Washington Trust Bancorp Inc (WASH) 2014 Q2 法說會逐字稿

Good morning and welcome to the Washington Trust Bancorp International's (sic) conference call. My name is Betty; I will be your operator today. (Operator Instructions) Today's call is being recorded.

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

Thank you, Betty. Good morning and welcome to Washington Trust Bancorp, Inc.'s second-quarter 2014 conference call. Washington Trust is publicly traded on the NASDAQ OMX market under the symbol WASH.

This morning's conference call is being recorded and webcast life. A replay of the call will be available shortly after the conclusion of the call through the Corporation's website at washtrustbancorp.com under the subhead Presentations.

As a reminder, 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 Chief Executive Officer, and David V. Devault, Vice Chair, Secretary, and Chief Financial Officer, are hosting today's call and will answer questions at the end of the presentation.

Now I am pleased to introduce Washington Trust's Chairman and CEO, Joseph MarcAurele.

Thank you, Beth. Good morning, everyone, and thank you for joining us today for a review of our second-quarter results. The positive momentum continued in the second quarter as we once again posted solid earnings as well as good growth across our business lines.

Net income for the second quarter totaled $9.8 million or $0.58 per diluted share. Earnings are up both from the first quarter of this year and from the same quarter a year ago.

Washington Trust's profitability, asset quality, and capitalization metrics all remain strong. Return on average equity was 11.52%, while return on average assets increased to 1.22%.

Our continued success is attributable to our commitment to a corporate strategy focused on market expansion, corporate business line growth, and maximization of what we consider to be our unique business model, namely our Wealth Management division.

I am pleased to report that our Wealth Management division achieved a major milestone during the quarter, reaching $5 billion in assets under management for the first time in our Company's history. This is a high-priority business line for us because it provides a consistent stream of noninterest income. In fact, Wealth Management revenues represented 23% of the Company's total second-quarter revenues.

While we benefited from continued market appreciation, we also had good new business activity in this quarter. After a slow start earlier in the year, mortgage banking activity increased in the second quarter, and we posted solid loan sale gains.

Expansion has been a critical part of our mortgage banking growth in the past 5 years. In August 2009 we opened our first mortgage office outside of our home state of Rhode Island, a production office in Sharon, Massachusetts. Since then we have hired teams of loan officers and opened four additional mortgage offices in Fairfield County and Greater Boston areas.

This proved to be a key strategic decision, as more than 50% of our current mortgage portfolio is now comprised of loans from Massachusetts and Connecticut. The economies in those markets have proven to be somewhat stronger, with higher home values and more robust sales activity than what we have seen in Rhode Island. We believe we are in the right markets, and have a great sales team, and will continue to garner our share of the mortgage market going forward.

We have been successful in capitalizing on opportunities to grow the mortgage business while the markets have been favorable. While the pipeline looks healthy going into the third quarter, we are well aware of industry predictions of a slowdown, and we will continue to monitor trends and adapt accordingly.

Total commercial loans were up during the quarter. By all indicators, commercial activity was good. We booked a fair amount of C&I and CRE loans, and both line usage and construction loan advances were up.

We did, however, have a number of CRE payoffs during the quarter which affected the overall portfolio growth. Commercial lending activity and momentum has continued into the third quarter.

As mentioned in last quarter's call, we sold our merchant business line to Vantiv in March. It is important to note that while we transitioned our customers' merchant processing services to Vantiv, we continued to maintain the deposit and loan relationships with those business customers.

During the quarter we opened a new retail branch in Johnston, Rhode Island, a town adjacent to Providence and neighbors Cranston, Rhode Island, where we have three other branches. We believe we can continue to grow our deposit base in Rhode Island by opening branches in markets where we currently don't have a physical presence.

Washington Trust currently ranks third in the Rhode Island deposit market share, behind Citizens and Bank of America, who have almost 70% of the state's deposits. We really believe that that is where the opportunity lies for us.

We have opened branches in recent years and they have all met our expectations. Our branch model has changed over time; we have added new technology to meet the changing customer needs. But at the end of the day, retail banking remains a people business.

