Washington Trust Bancorp Inc (WASH) 2011 Q4 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp Inc.'s conference call. My name is Val. I will be your operator today. (Operator Instructions). Today's call is being recorded. Now, I will turn the call over to Elizabeth Eckel, Senior Vice President, Marketing and Investor Relations.

Thank you. Good morning and welcome to the fourth-quarter and 2011 year-end earnings conference call for Washington Trust Bancorp Inc. We're listed on the NASDAQ Global Select Market under the symbol WASH.

As Val said, 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 our website at 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 these statements after the conclusion of this call.

Hosting this morning's discussion is Joseph J. MarcAurele, Chairman, President, and Chief Executive Officer, and David V. Devault, Senior Executive Vice President, Secretary, and Chief Financial Officer. Now I'm pleased to introduce Washington Trust's Chairman, President and CEO, Joseph MarcAurele.

Thanks. Good morning and thank you for joining us on today's call.

Yesterday afternoon, we released fourth-quarter and year-end 2011 earnings. This morning, I'll review some of the highlights, and then David will provide a more detailed overview of both the fourth quarter and the full year. We'll answer any questions you may have at the end of the call.

By all measures, Washington Trust had an outstanding fourth quarter and an exceptional year. We reported net income of $7.7 million, or $0.47 per fully diluted share, in the fourth quarter of 2011. These strong fourth-quarter results contributed to a full-year 2011 earnings of $29.7 million, or $1.82 per fully diluted share, up $0.33 from the prior year. This is the highest level of earnings in Washington Trust's 211 year history.

Key profitability measures were also strong, as return on average assets was 10.61% and return on -- excuse me, return on average equity was 10.61%, and return on average assets was 1.02%.

Our performance is especially significant considering that we are operating in a slow-growth economy. Because of this, our strategy was very clear. 2011 would be a year of discipline and hard work and capitalizing on opportunities. That's what we did. Let me explain.

On past calls, we've mentioned the continued disruption at some of our larger competitors. Over the years, we've built an experienced team of commercial lenders, many of whom we've recruited from some of those banks and joined with our existing lending staff.

Commercial loans demand was sluggish throughout the year. However, our commercial team made the calls and worked hard with potential clients. As a result, we not only had a strong fourth quarter, but total commercial loans were up 8% year-over-year.

Our commercial portfolio is made up of quality assets and is a mix of both commercial real estate and C&I loans, primarily in Rhode Island, Massachusetts, and Connecticut. Again, there wasn't a lot of loan demand out there, so I am pleased that we took advantage of the opportunities that came our way.

The continued low interest rate environment in our new home loan production office in Burlington also provided opportunities for us in the mortgage area. Entering this new market enabled us to take advantage of a strong refinance environment and further expand our Massachusetts mortgage presence. We originated a record number of mortgages in the fourth quarter of 2011, accounting for strong mortgage revenues for both the quarter and the year.

In December 2011, we opened a new home loan center in Glastonbury, Connecticut, in the greater Hartford area, with a team of experienced mortgage originators that we recruited. Next month, we will open a home loan center in Warwick, Rhode Island, which is centrally located within the state. This office will support our branch and mortgage operations that already exist in Rhode Island.

Our deposit story is also a good one, as total deposits reached a record $2.1 billion at year-end. More importantly, demand deposits increased 49% over 2010 levels, helping to improve our mix of lower-cost deposits. The increase in demand deposit accounts is a result of good business development efforts among the retail branches as well as our commercial lending and cash management staffs, which we have said before we've been investing in.

We had good success at attracting new depositors and increasing our market share in the state, including our East Providence, Rhode Island branch which opened in October 2011. Renovations are currently planned at the site of our third Cranston, Rhode Island branch, which is scheduled to open in (inaudible) in July of this year. This location allows us to reach more households and businesses in the greater Providence market, which is dominated by the larger banks. We have a great statewide brand, and we had success gaining market share from these in-state competitors who are continued de novo branching.

