Q2 2021 Washington Trust Bancorp Inc Earnings Call
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Good morning, and welcome to Washington Trust Bancorp, Inc Conference call.
My name is fast moving and everything.
We're operating today.
Participants may discuss during the call.
Rate relief.
So any day.
Yeah.
I just would be interested in asking a question at the end of the call chip credit.
And on 1 to get into the queue today's call is being recorded.
Now I won't go on on the call over to Elizabeth Eckel, Senior Vice President Chief marketing and corporate communications.
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Thank you good morning, and welcome to Washington Trust Bancorp, Inc. Second quarter 2021 conference call joining us on today's call are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer, Mark <unk>, President and Chief Operating Officer, Ron Osborne, Senior Executive Vice President and Chief financial.
Officer, and Treasurer, and Bill rate Senior Executive Vice President and Chief Risk Officer. As a reminder, today's call may contain forward looking statements and actual results could differ materially from what is discussed today, our complete safe Harbor statement appears in our earnings press release as well as in other documents filed with the SEC you May view.
These materials as well as our safe Harbor statement in its entirety on our Investor Relations site at IR Dot Wash Trust Dotcom, Washington Trust trades on NASDAQ under the symbol wash I'm now pleased to introduce the host of today's call, Washington Trust, Chairman and CEO Ned Handy.
Thank you Beth and good morning, everybody. Thank you for joining on our second quarter call.
I hope everyone's doing well and has remained healthy since our last call. We appreciate your continued interest in Washington Trust.
Todays agenda is similar to past calls I'll provide an overview of our second quarter highlights and then Ron Iceberg will review our financial performance. After our prepared remarks, Mark Jim and Bill rate will join us to answer any questions. You may have about the quarter.
I'm pleased to report that Washington Trust posted strong second quarter results with net income of $17.5 million or $1 per diluted share.
Meaningful quarter over quarter increases in net interest income wealth management revenues and loan related derivative fees were offset by lower mortgage banking revenues.
Noninterest expenses were well managed in the quarter and our returns on capital levels reflect the successful quarter Ronald.
Ron will provide more detail on a moment.
We are increasingly optimistic about where we are customers in the economies in which we operate stand with regards to the pandemic.
As we contemplate the new work environment, We think first about what is safest for everybody and then we turn to what is most effective and efficient for our customers. We will implement all of the best practices. We've learned throughout the pandemic and we will find the appropriate balance between technology assisted flexibility outstanding customer service culture enhancing product.
This is and continued dedication to delivering consistent strong results.
I continue to feel great pride in the way our employees adjusted and adapted without ever losing sight of what matters most to our customers and the communities we serve.
We were recently named by Forbes as 1 of America's Best in state banks for 2021.
As a reward based on a survey of our customers recognizing the strength of our franchise based on factors such as trust products branch services digital services and financial advice.
Additionally, we were also recognized by Providence business news as 1 of the best places to work and 1 of the healthiest employers in Rhode Island.
We're very proud of these acknowledgements and believe that when we take great care of our customers and our employees it translates into growth and profit for our shareholders.
We were pleased that Liza Staunton Jordan joined our board on April Lisa has deep experience in the payment space and in various aspects of data security Liza was most recently general manager Enterprise strategy for American Express, we very much look forward to her contributions.
Its a digital world and we recognize that the ever spreading technology ecosystem causes both opportunities and challenges. So we continue to invest in improving our customers experience across delivery channels and in our evolving hybrid work environment at.
At the same time, we are investing to protect our customers' data privacy, while educating them about the increasing risk of cyber fraud that accompanied the shift to digital commerce.
Our business model has consistently provided a diverse stream of earnings for us through various economic cycles and that has served us well during the crisis our commitment to strong credit practices has helped to minimize potential costs associated with the pandemic.
We opened our new branch location in East Greenwich, Rhode Island, our first in that vibrant market. We're very pleased with the first few months of operations. We continue to believe we have deposit market share opportunity in Rhode Island, and believe that physical presence matters in tandem with enhanced digital connection and service points.
In market deposits were up 12% from a year ago. We also saw a continued reduction of cost in both on our end market deposit base and our wholesale funding base, Ron will comment on the margin impact.
