Washington Trust Bancorp Inc (WASH) 2015 Q1 法說會逐字稿

Welcome to Washington Trust Bancorp, Inc.'s conference call.

(Operator Instructions)

Today's call is being recorded. Now, I'll turn the call over to Elizabeth B Eckel, Senior Vice President, Marketing and Investor Relations. Ms Eckel, you may begin.

Thank you, Kevin. Good morning. Thank you for joining us for Washington Trust Bancorp Inc.'s first-quarter 2015 conference call. Washington Trust trades on NASDAQ's OMX market under the symbol WASH. Hosting this morning's discussions are: Joseph MarcAurele, Chairman and Chief Executive Officer; Ned Handy, President and Chief Operating Officer; and David V. Devault, Vice Chair, Secretary and Chief Financial Officer.

Today's presentation may include forward-looking statements. Actual results could differ materially from those statements. For a discussion of related factors, please see our earnings release and our most recent SEC reports on Forms 10-K and 10-Q. These materials will be furnished to the SEC and are available on the Investor Relations section of our website, washtrustbancorp.com. I am now pleased to turn the call over to Washington Trust's Chairman and CEO, Joseph MarcAurele.

Good morning. Thank you for joining us on today's call. This morning, I will review first-quarter highlights. David will discuss the Company's financial results. At the conclusion of the call, Ned, David and I will answer any questions you may have.

I'm pleased to report Washington Trust earnings' momentum continued into 2015. We posted first quarter net income of $11 million or $0.65 per diluted share, as compared to $9.3 million or $0.55 per diluted share for the same quarter a year ago.

Our profitability measures remain strong as return on average equity totaled 12.54% and return on average assets was 1.23%. We have excellent asset quality. Capital ratios remain healthy. As a testament to our capital strength, we increased the quarterly cash dividend from $0.32 to $0.34 per share during the first quarter. This marked Washington Trust's fifth dividend increase in the last eight quarters, demonstrating our continued commitment to our shareholders.

Our solid first-quarter performance reflects our success at growing our core business lines and expanding our branch network while efficiently managing expenses. The operating environment remains extremely challenging as continued low interest rates have squeezed margins. Fortunately, we have a diversified business model which allows us to generate a consistent stream of revenues over time.

Our wealth management area is a key part of this business model. During the first quarter, wealth management revenues amounted to $8.4 million, comprising 60% of total non-interest income. Wealth management assets under administration were up from year-end levels, reaching an all-time high of $5.2 billion.

Total loans were $2.9 billion at quarter's end, primarily as a result of solid commercial and residential loan growth over the past 12 months. Our residential mortgage area has contributed nicely to the bottom line over time.

Over the past year, our mortgage team has worked hard to develop sales side partnership with additional investor outlets. These efforts paid off in the first quarter as we generated substantial non-interest income from loans sold into the secondary market.

Despite a harsh New England winter, borrowers came out to take advantage of low interest rates, resulting in steady refinancing and purchase activity. We continued to have success with production coming from all of our southern New England mortgage offices. In the latest quarter, we had modest commercial loan growth and commercial balances totaled $1.6 billion at quarter's end.

You may recall that we had a very strong fourth quarter. In fact, commercial loans have grown by 17% in the last 12 months. The competition has heated up, spreads are tightening. But we continue to be a strong player, certainly in the southern New England market.

Deposits are essential to fuel loan growth and totaled $2.8 billion at the end of the first quarter. In-market deposits were up 1.5% from year-end. As we have mentioned on previous calls, we've had success growing our deposit base organically and believe there are additional opportunities in Rhode Island.

During the quarter, we opened an office in Rumford, Rhode Island, the 20th branch in our network. We also received regulatory approvals for a branch on the east side of Providence to be opened later this year or in early 2016. We've identified other future branch sites in Rhode Island and are awaiting regulatory approvals on those.

I will now turn the discussion over to David for a view of our financial results. David?

