Washington Trust Bancorp Inc (WASH) 2006 Q4 法說會逐字稿

Welcome to the Washington Trust Bancorp, Incorporated, fourth-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Elizabeth Eckel, Senior Vice President of Marketing. Thank you, Ms. Eckel, you may begin.

Thank you, Claudia, and good afternoon, everyone. Welcome to the quarterly earnings conference call for Washington Trust Bancorp, Inc., NASDAQ global market symbol WASH. Today's conference call is being recorded and is being webcast live. A webcast replay of this conference call will be available shortly after the conclusion of today's call through the Corporation's website, www.washtrust.com, in the investor relations section under presentations. However, the information we provide during today's 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 a 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 federal securities laws. The Corporation's actual results, performance, or achievements could differ materially from those projected in these forward-looking statements, as a result of the risks and uncertainties described in our press releases and SEC filings. Now, I am pleased to introduce Washington Trust's Chairman and Chief Executive Officer, John Warren.

Thank you, Beth, and good afternoon. Earlier today we released our earnings for the fourth quarter and the year ended December 31, 2006. I will go over the highlights with you, and then David Devault will discuss the numbers in more detail.

2006 was a challenging year for most New England banks, as we were faced with a flat to inverted yield curve and a slow-growth economy. This resulted in intense competition along all lines of business. Yet Washington Trust's strong business model enabled us to continue to post solid earnings.

For the fourth quarter of 2006, net income was $6.2 million or $0.45 per diluted share, which was consistent with last year's fourth-quarter earnings. For the year ended December 31, 2006, net income was $25 million, up $2 million or 8.7% from last year. On a per diluted basis, net income was $1.82 for the year ended December 31; and that was up $0.13 from a year ago.

A key factor to our 2006 results was our ability to increase noninterest income to 40.7% of total revenues. This was significant because the interest rate environment put continued pressure on deposit pricing and spreads, making it difficult to increase earnings through net interest income.

Total loans increased more than $31 million in the fourth quarter, with much of that growth in commercial loan balances. There was moderate growth in total loans for the year overall. The good news here is that asset quality remains very strong.

Deposits declined slightly in the fourth quarter and were up moderately for the year. Competition for deposits remains very intense in our marketplace.

Our wealth management group continues to perform well, adding revenues to the bottom line from both investment and trust services. We have got an outstanding team of advisers, and we are successful in attracting new personnel and institutional clients throughout our marketplace.

Finally, I would like to update you on a few of our recent growth initiatives. On November 3, we held the ground-breaking ceremony for our second Cranston, Rhode Island, branch. We are anticipating a grand opening celebration in the second quarter of 2007.

Also in the fourth quarter, in December, our Providence commercial lending team relocated into new office space at 10 Weybosset Street in the financial district of downtown Providence. It is an outstanding location, ideally suited for and situated for meeting with key clients in centers of influence in the Providence area.

Now, I will turn the discussion over to David Devault for a more detailed review of our financial performance. David?

Thank you, John. Good afternoon, everyone, and thank you for joining us on our call today. I will be reviewing the fourth-quarter operating results and our financial position, as described in our press release earlier today.

Net income for the fourth quarter of 2006 was $6.2 million and $0.45 per diluted share. Both of these amounts were equal to the results for the fourth quarter of 2005. For the year ended December 31, 2006, net income was $25 million, up $2 million or 8.7% from the previous year. Fully diluted earnings per share was $1.82, up $0.13 or 7.7% over 2005.

The quarterly return on average equity was 14.06% compared to 15.63% for the fourth quarter of 2005. The return on average assets for the latest quarter was 1.04% compared to 1.03% for the same quarter a year earlier. The returns on average equity and average assets for the year 2006 were 14.99% and 1.04%, respectively, up in both cases from 14.8% and 0.98% in 2005.

Net interest income was $15 million in the fourth quarter of 2006, down $727,000 from the fourth quarter of 2005. The taxable equivalent net interest margin was 2.74%, down 10 basis points from the same period a year earlier. Compared to the third quarter of 2006, the margin declined by 4 basis points, excluding the additional 8 basis points attributable to an extra Federal Home Loan Bank dividend that we received in the third quarter.

The continued rise in short-term rates associated with the inverted yield curve throughout 2006 has caused deposit and borrowings rates to rise at a greater level than yields on loans and investments have risen. We expect that we may have experienced the worst of this; and we are cautiously optimistic about modest improvement in the margin in 2007.

Noninterest income, excluding net realized gains and losses on securities, was $10.4 million in the fourth quarter of 2006, 14% higher than the same quarter a year earlier. More than half of that increase is attributable to higher revenues from wealth management services. This is the first year-over-year quarterly comparison containing the results of Weston Financial Group in both periods.

On a linked-quarter basis, noninterest income, excluding realized securities gains and losses, declined by $699,000 or 6%. However, this was mostly due to the seasonal aspect of merchant services revenues, which was $745,000 lower compared to the third quarter.

Revenues from wealth management services in the fourth quarter of 2006 was $6.7 million, a 15.4% increase over the fourth quarter of the previous year. Assets under administration amounted to $3.695 billion at the end of 2006, up $144 million in the fourth quarter, and up $423 million or 13% since the end of 2005. That increase was due to financial market appreciation as well as successful business development efforts.

Again excluding realized gains and losses on securities, noninterest income was 41% of total revenues for the fourth quarter of the year just ended, up from 37% a year earlier.

Total noninterest expenses were $15.7 million for the fourth quarter, about the same as the fourth quarter a year earlier, although the fourth quarter in 2005 did include our annual contribution to our charitable foundation in the amount of $522,000. Our annual contribution in 2006 occurred in the second quarter. Excluding the impact of this, and also backing out the change in merchant processing expenses, core operating expenses were up about 2% over the same quarter in 2005.

