Washington Trust Bancorp Inc (WASH) 2010 Q3 法說會逐字稿

Good morning and welcome to the Q3 2010 Washington Trust Bancorp, Inc. earnings conference call and webcast. (Operator Instructions). Please note that this event is being recorded. I would now like to turn the conference over to Elizabeth Eckel, Senior Vice President. Please go ahead, ma'am.

Thank you. Good morning and welcome to the third-quarter earnings conference call for Washington Trust Bancorp, Inc., NASDAQ global market symbol, WASH.

This morning's conference call is being recorded and is being webcast live, and the webcast replay of the conference call will be available shortly after the conclusion of today's call through the Corporation's website at 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 the call.

Posting hosting this morning's discussion is Joseph J. MarcAurele, Chairman, President and Chief Executive Officer, and David Devault, Executive Vice President, Chief Financial Officer and Secretary. Now I am pleased to introduce Joseph MarcAurele.

Thank you, Beth. Good morning everyone and thank you for joining us on today's call. David and I will review the results for the quarter ended September 30, 2010, and then answer any questions you may have about our performance.

Washington Trust had a very good third quarter, and we are especially pleased with the results considering the continued difficulties in the economy. Net income for the quarter totaled $6.4 million or $0.39 per fully diluted share, up from $4.9 million or $0.31 per diluted share earned a year ago.

For the nine months ended September 30, 2010, net income was $16.8 million or $1.04 per diluted share compared to $11.3 million or $0.71 per diluted share for the same period last year.

One of the key highlights for the quarter was the improvement in our margin. For the third quarter of 2010 the net interest margin was 3.01%. This is up from 2.86% in the second quarter of 2010, and up from 2.51% for the third quarter a year ago. The steady margin improvement is a result of several strategic balance sheet actions taken throughout the year. David will speak in more detail about this shortly.

Another important milestone reached during the quarter was that deposits got to $2 billion for the first time in the Corporation's history. Total deposits were up $107 million or 5.5% from the previous quarter, and up 8.6% from a year ago. We had increases in all deposit categories, and especially good growth in core deposits, including transaction accounts.

Washington Trust has a great brand reputation in the state. We have gained marketshare at the expense of our competitors. This is evidenced in the recent FDIC marketshare statistics as of June 30, 2010. The FDIC report indicates that Washington Trust now ranks third in deposits among banks in the state of Rhode Island.

We have had success with our new Warwick location, which we opened up just a year ago. We brought in new customer and business deposits from the area. The branch now has $28 million on deposit, and we are very pleased with our result.

We believe they are still opportunities to grow within the state, and are evaluating locations for future Washington Trust branch sites as we speak.

Now turning to the lending side. We continued to see solid loan demand in the third quarter. Total loans were up $39 million or 2% in the quarter. This growth was once again led by commercial loan activity, which rose by $30 million or 3% from the previous quarter. Most important, our asset quality remains strong.

On the residential side mortgage refinancing activity continued at a record pace. It seems that every time we believe rates can't go down any lower they decrease again, and the refinancing flurry starts all over again. We are well-positioned to take advantage of that. The high-volume of mortgage activity during the year has contributed directly to the bottom line.

You may recall that just over a year ago we opened our first residential mortgage office in Sharon, Massachusetts. This office has proved to be a great investment for us, and has accounted for almost 25% of mortgage production so far this year.

Let me turn now to Wealth Management. Wealth Management assets under administration increased to $3.9 billion at September 30, 2010, up 6% from June 30. Much of this is due to recent market appreciation, but new business flows have been reasonable.

Third-quarter Wealth Management revenues are up 7% from the third quarter of last year. And Wealth Management revenues continue to be a strong source of noninterest income for the Company.

At this point that concludes my remarks. I will ask David Devault to provide more detail on our third-quarter financials. David.

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

Net income for the third quarter of this year was $6.4 million or $0.39 per diluted share. That was a net income increase of 20% or $0.06 per diluted share over the second quarter. And earnings were 30% higher than the $4.9 million earned, or $0.31 per share, in the third quarter last year.

The increase in profitability over the third quarter of 2009 is due to higher net interest income, a lower loan loss provision, improvement in Wealth Management revenues, and the lack of other than temporary impairment charges in the most recent quarter.

Year-to-date net income for the nine months of 2010 is $16.8 million or $1.04 per diluted share, and that is up from $11.3 million or $0.71 per share for the same period a year ago.

