Washington Trust Bancorp Inc (WASH) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Washington Trust Bancorp second-quarter 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).

Please note this conference is being recorded. I would now like to turn the conference over to Elizabeth Eckel. 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 the conference call will be available shortly after the conclusion of today's call through the Corporation's website, washtrust.com, in the Investor Relations section under the subhead of 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 the call.

Hosting this morning's discussion is Joseph J. MarcAurele, Chairman, President and CEO; and David Devault, Executive Vice President, Chief Financial Officer and Secretary. And now I am pleased to introduce Washington Trust's Chairman, President and CEO, Joe MarcAurele.

Thank you, Beth. It is a pleasure to welcome you to today's call as we discuss the results of Washington Trust's second-quarter 2010 performance. Yesterday, we announced that Washington Trust once again posted solid earnings increases for the second quarter. Net income totaled $5.3 million, or $0.33 per fully-diluted share, for the second quarter ended June 30, 2010, compared to $3.8 million, or $0.23 per fully-diluted share, earned a year ago.

On a year-to-date basis, net income amounted to $10.5 million, or $0.65 per fully-diluted share, up from $6.4 million, or $0.40 per share, earned for the first six months of last year. Our key performance ratios improved as second-quarter return on average assets increased to 0.73%, while return on average equity increased to 8.05%.

Washington Trust remains well-capitalized and paid a $0.21 cash dividend during the quarter. We are pleased with the positive earnings trend thus far in 2010 despite continued difficulties in the national and local economies.

Last quarter, we mentioned our concern over the March flooding and its impact on the local economy. While FEMA and other local organizations acted swiftly, many homeowners in the area and businesses are still continuing to recover. Once the rainy spring season ended, we have been fortunate enough to have a summer of sunshine, which should help certainly our local businesses.

As many of you know, Rhode Island is the Ocean State, and many businesses are heavily dependent on the summer tourist season. Overall, we remain guarded about the outlook for the local economy and how that will affect the business community going forward. Rhode Island is still struggling with high unemployment, and we believe the recovery will be slow.

It is important to note that Washington Trust has had good business growth despite the slow growth economy. Strong business development efforts and excellent customer service have contributed to our success along many key business lines. Washington Trust has a strong brand reputation and our role as trusted advisors has continued to help us retain and attract depositors, borrowers and investors.

Let me take a moment to review the performance of our key lines of business. We have had modest growth in our commercial portfolio during the second quarter, with commercial loans up 2%. For the first six months of 2010, commercial loans were up 4%. As we mentioned on last quarter's call, commercial loan growth has started to taper somewhat, and the pipeline isn't quite as strong as it was a year ago. I would like to once again stress the quality of our loan portfolio. Our asset quality measures reflect our adherence to disciplined underwriting standards. We have continued to work closely with our borrowers during the difficult economic times and our relationships remain good with our clients.

Our wealth management area had a good quarter despite downturns in the financial markets. Wealth management revenues were up 7% from the first quarter of 2010 and 14% from a year ago. Assets under management totaled $3.7 billion at June 30, 2010, which were up from a year ago, but down from the previous quarter, due primarily to market value depreciation.

We recently announced another key hire in our wealth management area. Joan Caine has joined us as Vice President and Investment Officer and will work with our wealth management team on South Main Street in Providence. Joan has exceptional credentials and once served as Chief Investment Officer and Deputy General Treasurer for the Rhode Island General Treasurer. It is a pleasure to have her on our team.

On the retail side, we continue to have good core deposit inflows, which combined with deposit repricing have helped us improve our net interest margin. David will speak more about that later.

On the mortgage side, we thought that rates really couldn't go any lower, but they did. In late June, mortgage rates declined to their lowest levels in 50 years. We've also seen some improvement in the local housing market as prices have stabilized or increased while inventory is down.

Our consumer lending area has been consistent, but relatively flat, year-over-year. In late spring, we saw some evidence of homeowners and small business refinance or obtain small home-equity loans for flood repairs. However, the spring home-improvement season has seemed to come and go with little demand for home-equity loans or lines. Again, economic conditions drive consumer confidence and buying habits, so unless we see some consecutive quarters of more positive economic trends, we believe consumer and business loan demand will continue to be somewhat slow.

