Washington Trust Bancorp Inc (WASH) 2014 Q1 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Maureen and I will be your operator today. (Operator Instructions) Today's call is being recorded.

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

Thanks, Maureen. Good morning. This is the first-quarter 2014 conference call for Washington Trust Bancorp, Inc. NASDAQ / RMAX under the symbol WASH. This morning's conference call is being recorded and webcast live. A replay of today's call will be available shortly after the conclusion of the call through the Corporation's website, washtrustbancorp.com, under Presentations.

However, the information we provide during today's call is accurate only as of this date and you should not rely on today's statements after the conclusion of the call.

Washington Trust executives Joseph J. MarcAurele, Chairman and CEO; David V. Devault, Vice Chair, Secretary, and Chief Financial Officer; and Edward O. Handy, III, President and Chief Operating Officer are hosting today's call and will answer questions at the end of the presentation.

And now I am pleased to introduce Washington Trust's Chairman and CEO, Joseph J. MarcAurele. Joe?

Thank you, Beth, and good morning and thank you all for joining us on this morning's call. Earlier, we released our first-quarter 2014 results of net income totaling $9.3 million or $0.55 per diluted share. David will provide a more detailed analysis of our core earnings and financial results shortly.

Overall, Washington Trust had another good quarter. Profitability, capital, and asset quality measures all remained strong. During the quarter, we did increase our cash dividend for the third consecutive quarter.

The local economy has been -- continued to be slow to recover. The competition has, in fact, heated up. This has made for a challenging environment. We continue to stick to our business model and manage those things that we can control. We had some success along various business lines during the quarter as the net interest margin rose, core expenses were well managed, and we were able to reduce the loan loss provision.

Our mortgage area has been a key source of growth and earnings for us in recent years. Mortgage production did slow in the first quarter due to several factors, not the least of which was a difficult winter and, obviously, higher interest rates. These things certainly contributed.

We have seen an uptick in the mortgage activity in recent weeks. While we won't reach the levels that we saw during the refinancing boom, we're optimistic that production will start to pick up, particularly in the Massachusetts and Connecticut markets, where we have added to staff.

Commercial loans were down slightly from the fourth quarter of 2013, primarily as a result of strong year-end closing activity and payoffs of a few larger loans. Commercial pricing has continued to be very competitive. We do, however, have a healthy pipeline and some good prospects, but we remain cautious about this area in growth going forward.

On March 1, we sold our merchant processing services business. That line of business we sold to Vantiv, one of the nation's leading payment processors. Vantiv is very familiar to us. They have managed our credit card processing for quite a while and we're familiar with their service and technology.

We believe this is a good situation for our merchant customers, who will benefit from Vantiv's 24/7 customer service and many innovative payment solutions. David will discuss the impact of this transaction on earnings going forward.

Wealth management assets under administration were relatively flat from year end. Wealth management revenues were down, however. Fourth-quarter revenues did include and were positively impacted by significant insurance commission, which tends to be a little episodic and was not repeated in the first quarter.

Our retail banking area continues to be a bright spot for us. It's important to note that demand deposit growth has increased 19% since the first quarter of 2013. Core deposit growth is a key initiative for us, obviously, as it helps our interest margin.

We hope to keep the deposit growth momentum going in 2014, with the opening of a new branch in Johnston, Rhode Island. It will be our 19th branch. It is located just outside of Providence. The Johnston market has a good mix of business and retail households and we are excited about the opportunity that this offers for all of our lines of business.

I would now like to ask David Devault to provide an analysis of our first-quarter financial results. David?

Thank you, Joe. Good morning, everyone. Thanks for joining us on our call today. I will review our first-quarter 2014 operating results and financial position as described in our press release this morning.

Net income amounted to $9.3 million or $0.55 per diluted share for the first quarter of this year. That compares to fourth-quarter 2013 net income of $9.8 million or $0.58 and first-quarter 2013 net income of $7.4 million or $0.45.

Looking at the first quarter year-over-year comparison, we would point out that the first quarter last year included an impairment loss on an investment security, which was deemed to be other than temporarily impaired. And that had an impact of about $1.9 million last year after tax or $0.11 per diluted share.

There were certain transactions in the first quarter of this year that resulted in a net after-tax charge of $0.01 per diluted share on March 1, and as previously noted, we sold our merchant processing services business line. That sale resulted in a net gain of $6.3 million or $4 million on an after-tax basis, $0.24 per share.

In connection with that sale, we incurred divestiture costs in the first quarter this year of $355,000, or $227,000, $0.01 per share on after-tax basis.