Thank you, Joe. Good morning, everyone. Thanks for joining us on our call today. I will review our first-quarter 2015 operating results and financial position as described in our press release late yesterday afternoon.

Net income was $11 million or $0.65 per diluted share in the latest quarter. That compares to fourth-quarter 2014 net income of $11.2 million or $0.66 per diluted share. The latest quarter profitability results included a continuation of our very solid return on equity and return on asset measurements. Return on equity was 12.54%. The return on assets was 1.23%.

In the first quarter, net interest income was $25.7 million, down 2% on a linked-quarter basis. While average interest earning assets were $61 million higher in the fourth quarter, due to commercial loan and residential loan growth, the net interest margin in the quarter was 3.18%, a decline of 5 basis points from the fourth quarter. Included in the latest quarter was $266,000 of commercial loan prepayment fee income compared to $445,000 of that income source in the fourth quarter.

Excluding the prepayment fee income, the margin was down by 4 basis points on a linked-quarter basis, largely due to lower yields on the more recent commercial loan originations and the debt references -- the competitive pressures that Joe mentioned earlier. Meanwhile on the funding side, the yield on average interest bearing liabilities declined by 2 basis points on a linked-quarter basis. The cost of in-market time deposits, which excludes wholesale brokered deposits, dropped by 9 basis points.

Also in early February, $69 million of federal home loan bank advances were modified to lower interest rates. The maturities of these advances were extended. The original weighted average rate of these advances was 4.06%. That was reduced to 3.5%. The maturities were extended by two to four years from 2018 to 2022.

On the balance sheet, total loans rose by $21 million, that included a $24 million increase in commercial loans. More than all of that was in commercial real estate; there was a net decline of about $7 million in the C&I portfolio with lower usage of commercial lines in the quarter. Residential loans were up about $2 million from the end of 2014. Consumer loans were down slightly during the quarter.

The investment securities portfolio stood at $365 million at the end of March, down about $18 million in the quarter. There were no additions to the portfolio. We had some payments on mortgage-backed securities as well as maturities and calls on some municipal holdings.

Deposits stood at $2.8 billion at March 31, an increase of about 1% over the end of the fourth quarter. In-market deposits, which again excludes wholesale brokered time deposits, were up 1.5% in the quarter. We were able to reduce federal home loan bank borrowings by about $20 million from the fourth quarter.

Non-interest income continues to represent a significant portion of our total revenues, over 30%. Total non-interest income was $14 million in the first quarter, up 2% on a linked-quarter basis.

Mortgage banking revenues, which include net gains on loan sales and commissions received on loans originated for others, was $2.6 million in the quarter, a 22% increase compared to the fourth quarter; that was the result of higher residential mortgage loan sales volume. Loans sold into the secondary market rose from $99 million in the fourth quarter to just under $128 million in the most recent quarter.

We've been successful in shifting a higher portion of loan originations into saleable product. That's been helpful in maintaining the healthy level of mortgage banking revenues along with the favorable longer term rates for mortgage origination in this period.

We saw a continuation of commercial borrower demand for interest rate swaps in the first quarter. Net gains on interest rate swap contracts were $645,000, up about $71,000 on a linked-quarter basis.

In the wealth management business, first-quarter revenues were $8.4 million, consistent with the fourth quarter and up about 5% over the first quarter a year ago. Wealth management assets stood at $5.2 billion at the end of March, a 2% increase in the quarter. They were up 7% in the last 12 months. Financial market appreciation has been helpful to the level of wealth management assets.

Turning to non-interest expenses, total non-interest expenses in the quarter were $23.5 million, up 2% on a linked-quarter basis. Included in that increase were an increase of $800,000 in salaries and employee benefit costs; the largest factor is payroll taxes -- employer payroll taxes as you turn the calendar year and people resume paying FICA and things like that. We also saw an increase in occupancy costs on a linked-quarter basis, up about $246,000. That would be primarily weather-related utilities and snow clearing and other occupancy type of costs.

