Q3 2019 Earnings Call
Good morning, welcome to the Washington Trust Bancorp Inc. Conference call.
My name is Jamie and I will be operator today.
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Today's conference call is being recorded.
And now I'd like to turn the call whatsoever to Elizabeth B. Eckel Senior Vice President Chief marketing, a corporate Communications officer cycle you may begin.
Thank you Jamie good morning, and welcome to Washington Trust Bancorp Inc. third quarter 2019.
Today's call will be hosting Washington Trust executive team that handy, Chairman and Chief Executive Officer, Mark and President and Chief Operating Officer, and Robert Senior Executive Vice President Chief Financial Officer, and Treasurer before we begin we'd like to take notice.
Today's presentation may contain forward looking statements and actual results could differ materially from what as discussed on the call our complete safe Harbor.
It appears that <unk> earnings press release, and another documents that we filed the FCC. We encourage you to visit our Investor Relations website, <unk> IR Dot Wash Trust Dot Com to review all of our FCC filed documents in the complete Safe Harbor statement, Washington Trust trade on NASDAQ under the symbol wash I'm now pleased to introduce Watts Washington.
Truck, Chairman and Chief Executive Officer that guarantee.
Thank you Bob Good morning, Thank you for joining us a yesterday, we released our third quarter earnings. This morning, I'll review the quarter's highlights and then turn the call over to run Osberg, who will discuss our financial performance in more than.
And Rod Mark and I will answer any questions. You may have bought the third quarter performance or outlook for the remainder of 2019.
I'm pleased to report that Washington Trust posted record third quarter earnings with net income of 18.8 million or one dollar an eight cents per diluted share.
Our performance reflects the benefits of our diverse business model and generating consistent revenues through various economic cycles and interest rate realities.
Your profitability measures remain strong we are well capitalized and asset quality also continues to be strong.
The federal reserves right decisions during the third quarter presented both opportunities and challenges for US let me take them over now to review some of the highway to the quarter.
We had good deposit momentum or third quarter. That's total deposits reached reached a record 3.6 billion at September Thirtyth.
And then market deposits were also at all time high levels at quarter's end.
We had solid growth in both demand deposits and money market accounts.
My last quarter's call. It in test in anticipation of the fed rate cuts, we began ratcheting down rates early in the quarter and ultimately saw modest run off in time deposits.
We had seasonal deposit inflows from municipal and institutional clients during the quarter in market deposit growth enabled us to reduce FHLB wholesale borrowings.
And just to our deposit mix careful management of deposit pricing. That's continued end market deposit growth growth will help offset margin pressure.
FDIC deposit market share Us statistics were released during the third quarter and we're pleased to report that Washington Trust continues to ranked third in Rhode Island, when an 11% market share.
We've opened eight branches in Rhode Island in the last 10 years, and our FDIC market share ranking reflects our success at expanding our footprint in the state.
We believe retail branches still play an important role in our customers banking experience and continue to seek out new locations to expand our branch network and separate Allen communities.
Total loans reached a record 3.8 billion at quarter's end with increases in commercial real estate residential mortgage and consumer loans.
Commercial origination activity in the quarter was concentrated in commercial real estate.
Early creep payoffs continued in the third quarter moderating long growth somewhat.
But the commercial pipeline, including both commercial real estate and see like remains healthy through your reps.
Reduced interest rates helped our retail lending team delivered record level mortgage volume and mortgage banking revenues in the third quarter.
We had a record number of mortgage applications during the quarter on the mortgage pipeline is strong so volume should continue at a good pace through yearend.
We're pleased with the mortgage James third quarter results, we remain steadfast in the mortgage business, but we'd at times by strength elsewhere in our business mix and therefore been position to be opportunistic when conditions are supportive.
We remain committed to growth has invested in new technology at a mid process improvements to streamline operations and will serve our customers experience.
Our strategy and those investments are paying off for us.
Wealth management assets under administration were 6.1 billion at September Thirtyth down from the previous quarter.
Expected seasonal declines in tax preparation fees income as well as the impact of quiet outflows from our Weston Division, which lost two senior counsellors earlier. This year were partially offset by new client growth and favorable market conditions in the third quarter.
Before I turn the call over to Ron I'd like to mention some very important recognition Washington Trust received an August Washington Trust was named one of the nation's best backs to work for by American Banker magazine as part of its annual review by the best companies Group.
We're the largest northeast bank and the only around based insertion named for the letter.
The program identifies recognizes that audits U.S. bags for outstanding employee satisfaction, and it's based on workplace policies and practices as well as a survey of employees regarding life at Washington Trust, our work environment, Ral benefits and growth opportunities.
