Q4 2019 Earnings Call
Both areas also generated key revenues for us in 2019 as Mortgage Banking revenues and Loan sale volume hit record levels and Loan related derivative income for the full year 2019 was at an all-time high.
Total commercial loans increased by 6% year-over-year driven by growth in the commercial real estate portfolio. As we mentioned last quarter. We hired a commercial real estate banker and a cni banker in the Connecticut Market off. Both are experienced lenders with strong history and connections with borrowers developers and centers of influence. They've hit the ground running and we have optimistic expectations for their production in the year ahead. We answered twenty-twenty with a healthy commercial Pipeline and hope to keep the momentum going.
Favorite Cuts cutting rates low and our Residential Mortgage origination processing and production teams busy throughout the year. Our mortgage banking model is built on speed and service and we can continue to deliver both to our customers which has been a competitive Advantage for us applications. We're still strong as we entered twenty-twenty and the mortgage pipeline looks good as we enter the first quarter.
Wealth management assets under Administration told 6.2 billion at December 31st benefiting from strong financial Market appreciation in 2019 and organic edition of gross new assets under management in 2019 similar to that in 2018, which helped us set. The business loss due to the departure of two senior counselors from our Western Financial Group subsidiary in the second quarter of 2019.
A year ago, we introduced a new private clients initiative aimed at improving the links between our commercial lending and wealth management business has pleased to report we generated more than twenty-five million in new assets under management in 2019 in mid 2019. We added a new member to the private client group in the Boston area. He was working closely with our wealth commercial and mortgage officers to help build relationships and generate wealth not going to assets from high-net-worth clients and business owners. We look forward to further growth from private clients group as its Outreach with prospects clients and centers of influence continues in 2020.
I'll now turn the
All over to Ron for review of our financial performance. Thank you said good morning everyone. Thank you for joining us on our call today. I'll review our fourth quarter 2019 results in some more detail is not mentioned net income was 15.5 million or $0.89 per diluted share for the fourth quarter is compared to 18.8 million in a dollar eight for the third quarter that interest in office for the fourth quarter was thirty-two million dollars in declined by $984,000 net interest margin was 261 down 11 basis points income from loan pack option prepayment penalties was modest and totaled $189,000 compared to $130,000 in the third quarter income and margin were affected by the July September and October Federal Reserve rate reductions off with Libor and Prime base loans resetting downward and continuing three payments in our mortgage-backed Securities and residential loan, portfolios.
The average balance of interest-earning assets increased by complete a million dollars on a linked quarter basis average loan balances were up by $70 million while average investment Securities were down by forty six packs the yield on earning assets decreased by 21 basis points from the third quarter to 3.86% do to lower Market interest rates on the funding side average in Market deposits Rose by ninety million dollars while the average balance is wholesale funding sources which includes fhlb borrowings and wholesale broker deposits declined by $57 million from the third quarter off the cost of interest bearing liabilities declined by 13 basis points to 1.53%
that interesting
I'm comprise 34% of total revenues in the fourth quarter in a mounted to 16.6 million down 1.7 million or 9% from the third quarter wealth management revenues were $8,000 down $259,000 or 3% This was in line with the average balance of assets under Administration which decreased by $209 million or 3% during the quarter Thursday December 31st end up. Balance of assets under Administration totaled 6.2 billion up by $109 million or 2% from September Thirty and up 325 million or five and half percent since the end of 2018. This was despite approximately $650 million in cumulative lost client assets through the end of 2019 due to the departure of two senior counselors at the end of the second quarter.
Associated lost revenues in the fourth quarter totaled 775,000
We estimate an additional run rate impact of about $100,000 beginning in the first quarter based on current attrition levels.
Which banking revenues total 3.7 million in the fourth quarter, which was our second strongest quarter of the year after the third after the third quarter the link or decline of 1.2 million was due in part to seasonally loan origination levels in a mix shift in Q4 between loans originated for sale versus portfolio. Additionally. Our hedging program does cause some timing volatility which resulted in some of the divorce and quarter-over-quarter. However, you can see on the mortgage table of our release that our origination were still very strong to close out the year. We expect this momentum to continue into q1.
Loan related derivative income amounted to 1.1 million in Q4. This was down by $291,000 from the above-average level recorded in Q3.
Now let me turn to nine interest expenses. Total expenses are up by one point nine million from Q3. The link water change was impacted by a couple of items first in oreo rate down at 1 million was recognized you for and there were no such adjustments in Q3 and second FDIC assessment credits, which are a contra expense of 235,000 were recognized in the fourth quarter compared to $895,000 in the third quarter. This was a link what a difference of $660,000 excluding these two items expenses for Q4 increased by $190,000 or 1% with modest increases across various non interest expense categories note that no additional FDIC credits remain available to us as they were fully utilized in the fourth quarter.
