Washington Trust Bancorp Inc (WASH) 2007 Q4 法說會逐字稿

Hello and welcome to the Washington Trust Bancorp Fourth Quarter 2007 Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS).

Please note this conference is being recorded.

Now I would like to turn the conference over to Ms. Elizabeth Eckel. Ms. Eckel, you may begin.

Thank you. Good morning and welcome to the quarterly and year end 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 and a webcast replay of today's conference call will be available shortly after the conclusion of the call through the Corporation's web site, www.wash trust.com, in the Investor Relations section under the subhead presentation. However the information we provide during this call is accurate only as of this date and you should not rely on the statements after the conclusion of this call.

Hosting this morning's discussion is John C. Warren, Chairman and Chief Executive Officer of Washington Trust and David V. Devault, Executive Vice President, Secretary, Treasurer and Chief Financial Officer.

Now I'm pleased to welcome Washington Trust Chairman and Chief Executive Officer John Warren.

Thank you, Beth, and good morning to everyone. Thank you for joining us this morning.

Yesterday afternoon we released our earnings for the fourth quarter and the year-end of December 31st, 2007. I'm pleased to report that Washington Trust performed very well in 2007, despite unsettled market conditions. We achieved excellent growth in key lines of business and continue to maintain strong asset quality, which is critical in this operating environment.

For the fourth quarter of 2007 we earned $5.8 million or $0.43 per diluted share, down slightly from $6.2 million or $0.45 per diluted share reported in 2006. For the year ended 2007, net income was $23.8 million or $1.75 per diluted share compared to $25 million or $1.82 per diluted share in 2006.

A key driver for our 2007 results was robust growth in our commercial lending area. Commercial loans were up almost $93 million or 16% for the year ended December 31st. It increased by $30 million or 5% in the fourth quarter of 2007 alone. We had good production from both our commercial, C&I and commercial real estate groups.

For the last quarter of the year we were recognized as the top SBA lender in Rhode Island. And it's critical to note that we continued to maintain strong asset quality even as our loan portfolio grew. As a result of this substantial commercial loan growth, as well as uncertain economic conditions, we added to our provision for loan losses in the fourth quarter of 2007. This contributed to the decline in the year-over-year fourth quarter earnings.

We have an experienced team of commercial lenders and businesses from throughout the area look to Washington Trust as the preferred lender for small-business financing as well as major multi-million dollar deals. We also had outstanding growth in our wealth management area this year. During the year wealth management assets surpassed $4 billion for the first time in our Corporation's history. Revenues from wealth management services were up 11% from the fourth quarter of '06 and increased 10% for the year ended December 31st, 2007.

Approximately one-quarter of our earnings are generated through our wealth management services. We have a great team of trusted advisers in our wealth management area and are now recognized as one of the leading providers of integrated wealth management solutions for high net worth individuals and institutions in New England.

On the consumer side, it was much quieter in 2007 as residential mortgages grew by 2% and consumer loans grew by 3% during the year. It is important to note that we have never had a subprime lending or ALT A mortgage program. But our concern in the economy is that the sheer magnitude of this economic dilemma could spill over into the healthier portion of the economy. Obviously this is the Feds' concern too.

We were successful in growing our reverse mortgage origination activity during the year; and we took the lead in educating consumers and professional advisers of how this innovative product can help people in a variety of situations achieve their financial and lifestyle goals. Like others in the industry, deposit generation continues to be a challenge as we balance the need for core deposits with managing the spread on time deposits.

At this point I will turn the discussion over to David Devault for a more detailed review of our financial performance. David.

Thank you, John. Good morning, everyone. Thank you for joining us on our call today. I will review the fourth quarter operating results and financial position as described in our press release yesterday.

Net income for the fourth quarter of 2007 was $5.8 million or $0.43 per diluted share compared to $6.2 million or $0.45 per diluted share earned in the fourth quarter of 2006. The 7% year-over-year decline in income and 4% decline in earnings per share was primarily attributable to a higher provision for loan losses. The provision in the fourth quarter just completed was $1 million, compared to provisions of $300,000 in both the fourth quarter of 2006 as well as the earlier quarter -- third quarter in 2007.

The increase in the provision was based on management's assessment of various factors affecting the loan portfolio including, among others, growth in the portfolio, our ongoing evaluation of credit quality and economic conditions. I will comment more on this in a few moments.

