Washington Trust Bancorp Inc (WASH) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to your quarter 4, 2004 Washington Trust Bancorp earnings conference call. At this time all lines are in a listen-only mode. Towards the end of the conference call we will be taking questions. (OPERATOR INSTRUCTIONS). At this some I will turn the call over to your host Elizabeth Eckel, Senior Vice President of Marketing.

Good afternoon, everyone. Welcome to the quarterly earnings conference call for Washington Trust Bancorp, Inc. NASDAQ national symbol WASH. Today's conference call is being recorded and is being webcast live and a webcast replay of this conference call will be available shortly after the conference call on the Corporation's Website www.WashingtonTrust.com. (technical difficulties) However, the information we provide during this call is accurate only as of this date and you should not rely on these statements after the conclusion of this call.

Hosting today's discussions are John C. Warren, Chairman and Chief Executive Officer and David B. Devault, Executive Vice President, Treasurer, and Chief Financial Officer. Before we begin I would like to (technical difficulty) of our Safe Harbor statement. During today's conference call certain statements (technical difficulty) are considered forward looking within the meaning of section 27-A of the Securities Act of 1933, as amended and section 21-E of the Securities Exchange Act of 1934, as amended. The Corporation's actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result among other factors of changes in general, national or regional economic conditions, changes in interest rates, reductions in the market value of trusts and investment assets under management, reductions in loan demand, reductions in deposit levels necessitating increased borrowings on loans and investments, changes in loan default and charge operates, changes in the size and nature of the corporation's competition, changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements.

Now I am pleased to introduce Washington Trust's Chairman and Chief Executive Officer, John C. Warren.

Good afternoon and welcome to Washington Trust quarterly earnings call (technical difficulty). Earlier today we released our earnings for the fourth quarter and year ended December 31, 2004. This afternoon we will discuss those results and answer any questions you may have. I am pleased to report that Washington Trust had an excellent fourth-quarter and an exceptional year. As we mentioned in previous conference calls we had good balance sheet growth throughout 2004 and that momentum continued into the fourth quarter. By year end we had double-digit growth in all our major lines of business.

Clearly in 2004 Washington Trust was a major player in the Rhode Island and southeastern Connecticut financial services market. Some of the highlights for the fourth quarter ended December 31, include net income of 5.5 million with an increase of 13 percent over the fourth quarter of 2003. Earnings per diluted share of 40 cents, up 11 percent from the same quarter a year ago, total assets of 2.3 billion up 17 percent from December 31, 2003. If you look at the year ended December 31, we posted record earnings for the Corporation (technical difficulty) 20.8 million up 10 percent and earnings per share on a diluted basis of $1.54, an increase of 9 percent from the prior year. How did we achieve this success? As I mentioned earlier we had double-digit growth in each of our major businesses. Total loans increased 30 percent in 2004 to pass the billion dollar mark for the first time for the Corporation.

While all of our lending portfolios were up let me just highlight a couple of key areas. 2004 commercial loans in both C&I and commercial real estate increased 24 percent over the 2003 (technical difficulty) that is outstanding growth. It shows that our strong business development efforts truly have paid off. Throughout the year Washington Trust (indiscernible) and better business opportunities. Our commercial real estate area had an excellent year as well attracting many good quality creditors. (ph) In addition we continue to work closely with the SBA and are one of the state's top SBA lenders.

Other highlights during the course of the year was our consumer lending area. We continue to grow at a record pace. 2004 our consumer loan portfolio largely comprised of home equity lines of credit and home equity loans increased 40 percent over 2003 levels.

(technical difficulty) at 40 percent level, once again an attractive promotional rate backed by a strong marketing campaign kept our home equity product in the forefront of consumers' mind throughout 2004. What is noteworthy is that we achieved this impressive loan growth in an extremely competitive environment and continue to maintain excellent asset quality. I would now like to comment on deposits, another area in which we had some good success in 2004. Total deposits increased 21 percent from the balance at December 31, 2003. Strong business development and marketing efforts helped attract new money both (technical difficulty) consumers and businesses. Our expansion over the past couple of years in the (indiscernible) and Providence has clearly help generate new deposits for the bank. Taken together deposits in those branches were up (technical difficulty) approximately $60 million after only 20 months of operation.

Washington Trust also enjoys a reputation as a significant player in the trust and investment management area combining proven expertise and results in (indiscernible) decision making and personalized service. This reputation combined with a strong business development effort helped us successfully attract new business in 2004. Revenues increased 21 percent. And by year end trust assets under administration (indiscernible) 1.871 (ph)billion. As you know trust and investment management revenues are a major source of non-interest income for the bank; they represent almost 50 percent of our non-interest income. Our non-interest income continues to represent one-third of our total revenue.

At this point I will turn the discussion over to David Devault for an overview of our financial performance.

