Washington Trust Bancorp, Inc.

Q1 2022 Earnings Conference Call

4/25/2022

spk04: Good morning and welcome to Washington Trust Bancorp Incorporated's conference call. My name is Bailey and I will be your operator for today. If participants need assistance during the call at any time, please press star followed by zero. Participants interested in asking a question at the end of the call should press star followed by 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. Ms. Eccle, please go ahead.
spk00: Thank you, Bailey. Good morning, and welcome to Washington Trust Bancorp Bank's 2022 First Quarter Conference Call. Joining us for today's call are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer, Mark Gims, President and 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. 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 this morning, and other documents that are filed with the SEC. 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 now pleased to introduce today's host, Washington Trust Chairman and CEO, Ned Handy.
spk01: Thank you, Beth. Good morning, all, and thank you for joining our first quarter call. We're grateful for your time and continued interest in Washington Trust. This morning, I'll provide an overview of our first quarter highlights, and then Ron Osberg will reveal our financial performance. After our remarks, Mark Gim and Bill Ray will join us and will answer any questions you may have about the quarter. I'm pleased to report that Washington Trust posted solid first quarter results with net income of $16.5 million, or $0.94 per diluted share, compared with $20.2 million, or $1.15 per diluted share, in the prior quarter. In the quarter, strength in core margin and our wealth business helped offset reduction in mortgage revenues. Continued expense management assisted in the sound results, and Ron will provide detail in his comments. I'm very proud of the way our teams have navigated through the pandemic, keeping customers at the forefront while positioning the pillars of our business model, margin, wealth, and mortgage, for relative strength as the Fed begins to implement anti-inflation measures. Our asset-sensitive positioning will drive continued margin improvement, and our investments in technology and process improvement in all of our business units will optimize productivity in what will be a challenging operating environment. In the quarter, we hit a record high in wealth management revenues, although assets under management declined at quarter end due to market volatility. Net new customer flows were strong in the quarter. Our rebranding in wealth to the Unified Washington Trust Wealth Management brand is helping to build awareness in Connecticut and Massachusetts and promises to deliver a simplified, comprehensive offering across our footprint. We've invested in continuous improvement in our financial planning capabilities, reflecting our deep, long-term care for our customers and their families. Our efforts have been well-received by clients, prospects, and centers of influence. Total in-market deposits hit a high of $4.7 billion at quarter end and enabled us to continue reducing wholesale funding. Given our strong brand positioning, we continue to explore branching opportunities in Rhode Island. Construction of our new branch in Cumberland, Rhode Island is progressing, and we expect an opening in late summer. First quarter mortgage revenues and volume were down as expected, but both weekly applications and pipeline remain above pre-pandemic levels. We're built to service a purchase-oriented market, and the New England markets we serve remain relatively strong. Total loans, excluding PPP loans, were up 1% in the quarter and 8% year over year. Our commercial lending business was impacted by early payoffs as customers continued to take advantage of high valuations and the seller's market. Commercial loans, net of PPP, declined by $12 million in the quarter as new originations and advances of $110 million were more than offset by payoffs and paydowns of $122 million. The commercial pipeline remains strong entering second quarter 2022. Robust growth in residential mortgage loans helped to offset the commercial decline. Once again, this quarter, we are well served by the diversity of our business lines and revenue sources. Credit has remained very strong, and Ron will provide some detail on both our credit statistics and some comments on our provisioning and reserve positional. We've maintained a conservative posture on credit risk, which has served us well through the pandemic and prior cycles. We feel confident about how Washington Trust and our customers have managed through the pandemic. And while there have been some positive signs of economic growth, we recognize there are many variables at play locally and globally. We're planning for and continuously analyze the potential impact of several interest rate adjustments in the near term. We remain cautiously optimistic about the underlying economic fundamentals of low unemployment, strong corporate earnings, and buoyed consumer strength. We believe that active engagement with the FinTech ecosystem is an important method of understanding the competitive landscape. We are continuously updating our products, improving our processes, and working with our core providers and other FinTech partners to ensure we are providing the best experiences and solutions for our customers and our employees. We issued our inaugural ESG report in the quarter, highlighting our long-held belief that we are well-positioned to help our entire communities find opportunity for success and to be a positive contributor to environmental health and to operate with the highest level of integrity, security, and ethics. We are proud of our 221-year heritage and of our deep awareness of today's important opportunities and obligations. We launched a new multi-year financial literacy initiative in the quarter designed to provide individuals, families, businesses, and nonprofit organizations with the money management tools and resources they need to achieve economic empowerment. We've committed multi-year funding to support literacy programs at three local nonprofits and introduced a free web-based financial literacy program for local schools and community groups. We also added a new financial wellness center on the company's website. I want to, once again, thank our employees for their strength of character and their consistent care and concern for each other and our customers. With that, I'll turn the call over to Ron for comments on the first quarter financial results. Ron? Great.
