Q4 2022 Washington Trust Bancorp Inc Earnings Call
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Good morning, and welcome to the Washington Trust Bank Conference call. My name is Bruno and I will be your operator today.
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And now I would like to hand over to Elizabeth Eckel Executive Vice President Chief marketing and corporate Communications Officer, Michelle <unk>. Please go ahead.
Thank you Bruno good morning, and welcome to Washington Trust Bancorp, Inc. Fourth quarter 2022 conference call. Joining us today are members of Washington Trust Executive team, Ned Handy, Chairman and executive Chief Executive Officer, Mark <unk>, President and Chief Operating Officer, Ron Osberg Senior Executive Vice President Chief Financial Officer.
Treasurer, and Mary News Senior Executive Vice President and Chief retail lending officer, and Bill rate Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward looking statements and actual results could differ materially from what is discussed on today's call. Our complete safe Harbor statement is contained in.
Our earnings press release, which was issued earlier yesterday and as well as other documents that are filed with the SEC all of these materials and other public filings are available on our Investor Relations website at IR Dot, Washington, Trust's Dotcom, Washington Trust trades on NASDAQ under the symbol wash I'm pleased to introduce today's host.
Washington, Trusts, chairman and CEO Ned handy.
Thank you Beth and good morning, everybody and thank you for joining our call. We appreciate your time and interest in Washington Trust.
I'll provide some comments about the fourth quarter as well as our thoughts on the current environment. Ron Osberg will then discuss our financial performance and afterwards, Mark M. Mere Nunes and Bill Ray will join us to answer any questions you may have about the quarter.
Before I turn to our quarterly results I'd like to make a few brief comments in December we announced that Mark M will retire as president and Chief operating Officer. This April and that he has immediately been elected to our board of directors.
Personally like to thank Mark for all the contributions he has made to Washington Trust over the past three decades. During his tenure he has provided great strategic vision and lead key business line growth and we look forward to his continued got continued guidance as a member of our board.
It's also my pleasure to introduce Barry News, who will become the first female president and Chief operating Officer, and Washington, Trust's 222 year history. Upon Mark's retirement, Mary is another Washington Trust veteran and over her 30 year career played a key role in the successful revenue growth and market expansion of our retail lending operations.
He is a proven leader a strategic thinker and has a passion for service excellence and process improvement and I look forward to working alongside her.
I'll now turn to our quarterly results I am pleased to report that Washington Trust posted sound fourth quarter net income was $16 $6 million or <unk> 95 per diluted share total loans grew by 5% in the quarter and 20% for the full year 2022, reaching a record high balance at year end.
While increasing wholesale funding balances and cost challenge net interest margin in the quarter. This robust loan growth helped deliver near record quarterly net interest income attracted new customers and positioning the balance sheet for long term success.
Our main noninterest income drivers wealth management and mortgage banking were both under pressure in the quarter rising interest rates had an expected impact on mortgage revenues in the quarter. Despite strong loan production.
Wealth management revenues were affected by lower levels of assets under administration, resulting from market pressures and from the departure of client facing advisers for our Wellesley office, which we previously reported on our Q3 calls.
Ron will provide more details in his comments, we are pursuing legal remedies associated with this matter and remain committed to servicing our wealth management clients and growing this key line of business.
Expenses were up slightly in the quarter, but included a $600000 contribution to our charitable foundation. This allows us to continue our tradition of assisting the organizations that provide health and human services housing and other support to those in need in our local communities.
I'm proud to report that our board approved a strategic diversity equity and inclusion plan.
And we launched our employee driven Eni counsel in the quarter I very much look forward to working with this team to ensure that ours is in accepting inclusive workplace built to reflect and benefit our employees customers and the communities we serve.
We continue to take a long term view and will be protective of credit and capital as we consider avenues for growth. The current period of continued although moderating inflation and the resultant unpredictable rate environment are challenging in the short run but they are temporary we continue to invest invest in talent to support growth and are also.
<unk> and rational technology investments to improve the customer experience and to ensure a secure operating environment.
At this point I'll turn the call over to Ron for an in depth review of our financial performance Ron. Thank you Ned and good morning, everyone. Thank you for joining us on our call today.
As Ned mentioned fourth quarter net income was $16 6 million or <unk> 95 per diluted share.
Net interest income was $41 3 million down 700000, or 2% from the preceding quarter.
