailed review of our financial performance. David?

Thank you, John. Good afternoon, everyone. 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 this morning.

Net income for the first quarter of 2008 was $5.8 million or $0.43 per diluted share, compared to $6 million or $0.44 per diluted share earned in the first quarter of 2007. The modest reduction in net income and earnings per share was primarily due to a decline in the net interest margin. This condition reflects the impact of Federal Reserve rate cuts in recent months. In addition, our loan loss provision charged to earnings amounted to $450,000 in the quarter, up $150,000 from the provision recorded in the first quarter of 2007.

Net interest income in the first quarter of this year was $15.1 million, 1.6% higher than the fourth quarter of 2007 and 1.4% higher than the first quarter a year ago. The net interest margin for the first quarter of 2008 was 2.59%, down 6 basis points from the fourth quarter and down 22 basis points from the first quarter last year. Included in net interest income in the first quarter of 2007 was an interest recovery of $322,000 received on a previously charged off loan. Excluding the 6 basis points attributable to that interest recovery in 2007, the margin was 16 basis points lower in the first quarter last year. The decline in the margin is due to decreases in yields on prime-related commercial and consumer loans, again resulting from actions taken by the Federal Reserve to reduce short-term interest rates.

Now, I will comment on some of the major balance sheet changes. Total loan growth amounted to $24.9 million in the quarter. Commercial loan growth continued to be strong with an increase of $46 million in the first three months. That represents the sixth consecutive quarter of very notable commercial loan growth.

Residential mortgages decreased by $21.8 million or 3.6% in the first quarter. That included a sale or sales of $18.1 million from portfolio for interest rate risk and balance sheet management purposes, which resulted in a gain of $77,000.

Consumer loans were essentially flat in the quarter, increasing by 0.2%. Investment securities portfolio totals declined slightly by $4.7 million or 0.6% in the first quarter.

Total deposits declined by $11.2 million or 0.7% in the first quarter. Excluding a change in brokered certificates of deposit, in-market deposits fell by $8.4 million. That reflects $14.6 million in certificate of deposit runoff and an increase of $6.8 million in money market and savings account balances. General deposit growth has been very challenging over the last several quarters.

I will now discuss non-interest income, including our Wealth Management business. Non-interest income in total was $11 million in the most recent quarter. There were $45,000 of net securities losses in the quarter, compared to net securities gains of $1 million in the first quarter of 2007.

Included in the first quarter 2008 net securities losses of $45,000 was the recognition of an impairment charge of $858,000 on an equity security holding, also, realized gains of $232,000 on the sale of commercial debt securities, and realized gains of $581,000 from the sale of other equity securities. Excluding those securities transactions, non-interest income amounted to 42.4% of total revenues in the first quarter and was up 8.6% over the same quarter a year earlier. This is primarily due to higher revenues from Wealth Management services and also includes a $227,000 increase in the amount of gains on loan sales and commissions on loans originated for others.

The Wealth Management business reported first-quarter revenues of $7.3 million, up 5.6% over the same quarter in 2007. Wealth Management assets under administration were $3.9 billion at March 31 of this year, up 4.4% from a year ago but down 3.4% from December 31. The decline in assets under administration in the first quarter of this year reflects declines in the financial markets, as evidenced by a 9.9% decline in the S&P 500 index in the first quarter.

Let me comment now on non-interest expenses. First, I'll point out that we incurred a debt prepayment penalty of $1.1 million in the first quarter of last year in connection with the prepayment of federal home loan bank advances.

Total non-interest expenses in the first quarter of this year were up by 6.9% compared to the same quarter of 2007, excluding those debt prepayment penalty expenses. More than half of the increase in non-interest expenses on this basis represents costs attributable to our Wealth Management business, higher FDIC insurance premiums for the banking industry, and the Cranston, Rhode Island de novo branch opened in June of last year.

Our effective income tax rate for the quarter was 31.8%, slightly higher than 31.4% in the first quarter of 2007.

Regarding asset quality, nonperforming assets remain at very manageable levels. We had a modest increase in nonperforming assets from $4.3 million or 0.17% of total assets at the end of 2007 to $5.7 million or 0.22% of total assets at the end of the first quarter of 2008. The nonperforming assets at March 31 of this year consisted solely of nonaccrual loans with no property acquired through foreclosure. The increase in the nonperforming assets was largely due to certain commercial loan relationships moving into the nonaccruing classification.

At the end of the first quarter of this year, our level of nonperforming assets as a percentage of total assets, again 0.22%, is well below the level of 0.95% for our national peer group of bank holding companies with assets of $1 billion to $3 billion. That was reported as of December 31, the most recent information available.

