Washington Trust Bancorp Inc (WASH) 2021 Q4 法說會逐字稿

Good morning, and welcome to the Q4 2021 Washington Trust Bancorp Inc. Conference Call. My name is Juan, and I will be your operator today. (Operator Instructions) 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. Eckel, please go ahead.

Thank you. Good morning, and welcome to Washington Trust Bancorp, Inc.'s 2021 Fourth Quarter and Year-end 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 and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Wray, 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 our earnings press release, which was issued yesterday and another document 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 the host of today's call, Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth. Good morning, all, and thank you for joining our fourth quarter call. We do appreciate your time and continued interest in Washington Trust.

This morning, I'll provide an overview of our fourth quarter highlights and then Ron Ohsberg will review our financial performance. After our prepared remarks, Mark Gim and Bill Wray will join us to answer any questions you may have about the quarter.

I'm pleased to report that Washington Trust posted strong fourth quarter results with net income of $20.2 million or $1.15 per diluted share compared with $18.8 million or $1.07 per diluted share in the prior quarter. In the quarter, we hit record highs in wealth management revenues, assets under management and total in-market deposits. Ron will provide more detail.

For the full year, we generated net income of $76.9 million or $4.39 per diluted share. Once again, this quarter, we were a 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. Our strong brand positioning in the Rhode Island market supports moderate branch expansion, along with investment in digital capabilities and access points.

We have commenced construction of our new branch in Cumberland Rhode Island. Our team has done an exemplary job of managing through the pandemic, keeping the branches open and staffed and safe for our customers.

In 2021, we grew in-market deposits by $678 million or 18%. Fourth quarter mortgage lending activity remained robust as we continued to take advantage of low rates in the strong markets in which we operate. Full year mortgage originations reached a record high of $1.69 billion. At year-end, our Wealth Management division's assets under administration stood at a record $7.8 billion and revenues reached a record high.

In the quarter, we rebranded and restructured our Rhode Island, Massachusetts and Connecticut Wealth Management offices. They now operate under one unified name, Washington Trust Wealth Management. Washington Trust has built one of New England's premier boutique advisory groups through both organic growth and strategic acquisitions, and this will better position our wealth management group for future growth. As a collaborative organization, we are able to offer clients Washington Trust's complete resources to help them manage their wealth, achieve their financial planning goals, build a legacy and meet their banking and borrowing needs. As part of the rebrand, we launched an enhanced wealth management website and comprehensive marketing campaign.

In 2021, total loans, excluding PPP loans, were up 6%. In the latest quarter, loans, excluding PPP, were up by 1%, buoyed by growth in residential loans. New loan formation in commercial was strong in the quarter but was more than offset by payoffs and paydowns. The commercial pipeline is relatively strong entering 2022, but the extent of payoff activity continues to be difficult to predict in the continued low rate environment.

We're investing time and talent to be sure we are staying informed about advances in the fintech space. We believe that active engagement with the fintech ecosystem is an important method of understanding both new opportunities as well as competitive challenges. We're making incremental improvements to products and processes constantly, and we often partner with our core providers and with fintech companies to achieve the best outcome.

During the quarter, we continued to make progress on our COVID-impacted loan deferrals, ending the quarter with only 2 loans in deferral to one borrower. And forgiveness of PPP loans continued to be processed smoothly through the SBA system. Overall, credit has remained very strong and has contributed to a negative provision for credit losses in the quarter.

We feel confident about how we and our customers have managed through the pandemic, although the latest variant confirms the need for a careful approach to determining optimal work structure and timing for transition. We're optimistic about the economic landscape with improved unemployment levels, approximately 10 million jobs still to be filled nationally, strong corporate earnings and buoyed consumer strength outweighing geopolitical concerns, the lingering impact of COVID-19 and the impact of inflation.

In the quarter, Washington Trust was named one of the nation's Best Banks to Work for by American Banker Magazine for the second straight year. Notably, Washington Trust was the only Rhode Island-based institution to receive this recognition.

I want to take this opportunity to thank our employees for their perseverance, their positive outlook and their consistent concern for each other and our customers. We continue to invest in our workforce to ensure our team is well compensated and has the right training, tools and technology. And we are attuned to the challenges of a hybrid work environment and offer wellness programs to ensure our employees maintain a good work-life balance.

With that, I'll turn the call over to Ron for a more detailed review of our financial performance.

Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $20.2 million or $1.15 per diluted share for the fourth quarter. This compared to $18.8 million and $1.07 for the third quarter. Full year net income for 2021 was $76.9 million or $4.39 per diluted share, up by 10% from $69.8 million or $4 per diluted share reported for the prior year.

