Q4 2020 Washington Trust Bancorp Inc Earnings Call
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Good morning, and welcome to Washington Trust Bancorp Incorporated Conference call. My name is Chuck and I'll be your operator today at participants need assistance during the call at any time. Please press Star then zero participants interested in asking questions at the end of the call. So press Star then one to get into the question for you today's call.
Is being recorded and now I will turn the call over to MS. Elizabeth B Eckel, Senior Vice President Chief marketing and corporate Communications Officer Ms Eckel.
Thank you Chuck Good morning, and welcome to Washington Trust Bancorp, Inc. 's conference call in fourth quarter and full year 2020, joining us on today's call are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer.
Kim.
President and Chief operating Officer, Ron Osberg Senior Executive Vice President Chief.
<unk> financial Officer, and Treasurer, and Bill rate Senior Executive Vice President and Chief Risk Officer.
As a reminder, today's presentation may contain forward looking statements and actual results could differ materially from what is discussed on today's call. Our complete safe Harbor statement is contained in Washington Trust Trust.
Earnings press release that was issued yesterday and with other documents that we filed with the SEC. We encourage you to visit our Investor Relations site at Washington, Dot Com to view, our complete Safe Harbor statement and all of these public filings, Washington Trust trades on NASDAQ under the symbol wash and now I'm pleased to introduce the host for today's call Washington.
<unk>, Chairman and CEO Ned handy.
Thank you Beth and good morning, and thank you for joining us on today's call I'd like to start by wishing you all the very best in this new year. We're all thrilled we're in the new year, but we hope that you and your families have stayed safe throughout this pandemic on we're all grateful that the vaccination campaign is underway.
With hopes that it will bring some normality back to us all soon.
So 2020 was a year like no other marked by unprecedented challenges disruption and uncertainty.
Washington Trust had strong and prevailed just as we've done so many times before on our 220 year history.
I'm really proud of the work our team has done to help our customers and our communities get through these ongoing challenges I know that by embracing our responsibility and being a proactive part of the solution. We've created more value on the Washington Trust franchise.
This morning, I'll provide some 2020 highlights and Ron Iceberg will review, our fourth quarter and year end financial results. After our prepared remarks, Mark Jim and Bill rate will join us for our question and answer session.
I'm pleased to report that Washington Trust ended 2020, with another solid performance posting fourth quarter earnings of $18 $6 million or $1.07 per diluted share. These results contributed to a strong full year 2020 earnings of $69 $8 million or $4 per diluted share.
<unk> compared to $69 $1 million or $3.96 per diluted share reported for 2019.
Our success in 2020 was due to several things the spirit and resilience of our dedicated team of employees, who maintained high service levels and business as usual operations during a major pandemic the strength stability and improvement in our balance sheet and the multiple facets of our business, which during continued low interest rates on and on.
Certain operating environment enabled us to achieve these earnings and the loyalty and perseverance of our customers who have trusted us to help them through these difficult times.
Washington Trust strong corporate governance, and enterprise risk management practices, which specifically address and test our business continuity plan ensured our preparedness for this crisis strategic technological investments made in recent years also enable enabled us to quickly securely and flawlessly transition business operations.
To a remote working environment.
Over the past year, we've learned many lessons, including just how much our customers value our personal service.
In 2020, Washington Trust like the rest of the industry saw increased customer use of digital banking online account opening another technological conveniences, we remain committed to and we'll keep keep pace with these technological developments as we know this trend will continue however, we also know that when customers need financial.
This they prefer a human connection and wanted to have a real conversation with a trusted advisor whether it's in person by phone or through video conferencing and.
And we take great pride in the relationships, we've built with our customers and strive to provide a high level of personal service in fact, our net promoter scores, which consistently ranked rate that's higher than the industry average is for customer satisfaction actually increased during the pandemic.
Looking forward, we will continue to measure customer satisfaction and monitor trends to ensure we're consistently improving the customer experience across all delivery channels and business lines.
Let me take a few moments to share some of the business line highlights from 2020.
