Washington Trust Bancorp Inc (WASH) 2014 Q3 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp Incorporated's conference call. My name is Rob. I will be your operator today.

(Operator Instructions)

Today's call is being recorded. And now I'll turn call over to Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations. Ms Eckel?

Thanks, Rob, and thank you, everyone for joining us for Washington Trust Bancorp Inc' third quarter conference call. Washington Trust trades on NASDAQ's OMX market under the symbol WASH. The host of this morning's discussion is Joseph J. MarcAurele, Chairman and Chief Executive Officer, and David V. Devault, Vice Chair, Secretary and Chief Financial Officer.

As a reminder today's call is being recorded webcast live, and a replay will be made available shortly after the call through the Corporation's website, www.washtrustbancorp.com. Please remember the information discussed on today's call is accurate only as of this date, and you should not rely any statements after the conclusion of the call. I'm now pleased to introduce Washington Trust's Chairman and CEO, Joseph J. MarcAurele.

Thank you, Beth. Good morning and thank you for joining us today. Yesterday afternoon we released Washington Trust's third-quarter earnings. David and I will now review those results and then answer any questions that you may have about the Company's performance. I'm pleased to report a solid quarter for Washington Trust as we earned $10.5 million or $0.62 per diluted share for the third quarter of 2014.

I'm proud to note that this now represents the Company's highest quarterly earnings to date. These results are truly a company-wide effort as not only did we have good growth along key business lines, but every employee from the front line to the back office continues to play a role in our success.

Let me provide some detail on our efforts during the quarter. Total loans reached a record $2.67 billion at September 30, up 4% from the previous quarter with a solid commercial loan growth and residential mortgage production.

In the past 12 months we have had double-digit loan growth with total loans up almost 14% from the year ago. Commercial lending activity was steady throughout the third quarter, and our team did a terrific job of bringing in quality commercial real estate and C&I loans from throughout the Rhode Island, Massachusetts and Connecticut areas.

While there's a lot of competition out there, we continue to get quality referrals from numerous sources including existing clients, attorneys and accountants. Our Business Development efforts have provided a healthy pipeline to keep our team busy with really what will end up being through the whole year.

Our residential mortgage area continues to perform well with total originations approaching $200 million in the third quarter. We've had good production in all three states. In fact, we were recently named one of the fastest growing mortgage lenders in Connecticut according to the Commercial Record's Fast 50.

Our sales and service model is the key to our residential mortgage success. Our originators work closely with the processing team to ensure loans close quickly for homeowners. In many cases we are able to close within 30 days which is much faster than the majority of our competitors.

A few weeks ago we opened a new mortgage production office in Darien, Connecticut. We held a grand opening reception attended more -- by more than 100 attorneys, accountants and realtors who were just as interested in our commercial lending and Wealth Management capabilities as they were about our mortgage lending services. We are excited about the additional growth opportunities that we have in Fairfield County.

Our retail banking and business cash management teams have also done an outstanding job as deposits reached an all-time high of $2.74 billion at September 30. Deposits are up 6% from the previous quarter including an exceptional 16% increase in demand deposits. Total deposits were up 12% from a year ago, which is attributable to strong business development and promotional efforts as well as continued branch expansion -- successful branch expansion in Rhode Island.

Our branch expansion strategy is working as we've gained market share in Rhode Island. According to recently released FDIC statistics, Washington Trust's Rhode Island deposit market share increased from 7.81% at June 30, 2013 to 9.34% at June 30, 2014. Our branch network provides funding for future loan growth, and we are committed to opening new branch offices in Rhode Island over the next few years.

Earlier this year we opened a branch in Johnston, Rhode Island, and it is off to a very solid start. In 2015 we will open a branch in Roquefort, Rhode Island which is in the northern section of East Providence and borders Seekonk, Massachusetts. It is a great location for us as it not only fills in a gap between our branches but also offers retail and business banking opportunities.

Wealth Management revenues totaled $8.4 million for the quarter and remains a significant contributor to corporate earnings and future growth. The Wealth Management business weathered a challenging period in the financial markets, and Wealth Management assets stood at approximately $5 billion at the end of the quarter.

David will now review our third-quarter financial results in more detail. David?

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

Net income and earnings per share both reached all-time highs for us in the third quarter of 2014. Net income was $10.5 million or $0.62 per diluted share for the third quarter. That compared to second quarter 2014 net income of $9.8 million or $0.58 per share.

Third quarter 2014 net interest income was $24.9 million up 2% on a linked quarter basis. The growth in net interest income was achieved primarily by a 4.9% linked quarter increase in average interest earning assets led by residential and commercial loan growth.