Net interest income for the fourth quarter of 2007 was $14.8 million, 3.1% lower than the third quarter and 0.9% lower than the fourth quarter a year earlier. The net interest margin in the fourth quarter was 2.65%, a decline of 16 basis points from the third quarter.

For the most part, this decline was attributable to decreases in yields on prime-related commercial and consumer loans resulting from actions taken by the Federal Reserve to reduce short-term interest rates over the last several months, with little commensurate reduction in deposit rates paid during the same period. We also believe that part of the reason for the deposit rate condition is that some larger institutions nationally have continued to hold rates high in an effort to address their liquidity challenges.

Compared to the fourth quarter of 2006, margin declined by 9 basis points, as funding costs rose to a greater degree than asset yields and also to changes in the funding mix.

I will now comment on some of the major balance sheet changes. Loan growth amounted to $59.2 million in the quarter, led by $30 million or a 4.7% increase in commercial and commercial real estate balances. This represents the fifth consecutive quarter of firm growth in the commercial area. Consumer loans rose by 2.8% in the quarter due largely to growth in home equity lines. The residential mortgage portfolio rose by $20.9 million or 3.6%, and that includes a purchase of $26.8 million in mortgages during that period.

For the full year 2007, total loans are up $114 million or 7.8%. Again the commercial category showed the largest increase growing by almost $93 million or nearly 16%. The net increase in residential loans was just under 2% for the year and the consumer category showed an increase of about $10 million or 3.5%. The investment securities portfolio balances rose by $63.1 million or 9.2% in the fourth quarter.

In November and December, the bank increased its holdings of fixed rate U.S. government and government-sponsored agency pass-through securities to take advantage of significant widening in spreads during these months. Purchases were funded partly with cash flows [for] maturing or [call] securities and partly with Federal Home Loan Bank advances.

Total deposits declined by $9.7 million or 0.6% in the quarter with the largest decrease in DD&A [allowances]. For the full year 2007 total deposits dropped by $31.8 million. However this did include a managed reduction in brokerage certificates of deposit of almost $46 million. Excluding the change in brokered deposits, end market deposits rose by about $14 million or just under 1%. In general, deposit growth has been very challenging over the last several quarters.

Let me turn now to non-interest income including the results in our wealth management business. Non-interest income in total was $11.3 million in the most recent quarter. There were $119,000 of net realized securities gains in the quarter compared to net realized securities losses of $16,000 in the fourth quarter a year earlier. Excluding the securities transactions, non-interest income was up by 6.9% over the fourth quarter of 2006. Non-interest income was 43% of total revenues for the quarter.

Our wealth management business reported excellent results in the fourth quarter, with revenues up by 10.9% over the same quarter in 2006. Wealth management assets under administration stood at $4 billion at the end of 2007, down slightly for the quarter.

For the full year 2007, investment performance as well as successful business development efforts and customer cash flows contributed to an increase of $405 million in assets under administration or 11.2% from the end of 2006. The effective income tax rate for the quarter was 31.1% down slightly from 31.3% in the third quarter. The effective tax rate for the full year 2007 was 31.3% and we anticipate that the effective rate for 2008 will be in the range of 31.5 to 32%.

Let me now discuss asset quality. Non-performing assets were $4.3 million at the end of 2007, up $1.6 million from the beginning of the quarter and about the same as the balance of the year earlier. Non-performing assets at December 31st consisted solely of nonaccrual loans. We had no property acquired before closure. Nonaccrual loans as a percentage of total loans was 0.27% at December 31st compared to 0.18% of total loans at the end of the third quarter and 0.19% of total loans at December 31st, 2006.

Also in the fourth quarter, total loans 30 days or more past due increased by $1.2 million. This included a $2.5 million increase in the commercial category, a $1.2 million decrease in their residential mortgage category and a small decrease in the consumer loan category.

Total 30-day or more delinquencies for all loan types were $7 million or 0.45% of total loans at December 31st which is actually down somewhat from $7.2 million or .49% of total loans a year earlier.

In our residential mortgage and consumer loan categories, total 30-day or more delinquencies were $2.3 million or 0.26% of those loans at December 31st, 2007, up from $1.4 million or 0.16% of those loans a year earlier. As John mentioned, we have never offered a subprime or an ALT-A residential mortgage loan program.