Other expenses were down $636,000 compared to the fourth quarter, with the major reason being the $400,000 charitable contribution we recognized in the fourth quarter. There was no such expense in the first quarter of this year.

Regarding asset quality, total asset -- our solid asset quality metrics remained very stable in the latest quarter. Non-performing loans declined by $80,000 and stand at 0.55% of total loans, down 1 basis point in the quarter. Total loan delinquencies saw a modest increase, up about $1 million and stand at 0.66% of total loans, an increase of 3 basis points over the end of the fourth quarter.

Net charge-offs remained very modest at only $213,000 in the first quarter. This is a continuation of the low loss experience we incurred in 2014 when net charge-offs amounted to only 0.07% of average loans in that year.

There was no loan loss provision charged to earnings in the latest quarter and that compares to a loan loss provision of $500,000 in the fourth quarter. We concluded that no loan loss provision was necessary given the stable asset quality metrics, the relatively modest loan growth in the most recent quarter and other favorable changes in loss exposure allocation. With that, the allowance for loan losses stands at 0.97% of total loans at the end of March, down 1 basis point from the end of December.

Total shareholders equity for the Corporation is just under $354 million at the end of March, an increase of $7.6 million in the quarter. You may have seen that in the first quarter, we declared a quarterly dividend of $0.34 per share paid last week. That dividend represented an increase of $0.02 per share from the previous quarter. It is our fifth consecutive year of dividend increases.

The Corporation in the subsidiary bank capital levels continue to exceed the well-capitalized minimums. The total risk-based capital ratio for the Corporation is 12.87% at the end of the first quarter compared to 12.56% at the end of the fourth quarter. The tangible equity to tangible assets ratio, a non-GAAP measurement, was 8.22% at the end of March, up from 8.04% at the end of December. At this time, I will turn the call back to Joe MarcAurele.

Thank you, David. We're pleased with our first-quarter performance and look forward to sharing these results with our shareholders at the annual meeting next week. Washington Trust has had a successful track record. We've provided healthy dividends. We believe positioned the Company for future growth. We certainly feel this is a good message.

Going forward, we remain committed to the core values and strategic vision that have guided our Institution for amazingly over 215 years. We feel like we're poised to meet the challenges in the market and feel as though we have great opportunities lying ahead for us. Thank you for your time this morning. Now Ned, David and I are happy to answer your questions.

(Operator Instructions)

Our first question today is coming from Mark Fitzgibbon from Sandler O'Neill & Partners. Please proceed with your question.

Dave, I wondered if you could share with us your thoughts on the outlook for the net interest margin?

Sure. I think the factors that affected the margin in the first quarter are likely to continue in the near term. The continued competitive pressure on commercial loan yields is likely to continue to cause the margin to be under some pressure. We would see some modest amount of margin erosion over the next couple of quarters. Until and unless the Fed changes its -- makes a change, that's likely to continue.

Okay. Then I guess it strikes me that your cost of deposits is a little bit high versus your peers. How much room do you think you still have to push deposit costs down? Also I wondered if you could share with us how much in CDs you have maturing in 2015? Maybe what the average rate might look like on those?

Well, for us, the cost of deposits overall may be higher than peers. We probably have a higher amount on average of brokered time deposits in our deposit mix. We also recognize that we would like to have a higher portion of demand deposits and other -- the lowest cost categories. We're working on that. We've made good progress over the last several years.

In terms of CDs maturing, we've got, let's see, maybe $250 million maturing between now and the end of the year. So there is some opportunity for continued repricing, but there is some competition with deposit rates out there as well.

Okay. Then I think you had said in the release, pipelines were strong but could you share with us in dollars what those are?

Yes, Mark, it's Ned. The commercial pipeline is very strong. It's $184 million over the next three or four months. We expect that the second quarter will be stronger than the first. We've had some -- obviously, we had a great fourth quarter, so we're rebuilding a little bit in the first quarter, had some payoffs. So our net growth of 2% in the first quarter was acceptable but not what we've seen in past quarters. But we think the second quarter will make up some ground.