Thank you, John. Good afternoon, everyone and thank you for attending our earnings conference call today. Net income for the fourth-quarter of 2004 was $5,498,000, an increase of 13 percent from $4,859,000 earned in the fourth quarter 2003. Earnings per share was 40 cents per share on a diluted basis, up 4 cents per share from the same quarter in 2003. Both the net income amount and the earnings per share amount were record highs for Washington Trust.

Return on average assets for the fourth quarter was .96 percent compared to 1.01 percent for the fourth quarter in 2003, while the return on average equity in the fourth quarter of 2004 was 14.54 percent compared to 14.19 percent the same quarter in 2003. The increase in quarterly profitability results is attributable to both higher net interest income as well as growth in non-interest income. For the full year 2004 net income was 20.8 million, up 10 percent over the 18.9 million earned in 2003. And fully diluted earnings per share totaled $1.54 per share, up from $1.41 per share in the prior year. Total assets rose to 2.3 billion up 17 percent from the end of 2003.

The largest asset increase was in loans which grew by $289 million or 30 percent during 2004, including an increase of $52 million in the fourth quarter. Total commercial and commercial real estate loans rose by $99 million for the year which was an increase of 24 percent. Residential mortgages were up by $124 million in 2004 including a $72 million increase in mortgages purchased from other financial institutions. Most impressively consumer loans grew by 40 percent during the year and amounted to $228 million at the end of the year. Most of this growth was in home equity lines and home equity loans.

Meanwhile in the deposit category we also saw good growth results for the year; total deposits rose by 252 million or 21 percent including an increase of 51.4 million in broker deposits. Excluding the broker deposits total in market deposits increased by 200 million dollars for the year which was up by 18 percent. Most of the growth was spread across the categories of now, savings, money markets and time deposits. Demand deposits were down slightly by about $4.6 million for the year; although as we disclosed at the end of 2003, we had a temporary placement of funds of approximately $18.6 million at that time in the category that was withdrawn in January 2004. To exclude the effect of this temporary placement of funds demand deposits rose by $14 million or about 8 percent in 2004.

Turning back to the earnings results for the fourth quarter net interest income amounted to $14.4 million, a 12 percent increase from the same quarter in 2003 and net interest margin for the fourth quarter of the most recent year was 2.69 percent, down from 2.87 percent in the fourth quarter of 2003 and unchanged from the third quarter of 2004. The lower net interest margin in comparison to 2003 was largely attributable to increased funding costs for deposits and borrowed funds partially offset by higher yields on investment securities and loans.

Total non-interest income for the fourth quarter exclude a net realized securities gains of $6.6 million, 12 percent higher than the same quarter in 2003. This increase was mainly due to increases in trust and investment management revenues as well as merchant processing fees, offset in part by a decrease in service charges on deposits. Trust and Investment management revenues which are the largest component of non-interest income rose by 23 percent for the quarter and 21 percent for the year both in comparison to the same periods in 2003.

Trust assets under administration amounted to $1,871,000,000 at the end of 2004 up from $1,742,000,000 a year earlier. Total non-interest income for the year it is again excluding net realized securities gains was $26.7 million, up from 26.1 million prior year. That increase was achieved in the face of a $2.8 million reduction in loan sale gains which resulted from a decline in fixed-rate mortgage origination and sales activity, the record high level of net activity in 2003.

Noninterest expenses amounted to 13.1 million in the fourth quarter of 2004 which was up 13 percent or 1.5 million over the same quarter in 2003. The explanation for that increase, the 2004 amount, included $454,000 for our annual contribution to our charitable foundation, a comparable contribution in 2003 occurred in the third quarter of that year and it also included in the fourth quarter of 2004 $367,000 recognized in audit and professional fees incurred to comply with the internal controlled documentation and testing standards of section 404 of the Sarbanes-Oxley Act.

For the year, total non-interest expenses were up by 8 percent, that excludes a pretax debt prepayment charge of $941,000 for 2003. The increase included approximately $600,000 for the full year to comply with the Sarbanes-Oxley Act and another $307,000 incurred in connection with conversions of some technology systems during the year.

The loan loss provision charged to expense for the year ended at $610,000 compared to $460,000 in 2003. The provision in the fourth quarter was $250,000 which was an increase from the $120,000 per quarter recognized in each of the first three quarters of 2004. That increase represents an adjustment to our quarterly provision rate primarily in response to the growth we have seen in the loan portfolio not due to any downturn in credit quality. Total nonperforming assets, nearly all of which are non-accrual loans, were $4.7 million at the end of 2004 or .21 percent of total assets and that is up from 2.8 million at the end of the prior year. The increase was largely due to a single commercial lending relationship classified as non-accrual earlier during 2004.

Overall our actual loan loss experience was relatively favorable for the year as indicated by the fact that loan recoveries exceeded loan charge-offs by $247,000. Total shareholders equity at the end of 2004 was $151.9 million up from $138.1 million a year earlier. In December the Board declared a fourth-quarter cash dividend of 17 cents per share which was paid on January 14. 2004 total dividends declared amounted to 68 cents per share, up from 62 cents (technical difficulty) the year 2003. At this time I will turn the call back to John C. Warren.