Total delinquencies 30 days or more past due for all loan types amounted to $10.4 million or 0.65% of total loans at the end of the first quarter of this year, up $3.4 million in the first quarter. This increase was primarily due to a single commercial lending relationship with a carrying value of $3.6 million, which is classified as delinquent but performing. Year-over-year, total 30-day or more delinquencies are up by about $2.4 million.

In the residential mortgage and consumer loan categories, delinquencies 30 days or more were $1.4 million at March 31, down from $2.3 million at December 31. The loan loss provision charged to earnings for the first quarter of 2008 was $450,000. That compares to $1 million for the fourth quarter of 2007 and $300,000 in the first quarter of 2007.

The net charge-offs -- that's charge-offs net of recoveries -- were only $3000 in the first quarter of this year, compared to net recoveries of $166,000 in the same period last year. The allowance for loan losses was $20.7 million at March 31 of this year, 1.3% of total loans. That Federal Reserve Bank holding company peer group level average was 1.17% at December 31.

During the first quarter of this year, we paid approximately $8.1 million. That represented the 2007 earnout prepayment pursuant to the stock purchase agreement of 2005 for the acquisition of Weston Financial Group. That deferred acquisition obligation had previously been recognized as a liability in 2007 and was classified in other borrowings at December 31.

Total shareholders equity was $191.2 million at March 31, 2008, up from $186.5 million at the end of 2007. In the first quarter, we adopted the required measurement date provisions of FASB statement number 158 for defined benefit pension plans. The effect of that accounting change was a net reduction to equity of $677,000 effective January 1 and did not affect earnings.

Our capital ratios at the end of the first quarter placed the Corporation in the well-capitalized category according to regulatory standards.

Last week, we announced that we've raised $10 million of trust deferred financing in April in a private placement through a newly created trust. The proceeds of the trust preferred financing, along with the proceeds from the common stock investment in the trust, we used in the issuance of $10.310 million of junior subordinated debentures of Washington Trust Bancorp. We will use the proceeds from this for general corporate purposes. The junior subordinated debentures and the trust preferred securities bear interest equal to three-month LIBOR plus 350 basis points. The initial rate is approximately 6.23% through the first quarterly reset date on June 15.

We also entered into a five-year interest rate swap contract with a notional amount of $10 million. Under the terms of that contract, we will pay a fixed rate of 6.97% and receive a rate equal to three-month LIBOR plus 350 basis points.

In March, we declared a dividend of $0.20 per share which was paid on April 11.

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

Thank you, David.

In closing, I would like to once again say that we are pleased with our performance in these challenging economic times. We obviously can't predict what the remainder of 2008 holds. It's disheartening to pick up the paper and read about layoffs, inflation and mortgage foreclosures. We are watching for any signs the Fed actions are taking hold and are hopeful that the consumer will soon begin to regain his confidence.

For our part, Washington Trust will stay focused on doing those things that are important to our customers and our shareholders while continuing to capitalize on our core competencies. That most importantly includes maintaining our focus on asset quality.

At this point, thank you for your time this afternoon. David and I would be happy to answer any questions you might have. Thank you.

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

My first question is on the yield. Do you have the net interest margin for the month of March available?

Well, March was about 2.5, 2.50. Now, when you get into individual months, that can be very misleading. I mean, February, because of the number of days, with -- few within 30 days, but also having a mortgage portfolio that is on a 33-60 basis pushes the margin up. So the margin has, I would say, increased slightly from the beginning of the quarter to the end of the quarter, but only slightly (multiple speakers) draw too many conclusions from that.

I think, as we look forward, Alper, what we're really looking at is a margin that stays somewhat level. We will see if the Fed drops another 25 basis points, but that appears to be the work we've done on the forecast, what we will see.

I guess, on a short-term basis, I'm trying to find out. On March 18, as you know, we had another 75 basis-point cut. So how much of that is reflected in your March net interest margin?

Well, certainly some of it was the loans that are tied to prime and immediately repriced would've been affected by that. Other loans, primarily home equity lines, would reprice on April 1, being tied to the Wall Street Journal prime index. At the same time, we are repricing deposits downward. There will be a lagging effect of those changes as well.

Okay, thank you. Also, switching to Wealth Management, do you have target assets under administration by the end of 2008?

Are you going to forecast where the stock market is going to be?

(LAUGHTER) Like, I mean, in terms of, you know, rewards that you are trying to set basically the bar for the Wealth Management division?

Yes, I mean, within the numbers that you see there, in the decline, we actually had pretty good net growth from new customers coming in so that if the stock market begins to come around and hopefully will be truly the leading indicator for the economy -- hopefully we see -- we easily surpass the $4 billion by the time we get to the end of the year as we would have been forecasting as you could expect at the beginning of the year.

Okay, but you (inaudible) a few ideas of acquiring something like Weston Financial, would you be interested in that?

