Washington Trust Bancorp Inc (WASH) 2005 Q4 法說會逐字稿

Good day and welcome to Washington Trust Bancorp, Inc. conference call. My name is Colby and I will be your operator today.

[Operator's Instructions]

And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel?

Thank you, Colby 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, is being webcast live, and a webcast replay of this conference call will be available shortly after the conclusion of the call through the corporation's website, www.washtrust.com in our Investor Relations section under the subhead 'Investor Information' in the category of webcast 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 statements. 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's Chairman and Chief Executive Officer, John C. Warren. John?

Thank you, Beth. Good afternoon everyone and welcome. Earlier today, we issued our press release for the fourth quarter and the year ended December 31, 2005. Needless to say, I'm very pleased to announce that Washington Trust had record earnings and earnings per share for both the quarter and the year. We had an outstanding quarter and an exceptional year.

All our lines of business performed well considering the highly competitive and challenging industry environment and business environment in which we operate. I couldn't be more proud of the accomplishments of our team.

Highlights for the fourth quarter included net income of 6.2 million, an increase of 12% over the fourth quarter a year ago. Earnings per share of $0.45, up $0.05 or 12.5% from the fourth quarter a year ago, as well. David will provide more details about our fourth quarter performance and full year performance in just a few minutes.

Now I'd like to discuss the results of our full year for 2005. We earned a record $23 million in 2005, an increase of 11% over 2004. Earnings per share were $1.69 up $0.15 from 2004. These are outstanding results and illustrate our success in managing our key lines of business.

Our loan portfolio was up 12% at year-end with growth balanced among the commercial, mortgage and consumer loan categories. Like other banks in our region, we have seen a slowdown in the pipeline over the past several months. But we continue to have excellent asset quality as non-performing assets to total assets declined from 0.21% at December 31, 2004 to 0.1% at December 31, 2005.

We continue to be one of the top SBA vendors in Rhode Island. And are proud that earlier this year, three of the five SBA award winners including the 2005 SBA business of the year was indeed a Washington Trust client. We're also proud to have recently received the 2005 Rhode Island SBA minority lending silver award for our efforts with minority borrowers.

We also had good deposit growth in an extremely competitive environment. Deposits were up 12%, largely due to the growth of time deposits, which have become more and more attractive to consumers as rates have risen.

Non-interest income, excluding net realized securities gains, topped 30 million in 2005. An increase of 3.9 million or 15% over 2004. This is primarily due to the 3.4 million increase in revenues from wealth management and trust services, a major source of non-interest income for us.

In August 2005, as you know, we acquired Weston Financial Group. And we have successfully integrated them into our operations. This was a strategic acquisition for us as it significantly increased our assets under management, contributed to revenue growth and enhanced our line of growth management services. Washington Trust is one of the leading players in the wealth management market. And we're excited about our future opportunities in this particular area.

In summary, we had record earnings, solid growth for the year. It was a terrific year. And now I'd like 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 joining us on our call today. I'll be reviewing the fourth quarter operating results and the financial position of our company as described in our press release earlier today.

Net income for the fourth quarter of 2005 was a record $6.2 million, an increase of $655,000 or 12% from the $5.5 million earned in the fourth quarter of the prior year. Earnings per share was $0.45 on a diluted basis, up $0.05 per share from the same quarter in 2004. The quarterly return on average equity was 15.63%, up from 14.54% reported in the fourth quarter of 2004. And the return on average assets for the fourth quarter of 2005 was 1.03%, an increase over the 0.96% for the same quarter a year earlier.

For the full year 2005, net income was $23 million, up 11% from the full year 2004 results. This represents a $1.69 per share on a diluted basis, an increase of $0.15 or 10% from the 2004 amount.

As John mentioned, Washington Trust completed the acquisition of Weston Financial Group on August 31st. The fourth quarter results include a full quarter of Weston's operating results for the first time. And the results for the full year 2005 include Weston's results for the period subsequent to August 31st.

As we reported at the end of the third quarter, one-time expenses incurred in connection with the acquisition amounting to a charge of $0.03 per diluted share were recognized in the third quarter.

Let me offer some comments on the balance sheet. Total assets at December 31st were $2.4 billion, unchanged for the quarter and up by $94 million from a year earlier. Loan growth moderated in the fourth quarter growing by about $6 million, less than 1%. The largest growth was in consumer loans, mainly in home equity loans. Commercial and commercial mortgage loans were unchanged for the quarter. And we saw some net runoff in residential mortgages.

