Washington Trust Bancorp, Inc. (WASH) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Washington Trust Bancorp Inc.'s Conference Call. My name is Kevin. I'll 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 you may begin.

Thank you, Kevin. Good morning and thank you for joining us for Washington Trust Bancorp Inc.’s first quarter 2015 conference call. Washington Trust trades on NASDAQ/OMX market under the symbol WASH. Hosting this morning's discussion are Joseph MarcAurele, Chairman, Chief Executive Officer; Ned Handy, President and Chief Operating Officer and David Devault, Vice Chair, Secretary and Chief Financial Officer. Today's presentation may include forward-looking statements and actual results could differ materially from those statements. For a discussion of latest factors, please see our earnings release and our most recent SEC reports on Form 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'm now pleased to turn the call over to Washington Trust's Chairman and CEO, Joseph MarcAurele.

Good morning and thank you for joining us on today’s call. This morning, I will review first quarter highlights and 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 am 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 measured remained strong as return on average equity totaled 12.54% and return on average assets was 1.23%. We have excellent asset quality and capital ratios remained 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 fifth dividend increase in the last eight quarters demonstrating our continued commitment to our shareholders. Our solid first quarter performance reflex our success by growing our core business lines and expanding our bridge 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 overtime. Our wealth management area is a key of this business model. During the first quarter, wealth management revenues amounted to $8.4 million comprising 60% of total noninterest 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 end, primarily as a result of solid commercial and residential load growth over the past 12 months. Our residential mortgage area has contributed nicely to the bottom line overtime. 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 noninterest income from loans sold into the secondary market. Despite a harsh snowing on winter, followers came out to take advantage of low interest rates resulting in steady refinancing and purchase activity. We continue to have success with production coming from all of our southern New England mortgage offices. In the latest quarter, we had modest commercial load 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 have [ph] speeded up and spreads our tightening but we continue to be a strong players certainly in the southern New England market. Deposits are essential to fewer loan growths and totaled $2.8 billion at the end of the first quarter. In market deposits were up 1.5% from year end. As we 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 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 awaiting regulatory approvals on those. I’ll now turn the discussion over to David for review of our financial results. David.

Thank you, Joe. Good morning everyone and thanks for joining us on our call today. I’ll 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 included a continuation of a very solid return of equity and return on asset measurements. Return on equity was 12.54% and 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 than 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 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 that 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 broker deposits dropped by 9 basis points. Also in early February $69 million of federal home loan bank advances were modified to lower interest rates and the maturities of these advances were extended. The original weighted average rate of these advances was 4.06% and that was reduced to 3.5%. And the maturities were extended by two to four years from 2018 to 2022. In the - 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 and 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 and we had some payments on mortgage back securities as well as maturities and cause on some municipal holdings. Deposits stood at $2.8 billion at March 31st, an increase of about 1% over the end of the fourth. In market deposits which again excludes wholesale broker 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. Noninterest income continues to represent a significant portion of our total revenues over 30%. Total noninterest 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 and that was the result of higher residential mortgage loan sales volume. Load 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 salable product that’s been helpful in maintaining the healthy level of mortgage banking revenues along with the favorable longer terms 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 and they were up 7% in the last 12 months. Financial market depreciation has been helpful to the level of wealth management assets. Turning to noninterest expenses, total noninterest 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 end, people isn’t paying [indiscernible] and things like that. We also saw an increase in net 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. Nonperforming 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 a $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 were net charge offs amounted to only 0.07% of the average loans in that year. There was no load loss provision charge 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 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 shareholder’s 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 at last week, that dividend represented an increase of $0.02 per share from the previous quarter and it’s our fifth consecutive year of dividend increases. The Corporation in the subsidiary back, capital levels continue to exceed the well capitalized minimums, the total risk based capital ratio for the Corporation is 12.87% at end of the first quarter compared to 12.56% at the end of the fourth quarter. And the tangible equity to tangible assets ratio in non-GAAP measurement was 8.22% at the end of March, up from 8.04% at the end of December. And at this time, I’ll turn the call back to Joe MarcAurele.

Thank you, David. We’re pleased with our first quarter performance and we look forward to sharing results with our shareholders at the annual meeting next week. Washington Trust has had a successful track record. We’ve provided healthy dividends and we believe position the company for the future growth and we certainly feel this is a good message. Going forward, we’ll remain committed to the core values and strategic vision that have guided our institution for amazingly over 215 years, which we like, we’ll poise to meet the challenges in the market and feel is all we have great opportunities lying ahead for us. Thank you for your time this morning and Ned, David and I are happy to answer your questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question today is coming from Mark Fitzgibbon from Sandler O'Neill & Partners. Please proceed with your question.

Good morning, gentlemen.

Good morning, Mark.

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 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 and we would see modest amount of margin erosion over the next couple of quarter. And I’ll tell as the fed changes, it’s - it makes a change, that’s likely to continue.

Okay. And then I guess it strengthen you that your cost of deposit is a little bit high versus your peers. How much room do you think you still have to push your deposit cost down and also wondered if you could share with us how much in CDs you have maturing in 2015 and maybe what the average rate might look like on those?

Well for us the cost of deposits overall maybe higher than peers. We probably have a higher amount on average of broker time deposits in our deposit mix. We also recognize that we would like to have a higher portion of demand deposits and other the lower cost categories. We’re working on that with 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 reprising but it’s - there is some competition with deposit rates out there as well.