Income tax expense total 4.3 million for the quarter. The effective tax rate for Q4 was 21.8% flat when compared to Q3. We currently expect our effective tax rate to be about 21.8 for the first half of 2020 and about 20.7% for the second half of the Year resulting in a blended rate of approximately 21.5%
Turning to the balance sheet total loans were up by $115 million or 3% compared to September Thirty and up 213 million or 6% from the end of 2018 presidential loaner up by seventy 1 million or 5% This included purchases of 53 million dollars total commercial loans were fourteen were up forty nine million dollars or 2% in the fourth quarter real estate portfolio increased by Thirty million while the cni portfolio increased by nineteen Consumer loans were down slightly by five million dollars investment Securities were up by 12 million month 1% in the fourth quarter. We purchased a hundred twenty-three million mortgage-backed Securities. These purchases were concentrated in December and we're largely offset during the quarter by routine pay downs and calls off investment securities.
In the Securities portfolio represented about 17% of total assets at the end of the year in Market deposits were up $59 million or 2% from the end of Q3 and by 167 million or five feet from me in a 20 2018 wholesale brokered CDs declined by 146 million and a Beethoven borrowings were up $185 million from September 30th.
Our asset quality remains strong non-performing assets declined by $527 million from the end of Q3. This included a three million dollar decline in Oreo and a 2.5 wage increase in on improving loans the decrease in our bill reflected the sale of a commercial property at no gain or loss. And as well as the previously mentioned 1 million dollar rate down dead not occurring loans where 5.45% of total loans compared to 2.39% at the end of Q3. The increase was concentrated in residential loans and Loans past due by 30 days at 5.40% of total loans compared to 3 8% at the end of Q3 now recoveries of $17,000 recorded in the fourth quarter compared to net charge-offs of eight hundred one thousand in the third quarter in the allowance for loan losses was six ninety percent of total loans and provided coverage of 155% No long-lost provision was necessary in Q4 compared to a provision of four years.
I was going to Q3.
And shareholders Equity was $503 Million at December 31st up by 5.7 million till the end of the third quarter. We remain well capitalized the total risk-based Capital ratio was 12.94% unchanged a third-quarter intangible Equity to tangible assets declined slightly to 8.28% compared to 8.28% compared to 8.32% at the end of the third quarter off and finally our fourth quarter dividend Declaration of $0.51 per share was paid on January 10th. And at this time I will turn the call back over to that. Thank you run a 2009 was another good year flashing and Trust in his we enter our entered our two hundred twentieth year of service. We remain committed to providing enhanced value to those who have contributed to our success over time our employees our customers off our communities and our shareholders. We know the year ahead will be challenging given the continued low interest rate environment and flat yield curve, but we have the right people products and Technology to continue to achieve positive birth.
Our markets we have a daddy.
A team of employees work closely with our customers to offer Financial Solutions back by top-notch personal service as in past years will continue to make incremental investments in our people in technology to ensure. I have all the tools necessary to deliver the best experience for employees and our customers last and Trust will continue to follow the strategy that has contributed to our success over the past two hundred nineteen years with a solid Financial Foundation strong capital and asset quality and a business model that is provided a consistent stream of revenues during the whole types of economic Cycles. We recently paid a $0.51 per share dividend off and have continued to enhance the value of our company for our shareholders. We thank them for their continued support of management and their investment in Washington Trust.
This concludes my prepared remarks and now part run and I'll be happy to answer any questions you may have we will now begin the question-and-answer session to ask a question. You may press star eight thousand one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star them to at this time. We will pause momentarily to assemble our roster. The first question comes from Mark Fitzgibbon of Piper Sandler, please go ahead.
Hey guys. Good morning.
20 Mark Mark, I was wondering if you could update us on the wealth management runoff. Do you think we're getting to the end of that? I know you said there's some residual impact on revenues in the first quarter of a hundred thousand bucks, but we pretty much through that that you know unique custom run off if you will.
Mark, this is Mark M. It feels like we are through the majority of that. Yes, we obviously one can you know handicap?
The amounts of probabilities but I think that substantially behind us and honor don't know if you have anything yet. Yeah. No the last couple of months things have slowed down quite a bit. So I don't think I should say that there will be no more attrition, but it feels pretty good at the moment. Okay, and then run, I wondered if you could sort of update us on your thoughts on the expected impact from Cecil.