Net interest income amounted to $37.7 million, up by $1.7 million or 5% from the preceding quarter. The net interest margin was $2.71, up 13 basis points. Net interest income continued to benefit from PPP forgiveness fee income, which totaled $1.2 million and had a 9 basis point benefit to the margin. This compared to $2 million and 13 basis points in the third quarter.

Additionally, there was $2.2 million of commercial loan prepayment fee income in the fourth quarter, which had a 16 basis point benefit to the margin. There was no prepayment fee income in the preceding quarter. Excluding the impact of both items, the margin increased 1 basis point from 2.45% to 2.46%.

Average earning assets decreased by $8 million, largely reflecting a decline of $36 million in average loans, which also included a decline of $64 million in average PPP loans. This was partially offset by increases in average investment securities and cash and due from banks. The yield on earning assets was 2.97% for the fourth quarter, up by 12 basis points. On a core basis, it was 2.72% unchanged from Q3. On the funding side, average in-market deposits rose by $203 million, while wholesale funding sources decreased by $257 million. The rate on interest-bearing liabilities declined by 1 basis point to 0.34%.

Noninterest income comprised 35% of total revenues in the fourth quarter and amounted to $20.3 million, down $213,000 or 1% from the preceding quarter. Wealth management revenues were $10.5 million in the fourth quarter, up by $49,000 or 0.5%. This included an increase in asset-based revenues, which were up by $193,000 or 2% and a decrease in transaction revenues of $144,000. The increase in asset-based revenues correlated with an increase in the average balance of assets under administration, which were up by $86 million or 1%. December 31, end of period, assets under administration totaled a record $7.8 billion, up by $341 million or 5% from September 30, largely due to market appreciation.

Our mortgage banking revenues totaled $4.3 million in the fourth quarter, down by $2 million or 32%. Net realized gains on sales of loans were $5.7 million, down by $55,000 or 1% from the preceding quarter. A lower sales yield was essentially offset by higher sales volume. Market pricing has been compressing the sales yield, and we expect this trend to continue into 2022. Mortgage loans sold totaled $197 million in the fourth quarter, up by $23 million or 13%.

Mortgage banking revenues in the fourth quarter were also impacted by negative fair value changes on mortgage loans held for sale and forward loan commitments of $1.6 million, largely reflecting a decline in the mortgage pipeline. This compared to a positive fair value change of $467,000 in the preceding quarter.

Mortgage loan originations amounted to $363 million in the fourth quarter, down by $33 million or 8%. Full year 2021 originations reached an all-time high of $1.69 billion, up by $16 million or 1% from 2020. The percentage of originations to be sold in the secondary market has been in the 50% range for the previous 3 quarters, and this was down from 65% to 70% previously. Our mortgage origination pipeline at December 31 was $194 million, down by $87 million or 31% from $281 million in the pipeline at the end of September.

Loan-related derivative income was $2 million, up by $1.2 million from the preceding quarter, and income from bank-owned life insurance totaled $1.1 million in the fourth quarter up by $526,000 due to life insurance proceeds. Regarding noninterest expenses. These were up by $2.7 million or 8% from the third quarter. In the fourth quarter, debt prepayment penalties of $2.7 million were incurred to pay off higher-cost FHLB advances.

Excluding the impact of these penalties, noninterest expense was essentially unchanged from the third quarter. Salaries and employee benefits decreased by $638,000 or 3% in the fourth quarter, largely reflecting adjustments to performance-based accruals. This was essentially offset by an increase of $291,000 in outsourced services expense due to higher swap volume as well as modest increases across a variety of other categories.

Income tax expense totaled $5.5 million for the fourth 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 down by $13 million from September 30 and up by $77 million or 1.8% from a year ago. In the fourth quarter, total commercial loans decreased by $64 million or 3%, which included a net reduction in PPP loans of $39 million. Excluding PPP loans, commercial loans decreased by $25 million or 1%.

Breaking this down a bit, commercial real estate loans decreased by approximately $23 million. New loan formation in the quarter was strong at $123 million that was offset by an elevated level of payoffs of $146 million. C&I loans, excluding PPP, decreased by approximately $2 million as payoffs of approximately $49 million were essentially offset by new loan originations and advances of $47 million in the quarter. Residential loans increased by $55 million, which included originations of $174 million.

In-market deposits were up by $162 million or 4% from September 30 and up by $678 million or 18% from a year ago. The increase included growth across all deposit categories. Wholesale brokered TDs were down $240 million in the fourth quarter and FHLB borrowings were down by $78 million, reflecting the prepayment of $45 million of higher cost FHLB advances in the fourth quarter.

Total shareholders' equity amounted to $564.8 million at December 31, up by $9.5 million. Washington Trust remains well capitalized. Our fourth quarter dividend declaration of $0.54 per share was an increase of $0.02 per share from the previous quarter and was paid on January 7.