Loan Outstandings grew 8% in 2020 aided by P. P. P fundings, but challenged by prepayment speeds on the retail side and payoffs on the commercial side, our credit formation was up about 35% over 2019.
I'd like to take a moment to acknowledge the efforts of our lending team branch staff customer service center on all of the employees throughout the bank, who went the extra mile to assist borrowers both customers and non customers with P. P. P loans I've personally spoken with several local borrowers who are grateful for the advice and guidance they receive from us and.
As a result of the personal attention. They received have committed to further building their banking relationships with us.
We continue to assist local borrowers with P. P P forgiveness and with the second round of PPP loans, and Ron will provide a more detailed update of our PPP lending program shortly.
We continue to be satisfied with overall credit quality of our loan portfolios and Ron will provide some more details in his comments. We also recognize that we're not through with this pandemic, we've cleared about $500 million in deferments through year end and have another 200 million or so it took clear we know the assets and follow them.
Closely Ron will give you some more information and we'll be happy to answer any questions. You may have during the Q&A session.
Total deposits at December 31, 2020 were up 25 per cent from a year prior and end market deposits, which exclude wholesale brokered time deposits grew by 18% in 2020.
The growth in deposits allowed us to reduce federal home loan bank borrowings improve our loan to deposit ratio and since interest rates have remained low decrease our funding cost to help offset continued margin pressure and improve our balance sheet for what comes ahead.
On a year ago, we were discussing the industry wide need for deposits today, we're reporting all time high level of deposits, including low cost core checking and savings accounts and increased money market balances.
Sumit started curtailing their spending habits and shifted to saving and liquid deposit accounts, given the continued economic uncertainty, resulting from the pandemic.
In 2020, we found new ways to encourage customers to save we introduced added up a program, which automatically rounds up debit card purchases to the next dollar and transfers the difference into another Washington Trust account.
The program has not only helped to increase savings balances, but also improve debit card and checking account activation.
As I've mentioned on previous calls we consider our branch employees frontline heroes as they have continued to work throughout the pandemic smiling beneath their mass and assisting customers through plexiglass dividers and drive through banking windows and while banks across the nation and locally have announced plans to close branches, Washington Trust remains committed to expanding our.
Network is branch banking remains and in part an important part of our community engagement and our delivery strategy.
In 2020, we broke ground for our East Greenwich Branch, we believe Theres a great deal of opportunity in this market and look forward to a spring 2021 opening.
And while the pandemic and social distancing protocols may still be in place when we open our east Greenwich branch doors, I know customers will be welcomed into a safe and friendly environment and fellow human connection with our team.
Our mortgage banking team also deserves recognition for the incredible results. They produced in 2020, not only did mortgage originations and sales volume reached record levels in 2020, but mortgage banking revenues totaled a record $47 $4 million for the full year 2020 up 220 per cent from two.
<unk> thousand 19 low.
Low interest rates drove increase mortgage demand in early 2020, but the onset of the pandemic was a cause for concern a residential mortgage team continued to work diligently and didn't Miss a beat when employees were forced to work remotely throughout the pandemic rates remained low and our new work from home trend resulted in significant new growth in single family home.
<unk> and mortgage refinancing.
Our mortgage team has worked extremely hard and there's some indication that mortgage banking activity <unk> may start to normalize in 2021, but it's difficult for us to predict what will happen for the full year Ron will provide some further color on his comments.
Our wealth management divisions assets under administration reached a record $6 $9 billion at December 31st up 7% from the end of 2019 position net position positioning us very well to head into 2021.
Throughout the year, we provided ongoing advice and guidance to help our clients plan for a better understand better understand market volatility and economic uncertainty.
Once our wealth management advisers began working remotely we became even more attentive with our clients and proactive with our communications conducting video conferences and Webinars and providing frequent market updates. We also saw an increase in our clients' use of our online portals viewing their portfolio status accessing statements and communicating with our.
Visors.
