Washington Trust Bancorp Q2 2023 Earnings Call Transcript

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July 25, 2023

There are 7 speakers on the call.

Operator

Morning, and welcome to Washington Trust Bancorp Inc. Conference Call. My name is Carla. I will be your operator today. Today's call is being recorded.

Operator

And now I will turn the call over to Elizabeth B. Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckle?

Speaker 1

Thank you, Carla. Good morning, and welcome to Washington Trust Bancorp, Inc. 2nd Quarter 2023 Conference Call. Joining us this morning are members of Washington Trust's executive team: Ned Handy, Chairman and Chief Executive Officer Mary Nunes, President, Chief Operating Officer Ron Osberg, Senior Executive Vice President, Chief Financial Officer and Treasurer and Bill Ray, 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.

Speaker 1

Our complete Safe Harbor statement is contained In the earnings release, which was issued yesterday, as well as other documents that have been filed with the SEC. All of these materials and other public filings are available Our Investor Relations website at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust Chairman and CEO, Ned Handy.

Speaker 2

Thank you, Beth, and good morning, everybody. Thank you for joining our Q2 call. We welcome the opportunity to share some highlights from the quarter and appreciate your time and interest in Washington Trust. I'll provide some comments about the Q2 as well as some thoughts And then Ron Osborne will then discuss the financial performance and Mary Noons and Bill Ray will join us To help answer any questions you may have about the quarter. Washington Trust posted 2nd quarter net income of $11,300,000 or 0.66 dollars per diluted share compared to $12,800,000 or $0.74 per diluted share in the prior quarter.

Speaker 2

Total loans grew by 3% and in market deposits grew by 1% in the quarter. We surpassed $7,000,000,000 in assets for the first time. The challenges of severe interest rate increases and more importantly, a lasting inverted yield curve and the prospects of recession Kept us totally focused on maintaining and strengthening our customer franchise and balancing prudent decisions about credit, capital, liquidity And the investment and the enhancement of our customers' experience with us. Our deposit franchise, although logically more expensive, is intact and growing and our loan books are in solid shape. We're proud to report that our most recently added branches in East Greenwich, Cumberland and Barrington, Rhode Island have reached approximately $70,000,000 $30,000,000 $8,000,000 in deposits, respectively.

Speaker 2

They've been open for 27 months, 11 months and 13 weeks respectively. We have 2 additional branches in process in the Olneyville section of Providence And in Smithfield, Rhode Island. Stronger market conditions enabled improvements in both wealth and mortgage revenues. Wealth assets under administration reached $6,400,000,000 atquarterend, up by 3%, driven by market appreciation, Offset by a normalized level of asset outflows. In our retail lending division, a concerted effort to increase loan sales drove a solid increase in gains in the quarter.

Speaker 2

Our balance sheet remains strongly positioned for long term performance. Our liquidity and credit positions are strong and we remain well capitalized. Our commercial real estate loan portfolio remains in sound condition. Our office loans at 14% of overall CRE at June 30 Exhibited a 1.5 weighted average debt service coverage ratio and a 58.7 percent weighted average loan to value. 74 percent of dollars or 38 properties are suburban and 26 percent of dollars or 14 properties are urban.

Speaker 2

Substantially all of the dollars, about 95% are Class A or Class B. We monitor maturities closely and We're comfortable with the portfolio at this point, and we regularly stress interest rates to assess refinance risk. We'll provide additional We continue to assess and improve our digital offerings to assure that our customers can access us easily And enjoy a digital experience as satisfying as the personal service for which we are renowned. We're careful and prudent in our lending, but feel that these times can be most trying for consumers and small businesses located in traditionally underserved communities. We will continue to actively serve those needs and have developed proprietary creative programs designed to help.

