Washington Trust Bancorp Inc (WASH) 2010 Q1 法說會逐字稿

Good morning and welcome to the Washington Trust Bancorp Q1 2010 earnings conference call.

All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) As a reminder this event is being recorded.

I would now like to turn the conference over to Maria Janes. Please go ahead, ma'am.

Thank you. 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 this conference call will be available shortly after conclusion of the call through the Corporation's website, washtrust.com, in the investor relations section under the subhead 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 this morning's discussion is John Warren, Chairman and Chief Executive Officer; Joseph MarcAurele, President and Chief Operating Officer; and David Devault, Executive Vice President, Chief Financial Officer and Secretary.

Now I am pleased to introduce Washington Trust Chairman and CEO, John Warren. John?

Thank you, Maria. Good morning and welcome to today's earnings conference call. Yesterday afternoon we released results for the first quarter ended March 31, 2010, and this morning we will provide an overview of our performance.

Our first-quarter 2010 earnings were good, more normalized than a year ago when we had a few unusual items that impacted our results. For the first quarter ended March 31 net income totaled $5.2 million or $0.32 per diluted share compared to $2.7 million or $0.17 earned a year ago. First-quarter return on average assets was 71 basis points and the return on average equity was 8% for the first quarter compared to an ROE of 4.5% for the same quarter last year.

Washington Trust remains well-capitalized and paid a $0.21 cash dividend during the quarter.

While we are pleased with our first-quarter results, we remain cautious about what lies ahead in 2010. There have been many positive economic signs both nationally and locally indicated that we are back on the road to recovery, but the recovery will be slow.

Rhode Island is still struggling with high unemployment and a slow growth economy. The recent floods in our area caused extensive damage to both homes and businesses, and the full effect of these floods may not be known for several months. This will further temper Rhode Island's recovery.

The good news is that Washington Trust remains a solid company with an experienced leadership team and a 210-year history of successfully managing our way through economic crises and storms of all shapes and sizes. We will navigate our way through these challenging times as well.

Now it's my pleasure to ask Joe MarcAurele to provide a review of our operations. Joe?

Thank you, John. Despite the economic and weather-related challenges John mentioned, all of our business lines continued to perform well in the first quarter. There is no doubt that we are in a slow growth market so most of our business continues to come from marketing and calling efforts and our ability to be effective versus the competition.

Our Commercial Banking area is one group that attracted new borrowers away from the competition. During the quarter we added some quality relationships to the portfolio and the pipeline, but volumes today are not quite at historic levels. In fact, last quarter we mention that demand was starting to slow down and that certainly has been the case.

While commercial loan growth increased substantially year-over-year, we had modest growth in the first quarter with commercial loans up over 1.4% since the end of 2009. However, what is important to mention is that our asset quality remains sound. We have fared better than most during these difficult times and really that is due to our disciplined underwriting standards and our commitment to servicing our customers.

During the last several months I spent a lot of time with our lenders calling on existing clients and prospects. Washington Trust continues to have a talented commercial banking group. We continue to work closely with our borrowers. We are hoping and we feel that the personal service and attention that we provide continues to be our competitive advantage.

On the Wealth Management side our wealth management area also had a solid first quarter. An increase in assets of -- under management of $131 million. Assets stood at $3.9 billion as of March 31, which is up $943 million over the last 12 months. We have had good new business development in this area and we have attracted a lot of good clients from some of our larger competitors.

During last year we hired some outstanding talent and it has paid off and I think that is most responsible for helping us grow our client base.

After getting off to a rocky start in early 2010 the financial markets recently rebounded and reached 11,000 for the first time since September of 2008. We are hoping this is the psychological mark that may lure investors back into the market. Corporate profits are certainly up but it's a little too early to predict what will happen with the financial markets in the remainder of 2010.

We do feel we have a top-notch team of professionals in our wealth management area. They have experienced up and down cycles and we are certainly continuing to be committed to meeting the needs of our investors.

On the Retail Banking side deposit growth continued to remain steady with good inflows, particularly in our Providence, Cranston, and Warwick markets where we have opened new branches in recent years. Ours second Warwick branch which was opened in November 2009 is performing as expected.

Deposit rates have remained low; there has not been much competitive pressure on rates. We feel we have been very successful in managing our rates and improving the margin. However, we do realize that competition for deposits will continue and that we will have to remain competitive.

