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spk03: Good morning and welcome to Washington Trust Bank Corp Inc's conference call. My name is Elliot and I'll 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'll turn the call over to Elizabeth B. Echol, Senior Vice President, Chief Marketing and Corporate Communications Officer. Ms. Echol.
spk01: Good morning. Thank you, Elliot. Welcome to Washington Trust Bancorp's third quarter 2022 conference call. Joining us for today's call are members of Washington Trust Executive Team, Ned Handy, Chairman and Chief Executive Officer, Mark Gim, 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 that 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 yesterday, and other documents that are filed with the SEC. These materials and other public filings are available on our investor relations site 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.
spk09: Thank you, Beth. Good morning, and thank you for joining our third quarter call. We value your time and your interest in Washington Trust. I'll provide some commentary on the quarter and our view of the current environment, and then Ron Osberg will review our financial performance. After our remarks, Mark Gim and Bill Ray will join us, and we will answer any questions you may have about the quarter. We're pleased to report that Washington Trust posted solid third quarter results with net income of $18.7 million, or $1.08 per diluted share. We saw very strong loan growth, which helped optimize our balance sheet in this rising rate environment. Commercial loans grew by 8%, with strong credit formation, strong construction funding, and a slowdown in payoffs. Margin expanded, and we delivered an all-time quarterly high in net interest income. Loan and in-market deposit growth have positioned the balance sheet to continue to offset pressure in our two main fee drivers, wealth management and mortgage banking. Our returns on average assets and average equity remain strong and asset quality did as well. The diversity of our revenue streams combined with credit discipline and strategic organic growth enabled a strong third quarter. Ron will provide details about our results in his comments. The markets we serve continue to provide us with quality growth opportunities. We opened our New Haven commercial lending office in July and now have five lenders in that market, supported by a new cash management hire and complemented by our strong wealth management and residential mortgage teams in Connecticut. We have operated in Connecticut successfully for years, but this commitment to the market will help establish our brand and leverage our diverse offerings. We announced our intention to add three new branch locations in Rhode Island in 2023. These branches, which are all in various stages of gaining federal, state, and local approvals, will position us well to better serve the full Rhode Island community and to continue our in-market deposit growth. Our latest branch additions in East Greenwich and Cumberland, Rhode Island have demonstrated the appeal of our high-touch service model in the marketplace. Our mortgage banking business has slowed as rates rise but continues to carry a relatively strong pipeline and weekly application levels and has added to strong portfolio loan growth over the past few quarters. The nature of the markets has changed the balance between portfolio growth and loan sales, so while gains on loan sales are down, quality assets have been added to the balance sheet. We are also finding opportunities to attract new loan officers in this environment, a testament to our long-term, consistent approach to the business. As we indicated in our press release, four wealth management advisors resigned recently. They were from our Wellesley, Massachusetts office of our registered investment advisor subsidiary, Washington Trust Advisors. As you know, this Wellesley office was formerly known as Weston Financial Group, a business we acquired back in 2005. In October, we have seen some AUM outflow and expect we will see more over the coming months. Ron will provide some guidance on the forward-looking financial impact. Washington Trust remains committed to growing this key business segment across the markets we serve and we have seen positive net organic growth in clients over recent quarters despite market volatility. As always, we will stay focused for opportunities to grow our wealth management business both organically and through M&As and plan to more than rebuild AUM levels over time. As we look forward and navigate the uncertainties in the local and global economies, we're even more committed to providing our customers, the communities we serve, and our employees with the highest quality experience available. As inflation continues to burden the entire economy, we expect further Fed action and have planned accordingly. We continue to invest in technology and process improvement to allow our employees to serve customers effectively and efficiently, in person or digitally, and to assure system resiliency. The landscape remains somewhat uncertain, but we are well capitalized and our balance sheet is in good shape to continue on our strategic path of quality growth. We are confident in the strength of our diversified business model, and in our dedicated and talented employees. I'll now turn the call over to Ron for comments on the third quarter financial results. Ron?
