Washington Trust Bancorp Inc (WASH) 2015 Q4 法說會逐字稿

Good morning and welcome to Washington Trust Bancorp's conference call. My name is Manny and I will be your operator for today. (Operator Instructions). Today's call is being recorded.

And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President Marketing and Investor Relations. Ms. Eckel.

Thanks, Manny. Good morning and welcome to Washington Trust Bancorp Inc.'s fourth-quarter and year-end 2015 conference call. This morning's call will be hosted by Washington Trust executives Joseph MarcAurele, Chairman and Chief Executive Officer; Ned Handy, President and Chief Operating Officer; and David Devault, Vice Chair, Secretary and Chief Financial Officer.

Please note today's presentation may include forward-looking statements, and actual results could materially differ from those statements. Our complete Safe Harbor statement, including a discussion of related factors, appears as part of our earnings press release and is also contained within our quarterly and annual reports that are submitted to the SEC. All of these materials are available on our investor relations website at washtrustbancorp.com.

Washington Trust trades on NASDAQ's OMX market under the symbol WASH.

I'm now pleased to turn the call over to Washington Trust Chairman and CEO, Joseph MarcAurele.

Thank you, Beth, and good morning, and thank you all for joining us on today's conference call. This morning I will provide an overview of our 2015 performance. David will review the Company's financial results. At the end of our prepared remarks, David, Ned and I will answer any questions you may have about 2015 or for the year ahead.

I am pleased to report that Washington Trust marked its 215th year of service on a positive note, as fourth-quarter results led to all-time record earnings of $43.5 million or $2.54 per diluted share. Our asset quality measures remain sound and our capital levels continued to exceed regulatory requirements.

Washington Trust 2015 performance reflects our ability to achieve continued growth and profitability in a challenging and competitive environment. Our success is attributable to our team's shared vision and commitment to providing excellent solutions and service to our customers. It's also a result of our continued discipline regarding pricing and expense management.

In a moment, David will provide a detailed analysis of our financial results, but I'd first like to discuss some of the year's highlights. Washington Trust had very good deposit growth in 2015, as total deposits reached an all-time high at December 31. The largest increases were in low-cost demand deposits and NOW accounts.

In recent years, we've had success in attracting new deposits by opening new branches, improving our cash management offerings, and growing our institutional and municipal deposit base. The results of our branch expansion are evident. Between 2010 and 2015, we opened five new branches, and our Rhode Island deposit market share doubled from 4.72% in 2010 to 9.58% at June 30, 2015. This is according to FDIC reports.

Two months ago we opened our 21st branch located on the east side of Providence in Rhode Island. We feel good about this location and expect it to perform well. We continue to be pleased with our ability to attract low-cost deposits in an extremely competitive market. In 2015, we had solid loan growth as total loans surpassed $3 billion for the first time in our Company's history. The largest increase was in our commercial portfolio led by commercial real estate.

What's important to note is that we had a substantial number of commercial real estate payoffs in 2015, but were still able to build and sustain a healthy pipeline throughout the year. We had strong fourth-quarter closings and ended up and ahead for the year.

We believe competitive and pricing pressures will continue into 2016, but we are confident in our ability to continue to attract quality commercial relationships in our market area.

At December 31, 2015, total residential mortgage balances amounted to $1 billion. Mortgage banking has been a steady contributor to noninterest income, and 2015 was no exception. We had very strong mortgage production in Massachusetts, illustrating the success of our mortgage banking expansion strategy. We expect the momentum we have built in the Southern New England marketplace to continue into 2016.

Wealth management revenues in 2015 amounted to $35 million, another record amount for the Company. The wealth management division ended the year with $5.8 billion in assets under administration, up from 2014 levels. Wealth management results also benefited from our third-quarter acquisition of Halsey Associates, an SEC registered investment advisor headquartered in New Haven, Connecticut.

The Halsey acquisition provided us with a nice base of high net worth clients in the Connecticut, New York area, and has helped us establish and build our relationships with referral sources, prospects and clients in the region.

In December we hired Kathleen Ryan, Esquire to head our client services team and trust and estate planning group. Kathy is an attorney with more than 25 years of trust and estate experience, and served as a partner at one of the region's most prestigious law firms. She is well respected in the legal community and will play a key role in our wealth management division's future growth.

