Washington Trust Bancorp Inc (WASH) 2007 Q3 法說會逐字稿

Greetings and welcome to the Washington Trust Bancorp third-quarter 2007 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 B. Eckel, SVP of Marketing for Washington Trust Bancorp. Thank you, Ms. Eckel, you may begin.

Thank you, Anthony, and good morning 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 is being webcast live and a webcast replay of today's conference call will be available shortly after the conclusion of our call through the Corporation's website, www.washtrust.com. in the investor relations section under the subhead presentation.

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. And now I'm pleased to introduce Washington Trust Chairman and CEO, John Warren.

Thank you, Beth. I'd like to welcome everyone to this morning's conference call. Yesterday afternoon as you know we released the results for the third quarter ended September 30, 2007. I'm pleased to report that while many institutions have been negatively affected by turmoil in the credit markets, Washington Trust continued to post solid earnings for the quarter ended September 30.

Here are some of the quarter's highlights. Washington Trust recorded net income of $6.6 million or $0.48 per diluted share which is consistent with our third-quarter earnings in 2006. Our key profitability measures remained strong during the quarter. Return on assets stood at 1.10%, up from 1.09% a year ago and return on equity was just under 15% at 14.99. Our profitability in light of difficult economic conditions and challenging competitive environments is a result of our diverse business model, sound credit policies and underwriting standards as well as our strong brand.

While the national headlines have been full of stories about the subprime mortgage crisis, fears of a credit crunch, and Fed rate cuts, Washington Trust continued to see good credit activity during the quarter. Washington Trust has never had a subprime or Alt-A residential mortgage program. In addition, our mortgage-backed investment portfolio contains only federal agency securities.

Our commercial lending continued to add to its book of business and posted an 11% or $62 million increase in commercial loans on a year-to-date basis. Competition remains fierce and spreads are extremely thin but we are getting our fair share of good commercial loans.

I'm also pleased to report that Washington Trust was named the leading SBA lender in dollar volume loans in Rhode Island for the year ended September 30, 2007. Small businesses, the engine of our local economy and this designation is a testament to our efforts to provide Rhode Island businesses with the resources they need to succeed.

On the consumer side, mortgage and consumer loan activity remained relatively flat during the quarter. Going forward we believe we will benefit as many of the smaller mortgage brokers go by the wayside, the economy improves and the borrowers begin to turn to trusted advisers like Washington Trust to handle their lending needs.

In light of what is going on in the environment, we are pleased to report that our asset quality continues to remain good. A major highlight for the quarter was our Wealth Management area as assets under administration surpassed $4 billion for the first time in our Corporation's history. This is up $165 million or 4% for the quarter and up $418 million or 11% since year end. We have a superb team of Wealth Management professionals who have helped us become one of the premier wealth management firms for high net worth clients and institutions in the New England region.

Deposit generation continues to be a challenge for everyone as competition for both core and time deposits is intense. For the first nine months of 2007, end market deposits were up approximately $22 million or 3%. As you may recall in May of this year, we opened our second office in Cranston, Rhode Island. To date that office has generated approximately $20 million in deposits.

Before I turn the call over to David, I'd like to comment on the delay of this quarter's earnings release and conference call. Unfortunately a recent review of the accounting treatment of certain securities transactions resulted in the need to restate our second-quarter financial statements. While we regret the error, it's important to note that the corrected accounting treatment related only to the sale of certain held to maturity securities.

David will provide a more detailed overview of our financial performance and the effects of the second-quarter restatement. David?

Thank you, John. Good morning everyone and thank you for joining us on our call today. I'll be reviewing the third-quarter operating results and financial position as described in our press release yesterday. That press release also included an announcement concerning a restatement of second-quarter 2007 results. I'll address that first with a synopsis of the reasons for the restatement for June 30, 2007. The press release issued yesterday contains a more complete narrative on this matter as well as a summary table of restated financial statement amounts.

In February of 2007, statement of Financial Accounting Standards Number 159, the fair value option for financial assets and liabilities was issued. It permits the measurement of selected eligible financial statements at fair value. For companies with a December 31st fiscal year, SFAS-159 permitted early adoption retroactive to January 1, 2007 with the requirement that the early adoption election be made within 120 days of the beginning of the fiscal year. For Washington Trust, the early adoption election could have been made no later than April 30, 2007.

