Q4 2021 Washington Trust Bancorp Inc Earnings Call
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Good morning, and welcome to the Q4 2021 Washington Trust Bancorp incorporated conference call. My name is one and that would be going up at eight O. Today, if participants need us he's done during their call at any time. Please press star followed by number zero participants are interested in asking a question at the end of the call.
Full press the star followed by number one to join the queue. So this call is being recorded and now I will turn the call over to at least have Beth b.
Senior Vice President Chief marketing and corporate communication Oh, if he said MS. Eckel. Please go ahead.
Thank you good morning, and welcome to Washington Trust Bancorp, Inc, 2021, fourth quarter and year end conference call.
Joining us for today's call are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer, Mark <unk>, President and Chief Operating Officer, Ross <unk> Senior Executive Vice President Chief Financial Officer, and Treasurer, and Bel Ray Senior Executive Vice President and Chief Risk Officer.
This 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 our earnings press release, which was issued yesterday and in other documents filed with the SEC. These material and other public filings are available on RF.
Investor Relations website at IR Dot wash Trump Dot Com, Washington Trust trades on NASDAQ under the symbol Soares.
Now I'm pleased to introduce the host of today's call, Washington Trust, Chairman and CEO Ned Handy.
Thank you Beth good morning, all and thank you for joining our fourth quarter call. We do appreciate your time and continued interest in Washington Trust.
I'll provide an overview of our fourth quarter highlights and then Ron Osberg 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 fourth quarter results with net income of $22 million or $1 15 per diluted share compared with $18 $8 million or $1 <unk> per diluted share in the prior quarter.
In the quarter, we hit record highs in wealth management revenues.
That's under management total end market deposits, Brian will provide more detail.
For the full year, we generated net income of $76 9 million or $4 39 per diluted share.
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 to minimize potential costs associated with the pandemic.
Our strong brand positioning in the Rhode Island market supports moderate branch expansion along with investment in digital capabilities and access points. We have commenced construction of our new branch in Cumberland, Rhode Island. Our team has done an exemplary job of managing through the pandemic, keeping the branches open and staffed and save for our customers and to.
'twenty, one we grew end market deposits by $678 million or 18%.
Fourth quarter mortgage lending activity remained robust as we continued to take advantage of low rates and the strong markets in which we operate.
Full year mortgage originations reached a record high of $1 $69 billion.
At year end, our wealth management divisions assets under administration stood at a record seven 8 billion.
<unk> revenues reached a record high.
In the quarter, we rebranded and restructured our Rhode Island, Massachusetts, and Connecticut wealth management offices, and now operate under one unified name, Washington Trust wealth management.
Washington Trust has built one of the new England's Premier boutique advisory groups through both organic growth and strategic acquisitions, and this will better position our wealth management group for future growth as a collaborative organization, we were able to offer clients, Washington, Trust's complete resources to help them manage their wealth achieve their financial planning goals.
The legacy and meet their banking and borrowing needs as part of the rebrand, we launched and enhanced wealth management web site and comprehensive marketing campaign.
In 2021 total loans, excluding PPP loans were up 6%.
In the latest quarter loans, excluding PPP were up by 1% buoyed by growth in residential loans.
New loan formation and commercial was strong in the quarter, but was more than offset by payoffs and paydowns.
The commercial pipeline is relatively strong entering 2022, but the extent of pay off activity continues to be difficult to predict and the continued low rate environment.
We are investing time and talent to be sure. We are staying informed about advances in the fintech space. We believe that active engagement with the Fintech ecosystem is an important method of understanding both new opportunities as well as competitive challenges.
We're making incremental improvements to products and processes constantly and we often partner with our core providers and with Fintech companies to achieve the best outcome.
During the quarter, we continued to make progress on our Covid impacted loan deferrals, ending the quarter with only two loans in deferral to one borrower.
And forgiveness of PPP loans continued to be process smoothly through the SBA system. Overall credit has remained very strong and has contributed to a negative provision for credit losses in the quarter.
We feel confident about how we and our customers and manage through the pandemic. Although the latest variant confirms the need for a careful approach to determining optimal work structure and timing for the transition.
Our optimism about the economic landscape with improved unemployment levels, approximately 10 million jobs still to be filled nationally strong corporate earnings and buoyed consumer strength.
Geopolitical concerns the lingering impact of COVID-19, and the impact of inflation.
