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spk09: Good morning and welcome to the Washington Trust Bancorp ANC's conference call. My name is Grant and I will be your operator today. If participants need assistance during the call at any time, please press star zero. Participants interested in asking a question at the end of the call should press star one to get in the queue. Today's call is being recorded. And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer. As I call, you may begin.
spk06: Thank you and good morning. Welcome to Washington Trust Bancorp Bank's third quarter conference call. Hosting today's call are members of Washington Trust Executive Team. Ned Handy, Chairman and Chief Executive Officer. Mark Gim, President and Chief Operating Officer. Ron Osberg, Senior Executive Vice President and Chief Financial Officer and Treasurer. And Bill 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 the earnings press release, which was issued yesterday, and in other documents we filed with the FTC. These materials and all public filings are available on our investor relations site at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. And now I'm pleased to introduce the host of today's call, Washington Trust Chairman and CEO, Ned Handy.
spk10: Thank you, Beth. Good morning, and thank you for joining our third quarter call. We appreciate your continued interest in Washington Trust and hope all is well with you as we all continue to navigate the best and safest ways forward. I'll provide an overview of our third quarter highlights, and then Ron Osberg will review our financial performance. After our prepared remarks, Mark Gemm and Bill Ray will join us to answer any questions you may have about the quarter. I'm pleased to report that Washington Trust posted strong third quarter results with net income of $18.8 million, or $1.07 per diluted share. We had a strong quarter. We hit record highs in net interest income, wealth management revenues, assets under management, and total in-market deposits in the quarter. We continue to believe that the Rhode Island market presents us an opportunity to add physical presence in addition to digital advances to leverage our brand and bring our distinctive level of care to more Rhode Islanders conveniently. I'm proud of the team's continued efforts on growth combined with their high degree of care for our customers as they too work their way through this uncertain stage in the pandemic. We continue to feel optimistic about how we and our customers are managing the pandemic and we acknowledge that the need for informed care thoughtful decision-making, and an empathetic approach to finding the optimum work and life balances is still critical to see our way through these trying times. We strive to keep what is safest for everyone and what is best for our customers at the center of our thinking. The economies in which we operate are faring better than in the midst of the pandemic, with students back in school, restaurants open, gyms open, and municipalities ready to embark on the equitable deployment of subsidies to make meaningful long-term improvements in critical areas like housing, infrastructure, education, job place training, and mental health assistance. The realities of labor shortages and logistics challenges and the risk of ongoing inflation weigh on us all. So we're helping where we can, adjusting where we must, and are prepared to adapt to any necessary changes. We were recently named by Newsweek as the best small bank in Rhode Island. we are humbly proud to serve our customers well. Whether we're serving our customers in person or in remote channels, our market reputation for outstanding service quality is very strong, as exemplified by our high net promoter scores, which have exceeded national averages both before and during the pandemic. Whether it is to simply speed the delivering of a mortgage or to make it even easier for small business customers to manage payments, or to ensure that our operating infrastructure is ever more reliable and secure, we recognize that the best solution is often digital. As always, the protection of our customers' data and privacy is a paramount concern. In all of these areas, we partner with our core providers and with fintech companies, and we believe that active engagement with the fintech ecosystem is an important method of understanding both new opportunities as well as competitive challenges. 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. Total loans declined 0.3% in the quarter. This was largely due to PPP loan forgiveness. New loan formation in commercial was strong at $100 million in the quarter, but was offset by commercial payoffs and paydowns. Third quarter mortgage lending activity remains robust and pipelines are relatively strong. Recent increases in longer term interest rates will likely result in a reduction of mortgage refinancing activity compared to the record levels of late 2020 and early 2021. However, in our markets, supply and demand characteristics suggest that buyer purchase activity and housing value should remain. Our Wealth Management Division's assets under administration stood at a record $7.4 billion at September 30th. Wealth management revenues were $10.5 million, up slightly for the third quarter and at a record level. We're very pleased with our wealth management division's continued strong performance from both a customer and shareholder perspective. Growth through business development and market appreciation helps us enhance this recurring revenue stream, which provides a welcome diversity in the current low interest rate environment. I'll now turn the call over to Ron for a more detailed review of our financial performance.