And now I would like to ask David Devault to provide more detail on our second-quarter financials.

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

Net income for the second quarter was $5.3 million, or $0.33 per diluted share, an increase in net income of 2.4%, or $0.01 per share, over the first quarter. Earnings were substantially higher than the $3.8 million, or $0.23 per diluted share, reported a year ago.

The notable increase in profits over the second quarter of last year is due to higher net interest income, improvement in wealth management revenues, a lower loan loss provision and also the charge incurred last year for a special FDIC assessment levied on all banks.

On a year-to-date basis after six months, earnings are $10.5 million, or $0.65 per diluted share, up from $6.4 million, or $0.40 per diluted share, last year. Our net interest margin improved for the fifth consecutive quarter. The net interest margin for the latest quarter was 2.86%, up 8 basis points on a linked-quarter basis and up 41 basis points from the second quarter of 2009. This result was driven in large part by lower funding costs, as indicated by declines in the cost of interest-bearing liabilities of 17 basis points on a linked-quarter basis, and 66 basis points from the second quarter a year ago.

Wealth management revenues were $6.8 million in the second quarter, up 7% over the first quarter and 14% over the quarter a year ago. On a linked-quarter basis, the increase includes $277,000 increase in seasonal tax preparation fees. Assets under administration stand at $3.7 billion, down 6% in the quarter, due to declines in the equity markets. Wealth management assets are up 10% in the last 12 months.

Mortgage Banking revenues, which include net gains on sales of loans and commissions on loans originated for others, were $318,000 in the second quarter. We saw lower levels of refinancing activity in the quarter, and as a result, the income level from this revenue source was down from the first quarter and the year-ago quarter. More recently, however, as Joe mentioned, we've seen a noticeable increase in the residential pipeline as refinancing activity has picked up due to the very low rates.

An impairment charge on investment securities of $354,000 was recognized in the latest quarter. That compares to $63,000 in the first quarter of this year, and there were no impairment charges recognized in the second quarter last year.

Noninterest expenses were $21 million in the second quarter of this year, up $1.4 million from the first quarter. About half of that increase was in merchant processing expenses, which is a seasonal item closely related to merchant services revenues. We also saw somewhat higher expenses in credit and collection costs as well.

Noninterest expenses last year included that special FDIC assessment, which was for us $1.35 million. On an after-tax basis last year, that was $0.05 per share in the second quarter. Excluding that unusual item, second quarter 2010 noninterest expenses were up by 11% over last year's quarter.

Salaries and employee benefits make up about two thirds of that increase over last year, including the impact of selected staffing additions in our wealth management area, higher staffing levels related to our Massachusetts loan production office and a new branch opened in the second half of 2009, as well as somewhat higher profit-based incentives which were being recognized at fairly low levels last year. Higher credit and collection costs have also contributed to this year-over-year increase.

On the balance sheet total, loans were up $35 million or 2% in the quarter. $21 million of that was in the commercial and commercial real estate category, somewhat higher growth in that category than in the first quarter.

On an annualized basis, commercial and commercial real estate loans were up about 7% for the first half of the year. The balance of the growth in the portfolio was in our residential category.

Total deposits declined slightly by $11 million, or less than 1%, but we were pleased with the change in the deposit mix, as total DDA and NOW balances rose by $58 million, or 15%, in the quarter, and that reflects continued success in attracting commercial deposit relationships.

In-market deposits, which we measure to exclude out-of-market brokered deposits, are up 7% in the last 12 months, including a 23% increase in DDA and NOW deposits in that same period.

Looking now at asset quality, the levels of nonperforming assets, delinquencies and the balance of troubled debt restructurings all showed improvements in the most recent quarter. Total nonperforming assets are just under $26 million, or 0.89% of total assets, at the end of June, and that is down from 0.95% at the end of the first quarter and 1.06% at the end of 2009. The decrease was largely in nonaccrual commercial loans, which declined by $2.1 million in the quarter.

Total delinquencies, loans 30 days or more past-due are just under $29 million, or 1.45% of total loans, at the end of the most recent quarter, a decrease of 10 basis points for the quarter and 19 basis points in the first half of this year. Commercial and commercial real estate delinquencies amount to 1.47% of that total category, and that was an improvement of 44 basis points in the latest quarter.