Our wealth management Division continues to be a key part of our diversified business model, providing a consistent stream of noninterest income to our company.
Ron will provide provide more detail on our expenses, but I'm proud that we continue to operate our business efficiently, while prioritizing expenditures to ensure outstanding and safe customer experiences as well as the continued well being and development of our employee team.
As a testament to these efforts we were recognized as one of the best places to work in Rhode Island for the 10th straight year and one of the best banks to work for by American banker being the only bank in Rhode Island on that list.
I'll now turn the call over to Ron for a review of our financial performance Brian.
Thank you Ned good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was $18 6 million for $1 seven per diluted share for the fourth quarter and this compared to $18 3 million and $1 six for the third quarter.
Full year 2020, net income was $69 8 million or $4 per diluted share compared to $69 1 million or $3 96 per diluted share reported for the prior year.
Net interest income amounted to $32 2 million on the fourth quarter up by 589000 or 2%.
The net interest margin was 2.39% up by eight basis points.
In the fourth quarter P. P. P for P. P. P loan forgiveness commenced as a result net interest income benefited from accelerated net deferred fee amortization of 423000.
Free basis point benefit to the margin.
Commercial loan prepayment penalty fee income was modest and totaled 123000 in the fourth quarter compared to 33000 in the third quarter.
Average, earning assets decreased by $82 million, mainly due to a decrease of $71 million in average loans and the yield on earning assets decreased by six basis points to 292% due to higher levels of prepayments on residential mortgages and mortgage backed securities.
On the funding side.
Market deposits rose by $110 million.
While wholesale funding sources decreased by $199 million.
The rate on interest bearing liabilities declined by 18 basis points to <unk> 67 per cent.
Noninterest income comprised 46% of total revenues in the fourth quarter and amounted to $27 7 million up by $2 3 million or 9%.
Included in other noninterest income in the fourth quarter was a gain of one point for clean associated.
Associated with the sale of our limited partnership interest in a low income housing tax credit.
Excluding this gain non interest income was up by 859000 or 3% from the prior quarter.
Also note that we have an offsetting expense item to this game.
Our mortgage banking revenues totaled $14 1 million in the fourth quarter. This included net realized gains on loan sales of $13 4 million.
Realized gains declined by 886000 or 6% from the prior quarter, reflecting lower sales volume, partially offset by a higher sales yield.
Mortgage loans sold totaled $318 million down by $36 million or 10% from the all time quarterly high reported last quarter.
Net unrealized gains included in mortgage banking revenues increased on a linked quarter basis.
Reflecting an increase in the fair value of mortgage loan commitments as of December 31st.
Full year 2020 mortgage banking revenues totaled $47 million.
[noise] excuse me.
Up by $332 6 million or 220 per cent from a year ago.
Volume of book mortgage originations and sales reached record highs in 2020.
Mortgage loan originations amounted to $1 7 billion in 2020 up from 945 million on the prior year and mortgage loans sold totaled $1 1 billion in 2020 up from $591 million in 2019.
Our mortgage origination pipeline at December 31 was about $323 million, which is 85% higher than it was at this time a year ago.
Wealth management revenues were $9 2 million on the fourth quarter up by 252000 or 3%.
This was due to an increase in asset based revenues, which were up by 280000 or 3% from the preceding quarter. The increase in asset based revenue is correlated with the increase in average the average balance of assets under administration, which were up by $213 million or 3%.
For December 31st end of period balance of assets under administration totaled a record $6 9 billion.
[noise] up by $471 million or 7% from September 30, reflecting financial market appreciation.
Loan related derivative income amounted to 173000. This was down by $1 1 million on a linked quarter basis, reflecting a lower volume of swap transactions.
Regarding noninterest expenses total expenses were up by $1 8 million or five per cent from the third quarter.
Included in the fourth quarter, we recognized one point for millions of debt prepayment penalty expense associated with the pay off of higher rate <unk> advances. Excluding this noninterest expenses were up by 352000 or one per cent from the prior quarter.
Salaries and employee benefits expense increased by 183000 or 1% from the core.