spk04: Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $18.7 million, or a dollar rate for diluted share for the third quarter. This compared to $20 million, or $1.14 for the second quarter. Net interest income amounted to $42 million, up by $4.5 million, or 12% from the preceding quarter. The net interest margin was 282, up by 11 basis points. There was essentially no benefit to the third quarter from PPP fees. In Q2, these fees amounted to $323,000, a two basis point benefit to margin. Prepayment fee income was modest at $30,000 in the third quarter and $62,000 in the second quarter. Both had no impact to the margin. Excluding the impact of both items for each period, the margin increased by 14 basis points from $268,000 to $282,000. Average earning assets increased by $365 million, driven by loan growth. The yield on earning assets was $349 for the third quarter, up by 46 basis points. On the funding side, average in-market deposits declined by $120 million, and average wholesale funding sources rose by $438 million. The rate on interest-bearing liabilities increased by 44 basis points, to 0.86%. Non-interest income comprised 27% of total revenues in the third quarter and amounted to $15.8 million, down modestly by $49,000 or 0.3% from Q2. Wealth management revenues were $9.5 million, down by $541,000 or 5%. This included a decrease in asset-based revenues of $339,000 or 4%, as well as a decrease in transaction-based revenues of $202,000 consisting mainly of tax servicing income, which is concentrated in the first half of the year. The decrease in asset base revenues correlated with a decrease in average asset balances, which were down by $337 million, or 5%. September 30 end-of-period assets totaled $6.3 billion, down by $327 million from June 30, largely due to market depreciation. As Ned mentioned, four of our wealth advisors recently left the company. They managed approximately $1 billion in assets. To date, we have been informed of client withdrawals of $412 million with related annual revenues of about $2.4 million or $600,000 per quarter. Our mortgage banking revenues totaled $2 million in the third quarter, down by $35,000 or 2%. Realized gains were $1.7 million, down by $199,000 or 10%. Mortgage loans sold down by $4 million or 6%. And market competition has also been compressing the sales yield as expected. Total mortgage loan originations amounted to $302 million in the third quarter, down by $48 million or 14%. Much like the second quarter, we continue to place a high percentage of mortgage originations into portfolio. Our mortgage origination pipeline at September 30 was $165 million, down by $69 million or 29%, from $234 million at the end of June. Loan-related derivative income amounted to $1 million, up by $372,000. Regarding non-interest expenses, these were up $2 million, or 6%, from the second quarter. Salaries and employee benefits expense increased by $1.2 million, or 6%, reflecting adjustments to performance-based compensation accruals. The remaining linked quarter increase in non-interest expense reflected modest increases across a variety of other categories. Income tax expense totaled $5.3 million for the third quarter. The effective tax rate was 22.1%. We expect our full year 2022 effective tax rate to be approximately 21.5%. Now, turning to the balance sheet. Loan growth was strong. Total loans were up by $369 million or 8% from June 30, and up by $562 million, or 13% from a year ago. Excluding PPP, loans increased by $638 million, or 15% from a year ago. In the third quarter, total commercial loans increased by $186 million, or 8%. Within this category, free loans increased by $153 million. New originations and advances of $229 million were partially offset by payments of $76 million. CNI loans increased by $33 million as new volume of $57 million was partially offset by payments of $24 million. Residential loans increased by $178 million or 9% from June 30. Originations for retention and portfolio were $225 million down by $39 million or 15%. Investment securities were down by $38 million or 4% from June 30. A temporary decline in fair value in routine paydowns and mortgage-backed securities were partially offset by purchases of debt securities. In-market deposits were up 79 million, or 2%, from June 30th. The increase included seasonal inflows associated with our larger institutional depositors. In-market deposits were up by 324 million, or 8%, from a year ago. Wholesale broker deposits were down by $16 million in the third quarter, and FHOB borrowings were up by $372 million. Total shareholders' equity amounted to $432 million at September 30, down by $44 million from the end of the second quarter. This was largely due to a temporary decrease in the fair value available for sales securities. As mentioned during our July earnings call, In the third quarter, we repurchased approximately 19,000 shares at an average price of $47.79 and a total cost of $896,000 under our stock repurchase program. Our total repurchases in 2022 under the program are approximately 194,000 shares, totaling $9.5 million, repurchased at an average price of $48.82. Washington Trust remains well capitalized. In our third quarter dividend declaration, a 54 cents per share was paid on October 7th. Regarding asset quality, it remains strong. Non-accruing loans were 0.25% of total loans compared to 0.28% at June 30th. Past due loans were 0.16% of total loans compared to 0.19% at prior quarter end. At September 30, non-accrual and past due loans were essentially all residential and home equity. The allowance for credit losses on loans totaled $36.9 million or 0.76% of total loans and provided NPL coverage of 304%. This compares to $36.3 million or 0.81% at June 30th. The third quarter provision for credit losses was a charge of $800,000 compared to a negative provision or benefit of $3 million in Q2. The third quarter provision reflects loan growth, our current estimate of forecasted economic conditions, and strong asset and credit quality metrics. We had net charge-offs of $54,000 in Q3 and patient net recoveries of $10,000 in Q2, and year-to-date net recoveries total $104,000. This concludes my prepared remarks, and at this time, I'll turn the call back to Ned.
