Q3 2022 Washington Trust Bancorp Inc Earnings Call
Good morning, and welcome to Washington Trust Bancorp, Inc. 's Conference call.
My name is Elliot and I'll be your operator today.
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<unk> Senior Vice President Chief marketing and corporate Communications Officer Ms cycle.
Good morning, Thank you Elliot welcome to Washington Trust Bancorp.
Our third quarter 2022 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, Ron Osberg Senior Executive Vice President Chief Financial Officer, and Treasurer, and Bill rate Senior Executive Vice.
And chief risk Officer.
Please note that today's presentation may contain forward looking statements and our actual results could differ material 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 other documents that are filed with the SEC. These materials and other public filings are available on our Investor Relations.
Right.
I R Dot Wash Trust Dotcom, Washington Trust trades on NASDAQ under the symbol wash I'm now pleased to introduce todays host, Washington trusts, Chairman and CEO Ned handy.
Thank you Beth.
And thank you for joining our third quarter call, we value your time and your interest in Washington Trust.
I'll provide some commentary on the quarter and our view of the current environment and then Ron Iceberg will review our financial performance.
Our remarks, Mark Jim and Bill Ray will join US and we will answer any questions you may have about the quarter.
I'm pleased to report that Washington Trust posted solid third quarter results with net income of $18 $7 million or $1.08 per diluted share.
Very strong loan growth, which helped optimize our balance sheet in this rising rate environment commercial loans grew by 8% with strong credit formation strong construction funding and a slowdown in payoffs.
Margin expanded and we delivered an all time quarterly high in net interest income.
Loan and end market deposit growth have positioned the balance sheet to continue to offset pressure in our two main fee drivers wealth management and mortgage banking.
Our returns on average assets and average equity remains strong and asset quality did as well.
Diversity of our revenue streams combined with credit discipline and strategic organic growth enabled the strong third quarter.
Ron will provide details about our results in his comments.
The markets, we serve continue to provide us with quality growth opportunities. We opened our new Haven commercial lending office in July and now have five lenders in that market supported by a new cash management higher and complemented by our strong wealth management and residential mortgage teams in Connecticut.
We've operated in Connecticut successfully for years this commitment to the market will help establish our brand and leverage our diverse offerings.
We announced our intention to add three new branch locations in Rhode Island in 2023.
These branches, which are all in various stages of Guinea federal state and local approvals will position us well to better serve the full Rhode Island community and to continue our end market deposit growth.
Our latest branch additions in each branch and Cumberland, Rhode Island, demonstrating the appeal of our high touch service model in the marketplace.
Our mortgage banking business has slowed as rates rise, but continues to carry a relatively strong pipeline and weekly application levels.
As added to strong portfolio loan growth growth over the past few quarters.
The nature of the markets has changed the balance between portfolio growth and loan sales. So while gains on loan sales are down quality assets have been added to the balance sheet.
We're also finding opportunities to attract new loan officers in this environment, a testament to our long term consistent approach to the business.
As we indicated in our press release for wealth management advisers resigned recently they were from our Wellesley, Massachusetts office of a registered investment advisor subsidiary, Washington Trust Advisors.
As you know this Wellesley office was formerly known as Weston Financial Group business, we acquired back in 2005.
October we have seen some AUM outflow and expect we will see more over the coming months.
Ron will provide some guidance on the forward looking financial impact.
Washington Trust remains committed to growing this key business segment across the markets. We serve and we have seen positive net organic growth in clients over recent quarters despite market volatility.
We will stay focused for opportunities to grow our wealth management business, both organically and through M&A and plan to more than rebuild rebuild AUM levels over time.
As we look forward to navigate the uncertainties in the local and global economies, we're even more committed to providing our customers. The communities, we serve and our employees with the highest quality experience available.
As inflation continues to burden the entire economy, we expect further fed action and had planned accordingly, we continue to invest in technology and process improvement to allow our employees to serve customers effectively and efficiently in person or digitally and to assure system resiliency.