Sure.
Yeah.
Income tax expense totaled $5 5 million for the fourth quarter. The effective tax rate was 22, 9% compared to 21.9 in the prior quarter and we expect the full year 2021 effective tax rate to be 22%.
Now turning to the balance sheet total loans were down by $86 million or 2% from September 30, and up by $303 million or 8% from the end of 2019.
In the fourth quarter commercial loans decreased by $38 million or 2% payoffs and paydowns amounted to approximately 105 million and included $18 million of PPP loans that were for given by the SBA.
Residential loans decreased by $39 million, reflecting increased payoff activity and consumer loans decreased by $9 million.
Investment securities were down by $19 million or 2%.
In market deposits were up by $85 million or 2% from September 30th and up by $573 million or 18% from the end of 2019. This included increases in DDA balances of 31 per cent and savings accounts of 25 per cent.
The deposit inflows have allowed us to improve our funding mix by paying down higher cost wholesale advances.
Wholesale brokered Cds were up by $7 million in the fourth quarter and <unk> borrowings were down by 120 million P. P. P. O S borrowings were paid off on the fourth quarter, and therefore were down by 106 million from September 30th.
Total shareholders equity amounted to $534 million at December 31st up by $6 5 million.
Washington Trust remains well capitalized total risk based capital ratio was 13.51% at December 31, compared to 13 point O nine at September 30th the tangible equity to tangible assets ratio was $8 two two per cent compared to 791% our fourth quarter dividend declaration of 52.
Per share was paid on January eight this reflected a one cent increase in Q4.
Regarding asset quality nonperforming loans are in excuse me on the performing assets declined by $1 5 million in the fourth quarter non on.
Accruing loans were three 1% of total loans compared to 3.34 per cent at the end of Q3 loans past due 30 days or more were <unk> three zero percent of total loans compared to two 4% at the end of Q3.
Troubled debt restructurings or <unk> increased by $7 1 million from September 30, largely due to restructurings of two C&I relationships that did not qualify for TD are accounting relief.
The allowance for credit losses on loans totaled $44 1 million or 105 basis points of total loans and provided NPL coverage of 334%, excluding PPP loans. The allowance coverage was 110 basis points.
The provision for credit losses was $1 8 million compared to $1 3 million recorded in Q3, Inc.
And included $1 6 million for loans and 200000 for unused commitments.
Net charge offs were 118000 compared to 96000 in Q3.
And finally I'd like to provide an update on our COVID-19 lending impact.
Loan deferments on just on January 21st totaled $203 million or 5% of total loans outstanding excluding PPP loans and down from 10% as of September 30th.
This includes 143 million of commercial real estate $33 million of C&I $26 million of residential and $1 million of consumer loans. The breakdown of commercial deferments by industry categories presented in a table in our earnings release, we will be happy to get into the details during Q&A.
As of December 31st we're reporting 1700, PPP loans with a carrying value of 200 million.
PPP loans with principal balances totaling approximately $18 million were for given by the SBA during the fourth quarter as I mentioned earlier approximately 425000 net net deferred fees were accelerated into income.
Net deferred excuse me net unamortized fees on PPP loans amounted to $3 9 million at December 31st the timing and recognition of these net fees into the margin will.
It will depend upon the pace of loan forgiveness as approved by the SBA.
And at this time I will turn the call back over to net.
Thanks, Ron.
2020 was certainly a whirlwind, but it turned out to be a strong year for Washington Trust. We were profitable we remained well capitalized we maintained credit quality and announced an increased dividend for our shareholders, which was recently paid in early January.
We faced numerous challenges in 'twenty and 2020 and met them head on I am grateful to our team for their work and their support.
2021 promises to be another challenging years, we will continue to deal with the pandemic and its ongoing and after effects interest rates remain low and continue to pressure margins and we must anticipate changes the new Biogen administration may may make that could affect our industry.