Residential mortgage delinquencies and nonaccrual loans rose modestly in the quarter as we continue to see instances of borrowers affected by the economy. We consider both metrics to be manageable, however, with delinquencies at 1.5% of the category and nonaccruals at 1.1%.

We also saw some increase in consumer delinquencies in the quarter, although, again, the metrics remain at relatively low absolute levels of 1.3% for delinquencies and 0.2% for nonperforming loans of that category.

Net charge-offs were $1.2 million in the quarter, mostly in commercial and commercial real estate loans, very similar to the results in amount and type that we saw in the first quarter.

Our loan loss provision charge to earnings was $1.5 million in the second quarter, unchanged on a linked-quarter basis, and down from $3 million in the same quarter a year ago. The allowance remains firm at 1.42%, a decrease of 1 basis point from the end of the previous quarter.

At this point, it is fair to say that the pace of nonaccrual and delinquency development this year is well below the levels we saw in 2009. Our levels of nonperforming assets continued to track below regional and national averages at the end of the first quarter, which is the most recent comparative data available. And we saw improvement in our level in the latest quarter.

That said, we will continue to devote significant efforts to manage credit issues, and economic conditions in general will likely continue to affect asset quality until we see some notable strengthening in the economy.

The Corporation and its subsidiary Bank continue to remain well-capitalized. The Corporation's estimated total risk-based capital ratio was 12.47% at the end of the most recent quarter.

As Joe mentioned, we declared a dividend of $0.21 per share in June, and that was paid earlier this month. And at this time, I will turn the call back to Joe MarcAurele.

Thank you, David. Before we open the call for the Q&A, I would like to announce that our Board of Directors has appointed Robert DiMuccio to the Boards of the Corporation and the Bank. Bob currently serves as Chairman, President and CEO of Amica Insurance Company, headquartered in Lincoln, Rhode Island. He has been at Amica since 1991, but prior to that he served as an audit partner for KPMG in Providence.

Bob is a very well-respected executive and business leader, and we look forward to his insight and contributions when he joins the board in September. Bob will also serve as a member of our audit committee.

I would like to thank you for your time this morning, and now David and I are happy to answer your questions.

(Operator Instructions) Damon DelMonte, KBW.

Good morning, guys. How are you? David, could you just comment a little bit about your outlook for the margin going forward? You had good expansion this quarter and what do you think your opportunity is to continue that trend in the coming quarters?

We do see the trends continuing into the near-term, certainly with additional opportunities to reduce costs on the funding side.

Okay. And do you think that would most likely come from core deposit growth, or do you have additional CDs that would be repricing during the quarter?

There will be CDs repricing downward. There will be other funding borrowings repricing downward over the next couple of quarters. And both of those should contribute to continued improvement in the margin.

Okay. With respect to out-of-market brokered deposits, do you have a balance on that?

We do. Hold on. We have $95 million of debt at June 30, which is included in time deposits.

And what is that -- what is the rate on that?

Those tend to be longer-term. We use that to primarily achieve interest rate risk management/liquidity management purposes. The weighted average cost of that is -- it's 3.7%, and over time, that balance has come down because we've been able to reduce it effectively because of the success that we've had in attracting in-market deposits.

Okay, great. And then lastly, could you help us kind of think about the provision a little bit going forward? Credit trends continue to remain very favorable. The reserve is pretty healthy, north of 140 basis points. So could we expect something along the lines of what we saw this quarter?

Well, I think my view is I would like to see some strong improvement in terms of a slowdown of delinquency and nonaccrual formation, and that would be a strong indicator of an ability on our part to reduce the provision. That day is coming. I'm not sure if it is this quarter or the next quarter beyond that.

But clearly, the trend appears that -- and not unlike the rest of the industry and certainly in the region -- that the high point or worst point in terms of nonperformers was late in 2009. And over time, we believe that improvement should allow certainly some reduction in the provision and that the need to cover charge-offs and loss of development will reduce by quite a bit.

Okay, great. I think that's all I have for now. Thank you.

Laurie Hunsicker, Stifel Nicolaus.

Good morning. Really solid quarter. So I have two questions. Just wanted to hone in on your thoughts on your CDOs. I mean, why not just blow out of them at pennies on the dollar and be done with it? They are sort of the only thorn out there.

