Washington Trust Bancorp, Inc.
Q4 2014 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good morning and welcome to the Washington Trust Bancorp Incorporated Conference Call. My name is Melissa, I will your operator 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?

[Elizabeth Eckel:]

Thanks, Melissa, and thanks for everyone for joining us this morning for Washington Trust Bancorp Inc's fourth quarter and year end 2014 conference call. Washington Trust trades on NASDAQ/OMX market under the symbol WASH. The host of this morning's discussion are Joseph MarcAurele, Chairman, Chief Executive Officer; Ned Handy, President and Chief Operating Officer and David Devault, Vice Chair, Secretary and Chief Financial Officer. As a reminder, today's call is being recorded webcast live and a replay will be made available shortly after the call through the Corporation's website washtrustbankcorp.com. Please remember that the information discussed on today's call is accurate only as of this date and you should not rely on these statements after the conclusion of the call. I'm now pleased to introduce Washington Trust's Chairman and CEO, Joseph MarcAurele.

[Joseph MarcAurele:]

Well, thank you, Beth. Good morning and thank you for joining us on today's conference call. This morning Ed and I will provide some highlights of the fourth quarter and full year 2014 as well as an overview of our business line performance. David then will discuss the company's financial results at the end of our prepared remarks we will answer any questions. Washington Trust had an excellent fourth quarter with net income of 11.2 million or $0.66 per diluted share. Earnings for the year 2014 amounted to 40.8 million or $2.41 per diluted share. I'm pleased to report that both the fourth quarter and annual earnings were all time highest for the corporation. Our key profitability ratios, capital position and asset quality measures also remained strong. The key to our 2014 performance was really consistency. In recent years we expanded our market area, enhanced our technology and attracted new talent. Yet we've continued to perform well because we've consistently stayed true to our core values in business. Our reputation for trustworthiness local decision making and exceptional services has helped us build existing relationships and attract new ones across all business lines. Let me share some of the highlights from our key business lines. In 2014 we had double digit total loan growth with increases in our commercial, mortgage and consumer portfolios. We had production from throughout the Southern New England area. Our commercial lending grew, posted outstanding fourth quarter numbers adding a good balance of commercial real estate and C&I loans. While we hoped the momentum continues in 2015. We have recently seen more aggressive competition both from a structure and pricing perspective. Continued low interest rate helped us maintain mortgage production through yearend and has continued early in 2015. Our loan sale gains were up nicely in the fourth quarter although down from 2013 levels. Our mortgage banking business has been a good source on non-interest income in recent years and we believe we have the right team and are in the right markets to garner our fair share of mortgage loans going forward. Our wealth management area also provides a key source of revenues, market appreciation contributed to an uptick in wealth management revenues in the fourth quarter while assets under administration amounted to just over $5 billion at year-end. We're investing in technology and marketing efforts which we believe will help us grow this business line. As mentioned on past conference calls we believe we have significant deposit growth potential in Rhode Island. We put a de novo strategy in place and have committed to opening one to two branches a year in Rhode Island cities and towns. In 2014 we opened a branch in Johnston, Rhode Island and we have plans to open two branches in 2015, one in Rumford, Rhode Island in late March and another on the east side of Providence in the third quarter of this year. We also recently submitted applications for future branches in Coventry and North Providence Rhode Island and are awaiting regulatory approval for those sites. To-date these most recently opened locations have all met or exceeded expectations. We continue to feel that opening modestly sized branches with reasonable staffing will enable us to take advantage of a strong state wide brand. In addition to this physical expansion we will also continue to invest in the technology necessary to meet customer expectations. Ned Handy our President and Chief Operating Officer oversees both our branch system and our technology department. I will turn the call over to Ned, so he can provide some additional thoughts on these matters. Ned?