Our Wealth Management area continued to generate revenues for the Company. While assets under administration were relatively flat year-over-year, Wealth Management revenues did increase 7% over 2010. Wealth Management assets obviously are closely tied to the financial markets, and since 2011 was another up-and-down year in the markets, building and maintaining client relationships was critical. Our Wealth Management team continues to do a good job in this respect.

Now, I'd like to ask David Devault to provide more detail on our fourth-quarter financials. David?

Thank you Joe. Good morning everyone. Thank you for joining us on our call today. I'll review our fourth-quarter operating results and financial position as described in our press release yesterday afternoon.

Net income for the fourth quarter of 2011 was $7.8 million, or $0.47 per diluted share, compared to $7.6 million, or $0.46 per diluted share, for the third quarter, and up from $7.2 million or $0.44 per diluted share in the fourth quarter of 2010. The returns on average equity and average assets for the fourth quarter of 2011 were 10.89% and 1.04%.

Fourth-quarter 2011 net income included a net reduction of about $0.03 per diluted share resulting from specific transactions. A contribution was made to our charitable foundation in the form of an appreciated equity security holding, resulting in $990,000 of expense included in other non-interest expenses, and $331,000 in a realized gain on the security disposition. The combined effect was a net after-tax charge to earnings of $305,000, or about $0.02 per diluted share.

We also conducted a modest balance sheet management transaction in December. $4 million in mortgage-backed securities were sold and $4 million in Federal Home Loan Bank advances were prepaid, resulting in net realized gains of $142,000, and $473,000 of debt prepayment expense. The net after-tax charge to earnings associated with this transaction was $213,000, or about $0.01 per share.

For the full year, net income was $29.7 million, or $1.82 per share, compared to $24.1 million, or $1.49 per share, in 2010. Both the fourth-quarter and full-year 2011 net income levels were record amounts for us.

Net interest income in the fourth quarter of 2011 was up 2% on a linked-quarter basis, and up 9% from the fourth quarter of 2010, due to continued reduction in our funding costs, primarily Federal Home Loan Bank advances and time deposits. The net interest margin was 3.22% in the fourth quarter, unchanged from the third quarter and up 17 basis points from the fourth quarter a year earlier.

Non-interest income was $14.8 million in the fourth quarter of 2011, up $1.9 million on a linked-quarter basis and up $1.4 million from the fourth quarter a year earlier. The increases are largely due to growth in Mortgage Banking revenues. Mortgage Banking revenues, which consist of net gains on loan sales and commissions received on loans originated for others, increased by $1.9 million and $772,000 respectively compared to the third quarter of 2011 and the fourth quarter of 2010. This reflects a high volume of residential mortgage loan refinancing and sales activity in the fourth quarter. Revenue from this source was up 25% on a full-year basis.

The low interest rate environment has certainly spurred refinancing demand in recent months, but we are also seeing the benefit of our mortgage production expansion into Massachusetts and more recently in Connecticut. That said, we would not expect the volume to continue with the fourth-quarter pace in the near term.

Those of you who follow us certainly recognize that the Wealth Management business is a significant contributor to our earnings. Fourth-quarter 2011 Wealth Management revenues were up 2% on a linked-quarter basis, and up 1% from the same period a year earlier. Wealth Management assets under administration stood at $3.9 billion at the end of the fourth quarter, up 5% from the end of the third quarter.

Regarding non-interest expenses, excluding the effect of the charitable contribution and the debt prepayment penalties I mentioned earlier, the increase in non-interest expenses on a linked-quarter basis and in comparison to the fourth quarter of 2010 was primarily concentrated in salaries and benefits, reflecting higher staffing levels in Mortgage Banking, other select staffing additions, and higher amounts of commissions paid to mortgage originators.

The effective income tax rate in the fourth quarter of 2011 was 29.7%, which brought the full-year 2011 effective rate to 30.3%. We currently expect the effective tax rate will be approximately 31.1% in 2012.

Total assets surpassed $3 billion for the first time in the fourth quarter and stood at $3.064 billion at the end of December. Asset growth in the quarter was led by a $59 million, or 3%, go-ahead in total loans. The Commercial portfolio in particular reported a solid increase of $54 million or 5% in the quarter. For the full year, total loans were up $152 million, including a 9.5% increase in the Commercial portfolio, and an 8.6% increase in the Residential portfolio.

