Washington Trust Bancorp Inc (WASH) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your 2005 Washington Trust Bancorp Earnings Conference Call. My name is Jean and I will be your conference coordinator today. (Operator instructions). At this time I'll turn the call over to your host, Ms. Elizabeth Eckel, Senior Vice President of Marketing and Investor Relations. Please proceed.

Thank you. And good afternoon, everyone. Welcome to the quarterly earnings conference call for Washington Trust Bancorp, Inc., NASDAQ national market symbol WASH. Today's conference call is being recorded and is being Web cast live, and a Web cast replay of this conference call will be available shortly after the conclusion of the call through the Washington Trust Bancorp corporate Web site, www.washtrust.com, in our Investor Relations section under the investor information in the category of Web cast Archives. 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 V. Devault, Executive Vice President, Secretary, Treasurer and Chief Financial Officer.

Before we begin, I would like to make special note of our Safe Harbor Statement. During today's conference call certain statements may be made that are considered forward-looking within the meaning of the federal securities laws. The corporation's actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result of the risks and uncertainties described in our press releases and SEC filings. And now, I'm pleased to introduce Washington Trust Chairman and CEO, John Warren.

Thank you, Beth. Good afternoon and welcome to Washington Trust quarterly earnings review. I'm pleased to announce that Washington Trust had another exceptional quarter, including both record earnings and earnings per share. Earlier today we issued our press release for the third quarter ended September 30, 2005, and reported net income of 5.8 million, a 9% increase over the third quarter of last year. The corporation also earned a record $0.43 per diluted share, up $0.04 or 10% from the same quarter a year ago. These results are outstanding considering our economic and competitive environment, and they reflect our continued success at managing our core lines of business.

Here are some of the highlights. We had good balance sheet growth for the first nine months of 2005, particularly in our loan portfolio. We continue to have excellent asset quality. On August 31st we completed the acquisition of Weston Financial Group, a registered investment adviser, located in Wellesley, Massachusetts. And also, in August, we hired Galan G. Daukas as Executive Vice President of Wealth Management for us.

As you know, the wealth management area is a key line of business for us, and Galan will be instrumental in growing this area. He joins us from The Managers Funds, LLC, where he served as Chief Operating Officer of the Norwalk, Connecticut-based firm. During his tenure with The Managers Funds the firm grew from 2.7 billion to 8.5 billion in assets under management.

Let me take just a few moments to discuss our performance to date. As I mentioned, we completed the Weston acquisition at the end of August. As a result of this acquisition, we significantly increased our wealth management assets under administration. At September 30th, assets under administration totaled 3.2 billion, with 1.3 billion attributable to Weston. We are one of the leading players in the wealth management market and are excited about our future opportunities in this line of business.

Revenues from our wealth management and trust areas serve as a key source of non-interest income for the corporation. In fact, revenues from wealth management and trust services represented 49% of non-interest income for the third quarter of 2005. And for the third quarter 2005 non-interest income increased 20% over the same period a year ago due primarily to growth in revenues from our wealth management and trust area.

Let me now turn to the balance sheet where we had increases in key areas. We had steady growth in our loan portfolio over the first nine months of 2005, with total loans up 12% over last year. Although the commercial lending and commercial real estate side has become more and more competitive, we had an increase of 47 million or 9% in the first nine months of the year. The market has cooled off somewhat, but we continue to see some good credits and we're careful not to sacrifice credit quality. And as I mentioned earlier, we're pleased to say that asset quality remains strong. Non-performing assets were just 0.08% of total assets at September 30th, the lowest level we've reported in several years.

The consumer loan portfolio, which is primarily comprised of home equity loans and lines of credit has continued to grow. For the first nine months of the year we had increases of $28 million or 12%. We believe that the shift in interest rates has led many borrowers to refinance debt for longer terms, and as a result, we may see slower equity loan and line growth in future months.

Speaking of refinancing, mortgage volume has slowed as interest rates have crept up, but we continue to garner a good share of mortgage loan originations in our market. During the first nine months of 2005 residential real estate loans grew by 71 million or 14%. This included 24 million in purchased mortgages.

The deposit market is extremely competitive, and yet we had good growth. Total deposits amounted to 1.6 billion, up by 10% in the first nine months. Deposit increases were led by growth in certificates of deposit, which are obviously attractive to consumers as rates increase.