As I mentioned earlier, we did increase our loan provision -- our loan loss provision in the fourth quarter to $1 million compared to quarterly divisions provisions of $300,000 in earlier quarters. The loan loss provision charge to earnings was $1.9 million for the full year 2007 compared to $1.2 million in 2006.

The increase in the fourth quarter 2007 provision is based on management's assessment of various factors affecting the loan portfolio including growth, our ongoing devaluation of credit quality with particular emphasis on the commercial portfolio as well as economic conditions.

Net charge-offs were $195,000 in the fourth quarter and $517,000 for all of 2007.

Having said all that, we would certainly say that our asset quality continues to be very good. Let me give some examples. In the entire residential mortgage portfolio of nearly $600 million there are only two loans totaling $441,000 over 90 days past due at the end of fourth quarter. In the entire consumer loan portfolio of $294 million there were also only to loans totaling $86,000 over 90 days past due at that date.

Our year-end level of nonperforming loans as a percentage of total loans, which is 0.27%, is less than one-third the level of 0.83% for our national peer group of bank holding companies with assets of $1 to $3 billion as reported by the Fed Reserve at September 30 which is the most recent information available at this time.

Our allowance for loan losses of $20.3 million is 0 -- is 1.29% of total loans at the end of the year and that also exceeds 1.16% average for the same peer group. again using the most recent information available at September 30th. We will continue to assess the adequacy of our allowance for loan losses in accordance with our established policies. The provision for 2008 is likely to increase somewhat above the 2007 level subject to the achievement of anticipated portfolio growth and the future evaluation of economic conditions.

Total shareholders' equity was $186.5 million at the end of 2007, up from $173.1 million at the end of 2006. We did not repurchase any shares during the fourth quarter.

In December we declared a dividend of $0.20 per-share which was paid on January 11th.

And at this time I'll turn the call back to John Warren.

Thank you, David. There are many words I could use to describe the banking industry in 2007. Challenging, difficult, extraordinary. But none of those words truly do it justice. Depending on which of many eras one has lived through, the early 1990s back to the '70s or reading some history books about what happened at the tail end of the Depression as part of what banks were going through, this one ranks certainly up there.

You know in the situation in the financial markets though better in spots is today still an unknown. There are problems in the subprime market, the option market. And needless to say, the Fed is obviously very concerned or we wouldn't have seen that 75 basis point drop yesterday.

We don't -- we didn't have a subprime loan program. We didn't have an ALT-A program and we don't know what the effect of the spillover will be on the economy as a whole. But we're obviously seeing some. Time and careful attention to business will get us through all of this.

Our commercial pipeline is actually where it was a year ago and we expect continued growth in that area. The residential market may see a pickup from refinancing activity with the lower rates and we would expect to benefit from that this year. But also in this environment, the consumers are remaining cautious and will probably be slow to do any borrowing and spending.

The good news is the management team at Washington Trust has been through difficult cycles before. Many of us remember not only the challenges of the early 1990s but those of the 1970s as well. We have the experience to guide the Corporation and advise our clients through these difficult times.

Going forward, Washington Trust will continue to focus on our keys to our success, maintaining asset quality, generating balanced earnings, providing superior service and investing in our future.

Thank you for taking the time this morning and now David and I would be happy to answer any questions you might have. Thank you.

(OPERATOR INSTRUCTIONS) Jared Shaw from KBW.

Just a couple of questions. First on the margin. It was a little bit weaker than we were looking for and then, obviously with the move that the Feds just made, and with the anticipation of some more cuts, how do you think the margin is going to be positioned going into 2008? And what are your thoughts on the interest rate position going through the year?

As we originally looked at it for certainly the early part of '08, we thought that it would be fairly stable compared to what we saw at the end of '07. The latest rate cut could initially have some impact on margin. We would expect something in the range of a few basis points in the first quarter if deposit rates begin to move downward in response to all of the rate cuts, then there would be somewhat of a catch-up in a little while after that we would think.

So you think that if the deposit rates are able to move down that you could actually see some margin recovery?

