Washington Trust Bancorp Inc (WASH) 2016 Q1 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp Inc.'s conference call. My name is Kevin. I'll be your operator today.

(Operator Instructions)

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

Thank you, Kevin. Good afternoon and welcome to Washington Trust Bancorp Inc.'s first-quarter 2016 conference call. Today's call will be hosted by Washington Trust executive team, Joseph MarcAurele, Chairman and Chief Executive Officer; Ned Handy, President and Chief Operating Officer; and David Devault, Vice Chair, Secretary and Chief Financial Officer.

We'd like to remind you that today's presentation may include forward-looking statements and actual results could differ materially from the statements made today. Our complete Safe Harbor statement is included in our earnings press release and in other documents we file with the SEC. These materials are available on our Investor Relations website, at washtrustbancorp.com. Washington Trust stock trades on NASDAQ's OMX market under the symbol WASH. I'm now pleased to turn the call over to Washington Trust's Chairman and CEO, Joseph MarcAurele.

Thank you, Beth. Good afternoon and thank you for joining us on today's call. I will review the highlights of the first quarter of 2016 and then David will provide more detail on our financial performance. At the conclusion of the call, Ned, David and I will answer any questions you may have about the quarter or the year ahead.

I'm pleased to report that Washington Trust once again posted solid earnings. First-quarter net income totaled $10.9 million or $0.64 per diluted share, up from the fourth quarter of 2015. Key performance metrics, including return on average equity and return on average assets, remained strong during the quarter. These profitability ratios continue to place us among the top of our peer group.

Our asset quality also remained stable during the quarter and we continue to be well-capitalized. During the quarter, we increased our quarterly cash dividend. This is the sixth consecutive year of dividend increases and is consistent with our dividend strategy and commitment to our shareholders. David will have more on the dividend in his comments.

Our first-quarter performance reflects our continued success in growing our key business lines through market expansion, de novo branching and acquisition. This strategy has allowed us to expand our regional presence for wealth management, mortgage banking and commercial lending services, and increased our deposit market share position in our home state of Rhode Island.

Our commitment to Rhode Island branch expansion continued in the first quarter of 2016, as we opened a branch on the east side of Providence. The branch is located in an affluent and historic district of the capitol city. It's a great location and offers terrific opportunities.

Over the past few years we've successfully rebalanced our deposit portfolio by attracting lower-cost deposits and repricing higher-priced funds. We've also brought in some larger commercial and municipal account relationships by enhancing our cash management offerings.

We experienced some seasonal fluctuations in institutional balances and money market account outflows during the latest quarter. Our mortgage banking area had tremendous growth in recent years due to expansion into Connecticut and Massachusetts. And I'm pleased to announce our plans to open another mortgage banking office in the greater Boston area.

We've selected a site in Wellesley, Mass, a community that has one of the highest median household incomes and home values in the state. We already have a lending team in place and are awaiting regulatory approval to open the physical office there, and we are anxious to do that.

While mortgage banking revenues and sales volumes were down from the previous quarter, our mortgage pipeline is at an all-time high. So we're optimistic that we'll see a rebound in mortgage banking going forward.

Our commercial lending area had a very good quarter with solid activity in both commercial and industrial and commercial real estate loans. Unfortunately, like many other banks have experienced, our growth was reduced by a number of loan pay-offs. The majority of these pay-outs are in the CRE portfolio, for selling into the advantageous cap rate environment that currently exists.

As with mortgage, we had a very healthy commercial pipeline and expect we'll see continued growth in the commercial portfolio. Our wealth management area posted solid results in the quarter, despite the volatility in the financial markets. Overall, our margin improved somewhat and our non-margin business continues to perform well. I'll now turn the discussion over to David for details on our financial results. David?

Thank you, Joe. Good afternoon, everyone, and thanks for joining us on our call today. I'll review the first-quarter 2016 operating results and financial position as described in our press release issued earlier today.

Net income was $10.9 million or $0.64 per diluted share in the first quarter. That represented a 2% increase in net income and an increase of $0.02 per diluted share on a linked-quarter basis compared to the fourth quarter of 2015.

