Washington Trust Bancorp Inc (WASH) 2013 Q1 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp, Inc. conference call. My name is Chad. I will be your operator today. (Operator Instructions). Today's call is being recorded. And now I would like to turn the call over to Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations.

Thank you, Chad. Good morning. This is the first-quarter 2013 conference call for Washington Trust Bancorp, Inc. (technical difficulty) global select market, symbol WASH. This morning's conference call is being recorded in a webcast slide. A replay of today's conference call will be available shortly after the conclusion of the call on the Corporation's website, washtrust.com in our Investor Relations section under the subject 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. And now I am pleased to introduce Washington Trust's Chairman, President and CEO, Joseph MarcAurele.

Good morning and thank you for joining us on today's call. Earlier this morning, we released our first-quarter 2013 results. I would like to take a few moments to discuss the highlights for the quarter and later, David will review our financial performance. At the conclusion of the call, we will answer any questions you may have.

For the first quarter of 2013, net income totaled $7.4 million, or $0.45 per fully diluted share. Included in these results was the recognition of a $2.8 million impairment charge to earnings on a trust-preferred collateralized debt obligation investment security. The after-tax impact of this charge was $1.9 million, or $0.11 per diluted share. David will discuss this item in more detail a little later on in the presentation.

Returns on average equity and average assets for the quarter were 9.91% and 0.98% respectively. We remain well-capitalized and recently increased the dividend during the quarter to $0.25 per share. The local economy has shown some signs of improvement. We are though continue to be -- we continue to be under some level of competitive pressure. Despite some economic challenges, Washington Trust posted solid loan growth and strong mortgage production in the first quarter of 2013.

In recent years, we have opened new branches and mortgage offices, hired talent from larger competitors and enhanced technology. These investments paid off for us in 2012 and provided momentum going into the first quarter of 2013. Our commercial lending area had a great fourth quarter and built a pipeline that carried us into the first quarter of 2013. As a result of these solid business development efforts, commercial loans were up by about $25 million, or 2%.

We have been successful in attracting quality commercial credits from larger competitors. In addition to providing commercial financing, we have been able to obtain their cash management and deposit relationships as well.

Mortgage banking activity remained strong during the first quarter; although it was not as robust as the record high level in the fourth quarter. We have seen some pickup in the purchase market and the recent interest rate drop has once again spurred additional refinancing activity.

We continue to generate good mortgage origination production in Massachusetts where home values have held up and the economy has rebounded faster than Rhode Island. We have an experienced team of originators covering Rhode Island, Massachusetts and Connecticut and are confident that we will get our fair share of the mortgage business in 2013.

In the past 12 months, we have done a good job attracting new core deposits, which helped -- once again helped our deposit mix and lowered our cost of funds. Wealth Management assets under administration were up from year-end. Wealth Management revenues totaled $7.5 million for the first quarter. A stronger and more consistent financial market will benefit our Wealth Management returns. I would now like to ask David Devault to provide more detail on our first-quarter results. Thank you.

Thank you, Joe. Good morning, everyone. Thanks for joining us on our call today. I will review our first-quarter 2013 operating results and financial position as described in our press release this morning. Net income amounted to $7.4 million with diluted earnings per share of $0.45 for this year. This compares to fourth-quarter 2012 net income of $9 million, or $0.55 per diluted share and first-quarter 2012 net income of $8.4 million, or $0.51 per diluted share.

While the operating results of our major lines of business were very sound in the latest quarter, the overall results did not meet our expectations. The sole reason for this was an other than temporary impairment charge to earnings of $2.8 million on a trust-preferred collateralized debt obligation, or CDO. The net after-tax impact of this was $1.9 million, or $0.11 per diluted share.

By way of background on this, on March 22, the trustee for the CDO entity issued a notice that a liquidation of the CDO entity will take place at the direction of holders of the two most senior CDO tranches. We estimate that the proceeds from the liquidation event will be insufficient to satisfy the amount owed to noteholders of the subordinated CDO tranches of which Washington Trust is a noteholder.

We had recognized other than temporary impairment charges of $2.1 million on this security in years prior to this year. However, prior to the March announcement of the liquidation event, the expected future cash flows of the CDO through its maturity in the year 2033 were considered to be sufficient to recover our remaining $2.8 million amortized costs.