Well, we certainly think about that and consider that. I mean, there are issues of further earnings reduction that it would generate accounting loss that is -- it is in equity right now, but it certainly hasn't gone through earnings, to the full extent that the market decline exists. And we are certainly considering that and continuing to look at that. But over time, the amount of loss should not be as large as the market has written it down to at this point.

I guess it is just hard continuing to see an OTTI bleed when you are hitting it on all cylinders in every other category. Even if you just took your CDOs to zero and you took a $4.5 million loss, it would -- tax-affected, you'd still be making plenty of money. I don't know, that's just a thought.

And so I guess to the point that you are hitting it on all cylinders, and certainly it is reflected in your stock price, you are trading up at 1.5 of book, Joe, maybe you can share with us again -- and I know I ask this question a lot -- but we are continuing to see a little bit of trickle in the M&A, the premium M&A.

Maybe you can just comment on some of the recent activity and how you look at the world, how you look at your stock as acquisition currency, since you are certainly trading ahead of your peer group, justifiably so, and where you see expansion opportunities.

Well, Laurie, as I've talked in the past, and I guess I would like to be consistent on this, I think that we are always looking for logical combinations. To the extent that those could be natural market extensions that would potentially support the continued use of our brand, that would be preferable. I think that we would be always open to combinations that we thought could bring efficiencies to the combined companies.

But in addition to that, I continue to believe in -- a significant part of our strategic plan is to add to our branching network in Rhode Island, particularly in the markets that we are not in currently. We have very significant share in southern Rhode Island, and our brand, I think, carries very well into the rest of the state. And it would be beneficial to us and to our customers if we could get more statewide convenience.

We continue to look at those opportunities. I think that it is fair to say that if our earnings and expense base support it, it is something that we are interested in doing. And I think a lot of the actual pace of that will be governed by our continued earnings and, to some extent, our control over some of our more controllable expenses and, quite frankly, finding the right locations. And we continue to do that. We pretty much never stop that search.

Did you all look at the LSBX deal in North Andover?

We knew about it, but it wasn't something that we felt fit with us.

Okay, great. Thank you very much.

Frank Schiraldi, Sandler O'Neill.

Good morning. I wonder if you could just talk a little bit about core deposit growth, and then what you are seeing so far this quarter and sort of has it slowed at all or you continue to expect it to grow at a pretty good clip.

In general, the third quarter is usually positive for us in terms of seasonal inflow due to tourism. And the impact of that has lessened as a proportion or a portion of our total deposit base as we have developed more of a statewide presence and less dependent on southern Rhode Island, which is probably a greater dependence on tourism. But again, it is generally positive in terms of inflows into DDA balances.

We continue to devote a lot of effort, very targeted, focused efforts on developing commercial and commercial cash management relationships. We saw that pay off certainly in the second quarter and the prospects are strong, and we continue to devote a lot of efforts to that, and over time that should continue to help.

There seems to be not a lot of sensitivity to rate reductions, and that is another thing that we've been able to take advantage of and reduce the fundings costs.

Okay, great. Secondly, I don't think it will, but I'm wondering -- do you expect there to be any impact to -- or would there be any impact possibly to the merchant processing business to your revenues, given new interchangeables when they come out, when we see them?

That is difficult to say. We are looking at that. We are going to need to see how the Fed writes those rules, that they are obligated to create as a result of the Financial Reform Act recently. And we will have to keep a close eye on that.

Could it potentially be decent, a meaningful chunk, or are you just -- it's too early to say?

I don't think that question has really been answered at all. The law seems to be focused more on limiting the intercharge fees that can be charged to merchants. But it is not clear whether that shows up in debit card charges that banks receive or the actual merchant fees themselves. So again, I think we need to see more development take place with the regulation.

And that development is probably going to take some time, right? I think the Fed has something like nine months to come up with rules, basically.

I don't know if it's nine months, but some period of time like that, yes.

Okay, thanks.

Thank you. This concludes our question-and-answer session today. Gentlemen, do you have any closing remarks for today's conference?

We thank everyone for joining us this morning, and we appreciate your participation. Thank you.

Thank you very much. Appreciate your time.

Thank you. This concludes the call. Thank you for attending, and you may now disconnect.