Yes, I think we've been very open, both in talking to each of you who would be on the phone today and various investment bankers. I know that a well-managed Wealth Management firm would be a great add for us and we would be very open to that.

Okay. There were no buybacks in the first quarter of 2008. Do you expect to complete the buyback program by the end of 2008?

You know, it's still open, but I think, realistically, with all of the turmoil that's going on in the marketplace, that I think we would just as soon keep a tight fist around our capital and take advantage of the opportunities for growth that are here rather than chasing a buyback.

Okay. Yes, talking about growth, commercial loan growth has been very strong. I guess an overall picture -- if you could give a bit of color on the sustainability of that growth, I guess in light of the budget shortfalls projected for the state of Rhode Island.

You know, what we're actually seeing on the growth is -- it's a blend of both commercial, the C&I as well as the commercial real estate, and the activities coming not from just our current customers but with the turmoil at all of the larger banks in Rhode Island are experiencing, we are seeing a lot more customer activity and non-customer activity -- I mean, customers of the large institutions coming to us. We are cautiously optimistic we will continue to see loan growth throughout the rest of the year.

All right, thank you very much, John and David.

Frank Schiraldi, Sandler O'Neill.

Good afternoon, guys. Just a couple of questions here -- first on the margin, John, did I hear you correctly? You sort of expect or are optimistic that it could stabilize here, or do you think there might be actually some expansion in the short-term?

I think, in the near-term, stable would be the most likely outcome.

Okay. Then, on charge-offs, is there any way you could share with us a breakdown? Were there recoveries in the quarter as well, or was that just a real small charge-off, that $3000, or were there recoveries against some charge-offs in the quarter?

There were some recoveries, certainly.

It was all small dollars, Frank. There were a couple of small charge-offs and a couple of small recoveries that netted to the $3000.

Okay, that's helpful. Thanks.

Then on the commercial relationship that you mentioned in the release as being 30-days plus delinquent, is there any update on that? Is that still delinquent as of today? Is there any sort of maybe a little bit more you can give us as far as what sort of credit those are, what they are secured by? Just your thoughts on potential losses down the road on that relationship?

It's a hotel. It's a customer that is experiencing, I would say, seasonal cash flow issues. On a loan-to-value ratio basis, we believe we are very well secured on that and it's just a matter of working through these issues with this customer.

I also want to ask you just finally about the deposit service charges line. It usually tends to being weaker in the first quarter on a linked-quarter basis. It was sort of flat from the fourth quarter this time around. Is there something different in there, maybe some new overdrive program or something like that, or is there any reason for that?

No, the answer is no. I mean the behavior of depositors, with respect to overdrafts, is -- it moves around. That's the best thing I can tell you. I don't think there is anything seasonal going on there right now.

Okay, great. Then just on the pipeline, I guess, John, you said commercial growth, you're optimistic that you can continue to grow. I mean, there was obviously a pretty strong commercial growth in this quarter. Are you seeing the pipeline accelerate here? Is it starting to slow or are you just still seeing -- you know --?

Yes, I would say the pipeline is holding its own, which is good. I mean, I wouldn't -- you know, we had just excellent growth in the first quarter. I don't think we will see growth at that level, but the pipeline is very good; it's coming from multiple locations, multiple customers. We are seeing great opportunities that really are indicative of the problems and a lot of other large institutions are having. The customers are looking for somebody that actually is paying attention to business.

Okay. Just one more question I just thought up on the reverse mortgages, that's a fee income business, right? Is there any consideration on whether you actually hold those, or no?

No, we don't hold those. That's not the business proposition just we wouldn't do.

Okay, great. Thank you.

Damon DelMonte, KBW.

Good afternoon, guys. Most of my questions have been answered. Just if I could follow up on the Wealth Management line items, would you characterize this quarter's performance as being driven by market valuations or would you just say that there's some seasonality in the first quarter?

Well, the change in the Wealth Management assets is largely driven by the markets. There was a positive net customer cash flow in the quarter, and it was larger than the first quarter a year ago, but when the S&P 500 drops 10% in the quarter, it's pretty hard to avoid the impact of that.

The most seasonal thing we have is tax preparation fees. That generally is a second-quarter item that is recognized, so that's not in the first quarter.

Okay, great. Then if we could just circle back on that $3.4 million commercial lending relationship, forgive me if you had said this but did you already establish a reserve against this?

Again, based on the loan-to-value ratio, we don't believe there is loss exposure identified on that.

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

(OPERATOR INSTRUCTIONS). We show no further questions at this time. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much. We appreciate you all taking the time this afternoon and thank you very much. We look forward to chatting with each of you individually going forward. Have a good afternoon now.

The conference is now concluded. Thank you for attending. You may now disconnect.