As Joe mentioned, we also saw very respectable deposit growth in the fourth quarter. Deposits were up 2% from the end of the third quarter and over half of that increase was in the demand deposit category. For the full-year 2011, deposits were up $90 million, or 4%, including a $111 million, or 49%, increase in demand deposits. Total deposits stand at $2.1 billion at the end of 2011.

Equally important is the progress we've made in changing the mix in deposits. Total demand and NOW accounts combined make up 28% of total deposits at the end of 2011, up from 23% a year earlier.

Regarding asset quality, nonperforming assets, which we define as nonaccrual loans, nonaccrual investment securities, and properties acquired through foreclosure or repossession, amounted to $24.8 million or 0.81% of total assets at the end of the most recent quarter, up from 0.8 -- excuse me, up from $24.6 million or 0.83% of total assets at the end of the third quarter, and $23 million or 0.79% of total assets at the end of 2010.

Total loan delinquencies 30 days or more past due rose by $4.3 million in the latest quarter, including an increase of $2.7 million in past-due commercial loans and $1.6 million in residential loans. The largest increase was a single commercial loan of $1.7 million.

Net charge-offs amounted to $839,000 compared to $712,000 in the third quarter and $1.1 million in the fourth quarter a year earlier. Net charge-offs as a percentage of average loans was only 0.17% for the full year 2011. This has been noticeably below regional and national peer levels throughout this economic cycle.

Our loan loss provision charge to earnings was $1 million in the fourth quarter, unchanged from the third quarter and down $500,000 from the fourth quarter a year earlier. We believe our allowance for loan losses remains very adequate at 1.39% of total loans and a coverage level equal to 140% of nonaccrual loans.

The Corporation and the Subsidiary Bank continue to remain well-capitalized. Our estimated total risk-based capital ratio for the Corporation was 12.86% at the end of December, up 7 basis points from a year earlier.

Total shareholders equity was $281 million at the end of December, down $4 million in the quarter and up $12 million from the year earlier. A charge of $7 million to the accumulated other comprehensive income component of shareholders equity was recorded at the end of the fourth quarter in connection with the annual remeasurement of defined benefit pension liabilities. This charge was largely due to a decline in discount rates used to measure the present value of pension liabilities as a result of a reduction in market rates of interest since the previous annual remeasurement at the end of 2010.

Finally, in December, we declared a quarterly dividend of $0.22 per share which was paid on January 13.

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

Thank you David.

2011 was a very successful year for the Company. However, it did take a great deal of discipline, hard work, and seizing opportunities. We did this, I believe, without taking unnecessary risk. I believe 2012 will be much of the same for several reasons. There is continued uncertainty in both the economy and the financial markets. The Fed obviously is committed to keeping interest rates low through 2013, and we still believe that some of our competitors are a bit distracted and we are hoping to continue to be able to take advantage of that.

Going forward, I can assure you that Washington Trust will continue to provide the best financial products and the highest level of service to our customers. This is really who we are and it's what we do. We believe it makes Washington Trust the leader in the communities we serve and what has earned us the reputation as Rhode Island's bank of choice. We will continue to try to capitalize on that.

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

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

Good morning. I was wondering if you could, David, if you could talk a little bit about the small -- it looked like you had a small structuring in the quarter. How much yield did that help you pick up?

It's modest at $4 million. I don't think it's really going to stand out. It's the kind of thing you should do. It is beneficial to net interest income on a go-forward basis. But it's pretty modest.

The margin itself at 3.22%, obviously unchanged from the third quarter, is -- was certainly facing some headwinds in terms of low market -- low rates of interest, a yield curve that's not all that friendly. So it's -- I think to maintain it at 3.22% was -- is something that is acceptable, given the current environment, and we have seen a number of banks reporting declines in the margin on a linked-quarter basis.

The growth in Commercial, can you sort of give us an estimate of where the loans are coming on at in terms of yield?