The landscape remains somewhat uncertain, we are well capitalized and our balance sheet is in good shape to continue on our strategic path of quality growth.
We're confident in the strength of our diversified business model and in our dedicated and talented employees.
I'll now turn the call over to Ron for comments on the third quarter financial results.
Thank you Ned good morning, everyone and thank you for joining us on our call today.
As Ned mentioned net income was $18 7 million or $1 <unk> per diluted share for the third quarter as compared to $20 million or $1 14 for the second quarter net.
Net interest income amounted to $42 million up by $4 5 million or 12% from the preceding quarter.
The net interest margin was 282 up by 11 basis points. There was essentially no benefit to the third quarter from PPP fees. In Q2. These fees amounted to 323000, a two basis point benefit to margin.
Payment fee income was modest at 30000 in the third quarter and 62000 in the second quarter, both had no impact to the margin excluding the impact of both items for each period. The margin increased by 14 basis points from $2 68 to $2 82.
Average, earning assets increased by $365 million driven by loan growth the yield on earning assets was $3 49 for the third quarter up by 46 basis points on.
On the funding side average in market deposits declined by $120 million in average wholesale funding sources rose by $438 million.
The rate on interest bearing liabilities increased by 44 basis points to 0.86%.
Noninterest income comprised 27% of total revenues in the third quarter and amounted to $15 8 million down modestly by 49000 or <unk>, 3% from Q2 welcome.
Wealth management revenues were $9 5 million down by 541000 or 5%.
This included a decrease in asset based revenues of 339000 or 4% as well as a decrease in transaction based revenues of 202000 <unk>.
Consisting mainly of tax servicing income, which is concentrated in the first half of the year.
The decrease in asset based revenue is correlated with a decrease in average asset balances, which were down by $337 million or 5%.
September 30 end of period assets totaled $6 3 billion down by $327 million from June 30, largely due to market depreciation.
As Ned mentioned four of our wealth advisors recently left the company. They managed approximately $1 billion in assets to date, we have been informed of client withdrawals or $412 million with related annual revenues of about $2 4 million or 600000 per quarter.
Our mortgage banking revenues totaled $2 million in the third quarter down by 35000 or 2%.
Realized gains were $1 7 million down by 199000, or 10% mortgage loans sold totaled $75 million in the third quarter.
Down by 4 million or 6%.
And market competition has also been compressing the sales yield as expected.
Total mortgage loan originations.
Amounted to $302 million in the third quarter down by $48 million or 14%.
Like the second quarter, we continue to place a high percentage of mortgage originations into portfolio. Our mortgage origination pipeline at September 30 was $165 million down by $69 million or 29% from $234 million at the end of June .
Loan related derivative income amounted to $1 million up by 372000.
Regarding noninterest expenses these were up $2 million or 6% from the second quarter salaries and employee benefits expense increased by $1 2 million or 6%, reflecting adjustments to performance based compensation accruals. The remaining linked quarter increase in noninterest expense reflected modest increases across a variety of other category.
Yes.
Income tax expense totaled $5 3 million for the third quarter. The effective tax rate was 22, 1%. We expect our full year 2022 effective tax rate to be approximately 21, 5%.
Now turning to the balance sheet loan growth was strong total loans were up by $369 million or 8% from June 30, and up by $562 million or 13% from a year ago.
Excluding PPP loans increased by $638 million or 15% from a year ago in.
In the third quarter total commercial loans increased by $186 million or 8%.
Within this category free loans increased by 153 million, new originations and advances of $229 million were partially offset by payments of $76 million.
C&I loans increased by $33 million as new volume of $57 million was partially offset by payments of $24 million.
Residential loans increased by $178 million or 9% from June 30 originations for retention and portfolio were $225 million down by $39 million or 15%.
Investment Securities were down by $38 million or 4% from June 30, a M.
Temporary decline in fair value in our routine pay downs on mortgage backed securities were partially offset by purchases of debt securities.
