Washington Trust Bancorp Inc (WASH) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Washington Trust Bancorp, Inc.'s conference call. My name is Emily and I will be your operator today. If participants need assistance during the call at any time, (Operator Instructions). Today's call is being recorded.

I would now like to turn the call over to Elizabeth Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel?

Thank you. Good morning, and welcome to the first-quarter 2012 earnings conference call from Washington Trust Bancorp, Inc. National NASDAQ Global Market, Select Symbol WASH.

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

Now I'm pleased to introduce Washington Trust's Chairman, President, and CEO, Joseph MarcAurele. Joe?

Good morning, and thank you for joining us on today's call. Earlier today, we released our first-quarter 2012 earnings. I'll make a few brief comments about the quarter, and then David will provide a more detailed financial overview. We'll then answer any questions you may have.

As you may recall, Washington Trust announced record net income in the fourth quarter of 2011. I'm pleased to report that the momentum continued into 2012. This was no easy task, considering the difficult Rhode Island economy. We posted record earnings of $8.4 million or $0.51 per diluted share for the first quarter of 2012, up from $6.8 million or $0.42 per fully diluted share in the first quarter of 2011.

Washington Trust has a solid foundation which we've built upon to improve our key performance measures during the quarter. As return on average equity was 11.85%, and return on average assets was 1.11%. We continue to be well-capitalized and our asset quality remains healthy.

The key to our success has been our ability to strategically grow the Corporation while adhering to the core values upon which Washington Trust was founded 212 years ago. We've never forgotten that banking is about people, depositors, homeowners, businesses, and investors who depend on us to help them reach their goals. As we grow, we bring our brand of personal service, competitive products and state-of-the-art technology to new market areas, reaching more and more people.

Our mortgage expansion into Massachusetts and Connecticut is a great example of how we've been able to strategically grow our core business line and use our competitive advantage of service excellence. While some of the larger banks have been caught up in red tape, Washington Trust has been able to quickly and efficiently service homeowners. As a result, we had outstanding mortgage production and realized significant mortgage banking income in the first quarter.

We believe there are mortgage opportunities for us in our home state of Rhode Island as well. So this past February, we opened a new mortgage office in Warwick, Rhode Island. It's a great location right off Interstate 95, and it allows our originators to service homeowners throughout the state. Branch expansion is also critical to Washington Trust's growth, as our branches are a key source of retail and commercial deposits, as well as consumer and small-business loans.

Last October, we opened our first office in East Providence, Rhode Island, and I'm happy to report it's performing to our expectations. Renovations are currently underway for our third Cranston, Rhode Island branch located on heavily traveled Plainfield Pike. The new Cranston branch will open in the third quarter of this year and will add to our solid presence in the state's third-largest city.

Deposits were up modestly from year-end, and we were just over $2.1 billion at March 31. Our concentration has been on attracting core deposits, as rate-driven deposit growth has been hard to come by in this low rate environment. On April 1, we kicked off a new promotion aimed at attracting core deposits and building our statewide brand. Our "I love Rhode Island" advertising campaign offers a free Rhode Island State Beach pass to every new checking account customer who signs up for direct deposit. It's a great promotion, and early results have been quite positive.

We saw moderate increases in our home -- in our commercial loan portfolio in the first quarter. Demand has not been robust. However, we do see opportunities that we feel we can capitalize on. Our lender's merchant services representatives and cash management team continue to work closely together, and have brought in some good prospects and relationships. And we will continue to work on that going forward.

Our Wealth Management area had a good quarter, as investment performance was solid. Wealth Management revenues for the first-quarter 2012 were up compared to the previous quarter, and Wealth Management assets under administration were up from year-end.

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'll review our first-quarter 2012 operating results and financial position, as described in our press release issued this morning.

As Joe mentioned, net income of $8.4 million and diluted earnings per share were $0.51 for the first quarter of this year; were record levels for Washington Trust. These results compared to $0.47 per diluted share in the fourth quarter of last year and $0.42 per diluted share in the first quarter a year ago. These latest quarter results reflect some excellent revenue increases in a number of business lines as well as continued improvement in asset quality.

Key performance ratios for the latest quarter were very sound, with a return on average equity of 11.85% and a return on average assets of 1.11%. The return on average equity for the quarter is the highest level we've seen since the third quarter of 2008. The return on average assets is the highest level in many years.

Net interest income for the first quarter of this year was up 2% on a linked quarter basis, due to continued reduction in the cost of wholesale funding and time deposits. From the first quarter a year ago, net interest income is up by 10%, reflecting the benefit of lower funding costs as well as 7% growth in average loan balances over that period of time. The net interest margin was 3.27% in the first quarter, up 5 basis points on a linked quarter basis and 11 basis points higher than the first quarter a year ago.