We continue to benefit from the mortgage refinancing during the quarter as rates remain low. We have also seen some improvement in the local housing market as prices have stabilized or increased while inventory is down. It's difficult to predict what the volume will be like going forward as rates start to inch up. The refinancing volume is expected to slow and tax and other first-time home buyer incentives we know are due to expire.

Our consumer area has been relatively flat but typically picks up in the spring when homeowners take on home equity loans and lines for home improvement projects. In order to assist homeowners who were affected by the floods which were fairly severe in our area we have discounted certain home equity loans and lines for a limited time and offered special one-month deferments on consumer loan payments. We hope homeowners will take advantage of these specials and use them to get their houses back in order.

At this time I would like to ask Dave Devault to provide some detail on our first-quarter financials.

Thank you, Joe. Good morning, everyone. Thanks for joining us on our call today. I will review the first-quarter operating results and our financial position as described in our press release yesterday afternoon.

Net income for the first quarter of 2010 was $5.2 million or $0.32 per diluted share. That compares to $4.7 million or $0.30 per diluted share for the fourth quarter of 2009 and $2.7 million or $0.17 per share in the first quarter a year ago.

We were generally pleased with the progression of earnings on a linked quarter basis and a major factor in the strong increase compared to the earnings in the first quarter of 2009 is that last year's first quarter was impacted by a $2 million credit-related impairment loss on investment securities which on an after-tax basis equated to $0.08 per diluted share in that period. And that compares to impairment losses of only $63,000 recognized in the first quarter of this year.

The return on average equity for the first quarter was 8% compared to 4.5% in the first quarter last year. We saw continued progress in the net interest margin which improved in the first quarter. The margin for the latest quarter was 2.78%, up 22 basis points from the fourth quarter and up 39 basis points from the first quarter a year ago. This was driven in large part by lower funding costs as indicated by a 66 basis point drop in the cost of interest-bearing liabilities from the first quarter a year ago.

The first quarter this year was also favorably impacted by somewhat higher level of loan prepayment penalty and other fee income of about $377,000. That was about five basis points in the margin compared to one basis point of margin from that source in the first quarter a year ago.

Wealth Management revenues were $6.3 million in the first quarter, a 16% increase over the first quarter last year. The major reason for that is that assets under administration are up 3% in the quarter and 32% in the last 12 months. And as Joe mentioned stand at $3.9 billion. The first-quarter increase in assets under administration included market appreciation and income of $96 million as well as net client cash inflows of $35 million.

Gains on loan sales and commissions on loans originated for others, primarily all residential mortgages, totaled $560,000 in the first quarter. We continued to see a fair amount of loan origination volume, although the activity is down from earlier quarters reflecting lower levels of refinancing and sales activity.

Non-interest expenses amounted to $19.6 million in the first quarter of this year, up 2% on a linked quarter basis and up 7% from the first quarter last year. Salaries and benefits account for about 85% of the increase over last year, including the impact of higher staffing levels related to the new branch opened in the fourth quarter as well as selected staffing additions in the commercial lending and wealth management areas.

On the balance sheet total loans grew by $18 million or 1% in the first quarter including $14 million in commercial and commercial real estate loans. Residential mortgages grew by $3 million or 1%, and consumer loan balances were essentially flat.

Commercial loans have grown by $90 million or 10% in the last 12 months. That was offset in part by a $28 million decline in portfolio balances of residential mortgages over that time. Although we continue to have a lot of originations, a substantial portion of those originations are sold into the secondary market.

Deposit growth continued to be steady with total deposits up $38 million in the first quarter. In-market deposits, which exclude out-of-market brokerage CDs, were up $43 million or 2% in the first quarter with the largest increase in time deposits, although we also saw growth of 1.2% in the quarter in low-cost DDA and NOW accounts deposits. In-market deposits are up 9% in the last 12 months including a 14% increase of $50 million in DDA and NOW deposits in the last 12 months.

Let me comment on asset quality. Non-performing assets stood at $27.5 million or 0.95% of total assets at the end of the first quarter, down from $30.5 million or 1.06% of total assets at the end of 2009. The decrease was largely in the non-accrual loan category which stand at 1.26% of total loans, down $3.1 million in the quarter with a decrease of $3.5 million in non-accrual commercial loans.

Total loans 30 days or more past due amounted to $30.1 million, 1.5% of total loans at the end of the first quarter, down from 1.64% at the end of 2009. The largest component of delinquencies is in commercial loans with a balance of $19.1 million, 1.91% of that category at the end of the first quarter with a decrease of $2.6 million in the quarter.

