Washington Trust Bancorp, Inc. (NASDAQ:WASH) Q4 2022 Earnings Call Transcript

Washington Trust Bancorp, Inc. (NASDAQ:WASH) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good morning, and welcome to the Washington Trust Bank Conference Call. My name is Bruno and I’ll be your operator today. . Today’s call is being recorded. And now, I would like to hand over to Elizabeth Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel, please go ahead.

Elizabeth Eckel: Thank you, Bruno. Good morning, and welcome to Washington Trust Bancorp, Inc.’s fourth quarter 2022 conference call. Joining us today’s are members of Washington Trust’s executive team, Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Mary Noons, Senior Executive Vice President and Chief Retail Lending Officer; and Bill Wray, 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.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I’m pleased to introduce today’s host, Washington Trust’s Chairman and CEO, Ned Handy.

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. This morning I’ll provide some comments about the fourth quarter as well as our thoughts on the current environment. Ron Ohsberg will then discuss our financial performance and afterward Mark Gim, Mary Noons and Bill Wray 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 Gim will retire as President and Chief Operating Officer this April and that he has immediately been elected to our Board of Directors. I’d personally like to thank Mark for all the contributions he’s made to Washington Trust over the past three decades.

During his tenure, he’s provided great strategic vision and led key business line growth. We look forward to his continued guidance as a member of our Board. It’s also my pleasure to introduce Mary Noons, who will become the first female President and Chief Operating Officer in Washington Trust 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. She’s a proven leader, a strategic thinker, and has a passion for service excellence and process improvement. I look forward to working alongside her. I’ll now turn to our quarterly results. I’m pleased to report that Washington Trust posted sound fourth quarter net income of $16.6 million or $0.95 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 costs challenged net interest margin in the quarter, this robust loan growth helped deliver near record quarterly net interest income, attracted new customers, and positioned the balance sheet for long-term success. Our main non-interest 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 advisors from our Wellesley office, which we previously reported on our Q3 call.

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 $600,000 contribution to our charitable foundation. This allows us to continue our tradition of assisting the organizations that provide health and human service, 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 DE&I Council in the quarter. I very much look forward to working with this team to ensure that ours is an 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 result in unpredictable rate environment are challenging in the short run, but they’re temporary. We continue to invest in talent to support growth, and are also focused on 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?

Ron Ohsberg: Yes. 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 $0.95 per diluted share. Net interest income was $41.3 million, down $700,000 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. On the 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 78 basis points to 1.64%.

Repayment fee income was modest at 15,000 and PPP fees in the quarter were 59,000 and collectively that added 1 basis point to the margin. Turning to non-interest 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 $901,000 or 9%. The decrease in revenues corresponded with a decrease in average AUA balances, which were down $527 million or 8%. December 31 end of period AUA totaled $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. AUA 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 prorated reduction of revenues of approximately $525,000 in the fourth quarter. The full run rate quarterly revenue loss related to these withdrawals is estimated to be $876,000 or an incremental $351,000 over Q4. Since the end of 2022, we have been notified of additional client withdrawals totaling approximately $55 million with an estimated Q1 prorated revenue loss of $40,000. Mortgage banking revenues totaled $1.1 million down by $944,000 or 46%. Realized gains were $1 million down $726,000 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. Total mortgage originations were $268 million down by 11%, and we placed 85% of mortgage originations into 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. Regarding non-interest expenses during the fourth quarter, we contributed $600,000 to our charitable foundation. Excluding this item non-interest expenses were down $308,000 or 1%. Salaries expense decreased by $797,000 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 $294,000 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 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 million was offset by payments of $44 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 FHLB borrowings were up by $280 million. Regarding asset quality, it remained strong. Non-accruing loans were 0.25% and past due loans were 0.23% of total loans.

The allowance totaled $38 million or 74 basis points of total loans and provided NPL coverage of 296%. The fourth quarter provision for credit losses was a charge of $800,000 consistent with Q3 and reflects loan growth continued negative trends in forecast of macroeconomic conditions, and strong asset and credit quality metrics. We had net recoveries of $264,000 in the fourth quarter and year-to-date net recoveries of $368,000. And at this time, I will turn the call back to Ned.

Ned Handy: Okay. Thank you, Ron, and we will now take questions.

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Q&A Session

Operator: . Our first question today is from Laurie Hunsicker from Compass Point. Laurie, your line is now open. Please go ahead.

Laurie Hunsicker: And Mark, I just — I just want to say it’s been absolutely lovely working with you and wishing you all the best. Glad you’re staying on the Board, and welcome Mary. So funding, maybe we can start there. Can you take us through your thoughts on using brokered CDs and how that will continue, what 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 on spot margin that would be super helpful.

Ron Ohsberg: Sure. So we view brokered CDs and FHLB. We always separate that out from what we call in-market deposits. And we view brokered CDs and FHLB; it’s kind of fungible funding sources. Brokered CDs have lately trended lower — lower cost than FHLB, but there’s less inventory out there. So I would say we would take full advantage of all the brokered CDs that we can collect. And FHLB is a little more instantaneous. You call; you get the funding the same day. It’s a little harder to get those brokered CDs in and there’s more competition out in the market to get them. But I would say we would rely on those as much as we can. We’re looking in the first quarter for guidance at a range of about $250 million to $255 million.

Laurie Hunsicker: Great. And then can you just remind me your brokered CD balances I know at September, it was $422 million, where it came in at December?

Ron Ohsberg: Yes.

Laurie Hunsicker: Or I can follow-up with you offline. I just wanted to get that. Maybe any thoughts — go ahead.

Ron Ohsberg: Laurie, yes, $358 million at the end of December.

Laurie Hunsicker: Okay. Great. Thank you. And then, just lastly, can you comment on how we should think about expenses, expense growth for full-year 2023, obviously a lot of moving parts? And just also wondering with the pressure on expenses has that slid your branch plans at all or how we should think about that? Thanks.

Ron Ohsberg: Yes. So I think our guidance on expense, we’ll keep that mainly to the first quarter. And we’re looking at a 2%, 2.5% 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 and those branches will open later in the year that’s $1 million. And also we have new FDIC insurance expense coming in at $1.4 million that that was not on the 2022 run rate.

Laurie Hunsicker: Perfect. Thanks. I’ll leave at that.

Mark Gim: Laurie, this is Mark. I’ll just comment on the branch timing. I — we have to balance the expense of opening branches in the short-term against the long-term value of increasing our deposit gathering radius and scope. So I think we are mindful of trying to balance near-term cost 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 is commercial deposit gathering and 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.

Laurie Hunsicker: Great. Thanks Mark.

Mark Gim: Thank you, Laurie.