Meanwhile on the funding side interest income was helped by deposit inflows including average balance increases in money market deposits and demand deposits. The net interest margin in the third quarter was 3.21% compared to 3.35% in the previous quarter.

The yield on interest earning assets declined by 14 basis points on a linked quarter basis. This was caused by a decline in loan yields with new originations coming onto the balance sheet at current lower rates. And also reflects the mix of commercial loan originations, the majority of which were variable rate loans tied to LIBOR. There was also a maturity of some higher yield -- higher yielding investment securities at the end of the second quarter.

Funding costs declined slightly by one basis point from the second quarter. We did add $50 million in wholesale funding in the form of longer-term brokerage CDs which we used to pay down short-term Federal Home Loan Bank borrowings. This liability extension along with the beneficial impact of the increase in DDA balances and the increase in floating rate loans has improved our interest rate risk position with respect to exposure to rising rates.

On the balance sheet, total loans increased by $93 million or 4% in the quarter. Commercial loans increased by 1.8% in the quarter including $14 million in commercial real estate loans and a $10 million increase in the C&I category during the quarter. Residential and consumer loans were up by $69 million or about 8%. The total loan portfolio stood at $2.7 billion at the end of September.

Investment securities rose by $47 million in the third quarter. The net increase reflected additions to support collateralization of public deposits and other liquidity management purposes. The additions included both agency securities and GSE mortgage backed securities. Total deposits grew by $153 million or 6% in the latest quarter primarily due to linked quarter increases of $65 million in demand deposit accounts, $61 million in money market accounts and a net increase of $40 million in wholesale brokered time deposits.

Total in market deposits, which excludes the category of wholesale brokered time deposits, are up 8% in the last 12 months. We reduced our Federal Home Loan Bank borrowings outstanding by $60 million in the latest quarter which was explained earlier by the additions to the brokered time deposits for the most part.

Let me comment now on non-interest income which continues to represent a significant portion of our total revenues. Total non-interest income was $13.1 million in the latest quarter up 2.4% on a linked quarter basis. In our Wealth Management business third-quarter revenues were $8.4 million, down by about 1.8% on a linked quarter basis. That decline included a $324,000 drop in non-asset based revenues mostly in the category of tax preparation fees which are typically concentrated in the second quarter. Asset based revenues rose by $168,000 from the second quarter level.

Total Wealth Management revenues for the latest quarter were up nearly 10% compared to the same quarter a year ago. In Wealth Management assets under administration were just under $5 billion at the end of September, a decline of about a half percent on a linked quarter basis and that decrease was primarily due to financial market volatility in the latest quarter.

Mortgage banking revenues in the form of net gains on loan sales and commissions received on loans originated for others were $1.7 million in the quarter, an increase of 2% on a linked quarter basis. Residential mortgage loans sold into the secondary market rose from $77 million in the second quarter to $80 million in the latest quarter. We also saw an increase in net gains on interest rate swap contracts which totaled $376,000 in the third quarter due to an increase in customer related interest rate swap transactions in the quarter.

Looking at non-interest expenses, total non-interest expenses in the latest quarter were $22 million down by $400,000 or 1.8% on a linked quarter basis. The more significant changes included salaries and employee benefit costs which declined by 1.7%. The largest contributing factor here was a decline in payroll tax expense, and advertising and promotion costs were $172,000 less in the second quarter as there were seasonal promotional efforts in effect during the second quarter that were not in effect in the third quarter.

Looking at asset quality the results for the quarter showed a continuation of very manageable levels of asset quality indicators. Non-performing loans increased by 4.5 -- $4.4 million to 0.63% of total loans up from 0.49% at June 30. The increase was primarily due to the classification of one commercial real estate loan with a carrying amount of $4.9 million into nonaccrual status during the quarter. Total delinquencies declined by $1.1 million and stand at 0.75% of total loans down from 0.82% at June 30.

Loans classified as troubled debt re-structurings amounted to it $18.3 million at September 30 down from $26.5 million at the end of the second quarter reflecting the payoff of an $8 million commercial real estate loan. The loan loss provision charge to earnings was $600,000 in the latest quarter up $150,000 from the second quarter mostly due to portfolio growth.

Net charge-offs were very modest at $101,000 in the latest quarter, and net charge-offs for the first three quarters of this year represent a loss rate of only 0.08% of average loans on an annualized basis. The allowance for loan losses stands at 1.04% of total loans at the end of the third quarter down two basis points from the end of the second quarter.