We have also had solid increases in both demand now and money market accounts. Last week the FDIC released deposit market share statistics for the period ended June 30, 2005. We're pleased to report that Washington Trust has continued to increase our share of deposits and solidified our position as the largest bank headquartered in Rhode Island.

We're excited about our quarterly results, as Washington Trust has once again achieved record earnings and earnings per share. And now I'm pleased to turn the discussion over to David Devault for an in-depth review of our financial performance. David?

Thanks, John. Good afternoon, everyone, and thank you for attending our earnings conference call today. I'll be reviewing the third quarter operating results and financial position as described in our press release.

Net income for the third quarter was a record $5,822,000, an increase of 9.2% from $5,333,000 earned in the third quarter of last year. Earnings per share was $0.43 on a diluted basis, up $0.04 per share from the same quarter last year. The quarterly return on average equity was 14.75%, up from 14.70% reported for the same quarter in 2004. And the return on average assets for the third quarter was 0.98%, compared to 0.96% for the third quarter last year.

The acquisition of Weston Financial Group was completed on August 31st. The core operating results of Weston are therefore included in the third quarter for one month only. There were, however, some one-time expenses incurred in connection with the acquisition that amounted to a charge of $0.03 per diluted share.

Let me now offer some comments on the balance sheet. Total assets at September 30, 2005, were $2.4 billion, up $64 million for the quarter and up by 123 million from a year earlier. Total loans grew by 50.9 million, or 3.8% in the third quarter, showing good growth in all three major categories of commercial, residential and consumer. Total loans are also $198.6 million or 16% higher than a year ago.

The third quarter saw a net increase in commercial real estate loans of $26.2 million or 5%. Residential mortgages increased by 3.1%, just under $18 million. And finally, total consumer loans grew by $6.9 million, a 2.8% increase for the quarter.

The investment securities portfolio was reduced by $43.8 million during the third quarter, and since the beginning of the year has declined by a total of 107.9 million. The flattening of the yield curve has made reinvestment of maturing balances relatively unattractive during this period.

Total deposits were up by 79.5 million dollars for the quarter. This was net of 30.2 million of reductions in brokered deposits due to maturities. And excluding the effect of the brokered deposits, in-market deposits rose by $110 million or 8.3% in the third quarter. Growth occurred in demand deposits, money market accounts, and time deposits. Total deposits are $141.2 million or 9.6% higher than at September 30, 2004.

Turning to the income statement, the overall third quarter profit results were favorably affected by a 10.6% increase in net interest income compared to the third quarter last year. Net interest income in the third quarter this year was $15.4 million, and our net interest margin was 2.78% on a taxable equivalent basis, up from 2.69% in the same quarter last year.

Excluding the effect of prepayment penalty income included in net interest income in these periods, the net interest margin for the most recent quarter was up by 6 basis points over the same quarter last year, and it was level with the second quarter of this year.

Net interest income also grew as a result of higher interest, earning asset -- interest earning asset balances, average earning assets in the third quarter this year were $2,226,000,000 compared to 2,093,000,000 the third quarter of 2004.

Looking at non-interest income, excluding net realized gains and losses on securities, non-interest income for the third quarter of 2005 was $8.4 million, 20% higher than the same quarter last year. The largest increase was in the category of wealth management and trust services, which represented 49% of non-interest income for the third quarter. Wealth management and trust service revenues were $848,000 or 26% higher than the third quarter of 2004, primarily due to the addition of Weston.

Assets under administration were also significantly affected by the addition of Weston and stood at $3,219,000,000 at September 30, 2005. This included 1,348,000,000 attributable to Weston. As a comparison, assets under administration were 1,837,000,000 a year earlier.

Non-interest expenses totaled $14.8 million in the most recent quarter, up 13% over the same quarter a year ago. This reflects the addition of Weston during the quarter. In addition, about 4.6% of the 13% increase is attributable to one-time expenses associated with the acquisition of Weston.

Also included in non-interest expenses was $129,000 in prepayment costs associated with the early paydown of some match funding federal home loan bank advances. Excluding the acquisition-related costs and the debt prepayment penalty expense, non-interest expenses for the third quarter were 8% higher than the same quarter last year, principally due to operating expenses of Weston, increases in compensation and benefit costs, and higher audit and other costs related to the requirements of Section 404 of the Sarbanes-Oxley Act.

