Washington Trust Bancorp Inc (WASH) 2011 Q3 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Valerie; 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, Valerie. 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, 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, 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 today's 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 Joseph J. MarcAurele. Joe?

Good morning, and thank you for joining us on today's call. Yesterday, we released earnings for the third quarter ended September 30, 2011. David and I will now discuss these results and then answer any questions you may have.

Washington Trust had another solid quarter with net income of $7.6 million for the third quarter, up from $6.4 million for the same quarter a year ago. Earnings per fully diluted share were $0.46, up 18% over the same period in 2010. For the nine months ended September 30, net income was $21.9 million, a 30% increase from a year ago.

We're very pleased with the consistency of our performance, especially in this sluggish economy. As we've mentioned in previous calls, we believe economic recovery is still a ways off, particularly in Rhode Island, so we must continue to follow our game plan.

Expansion is a key part of this plan and we will continue to introduce our unique community banking model into markets with high-growth potential. Our goal is to expand faster and more efficiently than we've done in the past. Branch expansion is critical because Washington Trust has a strong brand reputation in Rhode Island, but does not have the physical presence in key markets. Branches are also a key source of deposits, mortgages and small business services, so we hope to increase our market share as we expand our footprint statewide.

In late September, we opened a new branch in a busy shopping center in East Providence, Rhode Island. Instead of building the branch, we renovated an existing facility and were open for business in less than a year. We've been very warmly received by the city and we're very excited about the opportunities in this new market.

Our expansion will continue into 2012 as we plan to open a branch on Plainfield Pike in Cranston, Rhode Island. This will be our third branch in that city and while it is still subject to local and regulatory approvals, we anticipate opening by midyear. Like East Providence, we are renovating an existing facility in Cranston, so it meets our objectives of getting into the market quickly and less expensively.

We had good deposit growth in the third quarter, particularly low-cost core deposits, including increases in business checking, as well as money market and savings accounts.

Our mortgage banking area also benefited from low interest rates, as refinancing continued to be strong into the third quarter. As a result, mortgage revenues doubled from the second quarter of 2011. We have a healthy mortgage pipeline and expect mortgage activity to remain strong through the year-end.

The key to our mortgage banking success has been service, speed and flexibility. We have a great team of mortgage originators and a top-notch servicing staff who go the extra mile for our customers.

During this refinancing boom, we have consistently closed loans for customers in an average of 35 days. Our largest competitors have not been able to deliver in this timeframe or provide the same level of personal service. This fact has really led to some of our best mortgage referrals coming from new customers.

As you may recall, we opened two mortgage loan production offices in Massachusetts and they've been extremely successful, and this proves that our sales and service model works outside of our traditional Rhode Island boundaries, particularly for mortgages. We have therefore decided to expand this model into Connecticut. We've hired an experienced group of mortgage bankers who are already working in the Connecticut market. We've identified a facility just outside of Hartford in Glastonbury, Connecticut, and we'll open the mortgage loan production office there later this year.

On the commercial lending side, loan demand has been slower. We have booked some good commercial real estate deals and have recently won some key C&I accounts from larger competitors, but we continue to be challenged for volume in that area.

We've also attracted some very high-quality cash management accounts, as is reflected in our deposit balance growth, and we've been able to grow our demand deposit balance in a very healthy way.

Our asset quality measures remain strong and we believe we're adequately reserved. David will provide more details later.

Wealth Management revenues are a key source of non-interest income, but fluctuate with the changes in the financial markets. Wealth Management revenues were negatively affected by market volatility in the third quarter. However, year-over-year, third quarter revenues were up 5%.

That concludes my remarks, so I'll ask David Devault to provide more detail on our third quarter financials. David?

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

Net income for the third quarter of 2011 was $7.6 million. We earned $0.46 per diluted share, level with the second quarter of 2011, and up from $0.39 per diluted share in the third quarter last year. These latest quarterly results reflect higher net interest income, strong mortgage banking revenues and a decline in Wealth Management revenues.

Year-to-date, net income for the nine months ended September 30 amounted to $21.9 million, 30% higher than the same period in 2010. The latest third quarter results also included a return on average equity of 10.67% and a return on average assets of 1.03%. Asset quality measurements remained relatively sound as well.

Net interest income in the third quarter of this year was up 2% on a linked-quarter basis and up 7% from the third quarter last year due to continued reduction in our funding costs. The net interest margin was 3.22% in the third quarter, up slightly from 3.21% in the second quarter and up 21 basis points from the third quarter a year ago.