Looking at other non-interest revenue sources, mortgage banking revenues, which consist of net gains on loan sales and commissions received on loans originated for others, reached an all-time high for us in the first quarter of this year at $3.1 million. Mortgage banking revenues were up $162,000 from the fourth quarter of last year and up $2.6 million from the first quarter of last year.

While relatively low interest rates have created a favorable environment for mortgage borrowings, we also note that these results reflect continued success in origination volume growth in our residential mortgage lending offices. And we're seeing a continuation of this trend in the second quarter so far.

Our Wealth Management business also turned in a very solid quarter. First-quarter Wealth Management revenues were up 4% on a linked quarter basis and up 1% over the same period last year. We also saw an 8% increase in Wealth Management assets under administration in the quarter. Wealth Management assets stood at $4.2 billion at March 31, up $296 million in the quarter. This balance at March 31 represents an all-time high for Washington Trust.

The comparison of total quarterly non-interest income on a linked quarter and year-over-year basis is somewhat affected by differing amounts of other-than-temporary impairment losses, as well as net realized gains on securities transactions in the various quarters. Net interest income excluding these items was up 1% on a linked quarter basis and 23% year-over-year.

Looking at non-interest expenses, fourth quarter of last year included the effect of an above-average charitable contribution expense, as well as a debt prepayment penalty incurred in connection with some modest balance sheet restructuring in the fourth quarter. Excluding those items, total non-interest expenses for the first quarter of this year were essentially flat on a linked quarter basis. Compared to the first quarter a year ago, total non-interest expenses are up by $2.7 million.

Most of this increase was in salaries and benefits. It reflects higher amounts of commissions paid to mortgage originators; higher staffing levels in support of mortgage origination and other business lines; and also higher defined benefit pension costs for a number of reasons, that the largest of which would be the lower discount rate applied in 2012 compared to last year. The effective income tax rate for the first quarter of this year was 31.5%, and at this time that is our forecasted rate for 2012.

Turning to the balance sheet, total loans rose by $8 million in the quarter, with a $17 million increase in commercial real estate loans. In the past 12 months, total loans are up by 6%, including an 8% increase in total commercial loans. The total loan portfolio is $2.2 billion at the end of the first quarter.

Total deposits rose by $19 million in the quarter. In the past 12 months, total deposits are up by 5%, with an 18% increase in demand and NOW account balances. These, of course, are the lowest cost deposit categories, and they now comprise 28% of total deposits, up from 25% of total deposits a year earlier. Total deposits stand at $2.1 billion at March 31.

Turning to asset quality, we see that a number of indicators showed noticeable improvement in the first quarter. Non-performing assets, which include nonaccrual loans, nonaccrual investment securities, and properties acquired through foreclosure or repossession, decreased to $23.6 million or 0.78% of total assets at the end of the most recent quarter, down 3 basis points from the end of the fourth quarter of 2011.

Total loan delinquencies 30 days or more past due also declined by $5.2 million, ending the quarter at $21.1 million. Troubled debt restructurings decreased by $5.5 million in the quarter and amount to $14.1 million at March 31. Net charge-offs were $657,000 in the first quarter, compared to $839,000 in the fourth quarter and $974,000 in the first quarter of 2011. Net charge-offs were only 0.12% of average loans in the first quarter.

Based on these and other asset quality considerations, a loan loss provision charge to earnings of $900,000 was recorded in the first quarter of this year. This provision compares to $1 million in the previous quarter and $1.5 million first quarter a year ago. We believe our allowance for loan losses remains very adequate at 1.39% of total loans, and the coverage level equal to 155% of nonaccrual loans.

The Corporation and the subsidiary Bank continued to remain well-capitalized. The Corporation's estimated total risk-based capital ratio was 13.22% at March 31, up 36 basis points in the quarter. In March, we declared a quarterly dividend of $0.23 per share, which was paid on April 13. This represented a $0.01 per share increase over the quarterly rate paid throughout 2011.

At this time, I'll turn the call back to Joe MarcAurele.

Thank you, David. We're obviously pleased with our first quarter performance; it's a great way to start off the year. While we're happy with the momentum we've generated in recent quarters, there is still much work to do. We're still facing some economic headwinds, with both increased regulation and competition, as well as some continued weakness in the economy.

We have had great success growing key business lines, particularly our mortgage banking operation and branch network. And we plan to continue to do that. We will, however, not grow just for growth's sake. We will do it only if it is done strategically, so that we can build upon our already-strong foundation and really do what we do best to provide a solid return for our shareholders.

I'd really 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). Damon DelMonte, KBW.

My first question has to do with the margin. Obviously, a nice quarter-over-quarter increase for you guys. David, maybe you could talk a little bit about your outlook for other ways to reduce funding costs? Or maybe even on the asset side as to where you may be able to pick up a little bit of yield, to keep this level of the margin.

