Washington Trust Bancorp Inc (WASH) 2011 Q1 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp Inc. conference call. My name is Jamie and I will be your operator today. (Operator Instructions). At this time, I will turn the conference call over to Ms. Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel, you may begin.

Thank you Jamie. Good morning and welcome to the first quarter 2011 earnings conference call for Washington Trust Bancorp, Inc., NASDAQ Global Select Market symbol WASH. This morning's conference call is being recorded and is being webcast live and a webcast replay of today's call will be available shortly after the conclusion of the call through the Corporation's website, washtrust.com, in our investor relations section under the subhead presentations. However, please note that the information we provide during today's call is accurate only as of this date and you should not rely on the statements until after the conclusion of the call.

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

Thank you, Beth, good morning and thank you for joining us on today's call. This morning, we released our earnings for the first quarter ended March 31, 2011. I will provide a brief overview of the quarter. David will provide more detailed financial information, and then we will answer any questions you may have.

I would like to start by stating that I'm pleased with the momentum that Washington Trust has maintained over the past several quarters, especially in light of the difficult economic environment in which we are operating. As you may recall, we finished 2010 on a strong note, and I'm pleased to report that Washington Trust continued to post very solid results. For the quarter ended March 31, 2011 we recorded net income of $6.8 million or $0.42 per share, up substantially from the first quarter in 2010. Our key performance and capital ratios all remained strong and our asset quality continues to be good. These are all healthy indicators for the Company.

Our business lines continued to perform well. We've had great success at attracting new business and building relationships throughout the organization. We anticipate additional new business opportunities as we expand our retail network this year.

In January, we announced the opening of our new mortgage production office in Burlington, Mass. That office is now up and running and has already closed a number of mortgages. In fact, our Sharon and Burlington, Massachusetts offices combined have originated approximately one-third of our mortgage loan volume in the first quarter of 2011.

We have already started to see a change in the mix of the mortgage business. Last year when mortgage rates were at all-time record lows; the mix was about 75% refinancing and 25% purchase. In the first quarter 2011, it's more like 50-50. On last quarter's conference call we mentioned our plans to open a branch office in a busy retail shopping plaza in East Providence, Rhode Island. We recently received the necessary approvals and will begin renovations with the goal of opening the branch in September of this year.

On the retail side, deposits were up over $2 billion for the quarter with a good mix of low-cost core deposits. We've been managing deposit costs with positive results. We've been able to lower our cost of funds while retaining existing deposit relationships and improving the net interest margin.

We have also successfully attracted many brand-new deposits. Commercial loan demand has been reasonable and building and we have a solid pipeline. We're very happy with the nearly 3% first quarter commercial loan growth. We have a great team of commercial lending professionals who are out in the market making connections and bringing quality credits to the table. They are also generating new business relationships for our other areas of the Bank as well, including merchant services and cash management.

Our wealth management area had another outstanding quarter with revenues up significantly over the first quarter of 2010. We continue to benefit from strong financial markets and strong investment performance. We have also had success in landing new asset management business early in the year and are optimistic about potential opportunities in the coming months.

We recently hired some new wealth management talent who have either joined us or will soon be part of the team. Our wealth management area is critical to our community banking model. It enables us to offer a complete line of financial services to our customers and provides a key source of non-interest income. This line of business continues to help differentiate Washington Trust from other community banks.

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

Thank you, Joe, good morning everyone and thanks for joining us on our call today. I will review the first quarter operating results and financial position as described in our press release earlier this morning.

Net income for the first quarter of 2011 was $6.8 million or $0.42 per diluted share compared to $7.2 million or $0.44 per diluted share in the fourth quarter of 2010. Compared to the first quarter last year, both net income and diluted earnings per share were up by 31%.

The decrease in profitability from the fourth quarter reflects a decrease in residential mortgage banking activity revenues, and I will comment on that in a moment. The increase in profitability over the first quarter a year ago reflects both higher net interest income as well as good growth in wealth management revenues.