Regarding asset quality, non-accruing loans were 0.33% of total loans compared to 0.26% at the end of Q3. Loans past due by 90 days or more were 0.24% of total loans compared to 0.22% at the end of the third quarter. TDRs increased by $9.4 million from September 30 due to the restructuring of a commercial real estate relationship that did not qualify for additional TDR accounting relief.

The allowance for credit losses on loans totaled $39.1 million or 0.91% of total loans and provided NPL coverage of 275%. This was down from $41.7 million or 0.97% in Q3. Excluding PPP loans, the allowance coverage was 0.92%. The fourth quarter provision for credit losses was a negative $2.8 million. There was no provision recognized in the third quarter. The reduction in the ACL reflected a continued downward trend in loan loss rates as well as improvements in forecasted economic conditions and relatively stable asset quality metrics.

We had net recoveries of $27,000 in the fourth quarter compared to net charge-offs of $168,000 in Q3. Full year 2021 net charge-offs were $417,000 or 1 basis point compared to $1.1 million or 3 basis points in 2020. And finally, regarding COVID-19, as of December 31, we had a single deferment on a commercial real estate relationship totaling $9.7 million. This is down from active deferments totaling $38 million or 1% as of September 30.

Also, as of December 31, we are reporting 347 PPP loans totaling $38 million. In the fourth quarter, about $40 million of loans were forgiven by the SBA with $1.2 million of fees accelerated into income. Net unamortized fees amounted to $1.3 million as of December 31.

And at this time, I will turn the call back to Ned.

Thank you, Ron. This was another strong quarter and year for Washington Trust, and we feel very well-positioned heading into 2022. And at this point, we're happy to take any questions.

(Operator Instructions) And our first question comes from Mark Fitzgibbon from Piper Sandler.

First question, I wonder if you could share with us the size and complexion of the pipelines, both commercial and mortgage.

Yes. I'll start on commercial and then, Ron, I think you gave some stats on the mortgage, but we can go through that, too. So actually, the pipeline on the commercial side, Mark, is relatively strong. It's up almost $90 million over where it was last year at this time. It's at $175 million. And interestingly, it's weighted towards C&I. So it's about $100-plus million in C&I and the balance in CRE.

So we've really sort of renewed and refreshed activity in the Connecticut marketplace on the C&I front. We're pretty active in the assisted living with a memory care element to it, space, and that's proved to be pretty fruitful for us and we see some good activity there. And then we've got a couple of $100 million of yet to be funded construction proceeds out there. So we continue to expect kind of $7 million or $8 million a month in construction funding for the next bid year.

Yes, Mark, as far as residential, I mentioned our pipeline is $194 million, it has been declining now for 3 or 4 straight quarters. It's declining as I am sure you've seen across the national environment but I don't know if there's more that you need than that.

No, I think that's good. And then on, I guess as it relates to Mortgage banking revenue, when you guys do your budgeting for that business, do you sort of utilize the MBA stats in terms of expected volumes for 2022? Or do you think your business will perform a bit differently than sort of the industry trend?

So we certainly look at the MBA data to inform how we think about things. So I guess I can give a little bit of guidance on that. So the MBA is projecting that the industry origination volume will decline about 35% year-over-year and we are expecting a somewhat lesser decline than that, maybe in the high 20% range. You know this is all speculative given potential movements and rates.

And mortgage banking revenue is dependent on the percentage of originations sold, which has been trending down a bit for us as well as sales yields, which are trending down nationally. But we do expect revenues to be higher in 2022 than they were pre-pandemic.

Mark, this is Mark Gim. I'll add some...

I'm sorry, Mark, go ahead.

I was going to say that while originations and pipeline volumes are down from previous quarters, as Ron said, we still feel that purchase activity is quite robust. And in the markets that we serve, given the size of mortgage loans, particularly in the Boston metropolitan area, the purchase market still should produce a fairly robust level of loan originations, which we tend to retain in portfolio. Today, that pipeline is about 45% purchased. So the bigger decline on a relative basis will have been in refinance conforming sale activity.

Okay. Great. And then I think you have $1.2 million left in deferred PPP income. I'm wondering, do you expect most of that to come in, in the first quarter?

So I would say about half of what we had remaining at the end of September came in, in the fourth quarter, and it looks like the trend is about the same. So maybe it's got a half-life, Mark, about half will probably come in according to what we've seen in the brief period of the first quarter so far.

Okay. And then, Ron, I wonder if you could just kind of give us an update on what the impact on NII is for each 25 basis point hike in rates.

Yes. So we estimate that at about, say, $1 million.

That's on an annualized basis?