In the quarter, Washington Trust was named one of the nation's best banks to work for by American banker magazine for the second straight year.
Notably Washington Trust was the only Rhode Island based institution to receive this recognition.
I want to take this opportunity to thank our employees for their perseverance their positive outlook and their consistent concern for each other and our customers.
We continue to invest in our workforce to ensure our team is well compensated and has the right training tools and technology.
We are attuned to the challenges of a hybrid work environment and offer wellness programs to ensure our employees maintain a good work life balance.
With that I'll turn the call over to Ron for a more detailed review of our financial performance.
Thank you Nick good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was $22 million 50 per diluted share for the fourth quarter as compared to $18 8 million and $1 seven for the third quarter full year net income for 2021 was $76 9 million $4 39 per diluted share.
Up by 10% from $69 8 million or $4 per diluted share reported for the prior year.
Net interest income amounted to $37 7 million up by $1 7 million or 5% from the preceding quarter. The net interest margin was $2 71 up 13 basis points.
Net interest income continued to benefit from PPP forgiveness fee income, which totaled $1 2 million and had a 90 basis point benefit to the margin.
This compared to 2 million and 13 basis points in the third quarter. Additionally.
Additionally, there was $2 2 million of commercial loan prepayment fee income in the fourth quarter, which had a 16 basis point benefit to the margin. There was no prepayment fee income in the preceding quarter, excluding the impact of both items. The margin increased one basis point from $2 45 to $2 46.
Average, earning assets decreased by $8 million, largely reflecting a decline of $36 million and average loans, which also included a decline of $64 million in average PPP loans. This was partially offset by increases in average investment securities and cash and due from banks.
Yield on earning assets was $2 97 for the fourth quarter by 12 basis points on a core basis. It was $2 72 unchanged from Q3.
On the funding side average in market deposits rose by $203 million or wholesale funding sources decreased by $257 million.
The rate on interest bearing liabilities declined by one basis point to 34%.
Noninterest income comprised 35% of total revenues in the fourth quarter and amounted to $20 3 million down 213000, or 1% from the preceding quarter.
Wealth management revenues were $10 5 million in the fourth quarter of 549000 or <unk>, 5%.
This included an increase in asset based revenues, which were up by 193000 or 2% and.
And a decrease in transaction revenues of 144000 and the.
The increase in asset based revenue is correlated with an increase in the average balance of assets under administration, which were up by $86 million or 1%.
December 31 end of period assets under administration totaled a record seven 8 billion up by $341 million or 5% from September 30, largely due to market appreciation.
Our mortgage banking revenues totaled $4 3 million in the fourth quarter capped by $2 million or 32%.
Net realized gains on sales sales of loans were $5 7 million down by 55000 or 1% from the preceding quarter at lower sales yield was essentially offset by higher sales volume.
Market pricing has been compressing the sales yield and we expect this trend to continue into 2022.
Mortgage loans sold totaled $197 million in the fourth quarter up by $23 million or 13%.
Mortgage banking revenues in the fourth quarter were also impacted by negative fair value changes on mortgage loans held for sale and forward loan commitments of $1 $6 million, largely reflecting a decline in the mortgage pipeline.
This compares to a positive fair value change of 467000 in the preceding quarter.
Mortgage loan originations amounted to $363 million in the fourth quarter down by $33 million or 8%.
Full year 2021 originations reached an all time high of $1 69 billion up by $16 million or 1% from 2020.
The percentage of originations to be sold in the secondary market has been in the 50% range for the previous three quarters and this was down from 65% to 70% previously.
Yes.
Our mortgage origination pipeline at December 31 was $194 million down by $87 million or 31% from $281 million in the pipeline at the end of September .
Loan related derivative income was $2 million up by $1 2 million from the preceding quarter and income from bank owned life insurance totaled $1 1 million in the fourth quarter up by 526000 due to life insurance proceeds.
Regarding noninterest expenses these were up by $2 7 million or 8% from the third quarter.
In the fourth quarter debt prepayment penalties of $2 7 million were incurred to pay off higher cost of FHA advances.
Excluding the impact of these penalties noninterest expense was essentially unchanged from the third quarter.
Salaries and employee benefits decreased by 638000 or 3% in the fourth quarter.
Reflecting adjustments to performance based accruals.