In market deposits were up $79 million or 2% from June 30th.
The increase included seasonal inflows associated with our larger institutional depositors.
In market deposits were up by $324 million or 8% from a year ago.
Wholesale brokered deposits were down by $16 million in the third quarter and <unk> borrowings were up by $372 million.
Total shareholders equity amounted to 432 million at September 30 down by $44 million from the end of the second quarter. This was largely due to a temporary decrease in the fair value of available for sale Securities.
As mentioned during our July earnings call in the third quarter, we repurchased approximately 19000 shares at an average price of $47.79 and a total cost of 896000 under our stock repurchase program.
Our total repurchases in 2022 under the program are approximately 194000 shares totaling $9 5 million repurchased at an average price of $48 82.
Washington Trust remains well capitalized and our third quarter dividend Declaration of <unk> 54 per share was paid on October 7th.
Regarding asset quality. It remains strong nonaccruing loans were <unk>, 5% of total loans compared to point to 8% at June 30th.
Past due loans were one 6% of total loans compared to <unk> one nine at prior quarter end has.
At September 30, non accrual and past due loans were essentially all residential and home equity.
The allowance for credit losses on loans totaled $36 9 million or <unk>, 76% of total loans and provided NPL coverage of 304%.
This compares to $36 3 million or eight 1% at June 30th.
The third quarter provision for credit losses was a charge of $800000 compared to a negative provision or benefit of $3 million in Q2.
The third quarter provision reflects loan growth, our current estimate of forecasted economic conditions and strong asset and credit quality metrics. We had net charge offs up 54000 in Q3 compared to net recoveries of 10000 in Q2 and year to date net recoveries totaled 104000.
This.
<unk> my prepared remarks, and at this time I'll turn the call back to Matt.
Great. Thanks, Ron.
We can now Elliott, we can go to questions.
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Our first question comes from Mark Fitzgibbon from Piper Sandler. Your line is open. Please go ahead.
Hey, guys good morning.
A couple of questions on the line of wealth management good morning a.
A couple of questions on the wealth management business. Those for advisers have left I guess first did they end up going to the same place as the other team that had left a while back.
So we can say is they they left to pursue other career opportunities Mark small okay.
And Mark.
Have you changed like the pay structure or something at <unk>.
The wealth management side that caused these people to leave or did their noncompete burnt off or just curious on that.
So mark they have noncompete and non solicit agreements in place and we can't comment much further given where we are in the process.
Okay. So.
$400 million of client outflows have already.
<unk> announced they're leaving.
To all of them.
But it sounds like you expect a big chunk of that $1 billion book of business. They have to go away is that correct.
Yeah, Mark this is Ron I mean, we're still early in this.
So I can't really give you any more guidance other than telling telling you what has happened to date. So we're currently at $412 million.
Okay.
You get a little bit on that Mark.
It's we don't think that it's necessarily valid to extrapolate our experience from prior departures with what's happening now, but as Ron said, it's early to tell.
But whats change Mark I mean last time, we had the team leave the book of business, just kind of slowly blood out and I thought we were under the impression that you guys had made changes to the noncompete non solicit to try to prevent this kind of large chunks of business, leaving.
I guess I am curious whats changed.
So again, we have noncompete non solicitation agreements in place and as we said, where we can't comment on where we are at this stage in the process.
Okay.
Changing gears on.
I Wonder if you could share with us what the spot deposit rates are today.
Spot deposit rates.
Yes, I mean, we have not really changed.
Yeah.
Yes, Mark we haven't changed our or our rack rates.
We are competitive on some promotional pricing, particularly on Cds.
That's been a traditional strategy for us our current.
Promo rates for new money with the checking account is is $3 50.
Okay.
And then run all the expenses for the new branches and offices reflected in the third quarter number.
So that the new we announced three new branches opening in 2023, so that that none of that expense is really reflected in our in our numbers at this point.