spk00: Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $18.8 million, or $1.07 per diluted share for the third quarter. This compared to $17.5 million in $1 per share for the second quarter. Net interest income amounted to $36.1 million, up by $1.3 million, or 4%. the net interest margin was 258 up by three basis points. Net interest income continued to benefit from accelerated fee income recognition due to PPP forgiveness, which totaled $2 million and had a 13 basis point benefit to the margin. This compared to 1 million and seven basis points in the second quarter. Additionally, there were no commercial loan prepayments in the third quarter compared to $717,000 of prepayment fees in the second quarter, which was five basis points. Excluding the impact of these items, the margin increased from 242 to 245. Average earning assets increased by 69 million with increases of 42 million in average loans and 16 million in average investment securities. The yield on earning assets was 285 for the third quarter unchanged from the previous quarter. On the funding side, average in-market deposits rose by $108 million, while wholesale funding sources decreased by $79 million. The rate on interest-bearing liabilities declined by three basis points to 0.35%. Non-interest income comprised 36% of total revenues in the third quarter and amounted to $20.5 million, down by $73,000 from the preceding quarter. Wealth management revenues were $10.5 million, up by $27,000. This included an increase in asset-based revenues, which were up by $233,000, or 2%, offset by a decrease in transaction revenues of $206,000 due to a decline in seasonal tax reporting and preparation fees. The increase in asset-based revenues correlated with an increase in the average balance of assets under administration, which were up by $249 million, or 3%. September 30 end of period assets totaled $7.4 billion, up by $2 million from June 30, reflecting net positive client asset inflows, which were partially offset by marked depreciation of assets. Our mortgage banking revenues totaled $6.4 million in the third quarter, up by $379,006. This included net realized gains on sales of loans of $5.8 million, which were down by $2.8 million, or 33%. Mortgage loans sold totaled $174 million, down by $117 million or 40%. This was partially offset by an increase in sales yield. Mortgage banking revenues were helped by positive fair value changes on mortgage loans held for sale and forward loan commitments of $467,000. This compared to a negative fair value change of $2.5 million in the second quarter. Mortgage loan originations amounted to $396 million, down by $93 million or 19% from the preceding quarter and we're down by $114 million, or 22% from the third quarter of 2020. We are seeing a shift in market demand away from saleable loans. The percentage of originations to be sold in the secondary market declined from 50% to 48% on a link quarter basis and from 70% in the first quarter. Our mortgage pipeline is still robust at September 30. The pipeline was $281 million, down by $17 million or 6% from the end of June. Loan-related derivative income was $728,000, down by $447,000 in the preceding quarter. Regarding non-interest expenses, these were down by $492,000 or 1% from the second quarter. In the second quarter, debt prepayment penalties of $895,000 were incurred to pay off higher-cost FHLB advances. Excluding the impact of these penalties, non-interest expense was up by $403,000 or 1% from the second quarter. Salaries and employee benefits expense increased by $80,000 or 0.4% in the third quarter. FDIC deposit insurance costs were up by $108,000, and the remaining increase reflected modest increases across a variety of expense categories. Income tax expense total 5.3 million for the third quarter. The effective tax rate was 22.1 compared to 21.8% in the preceding quarter. We currently expect our full year 2021 effective tax rate to be 22%. Now turning to the balance sheet. Total loans were down by 13 million from June 30 and up by $4 million from a year ago. In the third quarter, commercial loans decreased by $90 million or 4%, which included a net reduction in PPP loans of $70 million. Excluding PPP loans, commercial loans decreased by $20 million or 1% from June 30, reflecting payoffs and paydowns of $103 million, as well as lower line utilization of $17 million. These decreases were partially offset by new loan originations and advances of $100 million. Residential loans increased by 82 million, reflecting a higher proportion of loans originated for portfolio. In-market deposits were up by 310 million, or 8% from June 30th, and up by 602 million, or 16% from a year ago. The quarterly increase