Washington Trust Bancorp Inc (WASH) 2008 Q2 法說會逐字稿

Hello, and welcome to the second quarter 2008 Washington Trust Bancorp Inc. earnings conference call. All participants will be in a 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. Ms. Eckel, please begin.

Thank you, Camille. Good morning and welcome to the quarterly earnings conference call for Washington Trust Bancorp Inc. NASDAQ Global Select Market symbol WASH.

This morning's conference call is being recorded, is being webcast live, and a webcast replay of our conference call is available shortly after the conclusion of the call through our website, www.washtrust.com in our Investor Relations section under the subhead Presentation. 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 today's call.

Hosting this morning's discussion is John C. Warren, Chairman and Chief Executive Officer, and David V. Devault, Executive Vice President, Secretary, Treasurer and Chief Financial Officer. Now I'm pleased to introduce, Washington Trust Chairman and Chief Executive Officer, John C. Warren. John.

Thank you, Beth, and good morning, everyone. Yesterday afternoon we released our earnings for the second quarter ended June 30, 2008. This morning David and I will discuss these results and answer any questions you may have about our company's performance.

I'd like to start by saying that these are certainly challenging times for the financial services industry. While we have continued to express our concerns about the economy, no one could have predicted the fallout of the national credit crisis or the number of financial giants who would require assistance and additional capital. Consumer confidence has declined as dramatically as gasoline and food prices have risen.

I'm pleased to report that despite all the turmoil that has taken place in the economy and the financial markets, Washington Trust story continues to be one of strength, discipline, and focus. For the second quarter ended June 30, 2008, net income totaled $6.1 million, or $0.45 per diluted share, compared to $5.5 million, or $0.40 per diluted share a year ago. Return on average equity was 12.88% compared to 12.57% last year. Return on average assets was 92 basis points, which is consistent with ROA for the same quarter in 2007.

We have achieved solid results through good capital and balance sheet management and sticking to the fundamentals. As I have mentioned before, we have an experienced leadership team who have been through difficult economic cycles before. We have a disciplined credit culture and have never offered a subprime or Alt-A mortgage program. By staying focused we have avoided many of the problems other banks have experienced. In fact, we have benefited from the disruption that is occurring at the larger banks and investment management companies and have been able to pick up new clients during this period.

Here are some of the second quarter highlights. We continue to experience strong commercial loan demand as commercial loans were up 9%, or $68.7 million, during the second quarter of 2008. This was our seventh straight quarter of solid commercial loan growth. Year-over-year commercial loans have increased $172 million or 28%.

It's important to once again note that even as we have grown our loan portfolio we continue to provide adequate reserves and maintain good asset quality. We have had good growth in both our C&I and commercial real estate groups. New business has come from various sources including larger banks and referrals from attorneys, accountants, developers, and existing clients. While we can't predict what future demand will be, our double-digit growth indicates that Washington Trust is a solid choice for business banking in our area.

Let me turn now to Wealth Management another key line of business for us. Wealth Management revenues were up $545,000, or 4%, over the same period 2007 and continue to be a key source of noninterest income for us. As of June 30, assets under management stood at $3.9 billion up $56 million from a year ago. Despite solid new business growth, our assets under management reflect the downturn in the financial markets.

Our Wealth Management area has seen good growth in new assets. Some of the new business has been generated at the expense of larger investment firms who have told their clients that their asset level isn't worthy of personal attention. We are countering with ads that state, we still believe your money deserves expert investment counsel and management including face-to-face service and everyday accessibility.

On the retail side, demand has been slow as consumer concerns about the economy, employment, and the housing market are prevalent. Deposit gathering continues to be a challenge as more and more consumers are becoming rate shoppers lured by the high rate offers that appear daily in newspapers and online. We continue to manage our deposit portfolio to maintain a good mix of core and time deposits while maintaining and building key client relationships. During the quarter we increased our dividend for the 16th consecutive year.

With that, I will now turn the microphone over to David Devault who will provide you more detail on our second quarter financial performance. David.

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

Net income for the second quarter of 2008 with $6.1 million, or $0.45 per diluted share, up 12.5% over the $0.40 per share reported for the second quarter of 2007. Return on equity for the current quarter was 12.88% compared to 12.57% for the same period last year. Net interest income for the second quarter this year was $16.2 million, 7.5% higher than the first quarter of 2008 and 8.6% higher than the second quarter a year ago.