Turning to lending total loans amounted to $4.3 billion at June 30 is up 3% from the end of the first quarter with residential mortgage and commercial real estate growth outstripping reductions from PPP forgiveness, we processed forgiveness of about $85 million in PPP loans in the second quarter.
Commercial pipelines continued to improve and have returned to pre pandemic levels.
We've seen a resurgence in Cree and warehouse and multifamily in particular and are seeing commercial lending activity pick up as the economy begins to recover.
Mortgage sales volume in the quarter remained strong at $291 million, essentially even with quarter with Q1.
Consistent with that we've seen in the industry in our market area.
Market pricing has reduced our sales yields from very elevated levels realized over the past several quarters.
<unk> mortgage originations at $489 million continued to be very strong on the second quarter with an increasing percentage of these originations heading for portfolio on.
Our mortgage team continues to work diligently the pipeline in application activity remains strong at higher than pre pandemic levels. It appears however that we are beginning to see indications of normalizing in the industry, Although it's too soon to forecast the pace and the impact.
Our wealth management divisions assets under administration reached a record 7.4 billion at June 30 up 6% from March 31. This.
This growth reflects financial market appreciation as well as strong business development and client retention efforts net of routine asset as a client asset flows.
Wealth management revenues were $10.4 million for the second quarter up 5% from the preceding quarter, providing a key source of noninterest income.
We're very pleased with our wealth management Division second quarter performance.
I'll now turn the call over to Ron for a more detailed review of our financial performance, Brian. Thank you Ned and good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was $17.5 million or $1 per diluted share for the second quarter.
This compared to $20.5 million and $1.17 in the first quarter.
Net interest income amounted to $34.8 million up by $1.9 million or 6% on the preceding quarter net.
Net interest margin was $2.55 up 4 basis points.
Net interest income continued to benefit from accelerated fee income recognition due to PPP forgiveness, which total $1 million and had a 6 basis point benefit to the margin.
As compared to $1.2 million and 90 basis points for the first quarter.
Excluding PPP accelerated fees in both periods the margin increased by 7 basis points from $2, 42% to 249%.
Also on the second quarter commercial loan prepayment fees totaled 17, $717000 compared to 217000 in the first quarter.
Excluding the PPP and prepayment fees the margin increase from 2.40% to 242%.
Average, earning assets increased by $140 million with increases at $114 million on average investments and $42 million on average loans.
Hold on earning assets decreased by 5 basis points to 285%.
On the funding side average in market deposits rose by $113 million, while wholesale funding sources decreased by $3 million the rate on interest bearing liabilities declined by 12 basis points to 38 basis points.
Okay.
Noninterest income comprised 37% of total revenues in the second quarter and amounted to $20.6 million down $5.4 million or 21% from the preceding quarter.
As previously disclosed included in other noninterest income in the first quarter with income up $1 million associated with the settlement excluding.
Excluding the impact of this item noninterest income was down by $4.4 million or 18%.
Wealth management revenues were a record $10.4 million on the second quarter by 533000 or 5%. This included an increase in asset based revenues, which were up by 408000 or 4%.
As well as an increase in transaction revenue was up 125000.
The increase in transaction revenues was largely due to tax reporting and preparation fees, which are concentrated in the first half of the year.
The increase in asset based revenues correlated with an increase in the average balance of assets under administration, which were up by $359 million or 5%.
The June 30 end of period assets totaled an all time high 7.4 billion up by $392 million or 6% from March 31, reflecting market appreciation of assets and net positive new business.
Our mortgage banking revenues totaled $6 million in the second quarter down by $5.9 million or 50% on the first quarter.
This included net realized gains of $8.6 million, which were down by $5.2 million or 38%.
Loan sales volume remained strong in the second quarter. However, realized gains were impacted by a reduction in our sales yield compared to the very high levels recorded in the past few quarters.
The decline in sales yield is consistent with what we're using within our markets.
Note that the net.
Second quarter sales yield is still higher than it was at the pre pandemic level.
Mortgage loans sold totaled $291 million in the second quarter down modestly by $1 million from the previous quarter.
Realized gains in the second quarter were offset by net unrealized losses of $2.5 million, reflecting a decrease in net fair value of mortgage loan commitments as of June 30.
This compared to a net unrealized loss of $1.9 million on the preceding quarter.