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

Hey 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 all of that in the first quarter, had some payoff. So in that growth of 2% in the first quarter was acceptable but not what we see in the past quarters. But we think the second quarter will make up some starts from payoffs, refinancing out of the bank in the balance sheet, but we think we’ll hit expected growth rates by the second quarter and we certainly feel that about hitting higher single digit growth by year end. On the mortgage side, we’re at all-time had a high area on the residential mortgage pipeline in a $150 dollar range. So we’ve had great months in the past three or four months in the mortgage side and the pipeline continues to be supportive.

Okay. And 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 a while or would you expect your resumption of that in Q and 3Q as long growth picks up?

The ladder, we would expect some modest resumption of loss provision, it will be somewhat growth dependent and we’re hoping that that we have the growth and we are expecting that. And so I think most likely there would be some resumption of loss provisioning in the next few quarters.

Thank you.

[Operator Instructions] Our next question today is coming from Travis Lan from KBW. Please proceed with your question.

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

You know those are seasonal things that I don’t think would be continuing at that level, so I think we’d see some modest expense relief.

Okay. And just on the wealth management side, could you just talk a little about the AUM growth strategy there and how you kind of attack that in terms of do you add teams or is it building on existing relationship, just a little bit more color on the wealth management growth outlook?

Travis, this is 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 in one strategy. The other strategy is working more closely than ever with particularly the commercial banker to be more successful in cross selling into that portfolio. And thirdly is really making sure that we not only keep the existing clients that we have but being - making sure that to the extend we can we add into 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. And we are still hoping to do better with our existing sales force. But we have gotten some attraction particularly in the last six months or so with that.

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

Yeah that as well I said, I think you know 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, from balance sheet perspective, we’re countering that and our guys know they have to replace those when they go away. So I feel good about that sort of mid to high single growth outlook. Could we outperform, we’ll try our hardest. As Joe said, there is a rate environment cost, competitive levels are high. We’re seeing various in pricing and even some structural change. So we’re being careful but we’re out there and fighting for each deal on the street corner side. I feel comfortable with that prediction and we’ll assure that the trips are running hard.

And just last follow-up. Is the completion coming across the board or is it coming from the larger banks or smaller banks or 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 this unusual completion is coming from the smaller peer banks who are fighting very hard for asset growth. Even though larger banks are lengthening our term and competing hard on price. So we’re seeing from all fronts but I would say most aggressively on the peer coming in.

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 with we expecting 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 is a number of moving pieces there.

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

Yeah. Hi good morning. Just a follow-up on two points here, looks you run for a branch opened, how does is schedule, is that…?

Yes, it’s good a little bit.

Okay. And then same, I guess your East Providence branch potentially will be out of schedule as well?

We went on East side of Providence, so think Laurie that dates that we had given on that that was late this year or early next year is consistent with what we had said before.

Okay. Okay and so as we think about modeling that into expenses, what approximately, let’s say annual run rate that a branch will drag expense wise?

Well, a branch like that is probably going to have a mid-six figure annualize 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. And then obviously the loan and deposit, you just think about from a deposit standpoint, what typically is your breakeven?

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

Okay. And then you mentioned you had identified some other branch sites, but you are waiting for regulatory approval, can you expand a little bit on where those are?

They are essentially extensions of our build our more into the greater providence market. So we’re obviously saturated in the southern part of the state, so there would be extensions for example one of the east side of Providence of the Rumford branch which is in East Providence which is a slightly different market. And we are in Cranston already. So these are things that are in all surrounding areas.

Okay. And how many branches are you well slighted [ph], Joe?

Well we have the two Rumford and the east side and then we have at least a couple more that we - where we feel is all we have in our locations, they are not totally solidified yet.

Okay. And then can you remind us, I know that as we look at your company’s slide deck, you got gross markets are called Fairfield County in greater Boston, can you just remind us those how you are thinking about those markets and is that - is great dense to be the branching or is that potentially acquisitions or how you are thinking about that?

These are today residential mortgage offices and we are very significantly penetrated particularly the commercial real estate market in both Connecticut and in the greater Boston area. I would say that to know all branching and things in areas like that is difficult. We don’t really have a brand. And you know 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 the both very competitive markets. So that’s the decision really around those types of things.

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

We’re always looking.

Always looking. Okay, okay good. And then just wanted to ask you, I noticed that this quarter, this is a smaller line item, you interest bearing demand look like in December was 19 million, zero costing and then jump to 38 million of your deposits this quarter with 9 basis point cost there, did you do some sort of a commercial campaign and this the thought to continue that or that’s 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 it’s promoted and it’s a good solid cost of - course of funds for us.

Great. Okay. And then 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 pipeline very strong, is that in commercial generally or is that specifically are we seeing that CRE versus C&I?

Hey Laurie, it’s Ned. We are seeing it both, we have - we are at 61% CRE on the balance 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 credit wherever you would get for relationships deposits cash management et cetera. So I think we’re more focused on that, we’re seeing lots of real estate opportunities and we’re hopefully picking the one - the right ones and are supporting, trying to support relationships even on the real estate side, we buy 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 and the pipeline reflex that strategy.

Great, thank you.

Yeah.

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. 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 our results have been consistent and we certainly plan on continuing that. So thank you and 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 is now concluded. Thank you for attending today presentation. You may now disconnect.