Our loan loss provision charged to expense for the third quarter this year was $300,000 compared to $120,000 for the same period last year, and it's unchanged from the second quarter. The total year-to-date provision for nine months is $900,000 compared to $360,000 last year. The increase is associated with the growth in the loan portfolio.

Non-performing assets amounted to $1.8 million or 0.08% of total assets at the end of the third quarter. And these non-performing assets, nearly all of which are non-accrual loans, are very low, and they're down for the quarter, the year-to-date period, and for the 12-month period. At the end of September this year total shareholders' equity was $157.3 million, up 5.4 million since the end of 2004 and up 8.8 million from a year ago. Total book value per share was $11.78 per share at September 30, 2005.

As we have previously announced in connection with the Weston acquisition, we largely financed the transaction through the issuance of $22 million in trust-preferred securities. We did not -- this is the first time we've issued trust-preferred securities. We did not issue any common equity in connection with the transaction.

The acquisition added approximately $31 million in goodwill and other intangible assets to the balance sheet. And accordingly, the tangible book value declined from $10.01 per share at the end of the second quarter to $7.68 per share at September 30th. Washington Trust Bancorp and its subsidiary bank are well capitalized by all regulatory measures at September 30, 2005.

We were pleased with the quarterly profit results. Going forward, we expect that Weston will add about $0.03 to $0.04 per diluted share annually on a GAAP basis, and that would be net of non-cash amortization of about $0.05 to $0.06 per diluted share.

Finally, in the third quarter we continued our dividend declaration rate of $0.18 per share paid on October 14th. The $0.18 dividend rate for each of the quarters this year is up from the $0.17 per share rate paid throughout last year, and we have reported dividend increases in each of the last 13 years. At this time I'll turn the call back to John Warren.

Thank you, David. We can't be more pleased with our third quarter results and the accomplishments of our corporation. We're thrilled to have Weston on board as they both complement and add to our existing line of banking financial services and wealth management products. All of our lines of business have performed exceptionally well in a challenging economic and competitive environment. We remain committed to increasing the value of our corporation for our shareholders. And at this time David and I will be happy to answer any of your questions. Thank you very much.

(Operator Instructions). And we'll take that from the line of Mr. Tom Noya (ph) of Sandler O'Neill. Please proceed.

Good afternoon, guys.

Hey, Tom, how are you?

Hi, Tom.

I appreciate the guidance on Weston. You're going forward, I guess you said $0.03 to $0.04 accretion net of the amortization?

Yes.

What would you estimate the Weston deal actually did -- I know it was just a month of this quarter, but would you call it modestly dilutive to -- against your results this quarter?

Well, the -- excluding the acquisition-related expenses, it really was negligible impact for the one month.

Okay. Negligible. Okay. And again, yes, that's how it meant it, exclusive of those charges.

Yes, Tom, I think as we've indicated, and we still expect this to be the case, that once we're beyond those one-time charges, which we are, we expect it to be accretive.

Great. In looking at the allowance for loan losses, I just noticed that the one reclassification you had in there for off balance sheet exposures this quarter, wondering, did that -- did that actually come in -- I guess that was $250,000 -- does that come in in the expense line?

No, that is a balance sheet reclassification. It's an accounting rule that -- we're wrestling with that. It's not an expense charge.

Okay, great. And then on the trust-preferred side, that was -- just to confirm -- that was -- the issuance with trust-preferred was simultaneous with the closing of the acquisition, so you had one month of costs on the trust-preferred this quarter?

Correct. It was within a day or two.

Great. And then finally, on the -- with regard to what to expect for the balance sheet going forward, obviously, the last couple quarters you've brought down the securities portfolio in a pretty steady manner. Would we look to see the same kind of thing the next couple of quarters as well?

I think the key, Tom, will revolve around what opportunities are in the market, as far as the investment portfolio. And if we can't make sense out of the opportunities and the spread that would be offered, then we would probably defer until the yield curve changes or some of the opportunities surface from an investment point of view.