I'm not sure what -- talk about what's coming on. They're coming on at rates that are competitive at spreads that are wider than they were several years ago, maybe not as wide as a year ago, but these are excellent quality assets. There was some good growth certainly as you noted in the Commercial Real Estate portfolio, and the quality that we are seeing in these credits is very good.

If I might comment on the loan growth, particularly in the fourth quarter, and why it was so much better in the fourth quarter than it had been previously, I think it is really a function of the fact that Commercial Banking and Commercial Real Estate Banking has a relatively long sales cycle. We recognized, even going back more than a year ago, that we had to keep up a very robust calling effort. We could see in the third quarter the beginning of a pipeline momentum build. We were able to bring a lot of that to close in the fourth quarter, but it really was more a result of a long-term effort to consistently call on borrowers that we felt we wanted to do business with in markets that we thought were more robust maybe than some of the other markets.

Okay, but the loans coming on, do they sort of, in terms of compared to the loans that are coming off, it's just sort of net-net in terms of yield? You are not picking up much or not losing much? Is that sort of the idea?

That's a pretty fair statement.

Yes.

Then I just wanted to -- just one other question, just switching gears to Mortgage Banking. I'm just wondering if you have any thoughts, Joe, of where you -- how much the ramp-up is due to the refi boom and how much is you ramping up the business? If we can get a sense of where this might end up, say, in a quarter were two, where these revenues could end up?

I don't think, Frank, that I could predict exactly where they would end up. I will tell you a brief explanation of the strategy that we developed around Mortgage Banking. I think that what we really saw was an opportunity to recruit successful originators in markets that we would not typically be able to get them from. I think we were able to get them because we deliver a better service quality proposition than the places that they had previously worked at. We also saw markets like Burlington and Glastonbury as being markets that are stronger purchase markets than the markets that we are currently in, primarily Rhode Island.

So our feeling for why we wanted to do that was that we felt we could get people who could produce; that ended up happening. We do believe that a purchase market will come back faster in particularly the Boston market and in the Connecticut market.

All that being said, we did more refinance this year than we did purchase. So that will be a challenge going forward and will be highly dependent on how the residential markets react as we go forward, but we do believe that the new markets we are in will be a better purchase market going forward.

I'm just wondering. Looking at refi activity, if -- when refi activity loses steam, if it loses steam here, do you have to pull back in some way? Are there going to be significant fixed costs that you are still basically stuck in, or are you able to pull back? I'm just wondering what happens when activity starts to slow.

There's a modest amount of fixed costs associated with these loan production offices. The most significant expense component is the commissions and pay to originators. That is highly variable with volume. So, if refinancing activity slows down, then you would see both a reduction in the revenues but also the expense side.

I would point out that, of the two Massachusetts loan production offices, one is only a year old, one is about two years old. I don't think particularly the one that is the more recent one is really up to speed and has reached its full potential by any means at this point. The most recent office in Connecticut only opened in the fourth quarter, so it really has not reached anywhere near its potential. So, you'll have the offset of more coming from new market areas to any decline that you would see or the decline that you would see from lower refinancing activity in general.

I think, Frank, the explanation too for cost there is when we look strategically at things we could do to grow the Company, one of the attractions to the mortgage business is the elastic cost associated with the business if the market goes away from you. So, as David said, that certainly was one of the drivers and one of the considerations that we felt made the expense associated with that a little more low-risk than other things you might invest in.

Okay, thanks.

Laurie Hunsicker, Stifel Nicolaus.

Good morning. I just wanted follow-up actually on Frank's question with that LPOs. Where do you stand as far as potentially turning those into full-service branches, or is that just not going to happen?

I think there is a difference between a loan production office and a traditional branch. I think we are not at a place right now where our retail brand would play in a market like the Boston market or the Hartford market. I think it would be a very big investment spend on branding to make that work. So, I would say that, right now, the mortgage business does not appear to be highly dependent on our brand. We have been able to recruit people based on our service delivery, so I think that, right now, that is where we would see the opportunity. Now, it does give you insight into those markets and quite frankly, from my prior experience, the Connecticut market is one that I understand well, but I would say that we are a ways away from considering that.