The first-quarter impairment loss reduces our carrying value in the holding to zero. As far as the effect on ongoing or core earnings this year, we believe that is negligible as the security had been in non-accruing status with no interest recognition since 2009 and we did not expect to recognize any interest income on the holding this year. The recognition of the impairment charge and the related reduction of the fair value to zero resulted in a modest reduction to equity capital of approximately $400,000 and that translates to a charge of about $0.0204 in book value and tangible book value per share.

First-quarter 2013 net interest income was $22.5 million, down by about $700,000 from the fourth quarter of last year. Included in the fourth quarter last year was a large prepayment penalty fee income item of about $357,000. Excluding the impact of that item, net interest income was down about 1% on a linked-quarter basis. The net interest margin held fairly steady at 3.32% compared to 3.33% in the fourth quarter of last year. Excluding the impact of the prepayment penalty income in the fourth quarter last year, the net interest margin for that quarter was 3.28% and on this basis, the linked-quarter increase reflects a reduction in the cost of funds offset to a lesser extent by a decline in the yield on loans.

Average interest-earning assets declined by $20.5 million on a linked-quarter basis reflecting payments received on mortgage-backed securities, partially offset by loan growth. In February, we also restructured $72.5 million of Federal Home Loan Bank advances with maturities in 2015 into new terms in the 2017 to 2019 period at a lower cost. The benefit of this in the first quarter was approximately $70,000 with an expected benefit of $326,000 in the remaining quarters of this year.

Our non-interest income business lines continued to play an important role in our profitability. In the Wealth Management division, assets under administration rose by 5% and reached an all-time quarterly high level of $4.42 billion at March 31. Asset-based revenues of $7.1 million in the quarter was also our highest amount ever. Total Wealth Management revenues, including transaction-based fees, amounted to about $7.5 million in the latest quarter. That was down slightly on a linked quarter basis because, in the fourth quarter of last year, there were two significant insurance commissions received of about $462,000. Total Wealth Management revenues were 5% higher than the first quarter of last year.

Mortgage banking also continued to contribute significantly to our profitability as mortgage originations and secondary market delivery volume remained strong. While down 7% from the record high level reported in the fourth quarter of last year, net gains on loan sales and commissions received on loans originated for others totaled $4.2 million in the first quarter. This was 35% higher than the first quarter a year ago. We believe the linked-quarter decline was, to a certain extent, seasonal and we have seen strengthening in the mortgage pipeline in the past several weeks. Meanwhile, merchant processing fee revenue was down by about 11% on the linked-quarter basis, which is a typical seasonal trend and correlates with the corresponding linked-quarter decline in merchant processing expenses.

With respect to non-interest expenses for the first quarter, they amounted to $24.2 million, down 12% on a linked-quarter basis and 3% higher than the first quarter a year ago. The linked-quarter comparison is affected by debt prepayment penalties and charitable contribution expense, both recognized in the fourth quarter of last year.

Excluding those items, non-interest expense on a linked-quarter basis declined by 4% from the fourth quarter, including declines in commissions and incentives, as well as a seasonal decline in merchant processing costs. The year-over-year interest increase in non-interest expenses included higher salary and employee benefit costs reflecting higher staffing levels to support growth and higher levels of business development-based compensation in mortgage banking and other areas.

Our effective income tax rate in the first quarter was 31.6% and that compares to an overall effective rate for the year 2012 of 31.1%.

On the balance sheet, total loans rose by $31 million in the quarter with increases in commercial loans of $25 million, or 2%, and a 1% increase in residential loans. The growth in commercial loans includes a $25.5 million or 3% increase in commercial real estate loans. Our total loan portfolio stands at $2.3 billion, up 8% in the last 12 months, including a 12% increase in commercial loans.

Total deposits were up modestly in the first quarter, increasing by $7 million. In the last 12 months, we have seen total deposit growth of 8%. We continue to have success in growing the lower cost non-timed categories of deposits. In total, deposits were at an all-time high level of $2.3 billion at March 31.

With respect to asset quality, non-performing assets amounted to 0.94% of total assets at March 31, up 11 basis points from the end of last year. The increase in non-performing assets was due to a $3.1 million increase in non-accrual loans. That change was driven by the classification into non-accrual status of one commercial real estate loan with a carrying value of $5.1 million. At the present time, this loan remains current with respect to contractual payment terms.

