Washington Trust Bancorp Inc (WASH) 2013 Q4 法說會逐字稿

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

Thank you for joining us on today's call for fourth quarter and full-year 2013 earnings. Washington Trust trades on NASDAQ's Global Select Market under the symbol WASH. Today's conference call is being recorded and a replay of the call will be made available through the Corporation's website at washtrustbancorp.com after the conclusion of the call.

A reminder that the information provided during today's call is accurate only as of this date and you should not rely on these statements after the conclusion of the call. Hosting this morning's discussion is Joseph J. MarcAurele, Chairman and Chief Executive Officer, and David V. Devault, Vice Chairman, Secretary and Chief Financial Officer. Also joining us on today's call is Edward O. Handy, III, President and Chief Operating Officer. I'm pleased to introduce Washington Trust's Chairman and CEO, Joseph J. MarcAurele. Joe?

Thank you, Beth, and good morning and thank you for joining us on today's conference call. This morning, David and I will review Washington Trust's performance for fourth quarter and full-year 2013. Ned, David and I will answer any questions you have about 2013 or the year ahead after -- at the end of the call.

I am pleased to report that the momentum we generated earlier in 2013 continued through the remainder of the year, as we earned $9.8 million or $0.58 per fully diluted share for the fourth quarter. This strong fourth quarter performance contributed to full-year 2013 net income of $36.2 million or $2.16 per diluted share, and are the highest earnings in the Company's history.

Our key profitability measures, capital measures, and asset quality ratios were strong, reaffirming our position as one of the top-performing financial institutions in our region. Our record results and solid performance are a testament to our business model and our diversified earnings stream. We continued to grow the Company during challenging economic times and compete head-to-head with our larger competitors by offering a comprehensive line of financial products, backed by local and personal service. Great products and outstanding service have continued to prove to be a win-win proposition.

We had good growth over most key business lines in the fourth quarter, helping us reach a record level of total loans, total deposits and wealth management assets under administration. Total loans reached $2.4 billion at year-end. A healthy third-quarter commercial loan pipeline contributed to a strong fourth quarter level of closings. A good portion of this growth, again, came at the expense of our larger competitors.

Mortgage origination production was down both in the fourth quarter of 2013 and year-over-year, but we continued to generate respectable levels of production, particularly in the newer markets we have entered in recent years. During the fourth quarter of 2013 we opened a mortgage production office in Stamford, Connecticut, enabling us to service the Fairfield County, Connecticut, market, one that we feel will be good for us. We also recently opened a mortgage production office in Braintree, Massachusetts. It's our third mortgage facility in the greater Boston area; again, a good market.

Deposit growth continued steady into the fourth quarter with total deposits reaching an all-time high of $2.5 billion at year-end. Demand deposits were up an impressive 16% from the end of 2012, primarily due to new commercial and cash management relationships. Our plans to generate future deposit growth include the opening of a new Johnston, Rhode Island, branch. That is scheduled to open early in the second quarter.

Our wealth management area had a solid fourth quarter and year, posting annual revenues of nearly $32 million, and reaching $4.78 billion in assets under management. Over the past year, the wealth management team has had good success in developing new client relationships, particularly by working closely with attorneys and accountants, as well as other Washington Trust business partners.

Now, I am pleased to introduce Ned Handy, who joined Washington Trust in November of 2013 as President and Chief Operating Officer. Ned served as Citizen's President of Rhode Island and Connecticut, and is very well known and respected in those states and throughout New England.

He's made an immediate impact and his presence at Washington Trust has been significant. He has already accompanied business development officers on prospect and client calls and met really all of the employees of the Company. So I'd like to turn the call over to Ned right now. Ned?

Thanks, Joe. It's a pleasure to be here. As Joe mentioned, I've spent the last couple of months on the road meeting Washington Trust employees at our retail branches and our mortgage offices and spending time with our commercial bankers. And have met several of our customers and even spent some time with members of the investment community. And I knew Washington Trust had a great story that I saw from the outside in, but with each visit I've become more and more aware of just how special this company is.