We conducted an assessment of SFAS-159 during the period after its issuance. That assessment culminated in a decision on April 12 to implement early the adoption of SFAS-159 and in connection with this, we selected the fair value option for approximately $61.9 million of certain U.S. government sponsored agency and mortgage-backed securities with lower coupons and slower prepayment characteristics in the held to maturity portfolio.

A portfolio restructuring plan was also undertaken to sell these securities to reduce interest rate risk and improve net interest margin. On Friday April 13, 2007, we executed sale trades for these securities. At the time of the sales transaction, the historical amortized cost carrying value of the sold securities exceeded the total sales price by $1.7 million.

On Monday April 16, additional information became available regarding clarifications of the interpretation of SFAS-159 by applicable regulatory and accounting industry bodies that led us to conclude that the application of SFAS-159 to our transactions might be inconsistent with the spirit and the intent of that pronouncement. Consequently we decided not to early adopt SFAS-159.

We were able to promptly execute purchase trade transactions to reacquire the identical securities prior to their sale settlement date for approximately 49.(technical difficulty) million of the $61.9 million total with the intent that in substance the sale transaction would be offset for these securities. The reacquired securities were retained in the held to maturity portfolio at their original presale amortized cost carrying value and a $1.4 million loss on the sale of those reacquired securities was not recognized.

We have now determined that the offsetting of the April 13, [2000] sales and the subsequent reacquisition of the identical securities was incorrect and that the sale transactions should have been recognized with a $1.4 million realized securities loss and a corresponding reduction in the carrying value of the reacquired securities.

For the quarter ended June 30, 2007, the accounting corrections for these transactions including the recognition of the realized loss and other related changes results in an after-tax reduction in net income of $828,000 or $0.06 per diluted share, the resulting net income of $5.5 million or $0.40 per diluted share and the same correction amounts also applied to the six-month period ended June 30.

We've also determined that the remaining held to maturity portfolio should have been reclassified to the available for sale category. This reclassification has been recognized as of April 13. Accordingly on the June 30, 2007 consolidated balance sheet, the securities previously presented as held to maturity have been reclassified to the available for sale category which resulted in a $1.6 million reduction in shareholder's equity at that time. We will not be able to classify securities in the held to maturity category for a period of two years from the April 2007 sales date as a result of this action.

The correction to reduce the cost basis of the reacquired securities results in a change to the accretion of discount for these securities which is recognized in interest income until their maturity dates. The resulting additional amount of accretion income recognized was $79,000 in the second quarter and the third quarter of this year.

As I mentioned, the summary of the changes to amounts previously reported by the Corporation accompanies the October 30th press release. The Corporation will file an amended Form 10-Q with the Securities and Exchange Commission for the quarter ended June 30th reflecting the necessary [adjustments] as soon as practicable. We will also file an amendment to our March 31st Form 10-Q to add a note regarding the subsequent event that had occurred.

Let me now turn to the discussion of the most recent quarter ended September 30th and where applicable amounts discussed reflect the second-quarter corrections. Net income for the third quarter of 2007 was $6.6 million or $0.48 per diluted share, substantially the same as the amounts earned in the third quarter of 2006. The quarterly return on average equity was 14.99% compared to 15.62% for the third quarter last year. The return on average assets for the latest quarter was 1.10%, up slightly from 1.09% in the same quarter a year earlier.

Net interest income for the third quarter this year was $15.3 million, 2.6% higher than the second quarter of 2007 but down by $556,000 or 3.5% from the third quarter a year ago. The third quarter of 2006 included an extra Federal Home Loan Bank of Boston quarterly dividend of approximately $450,000.

The net interest margin for the third quarter of 2007 was 2.81%, up 5 basis points from the second quarter. It was down 5 basis points from the third quarter of last year although again, the extra Federal Home Loan Bank dividend accounted for about 8 basis points of margin in the third quarter of 2006. The margin benefited modestly in the most recent quarter due to among other things seasonal growth in demand deposit balances as well as growth in commercial loan balances.