Yeah, so, you know, like other banks will will kind of stick to a range but we think it's, you know an increase on a on a non-tax affected.
basis of six point nine six six to nine million dollars
a range
that's the adjustment actually. Yeah just meant to equity mark.
Okay, great. And then I was just curious that that $53 million dollars of residue mortgages. She bought this this quarter at a yield of 336 when you factor in funding coughing. It strikes me that that's going to be segregated to the margin. Can you help us think about sort of the strategy there?
Well, you know, so we're we we care about the margin obviously but we also care about about net income and and certainly it's a creative thing come. Secondly Mark the smart game. We also view it as an opportunity to replace lower-yielding MBS with high-quality in Market resy loan purchases that fit our risk profile. So when we see opportunities in terms of low-cost High credibility attractive markets, we will sometimes make recourse to the purchase resy Market as an alternative to reinvesting MBS cash flows.
Okay, but considering that.
We probably should expect the margin to be down a little bit more in in coming quarters. Which would you say?
Actually, no, you know for the past couple of quarters, we have said that our loans tend to reprice downward faster than our our borrowing costs. We expect to get four or five basis points and then expansion in the first quarter and another four to five basis points in the second quarter.
So that would put us with a second quarter Nim, you know, approximately $270 and things will kind of level out from there for the rest of the year and Mark that assumes no further action by the Federal Reserve which is of course unknown to us that that's right.
Okay, and then lastly I'm curious on the expense front. Is there any you mentioned I think that in your earlier comments about you have passed it opens in Branchburg, Rhode Island. It should we look for any you know unique increases in expenses during the course of this year? Yeah. I mean, I think we are looking at other branch locations. So, okay. So that's that's a possibility, you know, the the the lenders that we hired in Connecticut are our Revenue generators customer-facing. If we if we came across, you know, opportunities like that. We might we might invest in those four for Revenue growth the technology spend run you might yeah, so then that
mark on a
Accor basis we see twenty20 expenses going up at about a 45% range. We are seeing some wage pressure. We're also wrapping up the final stages of three year old technology infrastructure upgrade, you know, we started with desktops and windows we moved on to servers and and this year will migrate things out to the cloud. So some you know, a little bit higher level of core operating expense increased in and what we've seen the past couple of years and in the 45% range and it's and it said it's always we will make appropriate strategic investments in the business such as additional branches, you know, if we find the right opportunities along the way but but there there's nothing unusual on the horizon at this point.
Thank you.
Thanks Bart. The next question comes from Eric is a pending in Scattergood, please go ahead.
Hey, good morning. Everyone morning.
Maybe it's still follow up on on the loan dress a little bit. Just curious, you know, given the Strong finish to the Year from the organic growth perspective a little bit of kind of purchase activity in there as well. You know, which we be thinking about it. I kind of how are you targeting loan growth in 2020? And what would you expect the mix to be from an organic versus kind of purchase perspective? Yeah. So so everything's runs off pipelines for both commercial and residential are pretty good right now heading into twenty-twenty as such we kind of expect a, you know, a strong mid single-digit growth wage heading into twenty-twenty on the resi side that could be supplemented with some additional purchase activity as as Mark mentioned in as we did in the third the fourth quarter, but that's kind of how I see it.
okay, that's how
And then given that that strong loan growth as well as letting some of the kind of you know, wholesale deposits run off though the loan deposit ratio into the year at 111% Just kind of curious you're thinking around that that current level and how that might Trend going forward. You have a Target, right? So we track loan-to-deposit son both a total deposit as well as an in-market deposit basis. So, you know the increase that you're seeing in in the the loan-to-deposit ratio to 111 really reflects the run off of the wholesale brokerage CDs, which we consider kind of interchangeable with fhlb advances in fhlb was just cheaper in the fourth quarter. So so we allowed some of that CD run off to be replaced by by fhlb.
Okay, so you expect to you know, if I think about it in terms of loans to the the in Market deposits try to kind of that level should be more more constant in the kind of total ratio wage rate based on kind of the the cost of the funding alternative funding and you know, as we've talked about many times deposits our priority for us, you know, that's why we're doing the de novo branching off it, you know, too difficult deposit environment out there. We recognize that and we're doing everything we can to to increase our deposit growth rate show. And then on the side obviously is a great year in 2019 from mortgage Revenue 14.8 million your expectations. You mentioned that the pipeline strong kind of heading into the the beginning of the year. Would you expect to be able to walk, you know approach to that number again and in 2020 or are too early to tell at this point? It's
Eric, this is Mark.