We learned a lot of lessons in 2020 and will use that knowledge to help our moving our company move forward in 2021 again. Thanks for your interest in the company and we're happy to to turn to questions and answers now.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning.
Good morning, Mark for him.
Good morning, Mark.
First question I, just wanted to follow up Ron one of the things you mentioned on loan deferrals on the $203 million of deferrals that you have outstanding.
When do those expire and I guess I'm curious are most of those paying interest at this point.
Yeah Bill I.
Go raise on our on the phone and he can probably talk about the.
The components of the deferral, we're looking.
I would say mark that our deferrals might be extending a little longer than others aren't in the industry. We're well aware of that we're looking at about $76 million that would roll off.
Basically in the first quarter and then the balance would roll up by the end of the year.
Yeah.
Yeah, Mark it's net I'll just I'll just add some color we've got a fair number of nine hotels in that mix.
On those those are just going to take a while longer to come back we know them well, we know and bill can give some more specific color if wanted but those we extended out some some rate to the to the end of the year.
So we're going to I think we started a little higher than some of our universe and I think we've you know we've cleared $500 million. We've got another 200 left we're watching them very closely and in touch with the borrowers regularly and.
It'll take a while but we've got a chunk that are going to come off from the first quarter and then the balance of them. We've got scheduled out through the through the remainder of the year Inc.
And do you have a sense for what percentage of those are paying some kind of paying interest rate.
On the yes. This is bill on the commercial side about half of them are paying interest only.
About half are both.
Both P&I deferments on the resi side, they're generally just full P&I.
Okay.
And then changing gears a little bit on the mortgage business. Obviously, you had a banner year in 2020, I think our revenues about tripled.
Versus 19, I guess as we move into 'twenty one at some point.
Think volumes would start to come down how do you you all model out mortgage revenues in an environment like this.
Yeah, I can take a shot at that.
Mark if you want to take it go ahead.
Yeah, Mark this is mark I'll, just try to provide a big picture outlook for what we think 2021 will shape up like and then Ron can take it there.
Obviously as you say at some point it feels like the mortgage banking train should start to slow down to normal levels.
That said as we finished the end of the fourth quarter, we found that pipeline volumes going into January and February have been very strong more characteristic of what we saw at the beginning of the fourth quarter and this is a combination of purchase activity, but still a lot of refinancing activity more which is saleable. So although we.
We share your thought that at some point this has to slow down it looks really like the first quarter is shaping up to be another fairly strong one.
The residential housing markets in new England in our markets in particular have been very robust normally mark this would be a time of year in January where you would expect purchase and home buying activity interest to slow down, but it really has not yet so a limitation on housing stock in our markets and very strong.
Demand for housing mean that this may continue to go at least for <unk>.
First quarter or perhaps even the first half of the year Ron.
Yeah, Mark I mean, Mark that's given I guess as I think about this it looks like Q1 is likely to look similar to Q4.
The mortgage bankers Association is forecasting a reduction in mortgage volume across the industry of.
20 to 25 per cent compared to last year. So so we take that into account I think it's premature for us to try to give you a full year forecast on mortgage.
We are aware that their sentiment out there that this will start to cool off by the end of the year, we don't know exactly when that will happen though.
Okay.
Great and then was curious Ron if you could give us some perspective on the core margin going forward, maybe excluding the impact of the P. P. P. What's your thinking on what.
The trend on the margin might be.
Yeah, so excluding PPP, we would expect some some modest expansion in the margin in the first half of the year, we still have some opportunity to lower funding costs.
And we will do that we are still seeing pressure in asset yields due to prepayments on on residential mortgages and mortgage backed securities.
And that will likely continue throughout the year. So as I think about it I think will be trending up modestly maybe to the 240 range for the first half of the year and then may be trending back down towards that two five range in the second half of the year.
Okay, Great and then lastly, I wonder if you could share with us your thoughts maybe at a high level on the branch network and wider sort of the digitization of the business that we're seeing out there and lots of your competitors closing branches. How are you all thinking about your branch network.
Yeah.
Mark Martin on the market.
Let me.