For the year, total loans rose by a $152 million or 12%. We saw a 9% growth in commercial loans, 13% growth in residential and 16% growth in consumer loans.

The investment securities' portfolio also remained essentially unchanged for the fourth quarter. For the 12-month period in 2005, investment securities were reduced by a $106 million. We chose to reduce the securities holdings because the flattening of the yield curve made reinvestment of maturing balances relatively unattractive during the past year. The net proceeds from this deleveraging were primarily used to reduce Federal Home Loan Bank borrowings, which declined, by a $127 million for the year.

Looking at deposits, total deposits were up by $29 million in the fourth quarter. Most of this was attributable to a $28 million increase in brokered certificates of deposit. Excluding the brokered accounts, in-market deposits were flat, which has been typical for us in the fourth quarter for the past several years. We did see a shift in the deposit mix with declines in demand now in savings balances and growth in the CD category.

For the full year 2005, total deposits were up by a $181 million or 12%. Excluding brokered deposits, we experience satisfactory in-market deposit growth of a $151 million or 12% in a very competitive environment.

Turning back to the income statement, a major factor in the net income growth for the fourth quarter was a 9% increase in net interest income compared to the fourth quarter of 2004. The fourth quarter of 2005 net interest income was $15.7 million and our net interest margin was 2.84% on a taxable equivalent basis, up from 2.69% in the same quarter of the prior year and up from 2.78% on a [linked] quarter basis.

Growth and earnings assets, a higher portion of loans as a percentage of total interest earning assets and changes in loan and deposit rates were all contributing factors in the net interest income growth.

Turning to non-interest income, excluding net realized gains and losses on securities, non-interest income in the fourth quarter of 2005 was $9.2 million, 39% higher than the same quarter in 2004. As mentioned earlier, the operations of Weston Financial are included in the 2005 results. And this is the most significant reason for this increase. Wealth management and trust revenues, which is the largest component of non-interest income rose by 64% for the quarter for the same reason. Wealth management and trust revenues amounted to $5.6 million in the fourth quarter of 2005 compared to $3.5 million the year earlier.

This revenue source is primarily related to the level of assets under administration and this was also significantly affected by the addition of Weston. Assets under administration amounted to $3.272 billion at the end of 2005, including $1.376 billion attributable to Weston. Assets under administration were $1.871 billion at December 31, 2004.

The addition of Weston Financial Group has also had a noticeable effect on the components of the revenue stream. Again excluding securities gains, non-interest income comprised 37% of total revenues for the fourth quarter of 2005, up from 31% in the fourth quarter a year earlier.

Net realized securities gains in the fourth quarter of 2005 were $337,000 compared to $387,000 in the fourth quarter of 2004. For both periods, these gains were primarily-- primarily related to the annual contribution of appreciated equity securities to our charitable foundation. The contribution expense associated with those transactions was $522,000 in the fourth quarter of 2005 and $454,000 in the same quarter of 2004.

Turning to non-interest expenses, non-interest expenses amounted to $15.8 million in the most recent quarter, up 2.7 million or 20% over the same quarter a year earlier. This reflects the addition of Weston, which accounted for $1.9 million or 70% of that increase-- that increase.

For the full year 2005, non-interest expenses were $56.4 million, up $6 million or 12% from 2004. Excluding the one-time acquisition charges and the operating expenses of Weston Financial, non-interest expenses for the year 2005 were up by $2.9 million, or 6%, over the previous year, with the largest increase in salaries and employee benefits.

Asset quality, as measured by the level of non-performing assets, continued to be strong in 2005. Total non-performing assets were $2.4 million, or 0.1% of total assets at the end of 2005, down from $4.7 million, or 0.24% [sic - see Press Release] of total assets at the end of 2004.

Loan recoveries, exceeded charge-offs in both years, with net recoveries of $197,000 in 2005 and $247,000 in 2004.

The loan loss provision charged to earnings for the fourth quarter of 2005 was $300,000 compared to the $250,000 for the same period of the prior year and it was unchanged from the third quarter. The total YTD provision for 2005 was $1.2 million compared to $610,000 in 2004. The increase in the provision has been associated with the growth in the loan portfolio. The allowance for loan losses stood at 1.3% of total loans at the end of both 2005 and 2004.