spk09: Great. Thanks, Ron. We can now, Elliot, we can go to questions.
spk03: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Mark Fitzgibbon from Piper Sandler. The line is open. Please go ahead. Hey, guys. Good morning.
spk05: A couple of questions on the wealth management. Good morning. A couple questions on the wealth management business, those four advisors that left. I guess first, did they end up going to the same place as the other team that had left a while back?
spk07: So we can say they left to pursue other career opportunities, Mark. Okay.
spk05: And, Mark, have you changed, like, the pay structure or something at, you know, the wealth management side that caused these people to leave or did their non-competes burn off? Or just curious on that.
spk07: So, Mark, they have non-compete, non-solicit agreements in place, and we can't comment much further given where we are in the process.
spk05: Okay. So $400 million of client outflows have already announced they're leaving to follow them. And it sounds like you expect a big chunk of that billion-dollar book of business they have to go away. Is that correct?
spk04: Yeah, Mark, this is Ron. I mean, we're still early in this, so I can't really give you any more guidance other than telling you what has happened to date. So we're currently at $412 million. Okay.
spk07: I'm going to expand a little bit on that, Mark. We don't think that it's necessarily valid to extrapolate our experience from prior departures with what's happening now. But as Ron said, it's early to tell.
spk05: But what's changed, Mark? I mean, last time we had the team leave, the book of business just kind of slowly bled out. And I thought we were under the impression that you guys had made changes to the non-compete, non-solicits to try to prevent this kind of large chunks of business leaving. I guess I'm curious, you know, what's changed.
spk07: So, again, we have non-compete, non-solicitation agreements in place, and as we said, we can't comment on where we are at this stage in the process.
spk05: Okay. Changing gears on, I wonder if you could share with us what the spot deposit rates are today?
spk04: spot deposit rates? Yeah, I mean, we have not really changed. Yeah. Yeah, Mark, we haven't changed our our our rack rates. We are competitive on some promotional pricing, particularly on CDs. That's been a traditional strategy for us. Our current promo rate for new money with a checking account is is 350.
spk05: OK. And then, Ron, are all the expenses for the new branches and offices reflected in the third quarter number?
spk04: So we announced three new branches opening in 2023. So none of that expense is really reflected in our numbers at this point. And we don't know the exact dates that those branches will open. Typically, we have some leading expenses prior to the branch's opening, but we don't have those opening days yet, Mark. So there's not too much to say on that at this point. Okay.
spk05: And could you share any thoughts around the NIM outlook?
spk04: Yeah. So, you know, we had pretty good NIM expansion in the third quarter. We would expect some additional expansion in the fourth quarter. So we're looking at 285 to 290. for Q4.
spk05: Okay. Okay, great. And then lastly, I know you manage the company toward regulatory capital ratios, but does the TCE ratio play any role in your sort of capital planning? And if so, how comfortable are you taking that down? Thank you.
spk04: Yeah. I mean, we obviously You know, look at it, and it certainly is a metric that's important. I wouldn't say that the level that it's at is going to change the way we're running the business at this time. I mean, we're quite comfortable with our regulatory capital ratios, and so that's kind of our position at this point.
spk05: Thank you.
spk04: Yep, thank you.
spk03: Our next question comes from Damon Del Monte from KBW. Your line is open. Please go ahead.
spk06: Hey, good morning, guys. Hope everybody's doing well today. Just to start off with a follow-up question on the margin outlook. I noticed borrowings increased a decent amount this quarter in light of the strong loan growth. So, Ron, when you think about the margin, you know, I heard your comments to Mark's question, 285 and 290 for the fourth quarter. But do you feel like the margin kind of peaks at the end of the fourth quarter and kind of starts to maybe see a little headwind as we go into 2023? Yeah.