We also prepaid $99.3 million in Federal Home Loan Bank advances, which resulted in a debt prepayment penalty expense of $6.3 million. Again, that translated into $4 million or $0.24 against earnings on an after-tax basis. And I will talk about the replacement funding in a moment.

The combined impact of the divestiture of this business line and the reduction in interest expense due to the change in borrowing transactions is expected to result in future ongoing pretax income enhancement of approximately $1 million in the remainder of this year, $1.3 million in 2015, and continuing benefits in the future years.

First-quarter 2014 net interest income was $23.8 million, up modestly on a linked-quarter basis. The net interest margin for the quarter was 3.34%, up 10 basis points on a linked-quarter basis.

We prepaid, again, $99.3 million in FHLB advances in March. The replacement funding was largely in the form of wholesale broker time deposits amounting to $80 million as well as the use of on-balance sheet liquidity. The net impact of these borrowing transactions was a reduction in interest expense of approximately $170,000 in March, which increased the first quarter's net interest margin by about two basis points.

In addition, the quarterly dividend on our investment in Federal Home Loan Bank capital stock increased by $107,000 in the first quarter. That also had a positive impact on the net interest margin of about two basis points. The remaining increase in the net interest margin on a linked-quarter basis reflected somewhat higher yields on residential and consumer loans as well as a lower average cost in in-market deposits and a modest effect due to the number of days in the quarter.

Noninterest income was $19.4 million in the first quarter, excluding the $6.3 million gain on the sale of the business line and also excluding the $717,000 other-than-temporary impairment charge recognized in the fourth quarter of last year. Noninterest income was down $2.7 million on a linked-quarter basis.

There were several factors. As Joe mentioned, when we reported the fourth quarter results, we had an above-average level of swap transaction fee income as well as an above-average level of commissions on insurance transactions. Both of these fee items were lower in the first quarter.

We also saw some decline in mortgage banking revenues on a linked-quarter basis. And finally, we also had the impact of the sale of the merchant processing business. There were only two months of revenue from that business line in the first quarter.

In our wealth management business, revenues were $8.1 million in the first quarter. Asset-based revenues were $7.8 million, up slightly from the previous quarter. Transaction-based revenues were down again, reflecting the decline in insurance income. Wealth management assets under administration were up in the quarter and stand at $4.81 billion at the end of March.

Mortgage banking revenues, or net gains on loan sales and commissions received on loans originated for others, declined by 20% on a linked-quarter basis -- $312,000. This reflects a decline in origination and sales activity due to somewhat higher rates compared to what had been in effect going into the fourth quarter as well as seasonal activity declines. No doubt some level of weather-related effects, also.

Residential mortgage loans sold into the secondary market were $57 million in the first quarter, down from $66 million in the fourth quarter. We have seen some strengthening in the pipeline towards the end of the first quarter that has continued into the first part of April, as well.

I will now comment on noninterest expenses. Noninterest expenses in the first quarter were $29.3 million compared to $24 million in the fourth quarter. The linked-quarter comparison also contains some items that need to be taken into consideration to fully understand the change. We had the prepayment penalty expense in the first quarter of $6.3 million.

We had the divestiture cost of $355,000, mostly in salaries and benefits and some in legal and professional expenses, as well. In addition, we had a $400,000 contribution expense to our charitable foundation in the fourth quarter of 2013. There was no such expense in the latest quarter.

So excluding these items, noninterest expenses were down about $1.3 million on a linked-quarter basis. More than half of this would be the elimination of the merchant processing expenses in March. They were down about $886,000 on a linked-quarter basis.

So when you eliminate all of these noncomparable items, we would conclude that operating expenses were down modestly on a linked-quarter basis.

On the balance sheet, total loans increased by 0.6% in the quarter. Merchant loans were down 2%, largely due to payoffs of several larger commercial loans, as we mentioned. Residential loans were up 5% and the total loan portfolio stands at $2.48 billion at the end of March.

Deposits were up about 3% in the quarter. This included a net increase of about $73 million in out-of-market wholesale broker time deposits, which were mostly the source for the prepayment of the Federal Home Loan Bank advances. In-market deposits, which we define to exclude wholesale brokered, were up about $13 million in the quarter. We had growth in money market, partially offset by some runoff in in-market time deposits.

Asset quality was a bright spot for the Company. We saw some further improvement in important credit quality metrics. Nonperforming assets were down $5.5 million or 28%. Total loans past due were down $3.9 million or 18% in the quarter. These were largely due to the successful progress in the resolution of some larger problem commercial credits. Nonperforming loans stand at $13.6 million or 0.55% of total loans, down from 0.74% at the end of December.

