Q3 2021 Washington Trust Bancorp Inc Earnings Call
Good morning, and welcome to the Washington Trust Bancorp, Inc. 's Conference call.
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Thank you and good morning, welcome to Washington Trust Bancorp, Inc. Third quarter Conference call hosting today's call are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer, Martin <unk>, President and Chief Operating Officer, Ron Osberg, Senior Executive Vice President and Chief Financial Officer and Treasurer.
And Bill rate senior Executive Vice President and Chief Risk Officer.
This presentation may contain forward looking statements and actual results could differ material materially from what is discussed on today's call. Our complete safe Harbor statement is contained in the earnings press release, which was issued yesterday and in other documents we file with the SEC. These materials in all public filings are available on our investor relation.
On site IR Dot Wash trust Dot com.
Singtel Trust trades on NASDAQ under the symbol wash and now I'm pleased to introduce the host of today's call, Washington, Trusts, Chairman and CEO Ned handy.
Thank you Beth.
Morning, and thank you for joining our third quarter call. We appreciate your continued interest in Washington Trust and hope all is well with you as we all continue to navigate the best and safest ways forward.
I'll provide an overview of our third quarter highlights and then Ron Osberg will review our financial performance. After our prepared remarks, Mark Gavin Bill Ray will join us to answer any questions you may have about the quarter.
I am pleased to report that Washington Trust posted strong third quarter results with net income of $18 $8 million or $1 <unk> per diluted share.
We had a strong quarter.
At record highs in net interest income wealth management revenues assets under management in total end market deposits in the quarter.
We continue to believe that the Rhode Island market presents us an opportunity to add physical presence. In addition to digital advances to leverage our brand and bring our distinctive level of care to more Rhode Islanders conveniently.
Proud of the team's continued efforts on growth combined with a high degree of care for our customers as they to work their way through this uncertain stage in the pandemic.
We continue to feel optimistic about how we and our customers are managing the pandemic and we acknowledged that the need for informed care thoughtful decision, making and an empathetic approach to finding the optimum work and life balances is still critical to see our way through these trying times.
Drive to keep what is safest for everyone and what is best for our customers at the center of our thinking.
The economies in which we operate are faring better than in the midst of the pandemic with students back in school restaurants open gyms opened and municipalities ready to embark on the equitable deployment of subsidies to make meaningful long term improvements in critical areas like housing infrastructure education job place training and mental health.
Assistance.
The realities of labor shortages, and logistics challenges and the risk of ongoing inflation weighed on us all.
So, we're helping where we can adjusting where we must and are prepared to adapt to any necessary changes.
We were recently named by Newsweek as the best small bank in Rhode Island, we are humbly proud to serve our customers well, whether we're serving our customers in person or in remote channels. Our market reputation for outstanding service quality is very strong as exemplified by our high net promoter scores, which have exceeded the national average.
As both before and during the pandemic.
Whether it is to simply speed, the delivering of a mortgage or to make it even easier for small business customers to managed payments are to ensure that our operating infrastructure is ever more reliable and secure we recognized that the best solution is often digital.
As always the protection of our customers' data and privacy is a paramount concern in all of these areas, we partner with our core providers and with Fintech companies and we believe that active engagement with the Fintech ecosystem is an important method of understanding both new opportunities as well as competitive challenges.
Once again this quarter, we were well served by the diversity of our revenue sources and our commitment to strong credit practices, which have helped the minimum minimize potential costs associated with the pandemic.
Total loans declined 3% in the quarter. This was largely due to PPP loan forgiveness.
New loan formation and commercial was strong at $100 million in the quarter, but was offset by commercial payoffs and paydowns.
Third quarter mortgage lending activity remained robust and pipelines are relatively strong.
Recent increases in longer term interest rates will likely result in a reduction of mortgage refinancing activity compared to the record levels of late 2020 and early 2021.
However, in our market supply and demand characteristics suggest that buyer purchase activity and housing values should remain.
Our wealth management divisions assets under administration stood at a record $7 4 billion at September 30th.