During the year we invested in new technology and rebranded our wealth management division, introducing a new website, www.washtrustwealth.com, in November. We will soon add enhanced client portals and redesigned statements to improve the online wealth management client experience.

I will now ask David Devault to take a few minutes to review our financial results. David.

Thank you, Joe. Good morning, everyone, and thanks for joining us on our call today. I will review our fourth-quarter 2015 operating results and financial position as described in our press release yesterday afternoon.

Net income amounted to $10.7 million or $0.62 per diluted share for the fourth quarter. That represented a 5% increase in net income and a $0.02 per diluted share increase in the third quarter of 2015. For the full year 2015, net income was $43.5 million or $2.54 per diluted share, and that was up 6% from the earnings in 2014, and up $0.13 per share over 2014.

The profitability results for the latest quarter continue to be very good, with a return on equity of 11.52% and return on assets of 1.16%. The full-year return on equity for 2015 was 12% and the return on assets was 1.19%, and both of those compared well with 2014 also.

Total net interest income in the fourth quarter was $26.3 million, up $258,000 or about 1% from the third quarter. The increase in net income was helped by a 1 basis point increase in the net interest margin on a linked-quarter basis. The net interest margin was 3.08%, and it benefited from a lower cost of interest-bearing funds which was reduced by 5 basis points from the third-quarter level.

The margin was also helped by balance sheet growth, and we saw an increase in both average loans and investment securities in the quarter.

On the balance sheet, total loans stand at $3 billion at the end of 2015, up 2.1% in the latest quarter and 5.4% in the last 12 months. These increases were led by growth in the commercial portfolio, which was up 4.7% in the quarter and almost 8% for the full year 2015.

Commercial real estate loans, which includes commercial construction, grew by $59 million in the fourth quarter and C&I loans increased by $16 million. It was a modest decrease in the residential portfolio of about 1% during the quarter, although residential loans are up about 3% from the year-earlier balance. And consumer loans were essentially unchanged in the latest quarter and are up about 2% for the full year.

The investment securities portfolio stands at $395 million at the end of December, up $50 million in the quarter which reflects purchases of government agency and mortgage-backed securities, which were partially offset by calls and routine principal paydowns on mortgage-backed securities. The increase was primarily for liquidity management and collateralization purposes.

Total deposits rose by 3.5% in the fourth quarter and are up 6.5% for the full year, and total deposits stand at $2.9 billion. If you exclude wholesale brokered time deposits, the remaining balance of in-market deposits was up 2.5% quarter and up over 7% for the full year.

We experienced significant growth in demand in NOW accounts, which rose by nearly 9% on a linked-quarter basis and 21% for the full year.

We reduced our Federal Home Loan Bank Borrowing position by about $3 million in the quarter and $27 million for the full year.

Noninterest income continues to represent a significant portion of our total revenues, at 37% of total revenues in the latest quarter. Total noninterest income was $15.1 million, up 9% on the linked-quarter basis due to several reasons.

In our wealth management business, fourth-quarter revenues of $9.2 million were up about $265,000 from the previous quarter. That included the impact of asset-based revenues generated by Halsey, which was acquired at the beginning of August during the third quarter. And wealth management revenues for the full year reached an all-time high level for us at over $35 million.

Wealth management assets under administration, which are predominantly assets under management, stood at $5.8 billion at the end of the quarter, up about 2% from the end of the third quarter. And that increase reflects appreciation in the financial markets during the fourth quarter following the declines that had taken place during the third quarter.

Mortgage banking revenues, which includes gains and commissions on loans sold into the secondary market as well as mortgage servicing fee income, was $2.6 million in the latest quarter, a 30% increase on a linked-quarter basis. That increase is reflective of a higher yield on loans sold into the secondary market.

Residential mortgage loans sold were $127 million in the fourth quarter compared to a slightly higher balance, $132 million in the third quarter.

Loan-related derivative income, which is primarily income from interest rate swap transactions with commercial borrowers, amounted to $752,000 in the latest quarter, a $425,000 increase from the third-quarter level. And that increase is largely due to a higher level of commercial borrower transactions executed during the quarter.