Our effective income tax rate for the full-year 2006 was 32.6%. The fourth-quarter rate was higher at 33.8% primarily due to a change in our state tax position. This higher rate is not representative of ongoing conditions; and we anticipate that the effective rate for 2007 will be in the range of 31.25% to 31.75%.

Turning to the balance sheet, total assets at the end of 2006 were $2.4 billion, reflecting slight decreases of less than 1% for both the fourth-quarter and the full-year periods. The investment securities portfolio declined by $37.5 million in the fourth quarter, primarily due to the sale of $48.1 million in mortgage-backed securities during the quarter. This repositioning of the portfolio was primarily conducted in response to the inverted yield curve and related economic conditions. Proceeds were primarily used to reduce borrowings.

These sales resulted in a realized loss of $1.2 million. In addition, sales of equity securities were also conducted in the fourth quarter, resulting in realized gains of $1.2 million. The total investment portfolio declined by $80 million since the end of 2005, due to these and earlier quarter deleveraging transactions.

Loan growth improved somewhat in the fourth quarter, after relatively slow growth for the first three quarters. The strongest growth occurred in the commercial category, which accounted for $26 million of the total $31.5 million in growth for the quarter. For the year, total loans rose by $58.1 million, or 4.1%, including a 5.9% increase in commercial loans and a 7.4% increase in consumer loans. Residential loans showed a slight increase of 1% in 2006.

For the year, total deposits rose by 2.4%. However, this was net of a $24.5 million reduction in brokered deposits. Excluding this, in-market deposits rose by $63.2 million or 4.4% in 2006. In the fourth quarter, total in-market deposits declined by 8/10 of 1%.

Typically, the fourth quarter for Washington Trust is a flat period for deposit growth. For example, in 2005, we experienced minimal in-market deposit growth of less than 1% in that quarter. Deposit gathering, as John mentioned, continues to be extremely competitive.

Turning to asset quality, our indicators continue to be very favorable. Nonperforming assets, which consists solely of nonaccrual loans -- we have no foreclosed property -- amounted to $2.7 million or 0.11% of total assets at the end of 2006 compared to $2.4 million or 0.10% of total assets at the end of 2005.

Charge-offs, net of loan recoveries, amounted to only $224,000 for the year 2006. The allowance for loan losses was $18.9 million or 1.29% of total loans at December 31, 2006, compared to $17.9 million or 1.28% of total loans a year earlier.

The loan loss provision charge to earnings was $300,000 for the fourth quarter and $1.2 million for the full year 2006. These amounts were unchanged from the amounts recorded for the same periods in 2005.

Total shareholders equity was $173.1 million at the end of 2006, up from $158.4 million at December 31, 2005. Washington Trust and its subsidiary bank are well capitalized by all bank regulatory measures at the end of 2006.

During the fourth quarter, we bought back 50,000 shares under a repurchase program that had been authorized a few years ago. We also announced the authorization for a new program to repurchase up to 400,000 shares. As we mentioned in the press release at the time of the announcement of the new program, the new program replaces the prior program, which was canceled. So the repurchase authorization today stands at 400,000 shares.

In December, we declared a dividend of $0.19 per share, paid on January 12. At this time, I will turn the call back to John Warren.

Thank you, David. In conclusion, we are very pleased that Washington Trust posted good results for 2006. Our business model provides for a diversified stream of revenues; and this has been the key to our success.

The crystal ball for 2007 shows several unknowns, obviously -- what will happen to interest rates, the yield curve, the behavior of the financial markets, and also, where is the local economy actually headed? Our mission is to continue to manage our business lines, to grow the Corporation, and to enhance the value of Washington Trust for our shareholders. We have a strong track record and it will continue.

Thank you all for taking the time to join in and listen today. Now David then I would add happy to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Frank Schiraldi with Sandler O'Neill & Partners.

I just had a couple of questions. First, I was wondering, I don't know if you have this, but I was wondering if it was possible to see how much of the increase in assets under administration, linked-quarter, how much was from new business and how much was from market appreciation.

I don't have exact figures on that. I would say a fair percentage of it is from market appreciation and earnings retention. But there was also good business development efforts throughout the year.

Frank, what we have with our trust area, obviously, is that from time to time during the course of year we also have estates that are settling that may require distributions. So that, unlike a mutual fund or a pure bucket of managed assets, the net numbers are not as pure as otherwise might be the case.

Right, okay. All right, thanks. Then, just noticed that there seemed to be a change in the reporting this quarter in the fee income as far as, it seems anyway, that the other income line, some of that was in the wealth management line now. Is that correct?

Yes, that is a good point. I am glad you brought that up. Some transactional fee income that had been included in other income, but was really related to the wealth management business, has now been reclassified into a section in the income statement under wealth management services. So all the income related to the wealth management business, whether it is based on assets under management or transaction fess of any kind is all in that category. So yes, some came out of other income and has been reclassified.

Okay, so we can, I guess, expect that going forward?

That's correct.

Okay. Then I guess just one final question on the deleveraging transaction in the quarter. Do you think we are likely to see some more of these going forward? If so, do you think sort of similar sized sort of things maybe in the quarter? Or -- I know you guys are pretty comfortable with the balance sheet. You are not looking to do a big restructuring. Nothing has changed there, has it?

We will certainly continue to evaluate, based on market conditions as they evolve, but there are no plans for further repositioning through sales at this time.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) I'm showing there are no further questions.

All right. Well, we thank you all for taking the time to join us and look forward to seeing you in person soon.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.