As Joe mentioned, the profitability results for the latest quarter were very solid. Return on equity was 11.5% and our return on assets was 1.16%. One of the reasons for the results is an increase in net interest income, which for the quarter was $27.7 million, up $1.5 million from the previous quarter.

Included in the net interest income in the latest quarter was $1 million in commercial loan pre-payment fee income which benefited net interest margin by about 11 basis points. And on an after-tax basis, that was about $0.04 per diluted share. A substantial portion of that pre-payment income was attributable to one relationship.

And excluding the prepayment fee income, the margin for the quarter was 3.13%, a 6 basis point improvement over the fourth quarter. The margin was helped by balance sheet growth as well as the increase in short-term rates, as announced by the Federal Reserve in December.

Our average interest earning assets were up 1.7% on a linked-quarter basis, largely due to growth in commercial loans. Total loans stand at $3 billion at the end of March, up $34 million or 1.1% in the quarter. And total loans are up 5.8% in the last 12 months. The increase in the quarter was led by growth in the commercial portfolio which was up 2.7%. And total commercial loans are up 8.9% in the last 12 months.

Commercial real estate loans, which are part of the commercial portfolio, grew by $46 million or 4.3% in the latest quarter, and there was a modest decline in C&I loans. The residential portfolio was down about 1% in the quarter, and they were up by 2% in the last 12 months. Consumer balances were essentially unchanged in the latest quarter and they were up 3% in the last 12 months.

Investment securities stand at $430 million at the end of March, an increase of $35 million in the quarter. During the quarter we added approximately $51 million in new purchases of government agency securities and agency mortgage-backed securities, which were partially offset by calls and maturities and routine principal pay-downs. These additions were primarily for liquidity management and collateralization purposes.

Total deposits stand at $2.9 billion at the end of March, down about $55 million or 1.9% in the quarter. Total deposits are up 3.5% in the last 12 months.

The largest outflow in the quarter was in money market deposits. As Joe mentioned, this was concentrated in various institutional and commercial deposits. For seasonal and other reasons, that is not unusual in the first quarter for us. I would note that money market deposits continue to be a significant source of funding for us, with a balance of $764 million at the end of March.

We've also been successfully managing the cost of the deposits in this category. For example, the cost of our money market deposit balances in the latest quarter was 26 basis points. That's down 20 basis points since the third quarter of 2015.

Federal Home Loan Bank of borrowings rose by $108 million in the quarter. Also in the quarter we prepaid about $10 million in FHLB advances. The weighted-average rate on the advances that we prepaid was 2.72%. This resulted in the recognition of debt pre-payment penalty expense or loss on the extinguishment of the debt amounting to $431,000, about a $0.02 per share impact on an after-tax basis.

We replaced those paid-off FHLB advances with a like amount of brokered certificates of deposits with an 18 month maturity and an interest rate of about 0.95%. So we'll have a savings of about $132,000 for the rest of this year, with additional benefits in periods beyond the end of 2016. That transaction occurred close to the end of the quarter, so there really wasn't any impact in the first quarter.

Non-interest income continues to represent a significant portion of our total revenues, 35% of total revenues in the latest quarter. And in our wealth management business, first-quarter revenues were $9.2 million, in line with the previous quarter. Wealth management assets under administration, the vast majority of which are assets under management, stand at $5.9 billion at the end of March, up about 1% in the latest quarter. This was achieved despite quite a bit of volatility in the financial markets during the quarter.

We were also pleased to see positive net client asset flows in the quarter. On an aggregate basis in the last four quarters, we have also seen positive asset flows in client balances.

Mortgage banking revenues, which includes gains and commissions on loan sales and mortgage servicing fee income, was $2.2 million in the latest quarter, down about 15% on a linked-quarter basis. That's all attributable to lower volume of loans sold or brokered into the secondary market, which were also down about 15% from the fourth quarter. As Joe mentioned, we are seeing strength in the mortgage pipeline currently and that certainly gives us a degree of confidence in this business heading forward.