spk02: Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, Ned's income was $16.5 million, or $0.94 per diluted share for the first quarter. This compared to $20.2 million, or $1.15 per diluted share for the fourth quarter. Net interest income amounted to 35.1 million down by 2.6 million or 7% from the preceding quarter. Net interest margin was 257 down by 14 basis points. Net interest income continued to benefit from PPP forgiveness fee income, which totaled 819,000 and had a six basis point benefit to the margin. This compared to 1.2 million and nine basis points in the fourth quarter. Additionally, there was 2.2 million commercial loan prepayment fee income in the fourth quarter, which had a 16 basis point benefit to the margin. It was a $76,000 prepayment fee in the current quarter, which had a zero basis point impact. Excluding both of these items, the margin increased by five basis points from 246 to 251. Average earning assets increased by 7 million. The yield on earning assets was 283 for the first quarter, down by 14 basis points. On a core basis, it was $276 million, up by four basis points from $272 million in Q4. On the funding side, average in-market deposits rose by $216 million, while wholesale funding sources decreased by $176 million, and the rate on interest-bearing liabilities declined by one basis point to 0.33%. Non-interest income comprised 33% of total revenues in the first quarter and amounted to $17.2 million. down by $3.1 million or 16%. Wealth management revenues were $10.5 million, up by $27,000. This included an increase in transaction-based revenues of $233,000, reflecting seasonal tax reporting and preparation fees that are concentrated in the first half of the year. This was partially offset by a decrease in asset-based revenues, which were down by $206,000 or 2%. The decrease in asset-based revenues correlated with a decrease in the average balance of assets under administration, which were down by 83 million or 1%. March 31st end-of-period assets under administration totaled $7.5 billion, down by 291 million or 4% from December 31st, largely due to market depreciation. New business activity in the first quarter was strong as net client asset inflows totaled $97 million. Our mortgage banking revenues totaled $3.5 million in the first quarter, down by $831,000 or 19%. Realized gains on sales of loans were $3.3 million, down by $2.4 million or 42% from the preceding quarter, reflecting lower sales volume and a lower sales yield. Mortgage loans sold totaled $130 million in the first quarter, down by $67 million or 34%. Market competition has also been compressing the sales yield as expected. decline in realized gains was partially offset by changes in fair value on mortgage loans held for sale and forward loan commitments. Mortgage loan originations amounted to $271 million in the first quarter, down by $92 million, or 25%. Our mortgage origination pipeline at March 31st was $210 million, up by $16 million, or 8%, from $194 million at the end of December. And as of last week, the pipeline was over $240 million. loan-related derivative income was $301,000, down by $1.7 million from the preceding quarter, reflecting lower commercial swap volume. And income from bank-owned life insurance totaled $601,000, down by $543,000 from the preceding quarter, due to the recognition of $526,000 of life insurance proceeds in the fourth quarter. Regarding non-interest expenses, these were down by $4 million, or 11% from the fourth quarter, In the fourth quarter of 2021, debt prepayment penalties of $2.7 million were incurred to pay off higher cost FHLV advances. No such debt prepayment expense was incurred in the first quarter of 2022. Excluding the impact of these penalties, non-interest expense was down by 1.3 million or 4% from the fourth quarter. Salaries and employee benefits expense decreased by 522,000, or 2%, in the first quarter, reflecting volume-related decreases in mortgage originator compensation expense and lower performance-based compensation accruals. These were partially offset by higher payroll taxes associated with the start of the new calendar year. Outsource services expense was down 343,000 from the preceding quarter, largely reflecting lower swap volume. income tax expense totaled $4.4 million for the first quarter. The effective tax rate was 