Originations amounted to $489 million up by $48 million or 11% from the preceding quarter and were up by $63 million or 15% from the second quarter of 2020.
We are seeing a shift in market demand away from sale of loans to portfolio. The percentage of originations to be added to excuse me to be sold in the secondary market decline from 70% to 50% on linked quarter basis on.
Our mortgage origination pipeline was smaller but still very robust at June 30, the pipeline was approximately $298 million down by $98 million or 24% from 396 million at the end of March.
Loan related derivative income was $1.2 million up by 708000 from the preceding quarter.
Regarding noninterest expenses these were down by $1.7 million or 5% on the first quarter.
In both the second and first quarter of 2021 debt prepayment penalties were incurred to pay off higher cost debt <unk> advances.
This expense was 895000 in the second quarter compared to $3.3 million on first.
Excluding the impact of these penalties from both periods noninterest expense was up by 739000 or 2% from the first quarter of 2021.
Salaries and employee benefits expense increased by 555000 or 3% in the second quarter largely due to increases in performance based compensation accruals.
Advertising and promotion expense was up by 338000 on a linked quarter basis, largely due to timing.
Income tax expense totaled $4.9 million for the second quarter. The effective tax rate was 21, 8% compared to 21, 7% in the previous quarter.
We currently expect our full year 2021 effective tax rate to be approximately 22%.
Now turning to the balance sheet.
Total loans were up $105 million or 3% from March 31, and by $12 million essentially flat from a year ago.
In the second quarter commercial loans decreased by $25 million or 1%, which included a net reduction in PPP loans of $82 million.
Excluding PPP commercial loans increased by $57 million or 3% from March 31.
Collecting originations and advances totaling $162 million, partially offset by payoffs and paydowns of $103 million.
Residential loans increased by $133 million, reflecting a higher proportion of wounds originated for portfolio as well as $39 million on residential loans with a weighted average rate of 274% that were purchased for our portfolio.
Investment Securities were up $104 million or 11% from March 31.
In the second quarter, we purchased $194 million of investments with a weighted average yield of 191%.
Securities represented 18% of total assets at June 30.
In market deposits were down $20 million or 1% per March 31, and were up by $421 million or 12% from a year ago.
The quarterly decline was modest considering the drawdown of PPP related deposits and the normal seasonal outflows of municipal in higher Ed deposits.
<unk> last year deposit inflows have allowed us to improve our funding mix by paying down higher cost wholesale advances.
Wholesale brokered Cds were up by $197 million in the second quarter, and an average marginal rate of 8 basis points.
<unk> borrowings were down by $58 million per March 31.
Total shareholders equity amounted to $548 million at June 30 up by $14 million on the end of Q1.
Washington Trust remains well capitalized.
Total risk based capital ratio was $13.6 5% at June 30, and the tangible equity to tangible asset ratio was 8.7%.
Our second quarter dividend declaration of <unk> 52 per share was paid on July 9.
Regarding asset quality non.
Nonperforming assets declined by $2.5 million in the second quarter.
Non accruing loans were 24 basis points.
On total assets on total loans and loans past due 30 days or more were 20 basis points of total loans, both of which were lower than the first quarter.
<unk> decreased by $3.5 million from March 31, reflecting payoffs.
The allowance for credit losses on loans totaled $41.9 million or <unk> 90, 897 basis points of total loans and provided NPL coverage of 400%.
Excluding PPP loans, the allowance coverage was 100 basis points.
There was no provision for credit losses in the second quarter compared to a negative $2 million recognized in the preceding quarter per.
Revision for credit losses, and a related ACL reflected our current estimate of forecasted economic conditions and continued stable asset quality metrics.
Net charge offs were 258000 in Q2 compared to 18000 in Q1.
And finally I'd like to provide an update on our COVID-19, letting the impact.
As of June 30, we had loan deferments on 22 loans totaling $93 million or 2% of total loans outstanding excluding PPP.
Which was down from 88 loans totaling $191 million or 5% of total loans as of March 31 the.
On the deferments as of June 30 consisted of 14 commercial real estate loans totaling $87 million and a residential real estate loans totaling $6 million.
As of June 30, we are reporting 1500, <unk> PPP loans with a carrying value totaling $147 million.