Wealth management revenues were $10 5 million up slightly for the third quarter and at a record level.
We're very pleased with our wealth management divisions continued strong performance from both a customer and shareholder perspective growth through business development and market appreciation helps us enhance this recurring revenue stream, which provides a welcome diversity in the current low interest rate environment.
I'll now turn the call over to Ron for a more detailed review of our financial performance.
Ned good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was $18 8 million or $1 70 per diluted share for the third quarter.
This compared to $17 5 million and $1 per share for the second quarter.
Net interest income amounted to $36 1 million up by $1 3 million or 4%.
The net interest margin was $2 58 up by three basis points.
Net interest income continued to benefit from accelerated fee income recognition due to PPP forgiveness, which totaled $2 million and had a 13 basis point benefit to the margin.
This compared to $1 million and seven basis points in the second quarter.
Additionally, there were no commercial loan prepayments in the third quarter compared to $717000 of prepayment fees and.
In the second quarter, which was five basis points.
Excluding the impact of these items the margin increased from $2 42 to $2 45.
Average, earning assets increased by $69 million with increases of $42 million in average loans and $16 million in average investment securities.
Yield on earning assets was $2 85 for the third quarter unchanged from the previous quarter.
On the funding side average in market deposits rose by $108 million, while wholesale funding sources decreased by $79 million the rate on interest bearing liabilities declined by three basis points to three 5%.
Noninterest income comprised 36% of total revenues in the third quarter and amounted to $25 million down by 73000 from the preceding quarter wealth management revenues were $10 5 million up by $27000. This included an increase in asset based revenues, which were up by 200.
<unk> 3000, or 2% offset by a decrease in transaction revenues of 206000 due to a decline in seasonal tax reporting and preparation fees.
The increase in asset based revenues correlated with an increase in the average balance of assets under administration, which were up by $249 million or 3%.
At September 30 end of period assets totaled seven 4 billion up by $2 million from June 30, reflecting net positive client asset inflows, which were partially offset by market depreciation of assets.
Our mortgage banking revenues totaled $6 4 million in the third quarter.
379000 or 6% this.
This included net realized gains on sales of loans of $5 8 million, which were down by $2 8 million or 33%.
Mortgage loans sold totaled $174 million down by $117 million or 40%.
This was partially offset by an increase in sales yield.
<unk> revenues were helped by positive fair value changes on mortgage loans held for sale and forward loan commitments of 467000, this compared to a negative fair value change of $2 5 million in the second quarter.
Mortgage loan originations amounted to $396 million down by $93 million or 19% from the preceding quarter and were down by $114 million or 22% from the third quarter of 2020, we are seeing a shift in market demand away from sale of loans the percentage of originations to be sold in the second.
<unk> market declined from 50% to 48% on a linked quarter basis and from 70% in the first quarter.
Our mortgage origination pipeline is still robust at September 30, the pipeline was $281 million down by $17 million or 6% from the end of June.
Loan related derivative income was 728000 down by 447000 in the preceding quarter.
Regarding noninterest expenses these were down by 492000 or 1% from the second quarter.
In the second quarter debt prepayment penalties of 895000 were incurred to pay off higher cost <unk> advances excluding the impact of these penalties noninterest expense was up by 403000 or 1% from the second quarter.
Salaries and employee benefits expense increased by <unk> 80000, or 4% in the third quarter FDIC deposit insurance costs were up by 108000.
And the remaining increase reflected modest increases across a variety of expense categories.
Income tax expense totaled $5 3 million for the third quarter. The effective tax rate was $22, one compared to 21, 8% in the preceding quarter.
We currently expect our full year 2021 effective tax rate to be 22%.
Now turning to the balance sheet.
Total loans were down by $13 million from June 30, and up by $4 million from a year ago.
In the third quarter commercial loans decreased by $90 million or 4%, which included a net reduction in PPP loans of $70 million.
Excluding PPP loans commercial loans decreased by $20 million or 1% from June 30, reflecting payoffs and paydowns.