Yes, I would like to start on that we're well aware of the trends in the industry towards branch closures, particularly among those banks with larger numbers and smaller sizes and we're also.
Very aware that customers are increasingly moving to the digital transactions in online transactions that said from a relationship on an account opening aspect really over the last couple of years, we haven't seen very much change and in branch activity for people coming in to open loans are open deposits. We certainly have seen a shift of transactional based business.
From people handing pieces of paper over account or two.
Received butter pieces of paper that is shifting more towards online and on.
And that's certainly something that we're aware of that said we have 23 total branches 12 have over 100 million on deposits six of them have over 200 million on deposits and we're talking core deposit levels as opposed to broker municipal so.
We do think that in the markets. We serve with 23 branches on the 24th opening there is room for a deliberate and careful pace of expansion.
Especially when some of our bigger competitors are cutting downsizes of smaller branches to economize on costs. So.
We think that it's a blend of technology and human service that will help us expand at least in our footprint.
Again, given our both our average branch size and and that for the.
The growth trajectory of existing locations, we don't view it as.
Is imprudent to selectively expand the network in Rhode Island, where our biggest competitors began for an citizens have far more branches on far more share thats available to take from.
Net I don't know if you have anything else to add to that.
You've covered it well I mean, we will be very deliberate as we always have been this is not a huge part of our strategy, but we do think that that our customer base are like for human connection and where there are still.
Five or six greater Providence suburbs that that we're not in and where we are in the you hit on.
They have physical presence, we compete very well against any of our competitors and you know it's at 65% market share still in citizens and bofa than.
We think we can we can chip away at that and that's a $31 billion market and so so.
Small percentage market gain for us as meaningful.
Thank you yeah no problem.
Thanks Mark.
The next question will come from Laurie Hunsicker with Compass point. Please go ahead.
Well I hope on the morning morning rate.
And Laura.
If we could go back to the P. P. P for them on until all of your 200 million of PPP loans that remain on how much in <unk>.
Chemical feed them up on it.
On the on my phone.
$3 9 million.
Okay and on Super helpful. You gave us free data point impact on pondering 23000 book corridor.
How how much was that what was the corresponding impact on free cash.
We didn't have any in <unk>.
All right and then can you just remind us in terms on in terms on that.
That's C d's, whatever pricing book quarter on quarter.
Yeah, we.
We have about 750 million of not just Cds, but but F. H O b borrowings that we think we can reprice down.
And you know as we discussed on.
Our earlier remarks, we did pay down some higher expense.
L B and we would consider doing that as well so that that's kind of our opportunity to bring some of our funding costs down in the first and second quarter.
Okay, and then what just what would be the net impact.
What are you expecting in terms about the coffee bar.
Well I don't have that broken out specifically worry, but we think our core margin will trend up to that the $2 40 range as a result of implementing those roles.
Interest okay.
I heard vehicle that early I'll call that that's super helpful. I'm on.
On slide I'm wondering if you could get go back here on what your background.
So on point that a book gain on for four of the limited partnership.
Yes.
Maybe I heard that right on apparel.
How much Masonic from you.
Yeah. So I was really referring to the breakage penalty on the FHL be so so we had oh thank god.
A one time income of one four and a onetime expense of one for offset okay. I thought I thought it was absolutely.
Perfect that makes sense, Okay, and then just last question I know you announced the 5% buyback on it looks like non was done.
In this current quarter.
How are you thinking about that and first of all is that right and then second of all how are you thinking about that right.
Yeah. So yeah that is correct, we have not done any.
We think that that the ability to buy back shares is an important option for us to have.
Our stock price has actually.
Recovered a bit since we announced the share buyback program. So so I would say at this at this price level, we really don't have any intention at the moment to be repurchasing shares.
Laurie This is mark just just.
Okay.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Net handy for any closing remarks. Please go ahead.
Well. Thank you all very much we do appreciate your time and your interest and we wish you a.
More normalized 2021, we hope for all the best and we will talk again soon so thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
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