spk04: I mean, listen, so we're asset sensitive. As the Fed increases rates, our LIBOR portfolio will reprice, you know, immediately. But we understand that some of our variable funding will change, including FHLB and brokered CDs and so forth. So I don't think we've peaked yet. I know that there is concern in the industry whether banks are already peaking. I don't think we're quite there yet, although I do think we'll see the expansion of our NIM begin to moderate somewhat in the fourth quarter. And we just need to keep looking at what the feds doing.
spk06: You know, we're not quite ready to put out any 2023 guidance on that yet But but I think we'll I think we'll see some benefit for another little bit Okay Thanks, and then with regards to the outlook for loan growth keys a little kind of broad commentary eyes and what your pipelines are looking like now and kind of how you're feeling about the next couple quarters and Obviously, two very strong quarters back-to-back for you guys, and kind of just wondering if the pipeline continues to build and the outlook remains relatively consistent, or how we should think about it.
spk09: Yeah, Damon, it's Ned. Thanks for the question. So, the pipeline still remains pretty strong. Commercial is in the mid-200s. Resi is still – it's down, but it's still pretty strong in the 160 to 170. um range so so um you know deals keep coming in we're we're uh we're seeing a lot of activity um a lot of requests and and all of the markets we serve connecticut's particularly strong um right at the moment the greater boston marketplace is still very supportive um on both sides so so we feel we feel good about the uh certainly the quarter ahead okay great um
spk06: Are you seeing much of a reaction from some of your commercial development customers with just the rapid rise in rates? And has that caused them to pause on projects at all and kind of revisit their personal balance sheets for the project?
spk09: No, it's a good question. We haven't seen it yet. Maybe in individual deals, we're having more discussions. I think we're seeing a little slowdown in swaps, which tells us that the borrowers think that over the next... I don't know, six to 12 months, we may see a reversal in rates. So they're not fixing through swaps. We see a little bit of a lift run in fixed rate requests. So people are interestingly locking in at current rates and yet not doing swaps. So I think there's a sort of across the board. But we aren't seeing people... you know, pull deals off the table because of current rates.
spk06: Got it. And then just last question.
spk09: Most of these guys have seen a lot higher rates in their careers.
spk06: Fair point. Last question on credit. You know, the reserve is now at 76 basis points, you know, in part because of the strong growth this quarter. But how are you guys thinking about the reserve? If you look at it like on a year over year basis, it's down 20 some odd basis points. I think there's some growing concern we could be going into an economic slowdown. Long growth outlook seems positive. So, I mean, should we start to see a little bit of a reserve build in the next couple of quarters?
spk04: Yeah, I'll take that, Bill, if you want to jump in at some point. So, in the third quarter, you know, we had strong loan growth, and we provided for that. The provision has several components to it, and so the loan growth provision was kind of, you know, commensurate with the amount of growth that we had. We also look at various qualitative factors that we've been providing for over the past couple of years, you know, one being COVID. And so we actually dialed back some of our, you know, kind of COVID-related reserves. So the net of that was an $800,000 provision for the quarter. I think going forward, you know, I think the reserve that you'll see printed will be more in line with just with loan growth and then any changes in, you know, economic and asset quality concerns that we might have from the economy. Bill, I don't know if you want to.
spk08: Sure. I mean, the The CECL model is fundamentally based on loan losses over a period of time and then looking forward against econometric outlook. We're very confident that we have good coverage based on our loss history. We have priced in the growing concerns about recession and unemployment and other things. I think we're very comfortable with where we are. It'd be wrong to say there's a magic number or that loan growth itself will change things, but again, I think we're in good shape now, and certainly as loans continue to grow, they'll be roughly commensurate provision.
spk06: Got it. Okay. I appreciate all the color, guys. Thanks a lot.
spk09: Thanks, David. Thank you.
spk03: As a reminder, to ask any further questions, please press star, followed by the one on your telephone keypad now. Our next question comes from Lori Hunfiger from Compass Point. Your line is open. Please go ahead.
spk02: Great. Hi. Thanks. Good morning. I just wanted to go back to Damon's question around reserve build. I just want to make sure I understand it. So when you're talking about sort of commensurate loan loss provisioning, pre-pandemic you were sitting at 69 basis points. Reserve salons, now you're at 76. I mean, is it fair to say and – And certainly I understand Cecil, but I also understand a lot of management teams all the way up are, you know, they're also factoring in an overlay on top, right? So is it fair to assume that we're not going to see you get below that 69 basis point level, or how do you think about that? Or when you say commiserate, are you thinking sort of 75, 76 basis points of reserves to loans? It's not going to go below that. Maybe just help us think a little bit more about that as we model provisions.