$103 million as well as lower line utilization of $17 million. These decreases were partially offset by new loan originations and advances of $100 million.
Residential loans increased by $82 million, reflecting a higher proportion of loans originated for portfolio.
Okay.
In market deposits were up by $310 million or 8% from June 30, and up by $602 million or 16% from a year ago.
The quarterly increase included seasonal inflows from our municipal and higher Ed depositors as well as organic growth compared to 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 $23 million in the third quarter, while <unk> advances were down by $186 million.
Total shareholders equity amounted to 555 million at September 30 up seven 5 million from the end of Q2, we remain well capitalized the total risk based capital ratio was 13, 83% at September 30, and the tangible equity to tangible assets ratio was eight 9%.
Our third quarter dividend of <unk> 52 per share was paid on October eight.
Regarding asset quality.
Nonperforming assets increased by 495000 in the third quarter nonaccrual loans were up two 6% of total loans and loans past due by 30 days or more were two 2%.
The allowance for credit losses on loans totaled $41 7 million or <unk>, 97% of total loans and provided NPL coverage of 380%.
Excluding PPP loans, the allowance coverage was <unk> 99 basis points.
Net charge offs were 168 third quarter compared to 258000 in the second quarter.
And for both the third quarter and the second quarter of 2021, there was no provision for credit losses to.
The provision and related ACL reflect our current estimate our forecasted economic conditions and continued stable asset quality metrics.
And finally I'd like to provide an update on our COVID-19 lending impact as of September 30, we had loan deferments on five loans totaling $38 million or 1% of total loans outstanding excluding PPP loans.
This was down from 22 loans totaling $93 million or 2% as of June 30.
Also as of September 30th we're reporting 630, PPP loans with a carrying value of $77 million.
In the third quarter $73 million was forgiven by the SBA was $2 million of net deferred fees accelerated into income as a result.
Net unamortized fees on PPP loans amounted to $2 6 million as of the end of September.
At this time I will turn the call back connect.
Thank you Rob this was another strong quarter for Washington Trust, and we feel well positioned heading into the final quarter of the year.
Now, Ron and Mark and Bill and I are happy to take any questions you might have.
We will now begin the question and answer session to ask a question in My Press Star then one on your Touchtone style.
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This time, we will pause momentarily to assemble our roster.
Our first question today will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Good morning.
Hey, Mark.
First question I had for you I heard your comments about the mortgage business, perhaps normalizing do you feel like in a more traditional environment. This is.
Maybe 25 or $27 million revenue kind of business or when.
When things normalized.
The revenues fall more precipitously than that do you think.
I'm going to turn that.
Mark comments Mark.
He's closest to it but I think I think we'll probably bottom out.
Somewhere higher than that.
<unk> levels.
Just just based on the volume that we've been generating of late so Mark. This is Ron So we had.
$15 million in mortgage revenue in 2019.
If you annualize what we just did in the third quarter that works out to about $25 5 million that feels like it's probably still higher than where it's going to end up so it's going to be somewhere I think between that 15, and the 25% that we're at currently is that $20 million.
I think it's hard to say and Mark Jim I don't know if you have any any color you want to add to that.
I do and thanks for those preceding comments net and Ron Mark Hi, Thank you.
Look back to where we entered the pandemic in 2020, we had a mortgage pipeline somewhere just below the $200 million range and from a mixed standpoint I think.
Certainly the run up in longer term interest rates will have an impact first on the conventional salable refinance business and so.
Pending on whether or not inflation expectations continue to be high if the pipeline were to decline in relative terms. It would probably be more on the saleable side than on the portfolio side. However, as Ned said in his comments, we think the housing markets in Connecticut, Massachusetts, and Rhode Island remained pretty robust and so mortgage.
And for retention of portfolio mortgages for reasons of size for example, jumbo should still continue to be strong so.
It's very broad guidance that Ron gave but somewhere between pre pandemic levels on an annualized level of sales gains would be.
Likely.
With interest rates and the housing market, where we see them now.
Okay great.
Very helpful. Thank you and also I guess I was curious as you think about the margin you guys.