I will now comment on some of the major balance sheet changes for the quarter. Loan growth amounted to $25.3 million in the third quarter led by a $27 million or 4.3% increase in commercial and commercial real estate balances. Consumer loan demand continued to be modest rising by 1% in the quarter and residential mortgages declined by $4.6 million or 0.8%. The investment securities portfolio totals rose by $12.5 million or 1.8% in the third quarter reflecting some additions to U.S. government sponsored agency mortgage-backed securities holdings as spreads have widened.

Total deposits decreased by $13.2 million in the quarter, although this was caused by a $29.3 million managed reduction in brokered time deposits. Excluding the change in the brokered deposits, in market deposits rose by $16 million or 1.1%. The deposit business continues to be very competitive. In general, we been following a disciplined pricing strategy with respect to deposits consequently we've seen some runoff of higher cost deposits which have been intentionally replaced with lower cost Federal Home Loan Bank funding.

I will now discuss non-interest income including our Wealth Management business. Non-interest income in total was $11.9 million in the most recent quarter. There were no securities gains or losses in the quarter and there were net realized securities losses of $356,000 in the third quarter of last year. Excluding those, non-interest income was up 6.3% over the same quarter a year earlier. Non-interest income was 44% of total revenues in the third quarter of this year.

The Wealth Management business reported excellent results in the third quarter with revenues up by 11% over the same quarter in 2006. Wealth Management assets under administration past $4 billion for the first time and stood at $4.1 billion at September 30th, up 4.2% in the quarter and up $562 million or 16% in the last 12 months. Financial market appreciation as well as successful business development efforts and customer cash flows have contributed to this growth.

Our effective income tax rate for the quarter was 31.34%, little changed from the rate in the first two quarters of this year. Our asset quality indicators continue to look good. Nonperforming assets were $2.7 million or 0.11% of total assets at September 30th, down from $3 million at the beginning of the quarter and about the same as the $2.6 million balance a year ago. All of the nonperforming assets at September 30th are nonaccrual loans. There isn't any property acquired through foreclosure.

Also in the third quarter, total 30-day delinquencies declined by $3.2 million. There was a $5 million decrease in the commercial category, a $1.6 million increase in the residential mortgage category and a $213,000 increase in the consumer loan category. Total 30-day delinquencies for all loan types were $5.9 million or 0.39% of total loans at September 30th. That is up somewhat from $4 million or 0.28% of total loans a year earlier.

In the residential mortgage and consumer loan categories, 30-day delinquencies -- 30 plus day delinquencies amounted to $3.6 million or 0.42% of these loans at September 30th, compared to $1.4 million or 0.16% of these loans a year ago. Here are some further comments on the residential and consumer portfolios. As John mentioned, we've never offered a subprime or Alt-A residential mortgage loan program. In the entire residential portfolio of $579 million, there is one loan of $302,000 over 90 days past due at the end of the third quarter. And in the entire consumer loan portfolio of $286 million, there are two loans totaling $76,000 over 90 days past due at that date.

The allowance for loan losses is $19.5 million or 1.3% of total loans at September 30th and it was 1.3% of total loans at the end of 2006 as well as September 30, 2006. The loan loss provision charged to earnings in the third quarter was $300,000 which has been our quarterly provision level so far this year. Net charge-offs, that is charge-offs net of recoveries, were $155,000 in the most recent quarter and they are $322,000 through the first nine months of this year.

Total shareholders equity is $177.9 million at September 30th. That compares to $173.1 million at the end of 2006. We repurchased just under 36,000 shares during the third quarter at a total cost of $921,000. In September, we declared a dividend of $0.20 per share which was paid on October 11th.

At this time, I'll turn the call back to John Warren.

Thank you, David. Once again Washington Trust had another good quarter with solid results led by strong performances in our commercial lending area and the Wealth Management area. Asset quality remains good. Our profitability ratios remain strong and we continue to be one of the top performing financial institutions in New England. We will continue to focus on the things that have contributed to our success and enhance the value of our Corporation for our shareholders.

I thank you all for taking the time this morning to hear more about Washington Trust and now David and I would be happy to answer any questions you might have. Thank you.

(OPERATOR INSTRUCTIONS) Damon DelMonte, KBW.

