Washington Trust Bancorp Inc (WASH) 2010 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter 2010 Washington Trust Bancorp earnings conference call. All participants will be in listen-only mode. (Operator instructions). After today's presentation there will be an opportunity to ask questions. (Operator instructions). Please note this event is being recorded. I now would like to turn the conference over to Elizabeth Eckel. Ms. Eckel, please go ahead.

Thank you. Good morning and welcome to the fourth-quarter/year-end 2010 earnings conference call for Washington Trust Bancorp Inc., NASDAQ Global Select Market symbol WASH. This morning'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 the call through the Corporation's website, washtrust.com, in the investor relations section under the subhead Presentations. However, the information we provide during today's call is accurate only as of this date, and you should not rely on today's statements after the conclusion of this call.

Hosting this morning's discussion is Joseph J. MarcAurele, Chairman, President and Chief Executive Officer; and David B. Devault, Senior Executive Vice President, Secretary and Chief Financial Officer. And now, I am pleased to introduce Washington Trust's Chairman, President and CEO, Joe MarcAurele.

Thanks, Beth, and good morning and thank you for joining us today. Yesterday afternoon, we released our earnings for the fourth quarter and the year end 2010. This morning, we provide an overview of our results and then we will answer any questions you may have.

I'm pleased to report that Washington Trust had a strong fourth quarter. We reported net income of $7.2 million, the highest quarterly earnings in our Corporation's 210-year history. Our full-year 2010 results were also solid as net income was $24.1 million, or $1.49 per share, up substantially from 2009. In a moment, David will provide more detailed financial information for both the fourth quarter and the year.

I'd like to comment on the full year 2010 results. It's important to note, while we achieved great success in 2010, we did it the hard way; we earned it. Not only were we operating in a slow-growth economy, but in 2010 Rhode Island was faced with record unemployment, consumers were cautious about borrowing and spending, and the business community was struggling. It was, all in, a challenging year.

Our game plan was simple. We continued to play to our strengths. We have a great team of talented professionals who provide exemplary customer service. In recent years there has been a flight to quality, and Washington Trust has become the bank of choice for those depositors, borrowers and investors seeking big-bank products and local, personalized service.

All of our lines of business performed well. We had record production in the mortgage group in 2010, which resulted in significant loan sales gains for the Company. While record low interest rates brought borrowers to our door to refinance, it's our service that sets us apart from many other banks. We have a top-notch team of mortgage originators and an equally talented mortgage production staff that turns loans around quickly, efficiently and professionally.

One of the keys to our success in 2010 was the mortgage business generated through our home loan center in Sharon, Massachusetts. Opened in August of 2009, this was our first full year of operations, and I'm pleased to announce that the Sharon office contributed more than one fourth of our 2010 mortgage volume.

The success of the Sharon office indicated to us that our mortgage banking model is not confined to our Rhode Island borders. We have, therefore, decided to open a second home loan center in Burlington, Mass., just north of Boston. We recently hired a team of Boston-area mortgage professionals, and they are already out in the market and producing new volume for us.

We also had excellent growth in retail deposits during the year. We attracted a good mix of low-cost core deposits, which enabled us to reduce both our Federal Home Loan bank borrowings and our overall cost of funds. These factors contributed to net interest margin improvement.

As you may recall, in November of 2009 we opened our second branch in Warwick, Rhode Island, and it has proven to be a success and is attracting a solid base of both deposits and loans.

In past calls, we have mentioned our interest in continuing to expand our retail footprint in Rhode Island. Given that, I'm pleased to announce that we have plans to open a full-service branch in a busy retail shopping complex on Taunton Avenue in East Providence, Rhode Island. The branch is still subject to local and regulatory approval, but since we will be renovating an existing building instead of building our own site, things should move quickly, and we plan to open later this year.

In December we hired Deb Gormley to lead our retail banking team. Deb joins us from Citizens and has extensive branch experience. We are excited to have her on board and look forward to her contributions -- or the contributions she will like to our growing retail network.