Total shareholders' equity for the Corporation was $349 million at September 30 an increase of $5.1 million in the latest quarter. In the third quarter we declared a quarterly dividend of $0.32 per share paid on October 15. That dividend rate represented an increase of $0.03 per share over the prior dividend rate, and it was also our third dividend increase in the past year.

The Corporation and our subsidiary bank continue to remain well capitalized. For example, the total risk-based capital ratio for the Corporation is 13.26% at the end of the third quarter, up two basis points from the end of June. The tangible equity to tangible assets ratio was 8.51%, down by 10 basis points in the latest quarter.

At this time I'll turn the call back to our Chairman and CEO, Joe MarcAurele.

Thank you, David. As I mentioned earlier, we achieved record results through the coordinated effort and shared vision of really our entire team. In recent years we've embarked on significant growth initiatives by expanding into new markets, investing in technology and most pointedly attracting talent from the competition.

We remain committed to growing the Corporation to generate continued profitability and value for our shareholders. I thank you for participating in this morning's call. David and I are now happy to answer any questions you may have.

(Operator Instructions)

Mark Fitzgibbon, Sandler O'Neill.

Thanks for taking my question. Good morning.

Good morning, Mark.

David, you had said the liability extension that you have been doing has helped improved the positioning of the balance sheet relative to rates. Could you help us sort of -- could you quantify that for us possibly and also share with us your thoughts on the outlook for the net interest margin over the next quarter or two?

Yes, I think at the end of June we had put in our Q that the benefit to rising rates and an up 200 rate scenario was about 1.95% of net interest income. That's about a little over 3% now as a result of the changes in the funding mix and asset mix.

With respect to margin, the type of loan growth we saw in the third quarter could very well be repeated in the fourth quarter. And the reality of the type of incremental assets that you can add are probably going to have some continued impact as expressed by a lower net interest margin. So, I believe we will continue to grow net interest income very soundly. It may be accomplished, however, with some erosion of net interest margin.

Okay. And secondly, you guys had very strong residential mortgage growth in the third quarter. Was a lot of that 15- and 30-year paper, or was it hybrid ARMs?

More than half of it is 7/1 and 5/1 ARMs, so it has relatively favorable interest rate risk management characteristics.

Okay. And then lastly, it strikes me that your performance metrics really dwarf your peers, and you guys have a great currency advantage. I guess I was curious why not be out there using that currency to do acquisitions of less successful banks?

We certainly look at things. We don't preclude really anything from us other than things outside -- significantly outside of our geography. I would tell you that as we think of this, we like to think of it either as a logical extension, geographically, that we feel we can grow or something that might be slightly away from us that we feel as though we can be additive to. Particularly in the lines of business that we consider ourselves good at, which would most pointedly be Commercial, Wealth Management, and the Mortgage business. So, I would say that these things are not out of the question.

And just one follow-up, in the past I had asked you folks if you had interest in opening branches down in central and southern Connecticut. Obviously, with the press releases that you all put out, you have been doing a fair amount of lending down in those markets. Has your view evolved at all?

I would say no, Mark. My feeling is that we have a statewide brand in Rhode Island without having statewide convenience. The branches that we've opened in Rhode Island have all been very successful. They've exceeded or certainly met our pro formas.

One of the issues, obviously, with opening standalone branches in markets like Connecticut, particularly Fairfield County, is the combination of cost and brand recognition. So, I think that's more difficult. I wouldn't put a totally out of the picture in the future, but right now we feel as though we can be very successful expanding in Rhode Island where our brand is so strong.

Thank you.

There is significant expense to building a branch -- our brand recognition in markets outside of Rhode Island.

Thank you.

You're welcome.

(Operator Instructions)

Travis Lan, Keefe Bruyette & Woods.

Thanks. Good morning, gentlemen.

Good morning, Travis.

You guys had previously talked about a mid to high single digit loan growth rate, and obviously this quarter was well above that. So, I just wondered is there any change in your thinking about how active you wanted to be, or where the growth opportunity is just kind of stronger than you had expected?

I think I would hold to that prediction right now, Travis. The reason for that is because particularly in our real estate book, given the type of business we've done over the last four or five years, we are subject to payoffs at times. So, I think mid to high single digit loan growth is probably going to be what we see. We always hope to be pleasantly surprised by that. We feel good about the current commercial pipeline which stands at about $175-ish million, but all that being said the payoff situation is something that's not always controllable.

Okay. All right, and on the residential side could you break out maybe in general terms just the split between production in Rhode Island, Connecticut and Massachusetts? And then also, David, if you could just elaborate on the difference between origination yields, maybe on the fixed and the ARM production?