Meanwhile in the quarter, total loan delinquencies 30 days or more past-due declined by $1.9 million to end the quarter at $26.2 million, or 1.13% of total loans. Our asset quality levels have compared favorably with both regional and national asset quality indicators over a long period of time and we believe that that relative comparison will remain true when the first-quarter comparisons are available.

Net charge-offs continued at a low pace, amounting to $334,000 in the quarter, down from $479,000 on a linked-quarter basis and $657,000 a year ago. First-quarter net charge-offs this year amounted to only 0.06% of average loans on an annualized basis and that is half of the rate that we experienced in 2012.

We maintained our loan loss provision at $600,000 in the latest quarter, unchanged from the fourth quarter of last year. The allowance for loan losses stands at a very adequate level of 1.34% of total loans, down 1 basis point in the quarter.

Total shareholders' equity for the corporation was $301 million at the end of March, up by $5.6 million in the quarter. Peak capital ratios also rose in the quarter as well. The tangible equity of the tangible asset ratio at March 31 was 7.94%, an increase of 25 basis points from the end of 2012. The Corporation and its subsidiary bank continue to remain well-capitalized. The Corporation's estimated total risk-based capital was 13.5% at the end of the first quarter, also up by 24 basis points in the quarter.

In March, we declared a quarterly dividend of $0.25 per share, which was paid earlier this month. That represented a $0.01 increase over the dividend paid in the previous quarter and was our third dividend increase going back to March 2012. At this time, I will turn the call back to our President and CEO, Joe MarcAurele.

Thank you, David. While we are faced -- continue to be faced with challenging operating environments in general, we continue to be confident that Washington Trust can turn these challenges into opportunities by balancing our strategic growth initiatives with disciplined expense management.

Washington Trust continues to have a strong foundation and has provided solid returns for our shareholders. We will continue to focus on enhancing the value of our Company. We thank you for your time this morning and now David and I would be happy to answer any questions.

(Operator Instructions). Damon DelMonte, KBW.

Hi, good morning, guys. How are you?

Good morning, Damon.

I just wondering if we could start off with the mortgage banking. Could you just give us a little perspective on the volume and the gain on sale you saw this past quarter versus the fourth quarter?

Well, the fourth quarter was an all-time high, a lot of events occurred at really led to that in the fourth quarter. We saw some reduction this quarter in the pipeline, particularly earlier in the quarter with some increase in rates that had occurred around that time and probably some seasonality as well. So we have seen some strengthening in the pipeline over the last several weeks that keeps our optimism high and solid for mortgage banking as we head into the near term.

Can you quantify like actual dollar amounts for your volume or even for -- what the gain on sale of margin was for the first quarter versus the fourth?

I don't have a margin number per se. The originations in the quarter were $184 million. We sold about $153 million into the secondary market. In the fourth quarter, we had originated about $220 million and sold about $157 million into the secondary market. The margins have held pretty well, but they are not necessarily as high as they had been at certain points last year.

Okay, that's helpful. Thank you. And then could you just repeat, David, what you said about the benefit expected from the FHLB restructurings? I think that you said that in this last quarter you had about $70,000 of additional interest income and what what is the total amount that should be expected in the second quarter?

Well, $326,000 for the remaining quarters of this year.

Okay, for the remaining quarters. Okay.

I mean there would be a continuing benefit in 2014, but you can extrapolate that over time.

Okay, that's good. And then I guess just as you look at loan growth opportunities for the remainder of the year, do you think that something in the high single digit range is achievable for this year?

David, it's Joe. I would say that mid to higher single-digit commercial loan growth in general was probably something that is realistic for us. We feel decent about the pipeline as it stands today and actually feel a little bit better about the mix of C&I versus commercial real estate with a little bit stronger C&I pipeline than we have seen during the previous several months.

Okay. That is all that I had for now. Thank you very much.

Frank Schiraldi, Sandler O'Neill.

Good morning. Just a couple of questions. On credit, you continue to have very, very modest levels of charge-offs here and so even with the $600,000 provision in the quarter, you had a pretty strong continual reserve to loan ratio north of 1.3%. I wondered if you just maybe had any update there, Dave, on your thoughts on provisioning going forward?