We had good commercial lending production in 2010. As in recent years, we attracted some quality credits from the larger banks. However, lately we have seen a flattening in loan demand. While the market in general has softened, we do believe there are still some good opportunities, and we plan to be involved in them on a selective basis going forward.

Our wealth management area generated solid revenues, contributing nicely to non-interest income. Assets under management rose to the highest level in the Corporation's history. Our asset management professionals also provided above-average returns for investors.

While we have seen some increases in the financial markets, there is still a great deal of uncertainty, and we believe the recovery is still a ways off.

At this point, I would like to turn it over to David Devault to provide more detail on our fourth-quarter financials.

Thank you, Joe, good morning, everyone. Thanks 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 yesterday afternoon.

Net income for the fourth quarter of 2010 was our highest quarterly net income ever at $7.2 million, or $0.44 per diluted share. Net income was 13%, or $0.05 per share higher than the third quarter and 52%, or $0.14 per share higher than the fourth quarter a year ago.

The increase in profitability over the fourth quarter of 2009 reflects higher net interest income, a lower loan loss provision, strong mortgage banking results, good growth in wealth management revenues and the lack of other-than-temporary impairment charges in the most recent quarter.

Net income for the full year 2010 was $24.1 million, or $1.49 per diluted share, up 49% from the $16.1 million or $1 per share reported in 2009. Net interest income in the fourth quarter of 2010 was $20.3 million, essentially level with the third quarter and up 20% over the fourth quarter of the earlier year. For the year, net interest income was up 17% over 2009.

The fourth-quarter net interest margin was 3.05%, an increase of 4 basis points over the third quarter and 49 basis points higher than the fourth quarter in 2009. On a full-year basis the net interest margin was up by 45 basis points over 2009. These results were due in large part to lower funding costs. The cost of interest-bearing liabilities for the year 2010 was 68 basis points lower than 2009.

Wealth management revenues, our largest source of non-interest income, were up by 5% from the third quarter and up 7% over the fourth quarter of 2009. The run rate for this revenue source heading into 2011 has been helped by the level of wealth management assets under administration, which rose to the highest level ever in the fourth quarter and totaled $4.12 billion at December 31.

As Joe mentioned, net gains on loan sales and commissions on loans originated from others were strong, $2.2 million in the fourth quarter compared to $1 million in the third quarter and $1.2 million in the fourth quarter of 2009. The strong results in the most recent quarter reflect higher levels of residential mortgage refinancing activity in response to the low mortgage interest rate environment. Mortgage refinancing activity has recently slowed as a result of a rise in market interest rates in the latter part of the fourth quarter, and we don't expect the level of mortgage banking revenues to continue at the fourth-quarter pace as we head into 2011.

Merchant processing fees in the fourth quarter were down by 31% on a linked-quarter basis, reflecting expected seasonal declines in transaction volume. Compared to the same quarter of 2009, merchant processing fees were up by 17% due to growth in the volume of transactions processed for both existing and new customers.

There were no other-than-temporary impairment losses on investment securities in the latest quarter compared to $679,000 of OTTI charges in the fourth quarter of 2009.

Non-interest expenses were $21.8 million in the fourth quarter, a reduction of 5% from the third quarter. This decrease reflects an expected seasonal decline in merchant processing costs offset in part by an increase of $312,000 in foreclosed property costs. There was also a $752,000 debt prepayment penalty charge recognized in the third quarter. Compared to the fourth quarter of 2009, non-interest expenses were up by 13%. That increase is primarily attributable to higher commissions and incentives, which were being recognized at lower levels in 2009, as well as higher foreclosed property costs in the most recent quarter.

Foreclosed property costs were up by almost $500,000 from the fourth quarter of 2009, due primarily to valuation adjustments on OREO properties. The effective income tax rate for the year 2010 was 30%, and based on the current status of federal and applicable state income tax laws, we expect the first quarter of 2011 effective tax rate to be about 30.5%.