Total shareholders' equity was $158.4 million at the end of 2005, up by $6.5 million since the end of 2004. Washington Trust and its subsidiary bank are well capitalized by all bank regulatory measures, at the end of 2005.

And I will conclude with a note that we continued our dividend declaration rate of $0.18 per share in the fourth quarter with that dividend paid on January 13th of this year. The dividends in 2005 continue our record dividend increases in each of the last 13 years. And at this time I will turn the call back to John.

Thank you very much, David. As I stated earlier we are obviously very pleased with our record performance in 2005, and the continued growth that we have had along all our lines of business. Washington Trust is a solid financial institution with strong market leadership. As we start our 206th year of business, we will maintain our focus and continue our earnings momentum -- continue capitalizing on growth opportunities, focus and maintain our strong asset quality and as always, do what's necessary to enhance the value of our corporation for our shareholders.

And at this time David and I will be happy to take any questions you might have. Thank you very much.

[Operator Instructions]

Your first question comes from the line of Jared Shaw with KBW. Please proceed.

Hi, good afternoon.

Hey Jared. How are you?

Good, thank you. Just had a couple of questions for you. One and if you have addressed this, I'm sorry -- I got a call in at the beginning, on the margins. The margin growth, was there anything a particular that caused that? Was there any, maybe a prepayment or anything like that, or is that just general margin expansion?

There is nothing unusual in there. The prepayment activity was fairly consistent among the periods I talked about. It's just normal.

Okay, and that's sustainable looking into the next few quarters?

Well ...

Barring any taking interest movements, I guess.

I think what we are looking at Jared is, it's plus or minus a few basis points. That's a range that we are very comfortable, as we see things going forward.

Okay. Thanks a lot. And then again on the other non-interest income -- or I'm sorry -- other non-interest expense, summed up. Was that would you say, due to a charitable contribution?

We did record a $522,000 charitable contribution expense in the forth quarter. That's probably the most significant non-regular quarter item in there.

Okay. So take that out, looking at the first quarter?

Yes.

There is a fourth quarter there. Okay great, thank you very much.

Thanks Jared.

Your next question comes from the line of Laurie Hunsicker with Friedman, Billings, Ramsey. Please proceed.

Yes. Hi John and David. Good afternoon.

Hi Laurie.

Just to Jared's question on the charitable contribution. Will that continue or is that going to be accrued throughout '06 or how is that going to play out?

We've historically done this on an annual basis and we put the dollar amount, in this case, a little over $0.5 million into our charitable foundation. And then the charitable foundation during the course of the year makes grants to various non-profits, 501(c)(3). So you would expect to see that at one point during the course of '06.

Okay. But there is no sort of accretive of four quarters?

No, we recognize it when contributed in a single quarter each year. And it's been in the fourth quarter for the past couple of years.

Okay, great. And in terms of just other adjustments, FAS 123, I did not see that accelerate investing in your options, is that correct?

That's correct.

So that you will have probably about a $1 million, is there a pretax that will hit a year?

No. We don't see an amount of that magnitude. In the past couple of years, in preparation for this accounting change we have made some changes including converting or granting some of the equity awards in the form of restricted stock or restricted stock units. And those compensation items have already been, started to be recognized expense, since those award dates. So the absolute incremental expense of the adoption of FAS 123R will not be of the magnitude that you have mentioned.

Okay. Is there a way you can quantify that for us, because I'm just looking at your latest filing and picking out number on an annualized basis, which is $656,000 after tax and about 1 million pre-tax?

Well, again you have to look at the vesting dates on those items. The remaining unvested portion of previously granted options is much lower than that. So we think that the increase in absolute dollars for the equity compensation is probably something on the order of 250 to $300,000 on a pretax basis based on what has been awarded and what we think would be awarded in 2006.

Okay great. And just back to Jared's question of the margins, can you help give us a little guidance there? I mean that's expanded margin we expected or more than we all had expected. And, just looks to be going exactly in the right direction, when everybody else is really facing headwinds.

Well, it's always going to move around a little bit. I think the experience in the fourth quarter was a benefit of a modest amount of asset sensitivity in a period in which short-term rates were pushed up a couple of times. And we think, by and large we've tried to remain as neutral as possible and we don't see any significant volatility in that over the next several quarters.

You know, Laurie, one of the other things that has added value and added a couple of basis points probably in the -- as time has passed, if you look at the mix on our balance sheet, you see that the ratio of the securities or investment portfolio to the total balance sheet continues to shift a little bit

Right, right.