Loan-related derivative income, which is primarily fees on swap transactions with commercial borrowers, was $645,000 in the latest quarter. It was a little bit down from the fourth quarter, although customer demand for these transactions continues to remain fairly steady, both in the first quarter and as we look ahead into the current quarter as well.

Non-interest expenses in the quarter were up about 4% in total on a linked-quarter basis, an increase of $889,000. Included in that was the $431,000 cost associated with the pre-payment of the FHLB advances that I mentioned earlier. Excluding those, total non-interest expenses were up about $458,000, or a 2% increase. The largest increase is in salaries and benefits. And the biggest piece of that is an increase in employer payroll taxes associated with the start of the new calendar year with a reset of tax limits.

Our effective income tax rate was 33.4% for the latest quarter. That would also represent our current forecast for the full year of 2016.

Looking at asset quality, we continue to believe that our asset quality is very good. Total loans past due by 30 days or more as a percentage of total loans outstanding, stood at 0.60% of total loans at the end of March. That was up slightly by 2 basis points from the end of the fourth quarter. Meanwhile, non-performing loans decreased to $17 million, a decline of about $4 million in the quarter and stand at 0.57% of total loans.

Our loan loss provision charged to earnings was $500,000 in the first quarter. That compares to a provision of $750,000 in the fourth quarter. That loan loss provision reflects our assessment of loss exposure as well as loan loss allocations commensurate with loan portfolio growth in the latest quarter as well.

Net charge-offs in the latest quarter were $1.4 million. That included a $1.2 million charge-off associated with a single commercial real estate relationship. And while we did take the charge-off in the quarter, the loss exposure associated with that account had been provided for in the balance of our allowance for loan losses at the end of the fourth quarter. So net charge-offs for the previous quarter were $842,000.

The allowance stands at 0.86% of total loans at the end of March, down 4 basis points from the end of December. That 4 basis point reduction is equal to the impact of the $1.2 million charge-off, which, again, had been allocated in our loss exposure at the end of December.

Total shareholders equity was $381 million at the end of March, a $6 million increase in the quarter. And in the first quarter, we declared a quarterly dividend of $0.36 per share that was paid on April 14. That represents a $0.02 per share increase from the previous quarterly dividend rate. And it also marks the 23rd year in the last 24 years with a dividend increase.

The Corporation's subsidiary bank capital levels continue to be well-capitalized. Our total risk-based capital ratio was 12.45% at the end of March, down about 13 basis points in the quarter. Meanwhile the tangible equity to tangible assets ratio, a non-GAAP non-regulatory measurement, was 8.13% at the end of March, up 2 basis points in the quarter. At this time, I'll turn the call back to our Chairman and CEO, Joe MarcAurele.

Thank you, David. We are pleased with our first-quarter performance and believe that our market expansion efforts, along with the continuing strength of our commercial retail mortgage banking and wealth management business lines, will help us to continue to achieve favorable results in future periods.

The low interest rate environment, challenging economy and unstable market conditions continue to present challenges for all banks. But we have a strong capital position, a sound balance sheet and we will continue to seek opportunities to grow and provide solid returns for our shareholders.

We look forward to sharing our results and our story with our shareholders at the annual meeting on May 10. Thank you for your time this afternoon. And now Ned, David and I are happy to answer any of your questions.

(Operator Instructions)

Mark Fitzgibbon, Sandler O'Neill.

Good afternoon, guys, this is Nick filling in for Mark.

Hi, Nick, how are you?

Doing very well, thank you. First, I heard your comments on the mortgage banking pipeline being at an all-time high. I was wondering if you could share with us the size and complexion of the commercial pipelines.

The commercial pipeline is what I call the short pipeline, so 50% or more likely to close, is right about $195 million. Pretty healthy. Split about $50 million in C&I and $146 million on the CRE side. So we're happy with that.