This was essentially offset by an increase of 291000 and outsourced services expense due to higher swap volume as well as modest increases across a variety of other categories.
Income tax expense totaled $5 5 million for the fourth quarter. The effective tax rate was 21, 3%. We expect our full year 2022 effective tax rate to be approximately 21, 5%.
Now turning to the balance sheet.
Total loans were down by $13 million from September 30, and up by $77 million or one 8% from a year ago.
In the fourth quarter total commercial loans decreased by $64 million or 3%, which included a net reduction in PPP loans of $39 million.
Excluding PPP loans commercial loans decreased by $25 million or 1%.
Breaking this down a bit commercial real estate loans decreased by approximately $23 million.
<unk> formation in the quarter was strong at $123 million was offset by an elevated level of payoffs of $146 million.
C&I loans, excluding PPP decreased by approximately $2 million as payoffs of approximately $49 million for essentially offset by new loan originations and advances of $47 million in the quarter.
Residential loans increased by $55 million, which included originations of $174 million.
In market deposits were up by $162 million or 4% from September 30, and up by $678 million or 18% from a year ago.
The increase included growth across all deposit categories wholesale brokered Cds were down $240 million in the fourth quarter and <unk> borrowings were down by $78 million, reflecting the prepayment of $45 million of higher cost <unk> advances in the fourth quarter.
Total shareholders equity amounted to $564 8 million at December 31 up by $9 5 million.
Washington Trust remains well capitalized our fourth quarter dividend declaration of <unk> 54 per share was an increase of <unk> <unk> per share from the previous quarter and was paid on January seven.
Regarding asset quality non accruing loans for 33% of total loans compared to <unk>, 6% at the end of Q3.
Loans past due by 90 days or more were two 4% of total loans compared to two 2% at the end of the third quarter.
<unk> increased by $9 4 million from September 30, due to the restructuring of our commercial real estate relationship that did not qualify for additional TD are accounting relief.
The allowance for credit losses on loans totaled $39 1 million or <unk>, 91% of total loans and provided NPL coverage of 275%.
This was down from $41 7 million or <unk>, 97% in Q3.
Excluding PPP loans, the allowance coverage was <unk>, 92%.
The fourth quarter provision for credit losses was a negative $2 8 million there was no provision recognized in the third quarter.
The reduction in the ACL reflected a continued downward trend in loan loss rates as well as improvements and forecasted economic conditions and relatively stable asset quality metrics.
We had net recoveries of $27000 in the fourth quarter compared to net charge offs of 168000 in Q3.
Full year 2021, net charge offs were 417000, or one basis point compared to $1 1 million or three basis points in 2020.
And finally regarding COVID-19 as of December 31, we had a single deferment on a commercial real estate relationship totaling $9 7 million.
This is down from active deferments totaling $38 million or 1% as of September 30.
Also as of December 31, we are reporting 347, PPP loans totaling $38 million in the fourth quarter about $40 million of loans were given by the SBA with $1 2 million of fees accelerated into income net unamortized fees amounted to $1 3 million as of December 31.
And at this time I will turn the call back to Nick Thank.
Thank you Ron this was another strong quarter and year for Washington Trust, and we feel very well positioned heading into 2022.
And at this point, we're happy to take any questions.
Thank you as a reminder to ask any questions. Please press the star followed by one on your telephone keypad. If you turn your mind. Please press the star followed by number one.
One propane to ask a question Lisa So Youll fund Ethan mute locally.
And our first question will come from Mark fitting long from Piper Sandler. Please Mark your line is now open.
Thank you for that nice introduction and happy new year everybody.
Good morning, My first question.
Hey, Nick I was wondering if you could share with us the size and complexion of the pipelines, both commercial and mortgage.
Yes, I'll start on commercial and then Ron I think you gave some stats on the mortgage where we can go through that do so actually the pipeline on the commercial side Mark is relatively strong it's up almost $90 million over where it was last year at this time instead of $175 million in.
Interestingly, it's it's weighted towards C&I. So, it's about 100 plus million C&I and the balance in crude.
So we've really sort of.
Renewed and refreshed activity.
Netiquette marketplace.
C&I front, we're pretty active in the.
Assisted living with memory care element to it space.
It's proved to be pretty fruitful for us.
We see some good activity there and then we've got.
Couple of hundred million dollars of yet to be funded construction.