Charge-offs were $1.1 million in the quarter compared to $522,000 in the previous quarter and included in the first quarter was an $853,000 charge-off on one commercial real estate relationship. That had been allocated as loss exposure at the end of December.

As a result of the continuing trend in asset quality improvement, we have reduced our loan loss provision to $300,000 in the most recent quarter compared to $400,000 on a linked-quarter basis. The allowance for loan losses stands at 1.09% of total loans at the end of March.

Shareholders' equity for the Corporation increased by $6.2 million. The Corporation and the subsidiary bank continued to remain well capitalized. The total risk-based capital ratio for the Corporation is 13.56% at the end of March, up from 13.29% at the end of the fourth quarter.

In March, we declared a quarterly dividend of $0.29 per share, which was paid on April 11. That was a $0.02 increase over the dividend paid in the previous quarter and represents our third consecutive quarterly dividend increase.

And at this time, I will turn the call back to our Chairman and CEO, Joe MarcAurele.

Thank you, David. Washington Trust posted solid results for the first quarter. However, we recognize that growth will be both a priority and a challenge going forward. Our team is focused on these priorities with a directed effort and we're all working together toward the desired results.

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

(Operator Instructions) Mark Fitzgibbon, Sandler O'Neill & Partners.

The first question I had was for Dave. Dave, I wondered if you could help us think through the merchant processing fees and expenses. Should we assume that merchant processing costs will go to $0 and, excluding some small referral fees, the merchant processing fee line will essentially go to slightly above $0, as well?

That is correct.

Okay. Secondly, as it relates to the capital ratio, capital has been building. You are up around an 8.70 TCE ratio and I know you increased the dividend, but do you feel like you are carrying excess capital today? And if so, where are you targeting for a capital ratio and when might we see the Company get there?

Well, earnings retention have been strong. That is why we've pushed up the dividend. There was a pause in balance sheet growth, I would say, in the quarter, which may have also upped the capital ratios a little bit.

So we are hoping that with growth and with continued strong dividends that we will be able to keep that within a very manageable range.

Okay. And then the other thing I was surprised by -- the average yield on your residential real estate loans went up from, I think, 4.09% to 4.15%. Why was that? And are you extending duration or something to improve the yield?

I think there has been some bottoming out in terms of yields of loans coming on compared to the book that had been in place at the beginning of the quarter. It is not a significant extension of duration. It is what we are originating today.

What types of loans are driving the production today?

Mark, I think we could let Ned talk a little bit about that. The commercial group reports to him, so he can give you some color on the real estate market.

Yes, so the competitive stresses are for longer duration, but we're trying to stick within our -- 10 years is really the longest we will go and we haven't done a lot of those. We have done a few more construction loans, which are starting to fund now, and as we get into the second quarter those are priced a little bit better, but there haven't been huge fundings on those.

We have done a couple of larger-ticket apartment deals, which are bringing a little bit better pricing. But you know, we have been -- what David is referring to is as loans pay off, and we had a few large loans from prior periods pay off in the first quarter and they generally have higher pricing than the loans we are putting on. That has been a problem in the last couple of quarters.

That, I think, is sort of diminishing in effect and the loans we're putting on are slightly better priced than had been in the prior two quarters.

So I think it is a notch-up in pricing. And, frankly, sticking to our guns and not giving into competitive pressure on duration and structure and in some cases pricing. So we are trying to -- obviously, it causes more pressure on us from a growth perspective, but we are going to stay consistent in our approach, at least for a while here.

No, I was talking about the residential side.

Oh, I'm sorry

The average yield had gone up quite a bit from the fourth quarter to the first quarter and it didn't seem like you put on enough production that it could really budge the numbers that much, so I was just curious if there was something else.

Yes, I think prepayments or payoffs and amortization of deferred costs were probably higher in the fourth quarter than the first quarter. That would have some impact on yield -- it would have had some impact, negative, on yield in the fourth quarter. Origination volume was down slightly, so payoffs of existing loans were no doubt down slightly.

Less than half of that production is fixed rate. We do add jumbo loans to portfolio where we have strong relationships with mortgage clients. And those were a little bit harder to sell in the secondary market, as well. They are great quality loans and they are above average in terms of quality and the strength of the relationship.

So I wouldn't expect us to continue that kind of pace of growth over a long period of time, but it is something that we are able to take advantage of right now.

And the last question I had, Dave, is if you net out the nonrecurring items in the margin that you had this quarter and assume a full-quarter benefit from the liability restructuring, it looks like the margin is probably relatively stable here in the near-term. Is that your understanding as well?