We still have some payoffs, refinancings out of the bank in the balance sheet, but we think we will hit our expected growth rates by second quarter. We certainly feel good about hitting higher single-digit growth rates by year-end.

On the mortgage side, we're at an all-time kind of high area on the residential mortgage pipeline, in the $150 million range. So we've had great months in the past three or four months on the mortgage side. The pipeline continues to be supportive.

Okay. Then last question is on the provision. Obviously you guys have had very low charge-offs and low levels of problem loans. Do you think we can sort of run with no provision for awhile? Or would you expect a resumption of that in 2Q and 3Q as loan growth picks up?

The latter. We would expect some modest resumption of loss provision. It will be somewhat growth dependent. We're hoping that we have the growth -- we are expecting that. So I think most likely there would be some resumption of loss provisioning in the next few quarters.

Thank you.

Thanks, Mark.

(Operator Instructions)

Our next question today is coming from Travis Lan from KBW. Please proceed with your question.

Yes, thanks. Most of my questions were asked, but just on the expense side. Normalizing for the weather costs and the seasonal payroll taxes, David, do you expect the 2Q expenses to be flat or lower? Or is there enough investment coming to put some upward pressure on the expense line?

Those are seasonal things that I don't think would be continuing at that level. So I think we would see some modest expense relief.

Okay. Then just on the wealth management side, can you guys talk a little bit about the AUM growth strategy there? How you kind of attack that in terms of, do you add teams? Or is it building on existing relationships? Just a little bit more color on the wealth management growth outlook.

Well, Travis, it's Joe. It's really a combination of both. We have very actively recruited new sales people into the wealth management area over the last year or so. So that is one strategy. The other strategy is working more closely than ever with particularly the commercial bankers to be more successful in cross-selling into that portfolio.

Thirdly is really making sure that we not only keep the existing clients that we have, but being -- making sure that to the extent we can, we add to those accounts. I would say at this point, we have been very successful, adding to existing accounts. We've been successful -- more successful on the referral side particularly from commercial bankers. We are still hoping to do better with our existing sales force. But we have gotten some traction, particularly in the last six months or so with that.

Got it. Great. Then last one, just kind of following up on one of Mark's questions. Ned, despite a similarly slow first quarter for loan growth in 2014, you guys bounced back to put up mid teen loan growth for the year. I don't -- it sounds like that's not going to recur. But just give us a little bit of outlook for loan growth for the rest of this year? I think you may have said high single-digits but just wanted to make sure I got that.

Yes, that is what I said. I think the pipeline is very strong for the next couple of months. May is going to be a great month. June will be strong. We've got a number of construction loans in the portfolio that are building in growth. We have had some payoffs. So from a balance sheet perspective, we're countering that. Our guys know they have to replace those when they go away. So I feel good about that sort of mid to high single-digit growth outlook.

Could we outperform? We'll try our hardest. As Joe said, the rate environment is tough. Competitive levels are high. We're seeing very thin pricing and even some structural decay. So we're being careful. But we're out there and fighting for each deal on the street corner. So I feel comfortable with that prediction. We'll assure you that the troops are running hard.

Just the last follow-up, is the competition coming across the board? Or is it coming from the larger banks? Or smaller banks? Or a mix of the two? Thanks.

A mix of the two, but I think we continue to see some -- the most what we would think of as unusual competition as coming from the smaller peer banks, who are fighting very hard for asset growth. Even the larger banks are lengthening out term and competing hard on price. So we're seeing that from all fronts, but I would say most aggressively on the smaller, peer community.

Great. Thanks, guys.

Travis, this is Dave again. I just want to clarify my comments on expenses. While those things that were unseasonably larger in the first quarter would be expected to abate, there are some other seasonal things, advertising and promotion typically would be higher in the second and third quarter than we had in the first quarter. So there's a number of moving pieces there.

Thank you. Our next question today is coming from Laurie Hunsicker from Compass Point. Please proceed with your question.

Just to follow up on two points here. It looks like your Rumford branch opened ahead of schedule? Is that correct?