I would now like to ask David Devault to discuss our first-quarter financial results. David?

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

Net income was $9.8 million or $0.58 per diluted share in the second quarter of 2014. That compared to net income of $9.3 million in the first quarter or $0.55 per share.

Second-quarter 2014 net interest income amounted to $24.5 million, up 3% on a linked-quarter basis. The net interest margin for the second quarter was 3.35%, up 1 basis point from the first quarter.

The growth in net interest income was achieved due to several factors, including a 1.2% linked-quarter increase in average interest-earning assets. This reflects loan growth, net of reductions in the securities portfolio.

We also benefited from a decline in funding costs resulting from the prepayment of higher-rate Federal Home Loan Bank advances in March of this year. This was the primary reason for an 8 basis point decline in the cost of interest-bearing funds from the first quarter to the second quarter.

On the balance sheet, total loans rose by $102.5 million or 4% in the quarter. Commercial loans increased by nearly $29 million or 2.2%. The largest growth occurred in the C&I portfolio, which rose by $31 million.

Residential and consumer loans were up by nearly $74 million on a combined basis, or about 6.5% with increases in first mortgages and, to a lesser extent, home equity lines and loans. The total loan portfolio stands at $2.58 billion at the end of June.

The investment securities portfolio amounted to $355 million at the end of the second quarter, down about $34.5 million in the quarter due to the maturity of government agency securities, called securities, and principal payments received on mortgage-backed securities.

Total deposits declined by a modest $6 million or 0.2% in the latest quarter, reflecting in part some seasonal outflows near the end of the quarter associated with institutional depositors, such as municipalities. The total average balance of in-market deposits, excluding wholesale broker time deposits, was up by $40 million or 1.7% on a linked-quarter basis. Total in-market deposits are up over 9% in the last 12 months.

Federal Home Loan Bank borrowings increased by $119 million in the latest quarter, primarily to fund loan growth.

On the income statement, noninterest income totaled $12.8 million in the second quarter, compared to $19.4 million in the first quarter. The linked-quarter comparison contains some items that we need to consider to fully understand the quarterly change.

Among them, in the first quarter of this year we recorded a net gain of $6.3 million on the sale of our merchant processing services business line. In addition, prior to the consummation of that business line sale in early March we had recognized merchant processing fee revenue of $1.3 million. Excluding these items recognized in the first quarter, noninterest income was up $1 million or 8% on a linked-quarter basis.

In our Wealth Management business, second-quarter revenues were up by $465,000 or 6% compared to the first quarter. That included a $317,000 increase in transaction-based revenues, primarily due to an increase in fees for tax-related services, which are typically concentrated in the second quarter.

As Joe mentioned, Wealth Management assets were up by $204 million in the quarter and exceeded $5 billion at the end of June, the first time we have exceeded of $5 billion in our history. Total Wealth Management revenues for the latest quarter were up nearly 8% compared to the same quarter last year.

Our mortgage banking business showed a nice rebound from the first-quarter level. Mortgage banking revenues, in the form of net gains on loan sales and commissions received on loans originated for others, were up by $468,000 or 38% on a linked-quarter basis. We benefited from higher levels of mortgage loan origination and sales activity, reflecting a seasonal increase in home purchases, as well as benefiting from somewhat slower market interest rates compared to earlier quarters.

Residential mortgage loans sold into the secondary market rose from $57 million in the first quarter to $77 million in the latest quarter. Also in noninterest income, net gains on interest rate swap contracts declined by just under $300,000 on a linked-quarter basis as there were fewer customer-related interest rate swap transactions in the most recent quarter.

So, total core revenues on a pro forma basis, excluding the revenues associated with the merchant processing business sold in the first quarter and that related gain, were up by $1.6 million or 4.6% on the linked-quarter basis.

Looking at noninterest expenses, total noninterest expenses in the latest quarter were $22.4 million, down from $29.3 million in the first quarter. Again, there are some one-time items we need to consider to fully understand this change.