[Ned Handy:]

Thanks, Joe and good morning. I'd like to follow-up on Joe's comments regarding our branch strategy. Our thoughts are balanced between building product and service parity from a technology standpoint supplementing our brand awareness with both physical convenience and remote capability while always keeping an eye on cost. We have an opportunity to build on our 9% Rhode Island deposit market share with a rational addition of appropriately sized branches in key locations, Joe mentioned those locations. We believe our customers increasingly appreciate varied access points. Since joining Washington Trust just over a year ago I have spent a lot of time on the road on calls with lenders and the branches with tellers and with our technology and operation staff. I have heard from customers and employees about their experiences both at Washington Trust and with other banks. What I found is that concurrent with all the technological advances banking is still a people business. Washington Trust has the same technology as our competitors but what sets up apart is our people, our reputation for personal service excellence and increasingly our convenience. As Joe said consistency matters and being local matters as well. We are maintaining our balance between technology investment and brick and mortar investment to ensure we meet our customers' expectations when, where and how they need us. Now it's a pleasure to turn the call over to David for a review of our financials. David?

[David Devault:]

Thanks, Ned. Good morning everyone thanks for joining us on our call today. I will review our fourth quarter 2014 operating results and financial position as described in our press release at the end of the day yesterday. Net income and earnings per share reached record highs in the fourth quarter. Net income was $11.2 million was $0.66 per diluted share in the quarter that compared to third quarter 2014 net income of $10.5 million or $0.62 per diluted share. There were a number of factors that contributed to the earning strength. Fourth quarter 2014 net interest income was $26.3 million, up 5% on a linked quarter basis. Average earning assets increased a $153 million led by solid commercial and residential loan growth. Meanwhile on the funding side, average interest bearing liabilities rose by a $121 million. The net interest margin in the fourth quarter was 3.23%, up from 3.21% in the third quarter. Included in the fourth quarter net interest income was about $445,000 of prepayment penalty fee income on commercial loans that accounted for about 5 basis points in our margin. So excluding that prepayment penalty income the margin on a core basis was down about 3 basis points in the third quarter. And that decline was largely due to lower rates on recently originated loans and payoffs of higher yielding loans in the portfolio. The yield on interest earning assets was 3.85% in the fourth quarter again excluding that prepayment fee income. The yield on average interest bearing liabilities remained unchanged at 0.84%. We did add about $88 million in wholesale funding in the form of broker time deposits which we used in part to fund that loan growth. And the terms of that wholesale funding ranged from 30 to 60 months with about a weighted average cost of about 1.54%. On the balance sheet total loans grows by $185 million or 7% in the latest quarter then included 145 million or 10% increase in commercial loans which sub-included $98 million in commercial real estate loans and $47 million increase in the commercial and industrial portfolio. Residential and consumer loans were up about $40 million or 4% on a linked quarter basis, and the total loan portfolio stands at $2.86 billion at the end of December. Investment securities portfolio declined in the quarter by about $20 million due to principle payments received on mortgage back securities and maturities and calls of municipal securities. Total deposits stand at $2.75 billion at the end of December up about 1% in the fourth quarter including the increase of $88 million in the wholesale broker time deposits. End market deposits which exclude the wholesale broker time deposits decline by about 3%. We did increase federal home loan bank borrowings by about $145 million in the quarter as well. As you may know non-interest income represents a significant portion of our total revenues and total non-interest income was $13 million in the latest quarter up 4.4% on the linked quarter basis. Mortgage banking revenues in the form of net gains on loans sales and commissions on received on loans originated for others was $2.1 million for the quarter up 21% on a linked quarter basis. This was the result of higher sales volume. Residential mortgage loans sold into the secondary market increased from $80 million in the third quarter to $99 million in the latest quarter. We also saw an increase in net gains on interests rate swap contracts in the latest quarter, they totaled $574,000 up $235,000 from the third quarter and that was due to increase in customer related interest rate swap transactions in the fourth quarter. That’s an above average amount if you look at the average for the first three quarters of the year, they were about $187,000 per quarter. In our wealth management business fourth quarter revenues were $8.4 million up modestly from the previous quarter. And total wealth management assets under administration as Joe mentioned are just over $5 billion at the end of December up about 2% from the end of the third quarter primarily due to financial market appreciation in income. Turning to non-interest expenses, total non-interest expenses in the latest quarter were $23.1 million up $1 million or 4.6% on a linked quarter basis. Some of the more significant changes compared to the third quarter include a charitable contribution expense of $400,000 as the cash contribution to our charitable foundation something that we do periodically. We also based on the strength of the fourth quarter earnings and full year earnings increased our profit based incentives expense by about $312,000 in the latest quarter compared to earlier quarters. And outsourced services were up about $148,000 in the third quarter level. That is largely execution cost associated with those customer related interest rate swap transactions I mentioned a moment ago. Looking at asset quality, asset quality metrics remains very strong and showed continued improvement in the latest quarter. Total non-performing loans decline by about $1 million stand at 0.6% of total loans down from 0.63% at the end of the third quarter. Total delinquencies 30 days and more pass due also decline by about $2 million stand at $8.1 million or 0.63% of total loans at the end of the year. Our loan loss progression charge to earnings was $500,000 in the latest quarter down slightly from $600,000 in the third quarter. Net charge offs in the latest quarter were $245,000 and net charge offs for the year amount to just 0.07% of average loans compared to 0.23% for the year 2013. The allowances for loan losses stood at 0.98% of total loans at the end of December down 6 basis points from the end of the third quarter. Total shareholder's equity for the corporation is $346 million at the end of December down slightly in the quarter. Included in the accumulated other comprehensive income component of shareholder's equity is a charge in the fourth quarter of $8.9 million associated with the annual measurement of defined benefit pension liabilities. That charge is largely due to the adoption of new mortality assumptions recently issued by the Society of Actuaries, as well as a decline in the discount rate used to measure the present value of pension liabilities compared to the discount rate used at the end of 2013. In addition in the fourth quarter we declared a quarterly dividend of $0.32 per share which was paid earlier this month. The corporation and our subsidiary bank capital levels continue to exceed the minimum levels to be considered well capitalized. The total risk based capital ratio for the corporation is 12.56% at the end of December compared to 13.26% at the end of the third quarter. And the tangible equity to tangible assets ratio stands at 8.04% at the end of the fourth quarter down from just over 8.5% at the end of the third quarter. Those declines in capital are obviously related to the strong loan growth that achieved during the latest quarter. And at this time, I'll turn the call back to our Chairman and CEO, Joe MarcAurele.

