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spk00: Good morning and welcome to Washington Trust Bancorp Inc's conference call. My name is Carla. 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, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Echol.
spk06: Thank you. Thank you, Carla. Good morning and welcome to Washington Trust Bancorp Bank second quarter 2023 conference call. Joining us this morning are members of Washington Trust Executive Team. Ned Handy, Chairman and Chief Executive Officer. Mary Nunes, President, Chief Operating Officer. Ron Osberg, Senior Executive Vice President, Chief Financial Officer and Treasurer. And Bill Ray, Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward-looking statements, and actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in the earnings release, which was issued yesterday, as well as other documents that have been filed with the SEC. All of these materials and other public filings are available 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, and good morning, everybody. Thank you for joining our second quarter call. We welcome the opportunity to share some highlights from the quarter and appreciate your time and interest in Washington Trust. I'll provide some comments about the second quarter as well as some thoughts on the current operating environment, and then Ron Osberg will then discuss the financial performance And Mary Nunes and Bill Ray will join us to help answer any questions you may have about the quarter. Washington Trust posted second quarter net income of $11.3 million or 66 cents per diluted share compared to $12.8 million or 74 cents per diluted share in the prior quarter. Total loans grew by 3% and in-market deposits grew by 1% in the quarter. We surpassed $7 billion in assets for the first time. The challenges of severe interest rate increases and, more importantly, a lasting inverted yield curve and the prospects of recession kept us totally focused on maintaining and strengthening our customer franchise and balancing prudent decisions about credit, capital, liquidity, and the investment and the enhancement of our customers' experience with us. Our deposit franchise, although logically more expensive, is intact and growing, and our loan books are in solid shape. We're proud to report that our most recently added branches in East Greenwich, Cumberland, and Barrington, Rhode Island, have reached approximately $70 million, $30 million, and $8 million in deposits, respectively. They've been open for 27 months, 11 months, and 13 weeks, respectively. We have two additional branches in process in the Onlyville section of Providence and in Smithfield, Rhode Island. Stronger market conditions enabled improvements in both wealth and mortgage revenues. Wealth assets under administration reached $6.4 billion at quarter end, up by 3%, driven by market appreciation offset by a normalized level of asset outflows. In our retail lending division, a concerted effort to increase loan sales drove a solid increase in gains in the quarter. Our balance sheet remains strongly positioned for long-term performance. Our liquidity and credit positions are strong and we remain well capitalized. Our commercial real estate loan portfolio remains in sound condition. Our office loans at 14% of overall CREE at June 30th exhibited a 1.5 weighted average debt service coverage ratio and a 58.7% weighted average loan to value. 74% of dollars or 38 properties are suburban and 26% of dollars or 14 properties are urban. Substantially, all of the dollars, about 95%, are Class A or Class B. We monitor maturities closely and are comfortable with the portfolio at this point, and we regularly stress interest rates to assess refinance risk. We'll provide additional free detail during the Q&A session. We continue to assess and improve our digital offerings to assure that our customers can access us easily and enjoy a digital experience as satisfying as the personal service for which we are renowned. We're careful and prudent in our lending, but feel that these times can be most trying for consumers and small businesses located in traditionally underserved communities. We will continue to actively serve those needs and have developed proprietary creative programs designed to help. I'm proud of the way our employees have been there to serve our customers through these challenging times. We take our role as a community bank very seriously and value our employees, customers, communities, and shareholders. For 223 years, we've understood that the permanence of that commitment will outlast the momentary issues of economic stress, inflation, or global unrest. We intend, as always, to be a catalyst for equitable improvement across our entire marketplace. I'll now turn the call over to Ron for an in-depth review of our financial performance in the quarter. Ron?