Capitalizing on the recent downward movement in interest rates, we conducted a restructuring of Federal Home Loan Bank advances in September, advances totaling $94 million with a weighted average cost of 4.18%. We're restructured into longer terms with a weighted average cost of 3.05%.

Non-interest income represented 38% of core revenues in the third quarter.

Wealth Management revenues were down 10% on a linked-quarter basis. This reflects the effect on Wealth Management assets of weakness in the equity markets in the third quarter, as well as the seasonal impact of tax service revenues, which are always concentrated in the second quarter. Wealth Management revenues are up 5% over the third quarter of last year.

Wealth Management assets under administration totaled $3.7 billion at September 30, down 500 -- excuse me -- $420 million in the third quarter.

The mortgage banking business strengthened significantly in the third quarter and we were well poised to capitalize on that.

Net gains on loan sales and commissions on loans originated for others totaled $1.1 million in the third quarter, up 101% on a linked-quarter basis and up 7% from the same quarter a year ago. Year-to-date revenue from this source was up 13% over the same period in 2010. And as Joe mentioned, the pipeline is strong heading into the fourth quarter and we expect mortgage banking revenues to continue at a solid level in the near term.

Other than temporary impairment losses on investment securities of $158,000 were recognized in the third quarter on a pool trust preferred holding. There were no other than temporary impairment losses recorded in the prior quarter or in the third quarter of 2010.

I'll comment on non-interest expenses now. There were no significant non-core items in the latest quarter. However, there were such items in the comparable periods, including debt prepayment penalties in both the second quarter of this year and the third quarter of last year, as well as a contribution to our charitable foundation in the third quarter last year.

Excluding the effect of these non-core items, non-interest expenses for the third quarter of this year were up 3% on a linked-quarter basis and up 2% from the same period a year ago. This increase reflects higher levels of staffing and merchant processing costs, offset in part by lower foreclosed property costs and lower FDIC deposit insurance costs.

The effective income tax rate in the third quarter continued at 30.5%, unchanged from the first two quarters of this year.

On the balance sheet, total loans grew by $31 million or 1% in the quarter, with an increase of $33 million in the residential portfolio. During the first nine months of this year, total loans were up $92 million or 5%, with a $44 million increase in the commercial loan portfolio and $46 million in the residential portfolio.

Total deposits stood at $2.1 billion at the end of the third quarter, up 5% on a linked-quarter basis and over 70% of this quarterly increase was in demand deposits and NOW accounts. Among other factors, we continue to have good success in building commercial demand deposit relationships. During the first nine months of this year, deposits are up by 2%, including a 40% increase in demand deposits.

Regarding asset quality, we view asset quality to be relatively stable with continued modest improvement.

Non-performing assets rose slightly in the quarter, but still remain at comparatively low absolute levels. We also note that total loan delinquencies and troubled debt restructurings have both declined for two consecutive quarters.

Non-performing assets, which we define as non-accrual loans, non-accrual investment securities and properties acquired through foreclosure or repossession, amounted to $24.6 million or 0.83% of total assets at the end of the third quarter, up 1 basis point in the quarter.

Meanwhile, total loan delinquencies 30 days or more past due declined from 1.19% of total loans at the end of the second quarter to 1.05% at the end of the third quarter, led by a decline in commercial loan delinquencies.

The loan loss provision charge to earnings was $1 million in the third quarter of this year, down $200,000 on a linked-quarter basis, and down $500,000 from the third quarter of last year.

Net charge-offs were $712,000 in the latest quarter compared to $956,000 in the second quarter and $1.3 million in the third quarter last year. This is the lowest quarterly level of charge-offs we've seen since the fourth quarter of 2008.

The allowance for loan losses remained firm at 1.42% of total loans, down 1 basis point from the end of the second quarter.

The corporation and the subsidiary bank continued to remain well capitalized. The corporation's estimated total risk-based capital ratio amounted to 12.99% at September 30, up 1 basis point in the quarter and up 49 basis points in the last 12 months.

The tangible equity to tangible assets ratio was 7.58% at the end of the third quarter, up 6 basis points in the quarter and up 51 basis points from a year ago.

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

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

At this time, I'll turn the call back to our President and Chief Executive Officer, Joe MarcAurele.

Thank you, David. We are very pleased with our third quarter results and the consistent performance really along all business lines. Despite the challenges in our market, we continue to feel that we can operate from a position of strength.