[Joseph MarcAurele:]

Thank you, David. Washington Trust had another solid year and a key part of our continued success is our ability really to bring our unique brand into new markets while consistently delivering quality products and local personal service. As we look ahead and plan ahead we're well aware of the challenges that our industry faces obviously to continue to our interest rate environment, rapidly changing technology and increasingly complex regulations. We have faced many obstacles in our 215 year history and we do believe that we are poised to meet the challenges ahead. We have a strong financial position, an experienced team of professionals and the tools and technology we need to compete. We're pleased to have provided solid returns and healthy dividends to our shareholders and are committed to generating additional value for them in the years to come. We thank you for your time this morning. And now Ned, David and I are happy to answer any questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mark Fitzgibbon with Sandler O'Neill and Partners. Please proceed with your question.

[Unidentified Analyst:]

Good morning guys this is Nick filling in for Mark. With your [TCE] [ph] ratio right around 8% we were wondering how low you guys are comfortable thinking it?

[David Devault:]

Well that's certainly a very adequate level, it could go lower. I think our earnings retention will largely keep it at around that level and we're very comfortable with that.

[Unidentified Analyst:]

Okay. You guys had a 7% rise in loans in the fourth quarter and we suspect some of this is unique to the quarter, what's the pipeline today and do you see loan growth softening going forward?

[Joseph MarcAurele:]

The residential pipeline is healthy in fact with rates where they are it's grown significantly over the past month or so, it's up in the $130 million range. The commercial pipeline although somewhat depleted by that strong fourth quarter in that case it is actually healthier than it was a year ago around about the $85 million level and growing daily as our guys are out finding new opportunities, so I think we're in pretty good shape.

[Unidentified Analyst:]

Okay. Great. Could you guys share with us your outlook for the core NIM?