In the second quarter, we originated $4 million on PPP loans down from the $97 million that we originated in Q1 on.
Also in the second quarter, approximately $85 million were forgiven by the SBA as I mentioned earlier approximately $1 million of net deferred fees were accelerated into income.
Net unamortized fees amounted to $4.9 million as of June 30, the timing and recognition the timing of the recognition of these net fees into the margin will depend upon the fee the pace of loan forgiveness as approved by the SBA.
Okay.
That concludes my remarks, and at this time I'll turn the call back over to net.
Thank you run this was another strong quarter for Washington Trust, and we feel well positioned heading into Q3 and at this point, we're happy to take any questions.
We will now begin the question is on quick question 2 quick questions on April.
1 on you touched on Covid.
Moving next speaker phone.
A couple of handset Bancorp.
Thank you.
Any final question has been on Jay.
So on your question Chris.
Great.
Joe.
Okay Brian.
We will pause momentarily to our controller.
Okay.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys. Good morning, good morning.
Mark Good morning, Mark.
I saw that the flows turned positive in the wealth management business I guess I'm curious have you hired some new producers there and have we also seen sort of a last of the runoff from those.
Past employee departures.
So mark this is mark I'll start with that.
We have not added new business developers recently, but as you know we've.
Increased our outbound marketing from our inside that business development officers and also had launched the private clients group initiatives.
Years ago, which is starting to.
Bear fruit on both sides and as far as the outflows from Western financial we do believe that the substantial majority of that is really behind us. So a combination of some good business development outreach.
And slowed asset outflows from western financial really contributes to that and we're feeling very positive about business development momentum going into the second half of 2021.
Okay, yes on market.
And just to add on to the Western outflows really were finished by the first quarter of last year.
Okay. Thank you and then.
On the mortgage front.
If gain on sale margins kind of remain under pressure and it sounds like youre going to be portfolio, a little bit more volume versus selling it.
So im curious how youre thinking about the expense structure at the mortgage company is there an opportunity to maybe scale back some of the costs there volumes are coming down a bit.
Mark I'll take the first part of that question as far as expense base is concerned and then turn it to net and Ron for further comments, we really did not add to the expense base on the mortgage banking business at all during the really strong origination volume for the last 4 quarters. We think we have a very.
Flexible and process oriented infrastructure in place. So there was very limited incremental cost the majority of the costs on that business when volumes increase is variable based on commissions and debt.
And.
As sales go up the commission expense goes up as well as sales come down the commission expense goes down as well. So we really did not build up on mortgage banking cost infrastructure at all at anything more than the very marginal levels. During 2020. So there is we're not concerned about cost reductions.
<unk>.
As Ron said, the mortgage banking business well the mortgage business remains strong, but more skewed towards purchase in this environment than than salable mortgages as a 10 year trended up early in the second quarter, we saw refi drop off as a percentage so.
Cost reduction is not really on.
Our radar screen simply because we didn't have non variable cost increase is running up.
Yes.
I'm sorry.
Go ahead.
I was just going to say, what's the rough split fixed versus variable cost this quarter in the mortgage business.
Ron do you have debt.
Mark I'd have to get back to you on that 1.
Yes.
Okay.
And then lastly, Ron I wondered if you could kind of share with us your outlook for the margin and operating expenses. Thank you.
Sure.
So for the margin I think we would expect to see a slight decline in kind of the core margin in the third quarter to perhaps 2.4%.
Plus or minus and mainly that's because we're still seeing some some some asset yield pressure as the residential mortgages and investment securities rollover and Youll note that we had some some asset yield compression in those 2 areas in the second quarter, so that should likely continue.
Most of the <unk>.
Liability repricing opportunity is behind us.
There's a little bit more left to go but.
I think we'll be roughly on the $2.40 range.
As far as operating expenses I would say that our Q2.
Operating expenses represent a good run rate going forward.
Thank you.
Yes.
Our next question comes from Goldman Derm on Google.
<unk>. Please go ahead.
Hey, good morning, everyone hope everybody's doing well today.
Good morning, David Good morning, Devin.
Great.
On my first question just regarding the loan growth nice to see commercial loans ex PPP come.
Come back this quarter can you just talk a little bit about your outlook here on the back half of the year on how the pipelines look in.