spk08: Thanks. Sure. This is Bill Ray. I used, I think I said roughly commensurate to allow for a little bit of wiggle room there because there's multiple factors in the model, which I'm sure you understand. But again, there's no magic number. The key to CECL is looking at loss history. And if you look at our loss history, especially recently, it's extremely low. And we have to factor those in as we look at our quantitative model. That said, I think we're generally in a range that looks like a reasonably stable range. And if you start growing loans in that, which we've been able to do, it's likely that provisions will be roughly commensurate with that. So I think we're comfortable at the range we're in. We were comfortable at the 69 basis points. I don't see material change, frankly, in either direction at this point, assuming that there's no market change in economic outlook. We've already, as the model requires, we've factored in the forecasted economic changes that are out there, and that's what got us to the number where we are now. And so I think we're probably at a reasonably stable, steady state number, but that's subject to all the potential changes that could come down the road in terms of economic forecasts.
spk02: Got it. Okay, that's helpful. Thanks. And then just to go back to the wealth advisors that departed, I just want to make sure that I heard this right. I think you said 412 million have already left with the four advisors. Did I hear that right?
spk04: So we've been notified, Laurie, that 412 million, our clients have told us that they are leaving. So that doesn't mean that they're 100% out the door yet. So The impact of that on Q4 earnings would be prorated to whatever point in time the assets were deplatformed.
spk02: Got it. Okay, yeah. So when we're looking at the $6.3 billion, $6.3 to $6.3 billion that you had as of September 30th, nothing has left at that point in time, right? There was only $8 million of outflows this quarter. None are actually related to... Okay, okay. And then can you just remind us, how many AUA wealth managers do you currently have, senior AUA wealth managers?
spk07: So we have, Troy, this is Mark, about 60 client-facing or client service team members out of approximately 100 employees across wealth management.
spk02: Okay. And then are you going to be pursuing legal action against them, as you've done in the past? for the non-consumers, or how do you think about that?
spk07: We really can't comment at this time any further, Lori. I'm sorry, just given where we are in the process.
spk02: Okay. So maybe then sort of a more macro question. I mean, you have gone after them in the past, and I understand you don't want to comment, but I guess it's worth thinking about that legal audit professional fee expense line And then also with the new branches, can you help us think about what non-interest expenses are going to look like in 2023?
spk04: Yeah, Lori, it's Ron. So, the annual run rate cost of a branch for us is about $600,000 to $700,000. So, I can't tell you what month those costs will come online for the branches. And, you know, there will be some expense saves associated with the Wellesley situation, you know, particularly on comp. You know, there may be some other costs in there as well, either savings or otherwise. It's just, it's too early for us to give you any guidance on that particular piece yet.
spk07: Yeah, and Lori, this is Mark with regard to the branch applications that we've put in for 2023. Those are subject to a long line of regulatory and federal and state approvals plus outfitting construction. So we've announced our intention to open those, but we don't necessarily have hard dates. So it's tough to give you specific guidance.
spk02: Okay. And then just one last thing as we model out those expenses coming online, can you just help us roughly think about
spk09: even which quarter we might see the expense build start for each of those three branches thanks yeah lori i i it's it's it's really too early to tell um i don't know second third fourth quarter if you wanted to start to live yeah i think they'll be spread throughout the year in 2023 they're they're the ones that we uh are looking at are all existing structures so it's not as much of a construction process, but again, we're subject to federal, state, local approvals. To give you an exact timeline is a little tough, but it is certainly, as we stated, it's our intention to do all three, but we'll stagger them over the course of the year.
spk02: Okay, great. Thanks for taking my questions.
spk09: Thank you, Laurie.
spk03: This concludes our Q&A. I'll now hand over to Ned Handy for final remarks.
spk09: Thank you, Elliot. We certainly appreciate your time with us this morning. We had a very solid quarter. Our balance sheet, capital position, and credit quality remain strong, and our diversified business model continues to be supportive. Strong loan growth and in-market deposit growth set the balance sheet to continue contributing with strength. The addition of the Cumberland branch and Q3 will help build our deposit base in northern Rhode Island. We have strong momentum heading into Q4, which will help to offset any wealth management revenue loss. Once again, I want to thank our employees for their strength of character and their consistent care and concern for each other and our customers. We thank you all very much. Have a great day, everybody.
spk03: Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
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