included seasonal inflows from our municipal and higher-ed depositors, as well as organic growth. Compared to last year, deposit inflows have allowed us to improve our funding mix, by paying down higher cost wholesale advances. Wholesale brokered CDs were up by $23 million in the third quarter, while FHLB advances were down by $186 million. Total shareholders' equity amounted to $555 million at September 30, up $7.5 million from the end of Q2. We remain well capitalized. The total risk-based capital ratio was 13.83% at September 30, and the tangible equity to tangible assets ratio was 8.19%. Our third quarter dividend of 52 cents per share was paid on October 8th. Regarding asset quality, non-performing assets increased by 495,000 in the third quarter. Non-approval loans were 0.26% of total loans, and loans past due by 30 days or more were 0.22%. The allowance for credit losses on loans totaled 41.7 million or 0.97% of total loans and provided NPL coverage of 380%. Excluding PPP loans, the allowance coverage was 99 basis points. Net charge-offs were $168,000 in the third quarter compared to $258,000 in the second quarter. And for both the third quarter and the second quarter of 2021, there was no provision for credit losses. The provision and related ACL reflect our current estimate of forecasted economic conditions and continued stable asset quality metrics. And finally, I'd like to provide an update on our COVID-19 lending impact. As of September 30, we had loan deferments on five pre-loans totaling $38 million, or 1% of total loans outstanding, excluding PPP loans. This was down from 22 loans totaling $93 million, or 2% as of June 30th. Also, as of September 30th, we are reporting 630 PPP loans with a carrying value of $77 million. In the third quarter, $73 million was forgiven by the SBA, with $2 million of net deferred fees accelerated into income as a result. Net unamortized fees on PPP loans amounted to $2.6 million as of the end of September. And at this time, I will turn the call back to Ned. Thank you, Ron.
spk10: This was another strong quarter for Washington Trust and we feel well positioned heading into the final quarter of the year. Now Ron and Mark and Bill and I are happy to take any questions you might have.
spk09: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
spk08: This time we'll pause momentarily to assemble our roster. Our first question today will come from Mark Fitzgibbon with Piper Sandler.
spk10: Please go ahead.
spk07: Good morning.
spk10: Hey, Mark.
spk07: First question I had for you, I heard, Ned, your comments about the mortgage business perhaps normalizing. Do you feel like in a more traditional environment, this is, you know, maybe a $25 or $27 million revenue kind of business? Or does, you know, when things normalize, do revenues fall more precipitously than that, do you think?
spk10: You know, I'm going to turn that to Mark for comments. Mark, he's closest to it. But I think, you know, we'll probably bottom out at somewhere higher than our, you know, pre-pandemic levels.
spk00: uh just just based on the volume that we've been generating of late yep so mark this is ron so so we had uh 15 million dollars in mortgage revenue in 2019. uh if you annualize what we just did in the in the third quarter uh that works out to about 25 and a half million you know that feels like it's probably still higher than where it's going to end up uh so with you know it's going to be somewhere i think between that 15 and the 25 that we're at currently you know is that 20 million I think it's hard to say. And Mark, Jim, I don't know if you have any color you want to add to that. I do.
spk04: And thanks for those preceding comments, Ned and Ron. Mark, I think if we look back to where we entered the pandemic in 2020, we had a mortgage pipeline somewhere just below the $200 million range. And from a mixed standpoint, I think certainly the run-up in longer-term interest rates will have an impact first on the conventional saleable refinance business. And so I depending on whether or not inflation expectations continue to be high, if the pipeline were to decline in relative terms, it would probably be more on the saleable side than on the portfolio side. However, as Ned said in his comments, we think the housing markets in Connecticut, Massachusetts, and Rhode Island remain pretty robust, and so mortgage pipeline for retention of portfolio mortgages for reasons of size, for example, jumbo, should still continue to be strong. So, you know, it's very broad guidance that Ron gave, but somewhere between pre-pandemic levels and an annualized level of sales gains would be likely with interest rates and the housing market where we see them now.