The net interest margin was $2 65 down 17 basis points.
Strong loan growth was funded mainly from increasingly expensive wholesale sources deposit betas were also higher than expected.
Average, earning assets increased by $294 million the yield on earning assets was $3 94 up by 45 basis points.
Funding side average in market deposits increased by $84 million and average wholesale funding sources rose by $220 million the rate on interest bearing liabilities increased by 70 basis points to 164%.
Prepayment fee income was modest at 15000 and PPP fees in the quarter were 59000.
Collectively that added one basis point to the margin.
Turning to noninterest income this comprised 25% of total revenues in the fourth quarter and amounted to $13 8 million down $2 million or 13% from Q3.
Wealth management revenues were $8 6 million down by 901000 or 9%.
The decrease in revenues corresponded with a decrease in average balances, which were down $527 million or 8%.
December 31 end of period <unk> <unk>.
<unk> 6 billion down $361 million or 6% from September 30.
Reflecting net client asset outflows of $673 million, partially offset by net investment appreciation of $312 million.
<unk> declined by $604 million due to client asset withdrawals related to the advisors that left the company at the end of Q3.
This resulted in a pro rated reduction of revenues of approximately 525000 in the fourth quarter.
The full run rate quarterly revenue loss related to these withdrawals is estimated to be 876000 or an incremental 351000 over Q4 <unk>.
Since the end of 2022, we have been notified of.
Additional client withdrawals totaling approximately $55 million with an estimated Q1 pro rated revenue loss of $40000.
Mortgage banking revenues totaled $1 1 million down by 944000 or 46%.
Realized gains were $1 million down 726000 or 42%.
Mortgage loans totaled.
Mortgage loans sold totaled $55 million in the fourth quarter down by $21 million or 28%.
Market competition has continued to compress the sales yield.
Mortgage originations were $268 million down by 11% and we placed 85% of mortgage origination centric portfolio compared to 74% in the preceding quarter.
Our mortgage origination pipeline at December 31 was $102 million, which was down $62 million or 38% from the end of September .
Yes.
Regarding noninterest expenses during the fourth quarter, we contributed 600000 to our charitable foundation. Excluding this item noninterest expenses were down 308000 or 1% sour.
Salaries expense decreased by 797000, or 4%, reflecting adjustments to performance based compensation accruals lower wealth management compensation and volume related decreases in mortgage compensation.
Legal audit and professional fees increased by 294000, or 42%, reflecting higher legal expenses.
Now turning to the balance sheet.
Loan growth was strong total loans were up $261 million or 5% from September 30, and by $837 million or 20% from a year ago in.
In the fourth quarter total commercial loans increased by $70 million or 3% within this category commercial real estate loans increased by $66 million with additions of 146 million, partially offset by payments of about $80 million and C&I increased by $4 million as new volume of 48 was offset by payments of four.
$4 million.
Residential loans increased by $179 million or 8% from September 30, and by $596 million or 35% from the end of 2021.
In market deposits were up by $34 million or 1%.
Compared to September 30, and by $196 million or 4% from a year ago.
Broker deposits were down by $85 million in the fourth quarter, while <unk> borrowings were up by $280 million.
Regarding asset quality. It remains strong non accruing loans were two 5% and past due loans were 23% total loans the.
The allowance totaled $38 million or <unk> 74 basis points of total loans and provided NPL coverage of 296% the fourth quarter provision for credit losses was a charge of 800000 consistent with Q3 and reflects loan growth continued negative trends in forecasted macroeconomic conditions and strong asset and credit quality.
<unk>, we had net recoveries of 264000 in the fourth quarter and year to date net recoveries of 368000.
And at this time I will turn the call back to Ned.
Great. Thank you Ron and we will now take questions.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad now.
If you'd like to cancel the question. Please press star followed by two.
Please do also remember to one mutual microphone.
Laurie.
Our first question today is from Laurie Hunsicker from Compass point.
Laurie Your line is now open. Please go ahead, great Hi, Greg Hi, Thanks, Good morning.
Mark I'd just add.
Just wanted to say, it's been absolutely lovely working with you and wishing you all the best glad Youre staying on the board.
And welcome Barry.
Yes.
So funding maybe we can start there can you take us through your.
Thoughts on using brokerage Cds and how that will continue with the trajectory there is going to look like.
And maybe a spot margin for the month of December .