So I I think what you've said, is it pretty accurate. We believe that the first and second quarters of 2020 will be strong based both on current pipeline volume and on the strength of the resi housing market crash landing areas where there really aren't any signs of increased demand and pressure on Supply and given the level and trend of the longer end of the yield curve. We don't have a choice major expectation that rates would friend up from here. The crystal ball is a little less clear on the second half of the year just because it's further out and we're we're late in the in the growth cycle. But at least for the first half of the Year from a color standpoint, it seems wrong Ron. I don't know if you ever needed in. Yeah. No, I mean we had a record year. We don't necessarily think that mortgages, you know mortgage revenue is going to go up 40% off again. But but we have we have much stronger volumes and and pipeline levels than we normally do with this time of year. So it's it's things are pretty good on mortgages.
I appreciate that the color there and maybe just one last one for me is I think about kind of the bigger picture. It's obviously a tough operating environment giving the the shape of the curve that the low interest rate environment certainly putting a little bit on on earnings as well as profitability. I guess in terms of you know, how you think about, you know success and twenty twenty in terms of either earnings growth or you know, r o a profitability measurement, you know, kind of how how are you shaping your expectations for 20 20, let me load that it's Ned and thanks for the question. I think we feel well positioned certainly credit quality is great. We don't we don't have anything to worry about on that front. I think the growth the growth rates that that Ron has talked about or or achievable. We we could do know the deposits is our it continues to be our number one priority in so we're thinking about that strategically as we talked about earlier, you know, if if a if a great branch location comes off
We think we're prepared to to pull the trigger on that m&a our view on m&a as in changed, you know, we're going to be very cautious and thoughtful about it both.
On the bank and and and wealth side. So, you know, we were obviously generating capital and we've got the capital to do some things how we how we deploy it and we're we're dead we we think about all the time and and look for look for ways to continue to can to continue growth off of what we think is just a great Foundation.
And Eric, this is Mark. Our goal is always has to remain on the top quartile of Community Banks are in our peer group and it's challenging rate environment certainly for all of them. We think that some of the differentiators we have wage welcome and from business The Mortgage Banking business are worth emphasizing and environments like this. And lastly we as Ned said have enough roots to deploy Capital Weather Gang dividend or through m&a or through the opportunistic use of repurchase to manage those profitability lovers.
Great. Thank you so much for taking my questions. Thanks.
The next question comes from Laurie Hunter of compass point please go ahead. Yeah, I think's good morning. Lauren Lauren Tyler. Just wanted to go back to expenses when you said a 45% increase in in core expenses. I just wondered what you're using is your core base for 2019 because certainly there was some noise whether it was the the outside edge for the REO or if you're just looking at this on a on a more reported level. It's it's basically in a reported level that the oil right down the the Oreo write down that we took in December kind of offsets the the benefit that we had on the FDIC. So on a full year basis, I think I reported expense basis is pretty representative of life that we have on board. Okay, and then for for your full year 20 guide does that assume any denova branches are opened or you know more than likely no identified? Okay.
Going to be Twenty-One, okay.
And then um, just just jumping back to the comments around about selected by that. Can you help us think about as you as you rank used Capital where you would stand in terms of buyback vs. Dividend versus m&a and how we should think about that with your stock sitting here at 51,000 where we trade relative to tangible Book value seems like buyback doesn't necessarily make a a lot of sense at these levels. I mean, we we would be looking closely at our price when making that decision and you know, just considering what we think is important overall to to investors in terms of whether a dividend would be preferable or not.
okay, and so what what is
Sorry Dolores net. I was just going to say that you know the value of the dividend which we paid historically is is we think of a big part of investing in our stock and and you know, that's obviously to us is a a priority but it but it doesn't doesn't mean that we don't think about other alternatives for Capital deployment.
okay, great and
M&a is as you know, opportunistic. We are we have historically been a disciplined, uh acquirer and would put money to work as appropriate on the bank or wealth sidewalk when those opportunities are a good fit for us.
Okay, great and just just ask question on the buy back. What what price point do you become more constructive? Yeah. I don't know that we we would get into that. Okay fair enough. I'll leave it there. Thank you. Thanks Lori, this concludes our question-and-answer session. I would like to turn the conference back over to Ned handy for any closing remarks. Well, thank you so much for your time and your interest in watching Trust. We appreciate it. And we know we you have a lot on your plate. So with that I will say thank you and we'll talk to you again soon. Thanks very much. God has now concluded. Thank you for attending today's presentation. You may now disconnect.
Thursday