<unk> performed a little better maybe than you thought you were going to last quarter. How are you thinking about the outlook for the margin today do you still have some ability to drive those funding costs lower.
Yes, there is not much left there Marc so I would say, we'll probably see some pressure on asset yields. So yes, we did do a little better in the third quarter than we than we guided.
But I would say our the guidance, we gave reported kind of consistent with the guidance, we're giving now I would say we trend closer to $2 40 in the fourth quarter.
Okay, and then last question I guess I was curious about it looks like you've got about $1 billion six loans in Massachusetts, and no branches. There is that a missed opportunity to maybe sell other products and services to those loan customers.
Is that in the cards for you all to.
Open some branches in Massachusetts, and thank you.
Yes, Mark do you want to comment on that.
Yes, I would.
We continue to try to figure out the best way to improve deposit gathering in markets, where we have less of a physical presence like Connecticut or no physical presence in Massachusetts, and we have been successful on a preliminary basis and introducing some programs, where if we are able to get deposits from customers. For example, who are jumbo mortgage customers in Massachusetts.
And service them primarily digitally.
Been successful in gathering some of those announced the tricks is to of course keep and build on them and I think in the remote markets.
Well, we don't have a current branch presence, it's more likely that we would try to broaden our digital offerings to those customers then to open branches de novo.
It's <unk>.
Primarily because it's a hard market to get into de novo and you'd have to either.
<unk> opened several at one time.
Or perhaps look for opportunities to M&A and branch divestiture. So I'd say at the current time our plants are more.
If there are physical opening presence opportunities they are probably going to be more profitable faster in Rhode island than they would be in master, Connecticut, and so we may look to a combination of digital <unk> M&A.
Two.
<unk> broadened that our client service our customer service center is our outreach.
Part of the digital offering program and has been as we think successful in servicing some of those remote customers.
Thank you.
Thanks Mark.
Okay.
Our next question will come from Damon Delmonte with K BW. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
Alright, then being first.
First question regarding loan growth and kind of the outlook.
Can you just give us a little bit of insight.
Insight as to how you think the Paydown activity is going to play out here in the back half of the year I mean originations have been strong.
Offset by the elevated pay downs or do you think that slowing at all and you can start to show some some net growth in the coming quarters.
I would say certainly slowing in Q4 versus Q3 is our expectation Q3, we had.
Pretty big payoff quarter.
The story continues to be somewhat the same we're lending to high quality borrowers who are able to take advantage of long term financing opportunities or sales continuing low cap rates and so I think.
While rates stay low.
Our type of customer, we will keep taking advantage of cycling cycling money in an in and out of deals.
And we tried to put.
Prepayment penalties or success fees in place, but that's pretty early thing to be negotiated away by competition in the market. So that's a little bit.
It's difficult, but I think I think.
Certainly as rates if rates if rates tick up a little bit that may put some pressure on cap rates and might make it less enticing.
We in terms of scheduled to pay US we think the number is a little lower in Q4.
Credit formation.
I'd like to see more we continue to look at the possibilities of adding <unk>.
Lenders.
And growing organically that way.
We think theres opportunity.
Some of the.
The noise in Connecticut.
And in Massachusetts, We think there may be some opportunities to add lenders, but I think I think for the time being we don't see it.
Opportune time to change.
Our risk tolerances.
We think we think we're playing in the right place and.
We're.
We're on the pavement constantly fighting it out on the street corner to winter.
Hopefully more than our fair share of deals.
I've said, it before and I'll say, it again I'd rather be paid off early in real estate.
So I like the quality of the deals.
Sure.
I'm getting involved in and I think we will.
Keep on that path.
Got it okay. That's good color. Thank you and then on the C&I side in line utilization.
Where does that stand in the third quarter and how does that compare to the second quarter.
Yes, we have.
We have a pretty small universe.
Corporate lines are down by down by $17 million in the quarter down a little bit on a percentage basis.
It's not going to.
They have a major impact on the numbers either way I expect that utilization will come back to.