Washington Trust has a strong financial foundation and an amazing history, but more than that, what I found is that the people genuinely care about their customers, they care about their fellow employees, they care a lot about the communities in which we work. And that's what community banking is all about, and so I couldn't be more excited to be a part of this outstanding organization.

I look forward very much to working with Joe and David and the rest of the Washington Trust team to help keep the momentum going. So, at this point, I'd like to turn it over to David for his financial review of the quarter and the year, and happy to help answer questions at the end. David?

Thanks, Ned. Good morning, everyone, and thanks for joining us on our call today. I'll review the fourth quarter 2013 operating results and financial position, as described in our press release yesterday afternoon.

Net income was $9.8 million with diluted earnings per share of $0.58 for the fourth quarter. This compares to third-quarter net income of $10 million or $0.59, and fourth quarter 2012 net income of $9 million or $0.55 per share. Highlights for the latest quarter include an increase in loans of $109 million, or 5%, with the largest increase in the commercial loan category. Loans amount to $2.46 billion at December 31, up 7.4% during the year.

Deposits rose by $50 million in the quarter or 2%, reaching $2.5 billion. Total deposits are up 8% in the last 12 months. Wealth management assets under administration increased by 4% in the quarter and now stand at $4.78 billion at December 31.

The fourth quarter net interest income was $23.5 million, up modestly on a linked quarter basis. The net interest margin for the fourth quarter was 3.24% compared to a linked quarter result of 3.29%. The yield on interest-earning assets declined by 10 basis points on a linked quarter basis, largely due to lower yields on commercial loans. Meanwhile, the cost of funds improved by 4 basis points.

Non-interest income was $15 million in the fourth quarter and continues to contribute significantly to our profitability. Included in non-interest income in the fourth quarter was an other-than-temporary impairment charge of $717,000 on a trust preferred collateralized debt obligation security. That security was sold in January with a realized loss equal to the impairment charge. We have no other security holdings in the trust preferred CDO category.

In our wealth management business revenues were $8.8 million in the fourth quarter, an increase of 16% on a linked quarter basis. This included a 5% increase in asset-based revenues, totaling $7.7 million in the quarter, and an increase of $805,000 in transaction-based revenues, which totaled $1.1 million. The increase was primarily due to an above average level of insurance commission income. Transaction-based revenues of this nature was about $700,000 higher than the average amount recognize for each of the three previous quarters in 2013.

Wealth management assets stand at $4.78 billion at the end of the year following a 4% linked quarter increase and a 14% increase in the last 12 months. Net gains on loan sales and commissions received on loans originated for others declined by $1.4 million, or 47%, on a linked quarter basis. I'm excluding the $977,000 gain related to a sale of a group of loans from portfolio in the third quarter in this comparison. These results are primarily due to a decline in refinancing activity due to higher mortgage interest rates. Residential mortgage loans sold into the secondary market declined from $114 million in the third quarter to $66 million in the fourth quarter.

Meanwhile, net gains an interest rate swap contracts totaled $726,000 in the fourth quarter, up by $672,000 from the previous quarter, and this increase was largely due to an above average level of customer-related interest swap transactions in the quarter. The amount of the gains in the fourth quarter were about $650,000 higher than the average in each of the first three quarters of 2013.

Also in the fourth quarter, merchant processing fee revenue was down by $1.1 million on a linked quarter basis. This is a typically seasonal trend and correlates with the corresponding linked quarter decline in merchant processing expenses.

Speaking of non-interest expenses, total non-interest expenses in the fourth quarter were $24 million, down $1.5 million from the third quarter. Looking at the linked quarter comparison, we see that the third quarter included debt prepayment penalties of $1.1 million. There were no expenses in that category in the fourth quarter. We also had a $400,000 expense in the fourth quarter for a contribution to our charitable foundation. There was no such expense in the third quarter.