21.3%. We expect our full year 2022 effective tax rate to be approximately 21.5%. Now turning to the balance sheet. Total loans were up by $11 million from December 31st and up by $89 million or 2% from a year ago. Excluding PPP, loans increased 0.9% versus Q4 and 7.7% compared to Q1 2021. In the first quarter, total commercial loans decreased by 37 million or 2%, which included a net reduction in PPP loans of 25 million. Excluding PPP, commercial loans decreased by 12 million or 1% from December 31st. Within this category, CRE loans decreased by 11 million, Payoffs and paydowns of $100 million were partially offset by new loan originations and advances of $89 million. CNI loans, excluding PPP, decreased by $1 million as payoffs and paydowns of $22 million were essentially offset by new volume in the quarter. Residential loans increased by $51 million, or 3%, and by $320 million, or 22%, year-over-year. Investment securities were down by $35 million or 3% from December 31st, reflecting a temporary decline in fair value and routine paydowns on mortgage-backed securities, partially offset by purchases. In-market deposits were up by $261 million or 6% from December 31st, concentrated in money market accounts, and were up by $713 million or 18% from a year ago. Wholesale broker CDs Wholesale brokerage CDs were down by $113 million in the first quarter. FHLB borrowings were down by $90 million from December 31st as lower levels of wholesale funding were needed given the in-market deposits increase. Total shareholders' equity amounted to $513 million at March 31st, down by $52 million from the end of Q4. The decline reflected a decrease of $60 million Washington Trust remains well capitalized. Our first quarter dividend declaration of $0.54 per share was paid on April 8th. Now regarding asset quality, non-performing assets declined by $1.6 million in the first quarter. Non-occurring loans were 0.29% of total loans compared to 0.33% at the end of Q4. Past due loans were 0.16% of total loans compared to 0.24%. As of March 31st, there were no COVID deferrals. The allowance for credit losses on loans totaled $39.2 million or 0.92% of total loans and provided MPL coverage of 312%. This compares to $39.1 million or 0.91% in Q4. The first quarter provision for credit losses was a positive $100,000. There was a $2.8 million negative provision recognized in the preceding quarter. The first quarter provision related to an increase in the reserve for unfunded commitments. There was no provision for loans recognized in the first quarter, reflecting continued low loss rates, strong asset and credit quality metrics, as well as our current estimate of forecasted economic conditions. Net recoveries were 148,000 in Q1 compared to net recoveries of 27,000 in Q4. This concludes my prepared remarks, and at this time I will turn the call back to Net
spk01: Thanks, Ron. The road ahead is going to be challenging, and we appreciate you taking the time to listen to our story and understand our positioning. We had a good quarter. Our balance sheet, capital position, and credit quality remain strong, and we believe our diversified business model positions us well in a rising rate environment. So with that, we'll open it up to questions.
spk04: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. As a reminder, if you are using a speakerphone, please remember to pick up your handsets before asking your question. Our first question today comes from Mark Fitzgibbon from Piper Sandler. Mark, please go ahead. Your line is now open. Hey, guys. Good morning.
spk01: Morning, Mark. Good morning, Mark.
spk05: Ron, just to clarify, one of the comments you made, did you say the commercial loan pipeline was $240 million?
spk02: No, the residential pipeline.
spk05: Oh, I thought you had said the residential pipeline was $210 million.
spk02: As of March 31st, and as of last week, it's $240 million.
spk05: Gotcha.
spk01: Mark, I'll just tell you, the commercial pipe is at about $270 million. 270. Okay, great.
spk05: That's up like 100 million from last quarter, right?
spk01: Yes. Things are very strong right now in terms of inflow of opportunities.
spk05: Okay. Secondly, assuming the Fed rate hikes follow what the forward curve is suggesting, what do you think the core net interest margin can get up to by the end of this year, Ron?