Well, it was -- continued to be some opportunity to continue to reduce wholesale funding costs and time deposit costs; I think it will be modest over time. The ability to generate new assets at yields that will support the margin is something we're going to try very hard to do. The longer the low interest rate environment continues, the more stress there will be on that aspect of managing the margin. We would, I think, look to see some stability in the margin over the next couple of quarters, and we'll take it from there.

Okay. That's helpful. Can you just talk a little bit about the loan pipeline? I know period-end loans didn't show much of an increase, but is the first quarter typically seasonally low for you? And if so, what would be your outlook for the second and third quarters coming up?

Well, Damon, this is Joe. My feeling is pretty basic here. We had a very, very strong fourth quarter in loan closings. To that extent, we, to a large degree, blew out a fairly significant portion of the pipeline. We are rebuilding that now. The all-in commercial pipeline right now stands at about $75 million. It has more typically been a bit higher than that. My sense is that we will continue to build that. And hopefully, we will show some level of growth in the second quarter that may be at least slightly better than we showed in the first quarter.

And would you expect that pipeline just to continue to build as we go further through the year?

That would be the goal.

Okay. And then, I guess, lastly, David, with regards to expenses, is this quarter's level a good run rate going forward? Or are there additional expenses we should be considering?

This is a pretty good run rate, Damon. You're seeing, as I mentioned, before the impact of mortgage origination, commissions that are included in those expenses. Right now, we anticipate certainly that the revenue side will continue to hold that up and we'll see those kind of expenses.

Now, we have a plan to open a branch later in the year, but that would be, I think, pretty modest on the total expense base, and largely staffed from the existing employee pool, for the most part. And maybe a few hundred thousand dollars on an annualized basis of additional costs from that new branch.

Okay, great. Thank you very much.

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

Just a few questions. I wondered, first, just a follow-up on the margin. Dave, if you could talk a little bit about where CDs are being put on the books currently, and give us a little color on, if possible, on maturities going forward, timing?

Yes. Most -- the weighted average cost of CD originations has been hovering around the 30 to 40 basis point range on a monthly basis. That would include rollovers of existing CDs as well as new CDs opened by customers. So that is going to continue to gradually reduce our funding costs there, I think.

Okay. Is there any -- in terms of maturities going forward, is there any bulkiness coming up, or any programs coming up that would take down a large -- larger-than-usual balance?

No, it's pretty evenly spread out on a maturity basis.

Okay. And then on mortgage banking, given the office you opened in 4Q, and the office in Rhode Island and in the first quarter -- late in the first quarter, as I recall, as those ramp up, should we expect, even if industry originations fall, do you think we should expect to continue to see increased revenue going forward, at least in 2Q versus 1Q?

Well, right now, the pipeline for mortgage originations has been and continues to be fairly stable. Both the balance that we saw at -- in the fourth quarter, at the end of the fourth quarter, pretty much throughout the first quarter, it's continuing at the range that it has been in, which is between $100 million and $120 million for the most part of the residential pipeline. This is different than the commercial pipeline Joe was referring to earlier.

So, I don't think we've seen the full impact yet of those new offices. We certainly haven't. I think we will see a gradual increase in originations from those new offices. And then you also have the impact of rates. Right now, and for the foreseeable future, it looks like rates are going to continue to support the demand that we've been seeing.

Okay, great. Then I wonder, Joe, maybe if you could just talk a little bit about -- you know, you talked a little bit about the marketplace, about the pipeline, certainly. Many banks that I have been talking to have really spoken about a ramp-up in loan competition in their footprints -- both on pricing and terms. I'm just wondering if you would say the same is true of Rhode Island, or if it's maybe a bit different of a story, considering the players and the share characteristics of the state?

Well, I really would say that the competition, both on a rate and a structure standpoint, has certainly heated up. And we do feel that. The advantage that I think we continue to feel is some opportunity, particularly against larger competitors, to be a bit more agile. All that being said, I read the same thing that you read with other competitor banks, and I would say that my comments would be consistent with that.

Okay, great. And then just finally, you mentioned the difficult economy in Rhode Island. And I'm wondering, are you seeing the hopeful signs here, early in 2012, sort of lockstep to the rest of what the country is seeing? Or is that a bit too optimistic?

I think lockstep but slower, Frank. That would be my comment. Rhode Island, in my opinion, will come out of this later than other parts, certainly, of New England and probably certain better parts of the country. And again, our opportunity is that we have relatively modest market share, and even though the economy is challenged, our opportunity is to continue to make market share gains.

Right. Okay, great. Thanks. That's all I had.

Thank you.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Joseph MarcAurele for any closing remarks.

Well, I'd like to thank everyone again for your time. And, obviously, we are pleased with what's been a solid first quarter. We think that the trends and the opportunity for the Company continue to be reasonable, and our hope is that we can continue to perform on those.

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

Thank you.