The net interest margin for the second quarter this year was 2.71% up 12 basis points from the first quarter, but down 5 basis points from the second quarter of 2007. The increase in the margin on a linked-quarter basis was largely attributable to lower deposit and funding costs. Compared to the second quarter of 2007, the margin decline of 5 basis points was for the most part attributable to the lagging impact of lower rates on deposits compared to variable rate loans.

Our loan loss provision charged to earnings in the second quarter was $1.4 million due largely to growth in the loan portfolio, as well as our ongoing evaluation of credit quality and general economic conditions. I'll comment more on asset quality in a few moments.

Let's turn now to the balance sheet. Total loan growth was $107.1 million, or 6.7%, in the second quarter lead by $68.7 million, or 9.5%, increase in commercial and commercial real estate balances. This represented the seventh consecutive quarter of firm growth in this category. Residential mortgages grew $30.5 million, or 5.3%, in the quarter including $30.8 million in mortgages purchased during the quarter. Meanwhile, consumer loans increased by $7.9 million due to higher balances of home-equity lines and other consumer loans.

The investment securities portfolio totals increased by $43 million, or 5.8%, in the second quarter. This included an increase of $61 million in mortgage-backed securities during the second quarter of 2008. Total deposits decreased by $25.5 million, or 1.6%, in the quarter. Excluding brokerage certificates of deposit, in market deposits fell by $12.2 million reflecting decreases in money market account and certificate of deposit balances, while demand deposit and now balances increased. In general, as John mentioned, deposit growth continues to be very challenging and competitive.

I'll now discuss non-interest income including our wealth management business. Total non-interest income was $12.2 million in the most recent quarter. There were $53,000 of net securities losses in the quarter compared to net securities losses of $700,000 in the second quarter last year.

Included in the second quarter net securities losses this year were impairment charges of $1.1 million on three preferred stock holdings and realized gains of $1.1 million on the sale of equity securities. Excluding the securities transactions, non-interest income was up 3.3% over the same quarter a year ago.

Our Wealth Management business reported second-quarter revenues of $7.7 million, up by 2.1% over the same quarter a year ago. Wealth Management assets under administration totaled $3.9 billion at June 30, up $56 million, or 1.4%, from a year earlier and up $45 million, or 1.2%, in the most recent quarter. Most of that increase in the second quarter was attributable to new business and other additions to customer balances.

I will comment now on non-interest expenses. First, I will note that included in the noninterest expense in the second quarter last year was $520,000 representing the cost of our contribution of appreciated equity securities to our charitable foundation. We expect to make our 2008 annual contribution to the foundation later this year.

Excluding the 2007 charitable contribution, non-interest expenses in the second quarter of this year were up by 4.7% over last year. More than half of the increase in non-interest expenses on this basis reflects costs attributable to higher FDIC insurance premiums, costs related to our Wealth Management business, and the operating expenses related to the De Novo branch in Cranston, Rhode Island, which opened late in the second quarter last year. The effective income tax rate for the quarter was 31.6%, a little bit above last year's rate of 31.4%.

Let's now look at asset quality. Non-performing assets remain at manageable (technical difficulty) modest increase from $5.7 million at March 31, 2008, to $6.2 million, or 0.23% of total assets, at the end of the second quarter of this year. Total non-performing assets consist solely of non-accrual loans. We have no property acquired through foreclosure.

The increase in non-performing assets in the quarter was largely due to certain commercial loan relationships moving into the non-accrual classification. At June 30, our level of non-performing assets as a percentage of total assets, 0.23%, was less than the level of 1.26% for our national peer group of bank holding companies with assets of $1 billion to $3 billion as reported by the Federal Reserve at March 31.

Total 30-day or more delinquencies for all loan types were $15 million, or 0.88% of total loans, at the end of the second quarter up $4.6 million in the quarter. Commercial loans represent $12.4 million, or 83%, of total delinquencies at June 30. Year-over-year total 30-day or more delinquencies are up just under $6 million. In the residential mortgage and consumer loan categories delinquencies amount to $2.6 million, or 0.29%, of these loans up from $1.4 million at March 31.

As I indicated earlier, our loan loss provision charged to earnings for the second quarter this year was $1.4 million. This compares to a quarterly provision of $450,000 in the first quarter of this year and $300,000 in the second quarter of last year. The provision is based on management's assessment of various factors affecting the loan portfolio, including growth in the portfolio, ongoing evaluation of credit quality with particular emphasis on the commercial portfolio, and economic conditions.