Excluding these items, non-interest expenses for the fourth quarter were down about $755,000 from the previous quarter. Salaries and employee benefits were down $212,000, or about 1%. The largest reason was the modification to our defined-benefit pension plans that we had previously disclosed at the end of the third quarter. Correlating to the linked quarter decline in merchant processing fees I mentioned a few moments ago, linked quarter merchant processing expenses were down by $926,000, also a 32% change.

On the balance sheet, we're pleased to note that total loans were up 5% in the quarter. Commercial loans were up 5%, or $65 million, with growth in both the commercial real estate and C&I portfolios. In addition, residential loans were up 6% and the total loan portfolio is $2.46 billion at the end of the year, up 7% from the end of 2012. Deposit growth also continued, with an increase of 2% in the quarter. We were pleased with the increase in the category of demand in NOW account deposits, which were up 4% in the latest quarter. Total demand in NOW deposits represent 30% of total deposits, up from 23% of total deposits just three years earlier. So, we have made good progress in growing that low-cost component of our deposit base.

Deposit growth for the full year was 8%. Looking at asset quality, we saw improvement in a number of important credit metrics in the quarter. Nonperforming loans declined to $18.3 million, now stand at 0.74% of total loans, down from 0.83% at the end of the third quarter. Total loan delinquencies also declined, ending the quarter at just under $22 million or 0.89% of total loans, down from 1.02% in the third quarter. Net charge-offs were $522,000 in the quarter compared to $576,000 in the third quarter.

As a result of the continuing trend of asset quality improvement, the loan-loss provision charge to earnings was $400,000 in the fourth quarter compared to $700,000 in the third quarter. Total shareholders' equity for the Corporation is $330 million at December 31, an increase of $6 million in the quarter.

The Corporation and our subsidiary bank continue to remain well-capitalized. Total risk-based capital ratio for the Corporation is 13.29% at the end of December, up 3 basis points from the end of 2012. In December, we declared a quarterly dividend of $0.27 per share paid on January 10. This was a $0.01 increase in the dividend rate, and it represented the third quarterly increase in our dividend during 2013.

And at this time I will turn our call back to our Chairman and CEO, Joe MarcAurele.

Thank you, David. Washington Trust had another solid year in 2013. We plan on keeping the momentum going this year. As I mentioned earlier in the call, our success is due to our core business model. We continue to believe that the markets we operate in will provide us with the opportunity for more organic growth as we go forward. Given that, we will continue to focus on the same key strategies that we will continue to use to help us grow our Company while enhancing shareholder value.

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

(Operator Instructions). Damon DelMonte, KBW.

My first question, just talking about your last comment about you believe there is continued -- or good organic growth opportunities for you guys. I guess, first, what aspects of the loan portfolio do you feel offer the greatest opportunity for one? And for two, how do you look at the overall growth of the portfolio from full year to full year?

David, I think we can continue to do what we have done over the last few years, which is medium- to high-single-digit commercial loan growth. We do feel that with some of the hires that we have made in commercial banking and our addition of a new President and COO, who is a commercial banker by training, that we are hoping to also make further inroads into the C&I books of business in the markets that we operate in, primarily Rhode Island and Connecticut.

Okay. And then the increase this quarter on the residential mortgages, correct me if I'm wrong, but that's just a function of it being more attractive to hold the residential mortgage versus trying to sell it, given the compressed gain on sale? Is that correct?

Yes. It's not so much the compressed margin for the gain on sale, but it is an opportunity, given what's happened in the rate environment, for us to hold what are more attractive ARM products on our balance sheet. And our overall production -- while the fees have gone down, our overall production has gone down less, so that is one of the contributing factors to some of the residential growth that we put on the balance sheet this quarter.

Okay. And then as far as your outlook for mortgage banking in general, a pretty sizable quarterly decrease in your revenues. Do you see that rebounding? Or do you think that's going to continue to trend lower?