Proceeds out there. So so we continue to expect kind of $7 million to $8 million a month in construction funding for the next bit here.
Yes, Mark.
As far as as far as residential I mean, I mentioned, our pipeline is $194 million. It has been declining now for our COO.
For three or four straight quarters.
It's declining as I'm sure you've seen across.
Across the national.
Yes, the national environment, but I don't know if theres more that you need in that.
Okay, No I think thats, good and then on.
So as it relates to mortgage banking revenue.
When you guys do your budgeting for that business do you sort of utilize the MBA stats in terms of expected volumes for 2022 or do you think your business will perform a bit differently than sort of the industry trend.
Yeah. So we certainly look at the MBA data to inform how we think about things. So I guess I can give a little bit of guidance on that.
The MBA is projecting industry origination volume will decline.
About 35% year over year.
And we're expecting to be somewhat lesser decline than that maybe in the high 20% range.
This is all speculative given potential movements in rates.
And mortgage banking, Rick excuse me.
Yeah.
Mortgage banking revenue is dependent on the percentage of originations sold which has been trending down a bit for us as well as sales yield which are trending down nationally.
But we do expect revenues to be higher in 2022 than they were pre pandemic.
So far this is mark I'll add some.
Im sorry, Mark go ahead.
I just wanted to say that while originations and pipeline volumes are down.
From previous quarters as Ron said, we still feel a purchase activity is quite robust in the markets that we serve.
Given the size of mortgage loans, particularly in the Boston Metropolitan area.
The purchase market still should produce a fairly robust level of loan originations, which we tend to retain in portfolio today that pipeline is about 45% purchase so the bigger declined on a relative basis, we'll have been.
Refinance.
Conforming sale activity.
Okay.
Okay, Great and then I.
I think you have $1 billion to lock in deferred PPP income I'm wondering do you expect most of that to come in in the first quarter.
So I would say about half of what we had remaining at the end of September came in in the fourth quarter and it looks like the trend is about the same so maybe it's got a halfway.
Mark.
About half will probably come in.
According to what we've seen in the brief period of the first quarter so far.
Okay.
And then Brian I Wonder if you could just kind of give us an update on what the impact on NII is.
For each 25 basis point hike in rates.
Yeah, So we estimate that at about a $1 million.
That's on an annualized basis.
Yes.
Okay.
And then can you help us think about sort of other.
Significant moving pieces as it relates to the margin.
I know you had that.
Prepayment penalty income this quarter and the PPP fees, but anything else.
That we should be thinking about as we model out margins for 2022.
Yes, I don't think so mark so we had a core margin of $2 46 in the fourth quarter.
All of our.
More expensive longer term <unk> debt has been paid.
So theres no more opportunity there so.
Excluding PPP and excluding any any change in the fed funds rate, we would expect our margin to be pretty much in line with what we reported on a core basis in the fourth quarter at mid $2 <unk>.
Great and then just one last question what sort of growth rate are you budgeting in 2022 for technology related spending thank you.
Yes.
Nothing unusual I mean, we've been our mark our overall expense growth rate. We think is about five ish percent, we have no major technology initiatives planned.
So it's kind of steady as she goes.
Thank you.
Yes.
Thank you. Our next question comes from Laurie Hunsicker from Compass point. Please <unk>. Your line is now open.
Yeah.
Hi, Thanks, good morning.
Good morning Laurie.
I wanted to I wanted to check on expenses.
Obviously the debt the debt.
Hey that was great for $45 million, how much was that costing and win in the quarter. Thank you guys.
Yeah, So that was early.
Early in the fourth quarter.
The average cost of that was about 225, 9%.
And so when we did.
That we expected it we expected to get about a basis point of benefit in 2022 off of that.
Okay. Okay.
And Thats.
Alright. Thanks.
On the other expense line looked high at $2 three eight longhorn was there onetime items in that I'm talking about the other non interest expense line with our rebranding Courtney.
When we look when we look down and obviously your core expenses, while holding very nicely.
Yes, that's right.
Number higher how should we think about that.
Yes.
No.
Just kind of.
Normal activity.
Okay, Okay, and then can.
Can you help us think a little bit about your approach.
With any de Novo.
That you're seeing out there or any potential and maybe dovetailing with that how should we think about core expense growth in 2022 and 2020.
Yes, so we've been alloys it at one of our ranch coming out.