Yes. I think they really have to move down, Jared. I mean we really for whatever reason up here have not had the effect on the deposit side with the Fed rate cuts. I mean there really is -- David mentioned the impact of full page ads in the Wall Street Journal and the New York Times for some of those troubled companies and the rates they've been paying that have still been 5% plus has really had a dragging effect as far as making the local market very willing to aggressively move down sort of compatibly with the Fed decline in rates.

Are you seeing the competition on the deposit side mostly from like those country-wise and in direct deposit gatherers? Or is it more of the local competitors not feeling that they can't bring their rates down because there's that big rate out there somewhere in the market?

Yes. It's the latter.

It's the latter.

So, hopefully, if we see the whole market move down or the whole local market move down then maybe that will provide some relief.

It should.

What was the -- do you have the margin for this quarter broken out by month? And was it moving down throughout the quarter or did it start recovering at all?

I don't have that with me here.

Then on the asset quality side, obviously, the provision was an increase here. You think that while we are in this period of economic uncertainty that this is a good provision to assume for the next few quarters? Or was this more a reaction to specific individual moves you saw in the [MPAs]?

Yes. The $1 million provision at this time I don't think would be representative at all of near-term provisions in the next several quarters.

Do you think if you go back down to that lower level?

I think our reference was that we expected the full year '08 to the slightly higher than the full year '07 and so that, subject to the continued strong loan demand especially on the commercial side and then the overall economy as to how the economy hangs in, that will determine what we have to do from there.

Okay. Great. And then if you could just give -- I'm sorry if I missed this part on the call, but just an update on the wealth management. I know you were saying that things are going well. Do you still anticipate that to be a strong engine of growth in '08?

Yes we do.

It's certainly a significant portion of our business. It adds about 25% to our bottom line and wealth management assets were up $400 million in 2007.

Great. Thank you very much.

Frank Schiraldi. Sandler O'Neill Asset Management.

I think just a couple of questions. One, I was wondering on the wealth management revenues were up quarter-over-quarter and AUA was flat to down a little bit. Could you just explain that a little bit?

There is some seasonality or fluctuation in some elements of wealth management assets that's really the -- there are some commissions and other things that are not ongoing recurring revenues in there. They will fluctuate from quarter to quarter.

It's not all tied to assets under management.

So is it in the fourth quarter there's some seasonal revenue that's just in there not tied to AUA or is it every quarter basically?

I think it was more of a -- just less of it. I am not sure it's really seasonal.

And then as far as the assets under administration as far as the balance at the beginning and end of the period, obviously depreciation and the market, the net customer cash flows looked like it was $226,000. Is that seasonal (technical difficulty) as well and do you happen to know what it was, for instance, last year? For these three months?

I don't think we can say it's seasonal. I think it's -- there are obviously year end financial planning steps that clients will undertake that can add some volatility to it.

Yes. I mean we had a slowdown in activity and part of it could've been volatility in what was going on in the market and, yet, we've begun to see a strong pipeline coming in to '08.

Okay, that's helpful. Thanks. And finally I just want to ask about the loan growth. And I know a lot of guys I'm talking to our sort of shy away from loan growth, especially construction loan. It seems like you guys are ramping up a little bit.

Is there something that you are seeing out there that there's just a lot of opportunity other people aren't taking? Maybe people are being a little bit too scared to go into construction loans now? Or what are you seeing there?

The construction loan growth -- we had a couple of long-time customers that are actually -- have actually moved and expanded their business and that was one of the projects or a couple of the projects that hit in the fourth quarter. It's not -- it wasn't new residential development if you will. These were commercial customers.

So these are already customers not necessarily a ramp up of construction loans. It's just customers that you already have.

That's right. We are probably as conservative as everybody else right now in this environment on construction lending.

Then finally, I wondered if you could share with us maybe where those purchases came, the residential mortgages. Is that sort of just a national bucket?

I believe they are certainly Northeast-based and possibly even New England-based, but generally we've stayed in the Northeast with purchase mortgages when we can find them.

Frank, most of those were jumbos and there was -- when the market took that kind of whiplash and the spread really opened between conforming and jumbos, people have known that if something like that happens, that we would have an interest in that in. So we were able to pick up that one pool.

As always on the mortgages we purchase, we literally underwrite every single one of them. So we sent a team off and went through every single one of the loans.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no questions at this time.

All right. Thank you all very much for attending this morning. We look forward to chatting with you all soon.

Thank you. That does conclude today's conference call. You may disconnect now.