spk02: Yeah. Yeah. Wasn't going to go out that far, but just hypothetically, we think that the kind of the recurring margin could be high 270s by the end of the, by the fourth quarter, for the fourth quarter. And Mark, that's so totally dependent on what actually happens, right? So, understanding that that's a big assumption.
spk05: Okay. Also, I was curious, the securities book is about 17% of the balance sheet today. Where would you like that to be over time? Is it likely to get a lot smaller as loan growth picks up?
spk02: I think it's probably a little bit on the light side of where we normally are. We're usually between 17% and 20%, Mark. We're not looking necessarily to take that down. You know, we look at it quarter by quarter, and if we have excess capital to deploy, sometimes we'll just top up the investment portfolio.
spk03: Yeah, and Mark, this is Mark again. I think part of that depends on the strength of total loan outstanding growth. Credit formation has been strong, as Ned mentioned. The net growth is what's important to us, and interest rates have risen to the point that securities purchases, if funded by low-cost deposits, are a relatively more attractive source of earnings than they were before the yield curve flattened to the levels where it is today. So if we could fund loan growth with deposits and liquidity is not excessive, then securities balances probably would not grow. If we have the opportunity to continue growing deposits and loan growth is not as strong, securities purchases are a way of providing net interest income at reasonable spreads going into 2023, more so than it has been for the last couple of years.
spk05: Okay. And then lastly, just a couple questions around the wealth management business. You had really good client flows this quarter, I think 97 million. I guess I was curious where that's coming from. Any particular type of client? Is it new or existing clients? you know, what would you guess the average size of the new relationships that you're bringing in look like? Thank you.
spk03: So, Mark, this is Mark again. A large portion of those inflows in the first quarter were driven by a significant relationship that was brought in by a combination of a private clients group, proceeds from a business sale, along with the wealth management division as well. Those kinds of opportunities don't come along all the time. We are happy to be able to take advantage of our service levels to be able to accommodate what we can. More typically, our relationships are between the $2 and $10 million range as they come in. But one of the advantages of having a better linkage between the balance sheet side of the bank and the wealth side is that, for example, business succession planning opportunities or a business sale If we are banking a commercial customer, we're now able to be in a position to take advantage of that when the liquidity event occurs. And that pipeline may be a long time, multiple years, but if we've serviced the client effectively on the credit side, we're naturally in a good position to be able to offer our wealth services as well.
spk05: Thank you.
spk02: Okay, and Mark, just to supplement on your question on the margin, I I also just want to put out there that we're expecting the second quarter margin on a core basis to be more like the mid-250s. So obviously more confident in that guidance and then further out.
spk04: Thank you, Mark. The next question today comes from Eric Zwick from Burning and Scattergood. Eric, please go ahead. Your line is now open.
spk06: Good morning, everyone. Good morning, Eric. First, I'll follow up with kind of the margin discussion there. Ron, within those kind of expectations that you've provided, can you remind us what you're assuming for deposit betas over the next few quarters?
spk02: Yeah, so we still have... We think that deposit betas this time around will be somewhat less than what they were during the last rate increase cycle. We have brought our wholesale funding levels down quite a bit, but we still have, I think, higher wholesale funding levels than our peers, so that's obviously variable. Some of the deposit growth that we brought in this quarter is variable, but we have... about $2 billion of loans that we'll reprice in 12 months, about $1.7 billion of that we'll reprice in the first month, and about $400 million of liabilities we'll reprice in one month and about $1 billion over the course of 12 months. So we still have quite a bit of asset sensitivity baked in there. Our core RAC rates probably won't move that much, but we do have some variable funding in there that will move up But we expect that to be net beneficiaries of rate increases.
spk06: Thanks for the color there. And then thinking about the commercial loans, and I appreciate the commentary on the pipeline being up quarter over quarter. Curious where your line utilization rates stand today relative to kind of what you consider normal from a historical perspective. And, you know, if you're starting to see any upticks there, it seems like that could potentially be a headwind to net growth going forward as well. So I'm kind of curious what you're seeing there.