Our net interest margin continued to show improvement for the sixth consecutive quarter. The margin for the latest quarter was 3.01%, up 15 basis points on a linked quarter basis, and up 50 basis points from the third quarter of 2009.

These results were driven in large part to a decline in the cost of interest-bearing liabilities of 16 basis points on a linked quarter basis, and 70 basis points from the third quarter a year ago.

Wealth Management revenues were $6.5 million in the third quarter. That was down 4% on a linked quarter basis, although the second quarter did include $327,000 in seasonal tax preparation fees. Compared to the third quarter of 2009 Wealth Management revenues are up by 7%.

Wealth Management assets stand at $3.9 billion at the end of the latest quarter, an increase of 6% in the third quarter, reflecting market value appreciation and income. Wealth Management assets are up 8% in the last 12 months.

As Joe mentioned, net gains on loan sales and commissions on loans originated for others was strong at $1 million in the third quarter. That compares to $318,000 in the second quarter and $591,000 in the third quarter a year ago.

These strong results in the most recent quarter reflect higher levels of residential mortgage refinancing activity in response to declines in mortgage interest rates. The pipeline for this activity remains strong continuing into the fourth quarter.

There were no other than temporary impairment losses on investment securities recognized in the third quarter, and that compares to OTTI losses of $354,000 in the second quarter and $467,000 in the third quarter of 2009.

Noninterest expenses were $22.9 million in the third quarter of this year, up $1.9 million from the second quarter and $3.7 million from the third quarter a year ago. Included in the third quarter of 2010's result was a $752,000 debt prepayment penalty charge, as well as $300,000 of contribution to our charitable foundation.

There were no debt prepayment penalties in either the second quarter of 2010 or the third quarter of 2009. And in 2009 the charitable contribution was recognized in the fourth quarter. Higher commissions and incentives also contributed to the increase compared to the third quarter last year.

Our effective income tax rate on a year-to-date basis is 29.8%, and that is our estimated rate for the full year 2010.

Turning to the balance sheet, total loans were up $39 million or 2% in the third quarter. And they are up almost 5% from the beginning of the year. The largest growth category in the quarter was commercial loans, an increase of 3%. And about three-quarters of that increase was in commercial and industrial loans. Total commercial loans are up 7% from the beginning of the year. The balance of the growth in the portfolio in the third quarter was in the residential category.

Investment securities stand at $577 million at the end of the third quarter, down $99 million in the quarter. We conducted a balance sheet deleveraging transaction in the third quarter of this year, which included the sale of $63 million of mortgage-backed securities, yielding less than 1.5%, and a prepayment of $65 million in Federal Home Loan Bank advances with a weighted cost of 3.83%.

The security sale resulted in a realized gain of $800,000. And a prepayment penalty of $752,000 was incurred on the paydown of the FHLB advances. This transaction resulted in a benefit to margin for the quarter of approximately 3 basis points.

Deposit growth continued at a very good pace in the quarter. Total deposits were up 5.5%. That was net of intentional $25 million reduction in out of market brokered time deposits. Excluding that, in-market deposits were up by 7%, with growth experienced in all categories.

FHLB advances were reduced by $135 million in the third quarter, including the impact of the deleveraging transaction I mentioned a few moments ago, along with balance reductions funded by deposit growth.

In October, at the beginning of this month, in connection with our ongoing balance sheet management efforts, we executed a transaction to extend maturity dates of certain FHLB advances with original maturity dates in 2012. Advances totaling $62.5 million with a weighted average rate of 4.78% and a remaining term of about 24 months were modified to a weighted average rate of 3.76% and a weighted average maturity of 59 months.

Let me now comment on asset quality. We saw improvement or reductions in the levels of both non-performing assets and total delinquencies in the most recent quarter. Total nonperforming assets stand at $23 million or 0.79% of total assets, down from $25.9 million or 0.89% of total assets at the end of the second quarter. That decrease was largely in nonaccrual loans, which were down $3.2 million. About $2.4 million of that was a decrease in nonaccrual commercial loans.

Total delinquencies, or loans 30 days or more past due, stand at $24.9 million or 1.24% of total loans at the end of the third quarter. And that was down by $3.8 million. $2.8 million of that decrease was in residential and consumer and $1 million was in the commercial category.

Troubled debt restructurings amount to $20.5 million at September 30, an increase of $7.2 million in the third quarter. $18 million of these loans are in accruing status. And the increase in the third quarter amount included a $5.8 million accruing commercial mortgage loan relationship.

Our loan loss provision charge to earnings was $1.5 million in the third quarter, unchanged on a linked quarter basis, and down $300,000 from the third quarter a year ago.