Some of the key performance ratios were also very respectable with return on equity over 10%, return on assets just shy of 1% and a continuation of good asset quality measurements. The net interest margin rose by 11 basis points on a linked-quarter basis to 3.16%, reflecting a 7-basis-point increase in the yield on interest earning assets from the fourth quarter of 2010. The 38-basis-point increase in the margin from the first quarter a year ago is largely due to a reduction in funding costs. Net interest income was up 13% over the first quarter a year ago.

Non-interest income continues to represent a significant portion of our revenue stream at 37% of total revenues to date this year. Our wealth management business continues to be a major contributor to our profitability. Wealth management revenues were up 4% on a linked-quarter basis and up 12% over the same quarter a year ago. Wealth management assets under administration grew nicely by about 3.8% in the quarter and stand at $4.119 billion at the end of March.

We had noted when we reported our fourth-quarter 2010 results that the $2.2 million amount of mortgage banking revenues in that quarter was higher than usual and due to an increase in market interest rates was not likely to be repeated in the near-term. As expected, residential mortgage refinancing and sales activity has declined in recent months compared to the latter half of 2010. That said, net gains on loan sales and commission on loans originated for others is still a good source of non-interest income for us and totaled $525,000 in the first quarter this year, down slightly from the first quarter a year ago.

In the latest quarter we recognized other-than-temporary impairment losses of about $33,000 on our pooled trust-preferred security holdings compared to OTTI losses of $63,000 in the first quarter a year ago. There were no OTTI charges in the fourth quarter of last year.

Non-interest expenses were $20.7 million in the first quarter this year, down about 5% on a linked-quarter basis mainly because of a higher level of commissions and incentives in that quarter as well as higher foreclosed property costs. We also had a $350,000 contribution to our charitable foundation in the fourth quarter. There was no such contribution in the first quarter this year.

Compared to the first quarter a year ago, non-interest expenses are up about 5%. About the largest increase would be a 3% increase in salaries and benefits as well as an increase in some foreclosed property costs.

The total amount of FDIC premium expense was $723,000 in the first quarter. We expect to see a reduction in FDIC premiums in coming quarters compared to the recent run rate. We're forecasting a level of around $500,000 on a quarterly basis for the remaining quarters of this year.

The effective income tax rate in the first quarter was 30.5%, up slightly from 30.4% to the fourth quarter.

Looking at the balance sheet, total loans rose by $34 million, 2% in total. $29 million of that increase was in the commercial category concentrated in commercial real estate loans. The residential portfolio grew by 1% in the quarter, and total loans stand at approximately $2 billion at March 31.

Deposits rose by about 1% in the first quarter. More importantly, we saw a noticeable favorable change in the mix with a $46 million or 20% increase in demand deposits. This result reflects our continuing efforts to grow that deposit category and improve our overall cost of funding. Total deposits also amount to approximately $2 billion at March 31.

Turning to asset quality, non-performing assets, which we define as non-accrual loans, non-accrual investment securities and properties acquired through foreclosure or repossession, declined by 2 basis points as a percentage of assets in the latest quarter to 0.77% of total assets. This decline was due to a $1.5 million decrease in OREO property, offset in part by an $869,000 increase in non-accrual loans. Non-accrual residential mortgages rose while commercial portfolio non-accruals declined.

Total delinquencies amounted to about 1.34% of total loans at the end of the first quarter, up 7 basis points in the quarter. Included in that increase was a commercial real estate loan 37 days past due with a carrying value of $1.2 million at March 31. This loan is also classified as a troubled debt restructured loan. In April, payments were received on a loan bringing it current with its restructured terms.

Our loan loss provision charge to earnings was $1.5 million in the first quarter, unchanged from the fourth quarter and also unchanged from the first quarter a year ago.

Net charge-offs were $974,000 in the quarter compared to $1.1 million on a linked-quarter basis and $1.2 million a year ago. The allowance of loan losses stands at 1.43% of total loans, unchanged from the end of the fourth quarter.

Our overall conclusion is that asset quality trends are continuing to improve. For example, net charge-offs were below $1 million for the first time since the first quarter of 2009. The pace of improvement is modest and significant improvement will require concurrent improvement in general economic conditions. We continued to work through these matters and the absolute level of non-performing assets remains very manageable.