And any forward guidance, you can give us the margin that would be super helpful.
Sure.
So we view brokerage Cds in FHL B we.
Always separate that out from what we call in market deposits.
We view brokered Cds and FHFA is kind of fungible funding sources.
Brokerage Cds have lately trended lower lower cost in <unk>, but there is there.
There is less inventory out there. So I would say we would take full advantage of all of the brokered Cds that we can collect.
And.
<unk> is a little more instantaneous you call you get the funding the same data.
To get those brokerage Cds and Theres more competition out in the market to get them.
I would say we would we would rely on those as much as we can.
We're looking in the first quarter for guidance.
And a range of about $2 50.
<unk> to $2 55.
Great and then can you just remind me your brokerage CD balances I know in September with $422 million.
It came in at December .
Yes.
Alright, I can I can follow up with you offline.
Just wanted to get that maybe.
Maybe any.
Okay.
$358 million at the end of December .
Okay great.
And then just.
Lastly, can you can you comment on how we should think about expenses expense growth for full year 'twenty three obviously lot of moving parts.
Yeah.
Yes, and just also wondering with with the pressure on expenses.
Has that led you branch out plans at all or how we should think about that.
Yeah. So I think our guidance on expense will keep that mainly to the first quarter and we're looking at a two to one 5% increase in Q1.
Mainly as we have merit increases implemented in payroll tax resets and those types of things.
For the full year the branch, we expect the new branch impact.
Branches will open later in the year, that's a $1 million.
And.
Also we have.
New FDIC insurance expense coming in at one four that was not in the 2022 run rate.
Perfect Alright.
Okay.
Laurie This is mark I'll just comment on the branch.
Timing, we have to balance the expense of opening branches in the short term against the long term value of increasing our deposit gathering rate yes.
And scope. So I think we're mindful of trying to balance.
Near term costs in a challenging economic environment against the long term value of improving our funding base, which remains a strategic priority for us branches are part of that.
So as commercial deposit gathering a cash management and we have a really substantial focus on that from a strategic point of view so.
Branch opening timing might vary a little but it would really be more based on when it's feasible as opposed to.
A desire to minimize near term cost.
Great. Thanks, Mark.
Thank you Larry.
Thank you Laurie.
Our next question is from Mark.
Given.
From my perspective.
Mark Your line is now open. Please go ahead.
Thank you.
Good morning, everybody and let me Echo Lori's comments, congratulations to Mark and also congratulations to Mary on your new role.
Thank you thanks Mark.
Net I wonder if you could help us think about.
How youre thinking about your loan to deposit ratio I think it's 102 right now.
Is that likely to serve as sort of a governor on on balance sheet and loan growth in coming quarters.
Yes, I don't think so I mean, I think we've got a strong commercial pipeline and strong.
Not as strong as historic residue pipeline than we think.
We have to continue to serve our customers and prospects in the marketplace, we need to.
Focus on deposit gathering Mark and fund that loan growth and a better fashion.
Then we have been able to in the certainly in the recent quarter, obviously in the fourth quarter, we had huge loan growth.
At a time when when.
The funding source available to us was.
Borrowed funds <unk>.
Increasingly expensive deposit base, so not the perfect scenario. So so I think more focus on growing the deposit side of that question then reducing the loan side in the short run we think we think positioning the balance sheet for the long term is important serving the customers continues to be important we can't choose.
When to serve as a service then we need to stay in the marketplace and stay active.
But at the end of the day, we do have to be focused on loan to deposit ratio and at some point it could become a governor I don't see that in the.
In the near term.
Okay, I guess I was just thinking about like your capital ratios are not.
Yeah as high as they've been historically sort of $5 80, TCE ratio I know the regulatory ratios look good but.
Yeah.
I just wondered if it maybe made sense to kind of slow growth a little bit on the loan side to let deposits catch up in <unk> capital ratios build if particularly if we're going into a more difficult economic period.
So mark this is mark I'll take just a shot at the question about loan growth and kind of how we try to think of it in terms of long term opportunities our credit quality standards have not changed at all and we're very mindful of the economic environment in 2023, and 2024 might worsen if the U S.
And global economy slip into recession that said, we're seeing opportunities, particularly on the commercial side of the house from customers, who we have not seen before because of our very high credit quality and we think the ability to establish some of those relationships for the long term win.