Well, at this time, we are not seeing a lot of pressure to increase the provision and our goal would be to certainly cover charge-offs and provide enough to keep up with growth in the portfolio. When we took all things into consideration at the end of March, we concluded a $600,000 provision would achieve that. We are not seeing any significant pressure that would change that in the near term and that is our outlook at this time.

Okay. And then I just wanted to ask about securities balances. Obviously, continue to run off here and I just wonder is there a point that we are reaching soon in your mind where you have to at least reinvest and then sort of hold those securities balances at least constant?

If things continued at the current pace, that day will arrive. That is several quarters away by our estimation.

Great. Okay, and I just wondered if you could remind us -- I know you have got a little bit of a boost or I believe you do in investment management revenues in [taxis] and I don't know how that hits and how much that is.

It is typically in the $300,000 to $400,000 range and it typically is -- it would be a second-quarter matter.

Great. Okay, thank you very much.

You are welcome.

(Operator Instructions). Matthew Breese, Sterne Agee.

Good morning, everybody.

Matthew, how are you?

Good, thank you. Just on the loan growth, I was wondering if you could characterize it a bit more. Would you say that the loan growth you are experiencing is taking marketshare or would you say that there is some organic loan growth in the client base you already have?

I would say that the majority of our loan growth comes from taking marketshare. Given the state of the economy, and this has been true over the last few years, the growth that you would normally expect from commercial portfolio coming from existing customers has been less dramatic. We believe, and I think it has proven out in regard to the deals that we do, that our opportunity continues to be to take share from larger competitors.

In what markets are you seeing the greatest strength?

Well, first of all, on the commercial real estate side, we do operate in what I would call primarily a three-state area, Rhode Island, of course, Connecticut, to a lesser extent and Massachusetts to a greater extent than Connecticut. We see very strong metrics coming out of the Massachusetts market, solid metrics in Connecticut and Rhode Island is a kind of pick-and-choose kind of deal market where we feel as though we get our share coming out of our native market here in Rhode Island.

Okay. And then my last question is really around your thoughts and strategy with M&A. Recently, there was a deal done. Newport Bancorp was acquired and I was just curious your thoughts overall M&A and thoughts on that deal in particular considering it was in your backyard.

We are always interested in deals that make sense and obviously, we look at virtually everything that we think would be of interest to us. Decisions around M&A have everything to do for us with good strategic fit and a price that we believe we can pay and make accretive in a reasonable amount of time.

Thank you, guys. That is all I had.

Damon DelMonte, KBW.

Hi, thanks. Just a quick follow-up. Could you remind us what, if any, additional CDO exposure you guys have?

We have one remaining pool trust-preferred CDO holding (technical difficulty). I will have the carrying value on that in a moment. The risk profile for that security, while it is in non-accrual status, is not anywhere near the kind of event that led to what is happening with the one that we took the impairment charge on. The carrying value of the one that remains is about $1.3 million.

Okay, perfect. Thank you very much.

You are welcome.

Julienne Cassarino, Prospector Partners.

Hi, you just said the carrying value of the remaining CDO is $1.3 million, but haven't you marked that down to fair value to less than $0.25 million?

Yes, that is a good point. The fair value of that at March 31 is $404,000. So if there were a loss, the charge to capital would be that number tax-effected, so roughly $300,000. But again, our outlook on the cash flow-generating capacity of that entity would indicate that it appears to be in decent shape.

The 10-K looks like $230,000 fair value off the amortized cost of $1.26 million. It just --.

It apparently went up during the quarter.

Oh, okay, okay. And the other one was being carried at like $600,000.

Yes.

So the mark -- which is why the mark to tangible book was minimal?

Yes, that number tax-effected was the approximate $400,000 number I mentioned earlier in the call and in the press release.

Okay, thanks. Thank you.

You are welcome.

There appears to be no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Joseph MarcAurele for any closing remarks.

Well, thank you very much and thank you, everyone, for joining us on the call today. Again, we all understand the kind of situation that we are operating in and the industry that we are in, but we do continue to feel well-positioned to take advantage of opportunities within this market. So we thank you and we look forward to our next call for the second quarter.

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