And so to the extent that we have loans versus securities, obviously this spreads a little bit wider. And I think that could be a little piece of what has actually happened during the course of this past year.

But to David's point I mean, we say that in each quarter, and we've been saying it of -- proves you know, we try to stay as interest rate neutral as possible. It's a constant challenge obviously. But we spend a lot of time and effort at that. And I'm really very pleased that what's happened has been the margin results that you have seen during the course of this past year.

Okay. And then speaking of securities, you had a lot of gains this quarter. What might we look for in terms of earnings management or in terms of what you are all thinking on securities positioning for '06?

Yes, once again the securities gain you see is strictly the charitable contributions.

Right, right, right.

Yes.

Yes okay, yes. And I guess, with respect to your consumer portfolio, I know this is very small relative to your home loan mix. Can you just take us through specifically what's in there and what the cycle is and what you kind of are expecting in terms of growth?

Sure. I mean, the bulk of the loan portfolio on the consumer side are home equity lines and loans ...

Right, that's the 161.

Well, that is just home equity lines.

Right.

And then you get another significant percentage of that is actually home equity loans. And--

And so that's all of the 103 or just the home equity loans?

72 million of the 103 is home equity loans.

Okay. And what is the residual?

Residual is a variety of things. It's personal lines of credit, it's auto loans, airplane loans -- I mean, it's a variety of things.

And what is your average cycle running?

We took a look at that in the past quarter. I don't have the number here. But we felt that our underwriting practices have been fairly conservative and that there's no significant exposure to low ratings in that area.

Okay.

I mean the numbers, Laurie, both on the FICO scores as well as the LTV, are numbers that make us very comfortable.

Okay.

As evidenced by the kind of credit quality you see on the ...

... Yes, your credit quality is pristine.

Right.

Absolutely. Everybody should take a page from your book. Just one last question on buybacks. If you could comment a little bit on that, keeping hopeful that we'll see you guys step up. What are your thoughts there?

Yes, it's always -- on-going capital management is something we talked about and a whole range of possibilities. I think that having made the acquisition of Weston and so forth, that you probably, at least on a near-term basis, will not see us doing any buybacks.

Okay, great. Thank you all very much.

You are very welcome.

Thanks.

Your next question comes from the line of Tom Doheny with Sandler O'Neill. Please proceed.

Hey Tom, how are you?

Good afternoon guys.

Good afternoon to you.

Just one follow-up on with regards to the securities portfolio. Obviously, you mentioned that as a sort of a run-down of securities portfolio this quarter. Wondering if yield curve kind of stays where it is, if we'll see it back continuing into the first half of 2006?

Yes, I mean I think what you'll see -- there actually wasn't much change in the fourth quarter. The 100 million plus drawback -- actually 106 million-- was a year-over-year number during the course of '05.

We manage the portfolio the way you are supposed to manage the portfolio. We look at it day-to-day. And to the extent that there might be opportunities, we would take a look at opportunities. To the extent that there are no opportunities down there, we could let it erode and we will not be dramatically upset if we had to do that. And we-- going out into '06, we don't expect any dramatic change one way or the other in the securities portfolio, other than, if things aren't attractive, we won't do any investing. If there are opportunities there, we will add things to the portfolio.

Okay. So there [obviously] is no big plan in place to kind of just continue to reduce that opportunity?

No. No. The fact that the as the balance sheet continues to grow, even if the securities portfolio were to stay at the dollar amount that it currently is, the percentage of the overall balance sheet will obviously continue to go lower.

Great. And then looking at the compensation line this quarter, were there any costs in there that were kind of one time -- not one time but associated with Weston that were coming in this quarter that we won't see in the future?

What you'll see is there -- and Dave, correct me or expand on this, what you'll see is because this past quarter was the first full quarter for Weston. So in other words you seeing three months of all the Weston salaries including bonuses and so forth because we are under purchase accounting. We only have one month in the third quarter that Weston was part of the organization. So we have added, in essence salaries of staff of 29 on to that line for the fourth quarter.

Right. I mean, but other than that, obviously you have the full months, full period this quarter, but other than that there's nothing really in that number that we should be taking out, in our forecast going forward.

That's correct.

Thanks, guys.

You're welcome.

[Operator Instructions].

At this time there are no further questions appearing in queue.

Colby, thank you and everybody on the line, we thank you very much for your attendance and appreciate it. Look forward to chatting with you soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.