As you can wee we had an exceptional year, had record earnings, (technical difficulty) dividend (technical difficulty) carrying that momentum into 2005. At this time David and I would be happy to answer any questions.

(OPERATOR INSTRUCTIONS)

We are waiting for a question.

(OPERATOR INSTRUCTIONS) Ryan Kelley, FBR.

Congratulations on a very nice quarter. Just a couple of specific questions. First of all your loan growth was very, very strong. Do you have any targets for 2005 in the loan growth side?

The momentum was good all the way through the fourth quarter and as we go into this year we expect that same kind of momentum to continue. Whether the economy stays quite as strong as it was last year I am not sure of that, but we are looking for continued good momentum through '05.

Which part of the loan portfolio are you concentrating most on at this time?

As you can tell from the presentation, we were seeing that quality of growth coming really in each one of the lending areas. The residential mortgage area is one that obviously with rates a smidge higher than they have been was a little bit lower. We did buy some adjustable-rate mortgages with pricing on the shorter end but the real activity is going to be on the consumer side, the equity credit lines and loans again and it is going to be on the C&I and commercial real estate lending as well.

Okay. Just on the deposits year-over-year there is nice growth and if you take out some of the noises last fourth-quarter '03, the demand deposits from third crop was there anything seasonal there?

It is not unusual to have some seasonal flattening at this time of the year for us. The third quarter is very strong with deposits coming in with the tourism industry. It is not unusual for us at all to peak at the end of the summer which of course is the end of the third quarter.

Okay. Just on the SOX expense, how much of the expense for the year would you say is going to be ongoing in the next year? I'm just trying to get a run rate there we can use.

David is laughing a little bit. I think the answer is --

(inaudible)

I think the answer is nobody knows fully. KPMG happens to be our accounting firm and we were talking to them just last week and they are still not fully -- we just don't know exactly how much it will be in '05. I don't think anybody knows for sure.

Yes, we have asked the same question and it is hard for people to pin that down but I thought I would try.

Some portion of it will be become annual expense for sure, not all of it by any means.

Okay. And just on margin it held up flat this quarter and just wondering if you give us any idea where we can look for that in '05?

As you know we try to manage the balance sheet in a way that makes us (technical difficulty) to changes (technical difficulty) some increases in market rates in prime over the past several months. (technical difficulty) Moderated by funding costs so our goal is to try to remain fairly neutral. I wish we could say that it would pop up but we really don't, the last thing you are going to hear from us is that we are betting that the Fed is really going to tighten, and then our earnings will go up because if the Fed really tightens, you won't hear that from us.

Finally if you could give us maybe an update on the branch and the expansion outside of Washington County and what your expectations are there?

We are looking at several potential locations in as you say north of Washington County. And hopefully would be able to have an announcement on at least one of them sometime this year.

In 2005 how many branches do you think you will be adding?

Historically we have only done one at a time.

Okay, so maybe one for the year?

Right.

Great, thank you very much and congratulations on a nice quarter.

Thank you very much.

Paul Roukis of Sidoti & Company.

A lot of my questions were just asked, but I do have, if you can elaborate a little bit on possibly pricing pressures on the deposit side, and what you are seeing in the region?

Yes, I think there is a competitiveness out there for sure. I think part of what we saw on the deposit side this year was really the widespread adoption for any of those that didn't (indiscernible) go to totally free checking. So you saw both from a pricing point of view and from a fee income point of view a reduction in some of the numbers that otherwise you might have seen.

And do you think over the course of the quarter pricing pressures accelerated or is there kind of a pretty much straight across the board throughout the quarter?

You're talking about rate?

Yes, rate issues. Yes.

There has been some movement upward but it has been fairly moderate over the past quarter.

Okay. Can you go through on the balance sheet side, we are seeing some nice pickup or strong momentum in the loan side of the business, what is your take on the investment securities portfolio for 2005? Do you have room to decrease that and transition some of the securities into loans this year? Or give us a little bit more flavor on the strategy there?

Sure, the real focus for the year will be in the lending side in each one of the loan categories. And the most optimistic I would say that the investment portfolio would stay flat and it may drift down slightly and I would just -- the better the loan demand the more likely you are to see a decline in the investment portfolio.

Okay. And finally, just on something different, when you went through the 2005 budgets, I guess when you detailed some of the capital management initiatives for 2005, outside of organic growth and really growing the balance sheet, has anything changed on dividend policy or share buybacks or things of that nature?

No.

David Honold of KBW.

I just had one more quick question regarding the provision, can we use the 250 as a good run rate going forward?

It will be pretty close to that.

Okay, great. I think that is about it, thank you very much.

(OPERATOR INSTRUCTIONS) It looks like you have no more questions at this time.

Well then we thank everybody and drive carefully and keep shoveling out there. Appreciate it.

Ladies and gentlemen, thank you for joining us on the conference call today. You may now disconnect.