In the first quarter of this year, we recognized $6.3 million in debt prepayment penalty expense related to the prepayment of just over $99 million of Federal Home Loan Bank advances. We also incurred $355,000 of divestiture-related costs in the first quarter in connection with the sale of the merchant processing services business line. Finally, we had recognized $.1 million of ongoing merchant processing expenses in the first quarter prior to the sale of that business line.

So excluding these items recognized in the first quarter, noninterest expenses in the second quarter were up about $855,000 or 4%.

Looking at linked-quarter changes, we see salaries and employee benefit costs were up $500,000 or about 4%, mostly due to higher transaction-based compensation due to higher mortgage origination volume. We also saw an increase in advertising and promotional costs, which were up just over $300,000 compared to the first quarter; that was due to promotion efforts that were not in effect in the first quarter and seasonal promotions and matters related to our new branch.

Total year-to-date expense is $772,000. And we would expect the full-year cost for advertising and promotion to come in in the range of $1.5 million to $1.6 million.

Looking at asset quality, the results for the quarter showed a continuation of very manageable levels of asset quality indicators. Nonperforming loans declined by $1 million to 0.49% of total loans, down from 0.55% at March 31.

Total past-due loans ticked up by about $3 million to $21.1 million, or 0.82% of total loans compared to 0.73% of total loans at the end of the first quarter. Our loan loss provision charge to earnings was $450,000 in the second quarter, and that compared to $300,000 in the first quarter.

Net charge-offs were $224,000 in the second quarter. The net charge-offs for the first half of this year amount to just over $1 million, representing a loss rate of 0.11% of average loans on an annualized basis. The allowance for loan losses stood out at 0.06% of total loans at the end of the second quarter, down 3 basis points from the end of the first quarter.

Total shareholder's equity for the Corporation is $343.5 million at the end of the second quarter, an increase of $7.6 million for the quarter. Corporation and our subsidiary Bank continue to remain well-capitalized. The total risk-based capital ratio for the Corporation is 13.24% at June 30, down from 13.56% at March 31. The tangible equity to tangible assets ratio was 8.61%, down slightly from 8.7% for the first quarter.

In June, we declared a quarterly dividend of $0.29 per share, and that was paid on July 11. That concludes my remarks, and I will turn the call back to our Chairman and CEO, Joe MarcAurele.

Thank you, David. Washington Trust had another good quarter, and while it is hard to believe we're midway through another year, we are confident this momentum will continue through year-end. We are committed to the corporate strategy that has led us to our performance thus far and remain dedicated to enhancing the value of our Company for our shareholders.

Thank you very much for your time this morning. David and I will be happy to answer any questions you may have about the quarter. Thank you.

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

Good morning. Dave, last quarter you had said on the conference call that you thought the outlook for the net interest margin was likely stable in the near term. Do you still hold that view?

Let's define stable. I guess we see some pressure on margin in the next couple of quarters, where it could drift downward somewhat. So we got the boost obviously in the second quarter; that is built-in now from the significant funding mix change in the first quarter.

So as things play out in what continues to be a relatively low interest rate environment, we believe there will still be continued pressure on margin, not dramatic, but some downward pressure.

Okay. Then secondly, I think you had about 6% C&I growth this quarter. I am curious. Was that a function of new loans, or was it a function of line utilization increasing?

I would say it is primarily new loans. I don't know, David, if you have some color around line usage versus new loans.

Line increases are part of it, but much more than half of the increase is in new loans.

Okay. Then of the $72 million of net client cash inflow you had in the asset management business, were there any large pieces in there? Or was it spread out across a lot of different new accounts?

There is a mix in there, Mark. Some of it is routine business; some of it is custody accounts, which have a somewhat lower fee schedule associated with them. So it is a mix. We were encouraged to see the increase in absolute dollars.

Okay. And then, Joe, I think you had said that the loan pipelines were healthy. I wondered if you could just share with us the size of those pipelines currently.

Sure. The current pipeline is about $130 million, Mark, which is up from the beginning of the year and up from the end of the first quarter. So I think it is a -- and that, quite frankly, is almost all in C&I. So it is a bigger C&I pipeline than it is a CRE pipeline today, which we are very happy about.