On the balance sheet, total loans amounted to $2 billion at the end of 2010, down 1% on a linked-quarter basis with a $22 million decline in the commercial loan portfolio, while the residential portfolio grew by $11 million. The largest decrease in the commercial portfolio was in the category of construction and development loans.

For the full year, total loans were up 4%. The commercial loan portfolio was up by $43 million, nearly all of which was in the commercial and industrial category. The residential mortgage portfolio was up by $39 million for the year, while consumer loan portfolio, reflecting relatively weak demand, was down by $6 million.

Total deposits at $2 billion were down slightly by about 1% in the fourth quarter but finished the year with a 6% increase over 2009. Excluding out-of-market brokered CDs, in-market deposits were also down slightly by about 0.2% on a linked-quarter basis, but showed an 8% increase for the full year. That full-year increase included an impressive 19% increase in demand deposits and NOW account balances.

Turning to asset quality, the overall level of non-performing assets remained fairly stable in the quarter with non-performing assets at $23 million, or 0.79% of total assets, essentially unchanged from September 30 and down from $30.5 million or 1.06% of total assets at the end of 2009. Non-accrual loans were $18.5 million at the end of 2010, down $1.1 million in the quarter and down $9 million for the year.

Property acquired through foreclosure or repossession amounted to $3.6 million at the end of 2010, up $1 million in the fourth quarter and up $1.7 million for the year. Loan delinquencies 30 days or more past-due were at $25.3 million, 1.27% of total loans, up modestly in the quarter and down $6.3 million from a year ago.

The loan loss provision charge to earnings was $1.5 million, unchanged from the third quarter and down by $500,000 from the fourth quarter of 2009. The loan loss provision charge to earnings for all of 2010 was $6 million, down from $8.5 million in the prior year.

Net charge-offs, $1.1 million in the fourth quarter, down slightly from $1.3 million on a linked-quarter basis. And for the full year, net charge-offs were $4.8 million, 0.24% of average loans, very similar to net charge-off amounts in 2009.

Our allowance for loan losses is $28.6 million, 1.43% of total loans, up by 3 basis points from the end of the third quarter and equal as a percentage of total loans to the end of 2009. We are encouraged by the trends in asset quality, particularly the much lower level of non-performing loan formation in 2010 compared to the prior year. The absolute level of non-performing assets remains manageable, although it remains fair to say that significant improvement will require sustained recovery in employment levels in the housing market.

The Corporation and the subsidiary bank continued to remain well-capitalized. The Corporation's estimated total risk-based capital ratio strengthened to 12.79% at the end of 2010, up from 12.50% at the end of the third quarter and 12.40% at the end of 2009. In December we declared a quarterly dividend of $0.21 per share, which was paid in January.

And at this time I'll turn the call back to our President and Chief Executive Officer, Joe MarcAurele.

Thank you, David. 2010 was certainly, at times, a very difficult year, but we feel as though we faced the challenges head-on and were successful. We controlled discretionary expenses and managed the balance sheet to improve earnings. We capitalized on opportunities along every business line to garner additional key market share. And we continued to provide a high level of personalized service to attract new clients and maintain our superior reputation.

We feel that 2011 will be another challenging year; but again, we feel we are ready. We are excited about the opportunities that our new Burlington home loan center and our East Providence branch office will present. We have a great team of professionals who are committed to providing a high level of service that differentiates us from our competition and has driven our success for the past 210-plus years.

I would like to thank you all for your time this morning, and now David and I would be happy to answer any questions.

(Operator instructions) Frank Schiraldi, Sandler O'Neill.

Just a couple of questions, sort of more modeling -- but first, I wanted to -- the first thing I wanted to ask was on the other non-interest income line. Sorry if I missed this, but is there anything sort of nonrecurring? Or it usually runs around $300,000 a quarter, and it was up around $800,000. Just wondering if that's mortgage related as well or if that's nonrecurring in any way.