As an employer, we strive to be an employer of choice a place where people aspire to work are proud to work and stay to build their lives and careers with us we're extremely proud to be recognized as one of the nation's best banks to work for as it reconfirms our commitment to our employees and the outstanding service they provide for customers and our communities I'll now.
Turn the discussion over to run for a more in depth review of our financial performance.
Thank you Matt Good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was a record 18.8 million or dollar rate per diluted share for third quarter.
As compared to 17.3 million 99 cents for the second quarter.
Also reported return on equity a 15.2% return on assets of 1.44%.
Net interest income for the third quarter of $33 million declined by 880003%.
Net interest margin was 2.72% down nine basis points.
Income in margin were affected by the July reduction in the fed funds rate with LIBOR and prime based loans resetting downward and continuing read prepayments on our mortgage backed securities and residential loan portfolios.
The average balance of interest, earning assets declined by 22 million or half a percent hauwei quarter basis average investment securities were down 76 million, while average loans were up 21 million.
The yield on average, earning assets decreased 11 basis points from the preceding quarter to 4.07%.
On the funding side, the average balance of wholesale funding sources declined $103 million well averaging in market deposits rose 58 million from a second quarter.
Cost of interest bearing liabilities declined two basis points.
Noninterest income comprised 36% of total revenues in a third quarter and amounted to 18.3 million up 1.6 million or 9% free game too.
Wealth management revenues were 9.2 million.
396004% from the preceding quarter.
[noise] transaction based revenues totaled $140000 down by 268000 on a linked quarter basis due to tax reporting and preparation fees, which are concentrated in the first half a year.
Asset base revenues totaled $9 million down 128000, or 1% on a linked quarter basis.
The September 30 ended period balance of assets under administration was 6.1 billion down 353 million for 5% from the balance at the end of Q2.
The average balance of assets under administration decreased 13 million <unk>, 0.2% from Q2.
The decline in assets under administration reflected approximately 450 million of client outflows associated with lost client accounts due to the departure of two senior counselors at the end of Q2.
The impact of these lost accounts through September 30 was a reduction of asset base revenues of approximately 290000 during the third quarter and is estimated to be a reduction of about $620000 in the fourth quarter.
Our mortgage banking revenues totaled a record 4.8 million in the third quarter up by 1.2 million or 33%.
These results reflected a substantially higher volume of mortgage loan sold on the secondary market.
Our origination pipeline at September 30 was very helpful. <unk> healthy healthy at about 250 million, an increase of 26 million or 12% since June thirtyth.
We expect fourth quarter revenues to be comparable to the third quarter.
Loan related derivative income was that an above average level I'm a third quarter in amounted to 1.4 million. This was an increase of 661000 from Q2.
Now I'll turn to noninterest expenses total expenses decreased by 1.3 million or 5% from the previous quarter included in this change was a 1 million dollar linked quarter reduction in FDIC deposit insurance costs, which included approximately $900000 of FDIC assessment credits, which were recognized.
In Q3.
We have an additional $200000 and credits available to offset future quarterly assessments.
Excluding the impact of the FDIC costs noninterest expenses were down 281000, or 1% compared to Q2.
This change included in net decrease of $104000 in salaries and benefits, which reflected lower wealth management compensation costs associated with the departure of the two for your comp figure counselors, which was partially offset by volume related commission expense due to an increase in mortgage banking activities.
We also had a decrease of 157000 in advertising and promotion costs, largely due to timing and an increase of $204000 and outsource servicing expense, reflecting volume related increases and third party processing costs largely to support higher mortgage and derivatives volumes.
Income tax expense totaled 5.2 million for Q3 effective income tax rate was 21.8% compared to 21.3 in Q2.
We currently expect the full year 2019 effective tax rate to be approximately 21.5%.
Turning to the balance sheet total loans were up $48 million or 1% compared to June thirtyth in up 222 million or 6% from a year ago.
Total commercial loans were up 17 million originations were approximately 93 million would concentrate concentrated in commercial real estate.
Some pay downs for 76 million.
As a result, the commercial real estate portfolio increased by about 34 million well, let's see I portfolio declined by 17.
Residential loans were up 26 million in consumer was up 4 million.
[noise] investment securities decreased $82 million, primarily due to pay downs on mortgage backed securities.
Thats been securities represented 17% of total assets at the end of third quarter.
Total deposits were 3.6 billion up 82 million or 2% from the end of Q2 and up to 172 million or 5% from a year ago.