Actually, I was -- had a question on CRE as well. With all the announcements that you all have made with respect to new CRE business, I was surprised to see commercial real estate actually declining about 2% linked-quarter. I guess I was curious. Was that a function of some big payoffs or just the (multiple speakers)?

Yes. I mean, Mark, really what has happened is the insurance and the conduit markets have picked up markedly and really since the beginning of the year. So what has happened to us is even sometimes before maturity some of our more high-quality borrowers in commercial real estate have opted to place some of these loans more long-term with those entities.

And there also have been some sales of property. But it is really a function of both of those things. It is really not lost customers through direct bank competition.

Thank you.

You're welcome.

(Operator Instructions) Travis Lan, KBW.

Thanks. Good morning, gentlemen. Dave, do you have a sense for what percent of the quarter's residential mortgage production was fixed rate versus variable?

Around 40% fixed and the rest variable.

And the variable that you do, is that primarily 5/1, or is there any type of changing customer preference there for an initial fixed period?

We have seen a preference for an inflection point at around a 7/1, Mark, for ARMs.

Got you, okay. Okay. Obviously, you put up really strong loan growth in two of the last three quarters. I just wonder; what are your own expectations for the franchise's growth capabilities going forward, versus the minimal economic support that you guys may get in your markets?

Well, we think that our opportunity in both commercial and in residential, Travis, is really more directed at really the markets adjacent to us in Connecticut and Massachusetts, where we have had good success. So I think we are still looking at certainly mid and maybe somewhat higher single-digit total loan growth.

Okay, that's helpful. then, Joe, in response to one of Mark's questions, you had said that the insurance companies and conduits have reengaged on the CRE side. Are they extremely competitive on rate? And how are you seeing your own CRE origination?

It is really longer-term rates, Travis.

Okay.

It's making -- really taking more duration risk than we are comfortable with, but obviously that in today's rate environment is very attractive to customers.

Got you. All right. That's helpful. Thank you very much.

You're welcome.

Taylor Brodarick, Guggenheim Securities.

Thank you. Good morning, everyone. A question on the -- just comparing to first quarter, obviously really strong loan growth this quarter. Joe, is there a sense from first quarter how much of that was impacted by either weather or maybe decreased business activity in the first quarter, or really just kind of natural momentum (multiple speakers)?

Well, I do think weather affected our residential mortgage business. I don't know if it affected the C&I business or the CRE business as much really, Taylor.

We were more affected in the first quarter from a commercial growth perspective by the fact that we worked through a very big pipeline in the fourth quarter of last year and in effect really needed to reload. And we were also, obviously, affected by the aforementioned payouts that we had either through conduits or insurance providers.

All right. Obviously, looking at that loan growth, your loan-to-deposit ratio, how do you think of -- I assume it is not as simple as we are at 100% loan-to-deposit, we need to sell off this percentage of loans. How do you think about that, barring like loan sales?

Well, I would tell you that one of the things that we are hugely focused on right now and have added some capability to is particularly our cash management business and obviously the opening of a new branch in Johnston. Deposit growth and at least some reasonable momentum in that is very, very important to us.

And one of the reasons why we are encouraged by the growth in the C&I pipeline is that, obviously, more deposits come with that. So that is obviously on our radar screen and something that we need to think about.

Then I guess really last one for me -- I think you hit on my margin questions earlier -- would be, it looks like about $50 million or so of excess capital. Is that about right?

Is that something that you are comfortable just holding for whatever opportunities present themselves? Or any other things we need to think about in the capital management front?

The capital levels are certainly comfortable for us. They certainly support continued growth in the loan portfolio, including higher risk-based assets in the commercial portfolio with greater concentration there. It obviously also gives us more flexibility to do whatever we need to do with the dividend, to keep that healthy and continue to pay out a good portion of our earnings.

Thank you both. Appreciate it.

(Operator Instructions) As it appears that there are no more questions, this will conclude our question-and-answer session. I would now like to turn the conference back over to Joseph MarcAurele for any closing remarks.

Thank you very much. Again, we appreciate all of your interest, and we look forward to producing the same or superior results to this in the next quarter and for the remainder of the year. So thank you very much and we will be in touch.

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