[Joseph MarcAurele:]

Core NIM our outlook remains pretty much what was said in the last couple of quarters that it is likely to drift downward with the current rate environment and new loans going on at somewhat lower rates than the existing book and on a core basis that's what happened in the fourth quarter and we can foresee that over the next few quarters as well.

[Unidentified Analyst:]

And then just lastly you guys seem to be firing on all cylinders with the strong currency like you had, does it make sense for you guys to be doing acquisitions at this time?

[David Devault:]

Well I think Nick we're always interested in looking at things. For us I think the situation is pretty much always the same, we want to look at something that we feel as though we can grow, where we can add value and at the same time has some level of expense synergies and is consistent with the way we do business. So from our perspective we're always open to that. We certainly recognize that our currency is strong and if the opportunity arises we will certainly be interested in thinking about it.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Travis Lan with KBW. Please proceed with your question.

[Travis Lan:]

You spoke a bit about investing in both wealth management and the branch network. And how should we think about then the potential impact of that investment on expense growth going forward?

[David Devault:]

The branch network is probably mid to high six figure annualized incremental cost in 2015 something that we certainly feel is affordable. The technology spend is measured and we have a lot of things that are reaching fully depreciated -- their end of their depreciable life. So again all of this is factored in and we think it's manageable.

[Travis Lan:]

Okay all right and does the high six figure annualized cost increase for the branches, is that includes headcount as well?

[David Devault:]

Yes.

[Travis Lan:]

Okay and then I think Nick touched on it but 16% loan growth is obviously a pretty dramatic acceleration from you've been in recent years. So could you talk a little bit about what you saw in the lending environment this year that motivated that acceleration, and then to what degree the increased competition that you referenced earlier could impact growth heading into '15?

[Ned Handy:]

Travis, its Ned. So we saw the growth in all of our markets Connecticut, Massachusetts and Rhode Island, it was in the first half of the year a little bit more heavily weighted towards C&I and then we had a very strong second half in the real estate space. But a fairly balanced sheet growth between the two. We did increase the average loan size somewhat. So we found some larger opportunities with and among our sophisticated borrowing base. But we are borrower based; we thought we could expand that a little bit. We did buy in to some syndicated loans led by variety of banks most of them Bank of America led, that will continue. On the competitive front what we're seeing is fairly heavy competition from the smaller local peer sized banks on both the C&I and real estate side both in pricing term and structure. We are not seeing as heavy competition on the larger more sophisticated deals. So we made slant towards a few more of those. But I think the opportunities are still there, we're seeing opportunities both in the C&I side and on the real estate side. We continue to see more robust activity outside of Rhode Island than in Rhode Island. But we've got our eyes on the bone and all of those of our footprint. I think that pretty much answers it.

[Travis Lan:]

Yes that’s great color. Okay thanks. And David the reserve obviously came down a bit at 98 basis points in the quarter. Is there more room for that to come even lower?

[David Devault:]

We think there is with the continued improvement in already fairly good asset quality and the quality of loans that are being added to the portfolio. So we could certainly justify a lower loss allocation in that respect.

[Travis Lan:]

Okay and then just two more for me. Could you just update us on how you think about your sensitivity to a flattening yield curve?

[David Devault:]

Yes that's something that could affect net interest income. We have a good mix I would say between fixed and variable rates in our portfolio and from a margin risk we think we are appropriately balance right now. So long term that will not be helpful, but it's something that we think we can reasonably withstand in the near term.

[Travis Lan:]

Okay and then the last one is just the outlook for the tax rate end of '15.

[David Devault:]

We are forecasting 32% for 2015.

[Operator:]

This concludes our question and answer session. I'd like to turn the conference back over to Joseph MarcAurele for any closing remarks.

[Joseph MarcAurele:]

Thank you all. Overall I'd just like to say that the senior management group in the company appreciates your interest. We will certainly keep working towards the types of returns that we produced historically. And again thank you for your participation in the call and I'm sure we will talk you again next quarter. Thank you very much.

[Operator:]

Thank you. This concludes today's conference. Thank you for attending today's presentation. You may now disconnect your lines.