In market deposits were up 134 million or 4%, representing reflecting seasonal inflows of various institutional and governmental depositors.
Brokered Cds were down by 52 million.
Federal home loan borrowings were down 104 million.
Our asset quality remains very strong.
Non accrual loans were 0.39% of total loans compared to 0.34% at the end of Q2.
Loans past due 30 days or more <unk>, 0.38% total loans compared to <unk>, 0.448% at the end of the second quarter.
[noise] and net charge offs were 801000 versus 771000 in the previous quarter.
The allowance for loan losses was 0.71% of total loans and provided MPL coverage of 181% the loan loss provision was 400000.
Appeared to 525000 in Q2.
And finally total shareholders equity was 498 million up 13.6 million from the end of Q2.
At this time I'll turn the call back over to that.
Thank you Ryan we're pleased with a third quarter performance and hopeful that the momentum will continue through your as.
Well aware of the challenges presented by the current operating environment as well as the uncertainty as of the new year may very well.
We've weathered many economic storms during our 219 plus year history and have a solid financial foundation, we are well capitalized we have a proven business model and our sites are set on continued sensible growth.
We thank you for your continued support of Washington Trust, and we'll continue to work hard to enhance shareholder value in Americas oldest community bank.
So thank you for your time this morning, and now Mark fraud, and I are happy to answer your questions.
Ladies and gentlemen will begin the question answer session to ask a question you May Press Star then one in your touched on telephones. If you are using a speaker phone when do I see please pick up your handset before pressing the keys to ensure the best sound quality.
If at any time your question. It's been addressed you would like to withdraw your question you May press star into.
Well pause momentarily to assemble the roster.
And our first question today comes from Mark Fitzgibbon from Sandler O'neil. Please go ahead with your question.
Hey, guys good morning.
Well I'm just to clarify I on the mortgage side did I hear correctly that you expect mortgage revenues to be pretty comparable in fourq, what you hadn't three Q.
Yeah, Yeah pipeline through real strong of you ended the quarter I actually were higher than it was a piano second quarter. So.
Yeah, we think.
Mortgage sales activity will be pretty strong.
A component of our of our mortgage revenue is that fair value of the hedge pipeline.
So at some point, we're going to see some tapering off of our mortgage volumes. We don't know exactly when that will be we don't think it'll be before the end of the fourth quarter, though.
In the gain on sale margins look pretty similar to what you saw in Threeq you as well.
Yeah, they've been strong I mean, they've been trending up through the year.
Okay.
Secondly, how much more do you think it's likely we'll see in outflows from those folks that left at West and now we are we sort of through most of that or you think theres a little bit still to come well. So we've had another 94090 $4 million leave since the end of September .
So I would say we're not at the end of it yet.
We probably won't know where we are in its entirety for another quarter or to Mark I didn't know if you have any.
You want to add on that are Jim no Mark we continue to do it because we have talked about on prior calls, we're reaching out to clients very proactively the.
Effort is related to the right thing for the customer the client but as.
Ron said, we'll keep you as current as we can as we receive information.
Okay.
And then lastly, I wondering if you could help us think about the margin in Fourq you.
I see my suspicion is it you'll continue to see some pressure until you get some of those Cds to reprice next year is that fair.
It is so you know obviously, we had a credit the end of September were expecting another cut at the end of this month. That's you know that's 50 basis points of pressure.
We're not really taking into consideration at this time any you know quite at the end of the year, but considering all that we would expect the fourth quarter margin to be in the low to mid two sixty's.
I can kind of break that down for you a bit. So we have 1.8 billion and drive more in prime based loans. So those we'd expect will reset downward on November 1st.
But offsetting that we'd have a billion six of interest sensitive liabilities that consists of home loan borrowings.
Liquid Cds retail Cds.
And those will that billion six will reprice out by the end of June .
And up that about half of it actually resets in the fourth quarter. So each rig that causes us some immediate pain, but we will be able to offset that on a relatively short term basis.
You know in terms of things that we're doing internally, we've been actively managing down the rates that we pay on our institutional money market accounts as well as a lowering and shortening our promotional offerings.
And on the wholesale side, we did restructure some advances which will lower our interest expense by 170000 in the fourth quarter and by about 610000 next year and 410000 in 2021 so.
We're not sitting still we do have some ability to manage our expenses down.
Thank you.
Our next question comes from <unk> switched from Boenning and Scattergood. Please go ahead with your question.
Good morning, just a couple questions on the expense side I think I recall from last quarter, you mentioned, there could potentially be.
Some legal expenses related to your issue you're kind of efforts to pursue.