Speaker 2

I'm proud of the way our employees have been there to serve We take our role as a community bank very seriously and value our employees, customers, communities and shareholders. For 223 years, we've understood that the permanence of that commitment will outlast the momentary issues of economic stress, inflation or global unrest. We intend as always to be a catalyst for equitable improvement across our entire marketplace. I'll now turn the call over to Ron for an in-depth review of our financial

Speaker 3

Thank you, Ned. Good morning, everyone, and thank you for joining us. As Ned mentioned, net income was $11,300,000 or 0 point $0.66 per diluted share. Net interest income was $33,500,000 down by $3,700,000 or 10% from the preceding quarter. The net interest margin was 2.03%, down by 30 basis points and in line with guidance.

Speaker 3

Average earning assets increased by 173,000,000 The yield on earning assets was 4.53, up by 23 basis points. On the funding side, average end market deposits Increased by $128,000,000 and average wholesale funding rose by $143,000,000 The rate on interest bearing liabilities increased by 60 basis points To 3.0 2. Prepayment fee income was $50,000 in the 2nd quarter and $124,000 in Q1. Non interest income comprised 30 percent of total revenues and amounted to $14,300,000 up by $1,000,000 or 8% from Q1, Reflecting increases in both Wealth Management and Mortgage Banking Revenues. Wealth Management Revenues were $9,000,000 up by $385,000 or 4%.

Speaker 3

This included transaction based revenues, which were up by $252,000 concentrated in tax servicing and estate fee income. Asset based revenues were up by $133,000 or 2 percent with a corresponding increase in average AUA balances, Which were up by $103,000,000 or 2%. End of period AUA totaled $6,400,000,000 up by $187,000,000 or 3 percent From March 31, reflecting market appreciation of $260,000,000 partially offset by net client outflows of $73,000,000 Of those outflows, dollars 9,000,000 were related to the advisers that left the company at the end of the 3rd quarter. Mortgage banking revenues totaled $1,800,000 up by $508,000 or 41%. Mortgage loans sold Totaled $65,000,000 in the 2nd quarter, up by $35,000,000 and total originations were $227,000,000 up by 89,000,000 Our mortgage pipeline at June 30 was $165,000,000 up by $18,000,000 or 13% from the end of March.

Speaker 3

Regarding non interest expenses, these were down by $548,000 or 2%. Salaries expense decreased by 1,200,000 Or 5%, reflecting decreases in performance based compensation accruals of approximately $1,900,000 partially offset by higher volume related mortgage commissions. And FDIC insurance costs were up by $499,000 Now turning to the balance sheet. Total loans were up by 150 or 3 percent from March 31 and by $901,000,000 or 20 percent from a year ago. In the 2nd quarter, total Commercial loans increased by $33,000,000 or 1%.

Speaker 3

Residential loans increased by $107,000,000 or 4%. End market deposits were up by $53,000,000 or 1% from March 31 by $165,000,000 or 4% from a year ago. Wholesale broker deposits were down $7,000,000 while FHLB borrowings were up by $115,000,000 As far as deposit and liquidity metrics are concerned, uninsureduncollateralized deposits are estimated to be 18% of total deposits. Our average deposit size is $37,000 and we have a $1,700,000,000 of contingent liquidity. Total equity amounted to $459,000,000 at June 30, down by $6,000,000 from the end of the Q1, and we do remain well capitalized.

Speaker 3

Regarding asset quality, it continues to remain strong. Non accruing loans were 19 basis points And past due loans were 12 basis points on total loans, both of which improved compared to the Q1. The allowance totaled $39,300,000 73 basis points of total loans and provided NPL coverage of 3 78%. The 2nd quarter provision Was a charge of $700,000 down by $100,000 from the provision recognized in Q1, and we had net charge offs of just $37,000 in Q2. And at this time, I will turn the call back to Ned.

Speaker 2

Thank you, Ron. And Carla, we can go to questions now.

Operator

Thank Our first question is from Mark Fitzgibbon from Piper Sandler. Your line is now open. Please go ahead.

Speaker 4

Hey, guys. Good morning. Good morning, Mark. Good morning, Mark.