Turning to noninterest expenses, we see that noninterest expenses in the quarter were $24.6 million, up modestly in total on a linked-quarter basis. Included in noninterest expenses were $52,000 in the fourth quarter of acquisition-related expenses related to the Halsey transaction, but $504,000 in the third quarter.

If you exclude those, the remaining total noninterest expenses are up by about $475,000 or a 2% increase. The largest piece of that would be Halsey's operating expense, the difference between the partial period in the third quarter and the full quarter in 2014 -- the fourth quarter, rather -- and also about $195,000 in legal audit and professional expenses largely attributable to non-routine matters.

Looking at asset quality which continues to be very good for the Company, total loans past due by 30 days or more as a percentage of loans outstanding declined by 16 basis points in the quarter and stands at 0.58% at December 31. Meanwhile, nonperforming loans increased somewhat to $21 million or 0.70% of total loans, up from a fairly low level of 0.57% of total loans at the end of the third quarter. And that increase is largely attributable to two commercial loans with a carrying value of $2.9 million.

We recognized a loan-loss provision charge to earnings in the fourth quarter of $750,000, and that compares to a provision of $200,000 in the third quarter. The increase in the provision was largely due to growth in the portfolio as well as changes in loss allocations for loans in nonaccrual status. The resulting allowance for loan losses stands at 0.90% of total loans at the end of December compared to 0.92% at September 30.

Net charge-offs for the year 2015 were 0.07% of total average loans, which was the same as it was in 2014, 0.07% for the year. Shareholders' equity is just over $375 million at the end of December, an increase of $4.9 million in the quarter. In the fourth quarter, we declared a quarterly dividend of $0.34 per share paid earlier this month.

This Corporation and the subsidiary bank continue to be well-capitalized. The total risk-based capital ratio for the Corporation was 12.58% at the end of December compared to 12.80% at the end of September. Meanwhile, the tangible equity to tangible assets ratio was 8.11% at the end of December, down about 7 basis points during the quarter.

And at this time, I will turn the call back to Joe MarcAurele.

Thank you, David. Washington Trust celebrated our 215th year of service this year, and we are recognized as the oldest community bank in the country. I am pleased that we were able to post record earnings and pay a consistent dividend to our shareholders in our anniversary year.

In recent years our story has been one of growth, but we have never lost sight of the guiding principles and core values that have distinguished us from our competition. At the heart of our success is our commitment to providing meaningful solutions and superior customer service.

Our strategy in 2016 remains largely the same. We plan to continue to grow our key business lines by bringing the Washington Trust brand to more people in more places. I thank you for listening, and David and I and Ned are available for questions. Thank you.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

Good morning, guys. This is Nick filling in for Mark. First, in wealth management we saw some net client outflows this quarter, and I was just wondering is this mainly from Halsey or what the dynamic was there?

I would say on balance, it was mixed. Some of them were routine outflows. I don't know, David, if you have more color around that.

No, routine. No adverse trends noted in those numbers by any means.

Fantastic. Okay, and then I'm sure you guys saw the joint regulatory white paper on commercial real estate. And I was wondering if that has changed your outlook or tempered expectations with respect to commercial real estate.

Yes, Nick, it's Ned Handy. Obviously, we are always careful. There are markets that we've talked about in the past where we are being even more careful than in others. We don't think our mix of CRE is, either in the portfolio or in the pipeline, is too high.

We do seek to balance it out with higher C&I levels and we continue to do that. And we think within our footprint there's opportunity to do that. So certainly a focus on being balanced. We are finding that the deals that we are looking at on the CRE side are -- continue to be well structured. There is competition.

Structure -- we have seen opportunities where the structure has been compromised; we pass on those. We are sticking with relatively low loan to value starting points, high equity contribution. So I think we're going about it the right way, but yes, we are being -- our level of care is heightened, let's put it that way.

Fantastic. And then next I just wanted to ask you about the non-routine expenses you guys saw in the legal audit and professional fees. I guess specifically, do we expect those to recur next quarter, or how will you be thinking about that?

No, I would say those are one-time things that are outside of the norm.