Yes, more than half of our origination volumes comes from outside Rhode Island. The greater Boston area is the, by far, largest source of mortgage originations. That has been true for a couple of years now, and it really speaks to the good decision that was made to expand our mortgage business into their market. The yields on loans are -- working on getting some information for that right now. What we saw in the quarter was that the 5/1 and 7/1 ARMs were in the range of 3.57% weighted average yield of third-quarter originations, for 5/1 3.81%. For 7/1s that amounted to -- as I said about 70% to 75% of total originations in the quarter. Most of the increase of what -- the net increase on the balance sheet were loans in those categories.

Okay, that's helpful. Then can you just give a little bit more color on the single CRE credit that you guys had mentioned? I guess specifically which geography that loan was in, when it was originated, kind of LTV and if you have any specific reserve there at this point?

Yes, that's a very immediate geographic area loan for us. It is local. It arose from a commercial real estate relationship. It has been troubled for some time. We've been monitoring it closely, and based on the performance of the borrower, we put that into nonaccrual status during the quarter. We have about an $850,000 loss allocation location on that credit which we believe is appropriate.

It was originated about five years ago, Travis.

Okay, all right, that's helpful. And then, Joe, just the last one. I know you talked about whole bank M&A, but just how you guys think about potential branch deals in Rhode Island or neighboring states or wealth management deals as well? Thank you.

Branch deals I think are -- they probably aren't really any in Rhode Island that are that interesting. One of the issues associated with branch deals that you would buy from larger banks is they do a pretty good job of figuring out the ones to sell to you and that they are may be not that good. I think we would again continue to expand in Rhode Island. I don't see us buying a series of branches in Connecticut and Massachusetts unless it was very interesting and the price was right and we thought we could grow them.

I would tell you that we are very interested in expanding our Wealth Management business. And to the extent that we would have an opportunity to do something, particularly in markets like Connecticut and Massachusetts that were interesting to us. We would definitely take those seriously. We have looked at a lot of them in the last few years. I think the gaining factors so far has been our discipline around price and sellers' expectation of what they are worth.

Thank you very much.

You're welcome.

Taylor Brodarick, Guggenheim Securities.

Thank you. I guess a question -- so the LPO count in Connecticut is at 2, right? There's the Stamford one and the one in Darien. Any sort of numbers that you can report how they are tracking, particularly the older one so far? Are they exceeding expectations?

Taylor, we essentially were in a temporary space in Stamford, and we really moved out of that temporary space into Darien, so it is really the same people. It is been in place for about a year or so, and, David, do you know the actual production? It 's tracked very well while it was in temporary space.

Yes, it is growing, and given that it is been open for really less than the year, it's -- we are very satisfied with the volume of originations coming from that area. We also have another one in Glastonbury, Connecticut that's been there about 3.5 years.

And then I think I asked this on the last call, but you should look at your loan deposit ratio how it seems to give you optionality to boost the income periodically. Again to just remind us how you think of that ratio and how you sell off production. We had 100% again -- what we need to start accelerating sales or does it depend on the product and the relationship involved?

It does depend on the mix. One of the things we are encouraged by is the success we've had in garnering commercial deposits along with particularly C&I relationships and to a lesser extent CRE relationships. We've also continued to place a lot of effort in growing institutional deposits through our cash management team. We've had some very good success stories over the last couple of years, and that has been continuing.

So we are trying very hard to continue to grow deposits. We will manage the balance sheet appropriately. We are high on the loan to asset and loan to deposit ratio side, but it is something that we think is manageable and at that we will continue to manage it.

Really, last question. When you look at the equity market volatility of the last few weeks, what do you hear from your wealth management people as far as I guess concerns from their clients? I know you have are pretty sticky high net worth client base. I just was kind of curious for your thoughts on that and what you hear from that side of the business, in regards to client retention and maybe client acquisition from, other wealth managers?

I would tell you that communication is probably more important during a time of volatility than any other time. And this is not a time for our investment management staff to hide from clients, given the volatility. All that being said I think your statement is correct. We do have a very significant number of high net worth individuals who have been with us for a long time. And a certain segment of our business is not totally based on performance. It is really a lot about providing the right type of service and liquidity to our Wealth Management customers.

So far, I would say that the retention part of that business has been terrific. It does, though, challenge the new Business Development part of it, because it does create a certain amount of paralysis among customers in regard to their existing relationships. So this kind of an atmosphere does probably make it a little more challenging to get people to move. All that being said, again, we've had success with that, but it probably could be better in a more robust market.

Thank you both. Appreciate it.

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

Again, we appreciate all of your time and we look forward to a reasonable fourth quarter. We think the momentum is good. And we will get back to you at that point, and I hope all of you have a nice day.

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