spk01: Yeah, Eric, it's Ned. First of all, we don't have a ton of lines in the commercial book, but we have not seen much move in utilization yet. I think, you know, the biggest variables for us are, you know, real estate, closings and fundings on the one side a fair amount of construction and in fact in the first quarter we we have in addition to the the funded loans that we talked about earlier we we closed another 27 million dollars of construction loans in the quarter that just haven't funded so there's future funding there I will tell you in the through the first half of April we closed 55 million in loans and um not all funded but but i think that that pace suggests that that the pipeline is is converting um fairly well um so so i i feel optimistic about q2 loan growth um and of course the other big variable is payoffs and and we think that as rates increase payoffs will at some point start to slow down we did not see that in the first quarter We schedule payoffs as much as we can and feel like it'll be somewhat reduced in the second quarter, but that's a tough one to peg. People are still selling at low cap rates and taking advantage of the opportunity to do so. So that'll be a variable that we just have to keep our finger on.
spk06: And then transitioning over to the mortgage, kind of residential mortgage loan pipeline, I think you said those balances were up quarter over quarter. I'm just curious kind of maybe what drove that increase. Is it starting to move into kind of the beginning of the prime home selling season or anything else? Just given kind of market dynamics, it seems like those continue to come down. But I'm curious what you guys are seeing.
spk02: Yeah. So I think there is some seasonality built in there, Eric. Our pipeline, as I mentioned, is higher at the end of the quarter versus last quarter, and then even into April, it's continuing to increase. In terms of our mortgage expectations, I can't really go out further than the second quarter, but we'd expect Q2 to be somewhat better than Q1, just on the basis of that pipeline. A lot of competition out there. The purchase market, where we are, is very strong. There's a lot of demand. probably constrained somewhat by supply, but that the market is still very, very hot in terms of customer demand.
spk03: Yeah, and Eric, this is Mark. The purchase market is traditionally seasonal, but the strength in Q1 is, we think, really reflective of just the demand and lack of inventory in New England. Our head of mortgage said to me the other day that It felt like the spring market started in the second month of January, which is a little early as far as purchase activity is concerned. And while we're careful about going out very far, given the rate-sensitive outlook of the mortgage business in general, the main catalyst in New England are lack of inventory and interest rate levels notwithstanding, demand is really strong across all the markets that we serve. Obviously, higher rates will have some impact on that. The offset, of course, is that the housing price appreciation that has been so strong over the last couple of years may stabilize. And that, in conjunction with the inventory shortage, ought to keep, for the foreseeable future, purchase demand strong. Now, the purchase market for us tends to be more destined for portfolio than sale. So that should provide a source of balance sheet outstanding growth. And that business for us is a, as Ned said earlier in his comments, Purchase market serves us well. We don't only serve the refined market. We can generate high-quality, sustainable growth in an attractive, well-collateralized asset class. So that should go well for loan growth for the foreseeable future.
spk06: That's helpful. I appreciate the detailed commentary there. And just one last one for me. I know I think, Ned, you mentioned in the opening commentary you've got a new branch in Cumberland opening late summer. And I know you guys are always kind of on the lookout for new markets and fields. There's some opportunity to gain deposits, some long-term kind of core deposit funding that way. Any new branches targeted for the second half of the year or nothing yet at this point?
spk01: Yeah, I don't think anything that would be delivered in 2022, but we've got one other site that we're working in. We're in the approval process on, so... If you can tell me exactly how long zoning approval will take, I will give you a very concrete answer. So that's probably first quarter, 23, and then we've got a couple other sites we're looking at, but nothing that we've signed on to yet.
spk06: Got it. I understand the challenge of some of those approvals sometimes. So that's great. Thanks for taking my question today. Thanks, Eric.
spk04: Thank you, Eric. The next question today comes from Damon Del Monte from KBW. Damon, please go ahead. Your line is now open.
spk07: Hey, good morning, guys. I hope everybody's doing well today.
spk04: Good morning, Damon.
spk07: Good morning. So my first question, I just wanted to kind of circle back on the loan growth. You know, the strong traction you guys are seeing on the commercial side, you know, indicative of the pipeline activity. You know, Ned, could you give a little color around where in the footprint you're seeing this and kind of, what some of these types of loans look like as far as size and industry?