Fantastic. And then, Ned, just while we're on the topic, could you just share with us the size of the commercial loan pipeline?

Yes, it's a little over $200 million, so it's very healthy despite the fact that we had a very strong fourth quarter, and in particular a very strong December. So we cleaned out the pipeline, but at the same time have been building.

So it's very healthy and that's the higher degree of probability part of the pipeline. There's an equally favorable amount of early-stage pipeline that puts us in good position as we go forward. So I am optimistic.

Okay, great. And then just finally, David, could you just share with us your outlook for the net interest margin?

Well, some of the actions that we had taken in the fourth quarter, you can see that we were able to reduce the interest-bearing cost of funds debt. That's built-in now, I would say, to ongoing margin.

Then you have the modest benefit that might be attributable to the short-term interest rate increase that was promulgated, I guess, by the Fed last month. So I would say that the margin has more stability than it had had over the last four or five where there had been some continued erosion. So that's how we are looking at it at this point.

Great, thank you very much.

Travis Lan, KBW.

Thanks, good morning, everyone. I noticed that money market costs fell in the quarter, and I'm just wondering if you could talk about the competitive deposit pricing environment that you are seeing?

Well, that was the major driver of how we were able to reduce the overall cost of interest-bearing funds, and we made some business decisions there to bring about those changes. That being said, it certainly is competitive, although we're certainly not seeing any pressure at this point in the marketplace for increases in deposit rates, which is obviously beneficial.

So we are just trying to manage it as prudently as we can and keep our eye on it very closely.

Okay. Do you expect -- on the mortgage banking side, do you expect any negative impact from TRID going forward?

TRID for us has manifested itself in a couple of things. We have certainly had to beef up the way that -- or respond in kind to the additional regulatory needs imposed by TRID, which we believe we have done very successfully. Some of the investors have brought a new look to the types of loans and the documentation associated with loans that they will purchase. But by and large, we have been able to work with them successfully to continue to sell product into the secondary market without really any hiccup.

Okay. Could you maybe talk a little bit about the feel of the local economy split, maybe if you could, between Rhode Island and Connecticut? Obviously, the credit performance continues to be very good, but we heard as the -- I don't know, I would say there's just I feel like more concern about the broader economy out there today than there was maybe 6 or 12 months ago.

So maybe just a little bit of commentary on how your local borrowers are feeling, how you feel about the local economies.

Travis, it is Joe. I would say that on balance if you went back two or three years ago, particularly in Rhode Island, the overall feeling of the consumer and our business customers is more positive. I would say there has been some negative things that have crept into the economic sense, particularly in the equity markets in the last few months, maybe five months.

All that being said, we see particularly our commercial customers being, I would call it, slightly more optimistic than what we had seen previously. Again, we don't have our pulse on it day to day, but on balance I think it's a little more positive than it was even a year ago.

Okay, that's helpful. And then how does that maybe guide the loan growth outlook? I think you were around 5.5% this year. Does that seem like a reasonable expectation going forward?

Yes, I would say we have guided over the last few years to more higher single-digit loan growth. I think that given some of the possibility of continued commercial real estate payouts in our portfolio, we feel more comfortable with mid-single digits. We feel as though that's something we could guide to.

Great. And then last one is, David, if you just have a sense for the tax rate going forward.

The expected effective tax rate for us for 2016 would be 33%.

Great. All right, thank you all very much.

(Operator Instructions). Laurie Hunsicker, Compass Point.

I wondered if we could start back with expenses. Did you all have a charitable foundation contribution this quarter?

We did not.

So is that something now that won't be there going forward, or it just happened you took a pass this year?

We did not do one in the fourth quarter this year. We had done that in the fourth quarter of last year. The foundation is well-funded and it did not need that, so it's something that we will monitor and do as necessary in the future.

Okay. And then to the extent that you mentioned new technology and rebranding, specifically with wealth management that that is going to continue, how should we think about that on the expense line for 2016?

The build-in of ongoing costs associated with that should be relatively modest. The branding is certainly not expensive. The technology part is part of our plans, and we don't think it would show up in any way as unusual in our total operating expenses.

Okay. And then on your de novo branches, obviously you had laid out for us the two that you were opening, one right at the end of last fall and the Eastern Providence that you just opened. How are you think about de novo branching for the rest of this year?