Good morning, guys. Question on your margin, you noted that part of the reason for the increase this quarter was seasonality related to the shifting of deposits toward more lower cost core deposits. How do you see that changing in the fourth quarter? Are you going to see an outflow from seasonal factors as well or no?

Typically there is some modest amount of decline in demand deposits compared to the seasonal inflow in the third quarter. The average balance of demand deposits was $188 million in the third quarter and the end of quarter balance I believe was about $183 million. So you can see that relationship there and usually there is some modest outflow in the fourth quarter although again, we continue to work on marketing and other program efforts to build the demand deposit base.

Okay. With the influence of the Fed, they cut rates earlier this quarter or back in September I should say and then potentially today we could see another cut. How would you view that as impacting your margin?

Well, I guess it depends on what happens with deposit rates. If there is a reduction in shorter term deposit rates that could be beneficial over time, we will just have to wait and see what happens.

Okay. And then lastly, could you just provide a little color on construction lending opportunities in your markets? In a lot of other areas in the country are [taking] some rough times and just kind of wondering what you guys are seeing in Rhode Island?

The residential construction is I would say with evaluated transactions, I think we've been very selective in what we've chosen to go after. In general seems to be a slowdown based on the weakening of demand for residential real estate. On the commercial side, it's very selective on our part with looking at better quality deals and seeing what is out there.

Damon, we don't have any of the sort of enormous developments, tracked developments that you might see in Florida or Las Vegas or Southern California. So it is much more selective and much smaller builders doing smaller number of units.

Okay, great. Thanks.

Alper Sungur, Sidoti.

Good morning, guys. My question is regarding the Rhode Island market. Where do you see the most of the growth coming from?

I would say it's a diversified growth from -- on the commercial side. We also continue to be the beneficiary of relationships from large banks that I think really appreciate a bank headquartered in Rhode Island. So when we go to credit committee, it's not at all unusual to see the source of some of those credits being long-standing relationships with some of the larger institutions that are opening the doors to us giving us a chance and we end up picking them up.

I see. An you initiated a growth initiative I believe last year, reverse mortgages. How is that shaping up?

The reverse mortgage effort on our part is working well with then working through our mortgage originators to originate that product. It sold into the market that acquires and services those loans. We are then I think very careful in the way that we underwrite those and interact with the borrowers in a responsible manner. And it has been working well for us.

We've been pleased to the point we started out with just one individual doing reverse mortgages and we've now added two more. So there are three people in our system doing reverse mortgages now and concentrating on it.

I see, okay. And the 35,700 share buyback during the quarter, what was the average price on that?

I believe it was around $26 per share. I don't have that right here.

Around 26?

It was $25.80.

$25.80. Okay, thank you very much.

Frank Schiraldi, Sandler O'Neill.

Good morning, guys. I had to step off for one second so hopefully no one asked these questions but if they did, feel free to hang up on me.

I don't think so.

I'm wondering if now that the rest of the held to maturity portfolio has moved into available for sale and basically it has hit equity already if there's any additional plans for any sort of restructuring of that or improving the margin through selling some of those securities?

You know, when we've looked at this, obviously the fact that its in available for sale gives us the flexibility to do it. We continue to look at opportunities from an asset liability point of view and from time to time that may happen but right now we're quite happy with what we have.

Okay, great. And then just wondering is there any change to the thought on buybacks? I mean when you talked earlier last quarter about buyback levels and what you were going to expect to get done this year, is there any changes to those thoughts or pretty much the same?

No significant change in philosophy there. I think you will see a modest amount of buyback activity continue in the upcoming periods.

Okay. And then finally is the Warwick branch still expected early next year?

The second Warwick branch is most likely third-quarter opening, probably late third quarter.

And depending -- it may even drift over into early '09.

Okay, great, thank you very much.

There are no questions in the queue at this time. (OPERATOR INSTRUCTIONS) There are no questions in the queue at this time. I'd like to turn the floor back over to management for closing comments.

Thank you very much. Once again, just thank you for all of you for showing up this morning on the conference call and as always if any point whether later today or at any time during the quarter you have a call or any information that you'd like to chat with us about, feel free to pick up the phone and call any of us, whether it's David, myself or Beth and we will be happy to chat with you.

Once again, thank you all very much. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.