Speaker 5

Hey, Ron, I wonder if you could help us think About the net interest margin, maybe in the Q3 or even for the back half of the year, I'm assuming we're to see a little bit more compression given funding challenges. Can you help us think through the magnitude of the compression?

Speaker 3

Yes. So Mark, we're actually thinking that the margin for Q3 will come in close to 2%. So we're not expecting a lot of compression in Q3. Okay. And

Speaker 5

then a little bit more compression you think in 4Q?

Speaker 3

Yes. So I would say our guidance for the remainder of the year will be around 2%.

Speaker 5

Okay. And then secondly, you guys have done a really good job on expenses. Should we assume that you can kind of hold operating expenses in that $33,000,000 range for the remainder of the year?

Speaker 3

Yes. So we did have some accrual reversals. So you might kind of think about that as a bit of a non recurring item. We also plan to do some Increases in advertising in the 3rd quarter. So yes, I think Q3 expenses will be somewhat higher Based on those two facts, FDIC expense has been running pretty hot for us, kind of in line with asset growth, but we think that's going to moderate Over the balance of the year.

Speaker 3

So we should have peaked in Q2.

Speaker 5

Roughly, how much were the accrual reversals?

Speaker 3

So we did $1,900,000 in reversals.

Speaker 4

Okay.

Speaker 5

And then I wondered if you could help us think about sort of capital ratios and how low you'd be willing to take Either the TCE ratio down or the CET1 ratio down, where would you be comfortable taking that down to? Because obviously you're continuing to grow.

Speaker 3

Yes. So I don't really necessarily have a target for you at We do quarterly stress testing on capital, and we are comfortable with where we are in capital. We understand that our balance sheet is growing. I guess just a couple of points. We are well capitalized.

Speaker 3

We do the stress testing quarterly. We also believe that our asset quality is a differentiator for us. And as such, our capital ratios do tend to be on the lower end of the peer group range. There is no doubt that the steeply inverted yield curve is putting a lot of pressure on our margin and on our mortgage business. But that said, we don't believe that, that steeply inverted yield curve is permanent.

Speaker 3

We are a community bank, and we will act We have internal conversations about the level of loan growth. I think we are becoming more selective, particularly on the commercial side. Residential, we think we have a good mortgage operation. We want to maintain that operation. So we're kind of giving what the markets we're kind of taking what the market is giving us In that regard right now, but we do believe that we've got the capital to maintain what we're doing and we'll adjust accordingly as we move forward We think there's an issue.

Speaker 5

So in that same vein, the dividend payout ratio looks optically high and so does sort of the dividend yield. Would you consider cutting it as a means for kind of accelerating capital generation?

Speaker 3

No, no. We have no plans to cut the dividend. Yes, we agree that the payout ratio is it's higher than we'd like it to be. We don't think that that's permanent state of being. We have had a dividend payout ratio similar to this in the past, and we work through that, and we expect that we'll be able to work through it now.

Speaker 5

Thank you.

Speaker 3

Yes.

Speaker 2

Thanks, Mark.

Operator

Thanks, Mark. Our next question is from Damon Downmont from KBW. Your line is now open. Please go ahead.

Speaker 4

Hey, good morning, everyone. Hope everybody is doing well today. So just wanted to start off on the loan growth side. I mean, it's pretty solid quarter, Around 12% linked quarter annualized. How do you look at growth over the back half of the year?

Speaker 4

And then kind of within that Outlook, how do you look at the consumer side versus the commercial side? Because it seems like you've been able to kind of add to the consumer side pretty consistently. So So just didn't know kind of what your thoughts were over the next couple of quarters?

Speaker 2

Yes, Damon, it's Ned. I'll start on the commercial side. The pipeline, Maybe not surprisingly, it's very strong. We're seeing a lot of opportunity partly because others are Probably passing on things that they might not have in other times. And so the prospects for growth are good, but we are being very careful, Looking for the right kind of pricing, looking for the right kind of structures, avoiding some asset classes.