Laurie, I would say that we are -- we are not going to open anything during this year. We have a couple of sites in mind for potentially future years. I would say that we are very happy with the branches that we have opened. However, we are not ignorant to the fact that retail branching and the retail bank delivery system in general is something that is changing. And to the extent that we can continue to do these for relatively modest costs -- all of the ones that we have opened recently are much smaller, much more lightly staffed -- we would like to take advantage of what has been a very strong statewide brand. But right now, this is the only one that we would open this year.

Okay, great. And then can you share with us your assets under management in terms of your goals or how you think about maybe trying to do another acquisition in that area?

Well, first of all, obviously we are very pleased with our wealth management business, and we like it from a scale perspective and a profitability perspective. We are very happy with the Halsey acquisition. Our attitude toward continued acquisition in that space has everything to do with first price. And secondarily, once we acquire it, can we in fact grow it.

So while we don't want to get out of balance from a size standpoint with wealth management, we are always interested in looking at things. We look at a lot of things. It really is a lot about cultural fit, the market and the price, and whether we can grow it.

Okay. And if you think about as we fast-forward to the end of this year, where do you expect your assets under management to be? Or do you have a target goal?

It's highly dependent on the market. We certainly have a very robust new business effort every year, but you can't generate enough brand-new business to outstrip either positive or negative effects in the market.

I guess my hope is for the market to go ahead at a reasonable rate, but that part of the business is unpredictable.

Okay, sure, great. And then just one last thing on credit. David, can you just walk us through -- and your credit is pristine here, but you did have a little uptick in your commercial real estate non-accruals and also your C&I non-accruals.

Can you just walk us through those two categories and if there's any sort of bigger macro trend that you are focused on? I mean certainly, you already made some comments around commercial, but just specifically in those two areas.

It's definitely not a trend that we can see that you could extrapolate to a larger population. These were two one-off instances that happened to both go into nonaccrual during the quarter, and it made up for the majority of the increase in nonaccrual loans.

Looking at the facts behind them with which we have done, there is nothing there that you could say is lurking in the portfolio as a result or learned from those experiences. They are really one-off situations.

Okay, and can you give us any color around the increases there?

Again, the larger piece of that was a commercial real estate loan. The smaller piece was a C&I loan, and that they are appropriately reserved and with loss allocations on them that we believe is adequate and appropriate.

Okay. Will you remind us, what is your average LTV on your commercial real estate book, approximate?

Well, it's probably better if we talk about our standards for that on new loans.

As I mentioned earlier, we are finding new real estate loans to be at favorable loan to values, offset in some cases by we are seeing some extended interest-only periods. So I think of that as -- low loan-to-value and longer interest-only period, I think of as pre-amortized to an extent.

We want to be careful about that, but our existing book is coming in somewhere in these 65% to 70%. I would say our standards for it are, I would say on average, 75% loan-to-value is kind of our underwriting norm. But we are seeing that the loan-to-values today are coming in lower at very low cap rates.

So we are also conscious of that, and we stress cap rates in all of our underwritings to make sure we are not fooling ourselves. So it's dynamic. I like to favor lower loan-to-value and higher equity contributions in this kind of a marketplace with cap rates where they are.

So that's our sort of outlook and our attitude about it today, but I would say our star credit policy still has us able to do a 75% loan to value. But I would say we are trending lower.

Okay, great. And then just one last question. Joe, this is for you. As you think about dividend here, and obviously you are a nice high yielder at the moment; how do you approach payout ratio going forward? Do you have a goal of a 50% payout or a threshold? How do you think about that?

This is Dave. I would say that we are in the mode where, given the balancing the earnings retention capacity of the Company and the growth trends of the Company, that something in the 50% to 55% payout ratio makes sense for us. So that's how we are reviewing that.

Perfect. Thank you.

We have no further questions at this time. I would like to turn the conference back over to Mr. MarcAurele for any closing comments.

Thank you. Well, first of all, we appreciate everyone's participation in the call. We hope that we have provided you with adequate information, and we look forward to talking to you at the end of the first quarter. Take care.

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a wonderful day.