Some of the.
Sectors or areas of the economy that are driving this growth.
Yes, so David I'll take that as net.
<unk> is healthy it's back towards pre pandemic levels. It has been sort of at pre pandemic levels. We've had a lot of fundings on the last few weeks. So it's kind of at the pipeline today is at $158 million.
Which is which is decent for us. So we are seeing renewed activity in.
Mostly industrial and multifamily and on the <unk> side most of the activity is inquiry, we haven't seen a lot of.
<unk> investment on the C&I side, we've got some.
Some senior housing and <unk>.
Memory care unit developments that were getting involved and we've always been in that space, but.
So that slowed down a little bit during the pandemic, but was.
With vaccinations occurring that's picked up a little bit so we're seeing opportunities there.
So we feel good about the second half I think sort of mid single digits is still a good place to.
Peg growth.
For the year, Okay, Great and then just kind of tie in loan growth with the mortgage banking discussion. So we should expect to see.
Growth in net residential real estate portfolio as you look to retain more of the origination is that fair yes.
Yes, it is and we saw some of that in Q2.
And Thats, just kind of a market driven it's not a conscious decision on our part it's just the nature of the of the applications that we're getting.
More and more oriented towards jumbo for instance, so I.
That's a fair statement David.
Okay, Yes, David.
David Hobbs, Mark I'll, just reinforce that the purchase activity in the Boston suburban areas, where many loans are not available by recently ended the conforming agency market by reason of size remains really strong so although refi of conventional refi activity may have dropped off a little bit the new England housing markets, where were present remain very robust and purchase.
Demand is extremely high and market values are strong so as.
As Ron said, it's not that we're redirecting loans from saleable into portfolio.
Just that the jumbo mortgage activity is still very very robust.
Got it that makes that makes a lot of sense.
And then I guess my last question on on credit I mean, obviously credit trends you're phenomenon.
Consistent for you guys.
How do we think about the provision going forward.
Took a credit in the first quarter nothing in this quarter.
As you continue to book loans do.
We asked about do we think about.
Maybe no provision again in the back half of the year.
Yeah.
We are.
Pretty comfortable with where we are on reserves.
I think generally speaking the.
Level of provisioning.
With somewhat correlated to loan growth, but we're also factoring in economic outlook Damian so.
I guess I'll just leave it at saying, we feel pretty comfortably reserved at the moment.
Okay.
Alright fair enough and then if I can sneak in 1 more just any quick updated thoughts on the dividend.
Just given the strength of the earnings.
And capital generation and kind of what you would view for the next potential.
Assessment of the dividend.
Yeah. So so we constantly look at our capital levels, obviously from a safety and soundness standpoint, but also from a shareholder return.
We review the dividend every every quarter.
We're comfortable with it right now.
We consider to be very.
Sustainable.
So I can't give you any guidance as to when the next dividend increase would be but that's something that we look at every quarter.
Okay fair enough. Thanks, a lot guys appreciate it.
Thanks, David.
The next question comes from.
Okay.
Please go ahead.
Good morning, everyone.
Good morning, Eric.
Good morning, Frank.
First question I know that loan related derivative income can be lumpy from quarter to quarter net it's interesting just to look across a couple of different banks that reported. This morning, you had a strong corridor on I had another bank that was weaker on pointed to just the shape of the yield curve, making it not as attractive, but just curious from your perspective.
Led to some stronger income this quarter on and how you think about that line item going forward.
Yeah It gets it.
It's based on new volume and we talk about it with every new customer list.
Rate.
Environment is rate, we generally fixed rates through swaps rather than doing fixed rate lending in.
I think we're dealing with a relatively sophisticated base of customers, especially in our larger ticket loans and they are accustomed to using swaps to manage interest rate risk. So we happened to have a good quarter in new originations and swaps followed so yes, and Youre absolutely correct in your.
Your first comment, it's lumpy and it's hard to predict quarter to quarter.
I can't tell you today, what the what the next quarter is going to look like but we feel pretty good about about.
Kind of staying in line with prior years in terms of the total year.
That makes sense, thanks, and just on switching gears to M&A certainly activity in the industry and then kind of your region has picked up this year and Washington Trust you on me as you know very strong currency could you just remind us how you think about the possibility of an acquisition today and what might be attractive from an asset.