Both the Corporation and its subsidiary bank continued to remain well capitalized. The total risk-based capital ratio strengthened to 12.92% at the end of March, up from 12.79% at the end of the fourth quarter of 2010. And the tangible assets ratio was 7.36% at the end of this quarter, up 55 basis points from a year ago.

Additional information regarding this non-GAAP financial measurement is included in the financial tables section of our earnings release.

In March, we declared a quarterly dividend of $0.22 per share. This represented an increase of $0.01 per share over the previous quarterly dividend rate which had been in effect since the second quarter of 2008. This dividend was paid on April 14, and at this time I will turn the call back to our President and Chief Executive Officer, Joe MarcAurele.

Thank you, David. As I mentioned, we're extremely pleased with the momentum we have generated in recent months and our goal is to keep the momentum going through 2011. We're excited about the growth opportunities presented by our new Burlington, Mass. mortgage office the and East Providence branch office, which will open in the third quarter of this year.

Our strategy going forward is much the same. We will continue to be aggressive in the marketplace while maintaining our quality credit and service standards. We will continue to focus on managing the balance sheet and controlling discretionary expenses to improve the bottom line and provide a solid return for our shareholders.

We thank you for your time this morning, and now David and I would be happy to answer any questions.

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

Wanted to just ask a couple of questions here. First on the margin, I didn't expect to see it up 11 bps; didn't expect to see that level of expansion in the first quarter. I'm wondering, is that in your mind, sustainable? And if the commercial pipeline is strong, might there be even more room for upward expansion in the short term?

It was nice to see that increase. Our forecast for the remaining quarters is that it would remain in this range. I'm not projecting any significant change upward. We achieved this through, again, continuing to closely manage deposit rates and trying to be fair and competitive with appropriate -- appropriately aggressive on loan pricing.

I think, Frank, to add to that, the commercial pipeline is, relatively speaking, stronger than it has been. However, the relative level of outstandings that we would that given our total book, while we know it will be priced certainly better than some of our securities opportunities, probably will not significantly affect the margin in the short term.

Okay, so it sounds like you're getting some pretty decent pricing on the loan book. The yields quarter over quarter were up in the loan book overall.

They were.

And I'm wondering on the securities side, it looks like the yields were up pretty significantly, both taxable and non-taxable. What is happening there? Is that prepayment speeds, or is there anything sort of nonrecurring or something happening in there?

No, nothing is nonrecurring. We did a modest rebalancing, I guess, or restructuring, about a $29 million to $30 million sale of some near-term maturities and invested in some agency mortgage-backed securities with a yield improvement. So that is the main reason we see some securities yield improvement for the quarter.

Okay, and was some of that non-taxable as well? Some of that that got sold, or no? I'm just wondering, that yield was up 19 basis points, it looks like.

No, this was from Treasury or US government into mortgage-backs.

Okay. And then I just wondered, Joe, if you could maybe quantify -- you're talking about the commercial pipeline; maybe quantify how strong that is in terms of today versus this time in early Q1?

I would say the commercial pipeline at the end of 2010 stood in the $68 million-$70 million range, and today it's over $100 million. So that is the basic improvement between the two quarters.

Great, that's helpful. Thank you.

Damon DelMonte, KBW.

David, with regards to the increase in non-performers in the resi mortgage portfolio, were those in-state, or were those part of your broader geographic exposure?

I think there was some in both in-state as well as some of the purchased mortgages from other states. I think that is a function of the economy, but our underwriting has continued to have proven to be very solid with very modest losses over time in that portfolio.

And are you continuing to purchase out-of-state mortgages at all, or no?

We do look for opportunities. We have not had any. We have not been able to find product that meets our criteria in terms of pricing structure or underwriting criteria.

Okay, great. And then, Joe, you had mentioned in your comments about you've made some recent additions or will be making some additions to your wealth management team. Are those folks going to be located in Rhode Island, or are they going to be maybe out of the Weston area?

Actually two will be in Weston, one a salesperson, and the others -- and there are three -- will be in Providence.

Okay, that's all I had for now, thank you very much.