Speaker 2

You might imagine we're not making a lot of office loans at the moment. But I think I don't want to change our sort of mid single digit growth Outlook for commercial, I think, will probably be at the higher end of that. Obviously, the quarter was strong. And again, the pipeline is In the high 300s. So it's as robust as it's been.

Speaker 2

So the challenge is getting the right kind of Yield out of the book, looking for deposit opportunities in particular, along with commercial loans. And We'll hit our projected growth rates. We might exceed them a little bit just because of the opportunity. And then I know Mary Noones is with us and she'll talk about resi. I know we're tilting the pipeline towards saleable assets And that showed up a little more in the Q2 than the first, but Mary?

Speaker 6

Good morning, Damon. This is Mary.

Speaker 4

Good morning, Mary.

Speaker 6

How are you? We've I'm well. How are

Operator

you doing?

Speaker 4

I'm great.

Speaker 1

Thanks, Carla.

Speaker 6

We've We've pretty much doubled our for sale production since February. And there's a lot of levers we can use To moderate the mortgage production. And one of the things that we've done is, we've got very good yields on our Portfolio production, which is helping us too. So, I think that we're for the Second half of the year, certainly for Q4, we're looking for solid for sale production As much as we can in the mortgage area. The consumer area is largely driven by What's being used on the lines of credit?

Speaker 6

We have a pretty good outstanding on lines of credit, what the credit limit is. Production is solid, but that's not really driving the numbers. It's really utilization of the line.

Speaker 4

Got it. Okay. And then kind of building on the commentary on the resi market and the pipeline that you guys are seeing. So should we You sound a little bit more optimistic that gain on sale of mortgage loans in the back half of the year will remain stronger than we have seen. Is that fair?

Speaker 6

Yes. As it looks right now, that's what we're thinking. This stuff can change very rapidly. We've seen a lot of volatility And the conforming loan side on the rates there, that's what's influencing portfolio production. But as it stands right now and what we're forecasting is We're going to have solid gains for the Q4.

Speaker 4

Got it. Okay. And then with regards to credit, I mean, obviously, very strong trends continue. From a provisioning standpoint, Ron, you kind of look at the provision as basically covering loan growth and Based on what you put up for the first half of the year, that's a reasonable level as we go through the second half of the year? Yes.

Speaker 4

Okay. Great. I think

Speaker 3

I can elaborate if you want, but yes, it's basically loan growth. So yes, I mean, we CECL, All the macroeconomic forecasting is kind of built into the computation. So current expectations of what the future will have is kind of baked in. So for right now, It's basically loan growth unless something changes.

Speaker 4

Got it. Okay. And then just to circle back on the expenses. So I think you noted about $1,900,000 of accrual reversals this quarter. So when you kind of factor that in plus some higher marketing costs, I mean, you're probably talking somewhere in the Upper $34,000,000 range, closer to $35,000,000 per quarter over the back half of the year.

Speaker 4

Does that sound reasonable?

Speaker 3

Yes. I think that sounds about right.

Speaker 4

Okay. Okay, great. Well, that's all that I had. So thank you very much. Yes.

Speaker 2

Thanks, Damon.

Speaker 1

Thank you.

Operator

We have no further questions. So I'd like to hand back

Speaker 1

to Ned for any closing remarks.

Speaker 2

Thank you, Carla, and thank you all. We appreciate your time with us this morning. We had another challenging quarter, but we saw some incremental improvement in our fee businesses, deposits and asset quality despite the continuation of the inflation driven rate environment. Interest rates will fluctuate and credit cycles will come and go, But we'll be there to help people prosper through thick and thin with prudent and productive extensions of credit. We're confident that our diversified business model, disciplined credit culture and Strong capital base will position us for further success as the operating climate begins to normalize over the coming quarters.

Speaker 2

We appreciate your interest and your questions and your support. Have a great day.

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Earnings Conference Call
Washington Trust Bancorp Q2 2023
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