Meanwhile, net charge-offs amounted to $161,000 in the latest quarter and $164,000 on a year-to-date basis compared to $333,000 in the second quarter last year and $167,000 for the six-month period last year. The allowance for loan losses was $22 million, or 1.29%, of total loans at June 30. That was above the average of 1.24% for our peer group, again using the most recent Federal Reserve information available from March 31.

Total shareholders equity was $186.4 million compared to $186.5 million at the end of 2007. Our capital ratios at June 30 place us in the well-capitalized category according to regulatory capital standards.

We had previously announced that we raised $10 million in trust preferred financing in April in a private placement through a newly created trust. The proceeds from the trust preferred financing, along with the proceeds from the common stock investment in the trust, were used in the issuance of $10.3 million of junior subordinated debentures of the holding company. Those debentures and the trust preferred securities bear interest at three-month LIBOR plus 350 basis points.

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 pay a fixed rate of 6.97%. In June, we declared a dividend of $0.21 per share, which was paid on July 11. That dividend was $0.01 higher than the dividend declared in the first quarter and this represents the 16th consecutive year with a dividend increase for Washington Trust shareholders.

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

Thank you, David. I would like to thank everyone for joining us in today's call and for your interest in Washington Trust. We are pleased with our performance, particularly in these challenging economic times. As I said earlier, Washington Trust's story is one of strength and discipline. We have a focused leadership team, a disciplined credit culture, and a strong balanced stream of earnings. In this environment we will stay on course, grow our core business lines, and maintain our good asset quality.

Thank you for your time this morning. Now David and I would be happy to answer any of your questions. Thank you.

(OPERATOR INSTRUCTIONS) Frank Schiraldi, Sandler O'Neill.

Good morning. A question on the margin going forward. CDs continue to run off, demand is up nicely. It looks like you are locking in some borrowing costs. Do you expect to continue to see some expansion in the net interest margin going forward?

We view that as being relatively neutral with respect to interest rate changes. There was certainly some improvement in the margin in the quarter. I think that where it is for the second quarter is largely representative of where we think it would be in the second quarter -- second half of the year. It could be some seasonal benefits with in-flow of demand deposit dollars in the summer season. That would help it somewhat in the third quarter, but second quarter is fairly representative.

Okay, thanks. Just looking at loan growth, it looks like commercial real estate quarter-over-quarter was up 16% un-annualized. Is there any more color you can give us on what sort of stuff you are putting the books? If it's owner occupied, where you are seeing the growth, loan to values, just any sort of more color we can get to get comfortable with that sort of growth?

Yes, I think a lot of what we have been seeing, Frank, it's split up in two categories. The larger institutions in New England have all, I guess, created an environment and in some points helped us out by offering us some very good loans. So we have had a couple of things, we have had the ability to acquire loans that are already outstanding and very highly -- high-quality, highly rated loans in our review.

At the same time, we are seeing customers out there in our neighborhood that are actually looking to Washington Trust and bringing their business to Washington Trust after years being at some of these other institutions. But once again, very high-quality paper.

Okay. Would you have numbers on owner occupied or non-owner occupied, just in the total commercial real estate portfolio? Then in what -- the growth, the quarterly growth or no? Is that something I might have to --?

I don't have it broken down that way in absolute dollars in the portfolio. The growth, as John mentioned, was really the result of a lot of work over time to build a pipeline that in many cases we were able to close in the second quarter. That resulted in that increase that you see. Our overall assessment -- the weighted average, I guess, of our internal underwriting rating system was actually higher than normal.

So it was very good quality paper that -- and book of business that we added. There were -- it's a variety. One of the strengths, I think, of the commercial real estate portfolio that we have is that it's relatively well diversified with retail, office, hotels, mixed use, multifamily. I mean there is a good mix in that portfolio.

Okay. In terms of geography, southern Rhode Island, farther north, or Connecticut, I mean is it just sort of spread?

Southern New England and, to a very limited extent, in the metropolitan New York area I think was a fair way to characterize it.

Okay. Then is that something that's -- now you are talking about the quarterly growth?

Yes.

Then the metro New York stuff is that some multifamily stuff or is that run the gamut as well?

I guess I should expand metro New York to be the Philadelphia area as well. That was -- it was some hotel business in there. We have a credit that represents its branches of a major financial institution underlying that credit, so it's -- these are strong credits.