The clients or enforce any kind of you know non competes or from the two wealth management.
Managers that that last I looked like legal expenses were kind of in line. This quarter I say, it's a good run rate going forward or kind of any updated thoughts on that front.
Yeah, it's pretty good I mean, you take the FDIC out obviously.
You know, we're going to see some kind of variable expense reduction on the wealth side at about 24% of revenue.
Revenue loss.
So that's where you're starting to see some of that in there. So we've had some some compensation saves on on the wealth management side, which which kind of offset on the short term some of those legal expenses.
We issued guidance at the beginning of year, it like 3.5% to 4% revenue and expense increase year over year were more or less on track with that I guess I would just also like to read reemphasize that we do have some variable cost in the mortgage in derivatives side of things, which are pushing up expenses, a little bit that's up kind of a good trade off.
Increase revenue that we have.
Okay. That's helpful. And then you kind of mentioned the FDIC piece, you expect to record any additional credits in the fourth quarter into the first quarter of 2020.
Yeah realistically, we think we'll get the 200 in the fourth quarter, assuming that the FDIC reserve levels maintain at the level that they were at.
Which the efficacy is kind of signal to the banks that that that they're going to ensure that that happens, but that would be the only caveat is you would just be the timing, we think we'll get into Q4.
Okay, great. Thanks, that's helpful. Thanks for taking my questions like there.
Our next question comes from Damon Delmonte from KBW. Please go with your question.
Hey, good morning, guys just to clarify the startup <unk> how's everybody doing today.
Great. Thanks, great Great just to start off real quick on the a and the expenses just to kind of follow up on Eric's question on the FDIC costs and so if you get an additional $200000 of credit that's coming off the the normal quarterly amount crack so if you're somewhere in that 400000 dollar range.
Are you take the 200000 dollar kind of your kind of looking at something around 200000 in the fourth quarter. Yeah. That's about right I would say our run rate is four to 450, okay on our normal quarter. So yes. It would be 200 lesson that got it okay. All right. Thanks for clarifying that.
I guess my my in my next question Kinda talk a lot about loan growth I'm you know as you noted in your prepared remarks I'm good commercial real estate activity kind of softness in the scene I, how do we kind of think about those two buckets as we progressed through the end of 19 and 20.
Yeah, I think we stick with our sort of mid single digit guidance. I mean, we were kind of a 3% to 5% year to date, you know that would require another 30 million a net growth in the fourth quarter, we generally have pretty strong.
Fourth quarters the pipeline is a is sound.
Some of the some of the Cnine reduction was utilization probably half of it I'm in the in the quarter. So so it's not that we had a loss of customers I would say that the pipelines built a little towards towards greedy, but there are some some see an eye opportunities in the pipeline. So I I feel comfortable with with that of the mid single.
Digit growth levels.
And we'll see we'll see about twice, what it but who knows what's going to happen in the economy, but for now we're.
I think we're fine through year end.
Got it Okay, and then with regards to see so have you guys Oh.
Coming to the point, where you're able to disclose expectations on the impact to your loan loss reserve level come 2020.
Yeah. So I would say, we're not we're not going to provide any specific guidance.
Just just now I said it would be fair to say that we expect a modest impact on capital.
No impact on our ability to implement our strategic initiatives. We're on track with the implementation where at this point, we're really just fine tuning methodology.
At some ongoing control implementation and testing to do but where we're completely on track with our implementation.
Just not not quite ready to give any specific numbers yet.
Fair enough.
And then kind of in regards to tee overall credit quality of the portfolio anything I'm you know any areas throughout the loan book that you're seeing some some weakness you know any any impact on manufacturing clients because of the trade where that's been going on.
Yeah, we we don't really see any softening.
And in the portfolio at all we had a slight uptick and then P.A. that was just a handful of residential mortgages.
We did foreclosed on one property this quarter, we kind of aggressively foreclosed on it we think it's a marketable property. It was we pass due at the end of June and you know kind of our best out was to just take it not ticket into foreclosure and we think we'll be able to turn that went around pretty quickly actually it's actually sold its okay.
Yeah.
[laughter] perfect [laughter], Okay. That's all that I really had thank you very much.
Thanks, a lot there.
Once again, if he would like to ask a question. Please press Star then one our next question comes from Laurie Hunsicker from Compass point. Please go ahead with your question.
Hi, Thanks, good morning right.
I wondered if we can get back to the AG right I just want to make sure I've I've got this right. So we obviously saw that you're 90 reduction this quarter I'm 620. It strikes me that reduction for next quarter. So that's a three point sixmillion.