spk01: Yep. I don't think average size has changed a whole lot. I would say we're kind of on average in the $5 to $15 million size. We're seeing some more activity in Connecticut. We've made a concerted effort. COI push and some marketing support in Connecticut. And we're seeing some CNI growth there. That CNI growth is a little bit manufacturing, a little bit distribution, a little bit more in the senior housing memory care space. We're seeing activity in the commercial real estate side and more in Connecticut and the greater Boston marketplace than in Rhode Island itself, but some in Rhode Island as well. Multifamily construction, we're seeing some real activity in the industrial side, very strong opportunities there. We're being, for obvious reasons, I think careful in the office front, careful in the retail front. So I think pretty much down the middle, not taking a lot of speculative risk. So I think, does that get it? We've seen a lot of construction opportunities, new construction on the multifamily side and conversion construction on the industrial side and renovation.
spk07: Yeah, that's great, Collier. Thank you. And then kind of switching over to fee income, swap gains were down pretty notably quarter over quarter. Ron, how do you kind of think about that line item as you go through the rest of this year?
spk02: Yeah, I mean, it's kind of chunky and, you know, hard to predict, but, you know, we typically are somewhere in the $3 million to $4 million a year range at the end of the year. So it's kind of hard to know exactly what quarter that lands, but that's where we've been, and that's kind of what we expect will continue to happen.
spk07: Okay, great. That's helpful. Thanks. And then I guess just lastly on the expense side, obviously some variable components with mortgage banking and the swap business. But as you kind of look out over the upcoming quarters, you know, you have a targeted range for, you know, expense level that we could kind of consider here.
spk02: Yeah. I mean, I think the guidance I gave back in January is, you know, we're thinking five-ish. You know, that doesn't necessarily factor in the, you know, the variable stuff. But, yeah, we're seeing some some expense pressure as I think everyone is, but there's nothing unusual happening within our expense base that we would need to call out to you. We have the branch coming online later in the year. That's about it.
spk07: I'm sorry, you said about 5% growth then for the year?
spk02: Yeah, call it 5%.
spk07: Okay, great. That's all that I had. Thanks a lot, guys. Appreciate it.
spk03: Thanks, Tim.
spk04: Thank you, Damon. The next question today comes from Lori Hunziker from Compass Point. Lori, please go ahead. Your line is now open.
spk08: Yeah, hi, thanks. Good morning. Just going back to Damon's question on expenses, I just want to make sure that I heard this right. So the 5% base, you're using a base for last year of $135.5 million. Are there some other adjustments that you're taking into account there?
spk02: No, with no other adjustments.
spk08: Got it. Even though mortgage banking may come down a little bit and there will be expenses, some of that expense growth is obviously related to the new branch. What else are you focused on spending? That's just a little bit of a bigger number.
spk02: It's just kind of across the board with salaries and supplies and outsourced services expense is just reflecting inflation.
spk03: Yeah, Laurie, this is Mark. I think we are seeing signs of wage pressure pretty much across the board, not only in the banking industry but elsewhere, and that is reflective in the overall higher costs on the salary and wage line. With regard to the mortgage banking business, accounting creates some weird artifacts where commissions, for example, are expensed when a loan is sold, but deferred labor costs and commissions can be a contra expense if you originate portfolio loans. So, when I think, Ron, and we think about core expense, some of those components can change over time. So, if your entire Portfolio origination is balance sheet driven. The deferred labor will be a contract expense. But we try to think in terms of poor expense run rates over time. Hard dollars for salaries, wages, outsourced services, and so forth. And that's what we base that on. Recall also that 2022 would be the first full year of operation for the branch that we opened in May of 2021. So relatively speaking, even though there is one branch opening this year, there is 12 months of expense for the one we opened last year versus seven or so months last year, which is why that growth rate may look higher.
spk08: Got it. Perfect. That's awful. And then just switching over to non-interest income, I appreciate the color, obviously, around mortgage banking and SWOT, but can you talk a little bit about where you stand on NSF and overdraft fees, maybe how much was in the quarter, how you're thinking about that in terms of potentially being more consumer-friendly going forward and how that may impact the incomes?