spk04: Thank you, Ned. Good morning, everyone, and thank you for joining us. As Ned mentioned, net income was $11.3 million, or 66 cents per diluted share. Net interest income was $33.5 million, down by 3.7 million, or 10 percent, from the preceding quarter. The net interest margin was 203, down by 30 basis points, and in line with guidance. Average earning assets increased by 173 million. The yield on earning assets was 453, up by 23 basis points. On the funding side, average in-market deposits increased by 128 million, and average wholesale funding rose by 143 million. The rate on interest-bearing liabilities increased by 60 basis points to 302. Pre-payment fee income was $50,000 in the second quarter and $124,000 in Q1. Non-interest income comprised 30% of total revenues and amounted to $14.3 million, up by $1 million, or 8% from Q1, reflecting increases in both wealth management and mortgage banking revenues. Wealth management revenues were $9 million, up by $385,000, or 4%. This included transaction-based revenues, which were up by $252,000, concentrated in tax servicing and estate fee income. Asset-based revenues were up by $133,000, or 2%, with a corresponding increase in average AUA balances, which were up by $103 million, or 2%. End-of-period AUA totaled $6.4 billion, up by $187 million, or 3%, from March 31, reflecting market appreciation of $260 million, partially offset by net client outflows of $73 million. Of those outflows, $9 million were related to the advisors that left the company at the end of the third quarter. Mortgage banking revenues totaled $1.8 million, up by $508,000, or 41%. Mortgage loans sold totaled $65 million in the second quarter, up by $35 million, and total originations were $227 million, up by $89 million. Our mortgage pipeline at June 30 was $165 million, up by $18 million or 13% from the end of March. Regarding non-interest expenses, these were down by $548,000 or 2%. Salaries expense decreased by $1.2 million or 5%, reflecting decreases in performance-based compensation accruals of approximately $1.9 million, partially offset by higher volume related mortgage commissions. And FDIC insurance costs were up by $499,000. Now turning to the balance sheet, total loans were up by $153 million or 3% from March 31st and by $901 million or 20% from a year ago. In the second quarter, total commercial loans increased by $33 million or 1%. Residential loans increased by $107 million or 4%. In-market deposits were up by $53 million or 1% from March 31st, by $165 million or 4% from a year ago. Wholesale broker deposits were down $7 million, while FHLB borrowings were up by $115 million. As far as deposit and liquidity metrics are concerned, uninsured slash uncollateralized deposits are estimated to be 18% of total deposits. Our average deposit size is $37,000, and we have a $1.7 billion of contingent liquidity. Total equity amounted to $459 million at June 30, down by $6 million from the end of the first quarter, and we do remain well capitalized. Regarding asset quality, it continues to remain strong. Non-accruing loans were 19 basis points and past due loans were 12 basis points on total loans, both of which improved compared to the first quarter. The allowance totaled $39.3 million, or 73 basis points of total loans, and provided NPL coverage of 378%. The second quarter provision was a charge of $700,000 down by $100,000 from the provision recognized in Q1, and we had net charge-offs of just $37,000 in Q2. And at this time, I will turn the call back to Ned.
spk01: Thank you, Ron. And Carla, we can go to questions now.
spk00: Thank you. If you would like to ask a question, please press Start followed by 1 on your telephone keypad now. To revoke your question, press Start followed by 2. Remember, prior to your question, please ensure your phone is unmuted locally. Our first question is from Mark. Fitzgibbon from Piper Sandler. Your line is now open. Please go ahead.
spk03: Hey, guys. Good morning. Morning, Mark. Morning, Mark. Hey, Ron. I wonder if you could help us think about the net interest margin, you know, maybe in the third quarter or even for the back half of the year. I'm assuming we're going to see a little bit more compression given funding challenges. Can you help us think through the magnitude of the compression?
spk04: Yeah. So Mark, we're actually thinking that the margin for Q3 will come in close to 2%. So we're not expecting a lot of compression in Q3.
spk03: Okay. And then a little bit more compression, you think, in 4Q?
spk04: Yeah. So I would say our guidance for the remainder of the year will be around 2%. Okay.
spk03: And then secondly, you guys have done a really good job on expenses. Should we assume that you can kind of hold operating expenses in that sort of $33 million range for the remainder of the year?
spk04: Yeah, so we did have some accrual reversals. So you might kind of think about that as a bit of a non-recurring item. We also plan to do some increases in advertising in the third quarter. So yeah, I think Q3 expenses will be somewhat higher based on those two facts. FDIC expense has been running pretty hot for us, kind of in line with asset growth, but we think that's going to moderate over the balance of the year. So we should have peaked in Q2.
spk03: Roughly how much were the accrual reversals?
spk04: So we did $1.9 million in reversals.
spk03: Okay. And then I wanted to, if you could help us think about sort of, you know, capital ratios and, you know, how low you'd be willing to take either the TCE ratio down or the CET1 ratio down, where would you be comfortable taking that down to? Because obviously you're continuing to grow.
spk04: Yeah. So, so I, you know, I don't really necessarily have a target for you at this point. We do quarterly stress testing on, on capital and, And we are comfortable with where we are in capital. We understand that our balance sheet is growing. But I guess just a couple of points. We are well capitalized. We do the stress testing quarterly. We also believe that our asset quality is a differentiator for us. And as such, our capital ratios do tend to be on the lower end of the peer group range. You know, there is no doubt that the steeply inverted yield curve is putting a lot of pressure on our margin and on our mortgage business. But that said, we don't believe that that steeply inverted yield curve is permanent. You know, we are a community bank, and we will act appropriately to meet the credit needs of our customers. So, you know, we have internal conversations about the level of loan growth. I think we are becoming more selective, particularly on the commercial side. You know, residential, we think we have a good mortgage operation. We want to maintain that operation. So, you know, we're kind of giving what the markets, we're kind of taking what the market's giving us in that regard right now. But we do believe that we've got the capital to maintain what we're doing and we'll, you know, we'll adjust accordingly as we move forward if we think there's an issue.
spk03: So in that same vein, you know, the dividend payout ratio looks optically high and so does sort of the dividend yield. Would you consider cutting it as a means for kind of accelerating capital generation?