Okay. Certainly, we are looking at a picture of your Glastonbury loan production office, and it's huge.

It's a small office in a huge building, Laurie, with (multiple speakers).

Is it? Okay, okay. I looked at it; it looked like a campus. I thought oh my goodness.

We did not invest in a campus in Glastonbury, as attractive as that might've been.

Okay. I guess sort of a broader question to that point then is where do you stand on de novo branches? Maybe you could give us an update -- and I realize it's brand-new -- but where you are in East Providence and then where you would be in terms of doing de novo branching potentially in the North Boston area where you've got your LPOs or in the Connecticut marketplace, and then anywhere you (multiple speakers) -- yes, go ahead.

I think we have to be very frank. I think we are a ways away from de novo branching in markets outside of Rhode Island. I would say it's safe to say that we are comfortably ahead of our projections in East Providence. We feel very good about the new Cranston branch. I think we have a ways to go, and I think, over time, we may be able to be slightly more aggressive in branching in Rhode Island. Again, I think our brand plays very well state-wide. There are other areas we would like to get into, but they will be natural extensions of the markets that we are already in.

Okay. Do you have a deposit figure on your Providence branch?

East Providence --

It's in the $14 million range currently.

Did anything transfer over there, or that's $14 million?

That's all new.

That's all new. That's great. That's through today or through December 31?

It's a current number.

Okay, fantastic. Great. Then just to your charitable charge, obviously you had the gain but it was more this quarter than it's been in past years. I guess past years it's run $300,000, $400,000. Do you have any guidance on what we could expect going forward? Is $1 million closer to where you would, or would you potentially see yourself back at that $300,000, 400,000 mark?

That is larger than we have done in the past. We had the opportunity to do that with that appreciated equity security. There's a tax advantage to donating that as well. I don't see us doing anything of that magnitude in 2012.

Okay, so maybe closer to $300,000, $400,000, or --?

Yes, if that, yes.

Okay. Then just one last thing. Could you touch on your thoughts on the trust preferred? Linked-quarter, the unrealized loss went up sharply in that, that $30.5 million you have linked-quarter, the unrealized loss went from $5 million to $8 million. Just sort of what your plans are with it?

Give me a moment to look at some detail on that.

Sure. If you want to take someone else's question and come back to that at some point later.

Sure.

Okay. Then just one last thing. Obviously, you've got one of the stronger stock currencies here in New England. Can you just update us on your thoughts on potentially making a whole bank acquisition and how you're looking at that?

I think it's the same as it's been in previous conversations. I think it's opportunistic at the right price. In my mind, it would have to be something that we could get synergies out of, and also would have to be something we thought we could grow if we bought it. So, I would say that we are always open, we are constantly looking, but it would have to be the right thing. We would be very, very disciplined about the decision.

Okay. Then one last thing as it pertains to de novo branching in Rhode Island, just given that your Providence branch is going well, how many de novo branches would you potentially see yourself opening per year? Are we still sort of at maybe a 2 to 3 run rate, or has that changed?

Actually, I don't think we're at a 2 to 3 run rate this year yet.

Okay.

I think we are at a 1. Then as we get -- it's easier to open two or three when you have 25 or 26 versus the 19 that we have currently.

That's perfect. Great color. Thank you.

Damon DelMonte, KBW.

Good morning guys. I guess my first question is probably for David. Could you talk a little bit -- and I apologize if you may have touched on this in your comments, but can you talk a little bit about maybe some of the additional levers you have to pull for your margin in order to kind of preserve it at this level, or maybe provide a little color around how you see that shaping up in the upcoming quarters?

I think, given that new assets are certainly coming on at rates that are not outstanding, and there is really no play in the securities portfolio that would be truly margin enhancing without a great deal of risk, we are going to have to be very disciplined in pricing, both on the loan side as well as on the deposit side. So far, we have been very thorough and committed to doing that.