Residential mortgage and consumer loan delinquencies stand at $11 million, 1.17% of total categories, up $1.2 million in the first quarter. The decline in non-accrual loans and delinquencies in the first quarter included several factors, the largest of which was the resolution of a commercial real estate relationship with a carrying value of $2.2 million at December 31. That was settled during the quarter with a payment of $2 million with a charge-off of the remaining balance.

While we were pleased with the lower pace of non-accrual and delinquency formation in the first quarter, we continue to watch credit quality very closely as the economy has certainly not strengthened to a level that we would be comfortable with on an ongoing basis.

Net charge-offs were $1.2 million in the quarter, mostly in commercial and commercial real estate, compared to $1 million in the fourth quarter and $927,000 in the first quarter last year. The loan loss provision charged to earnings was $1.5 million. That compares to $2 million on a linked quarter basis and $1.7 million a year ago. The allowance as a percentage of total loans remained at 1.43% unchanged from the level at the end of December.

The Corporation and its subsidiary bank continued to remain well-capitalized. Our estimated total risk-based capital ratio for the holding company was 12.5% at the end of the first quarter. We declared a dividend of $0.21 per share which was paid on April 14.

At this time I will turn the call back to our President and Chief Operating Officer, Joseph MarcAurele.

Thank you, David. As you can imagine we are pleased to start out the year on such a positive note with solid earnings, asset quality, and particularly growth along our core business lines. We do, however, remain somewhat cautious about the challenges that lay ahead in the economy, particularly Rhode Island.

We do hope that by year-end unemployment in Rhode Island reaches more normalized levels. We have seen some modest improvement along those lines in the last few months. And we certainly hope homeowners and businesses recover from the recent devastating floods.

We remain confident that Washington Trust, as always, will work through these challenges. We thank you very much for your time today and at this point John, David, and I are happy to answer any of your questions.

(Operator Instructions) Damon DelMonte, KBW.

Good morning, guys. This is actually Timur Braziler with KBW. Just a couple of questions. First, if we can start with the margin, there is pretty nice growth this quarter. How much more room do you guys have on the funding side?

There is still benefit that we expect to garner from lower funding costs. We would expect that the pace of increase would probably be more modest than we have seen in the past couple of quarters.

Okay, great. If we can move over to mortgage banking activity, it has been kind of choppy the last three quarters as far as modeling goes. Is there any kind of guidance you can give? I know you said the store remains fairly strong but not at current levels. Should we expect something maybe between first-quarter and fourth-quarter results?

Well, it does have an element of volatility with it certainly. It's affected by interest rates which certainly affect the level of refinancings. I would say 2009 was characterized by an above-average level of refinancing, certainly compared to the previous year.

More recently some of that refinancing activity has slowed down, although we have seen an increase in the pipeline in the last four to six weeks, which may be seasonal. It may also be somewhat evidenced by some strengthening of the housing market as well.

So first quarter may be a lower level than we might expect over the next couple of quarters. It's difficult to pin that down precisely.

Okay, great. How about the potential impact of the pending an NSF regulations? Have you guys worked that out?

Sure, we have analyzed that extensively. We are developing plans to reach out to depositors in response to the changes in regulations. We would expect that the amount of revenue that could be affected by that, which would probably impact the second half of this year, would be about $150,000 in 2010 and on an annualized basis something on the order of $360,000.

Now that assumes that there isn't any benefit gained back from people who might opt in to allow overdrafts to take place. So we are trying to be conservative in the way that we assess that.

Okay. So you would say that that $360,000 is kind of the worst-case scenario if nobody else options in the program, right?

On an annualized basis, that is correct.

Okay. And if we can just talk slightly bigger picture, can you describe your liquidity strategy? Will we see any kind of continued ticked up in security purchases? Will you be using that to pay down borrowings? What is kind of the plan there?

In the first quarter we did deploy some of the deposit inflow and continued strength in liquidity into a modest amount of securities purchases. I would say we would continue to look at that opportunistically. If spreads warrant investments that the opportunities for that have been fairly minimal over the last four or five quarters.

We are happy to have the deposit in-flow that we have been able to achieve and we will continue to take that, particularly given the ability to continue to reduce deposit costs. That has some benefit of providing additional strength and liquidity, although we feel very comfortable with our liquidity contingency and strategy that is either evidenced on the balance sheet or in other available liquidity sources for us.