spk02: Yeah, yep. So our overdraft NSF is really not that material. It was under $2 million in 2021. So we are reviewing our policies around that. We're well aware of the regulatory stance with regard to overdrafts. We will do the right thing for our customers. We will likely implement changes that will be directionally consistent with what our peers are doing. So that has not happened yet. You don't see that reflected in our numbers for the first quarter. That's something that will be implemented probably over the course of the year, sometime by the end of the year.
spk03: Yeah, Roy, this is Mark. I think what Rhonda said is right on. It's likely that the second half of 2022 is when we would feel any impact from that roughly. $2 million being lessened by changes, probably those that have effect mostly on the consumer side rather than the business side. So the whole universe of NSF OD fees isn't necessarily going to change as much. That said, we do think that this source of fees will be under sort of secular long-term pressure. We're glad it's not a very material contribution to our fee income source. We'll continue to do the right things for the customer to make sure that programs will be put in place to match client needs in the competitive market. So 2023 would be the first full year of those changes taking full hold.
spk08: Got it. Great. That's helpful. And then just lastly, going back up to net interest income margin, Just to your PPP fees, obviously you booked $819,000 this quarter. How much is remaining? Is that around $500,000, or do you have a better figure there?
spk02: Yeah, I do.
spk08: It is $425,000. Okay, great. And just to sort of quantify, I was doing some back-end math as you were talking to Mark earlier. It's looking like basically every 25 base points or so of hikes, we're getting round number three, three and a half basis points on margin. Does that sound right, or did I do my math wrong?
spk02: Yeah, you know, Laura, we kind of looked at it from a dollar standpoint versus a basis point, but we've calculated that every 25 basis points is about, and this is an estimate, is about a million dollars of net interest income. Annualized.
spk08: Annualized, right. That's helpful. Okay. Great. And then just lastly on credit, as we're starting to see normalized loan loss provisions, your reserves to loans obviously sitting here at 92 basis points. Where is the comfort level there? How should we be thinking about that?
spk02: Yeah. So, I mean, listen, we're obviously comfortable with what we just published. So provision is dependent on loan growth, economic outlook, and historical loss rates. We expect mid-single-digit loan growth. for the year and credit to remain stable in the absence of a COVID relapse or some unforeseen economic shock. We are monitoring events in Ukraine and China and the related impact on supply chains, as well as inflation and the Fed's policy response and how those might affect asset quality. So I would also say we're still carrying some COVID-related qualitative reserves, and the release of those would serve to offset any incremental reserve requirements. So, you know, having said all that, you know, we are comfortable with where we are at the end of March. We are looking for a little bit more clarity on those things that I just discussed. So, for the time being, it's kind of steady as she goes. I think it's, you know, our asset quality is good and we feel comfortable with where our reserves are at the moment.
spk08: Great. Thanks for taking the time.
spk01: Phil, I don't know if you have any other color that you want to provide for Laurie on that. I would simply confirm that Ron and I are completely aligned in terms of our outlook on that. Well said. Thanks, Laurie.
spk04: Thank you, Laurie. Next question today is a follow-up question from Damon Del Monte from KBW. Damon, please go ahead.
spk07: Hey, thanks for taking my follow-up. I just wanted to clarify the commentary on expenses. So the 5% growth is off of a base from last year on the reported, which was like $135.5 million, or like kind of the operating when you take out the FHLB and some other charges, which was closer to like $128.5?
spk02: Yes, thank you, Damon. Yeah, obviously we had high levels of prepayment expense in 2021. That would come out. Okay, all right, so it's off the adjusted level then.
spk07: Okay, perfect. Okay, that's all I had. Thank you very much.
spk01: Thanks, Damon.
spk04: Thank you, Damon. There are no additional questions waiting at this time, so I'd like to pass the conference over to Ned Handy for closing remarks. Please go ahead.
spk01: Thanks very much, Bailey, and thanks, everyone, for joining us. We had a strong quarter. We feel like we're very well positioned, and we certainly appreciate your time and your interest in Washington Trust. So have a great day, and we'll talk soon. Bye, all.
spk04: That concludes the Washington Trust Bancorp Incorporated's conference call. Thank you for your participation. You may now disconnect your lines.
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