Okay. And then from a capital perspective, as you mentioned, you're still well capitalized from a regulatory standpoint, but from tangible equity assets perspective, obviously, there's a reduction given the Weston deal. From a capital management standpoint, are you looking to just kind of build that back up over the course of the next year or so? Or are you kind of comfortable sitting at where you are, I guess 4-4 or so tangible equity assets?

I think you'll see over time that earnings retention will add back to that level. And that should happen over the next several quarters.

Great. I think that's all of my questions. I appreciate it.

Thanks.

We'll take our next question from Ryan Kelley, FBR.

Good afternoon and a very nice quarter.

Thanks, Ryan, appreciate it.

Thanks, Ryan.

One -- I may have missed this, but did you say what rate you're paying on the topper?

It's I believe 594, thereabouts, for the fixed period.

Okay. And then I like the details you gave us for the -- for what Weston did this quarter. Is there any way, though, that you could break out -- just to help me in my modeling purposes going forward -- how much on a dollar amount of the non-interest income was from Weston, and then how much of the non-interest expense was attributable to them as well? Forgetting about the acquisition-related expenses.

I understand the question. I think we'll have to provide that guidance in a public manner like the 10-Q in the next couple of weeks.

Okay. Yes, that would be helpful, just to help me project those two line items out. And then are there any other M&A expenses to occur next quarter? Or is that completely done?

We believe they'll be minimal.

Okay. So it could be something, but it's really minimal. Okay.

Yes. Ryan Kelley: And then just on the amortization expense, $0.05 to $0.06 a share per year at just over $1 million. Is that straight line? I mean, it's not an accelerated -- ?

That is an accelerated --

Oh, that is? Okay.

Yes.

So after one year's time we could see that decline. Are you using the sum of the years digits method or --

It's a method that we believe is appropriate for the facts and circumstances of the deal. But it will decline over time.

It will? Okay. And then -- actually, do you have any more details? I know Tom just asked the question about the $250,000 change to the allowance. Any more details on what exactly that is?

Well, the recognition of loss exposure for credit commitments --

Would be their line of credit, basically?

Yes.

Okay.

Things like that really belongs in an account other than the allowance for loan losses. So we've moved that into a different place on the balance sheet.

Okay. I was wondering if that's what it was. I've actually had a couple other companies that have been wrestling with the same thing this quarter.

Yes. Exactly.

And then one last question, just on the NIM, you attributed about 5 basis points to loan prepayment, penalties, 3 basis points to the last quarter's NIM, so essentially it was flat, if you take those -- the prepayments out. Any guidance you can give us going forward on maybe what you're seeing already this quarter? Will we see continued prepayment -- the NIM being helped by the prepayments or anything you can give us on that?

We certainly don't count on prepayments as a steady source of revenue. When it happens, we deal with it when it comes in, but that shouldn't be looked at as a regular recurring source of income. Overall, we believe we're fairly neutrally positioned with respect to interest rate risk.

Yes. And I think we -- and Dave, me if I miss it here, but I think one of the prepayments that we had in the quarter actually was offset with a match funding with a home loan that we paid off that was done against the loan and we took the corresponding penalty from the home loan bank.

That's correct, John. So that net, that really had no impact to the bottom line in the third quarter.

Yes. We had to report it in two different buckets, but it was a wash.

Right. Great. Well, thanks very much for the details.

You're very welcome.

And a good quarter.

Thanks very much.

Thank you.

(Operator instructions). We'll take our next question from Damon DelMonte of KBW.

Good afternoon.

Hi, Damon.

I just had a question on the -- with the dilution on the tangible book value. Do you have an estimated time frame it would take to re-grow that back to the current -- the level prior to the Weston acquisition?

Well, no. Given the amount of goodwill in tangible assets, that could take some time. So that's the reality of our balance sheet as a result of the acquisition.

Okay.

Obviously, Damon, you get part of it back as you do the amortization of intangibles and so forth. I mean that is streaming it as well.

Right. What part of the goodwill is going to be amortized?

Probably in the range of between 10 and $15 million. And we'll have further clarification on that shortly.

Okay. That's all. Thank you very much.

You bet. Thanks very much.

Thank you.

And I'm showing no questions at this time.

All right. Well, thank you all very much. Appreciate it and once again we are very pleased with the quarter, so thanks for taking the time this afternoon to join us.

Ladies and gentlemen, thank you for joining us on the conference call.