And how far are you guys willing to go along the curve in this present environment?

Again, it depends on whether the spreads are attractive. We are not going too far out because obviously with low rates you are going to live with that for a long time.

Okay. Thank you very much. That is all I have.

Laurie Hunsicker, Stifel Nicolaus.

Just to sort of, I guess, follow-on in terms of margin do you have a margin for the month, the month end?

I don't have that available. There was a -- I would say a general trend of improvement during the quarter but the months are a little bit -- particularly in the first quarter with the 28-day month in February, it affects that. But, again, there is a general trending -- improvement trend in margin that has been continuing.

Okay, great. Then just to jump over to commercial, can you remind us the $2.2 million loan that you resolved -- and by the way, nice work on that -- where did that start out balance wise?

That was probably over closer to $3.5 million all-in and we had taken a substantial charge-off of that in the early part of 2009. That was a commercial real estate loan.

That was the one that was secured by office buildings?

No, that was secured by a hotel property.

A hotel property, okay. Okay, great. And then the TDRs that are still accruing, the commercial real estate piece that is $5.8 million, can you just take us through generally as you restructure these loans how are you normally restructuring them?

Well, it varies. I think in that case that was --

I am talking about the CRE that is still accruing. So of your total TDRs of $12 million you have $11 million that is still accruing and of that commercial real estate is about $6 million that is still accruing. So just generally, as you are restructuring these.

That was -- well, a good portion of that one was a borrower with multiple properties that had some what we viewed as temporary cash flow challenges. We have worked with them in terms of forbearance. There was really no concession in terms of rate. The borrower has continued to perform in accordance with the restructured terms and we feel good about the collateral level with that.

So from an appropriate reporting standpoint we have classified it as a TDR, but we continue to believe that there is no unusual loss potential there. And that is why it's in the accruing status.

Okay.

You make that decision on a case-by-case basis. In many cases they are in accruing status at the time that this restructuring transaction takes place. And we will leave it in accruing status, again based on our conclusion, if warranted, that there is no risk of not collecting the principal and interest that is due to us.

Okay. And so I guess he has been on TDR status now, this is the second quarter. So the bigger jump came from the September quarter and that was mainly that one credit, is that a fair way to look at it? Or maybe let me ask another way, of the $6 million how much is that credit?

Well, there is a couple of pieces here. That is probably about $3 million and there is another one of $1.5 million that we would view as -- the comments that I made would apply to that as well.

So these will -- if they continue to perform, would come out of TDR status after some period of time. They were already in accruing status and we continue to look at those regularly to make sure that they are classified properly.

Okay, great. Just one last credit question -- by the way, I think your credit is holding up amazingly well so not to sound so focused on this. But it looks like from December you had in your loans that are 30 to 59 days past residential mortgages it looks like you had a tiny restatement. I am showing that that number was $1.6 million and it looks like you jump it up to $2.4 million.

Was there anything meaningful in that? And I realize it's a smaller number in the grand scheme of things.

I think that was probably a refinement of the number between the time that we issued the press release for the fourth quarter and the time that we closed the books formally with the Form 10-K that was filed. It's just something that we corrected as we put the numbers to bed.

Those things happen from time to time. We don't like that to happen but we do want to report the most correct number.

Okay. Okay, great. And then, Joe, last question for you. If you could comment -- obviously you posted very, very strong results in the face of still troubling time and you are currently trading at about [1.7] of tangible book so you have a nice strong currency.

Can you take us through now your vision in terms of expanding your footprint, especially now that you have the currency, you have a nice dividend yielding stock to offer? Where you are looking, what attracts you?

I continue to think, Laurie, that our primary opportunity is within the Rhode Island market. I think that Washington Trust certainly over the last several years has established a statewide brand. I don't think that this point obviously that we have statewide convenience.

I think that there have been a lot of encouraging signs in regard to the type of deposit growth that we have been able to garner from our Providence, Cranston, and Warwick locations. My sense is that what would be most beneficial to us is to continue to try to march northward in Rhode Island and I believe over the next few years that will be our, relatively speaking, consistent effort to do that.

I guess as we look further outside of your footprint, your few branches in Connecticut, if you were to choose one place that you would rather be Connecticut more or going into Massachusetts what would be your preference?