Net charge-offs amounted to $1.3 million in the third quarter, up slightly from the second quarter, but we believe they are manageable -- continue to remain manageable at 0.25% of average loans for the year-to-date period compared to the 0.27% of average loans for the first nine months of last year.

Our allowance stands at $28.2 million, 1.40% of total loans at the end of September, down slightly by 2 basis points from the end of the second quarter.

We are encouraged by the improvement in delinquencies and nonperforming loans, but we continue to believe that significant improvement is not likely to occur until unemployment levels in the housing market shows sustained signs of recovery.

The Corporation and the subsidiary bank continued to remain well-capitalized. The Corporation's estimated total risk-based capital ratio was 12.5% at the end of the third quarter.

Finally, in September we declared a quarterly dividend of $0.21 per share paid on October 14. And at this time I will turn the call back to Joe.

Thank you, David. As I think you recall, I joined Washington Trust about a year ago. Obviously, we are pleased with the progress and result. Really at this point I would say there has been total support by the Board and the executive team and many of the employees at the Bank.

We knew 2010 was going to be a challenging year, but we stuck to our strategic plan and did what we needed to do. I think the results speak for themselves for the first nine months of the year. Obviously, we had margin improvement. We got to a record deposit level. Have shown continued loan growth, and asset quality remains good and is improving.

Again, while we are pleased with our results, we are still cautious about what lies ahead. There is continued weakness in the national and regional economies. We believe the recovery is still going to take some time. With that in mind, we will continue to maintain our credit standards, evaluate our portfolio and work with borrowers as we have been.

I can assure you, though, that Washington Trust continues to operate in a business as usual mode. We are working with all of our customers to meet their needs, and hopefully by being the bank of choice in Rhode Island.

At this point I would like to thank everyone for your time this morning and your continued interest in our Company. At this time we would be happy to answer any questions.

(Operator Instructions). Frank Schiraldi, Sandler O'Neill.

I just wanted to ask a couple of questions quickly. On the margin, on the strong margin expansion in the quarter, where do you foresee that going in let's say over the next couple of quarters?

I think there is some modest continued improvement that we see over the next quarter or two. We continue to see some continuing benefit from lowering time deposit rates on maturities. And that will certainly contribute. We are also continuing to make every effort to strengthen yields on new loans and make that a contributor to margin as well.

So there is still some upside potential. I think this quarter was very good and I would not say that will be representative of a future increase.

I would imagine though this is a big focus for you guys. Joe, given that still the margin is quite lower than I would say a bank -- a similar sized bank, commercial bank, maybe your peers. I am assuming this is a big focus for you, building the (multiple speakers).

Yes, it is. As you can see by the progress that we have made, we will continue to focus on it. I think it is really all about continuing to improve the mix, particularly toward transaction accounts. And that we should be able to accomplish that as we continue to expand our commercial and cash management businesses.

I guess what I would say is we are trying to work it toward a mix that looks more like what I have seen in previous lives, I guess, as a banker.

Okay, great. Then I am just wondering if there is anything we could read into the reduction, though it is slight, the reduction in the reserve to loan ratio quarter-over-quarter? Are these levels you want to stay at or do you feel like there is maybe room to come down a little bit? I'm just curious on that front.

You are referring to the 2 basis point reduction in the third quarter?

Right.

I don't think there is a single right number, and it will change over time. And over time as the economy improves, I think it will come down. I am not signaling anything by the 2 basis point reduction. However, I think the provision is more of an indicator, and we have continued to provide at a level that is more than 100% of charge-offs.

Now, again, you can't match those dollar for dollar, because many of the charge-offs were allocated in the allowance at the end of the previous quarter. So I think you have to look at it over time. Don't read anything into the 2 basis point change.

Okay, thanks, Dave. And just finally, I just want to make sure I understand on the borrowing front. So $65 million was repaid early and then an additional $62.5 million was extended out?

That's correct. The $62.5 million was at the beginning of the current quarter, the fourth quarter.

Okay, got you. Thank you.

Damon DelMonte, KBW.

Joe, I was hoping you could talk a little bit about your outlook for loan growth. It seems like a lot of banks are struggling to find good lending opportunities and you guys seem to be very successful at booking quality credits. Could you fill us in on that a little bit?

I think there are two factors to that. I think that, first of all, our expansion into the Providence market has opened up some opportunities for us that maybe we wouldn't normally have had.