Mark go ahead.
I was going to say just de Novo just to clarify do you met de novo branching activity.
Yes de Novo branch.
Okay go ahead Ron.
Yes, yes, so Laurie we've announced that we've got one branch coming online in Cumberland, Rhode Island, probably kind of in the middle of the year.
Our annual run rate on that is about $650000 in some of those expenses are being incurred in advance of the actual opening so.
If youre looking for a run rate impact I would say about $6 50.
Okay and any other de Novo plans in the works.
Laurie This is mark we do think that there is still there still are opportunities for us to be placing branch locations and some of the demographically attractive.
Providence area suburbs, just to give some context the east Greenwich location that we opened in May of this year, just past the $30 million, Mark which is a very attractive number to get less.
Less than nine months of being fully opened so we believe the opportunities are their core and edge.
<unk>.
<unk> growth for US has been very strong during the pandemic and we have a lot of reason to believe that it is not simply temporary parking place for liquidity. So.
While we are.
We're of changes in technology and delivery.
Alternatives for customers.
Recent experience has shown this has a very robust way of us for us to build low cost core deposit balances that help us replace some of the more expensive wholesale funding on the balance sheet.
Okay and can you all just comment on how we should think about core expense.
And then for next year.
Yes.
Well I mean.
Next year being 2023, I mean, I think we're thinking quite that far ahead, yet Laurie, but I am just a core expense basis. We're looking at this is excluding the prepayment expense.
John .
Everything else probably 5%.
Increase excluding that branch costs that I mentioned.
Got it okay, great and then I just wanted to clarify one thing.
The PPP income that you booked this quarter $1 2 million and $1 2 million remaining on the $38 million loan is that correct 1.3.
Great.
Yes, we have $1 three remaining at the end of the year.
Okay, Great and then question for you can you just refresh that.
Popcorn.
We'll follow up on the wall.
Thanks, Amit.
Thanks Laurie.
As part of the thought process pricing has been high.
On the bank side.
There's not a whole lot of opportunity left we're always sort of eyes and ears open.
There is nothing nothing in the <unk>.
The Hopper right now on that front, Mark do you want to comment on the wealth side.
Sure, although although you asked specifically about bank M&A have already where interest at all base and wealth M&A.
Are trying to take a more proactive approach to identifying partner firms and the areas that we serve that we think would fit well with our business model not just within wealth management, but the commercial wound.
<unk> and our higher end residential mortgage services, we could offer their customers. So we remain active on that front, although we try to be prudent about valuations.
And their effect.
On GAAP earnings.
Okay. Thank you very much for taking my question.
Thanks, Larry.
You're welcome.
Thank you. The next question comes from Damon Delmonte from K BW. Please <unk>. Your line is now open.
Hi, This is actually Matt ranked filling in for Damon hope everybody's doing well today.
Good morning, Matt is hoping to get your.
Good morning, I was hoping to get your thoughts on the loan derivative income if you're still seeing.
Higher levels of commercial swaps heading into the year and if you think it will remain.
Elevated throughout 2022.
Yes, I think I think credit formation, given where the pipeline is today will continue all signs are that will be helpful.
We'll do as much as or more than we did.
Last year in derivative income comes along with new volume.
With rates position, where they are I think it's an attractive opportunity for for our customer base and many of them.
Two is to go that route to fixed rate. So we expect that that will continue.
Okay and was there any seasonality in Q4 or do you expect.
It's the run based on that number or.
Maybe a lower level.
Yes, we are.
We funded nearly $100 million in the month of December alone. So the fourth quarter was a pretty big quarter for providing <unk> and derivatives.
I think it's probably safe to say that.
It will it will spread out throughout the course of the year, depending on when the volume comes on board.
Hard to nail it to a quarter, but I would suggest spreading it out over the course of the year.
Okay, great. Thank you I'll step back.
Great. Thanks, Matt.
Thank you as a reminder to ask any further question. Please press star followed by one on your telephone keypad now.
Yes.
We currently have no further questions I will hand over back to Ned handy for any final remarks.
Well. Thank you all for joining us we really appreciate your time and your interest in Washington Trust and we look forward to seeing you soon hopefully.
And certainly talking to you soon have a great day everybody.
This concludes today's call. Thank you so much for joining you may now disconnect your lines.
Okay.
Yes.
Yes.
Okay.
Okay.