spk07: Is that helpful? It's very helpful. Thank you. And also, I guess I was curious, as you think about the margin, you guys were, you know, performed a little better maybe than you thought you were going to last quarter. How are you thinking about the outlook for the margin today? Do you still have some ability to drive those funding costs lower?
spk00: Yeah, there's not much left there, Mark. So, I would say we'll probably see some pressure on asset yields. So, yeah, we did do a little better in the third quarter than we guided last But I would say the guidance we gave before is kind of consistent with the guidance we're giving now. I would say we trend closer to 240 in the fourth quarter.
spk07: Okay. And the last question I guess I was curious about, it looks like you've got about a billion six in loans in Massachusetts and no branches there. Is that a missed opportunity to maybe sell other products and services to those loan customers? And is that in the cards for you all to open some branches in Massachusetts and Thank you.
spk10: Yeah, Mark, do you want to comment on that?
spk04: Yes, I would. Mark, we continue to try to figure out the best way to improve deposit gathering in markets where we have less of a physical presence like Connecticut or no physical presence in Massachusetts. And we have been successful on a preliminary basis in introducing some programs where if we are able to get deposits from customers, for example, who are jumbo mortgage customers in Massachusetts, and service them primarily digitally. We've been successful in gathering some of those amounts. The trick is to, of course, keep and build on them. And I think in the remote markets where we don't have a current branch presence, it's more likely that we would try to broaden our digital offerings to those customers than to open branches de novo. It's primarily because it's a hard market to get into de novo and you'd have to either open several at one time or perhaps look for opportunities through M&A and branch divestiture. So I'd say at the current time, our plans are more, if there are physical opening presence opportunities, they're probably going to be more profitable faster in Rhode Island than they would be in Mass or Connecticut. And so we may look to a combination of digital and or M&A to broaden that. Our customer service center is our outreach center. part of the digital offering program and has been, we think, successful in servicing some of the remote customers.
spk01: Thank you. Thanks, Bert. Our next question will come from Damon Del Monte with KBW.
spk09: Please go ahead.
spk03: Hey, good morning, guys. Hope everybody's doing well today. Hi, Bert. morning first question uh regarding loan growth and kind of the outlook um you know ned could you just give us a little bit of uh insight into how you think you know the pay down activity is going to play out here in the back half of the year i mean originations have been strong you know you've just been offset by the elevated paydowns do you think that's slowing at all and you can start to show some some net growth in the coming quarters
spk10: I would say certainly slowing in Q4 versus Q3 is our expectation. Q3, we had a pretty big payoff quarter. The story continues to be somewhat the same. We're lending to high-quality borrowers who are able to take advantage of long-term financing opportunities or sales at continuing low cap rates. While rates stay low, our type of customer will keep taking advantage of cycling money in and out of deals. We try to put prepayment penalties or success fees in place, but that's a pretty early thing to be negotiated away by competition in the market, so that's a little bit Difficult, but I think certainly if rates tick up a little bit, that may put some pressure on cap rates and might make it less enticing. In terms of scheduled payoffs, we think the number's a little lower in Q4. I'm happy with credit formation. I'd like to see more. We continue to look at the possibilities of adding lenders and growing organically that way and we think there's opportunity with some of the noise in Connecticut and in Massachusetts we think there may be some opportunities to add lenders but I think for the time being we don't see it as an opportune time to change our risk tolerances we think we're playing in the right place and we're We're on the pavement constantly fighting it out on the street corner to win hopefully more than our fair share of deals. I've said it before, Damon, and I'll say it again. I'd rather be paid off early in real estate than late. So I like the quality of the deals we're getting involved in, and I think we'll keep on that path.
spk03: Got it. Okay. That's good color. Thank you. And then on the CNI side in line utilization, Where does that stand in the third quarter and how does that compare to the second quarter?
spk10: Yeah, we have a pretty small universe of corporate lines. They're down by 17 million in the quarter, down a little bit on a percentage basis, but that's not going to have a major impact on the numbers either way. I expect that utilization will come back to Sort of normal levels that really most of that I believe was in was in 1 large line that paid down at quarter end. So it's really. There are so few lines, it's hard to, it's hard to think of that as being a major mover. Got it.