Sort of normal levels.
Really most of that I believe was in was in one large line that paid down at quarter end.
So.
It's really.
There are so few lines, it's hard to it's hard to think of that as being a major mover.
Got it okay.
And then just.
I guess my last question on expenses.
Ron anything unique that we should consider going forward or do you think this mid.
Mid $32 million range is a reasonable run rate going forward.
Yes, I think that's fine for Q4 came in I mean, we're just starting our budgeting process for 2022, so I'm not really ready to talk about that yet.
You guys are all aware of that.
Seem to be entering an inflationary period. So we kind of have to think about how that might affect our run rate going forward. So not quite at that point yet to talk about that.
Okay Fair enough, that's all that I had thanks a lot.
Thanks, Dave.
Okay.
Our next question comes from Erik Zwick with Boenning and Scattergood. Please go ahead.
Good morning, guys.
Good morning, Eric Eric Good morning.
And just to follow up on that last question I realize you're still in the planning process for 2002 with <unk>.
Susan I guess Im planning process for the whole organization, but as we think about the new branch in Cumberland, that's going to come online next year.
What's the expected timing in terms of the quarter that you expect to open that in any estimates on that annual cost for that branch.
Yes, Mark I don't know if you could talk about the timing.
Eric.
The typical cost of a branch for us on a full year basis is about 650000.
Right and from a timing perspective, Eric we're thinking late second quarter, perhaps the end of the second quarter of 2022.
Great. Thank you.
And then transitioning back to the discussion on loans is thinking about it maybe a different way.
Net in your comments opening comments you mentioned that the pipeline is relatively strong today wonder if any of you were able to provide any detail in terms of the construction of that in terms of type of loans as well as what the average yield is in the pipeline and how that might compare to existing loan portfolio yield.
Yes, I would say this.
The pipeline is not at its at its.
High point is.
The Midland is like 150.
There is a good portion of that that's construction loans like nearly half of it.
So.
And it's tilted.
Towards Cree.
At this point in time.
I think just based on loans coming on in the quarter versus loans being paid off the loans coming on were a little favorable from a yield perspective.
So I think.
Some of the high quality.
Year ago, two year ago vintage stuff was price a little lower than what's coming on today, we are getting a little bit of incremental yield.
So I feel I feel good about that from a from a margin standpoint.
We did we did have.
Fair amount of closing in the September itself. So the pipeline got a little.
Emptied out.
It will build back up it's kind of hovered in the $175 million to $200 million range I expect that we'll get back there.
One thing that I think we are experiencing a little bit as construction loans are.
Funding a little slower just based on.
Logistics issues.
And so I think they will.
I will take a little bit longer to reach full.
Full funding, but other than that.
I feel pretty good about where we are.
That's good color. Thank you.
Then thinking about credit.
You mentioned at the beginning of the call that you feel that the level of the reserve is appropriate today, given the risks in the portfolio and the economic outlook as we think about provisioning going forward would you expect it now to match net charge offs and growth or are there other factors to consider at this point.
Yeah, Eric it's Ron So we expect credit to remain stable in the absence of Covid relapse or some other unforeseen economic shock.
That said provision should generally track to loan growth and the economic outlook. So.
At least for the short term foreseeable future. It's it seems to be kind of stable.
Okay. Thanks, and one last quick one if I can squeeze it in.
I noticed in the press release, you mentioned it several times already with regard to.
Mortgage loans and must have been sold your gain on sale margin was up in <unk> and I think a lot of your competitors are seeing compression there on the margins. So just curious where your advantage might lie whether it's in the mix that you are selling or maybe a technological and speed advantage. Just curious if you've got any thoughts on that front.
Yeah.
Yes, Eric this is mark I'll start with that from kind of a.
An operational perspective, and then Ron can go into some of the details. We do think that one of the things that we do very well as speed and process time is a huge advantage for everybody in our mortgage transaction the seller the buyer of the bank and your referral sources and so we have made we think good use of.
Additional digital technology to try to speed the turn time from application to close.