The total pipeline above that is in the $300 million, so we got a lot of activity on the front end of the process. About $70 million of that pipeline is in construction, mostly in two projects, one apartment project and stores, Connecticut, and one medical office facility in Providence. So I think the pipeline is in great shape and feel good about the next -- certainly the next quarter anyway.

Okay. And are you still thinking mid single-digit loan growth is a good bogey for the full year?

Yes.

Yes, I think even on a combined basis, Nick, I think that makes sense. We continue and will continue to experience some level of commercial real estate pay-outs, but as Ned said the pipeline is strong. We are having a little bit of a challenge in residential mortgage business but we feel as though we will be able to add to that a little bit, too.

Okay. And then in terms of the margin, we saw the elevated pre-payments this quarter and the benefit from the December hike. I was wondering what your outlook on the core NIM was.

The core NIM did benefit from the increase in short-term rates. And the way I view it is it's going to set the bar a little bit higher but the general trend that we have been seeing over some time is that, barring some other Fed action or a change, noticeable change, in the shape or steepness of the yield curve, there probably would continue to be some erosion on a modest basis over the next several quarters.

Okay.

Now we certainly are doing whatever we can to manage funding costs. And growth is obviously an opportunity for us to overcome that in terms of net interest income dollars.

Right, okay. And then on expenses are there any initiatives you have planned for 2016? How are you viewing expenses more generally, a modest rise throughout the year?

I think a modest rise throughout the year would be a good way to characterize it. As we grow, we continue to build our infrastructure and that's always going to be a part of the equation. But we're not looking at any significant changes in the characteristics of our expense base.

And then, Joe, on the M&A front, I was hoping you could help us about your appetite for acquisitions on either the whole bank or wealth management side.

Well, I think, as you know, we did the Halsey Associates deal in New Haven on the wealth management side. And we garnered about $800 million in additional assets under management from that.

I would tell you that we would continue to consider acquisitions of that type. We think we have significant expertise in the wealth management business and we like the characteristics of that business.

On the whole bank side, I think it's really a function of, to some extent, geography. We wouldn't go too far afield. And then it comes down to price and our ability to grow a franchise when we got a hold of it. So I would say those are the gating factors for us. Obviously, there are also risk parameters associated with any kind of whole bank acquisition. But we feel as though we would box that if we were to pull the trigger.

Thank you.

You're welcome.

Travis Lan, KBW.

Yes, thank you. David, given the CRE environment that Joe laid out where you have borrowers selling at low cap rates, could we see pre-payment fees remain a little bit more elevated over the next few quarters?

It's possible. And if they are paying out fixed rate loans, which a number of the CRE credits are, then that can trigger pre-payment penalties. So it's possible. It's very hard to project that with a high degree of confidence. We tend to assume on the low side in our budgeting and forecasting process for that source of revenue.

Got it. On the deposit side, it sounds like you would be willing to let money market deposits run off a little bit further. Is that right?

Well, that's certainly not our preference and we are working very hard to rebuild those balances. Some of it will come back because it's -- they are accounts that have some natural volatility. We're putting a lot of effort into continuing to grow that deposit base.

What types of actions can you take to rebuild that base, beyond price?

I would say the biggest thing we can do is step up our efforts on the C&I side of our lending business. In addition to that, we continue to call, through our cash management effort, on municipalities and larger organizations, whether those are educational nonprofits or healthcare nonprofits that exist in our market. It's probably more of a marketing commercial effort than it is just driving deposits through the branches. It's fairly difficult in today's environment to advertise any kind of an exciting money market rate, given how low the rates are. So it's really one of calling on larger opportunities.

Great, okay, that's helpful. And then back on the expense side real quick, based on your comments, does that mean that any normalization of the payroll taxes that elevated the first quarter would be offset by some additional or higher costs elsewhere in the second quarter?

But well, the payroll tax impact tails off towards the latter part of the year as people reach taxable limits. With 600 employees, there is quite a range of timing on that. I would say the first quarter is representative of a cost base and there could be some staff adds, as we continue to grow business lines that might marginally increase those costs. But we're watching that very closely.

