Washington Trust Bancorp Inc (WASH) 2011 Q2 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp Bank's conference call. My name is [Case]; I will be your operator today. (Operator Instructions). And now, I'll turn the call over to Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel?

Thank you. Good morning and welcome to the second quarter 2011 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 our 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 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 --

Those two -- everything that has a sign on it has just reassigned the --

And now I'm pleased to introduce Washington Trust's Chairman, President and CEO, Joseph J. MarcAurele.

Thank you, Beth. I'd like to welcome everyone to today's call. Yesterday, we released earnings for the quarter ended June 30, 2011. I'm proud to report that Washington Trust posted a record $7.6 million in net income for the second quarter. Earnings per diluted share were $0.46, up 39% over the same period in 2010. For the six months, net income totaled $14.4 million or $0.88 per fully diluted share compared to $10.5 million or $0.65 per fully diluted share a year ago. Our key profitability measures for the second quarter were equally strong, as return on average equity was 10.83% and return on average assets was 1.04%.

Last quarter, I noted that Washington Trust had generated some momentum over the past several quarters and that momentum has continued through the first half of 2011. There are a number of factors that contributed to our success. Wealth Management revenues were up and continue to be a key source of earnings. We reduced our loan loss provision because asset quality has remained strong. Our net income margin once again increased, as we continued to manage loan and deposit pricing, while improving the funding mix. David will discuss these and other financial highlights in greater detail shortly.

While our results are very solid, it is important to note that we're still operating in a stressed economy. It's difficult to predict what effect Congress's decision on the debt ceiling will ultimately have on economic growth, and banks of all sizes continue to face new regulatory and compliance challenges.

The residential real estate market is a casualty of the weak economy and while recent reports indicate a slight rise in Rhode Island housing prices, there's still a lot of inventory and we need more sales before we see a real recovery.

The Massachusetts market, however, has fared somewhat better, and our Massachusetts Home Loan offices have provided good mortgage production through the first half of the year. Despite the market challenges, we successfully grew our residential portfolio in the second quarter. We also had some good commercial loan activity in the second quarter. However, overall demand has been modest.

Our growth continues to come largely at the expense of our larger competitors. However, in recent months, we have observed some competition in general, as all financial institutions push for loan asset growth. We've had success in attracting several new significant cash management relationships, which have generated new deposit balances for us and have contributed to our deposit mix improvement. We continue to have a comprehensive line of cash management products and we really have identified this as a key growth area to complement particularly our commercial lending relationships.

Deposits were down slightly during the quarter, primarily as a result of seasonal balance changes associated with governmental entities. These balances fluctuate and we do expect them to flow back into the bank in the future.

We recently made some changes to our checking product lineup that better positions us to compete head-to-head with big banks who are the market share leaders in Rhode Island and we feel that we will see benefit from this in the future.

Construction is well underway for our new East Providence, Rhode Island branch, which is on schedule to open in September. We hired an experienced and well known East Providence native who has already started business development efforts in that city. We're confident that we'll be successful in this new location and that it will help us grow our Rhode Island deposit market share.

Our Wealth Management area continues to perform well. Assets under administration increased during the quarter and we continue to see good new business opportunities. We've got a very talented team of professionals in that area and are optimistic that this will continue to contribute to the growth to the bottom line, especially as the markets improve.

I would now like to ask David Devault to provide more detail in our first (sic) quarter financials. David?

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

Net income, as Joe mentioned in the second quarter of 2011, was a record for Washington Trust at $7.6 million. That translated to $0.46 per diluted share. These results compared to $0.42 per diluted share for the first quarter of this year and $0.33 per diluted share for the quarter of last year.

The latest quarter results reflect higher net interest income, good growth in Wealth Management revenues and a decrease in FDIC insurance deposit expense.

The quarter also included a gain on sale of bank property in the amount of $203,000 pretax, which had an impact of about $0.01 per share.

Year-to-date net income for the six months this year is $14.4 million or $0.88 per diluted share, up from $10.5 million or $0.65 per diluted share last year.

Some of the key performance ratios were very respectable, with a return on equity of 10.83%, the highest level we've seen since the third quarter of 2008. Return on assets was over 1% and it's at the highest level we've seen since the third quarter of 2007. Asset quality measurements also continued to be sound.

The net interest margin rose by 5 basis points on a linked-quarter basis to 3.21% for the second quarter of this year and is up 35 basis points from the second quarter of last year. These results reflect continued progress in reducing our funding costs. Net interest income in 20111 is up 12% over the comparable second quarter and year-to-date amounts in 2010.