It's kind of an Unsexy thing, but every day that you can shave off the delivery time.
Helps to preserve margin a little bit.
Having said that I think that we do believe that compared to the high margins of late 2020 margins are returning to a more normal level, perhaps higher than when we entered the pandemic, but it's it's hard to defend against market trends with internal.
Process improvements alone, but we do think that that is an advantage and an edge for us in execution. Ron I didn't know if you have anything to add on.
<unk>.
Margin in Q3.
Yes.
Yes, Mark so the only other thing I would add to that as it becomes a little bit of a supply and demand thing and it is.
As volumes are ramping up high East, Tennessee, the yields go up because there is.
Capacity to process, the loans and the pricing pressure.
The pricing opportunity gets better so.
We kind of dipped down a little bit in Q2, we rebound a bit in Q3, I would say, we're probably still at a fairly high historical yields. So we'll see how long we're able to maintain that.
That's helpful. Thanks for taking my questions today.
Sure. Thanks, Eric Thanks, Sarah.
Our next question comes from Laurie Hunsicker with Compass point. Please go ahead.
Yeah, Hi, Thanks, good morning.
I'm wondering if.
If we could circle back to your comments on on that one.
Fourth quarter margin guide of around <unk> 40.
Stripping out PPP and obviously there are no prepay fees that we are at 244.
Essentially for third quarter staff four basis points of contraction can you just help us think a little bit more.
About that and I guess you know.
Looking into 2022.
No weapon to himself.
Especially given that your cost of funding for low and there is nothing left in terms of borrowing prepays.
I think that that was one.
Help us think about that and then just one last piece of that can you share with us what is remaining in terms of PPP fees that are amortized.
Yes, so I'll answer that second part first it's $2 6 million.
On amortized PPP.
Great.
As far as the margin itself.
We're going to continue to see some some asset yield pressure on our resi book and on our mortgage backed securities.
As those paydowns.
The legacy yields are higher than they are being replaced by lower yielding assets. So that's really the main story. There I think we've done a nice job of bringing down our funding costs.
Through both deposit growth and just kind of repricing or are our wholesale funding book down.
Not a lot of opportunity left there.
With that so.
That's kind of where we are I wouldn't expect to see lots of big moves within the margin, but I would say the overall trend over the next few quarters, we'll probably be.
Lower than where we are right now.
Okay. That's helpful.
And then obviously your credit is pristine here.
I was wondering if you could help us think it looks like on the hotel side Your hotel.
Loan balances have gone up from what's been previously 150 to 160, you're now $199 million or are you, adding to your hotel book and then.
Any color you can give us there.
Deferrals, how much of that is is.
The hotel.
Thanks.
So we did make one new hotel loan.
In Newport.
On a very favorable loan to value property that it just been renovated.
And where the customer would be no.
But I will tell you that we're not out canvassing for new hotel loans otherwise.
So that was.
Fair.
Opportunity.
Phil I don't know if you've got specifics on or run on the on the five remaining.
Deferrals.
In terms of whether whether there are hotels in there.
<unk> healthcare one retail okay basically three ways three relationships hotel is just under $10 million.
Okay, Great. Thanks, and then do you have an average LTV on your hotel Buck.
Or if not I can follow up with you offline.
So I don't know if you could give exit.
Yes, we'd have to we'll have to do that offline to give you what the latest numbers are the numbers. We looked at last time across the portfolio. If I remember right. We're in the mid fifties, we tend to underwrite these very carefully but we shouldn't do it offline follow up.
Okay, Great and then just one last question I appreciate.
Appreciate that 22% tax rate guide for fourth quarter, how should we be thinking about the tax rate in 2022.
Yeah.
Yes.
Yes, it's going to be approximately what we're seeing this year is like say 'twenty two.
Great. Thanks, I'll leave it there.
Sure.
Thanks Laurie.
Ladies and gentlemen, 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 all for joining us. This morning, we do appreciate your continued interest in <unk>.
Hope all is well with you and continues that way and we will talk to you all soon and Lori will come back to you.
Have a great day everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.