spk03: Okay. And then just my, I guess my last question on expenses, you know, Ron. Anything unique that we should consider going forward, or do you think this mid-$32 million range is a reasonable run rate going forward?
spk00: Yeah, I think that's fine for Q4, Damon. I mean, we're just starting our budgeting process for 2022, so I'm not really ready to talk about that yet. You guys are all aware that we're seem to be entering an inflationary period. So we'll kind of have to think about how that might affect our run rate going forward. So not quite at that point yet to talk about that.
spk08: Okay, fair enough. That's all that I had. Thanks a lot. Our next question comes from Eric's work with Dunning and Scattercode. Please go ahead.
spk02: Good morning, guys.
spk10: Morning, Eric.
spk02: Morning, Eric. Just to follow up on that last question, I realize you're still in the planning process for 22 with expenses and I guess the planning process for the whole organization. But as we think about the new branch in Cumberland that's going to come online next year, what's the expected timing in terms of the quarter that you expect to open that and any estimates on the annual cost for that branch?
spk00: Yeah, Mark, I don't know if you can talk about the timing, Damon. I can... Eric, the typical cost of a branch for us on a full year basis is about $650,000.
spk04: Right. And from a timing perspective, Eric, we're thinking late second quarter, perhaps the end of the second quarter of 2022.
spk02: Great. Thank you. And then transitioning back to the discussion on loans, thinking about it maybe a different way. Ned, in your comments, opening comments, you mentioned that the pipeline is relatively strong today. I wonder if any of you are able to provide any detail in terms of the construction of that in terms of type of loans as well as what the average yield is in the pipeline and how that might compare to existing loan portfolio yield.
spk10: Yeah, I would say the pipeline is not at its high point. It's in the mid-150s. There's a good portion of that that's in construction loans, like nearly half of it. So, and it's tilted towards Cree at this point in time. I think just based on loans coming on in the quarter versus loans being paid off, the loans coming on were a little favorable from a yield perspective. So I think some of the high quality you know, year ago, two year ago, vintage stuff was priced a little lower than what's coming on today. We're getting a little bit of incremental yield. So I feel good about that from a margin standpoint. We did have a fair amount of closing in September itself. So the pipeline got a little emptied out. I expect it will build back up. You know, it's kind of hovered in the 175 to 200 million range. I expect it will get back there. One thing that I think we're experiencing a little bit is construction loans are funding a little slower just based on logistics issues. And so I think they'll take a little bit longer to reach full funding. But other than that, I feel pretty good about where we are.
spk02: That's good, Collar. Thank you. And then thinking about credit, you mentioned that the beginning of the call that you feel the level of the reserve is appropriate today, given the risk in the portfolio and the economic outlook. As we think about provisioning going forward, would you expect it now to match net charge-offs and growth, or are there other factors to consider at this point?
spk00: Yeah, Eric, it's Ron. So we expect credit to remain stable in the absence of a COVID relapse or some other unforeseen economic shock. That said, you know, provision should generally track to loan growth and the economic outlook. So, you know, at least for the short-term foreseeable future, it seems to be kind of stable.
spk02: Okay, thanks. And one last quick one, if I can squeeze it in. I noticed in the press release, and you mentioned it several times already, with regard to mortgage loans and what's been sold, your gain on sale margin was up in 3Q, and I think a lot of your competitors are seeing compression there on the margin. So just curious where your advantage might lie, whether it's in the mix that you're selling or maybe a technological and speed advantage. Just curious if you've got any thoughts on that front.
spk04: Yeah, Eric, this is Mark. I'll start with that from kind of an operational perspective, and then Ron can go into some of the details. We do think that one of the things that we do very well is speed in process. Time is a huge advantage for everybody in a mortgage transaction, the seller, the buyer, the bank, any referral sources. And so we have made, we think, good use of additional digital technology to try to speed the turn time from application to close. It's kind of an unsexy thing, but every day that you can shave off the delivery time helps to preserve margin a little bit. Having said that, I think that we do believe that compared to the high margins of late 2020, margins are returning to a more normal level, perhaps higher than when we ended the pandemic, but it's hard to defend against market trends with internal process improvements alone. But we do think that that is an advantage and an edge for us in execution. Ron, I don't know if you have anything to add on components of margin in Q3.