Okay. Last one, big picture, is I know you referenced Connecticut and Massachusetts as growth markets and you already have exposure there obviously with wealth and mortgage. But do you have a desire or timeline, or potential timeline, I should say, to eventually back those efforts up with a more robust commercial lending platform, or LPL?

Yes, absolutely have the desire and are working on -- especially in Connecticut we think that's the primary opportunity. We have Halsey on the ground there and with a couple of mortgage offices and with existing lending activity already in that marketplace. We've got some real estate lenders that happen to work out of Westerly, but three of them are from Connecticut, live in Connecticut and do most of their business, if not all of it, in Connecticut.

But on the C&I side, we are still focused on putting a team on the ground. We delayed that a little bit in the third quarter of last year. But we're back with renewed vigor to bolster the existing effort in Connecticut with a team on the ground.

Got it. All right, that's all I had. Thank you all very much.

(Operator Instructions)

Laurie Hunsicker, Compass Point.

Hi, thanks, good afternoon. Wondered if we could go back to expenses here. I just want to make sure I've got this right. The East Side of Providence branch, that was fully reflected in the first quarter results, in terms of the expense drag. Is that correct?

Yes.

Yes.

Okay. Because that was a December opening? Is that right?

January 8, I think.

January 8.

Laurie, we had done some of the hiring even before the end of last year. So the salary part of it was completely in place.

And the rent.

Okay. And then, typically in the fourth quarter, you all have done a charitable foundation contribution. Is that in the works for this year?

That's something we decide on a year-by-year basis. And it's not a decision we've made at this time.

Okay. And going back to Genova branch plans. Can you refresh us on where we sit in terms of thinking about cost of Genova branch plans going forward? Or how you're thinking about that?

Well, Laurie, I would say that we -- the ones that we have opened have all gone very well. We have a very strong statewide brand. The way we are thinking about it is doing things that are smaller. If you were to see the new one that we opened on the side of Providence, it's actually a small space with four or five employees. That's the way we think of it from a size perspective.

Okay.

We would consider doing one or so a year going more north in the state, probably into towns that are a little more significantly populated around Providence.

Okay. And then, going back to --

They can tend to add $500,000-ish a year to expenses, each one of them.

$500,000, okay. And remind us, what is the break-even on deposits there, approximately, on one of those branches?

$35 million-ish.

It depends on the mix but --

Sure.

That would certainly do it.

Okay. And do we have an update. I know it's super early, but do we have an update on what the East Side Providence branch already has in?

It's on track.

Okay. And then the mortgage production office in Wellesley. Any plans to actually be on the ground there with a full branch? Or how are you thinking about the Wellesley market?

You know, Laurie, we don't really have a brand in Boston. And the Boston market is extremely competitive and crowded. The ability to generate residential mortgages, and commercial real estate loans in particular, is a lot different than opening an actual branch. The other thing we'd have to consider is there is a significant up-tick in expense, particularly for rent, in a place like Wellesley.

So I don't know if we would have the same kind of success. People know us in Rhode Island. We certainly have a statewide brand that is strong. But it's a totally different media market. We grow residential mortgages in that market because we hire people who know the market. We don't grow it as much off our brand.

Sure. And along those lines, you all certainly have the strongest currency or one of the strongest currencies in New England in terms of M&A, full bank M&A. I know I've asked you this before, but can you update us on what you think there?

I would agree with you in regards to our currency. It's certainly something that would give us an advantage. It really is all about, to some extent, price, but even more than that, can you grow what's available for you to buy?

And one of the really difficult decisions is to -- some of the things that are available today are not in great markets and they don't have great traction. So it's really -- once you get through the expense cuts that you may be able to do around it, you really have to resolve the doubts against yourself in regard to growing it. So that's the biggest gating factor for me.

Okay, great. Thank you very much.

You're welcome.

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

Great, thank you. I appreciate everyone's attention and interest today. We look forward to the next quarter. We feel as though we have very good momentum and traction. We hope to be able to show you some excellent results for the second quarter of this year. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful time day. We thank you for your participation today.