I think right now it's difficult to totally predict that. Again, as I have said on other calls, one of the reasons why we feel reasonably good about the mortgage business is we have entered some markets that we think are attractive to us. But right now it's probably reasonable to think that the gain volumes that we saw in the fourth quarter will be closer to what we could expect.

Okay. And then my last question, and that I will go back in the queue. David, on the margin outlook, how are you -- how do you feel about the margin going into 2014? Do you feel you have reached an inflection point? Or do think there will be additional pressures?

I think there will be some continued pressure with repricing downward on balance in the loan portfolio and, to a certain extent, in the securities portfolio as well. So, that will depend on the pack of rates, and if longer-term rates continue to get better and if we get a boost in short-term rates, then it would change dramatically. But right now -- for the good I would say. But right now we would say that there would be continued pressure in the near-term.

Okay. That's all that I had for now. Thanks.

Mark Fitzgibbon, Sandler O'Neill & Partners.

Just a follow-up on that last question, first off. So, David, I'm curious -- assuming rates hold here, when do you think the margin compression begins to subside? When will all that repricing, do you think, have funneled through the balance sheet?

It could be several more quarters of modest decline in net margin. Our goal is to manage that as effectively as we can through prudent pricing and, obviously, growth will help to offset the impact of that as well.

Okay. And then, separately, on the wealth management business I noticed that it looked like you guys did some restatement within that. Could you just explain what happened there?

I'm not sure -- there was no restatement that we intended to communicate, so I'm not sure what you're looking at there, Mark.

Okay, I'll circle back.

Mark, are you talking about the fact that we had a fairly high level of transaction-based fees in insurance, for example?

Yes, exactly.

Yes, it is part of our business, but we would say that our ability to generate really the very significant amount of insurance-based commission fee income was a little bit chunky and somewhat unusual, high for the good, in the fourth quarter.

Okay. And then, also, I noticed you have that fairly large charitable donation in the quarter. Was that one item, or a whole group of different items?

Well, we manage that periodically with a contribution to our charitable foundation. And then that usually is the annual expense for us, and then it makes contributions to the community throughout the year.

Great, thank you.

(Operator Instructions). Taylor Brodarick, Guggenheim Securities.

First question on wealth management, I know you broke down the fees by asset base and transaction, but per your commentary about working with accountants and attorneys, how much of growth is being driven by new relationships, and how much by increasing product spreads?

Well, we certainly work very hard at improving and developing those relationships to continue to serve as a source of new business. We are doing everything we can and plan to do more of that in the future. At the same time, there is a -- just part of the business is that people do use their funds and withdraw their assets, so it's an ongoing, steady effort to continue to develop business.

Great. Let's switch over to asset quality. It looked like on the other commercial loans your 30 to 59 past due had a nice drop on a linked quarter basis, and didn't look like it was migrating into 60 to 90. Am I missing anything? Or is there any interesting data points around those migrations or inflows?

Well, it's a good point. We would say that it has been our observation that the frequency and amount of loans that have been moving into nonperforming status has definitely been -- has declined substantially and noticeably in the last three consecutive quarters. There is always noise within those delinquency statistics, but in my mind, what they are telling us is that the formation of nonperforming loans has really slowed down tremendously.

Okay, one more for me. I guess, David, could you remind me CD schedule, maturity schedule for 2014, what that is, and if there is any lumps in any quarter where we should look for some more CoF leverage?

There is some modest improvement to -- or gain or beneficial impact of CD rollover in the next couple of quarters. It's a little bit more significant towards the second half of the year, but it is -- I wouldn't say it was extreme. And, obviously, that will depend on what rates are at that time.

All right. Thank you very much. Appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to Joseph MarcAurele for any (multiple speakers).

Thank you very much. Well, I just wanted to thank everyone for your continued interest in our Company. We appreciate all of your interest in us, and if anyone has any follow-on questions you should feel very comfortable in calling management, and we will try to help you. But thank you, and we will talk to you again next quarter.

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