We might not have had that opportunity is something we need to follow up on.
I'll turn it to Ron for comments on capital and the difference between TCE and and our regulatory capital ratios.
But just with again with a comment that we are very focused on credit quality, we're very.
Proactive about trying to identify potential risks long before they happen.
So we don't go into this lightly and Marc This is Ned obviously, a lot of the asset growth in the fourth quarter was <unk>.
And strong high quality <unk> and obviously, we're hopeful that at some point.
Down the road, we will be back at a point when we were selling.
The large majority of those loans are not not growing the balance sheet as much as we would have in the prior two quarters, so when that will happen.
Is anybody's guess.
It's obviously rate related so.
It's a good question and I think we have to be thoughtful about all those angles and Ron on the capital front, yes, yes, Mark I know.
We share your concern about about GAAP capital as it is and we agree that regulatory capital still is fine I do believe we have enough capital to support the <unk>.
Of growth that we've been booking.
As far as the residential that those have favorable regulatory capital implications.
So.
I don't see any reason.
On the funding side or on the capital side for us to necessarily curtail our our lending activities.
Okay and then last question is on the wealth side.
It looked like you had 600 million leave with those full relationship people and there is another $55 million come in this quarter it sounds like.
How much realistically beyond that.
Is that risk in your view of leaving.
So mark this is mark I'll try I'll take that as best we can it's difficult to predict how much we'll leave as you know having noncompete non solicit agreements in place doesn't necessarily ensure clients will remain with us even though we have been very active in reaching out to clients to affirm that they will.
They know that we're continuing to service them and that they paid.
So for the time being our remaining with us to be serviced so it's.
It's hard to predict I think we would certainly say we're much closer to the end of that run off from the beginning but we don't have any.
It's difficult to give specific guidance.
But that group of four people have a bulk of a $1 billion.
So to know that it's not going to go past that or can you give us a sense for what the size of those relationships as disclosed collectively they managed our associated with about approximately $1 billion in assets as of September 32022.
And I think Ron has disclosed how much of client asset withdrawals are there as a practical matter, we we measure.
Continually refresh our outreach to existing clients, those who have who have affirmed the table will stay with us for the time being but.
And while we're confident in our outreach efforts.
I think we're very reluctant to try to give a guidance number as to how much is at risk.
Part of what remains thank you.
Thank you.
Okay.
Thanks, Mark Thank you Mark.
Ladies and gentlemen, as a reminder, if you would still like to ask a question. Please press star one on your telephone keypad now.
Okay.
Our next question is from Damon Delmonte from <unk>. Steven Your line is now open. Please go ahead.
Hey, good morning, everyone and.
Echoing everybody starts here, congrats Mark and welcome Mary look forward to getting to meet you and work with you in the future.
So thank you I wanted to start off by circling back on the margin guidance and outlook.
Ron I think you said youre expecting $2 50 to $2 55 here in the first quarter.
Can you give a little bit more forward guidance, assuming the fed stops raising rates here in the first quarter, maybe two more 25 basis point hikes.
The margin stabilized at this point or does it actually reversed course and start to trend up or how should we kind of think about that.
Yes.
Okay.
Best case, it kind of stabilizes over the next couple of quarters, we still have quite a bit of.
Of liability repricing to come a lot of that in the first quarter.
Which explains kind of the dip between Q4 and Q1.
So we're a little guarded about this I mean that there is a number of different ways.
First rates could play out over the course of the year.
So that's why we really just kind of preferred is to stick to one quarter at a time right now.
Okay.
Can you give a little color on the rate.
New loan production.
The new loans that are coming on the books, but what kind of yields youre getting on the.
Yes.
Yeah.
So in the fourth quarter.
Total commercial loans came in at a weighted average of about $5 66.
Mortgages came in at.
About 484.
And that reflects the average for the quarter Damon.
Damon obviously as short term rates have trended up LIBOR related commercial loans coming on the balance sheet will be at a higher rate of December than they were in in October and then also from a mortgage production perspective, it's important to note that the lead time to bulk up mortgage typically means that the loans that are hitting the balance sheet are.
60 days.
45 to 60 days rate locks in terms of prior pricing decisions made Mary maybe you can give some indication of what our current jumbo rates might be that are going into portfolio of ballpark.
Yeah. So.
I'd say that what you saw in late for fourth quarter, certainly will be higher in the first quarter of this year, because we had implemented across the board rate increases.