One of the distinguishing characteristics of our operating strength is the high level of non-interest income, which was 37% of core revenues for the first half of this year. Wealth Management revenues are the largest component of non-interest or fee income and it is very much contributing to our good results this year. Wealth Management revenues are up 6% on a linked-quarter basis and are up 11% over the second quarter of last year. Wealth Management assets under administration stood at $4.148 billion at the end of the second quarter.

Net gains on loan sales and commissions on loans originated for others is another good source of non-interest income for us. It was $537,000 in the second quarter of this year, up $219,000 from the second quarter last year. On a year-to-date basis, gains on loan sales and commissions on loans originated for others is $1.1 million, up 21% over the same period a year ago.

There were no other than temporary impairment charges recorded in the second quarter of this year compared to $33,000 in the first quarter and $354,000 in the second quarter of last year.

We conducted a modest balance sheet restructuring in the quarter which included the sale of $5.7 million in mortgage-backed securities and the prepayment of $5 million in Federal Home Loan Bank advances. This resulted in a realized securities gain of $226,000 and a debt prepayment penalty expense of $221,000.

Regarding non-interest expenses, excluding net debt prepayment charge and also the $676,000 seasonal increase in merchant processing expense, which moves in step with merchant processing revenues, non-interest expenses for the second quarter were up 3% on a linked-quarter basis and up 4% from the same period a year ago. The increase in non-interest expense reflects higher personnel costs, as well as an increase in foreclosed property costs, offset in part by lower FDIC deposit insurance costs.

Our effective income tax rate remained at 30.5%, the same as the first quarter rate.

Total loans rose by $27.5 million or 1.4% in the quarter. It was led by an increase in commercial loans of $17 million or 1.6%. During the first half of this year, total loans are up $62 million or 3%, with a 4.5% go-ahead from the commercial loan portfolio.

The investment securities portfolio had a net increase of $15 million during the latest quarter, primarily due to selected purchases of mortgage-backed securities net of the modest sale transaction I described earlier. The investment securities portfolio was down slightly from the balance at the end of 2010 and is down by 12.5% from a year ago.

Total deposits stood at $2 billion at the end of the second quarter, down $53 million from the balance at the end of the first quarter, reflecting a seasonal decrease in governmental and other deposits. We expect these deposits to largely build again in the third quarter. Demand deposits were down by a modest $6.1 million and the average balance of demand deposits for the second quarter was little changed from the previous quarter. Total deposits are up by 2.4% from a year ago, including a 16% increase in demand deposits.

I'll comment now on asset quality. As a general statement, we feel that asset quality is stable with a modest pace of improvement. While non-performing assets rose slightly in the quarter, the absolute level of non-performing assets remains very manageable. And loan delinquencies and troubled debt restructurings both declined during the quarter.

Non-performing assets, which we define as non-accrual loans, non-accrual investment securities and properties acquired through foreclosure or repossession, amounted to $24.1 million or 0.82% of total assets at June 30, up $1.9 million -- or from $22.3 million or 0.77% of total assets at the end of the first quarter. The increase reflects a $1.6 million increase in non-accrual loans, $1.3 million of which was in non-accrual residential loans.

Meanwhile, total loan delinquencies of 30 days or more declined by $2.7 million to $24.6 million or 1.19% of total loans in the second quarter. This was led by a $4.1 million decline in commercial delinquencies offset by a $[1.4] million increase in residential delinquencies.

Our loan loss provision charged to earnings was $1.2 million in the second quarter of this year, down by $300,000 from the first quarter and that was also down from the second quarter of 2010 level.

Net charge-offs were $956,000 in the second quarter of this year compared to $974,000 in the first quarter and $1.2 million in the second quarter a year ago.

The allowance for loan losses remains at 1.43% of total loans, unchanged from the level at the end of 2010.

Incorporation in our subsidiary bank continued to remain well capitalized. The corporation's estimated total risk-based capital ratio strengthened to 12.98% at the end of the second quarter, up 6 basis points from the end of the first quarter.

The tangible equity to tangible assets ratio was 7.52% at the end of the most recent quarter, up from 7.36% at March 31 and up 57 basis points in the last 12 months.

Additional information regarding non-GAAP financial measures is included in the Financial Table section of our earnings release.

Finally, in June, we declared a quarterly dividend of $0.22 per share which was paid on July 14.

And at this time, I'll turn the call back to our President and Chief Executive Officer, Joseph MarcAurele.

Thank you, David. Needless to say, we're pleased with our midyear results and we continue to be optimistic about continued growth opportunities for the Company. We really have a great team of employees and I think we have a very competitive product lineup. When you add our outstanding customer service to that, I think it' a very compelling proposition.

We've proven that we can compete in challenging times. We're hopeful that the economy will begin to improve. We do have a very clear strategic plan that we plan to stick with and that will guide us, I believe, through an opportunity to continue to be committed to enhancing shareholder value.