That is my feeling: stable in the near-term. The second half of the year we start to see some impact of the continuing paydown -- scheduled paydowns in the investment portfolio that we're clearly not able to replace with today's rates. We hope to overcome that, certainly, with good, solid loan growth and prudent management of deposit pricing.

Thank you.

Travis Lan, KBW.

I was wondering if you could disclose your commercial pipeline or at least provide some color or comparison between where it stood at the end of the first quarter versus the end of the fourth quarter.

Obviously, we had a great fourth quarter, especially the second half of the fourth quarter, in terms of closing and we did somewhat deplete the pipeline. And so, part of the issue in the first quarter has been rebuilding the pipeline.

Right now, what I would call 50% and better or proposals accepted by customers or better is about $140 million. And some of that is on the verge of closing now. We closed some construction loans in the first quarter that are beginning to fund now.

So I feel better about the second quarter and we are outreaching into Connecticut and Massachusetts largely to this point through participating banks, with whom we've had -- we've had five or six banks that we have had meaningful conversations with. That is starting to help us in those marketplaces.

So I am encouraged by where we are. It is a relatively high point in the pipeline, but certainly first quarter was largely about rebuilding all that we closed in the fourth quarter.

Okay, that is helpful. And then I know you had mentioned some large commercial paydowns in the quarter. I was wondering if there was any notable prepayment income embedded in the margin at all.

Some of the prepayment was risk management-oriented, so those are by choice. And some of it was just maturing larger-ticket real estate deals that happened to mature in the first quarter, so I don't believe we had any unusual prepayment penalty income in the first quarter.

It was pretty consistent from the fourth to the first quarter.

Okay, great. And then, David, do you have a sense for the impact that the Johnston branch is going to have on expenses over the next few quarters?

The Johnston branch will have a modest at most effect over the remainder of the year. In large part, that staffing is really being reallocated from the existing retail staff. There will be some modest level of noninterest expenses associated with the facility, but I would say would be a low- to mid-six figure, at most.

Got you, okay. And then just the last one for me -- with NPAs down about 50% year over year, do you think there is more room to bleed the reserve going forward? Or how do you think about that, with the massive credit improvement that you have seen?

The coverage ratio is probably a better indicator. I would say that we would -- we believe there is room for the allowance as a percentage of total loans to drift somewhat lower for the reasons you just mentioned.

Okay. All right, that is helpful. Thank you very much.

(Operator Instructions) Taylor Brodarick, Guggenheim Securities.

First question: heard a little commentary about the weather, maybe sound like impacting resi mortgage production. I heard from a similar bank in the region, greater expenses -- I guess overhead expenses related to snow removal. Did you experience any of that? And also any sort of 2Q lift that you see in resi mortgage that maybe got pushback from 1Q.

First, on the expense side -- whatever that impact was, was modest. It's not something we felt needed to be mentioned in the numbers. I think -- we always plan on higher snow removal costs at that time of the year and manage other expenses, so that from a timing standpoint so it doesn't stand out.

Again, the residential pipeline has risen within the past four to six weeks, so whether that is the lift of the weather impact or just strengthening in conditions in general, I don't know, but it is a positive sign.

Okay, great. And then as I look at the loan-to-deposit ratio drifting down a little bit from year end, is there a quantitative target that you all look at as far as what you want to get when you are looking at loan and deposit pricing?

Well, that impact is a little bit, probably -- the change in the loan-to-deposit ratio on a quarterly basis is probably unusually large because loans did not grow very much, but we did add the broker deposits. So it was really a change in the funding mix of the total balance sheet that impacted that. Over time, we recognize we need to grow both loans and deposits to continue to generate good returns.

Okay. And last question would be, on that one commercial mortgage relationship, just remind me if there's anything interesting or of note of that relationship and if there is any other similar situations that we need to be aware of.

No, that was really a successful resolution and property was sold that allowed a significant paydown on a loan in recognition of the charge-off that had been previously reserved for. So there is a modest amount of relationship remaining, or balance remaining, with that commercial real estate relationship. But we don't see any significant or really any loss exposure remaining that hasn't already been allocated there.

Our largest nonaccrual relationship now is just over $1 million, which is that one. And I think that is the lowest amount we have had, the largest nonperforming relationship in a long time. So again, it just points to the continuing trend in asset quality improvement.

Great. Thank you, David. Appreciate it.

(Operator Instructions) And at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Joe MarcAurele for any closing remarks.

Thank you very much. We really appreciate everyone's time today and certainly continue to appreciate your interest in our Company. We are about to move forward for the second quarter and we will see you on the next earnings call. So thank you very much.

At this time, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.