Funding costs went up in overall mortgage rates went up even though we've seen a dip in the conforming rates, we have not adjusted our portfolio rate. So those will continue to be attractive for the first quarter.
Got it okay. That's helpful. Thank you.
And then.
As you guys think about your deposit beta.
Past quarter I think.
Total deposit linked quarter beta was around 31% and cumulatively around 20% with a big ramp up expected here and funding costs in the first quarter.
Where do you see like your overall beta during the cycle kind of playing out.
Yeah.
I don't have a calculated data number to share with you on this call payment, but clearly.
There is a lot of market competition out there we have customers coming in asking for rate exceptions, depending on the nature of the relationships we will grant those.
To retain the deposits.
It's competitive and.
Think that.
I think <unk> will go up from here, let's let's just say that.
Damon This is mark I'll try to give a little color.
I cannot give a little color on that our stance on the on the retail side has been not to be at the front edge of rate retention, but to keep an eye between providing fair rates to customers and maintaining as lower deposit cost of funds as we can.
Consistent with competitor practices, probably the highest betas are those for institutional perhaps municipal are public.
Public fund type deposits, one could view those two different ways.
As ARPA type funds get released to states. For example, there has been opportunity to bring those in there are certainly at a higher cost in the short term, but also bring with them the opportunity to bring in noninterest bearing relationships for example, and so while the betas on those might be higher than flat to inverted yield curve environment.
<unk> in the long term, we see value in either maintaining those are bringing them onboard. So while we have on the kind of commercial municipal side, a higher beta on interest bearing accounts, we view it as sound business to try to maintain in the long run rather than.
Letting at work.
<unk> equally priced wholesale funding, but then potentially losing the opportunity to renew or grow that relationship. Yes. We've got we've got relationships with about a third of the cities and towns in the state of Rhode Island, we'd like to have that be more.
Where we're seeing success on that front, but those are.
Relatively expensive deposits in the short run.
On the interest bearing side, they do tend to come with.
Deposit accounts, our DDA accounts operating accounts so that's.
That's one of several strategies that.
We hope will be helpful. In the long run, but again to marks point in the short run they might drive betas.
Okay.
I don't mean to belabor the discussion on the margin here, but looking back at my notes from last quarter I think the guidance was a $2 85 to $2 90 for the fourth quarter and it came you guys came in at 265.
That's a pretty sizeable.
Turning to other events and I'm, just trying to kind of connect the dots. So is it fair to say that the loan growth was just really strong and you. Just you were forced to tap outside sources into higher cost funding.
Had an immediate impact on the margin is it pretty much that simple.
Exactly what happened.
Okay, all right I appreciate that and then just lastly on loan growth outlook, you guys seem pretty optimistic youre going into 'twenty three.
Any guidance on kind of full year expectation for the overall portfolio.
Yes, Damon this net.
The pipeline is strong it was strong at year end just kind of in the.
$250 million level. It's grown since then so we are seeing an opportunity we think will be in the sort of mid single digit growth range again.
We have seen a tapering off.
Somewhat on the payoff side, so that could that could be helpful.
So, yes, I think we're going to see strong growth and frankly going into the year with a pipeline that's strong and I think we will see better better growth.
And the early part of the year than we did last year last year, we ramped up towards the end of the year, but we've got some momentum so.
I think I think it'll be a little bit more spread out over the course of the year and continue to be.
Really strong.
Mary do you want it.
Yes.
Yes.
For <unk>, we have I believe a 13% increase in our.
And our volume.
Portfolio.
What I'm, hoping is that that's a little lower and more go to sale.
We have.
We're working on certain fronts to increase our available avenues, but.
We already have a very diverse.
We've just hit a little kink in the in the yield curve on those so.
And I think we'll have very strong for that's the way a very oriented to the purchase market and purchase market in our region.
It.
It's very strong and.
Japan to stay that way.
Okay great.
Thank you for the color and thank you for taking all my questions.
Thanks, Tim.
Okay.
Thank you Damon.
We currently have no further questions I will now hand back to our speakers for final comments exhibit. Please go ahead.
Well, thank you all for joining us.
We appreciate your interest and your time.
And.
We look forward to talking again to come.
Coming quarters, Meanwhile, will be head down and focused on serving our customers well as always so I have a great day everybody. Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
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