spk00: Yeah, Mark. So the only other thing I would add to that is it becomes a little bit of a supply and demand thing. And as volumes are ramping up high, you tend to see the yields go up because there's less capacity to process the loans and the pricing opportunity gets better. So You know, we kind of dipped down a little bit in Q2. We rebounded a bit in Q3. I would say we're probably still at a fairly high historical yield, so we'll see how long we're able to maintain that.
spk02: That's helpful. Thanks for taking my questions today.
spk09: Thanks, Eric.
spk01: Thanks, Eric.
spk09: Our next question comes from Lori Hunsaker with CompassPoint. Please go ahead.
spk05: Yeah, hi, thanks. Good morning. One thing, Ron, if we could circle back to your comments on fourth quarter margin guide of around 240, you know, stripping out PPP and obviously there were no prepay fees. So we are at 244 essentially for third quarter. So four basis points of contraction. Can you just help us think a little bit more about that and I guess, you know, looking into 2022? you know, what potentially you can do to mitigate it, especially given that your cost of funds is so low and there's nothing left in terms of borrowing prepays. At least I think that that was what was on my notes. Just help us think about that. And then just one last piece of that. Can you share with us what is remaining in terms of PPP fees that are unamortized?
spk00: Yes. So I'll answer that second part first. It's $2.6 million of unamortized PPP.
spk05: Great.
spk00: And then as far as just the margin itself, I mean, we're going to continue to see some asset yield pressure on our resi book and on our mortgage securities, you know, as those pay down, you know, that the legacy yields are higher and they're being replaced by lower yielding assets. So that's really the main story there. I think we've done a nice job of bringing down our funding costs, you know, through both deposit growth and just kind of repricing our our wholesale funding broke down. Not a lot of opportunity left there with that. So that's kind of where we are. I wouldn't expect to see lots of big moves within the margin, but I would say the overall trend over the next few quarters will probably be, you know, a little lower than where we are right now.
spk05: Okay. That's helpful. And then obviously your credit is looking pristine here, but just wondered if you could help us think. It looks like on the hotel side, your hotel loan balances have gone up from what's been previously 150 to 160. You're now at 199 million. Are you adding to your hotel book? And then just any color you can give us, the 38 million in deferrals, how much of that is hotel? Thanks.
spk10: So we did make one new hotel loan in Newport on a very favorable loan to value, a property that had just been renovated and with a customer we know. But I will tell you, Laurie, that we're not out canvassing for new hotel loans otherwise. So that was a rare opportunity. Bill, I don't know if you've got specifics on that, or Ron, on the five remaining deferrals in terms of whether there are hotels in there.
spk00: Yeah, there's one hotel, one healthcare, one retail.
spk11: Okay. Basically three relationships. Hotel is just under $10 million.
spk05: Okay, great. Thanks. And then do you have an average LTV on your hotel book? Or if not, I can follow up with you offline.
spk11: Yeah, we'll have to do that offline to give you what the latest numbers are. The numbers we looked at last time across the portfolio, if I remember right, were in the mid-50s. We tend to underwrite these very carefully, but we should do an offline follow-up.
spk05: Okay, great. And then just one last question. Appreciate the 22% tax rate guide for fourth quarter. How should we be thinking about the tax rate in 2022?
spk00: Yeah, it's going to be approximately what we're seeing this year. I'd like to say 22. Great. Thanks.
spk05: I'll leave it there.
spk00: Sure.
spk09: Thanks, Roy. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Ned Handy for any closing remarks.
spk10: Well, thank you all for joining us this morning. We do appreciate your continued interest and hope all is well with you and continues that way. And we will talk to you all soon. And Laurie, we'll come back to you. Have a great day, everybody.
spk08: The conference has now concluded. Thank you for attending today's presentation.
spk01: You may now disconnect.
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