The other thing that I think is serving us well, this will be something that is going to have to pay off over a long term, is continuing to improve the mix of deposits. You can see, both on a year and quarterly basis, the progress that we've made in building demand deposits in particular, which is really the result in large part of some very successful business development efforts to cultivate business banking relationships, cash management relationships.

Do you have some CDs maybe that are repricing in the upcoming quarters that will help to mitigate the pressure?

There is some of that, certainly, but the volume of that has certainly -- the amount of potential saved from that is declining as we continue to go through this low interest rate environment.

So then it's reasonable to expect a modest amount of pressure at least for the upcoming couple of quarters?

Yes. I think, where it is right now, we would be happy keeping it around this level certainly in the near term.

Okay, fair enough. I guess, Joe, kind of touching on questions that have already been asked about your expansion plans for outside of Rhode Island, I've seen, through press releases, you guys have made some loans here in Connecticut. It seems like you're getting some good traction here. So what would be a reason for not moving forward with putting branches in Connecticut and lenders on the ground here if you are already getting traction so far and you don't really have a meaningful presence yet?

I would say that the reason for not opening branches in Connecticut is everything about the brand maybe not having the kind of traction that I would be happy with. If we just put a stake in the ground, for example, in the greater Hartford area, I would not rule out hiring additional commercial lenders who would be totally directed at markets other than Rhode Island, but those would be markets that we would know very well or I personally would know well, and Connecticut would be one of them.

Right now, we are very effectively penetrating the Connecticut market with Connecticut lenders who happen to be housed in our Westerly headquarters. I mean we are right on the Connecticut border. So, we did hire a couple of people during the last couple of years who are essentially Connecticut Commercial Real Estate lenders, and they have been effective in penetrating that market even though they actually physically reside in Westerly.

Okay, that's good to know.

That's doesn't mean we wouldn't consider doing that and putting a LPO somewhere, but that's not directly in the plan today.

That's helpful. Thank you. Then I guess my last question, when we were on the call last quarter, and now we are on a call this quarter, how has your outlook for 2012 changed? Would you say that today it is incrementally better, worse, or kind of the same?

I think it is very slightly better. I think we are -- most of the economic indicators are not significantly different than they were last quarter. So for us to continue to be successful and hold our own, I think we have to do exactly what we have been doing during this year. I think it's going to be a lot of hard work. We have to take an opportunity to take market share from others in an economy that, quite frankly, is expanding very, very little.

That's helpful. Thank you very much for the color.

(Operator Instructions). Laurie Hunsicker, Stifel Nicolaus.

Just to follow up on Damon's question --

It's hard to hear you when you are on mute.

I know, right? Just to follow up on Damon's question, if you guys were going to go into Connecticut in a meaningful way, which areas would be your top preference?

If you think about where the deposits are in Connecticut, they are really in the greater Hartford area. But I would say that I am most familiar with a lot of the markets, and obviously Fairfield County is attractive. I think other markets are more rural and would be a harder pull, so I think, if you were to get into those markets, the greater Hartford area/Fairfield County represent the most growth areas.

They are also highly banked and --

Right, and very expensive from a real estate perspective, particularly Fairfield County.

Right. But certainly you know the Connecticut market.

I do.

Okay. Great. Thank you. Any other color on the trust preferred or should I just follow up with you off-line?

You can certainly follow-up with me off-line. We are not seeing that big a change in the fair value on a linked-quarter basis. So there is maybe a couple million dollar at most change in the unrealized loss through the end of the third quarter. Again, we've taken OTTI charges certainly on the pool trust preferred securities, but there was none in the fourth quarter, which we were pleased to see, which represents I think a stabilization of the components of those pools and the individual issuer holdings in that portfolio are stable and we are not seeing any impairment charges coming out of that portfolio. They are in much better condition than they were in years past.

Sure. Okay. Great. Thanks.

At this time, I'm showing no further questions. I would like to turn the conference back over to Joe MarcAurele for any closing remarks.

Once again, I'd like to thank everyone for participating on today's call and your continued interest in Washington Trust. We do look forward to updating you on our Company's progress during the year, so I close out by thanking you, and we will see you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.