We don't know the exact dates that those branches will open tip.
Typically we have some some leading expenses.
Prior to the branches opening, but we don't have those opening days yet Mark zone.
There's not too much to say on that at this point.
Okay.
Can you share any thoughts around the NIM outlook.
Yeah. So.
We had pretty good NIM expansion in the third quarter, we would expect some additional expansion in the fourth quarter.
So we're looking at.
$2 85 to $2 90.
For Q4, Okay.
Okay, Great and then lastly.
Yeah.
I mean, we obviously look at it in and it certainly is a metric that's important I wouldn't say that the level that it's at is going to change the way we're running the business at this at this time I mean, we were we're quite comfortable with our regulatory capital ratios and then so that's that.
Kind of our position at this point.
Thank you.
Yes. Thank you.
Our next question comes from Damon Delmonte from <unk>. Your line is open. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
Just to start off just.
Follow up question. Good morning, just to start off with a follow up question on the margin outlook I noticed borrowings increased a decent amount this quarter in light of the strong loan growth.
So Ron when you think about the margin I heard your comments to marks question 285 to 90 for the fourth quarter, but do you feel like the margin kind of peaks.
Hi.
At the end of the fourth quarter and kind of start to maybe see a little headwind as we go into 2023.
Yeah, I mean listen so so are.
We're asset sensitive as the fed increases rates or LIBOR portfolio will reprice.
You know immediately.
But we understand that that some of our variable.
Funding what will change including.
<unk> brokerage Cds and so forth. So I don't think we've peaked yet I know that there is concern in the industry.
Whether whether banks already peaking I don't think we're quite there yet although I do think we will see the expansion of our NIM start begin to moderate somewhat in the fourth quarter.
And we just need to keep looking at what the fed's doing we're not quite ready to put out any 2023 guidance on that yet.
But I think we'll I think we'll see some benefit for another a little bit.
Okay. Thanks.
And then with regards to the outlook for loan growth can you just a little kind of broad commentary on what your pipelines are looking like now and kind of how you're feeling about the next couple of quarters.
Obviously, two very strong quarters back to back for you guys and kind of just wondering if the pipeline continues to build and you know the outlook.
Relatively consistent or how we should think about it.
Yeah, David it's Ned Thanks for the question. So the pipeline still remains pretty strong commercials in the mid two hundreds.
Rosie is still it's down but it's still.
There is pretty strong in the than the $1 60 to 170.
Range, so so deals keep coming in where we're we're.
We're seeing a lot of activity a lot of requests and all of the markets. We serve Connecticut is particularly strong.
But at the moment, the greater Boston market places still very supportive bolt on both sides. So so we feel we feel good about the certainly the quarter Ed.
Okay great.
Are you are you seeing much of a reaction from some.
Some of your commercial development customers with just the rapid rise in rates and has that caused them to pause on projects at all and kind of revisit their.
Personal balance sheets for the projects.
No. It's a good question, we haven't seen it yet.
Maybe an individual deals we're having more discussions I think I think we're seeing a little slowdown in swaps, which tells us that the borrowers think that over the next.
Don't know six to 12 months that we may see a see a reversal in rates so they're not they're not.
They are not fixing through swaps, we see a little bit of a lift run and fixed rate.
<unk> requests so so people are interestingly.
Locking in.
At current rates and yet not not doing swaps. So it's I think there's a sort of across the board, but but we arent seeing people.
Pull deals off the table because at current rates.
Got it and then just last question just kind of like most of the bad guys have seen a lot higher rates in their careers.
Fair point.
Lastly, I ask question on credit.
You know the reserve is now at 76 basis points.
In part because of.
The strong growth this quarter.
How are you guys thinking about the reserve if you look at it like on a year over year basis, its down 20, some odd basis points.
There's some growing concern me could be going into an economic slowdown.
Loan growth outlook seems positive. So I mean should we start to see a little bit of a reserve build in the next couple of quarters.
Yes.