I really would like to thank everyone for their time this morning and now David and I would be happy to answer any of your questions.

Thank you. (Operator Instructions). The first question comes from Damon Delmonte of KBW.

Hi, good morning, guys, how are you?

Good morning, Damon.

Good morning, Damon.

I was wondering, David, if you could talk a little bit to the restructuring this quarter. Do you foresee any additional balance sheet activities like you did this past quarter?

There were modest opportunities for that including the restructuring of FHLB advances into longer terms at lower rates. We've done a modest transaction of that nature in July which will have a modest impact, beneficial impact, on a go-forward basis. So we continue to evaluate that and as opportunities arise, we're taking advantage of those.

So when you say "modest opportunities," you mean something similar in size to what we saw this past quarter?

We've looked at the portfolio of FHLB advances. We did a restructuring of about $34 million in FHLB advances in July, and that will have an impact of probably in the range of $50,000 per quarter, of $50,000 to $60,000 per quarter of favorable reduced interest expense.

Okay.

So again --

Are you trying to offset the prepayment penalties on those with taking gains on securities?

That kind of transaction, where it is only FHLB advance restructuring does not result in a prepayment penalty. It's blended into the cost of those on a go-forward basis.

Okay. Okay, understood.

So these are marginal increases that are the kind of -- we've done a number of these over the past 18 to 234 months, I would say, and they've had a cumulatively beneficial impact and as we continue to see opportunities for that, we will do them. I would say that there are probably fewer opportunities for that in the future than there have been in the past.

Okay. And my second question is probably directed towards Joe. Could you just give us your thoughts on the pending Brookline Bancorp Rhode Island transaction? And obviously, BARI and yourselves are the two largest independent banks in the state, and what does that do from a competitive landscape? You have another reasonable player coming into the market. You obviously have a lot of ties in the greater Providence area. How does this bode for Washington Trust down the road?

Well, I think it does take a local -- it changes the effect of having a truly local player in our market. However, I would say that we certainly respect Brookline as a company. They've shown that they can be -- they are very well run. There will probably be some power associated with additional resources that can be brought to bear from the perspective of Bank RI. All that being said, I think that we continue to be in a very good position to compete not only against the larger banks, but any disruption that might be caused by changes that would happen at banks that end up getting acquired.

Okay. That's helpful, thank you. And I guess this is my last question regarding asset quality. It looks like we continue to see a little bit of an uptick in the residential mortgage portfolio. Are these non-performing loans coming from properties primarily in Rhode Island, or would you say there's more from your Connecticut-Massachusetts exposure, or even some of the other Northeast states?

It includes both in-market originations, as well as some in our acquired loans. The uptick is obviously driven by the economy. We also are seeing some lengthening in workout time because of changes, most of which are not helpful to banks, in either foreclosures or stays that are put onto a foreclosure process. And generally, those are state-driven regulations and that's simply a fact of life that we have to live with today.

Okay. And are you guys still purchasing out-of-state residential mortgages?

We have not acquired any in some time and continue to look at them. We have not been able to find any that meet either or both of our underwriting and pricing criteria. We have been very selective about that in the past and we would continue to be -- approach that in a very selective and prudent manner in the future. We're not ruling it out. We look at them all the time. We simply haven't found the product that suits us.

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

You're welcome.

Thanks, Damon.

Thank you. And the next question comes from Laurie Hunsicker with Stifel Nicolaus.

Yes, hi, good morning. I just wondered if you could -- circling back to credit here -- address the trouble that restructured loans that are actually not part of your non-performing status, that commercial real estate piece that continues to go down? I'm guessing maybe there were just a little migration into non-performers, but that continued to go down. Can you talk about that a little bit?

Specifically, I'm talking linked quarter. March was $10.1 million and down to $6.6 million, just the troubled debt restructured loans that are still accruing. I mean, we're seeing substantial improvement there relative to what we're seeing at other banks and I just wondered if you could provide a little color on that?

Yes, a couple of -- first of all, let's circle back to the -- what is a troubled debt restructuring and when there is a restructuring and either in some type of concession made to the borrower because of the borrower's troubled status, which is a subjective judgmental evaluation, we put those loans in troubled debt restructuring status. They perform for a period of time and we believe the appropriate measurement period is one year and we believe that because that's how we interpret the GAAP rules on this.

Then if the loan is performing in accordance with the restructured terms at the end of that four-quarter period and there is nothing else unusual about the credit, then we will declassify it from TDR status. So we had a couple of those in the quarter. That would be the reason for the net decline in troubled debt restructurings.