(Operator Instructions) Laurie Hunsicker, Stifel Nicolaus.

Just to follow-up here on Damon's question of wealth management, just a two-pronged question here. The restatement that you did, it looks like it was about $150,000 or so. Can you expand a little bit on that? And then also, I guess just to sort of add on, bigger picture since you are adding two people in Weston, can you talk a little bit about your plans to maybe actually de novo branch into Brookline, and any additional color you want to give us?

The restatement you are referring to is a -- we revisited the definition of wealth management assets under administration. We concluded that there was a single relationship with a balance of about $106 million that no longer met the definition of assets under administration. We continued to maintain a consulting relationship with that client, but we did conclude that it was not appropriate to include those assets. So we went back to I think probably the third quarter of 2010 and reduced those assets under administration balances for the third quarter, the fourth quarter and the route of the first quarter numbers as well. It did not affect earnings in any way, but that was just the definitional change.

Okay. And then, to the extent that you ever put a true de novo branch or have a full bank branch in that Weston-Brookline area, what are your plans with respect to that?

Laurie, I think I've been fairly consistent with comments on that in the past. Our brand certainly stretches state-wide in Rhode Island. I think we have more buildout that we can do in Rhode Island. I don't really think that it would be in our best interest to just put a stake in the ground in Massachusetts with one branch or even two. I don't think that would gain much traction.

Well, would you ever consider, then, doing a small whole-bank deal?

If it looked like it made sense, we're always open to looking at those things.

Okay. And just to jump over here to non-interest expenses, you mentioned your FDIC savings. And so by my calculations, that's about $900,000 pre-tax, or basically $0.04 after tax to your bottom line. Some banks that are having those savings are turning around and rolling it back into a marketing spend; others are obviously letting it drop to the bottom line. Do you have any plans on that?

I would say, Laurie, that we're in the process of assessing whether, given things that have been happening in the market, if it would be prudent to roll some of that into a marketing spend. While I can't give specific guidance on that, I would tell you that we are seriously considering redeploying some of that potential savings in a way that would build future business.

Okay. And then, we're still going to see the charitable foundation this year? Charitable foundation contribution -- is that likely?

You can probably take that out of forecasting for 2011. We will continue to reconsider that on a quarter-by-quarter basis, but if anything happens it would not be until much later in the year.

Okay, yes, because historically, it's either the third or the fourth quarter. And so you're saying just take it out altogether? Likely, it won't --

Well, we did one in the third and the fourth quarter of 2010, so it may be something that we're able to not do this year.

Okay.

That does not in any way indicate our -- any less in support for the non-for-profit world. We continue to make a substantial contribution from our foundation in support of charitable purposes.

Sure. Okay, and then just one more non-interest expense question here. Your new branch that's coming online in the third quarter, I have in my notes from last time about $500,000 to $600,000 annually. I just wanted to check on that.

That's, I think, a good estimate of an annualized run rate of incremental costs associated with that.

Okay, great. And then one last question as it pertains to credit -- obviously, we're continuing to watch your charge-offs come down, which is fantastic. So my question is, despite obviously your growth, at some point does loan loss provision follow suit, or do you look at it on a reserves to loans target, which it looks like it stayed flat at 143? Or, how do you look at that? When could we potentially see your provision follow?

If we continued to see this kind of improvement, we are prepared to lower the provision on a quarterly basis, and we continue to look at it quarter-by-quarter. It could happen as soon as the second quarter.

Okay, and when was your last regulatory exam?

We're on a cycle that -- with -- a 12-month annual cycle, which is appropriate for banks like us, and we've had one recently.

Okay, as in this year?

I'm not sure I'm supposed to be that specific about the nature of FDIC exams, but we have satisfactory relationships with our examiners.

Okay, great. Thank you all very much.

Ladies and gentlemen, at this time I'm showing no additional questions, so I would like to turn the conference call back over to management for any closing remarks.

I would just like to close by saying thank you for your time this morning. Obviously, you can tell by the tone of the call that we feel good about our current earnings and the trajectory of our future earnings. So we look forward to catching up with everybody again at the end of the next quarter. So thank you very much.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.