We looked closely at the issue of service charges on deposits and debit card interchange fees, and we had previously been reporting combining debit card interchange fees with service charges on deposits. We concluded that it was more appropriate to not include that in that category, and we've moved that down out of service charges on deposits and into other income. So the service charges on deposits presented for both the quarterly and year-to-date presentations have been restated in the financial statements that went out yesterday to reflect that reclassification.

So that is the main change in the increase in other income. And with that, service charges on deposits are appropriately and on an appropriate comparative basis presented in the financial statements.

Great, thanks. And then, just in terms of 2011, what sort of -- I don't know what sort of guidance you can give or in terms of the margin, your expectations, given that it's still sort of below peers here at just over 3%. Is there a lot more room, in your estimation, to move that higher?

Over time, there would be. It will largely depend on improving the mix of -- within the deposit and on the funding side and continuing to chip away at good, well-priced lending as we continue with organic loan growth over time. We would say that margin directionally is probably about where it would be in the next few quarters, but I would say that we will continue absolutely to manage deposit cost as effectively as possible to attempt to grow the margin.

So directionally, from 3 to 4Q, what we saw we can expect in the coming quarters? Is that what you're saying, David?

No, I'm saying that it's probably in a range that you would see as we report out over the next couple of quarters.

The current range? Okay.

Yes.

And then just on, finally, on loan growth, should we expect maybe similar to what we saw in 2010? Or, do you feel like we are on the cusp of getting some higher commercial loan growth in the door and sort of right-sizing the other portfolios?

I think I would comment on that. Some of the runoff that we experienced in the fourth quarter were really expected payouts in commercial, particularly in commercial real estate construction loans. Right now, our pipeline stands at about $81 million. It's reasonable. I think we would see, this year, probably growth that would be similar to what we experienced in 2010, overall. A little slower, maybe, in the first quarter, but then building a bit as the year goes on.

Okay, great, that's all my questions, thank you.

Damon DelMonte, KBW.

With regard to the growth in assets under management in the wealth management division, was that mainly from market appreciation, or is that a function of new accounts and new dollars coming in?

The majority in the quarter was market appreciation and income. There was good business origination results in the quarter, offset by some accounts leaving. But overall, we would say our pipeline of business development in the wealth management area is good. And that's how we are viewing it at this time.

From like an M&A perspective, do you think there's opportunities to grow this area of your business?

We're always looking for opportunities. We obviously feel that this is a very important part of our business. So to the extent that we could find things that made sense for us, we certainly would be looking. I really can't comment on anything that is in the offing currently.

Okay, fair enough. And then with regards to the expansion plans, the new branches and the LPOs, have you been able to quantify what the impact might be to the expense base?

Well, on an annualized basis, the non-interest expenses associated with a branch like that would be probably around $500,000 to $600,000. In our case, we would expect that to kick in, in the second half of the year. So you can do the math with that, but that's how we view basically the fixed costs of a branch like that.

Okay, that's helpful, thanks. Just lastly, credit remains really solid for you guys. How are you looking at the provision level going forward with regards to your reserve? Do you think you're going to be seeing provision levels similar to what we saw in the last couple quarters?

If we continue to see either a slowing or a reduction of non-performing loan formation, at some point we could see some reduction in the provision level. I would point out, we have 1.43% allowance as a percentage of total loans. We've averaged, even in a pretty bad economy, relatively speaking, no more than 0.25% of actual losses as a percentage of average loans in the past two years, so we think the reserve is certainly adequate and any improvement in asset quality could translate into somewhat lower provisions at some point in the next few quarters.

Okay, that's very helpful. That's all I had, thank you very much. guys.

(Operator instructions). There are no more questions at the present time. Are there any closing comments?

I would just like to thank everyone for your time today, and we look forward to speaking to you again when we have our first-quarter earnings report. Thank you.

Thank you. That does conclude today's teleconference. You may now disconnect your phone lines.