The hotel, as an example, Frank, is a 35% loan-to-value and it's a high-grade hotel.

Then just, finally, I wanted to ask about the securities portfolio and about the impairment charge in the quarter. I don't know if there is any more disclosure you can give us on that as far as the preferred securities. I mean, should we assume -- are those agency preferred? And if so, what is left on the balance sheet of that?

Two out of the three were agency preferred. The other was a financial entity, not a government agency. The agency paper we had about $1.1 million in carrying value after the impairment charge at June 30. We are just going to have to continue to monitor the condition of the securities portfolio to monitor their status.

Okay. Then in the common and preferred stocks, I know you have some or you had some utility companies as well. Out of that -- the fair value on that looks like it's $7.1 million now. Is that -- how much of that is financial?

I mean I guess you subtract the $1.1 million carrying of the agency so then you are down to $6 million. Can you tell us how much of that is financial institution?

The majority of it.

Okay. Then the other question was on the trust preferred securities line item. Are those pooled trust preferreds? And if so, is it bank-only trust preferred?

A portion of it. Way under 50% are pooled securities; under 25%, in fact. Most of them are -- they are financial institutions. They are all0 investment-grade rated securities. Clearly, this is a sector that is not in favor right now.

Right, okay. Would those include some REIT pooled as well or is it just banks?

No REITs.

No REITs. Then so what is the remainder of the 75% plus of trust preferred?

They are financial institutions, banking companies.

But not agency?

No.

Okay. Okay, and I guess just one last question, what about capital levels here? Are you guys comfortable? I mean, you did purchase $30 million in residential in the quarter and you upped the dividend $0.01. I guess you feel pretty comfortable with capital levels -- tangible capital levels where they are at these levels?

I think you answered the question with the increase in the dividend, the way you phrased the whole thing.

Okay. All right, thank you.

You bet. Thanks, Frank.

Thank you.

[Laurie Huntsinger], Stifel Nicolaus.

Hi, John and David, good morning. Just to go back to some of the points that Frank touched on. What was your month end net interest margin? Do you have that?

The margin for June was about where we were for the quarter.

Okay, great. Then you mentioned the charitable contribution expense, is that going to be in the fourth quarter?

Probably the third quarter, Laurie.

Third quarter. Is that going to be around $500,000?

Yes.

Yes.

Okay, great. Then within both your -- in terms of income statement, your other-other income and your other-other expenses, linked-quarter those were up. Were there any nonrecurring items in either of those categories?

In other-other expenses there is somethings there that are seasonal. So if you are looking at a linked-quarter comparison things like, I don't know, participating in charity golf tournaments, there isn't a lot of that in the first quarter. So that tends to be somewhat irregular. There is probably $80,000 to $100,000 of what I would call nonrecurring expense and they are associated with a couple of different things.

Okay. In terms of the income line, the [461 to 554], is there anything in there that is nonrecurring?

There is always things in there that are -- because it's other. But there is nothing major.

Nothing big, okay. Okay, great. As far as loan loss provision, you mentioned the $1.4 million was due to two factors, loan growth and economic conditions. You had massive loan growth in almost every category. Your loans are up at an annualized run rate of 27% for this quarter. If you were to break out the increase how much of it is related to low growth versus how much of it is related to your concerns about the economy?

It's probably more -- it is more growth -- than a scientific allocation of loss exposure. But it's primarily due to the growth. We want to maintain an allowance that keeps space with the growth. We wanted to have allowance coverage ratios that continued to be strong and made sense, so that really drove the provision level.

When you look quarter-over-quarter, Laurie, the level was 129 in both quarters. So reflective, really, of the loan volume.

So your target is going to be about that 129 level? At least right now?

In general, I think that is a level that makes sense. Now timing of charge-offs and recognition of charge-offs versus loan provisioning isn't going to be smooth from quarter to quarter.

Sure.

So it could vary somewhat.

In terms of our growth, I mean we are probably not going to see you al continue to grow linked-quarter at the same run rate. Is that a fair statement?

It is a very fair statement. I think there was a real anomaly in what was one on in the financial markets from the really the end of March through out the -- especially April and May of the second quarter. We took advantage of it in several spots and we were able to help several customers with some great loans. Also some of the activity in the residential mortgage side was reflective of a unique situation there as well.