Size or geographies or business next.
Yes, I don't think its changed a lot Eric this is net.
Our gating factors are for what they've always been price those convincing ourselves we can do something with it once we own it.
And it's got to solve for something that we don't think we can solve for is easily organically I don't think are Joe the outlook on the on a whole bank deal has changed.
And footprint.
Got it would be relatively proximate, there arent a whole lot of opportunities.
We've been very careful on the credit front, we're not going to inherit credit issues.
So I don't think any of that's different than it has been we still consider M&A 1 of the avenues for growth. So we're we're looking we're talking we're.
We're not certainly on unwilling to consider that as an important part of our growth strategy.
And then mark.
You can talk about it on the wealth side.
Yeah. Thanks, net we're always looking Eric for wealth M&A and in addition to being.
On the other end of the line for any outgoing incoming calls from sellers looking for a partner we are doing our best just start to proactively try to identify opportunities in our area probably in that size range, we'd be talking about.
800, $800 million 2 billion on a half.
And.
With.
As Ned said business mix.
On.
Capabilities that help complement what we have or address areas that we might like to build up and so the.
On the geography, there could extend a little bit further than in <unk>.
Footprint as it might for a bank.
New England in general and maybe a little bit further south of Connecticut.
That's great color. Thanks for taking my questions today.
Thanks, Eric Thank you.
And then Linda if you have a question please.
Good morning to be joined into the queue.
Next question comes from Laura even quicker with Compass point. Please go ahead.
Yeah, Hey, good morning.
Laurie.
Hoping that we can just go back to expenses.
Maybe just starting with your debt prepay you've done now for the last 3 quarters is that something that we likely see continue or I mean, how are you thinking about that you've got another 5.
$5 million of PPP unamortized fees come in did you not let that drop to the bottom line or how do we think about that yes.
We're pretty close to the end of the barrel on on those prepayments I wouldn't really expect us to be doing anymore.
Okay. Okay, and then just looking at your overall expenses the stripping out the prepays are $32 million a quarter.
Last time, you on mortgage banking revenues are running at $6 million or close to the $30 million per quarter on non interest expenses.
Are there other tightening measures that you're looking at.
Or are we kind of looking at a $32 million run rate for the back half.
Good morning.
I think thats rate, Larry we don't have any we run things pretty pretty lean to begin with so there isn't.
A lot of expense that we could take out necessarily so.
No I think thats, a pretty fair run rate.
Okay. Okay, and then just any comments on on future branch openings, how are you thinking about that.
Yeah.
Yes, Laurie its Ned.
Start with debt and Mark you can chime in I think we still have some market.
The opportunity on the deposit front, we think there are a couple of markets a handful of markets on the Rhode Island footprint that we're we're not physically present, where it would be helpful to be physically present.
We don't have anything planned.
For this year.
That.
What would be put in place this year. So he's Greenwich is it is credit.
Is doing well already beating our expectations, which is nice to see.
But I think Lori over the next couple of years, there might be a handful of branches and at the same time, we think it's really important for us to be thinking about sort of the digital approach and what we need to do to simplify things for our customers and find growth.
Through through non brick and mortar approaches. So we've got we've got both on the radar.
But I think our branch and on our average branch size is.
So on the 150 million.
Range. So we've got some some.
Can leverage that a little bit but.
We.
Every new branches, a little daunting rate in this day and age so we're very careful about it.
Okay perfect. That's helpful. And then just net last question going back to what came in was asking on capital management can.
Can you discuss buybacks you all haven't been active.
On many banks out there or can you talk a little bit about your your thoughts on that thanks.
Yeah <unk> Ron.
Again, we monitor our capital position all the time.
We refreshed our buyback program, which we will continue to do on an annual basis.
No plans at this point in time to be doing any share buybacks in our current.
Stock price level.
It is something that is definitely something that we're thinking about on a on a quarter by quarter basis.
Great. Thanks, so much.
Thanks, Laura.
Yeah.
This concludes our question and a quick question.
Like to turn the conference back over to Ned.
Sandy for any closing remarks.
Well. Thank you all very much we appreciate your time and interest and certainly look forward to speaking with all of you again soon.
That concludes it have a great day.
We'll speak soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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