I also think that people on the phone know that my background is primarily commercial banking. We have been able to, with some movements within our staff, bring on a few new commercial bankers, who have been helpful in getting us opportunities.

There is an opportunity to compete successfully against some of the larger banks in our market. Again, even though the economy in Rhode Island is certainly challenged, there are good commercial credits out there, and we are trying to call on them. And to the extent that we can pick them off, so to speak, one at a time, we have continued to do that.

Okay, great. Then we have seen a handful of deals happen in the Northeast, and obviously nothing specific in Rhode Island. But have your views changed on M&A at all? And do you think there would be some opportunity for Washington Trust to growth through acquisition?

I would say that my views are the same as they have been, that the team here continues to look at things as they become available. I still think that there is good organic growth opportunity within the market that we currently operate in.

I think we are evaluating some potential de novo branch sites as we speak. We are further along now than we were at the end of the last quarter, not ready to announce anything currently. But we are always on the lookout for things that could make sense for us. I don't think that we would go outside of our market substantially to do anything.

Okay, great. Thank you very much.

Laurie Hunsicker, Stifel Nicolaus.

Just a couple of things. Actually just to follow-up on what Damon was asking with respect to your potential, I guess, to weight acquisitions against branches. When you're looking at branch expansion are you all entertaining the idea of branch expansion up in Boston or is it just Rhode Island focused?

I would say it is safe to say that it is Rhode Island first and toward Boston second.

Then specifically we saw a deal yesterday, Brookline bought Ipswich. Would that have been something that you looked at?

We were aware of that transaction. That is really consistent with what Joe was saying, it is too far out of market for us on the banking side.

Okay.

And maybe a little smallish for --.

For what you would do, okay.

Yes.

I guess to that point, as we look across the spectrum of potential buyers, obviously you guys had a fantastic quarter, but you sit in a very healthy spot now with respect to capital and credit, and you are trading at [15] of tangibles. So you have the currency to do an acquisition where others don't. Yet I guess I am perceiving you all as maybe not quite as aggressive on the acquisition front.

Can you just update us in terms of what would get you excited about doing a deal versus branching, or what would be the catalyst to sort of move forward?

I think it would have to be something that would fit strategically with us. That -- where we could leverage our existing brand to bring value to a potential acquisition. And if it could be something that was contiguous to the market that we operate in today where we would have brand recognition, I think that would make sense.

Okay. When you said the Ipswich deal is too small, I mean, I realize that it is sort of the same amount of work (multiple speakers).

If it was in Rhode Island it wouldn't be too small.

Okay, right. That makes sense. But if you were to jump to the Boston market, is it a minimum of $500 million, is it -- what is your -- just rough (multiple speakers)?.

I don't think there is a specific size, but I think $100 million is too small.

Okay, okay.

I know Ipswich is bigger than that. What was it $267 million, something like that?

Yes. Okay. Fair enough. A question for you -- and I guess, David, you touched very briefly on this, but the jump in TDRs with respect to commercial real estate specifically, I am just talking linked quarter, going from $6 million to $12 million, can you just give us a little bit more color?

Yes, that was one credit where it was a restructuring, and it was based on our evaluation of the cash flow generating capacity of that borrower. It was a bifurcation, I believe, with a significant portion of the loan remaining on the existing terms and a smaller portion of the loan going to an interest only repayment term.

Our assessment of that credit based on value and cash flowing -- cash flow generation convinced us it was appropriate for it to remain in accruing status. It is a restructuring -- it is a troubled debt restructuring, and in accordance with the accounting rules, and we classified it accordingly. We think it was the best deal for us to do it that way. That is really the way we make those decisions on a case-by-case basis.

Okay, and what type of commercial real estate?

This is a mixed use residential and commercial/office type of property.

Okay, and what is your approximate LTV on it?

I don't have that at hand. I would -- again, it met our test sufficiently for us to keep it on accruing status.

Okay. And where approximately is it -- I mean, is it located in Rhode Island or is it --?

It is approximately in the city of Providence.

Okay. Great. One last question. The deleveraging you did in third quarter, when in the third quarter was that done?

Around the middle of August. So there is about (multiple speakers) quarters' benefit in there.

Okay, great. So we will see a little bit more come out of that. Okay, perfect. Great, thank you very much.

Actually, there are no more questions at present. I would like to turn the call back over to the speakers for any closing comments.

Really just -- this is Joe -- just to say that we appreciate your interest. We will continue to make steady progress, I think, during the next quarter. I look forward to talking to you again.

Thank you. That concludes today's teleconference. You may now disconnect your phone lines.