spk04: No, no, we have no plans to cut the dividend. Yes, we agree that the payout ratio is, you know, it's higher than we'd like it to be. We don't think that that's a permanent state of being. We have had a dividend payout ratio similar to this in the past, and we work through that, and we expect that we'll be able to work through it now.
spk03: Thank you.
spk04: Yep. Thanks, Mark.
spk00: Thanks, Mark. As a reminder, if you'd like to ask a question, please press Start followed by 1 on your telephone keypad now. Our next question is from Damon Dalmont from KBW. Your line is now open. Please go ahead.
spk02: Hey, good morning, everyone. Hope everybody's doing well today. So just wanted to start off on the loan growth side. I mean, a pretty solid quarter, around 12% link quarter annualized. How do you look at growth over the back half of the year? And then kind of within that outlook, how do you look at the consumer side versus the commercial side? Because it seems like you've been able to kind of add to the consumer side pretty consistently. I just didn't know what your thoughts were over the next couple of quarters.
spk01: David, it's Ned. I'll start on the commercial side. The pipeline, maybe not surprisingly, is very strong. We're seeing a lot of opportunity, partly because others are probably passing on things that they might not have in other times. The prospects for growth are good, but we are being very careful, looking for the right kind of pricing, looking for the right kind of structures, avoiding some asset classes. You might imagine we're not making a lot of office loans at the moment. But I think I don't want to change our sort of mid-single-digit growth outlook for commercial. I think we'll probably be at the higher end of that. Obviously, the quarter was strong. And again, the pipeline is... in the high 300s. So it's as robust as it's been. So the challenge is, you know, getting the right kind of yield out of the book, looking for deposit opportunities in particular, along with commercial loans. And so, you know, we'll hit our projected growth rates. We might exceed them a little bit just because of the opportunity. And then I know Mary Nunes is with us, and she'll talk about Resi. I know we're tilting the pipeline towards sellable assets, and that showed up a little more in the second quarter than the first, but Mary.
spk07: Morning, Damon. This is Mary. Morning, Mary. How are you? I'm well. How are you doing?
spk02: I'm great.
spk07: we've pretty much doubled our for sale production since February. And there's a lot of levers we can use to moderate the mortgage production. And one of the things that we've done is, you know, we've got very good yields on our portfolio production, which is helping us too. So I think that for the second half of the year, certainly for fourth quarter, we're looking for solid for sale production as much as we can in the mortgage area. The consumer area is largely driven by what's being used on the lines of credit. We have a pretty good outstanding on lines of credit, what the credit limit is. Production is solid, but that's not really driving the numbers. It's really utilization of the lines.
spk02: Got it. Okay. And then kind of building on the commentary on the resi market and the pipeline that you guys are seeing, so should we – you sound a little bit more optimistic that gain on sale of mortgage loans in the back half of the year will remain stronger than we have seen. Is that fair?
spk07: Yeah. As it looks right now, that's what we're thinking. This stuff can change very rapidly. We've seen a lot of volatility in the conforming loan side on the rates there. That's what's influencing portfolio production. But as it stands right now and what we're forecasting is that we're going to have solid gains for the fourth quarter.
spk02: Got it. Okay. And then with regards to credit, I mean, obviously very strong trends continue. From a provisioning standpoint, Ron, do you kind of – look at the provision as basically covering loan growth and kind of based on what you put up for the first half of the year, that's a reasonable level as we go through the second half of the year?
spk04: Yes.
spk02: Okay.
spk04: Great. I can elaborate if you want, but yeah, it's basically loan growth. You know, so we see all the macroeconomic forecasting is kind of built into the computation. So, you know, current expectations of what the future will have is kind of baked in. So for right now, it's basically loan growth unless something changes.
spk02: Got it. Okay. And then just to circle back on the expenses. So, you know, I think you noted about $1.9 million of accrual reversals this quarter. So when you kind of factor that in, plus, you know, some higher marketing costs, I mean, you're probably talking somewhere in the upper $34 million range, closer to $35 per quarter over the back half of the year. Does that sound reasonable?
spk04: Yeah, I think that sounds about right.
spk02: Okay. Okay, great. Well, that's all that I had, so thank you very much.
spk03: Yeah.
spk02: Thanks, Damon.
spk05: Thank you. If anyone else would like to register a question, please press star flipped by one on your telephone keypad now. We have no further questions, so I'd like to hand back to Ned for any closing remarks.
spk01: Thank you, Carla, and thank you all. We appreciate your time with us this morning. We had another challenging quarter, but we saw some incremental improvement in our fee businesses, deposits, and asset quality. despite the continuation of the inflation-driven rate environment. Interest rates will fluctuate and credit cycles will come and go, but we'll be there to help people prosper through thick and thin with prudent and productive extensions of credit. We're confident that our diversified business model, disciplined credit culture, and strong capital base will position us for further success as the operating climate begins to normalize over the coming quarters. We appreciate your interest and your questions and your support. Have a great day.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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