We are very blessed with a talented group of employees. We feel as though we have a superior brand reputation, particularly in our market, and we continue to benefit from a 211-year tradition of financial strength and stability.

While we are still facing challenging days ahead, we can assure you that we feel as though we are in the position to take advantage of opportunities as they come our way.

I would like to thank our shareholders, customers, and employees for their continued support of the Company.

At this time, we'd be happy to answer any questions.

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Frank Schiraldi of Sandler O'Neill.

Good morning.

Good morning, Frank.

Frank, how are you?

Good, thanks. Just a couple of quick questions -- first on the margin, a question for Dave -- you've got this restructuring you did late in the -- it looks like pretty late in the quarter, and so that's going to be a positive, but just your thoughts on the margin going forward?

We would expect the margin to be stable to modestly improving in the near term. Certainly, the impact of that restructuring will help. There is some additional downward room in time deposit repricing as well, and really, it depends on the path and the duration of this interest rate environment for how long that could continue.

Do you have numbers in terms of CDs that are going to be coming off the books in the next quarter?

We have not published that. It's not something I have available today. We'll take a look at that when we put out our 10-Q.

Okay. And then just on the deposit growth, I'm just curious, is the -- you talked about building new commercial demand relationships. So we didn't see commercial lending grow in the quarter. So is this basically existing borrowers creating a deposit relationship with you?

I think, Frank -- this is Joe -- I can handle that. Some of the downdraft in commercial outstandings had to do with lower line usage, particularly of our working capital lines of credit that are in place with customers, given, I think, a lot of the revenue challenges that our customers face in this difficult economy, which leads obviously, to lower receivable and inventory levels. We have though made a concerted effort to call on customers for their deposit business, both new and existing customers.

We have -- and I think we've talked about on previous calls -- made some relatively significant investments in adding to our cash management capability and staff, particularly on the sales side. And we believe, and we have seen evidence, that we are bearing fruit in that regard. So it's a combination of new and existing customers.

Okay, got you. And then just finally, Joe, I wondered if you could maybe just talk a little bit about your plans for expansion maybe beyond what was noted in the release.

Well, I'd say right now, Frank, we believe that we still have room to grow within the Rhode Island market. That's where our brand is strongest and my comment right now would be that we would continue to expand in the way that we have been, as long as our financial performance would allow us to do that without building up too much expense for the Company. So to the extent that we could accelerate branch expansion within Rhode Island, we will do that if, again, our performance allows.

Okay. So it's sort of what we've been seeing with a couple of branches a year. Is that --

Right now, what you have seen is one a year. If we can do it more quickly than that, that is something that is within our strategy.

Okay. Thank you.

(Operator Instructions). Our next question comes from Damon Delmonte of KBW.

Hi, good morning, guys. How are you?

Good morning, Damon.

Hello, Damon.

I just wondered if you could a little bit about the mortgage banking activity during the quarter. Can you quantify what the originations were in the third quarter?

Well, this would include both originations for portfolio, originations for sale, as well as the principal amount of loans for which we act as broker, was about $130 million in the third quarter compared to $72 million in the second quarter.

Okay. And you think that your pipeline remains very strong going into the fourth quarter, so it would be a similar level to what we saw in the third?

Yes.

Okay. And roughly, what -- you did have good growth, or you retained a decent amount on the balance sheet. So what could we expect for residential mortgage growth in the fourth quarter?

Well, it's always hard to predict the mix there from those three categories that I mentioned earlier, but we are retaining some of that origination on our balance sheet. I think there would be -- continue to be a net increase in mortgage balance.

Okay, great. And then with respect to what you're seeing on the commercial real estate side, can you talk a little bit about the dynamics of the pricing and with respect to competition?

I think really, we feel right now that quality commercial real estate deals, we have been experiencing some pricing pressure. So I would say that for the best credit deals, there is a lot of competition for those assets and we are seeing the price competition there to be more significant.

And generally, who are you guys competing against? Is it the large banks, such as the Sovereigns, the Citizens, the BofA, or do you find yourselves going up against more of the mid-tier regionals like a Webster, People's, maybe even a First Niagara?

I think we more significantly compete with our peer banks.

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

Thank you.

(Operator Instructions). At this time, I'm showing no further questions. This concludes our question-and-answer session and I would like to turn the conference back over to Mr. MarcAurele for any closing remarks.

Well, I'd like to thank everyone for their interest today and hopefully, we are heading into what we feel will be a reasonable fourth quarter, and just thank you for your interest and we will get back to you at the end of the year.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.