Or so annualized run rate reduction related to that Ron.
Is that correct.
[noise].
Yeah, I mean, we're we're.
We're looking more like 3 million on that.
Okay and.
And these two sets had run about <unk> billion and so.
You cite for 50 come out is your your 620 in revenue reduction for fourth quarter.
That's assuming what on the total outsized slant flush it didn't come out you're just update us and the 94 I mean are you assuming that that that stack sit around 550 in terms of outflows or how should we think about that.
Yes, so I mean, I think it's too early to tell what the total outflows are going to be so so what's it's running 544 million.
True through Friday.
And it's it's too early to know.
Got it okay and I certainly appreciate that color around that but if you can just update US you know one more when my thought as it pertains to that's these kids folks that apart Ed had one year non competes how are you thinking about that you know where he went person legal remedies are recaps our.
Yeah. So Lloyd this is mark I'm really what guidance. We gave you wouldn't be a second quarter earnings calls in place. We believe we had non solicit noncompete agreements in place we can't provide much more comment on the undergoing matter to add more than we have said, we continue to pursue legal remedies.
We believe that Thats most appropriate action at this time and then on the core business front. We continue to have been very active outreach and retention efforts were very proud of the people we have in place at west and who are doing the right thing to best serve our client needs and we'll provide updates both on retention and on any updates to litigation as David.
Come available.
Yeah, that's still active okay and then it just one last question around the expense side of that how much was the expense side of that in the third quarter and how should we think about that going forward.
Yeah. So.
I I think the best way to think about its just on a run rate basis at 24% of to watch revenue.
Okay Fair enough. Okay, and then just one other question that I have and that's regarding your wholesale broker deposit saw the trial that was great. How should we be thinking about that going forward. How are you approaching wholesale as we head into next year, yes. So.
We look at Ed the brokered Cds and the FHLB borrowings as as pretty interchangeable.
Which is why we break in market deposits out separately, because we think that that that's really our core deposit base. So we just play off the FHLB versus the brokered to come up with whatever we think is the cheapest source of funds at the moment, we keep it all relatively short.
Mostly shorter than the three to six month range, we're looking at the rate curve and.
Yeah trying to be able strategic about how we roll that over you know that we roll it out three or six months.
You know we've run the investment portfolio down.
We would probably start to be thinking about reinvestment opportunities in the coming months.
And generally we would find that increase with with some type of wholesale funding boy. This is mark will expand on what Ron is that are just a little bit.
We do consider both FHLB and wholesale brokered Cds as an alternative sources of funding obviously brokered has some advantages and that there is no collateral requirement.
But and we tend to book are those is kind of fungible and I think the regulatory treatment has changed to be a little bit less onerous for brokered Cds, but as Ron also said, it's important to consider curve shape. One of the reasons that we have gone down the wholesale book is because were.
Sure.
It's flat yield curve environment, it's tough to find ways to manage to reinvest money effectively within the securities portfolio. So those the decline about those balances were later.
Great. Thank you so much.
Thanks Laurie.
Yeah.
Next question is a follow up from Erik Zwick from Boenning and Scattergood. Please go ahead with your follow up.
Hi, just a quick follow up on lorries question regarding the lost revenue. So that was third quarter impact you mentioned an estimate the lost revenue, especially with the two managers that left I was 290000, <unk> third quarter, and then a projection for 620000 in the fourth quarter.
Additional 620000 Austin Runrate are also so really the deltas threethirty, maybe from third to fourth am I understanding that right.
Yes, so the 291 is on a.
<unk>.
That's kind of the the impacting Q3, because we didn't lose everything on July onest right and so they did.
The the to 91 would equate into 619 going forward on a run rate basis is 60 619 as the new annualized.
Totally got Fortunately this into quarterly range total order quarterly Red Sea Ray utilize this exactly 620 is about two and a half million annually and I think you mentioned originally they they were running at about five and a half million annually. So were about 45% of that it just like okay. Great. That's helpful.
In our just to clarify so in the fourth quarter Weve. So far we've lost another $94 million and assets under management.
That on a run rate basis would equal about $517000.
Our per year.
Hundred 29 per quarter.
So our run rate on a quarterly bit six nine team for the for that.
Three tranche and 129 on the Q4 tranche would give us a run rate at 740.
Perfect. That's great. Thank you so much okay.
And ladies and gentlemen at this time and showing no additional questions I'd like to turn the conference call back over for any closing remarks.
Well. Thank you all fear a for your interest in Washington Trust. We appreciate it and really I look forward to updating you next quarter and have a great day, thanks very much.
Yeah.
And that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.