I think first of all we would be opportunistic. However, I think that from a geographic perspective, although Connecticut is obviously very close to Westerly the inhabited areas and the heavy deposited areas of Connecticut are really more toward Hartford and Fairfield County which geographically is quite far away from us. I think really north into Rhode Island, Quidnick Island, and Massachusetts, Southeastern Massachusetts probably are somewhat more attractive.

Okay. Any comments on the Butler transaction?

We knew it was happening but other than that really, no.

Okay, great. Thank you very much.

Frank Schiraldi, Sandler O'Neill.

Just a couple of additional questions on -- I wondered if you had this, Dave, in terms of CDs rolling off the books. Just maybe a general number of CDs that are rolling off the books come second quarter compared to CDs that rolled over in the first quarter and where you are pricing new time deposits?

I don't think I have that at hand. There continues to be a fairly -- there is a high number of short-term CDs that rolled pretty frequently but also some level of CDs from earlier periods that would be rolling to much lower rates than they are currently paying. So again I would say that we do expect some modest level of margin improvement in the near term.

Could you tell me, give me a sense where 12-month CDs are pricing currently in the marketplace?

Well, I can tell you that our CDs on average in the past few months have been originating at a weighted average of less than 1% in the past couple of months and that a lot of depositors are still biased towards short-term CDs. We have done some selective pricing to entice depositors into longer terms to take advantage, from our standpoint, and lock in lower rates.

So we continue to manage that to achieve a balance between earnings and offsetting that with trying to manage interest rate risk.

Now when you say short term is that six months or less?

A large part of them are, yes.

Okay. And then I wanted to ask about the recent floods. I know they are quite severe and obviously destroyed a lot of property up there in and around the footprint. What is your sense, though, on the ultimate effect to bottom-line Washington Trust earnings in the second quarter, if you do have a sense?

Frank, this is Joe. I think we have certainly heard a lot of things anecdotally and obviously there have been a lot of our employees who have been affected personally by this. Our sense today if we were to look at short-term numbers in regards to any upticks, particularly consumer delinquency, we don't see negative trends.

But I do think that it is a little premature to make predictions about that. And I don't think we would have a sense today unless David has other things to add that we would be able to comment on the materiality of that.

I guess what I would say is that it would be difficult to isolate that as a specific factor in terms of what it might translate to in credit. I would think that some small businesses in particular may have been harmed by it and even being closed for some period of time or being challenged by the additional capital expenditure requirements to rebuild or recover from the flood. So there could be some modest impact in terms of the impact on small businesses.

I think it will be difficult to isolate that and it would be blended in really with just what is going on in the economy in general.

Frank, I think one of the interesting things over just the few weeks since we have had the floods, as Joe said, we have not had much communication from either retail consumers or small business people that there are problems. We know there must be problems out there.

So to Joe's comments, I mean I think where we really are is at this juncture we don't see anything that would cause us to be overly negative. But we just don't know. And Dave's comments, we may get some minor things that blend in and maybe over the next month or two things bubble up that are unforeseen and people just didn't pick up the phone. But we haven't had the phone calls to date.

It could also be a beneficial impact for some small businesses. If you are in the carpet business right now you are probably doing very well.

The carpenters, electricians, plumbers, and as David said the carpet business are all doing much better than they have been doing for the last two or three years.

Well, that was going to be my next question actually. If on the other side of the coin you had seen any perhaps business, any pipelines pick up maybe in terms of certain categories of business owner in terms of the loan side or even maybe on the -- I would think most of the small businesses have some form of insurance, right. So even on the deposit side perhaps a pick up in the early part of this quarter.

Well, I think really, Frank, one of my comments would be that over the last couple of months actually, although we have put up a few caution flags I know at the end of last quarter about commercial loan volumes, our commercial loan pipeline today is actually stronger than it has been in 15 months.

I actually don't think that is totally attributable to things related to the flood. I think it's attributable to the fact that the economic environment is getting incrementally better. And I also think that community banks in particular are getting a better chance to add kind of household names in many markets, including Rhode Island, than maybe we were a few years ago.

So I am actually quite encouraged by the actual pipeline today.

Okay, great. Thank you.

Gentlemen, at this time we have no further questions. Do you have any closing remarks today?

Really, I would just like to thank everyone and I would just close by saying that we are pleased with the results in the first quarter. We are cautiously optimistic about things going forward, but I do think that we are well-positioned to be able to continue along the track that we are on today.

This concludes today's conference. Thank you for joining us. You may now disconnect.