Yes, if (inaudible) --

If we're looking at the bulk of the rest of the $6.5 million because clearly, that sort of reflecting jump-back happened sort of nine months, a year ago. How much of that $6.5 million then would be hitting its one-year anniversary by September 30, do you know?

I don't have that handy. I would say there has been in general a slowdown in the pace of loans being put into troubled debt restructuring. I think that the peak of that, at least so far, seems to have been during mid-to-late 2010, so over the next few quarters, unless more go into that status, we should see some continued decline in the TDR classification.

Okay, great. And then just going back to something that Damon touched on with respect to the Brookline-BARI merger, we're about a quarter out now. Obviously, you've announced this new branch in East Providence. Can you just update us in terms of your more macro view on your plans for de novos over the course of the next one to two years and then just update us in terms of your thoughts on M&A? You certainly have the stock currently to go out and do an acquisition, just in light of everything, what your current thoughts are. Thanks.

Laura, this is Joe. I think the -- our de novo strategy in large part has not changed. I think we have said in the past that we would like to be on a pace to do at least one a year in new contiguous markets to the branching that we have already done, primarily north into Rohde Island from the markets that we are in, so approaching more Providence in the outlying communities of Providence, of which East Providence is one.

In regard to -- and to the extent that our financial performance and our expense control would allow in the out years -- and I'm talking a few years from now -- we would entertain doing more than one per year. I continue to believe that we have a very strong, strict, statewide brand. I think we could leverage that quite effectively by going into markets that we're not in today. Again, I would emphasize that we have statewide only 7% or 8% deposit market share, so even though the Rhode Island economy is not growing robustly, there continues to be quite a bit more for us to get.

In regard to M&A activity, I again don't think you would see us put a flag in the ground 100 miles from us to buy a two or three branch bank that would be hard for us to either grow or brand. I think things that are closer to us or present opportunities that are of a cost to the company that would create reasonable or no dilution, I think we would think of that, particularly if we thought there were synergies with other businesses that we are currently in, particularly mortgage origination and Wealth Management.

Okay. And certainly, I mean, to the extent that you have the big Wealth Management presence up in Massachusetts, would you favor -- if you had a (inaudible) -- would you favor going to Massachusetts over Connecticut?

I think the close proximity -- the Massachusetts market is certainly more populated from Providence to Boston than the seashore area of Connecticut is. Now all that being said, there are some very good franchises in Connecticut that, in the right circumstance, certainly we would not ignore.

Okay, great. Thank you.

Thank you. And the next question comes from Frank Schiraldi from Sandler O'Neill.

Good morning.

Good morning.

Hi, Frank, how are you?

Good, good -- just a couple of questions. Most have been answered actually, but I'm just wondering, Dave, on the NIM, if you could maybe characterize the margin going forward? Do you think most of the growth in the NIM has been realized, or you talked about potentially picking up $50,000 in additional interest income. I don't know if that was per quarter or per month, but would that be the main -- a big driver of any NIM expansion going forward or is there just more elsewhere?

That, combined with just a general continued trend downward in deposit funding cost and other FHLB funding costs, tells us there's a little bit of continued room for upward improvement in the margin. I would say it's modest and I wouldn't go out beyond a couple of quarters for that in a prediction because we just need to see what happens with rates and growth patterns.

Okay. And that $50,000 number, you had mentioned that was per month?

It was per quarter.

Per quarter, okay. Okay And then I apologize if I missed it in your previous comments, but in terms of 2Q seasonality in the total trust and investment management revenues, how much of that was just seasonally second quarter increase that we expect to flow back out for 3Q?

About $254,000 of the increase in the second quarter revenues over the first quarter was seasonal tax preparation fees for our fiduciary clients.

Okay, great. And I just wanted to make sure I totally understood the last comments you made, Joe, on M&A. When you talked about some of the synergies of businesses you're focused on, you said Wealth Management and then you were talking about residential mortgage originations?

Yes, I think, Frank, it's safe to say that we feel as though we have an expertise in mortgage origination. We continue to be able to deliver mortgage commitments to our customers in a very timely way. I think one of the things that has made us very successful in regard to our mortgage business is that we have been able to improve on some of the elongated closing times that some of our particularly larger market competitors have been experiencing. So I think that is something that we do very well.

Okay. Thank you very much.

Thank you.

You're welcome.

Thank you. And we do not have any more questions at the present time, so I'd like to turn the conference call back over to management for any closing remarks.

I'd really like to, first of all, thank everyone for being with us today. I really would close by saying thank we feel cautiously optimistic about our opportunity to take advantage of what we see in this market. We feel as though we are very well positioned to compete in the markets that we operate in and we will continue to try to drive results that will ultimately result in significant and certainly above-market, we hope, shareholder value.

So thank you very much this morning.