Yes, it did. A little bit.

Okay. Then same, I guess your east Providence branch potentially will be ahead of schedule as well?

The one on the east side of Providence?

Yes.

I think, Laurie, the dates that we had given on that of late this year or early next year is consistent with what we had said before.

Okay. So as we think about modeling that into expenses, what, approximately, what's the annual run rate that a branch will drag, expense-wise?

Well, a branch like that is probably going to have a mid six figure annualized cost. It doesn't necessarily mean all incremental, because with staffing moving around, we may be able to gain some efficiencies, but something in that range.

Okay. Then obviously the loan and deposits are key. If you just think about it from a deposit standpoint, what typically is your break even?

Well, of course, it depends on the mix. Certainly at the -- in the $30 million range, it's certainly holding its own.

Okay. Then you mentioned you had identified some other branch sites that you were waiting for regulatory approval. Can you expand a little bit on where those are?

They're essentially extensions of our build-out more into the greater Providence market. So we're obviously saturated in the southern part of the state. So they would be extensions, for example, of the east side of Providence or the Rumford branch, which is in East Providence, which is a slightly different market. We are in Cranston already. So these are things that are in those surrounding areas.

Okay. How many branches are you all slated to do?

Well, we have the two, Rumford and the east side. Then we have at least a couple more that we -- where we feel as though we have zeroed in on locations. They're not totally solidified yet.

Okay. Then can you just remind us, I know that as we look at your Company's slide deck, you've got growth markets circled of Fairfield County, greater Boston. Can you just remind us of how you are thinking of those markets? Is that -- there's greater density in the branching? Or is that potentially acquisitions? Or how are you thinking about that?

These are today residential mortgage offices. We have very significantly penetrated particularly the commercial real estate market in both Connecticut and in the greater Boston area. I would say that de novo branching in areas like that is difficult. We don't really have a brand.

My comment on acquisition opportunities into those areas is that we look at those things all the time. They are both attractive markets. They are also, though, both very competitive markets. So that's the decisioning really around those types of things.

Okay. So would it be fair to say that you are still actively looking for acquisitions?

We're always looking.

Always looking. Okay, good. Then just wanted to ask here, I noticed that this quarter, this is a smaller line item, but your interest bearing demand looked like in December was $19 million, zero costing and then jumped to $38 million of your deposits this quarter with the 9 basis point cost there. Did you do some sort of a promotional campaign? Is the thought to continue that? Or is that something unusual?

No, that's a product that would be helpful in our growing cash management relationships. So it's new in terms of the way it's promoted. It's a good solid source of funds for us.

Great. Okay. Then just one last question. Just going to your linked-quarter C&I growth, because that was down. Can you give us a little bit more color there on -- you mentioned your May and June pipeline very strong. Is that in commercial generally? Or is that, specifically are we seeing that CRE versus C&I?

Laurie, it's Ned. We are seeing it in both. We have -- we're at 61% CRE on the balance sheet today. We would love for it to be 50/50, so we are certainly promoting C&I growth wherever possible. The pipeline has a pretty good balance of each and also has a good proportion of sort of local C&I credits where we would get full relationships, deposits, cash management, et cetera. So I think we're more focused on that.

We are seeing lots of real estate opportunities. We're hopefully picking the right ones and are supporting -- trying to support relationships, even on the real estate side where we're going after more deposits and trying to become relevant to our real estate developers even on the cash management side. But I think the intent is to balance out, have a little bit more of a higher percentage of C&I. The pipeline reflects that strategy.

Great. Thank you.

Thank you. That does conclude our question-and-answer session. I would like to turn the conference back over to Joseph MarcAurele for any closing remarks.

Thank you very much. Well, I really would just like to thank everyone for taking the time to be with us today. We hope that our results -- certainly, we feel as though our results have been consistent. We certainly plan on continuing that. So thank you. We will certainly have an opportunity to talk to some of you during the quarter and others certainly next quarter. So thank you.

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