Okay. So if we were to model out what we could expect to see in the last half of the year as far as growth what would be a good range for us to use?

Less than the second quarter's growth rate.

Okay.

Our pipeline is back down to levels more akin to what we saw last year.

Okay.

Which would put it into I would say high -- mid to high single-digit type growth. We will just see if there is some other opportunities that come to us because of disruptions in the market. I think the more disruptions we see the more phone calls we are going to get from some good customers that want to move and give us a chance at it.

Okay, great. Then just jumping over the credit -- and you all give such a good breakdown, so thanks for that -- could you just touch, on as far as the commercial category, there was a pretty big jump in your loans 30-days to 59-days past due. You went from $2.2 million to $6.7 million. Just maybe a breakdown of what is commercial real estate versus C&I and generally how much of that category migrates over to non-performing?

It's nearly all C&I compared to commercial real estate. There is, well -- there is a $3.4 million hotel loan in that category; the rest are a variety of small business loans. The hotel loan -- I don't -- I can't predict where it's going to go. It's a credit that has, I think, been characterized by a strong loan-to-value ratio, but a borrower who has had some maybe under capitalization and cash flow difficulties. It has been a sporadically in delinquency status. There is a strong loan-to-value credit.

What is the loan-to-value?

I believe it was low 50s.

Low 50s. And is that -- that's in-market?

Yes.

That's in-market, yes.

Okay. Okay, great. Just one last thing. If you could just touch on -- your demand deposit growth has been exceptional. What are you all doing to pull that in? I'm guessing we are not going to see that necessarily continue at the same run rate?

We are just working very hard with promotions and product design. A lot of business development efforts; knocking on a lot of business doors to develop relationships that translate into demand deposits. We try very hard with commercial borrowers to garner the entire relationship, including their operating demand deposit account. It's a lot of singles and doubles and hard work.

We are getting the benefit of the loan group -- of most of the loan growth. You are seeing a lot of it as bringing deposits with us -- with it, Laurie. Then at the same time, as David said, we have got an internal program that people have set up baseball teams and are participating on their respective teams to bring in DDA accounts. That is helping quite a bit as well.

Okay, great. Thank you all very much.

John Stewart, Sandler O'Neill.

Good morning, guys. I just wanted to go back and touch on a couple of the questions that Frank raised earlier. First on the trust preferreds. I believe you said the rest of the 75% is banking institutions. Are there any specific company concentrations in there that we should be aware of? To the extent you can share that.

It's pretty well spread out. There is no significant concentration in there from an individual security. The largest holding would be about $3 million, the rest are under $2 million in value.

Those are -- that is by issuer or that is for a specific security?

Issuer.

Okay. Then I guess just back to the preferred stock, common stock line item. You said the carrying value of the GSC preferreds at June 30 was $1.1 million. What was it at March 31?

It must have been around closer to $2 million prior to the impairment charge.

Okay. So you wrote off -- or you impaired about 50% of the value, is that right?

It would have been around $1.6 million. I'm just roughly doing math quickly here. So the impairment charge on those securities was -- it looks like it was about $430,000.

The impairment charge on the GSCs is $430,000 of the $1.1 million?

Yes.

Okay. Okay, great. That was it, thanks.

Alper Sungur, Sidoti & Company.

Good morning. My question is, I guess, how much was the pipeline for the commercial loan portfolio at the end of the quarter?

I believe it was just under $100 million.

$100 million?

No, pipeline is tough thing to nail down. Not everything in the pipeline closes.

So what percentage would you say will close within the next 90 days?

That is very hard to nail down also. Included in that number are refinancings of existing credits or maturing credits or new requests from existing customers. I would go back to John's comment about the overall expected rate of growth is really the best indication for this.

Okay. Also the broker deposits were down substantially. Would we say that you guys are in a runoff on that front?

We had a net decrease in broker deposits over the past year, I think, is what you are referring to. There was some decrease in the quarter as well. That is a source of funding that we do use from time to time and you will see us use that among our various funding sources in the future.

Okay. Any buybacks during the quarter? Maybe I missed that.

No, there were not.

There were not. Okay, thank you very much.

We show no further questions at this time. I would like to turn the conference back over to Mr. Warren for any closing remarks.

I just want to thank everybody for joining us on the conference call. As usual, if you have any questions phone up with us. I think give David or myself a call, or Beth would be happy to chat with you. Thank you all very much.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.