Yeah.
I'll take that and Bill if you want to jump in at some point, but.
In the in the third quarter, we had strong loan growth and we provided for that.
The provision has several components to it and so the loan growth provision was kind of.
Commensurate with the amount of growth that we had we also look at various.
Qualitative factors that we've been providing for over the past couple of years, one being COVID-19.
And so we actually dialed back some of our kind of Covid related reserves. So the net of that was an $800000 provision for the quarter.
I think going forward.
I think the reserve that will Youll see printed will be more in line with just with loan growth and then any changes in economic and asset quality concerns that we might have been from the economy got in Q1.
Sure I mean the.
The seasonal model is fundamentally based on loan losses over a period of time and then looking forward against econometric outlook and so we're very confident that we have good coverage based on our loss history, we have priced in the growing concerns about recession and unemployment and other things. So I think we're very comparable with where we are.
And so it would be wrong to say there is a magic number or that.
Loan growth itself will change things, but again I think we're in good shape now and certainly is.
As loans continue to grow there'll be roughly commensurate provision.
Got it okay.
I appreciate all the color guys. Thanks a lot.
Thank you.
As a reminder to ask any further questions. Please press star followed by one on your telephone keypad now.
Our next question comes from Laurie Hunsicker from Compass point. Your line is open. Please go ahead.
Great Hi, Thanks, good morning.
I just wanted to go back to Damon's question around reserve Bill that just wanted to make sure I understand it. So when you were talking about sort of loan loss provisioning pre pandemic you were sitting at 69 basis points.
Or is there still and now Youre at 76, I mean is it is.
Is it fair to say and and and.
Certainly I understand T cell, but I hope I understand a lot of management teams all the way at R. R.
They are also factoring in an overlay on top right. So is it fair to assume that we're not going to see you get below that 69 basis point level or how do you think about that or what do you think mezz or that you are you think look toward 70 576 basis points of reserves to allowance backing up all of that.
Maybe just help us think a little bit more about that as ethylene model progression.
Sure. This is bill Ray I used I think I said roughly commensurate to allow for a little bit of wiggle room, there because there's multiple factors in the model, which I'm sure you understand but.
Again, there is no magic number of the key to Cecil is looking at loss history, and if you look at our loss history, especially recently.
Extremely low and we have.
<unk> to factor those in as we looked at our quantitative model that said I think we're generally in a range that looks like a reasonably stable range and if you start growing loans in that which we have been able to do it's likely that provisions will be roughly commensurate with that so.
Think we're comfortable with the range. We're in we were comfortable with the 69 basis points.
Okay. Okay.
How many of you bet.
You've done in the past.
With the Wellesley situation, particularly on comp there may be some other costs in there as well either savings or otherwise.
It's just it's too early for us to give you any guidance on that particular piece yet.
Okay and then just one last one last thing is as we model out those expenses coming online can you just help us roughly think about it.
Which quarter, we might see the expense they'll start for each of those three branches.
I don't know second third and fourth quarter. If you wanted to stretch a little bit I think there'll be spread throughout the year in 2023, there they're the ones that we are looking at are all existing structures. So its not as much of a construction.
Process, but again, we're subject to federal state local approvals. So to give you an exact timeline is a little tough but.
It is certainly our as we stated it's our intention to do all three but we will stagger them over the course of the year.
Okay, great. Thanks for taking my questions.
Thank you Laurie.
This concludes our Q&A I'll now hand over to Ned Handy for final remarks.
Thank you Elliot we certainly appreciate your time with US. This morning, we had a very solid quarter, our balance sheet capital position and credit quality remains strong and our diversified business model continues to be to be supportive.
We have strong momentum heading into Q4, which will help to offset any wealth management revenue loss.
Once again I want to thank our employees for their strength of character and Theyre consistent care and concern for each other and our customers and we thank you all very much have a great day everybody.
Today's call is now concluded I would like to thank you for your participation you may now disconnect your lines.
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