Yes.

Okay. And then can you help us think about sort of other significant moving pieces as it relates to the margin? I know you had the prepayment penalty income this quarter and the PPP fees, but anything else that we should be thinking about as we model out margins for 2022?

Yes. I don't think so, Mark. So we had a core margin of 2.46% in the fourth quarter. All of our more expensive longer-term FHLB debt has been paid, so there's no more opportunity there. So excluding PPP and excluding any change in the Fed funds rate, we'd expect our margin to be pretty much in line with what we reported on a core basis in the fourth quarter at mid-2.40s.

Great. And then just one last question. What sort of growth rate are you budgeting in 2022 for technology-related spending?

Yes. It's nothing unusual. I mean we've been -- Mark, our overall expense growth rate, we think, is about 5-ish percent. We have no major technology initiatives planned. So it's kind of steady as she goes.

Our next question comes from Laurie Hunsicker from Compass Point.

I wanted to check on expenses. So a couple of things, obviously, the debt prepay, that was great, the $45 million. How much was that costing and when in the quarter did you guys prepay that?

Yes. So that was early in the fourth quarter that average cost of that was about -- was 2.59%. And so when we did that, we expected to get about a basis point of benefit in 2022 off of that.

Okay. Okay. And that's somewhat fully baked then. The other expense line looked high at $2.38 million. Was there onetime items in that? I'm talking about the other noninterest expense line? Was there rebranding? When we look down and obviously, your core expenses are holding really nicely. Was there anything nonrecurring that drove that number higher? How should we think about that?

Yes -- no, it's just kind of just normal activity.

Okay. Okay. And then can you help us think a little bit about your approach with any de novos that you're seeing out there, any potential? And maybe dovetailing with that, how should we think about core expense growth in 2022 and 2023?

Yes. So we've been -- okay. Mark, go ahead.

I was going to say de novo, just to clarify, you meant de novo branching activity?

Yes. De novo branching, yes.

Okay. Go ahead, Ron.

Yes. Yes. So Laurie, we've announced that we've got one branch coming online in Cumberland, Rhode Island, probably kind of in the middle of the year. Our annual run rate on that is about $650,000. And some of those expenses are being incurred in advance of the actual opening. So if you're looking for a run rate impact, I'd say, about $650,000.

Okay. And any other de novo plans in the works, for this year or next year?

Laurie, this is Mark. We do think that there still are opportunities for us to be placing branch locations in some of the demographically attractive Providence area suburbs. Just to give some context, the East Greenwich location that we opened in May of this year, just past the $30 million mark, which is a very attractive number to get in less than 9 months of being fully opened.

So we believe the opportunities are there. Core [managed] the balance growth for us has been very strong during the pandemic, and we have a lot of reason to believe that it is not simply temporary parking place for liquidity. So while we're aware of changes in technology and delivery alternatives for customers, the recent experience has shown this is a very robust way of us for us to build low-cost core deposit balances that help us replace some of the more expensive wholesale funding on the balance sheet.

Great. Okay. And can you all just comment on how we should think about core expense growth both for this year and then for next year?

Well, I mean, next year being 2023, I mean, I don't think we're thinking quite that far ahead yet, Laurie. But on just a core expense basis, we're looking at -- this is excluding the prepayment expense that's done. Everything else, probably a 5% increase excluding that branch cost that I mentioned.

Got it. Okay. Great. And then I just wanted to clarify one thing. The PPP income that you booked this quarter, $1.2 million, there's $1.2 million remaining on the $38 million of loans. Is that correct?

Yes, $1.3 million. We have $1.3 million remaining at the end of the year, yes.

Okay. Great. And then, Ned, last question for you. Can you just refresh us with your strong stock currency, your thoughts on M&A?

Yes. Thanks, Laurie. It's always part of the thought process. Pricing has been high on the bank side. There's not a whole lot of opportunity left. We're always sort of eyes and ears open. There's nothing in the hopper right now on that front. Mark, do you want to comment on the wealth side?

Sure. Although you asked specifically about bank M&A, Laurie, we're interested in wealth M&A and are trying to take a more proactive approach to identifying partner firms in the areas that we serve that we think would fit well with our business model, not just within wealth management, but the commercial, retail and higher-end residential mortgage services we could offer to our customers. So we remain active on that front, although we try to be prudent about valuations and their effect on GAAP earnings.

The next question comes from Damon DelMonte from KBW.

This is actually Matt Renck filling in for Damon. I hope everybody is doing well today. I was hoping to get your thoughts on the loan derivative income and if you're still seeing higher levels of commercial swaps heading into the year? And do you think it will remain elevated throughout 2022?

Yes. I think credit formation, given where the pipeline is today, will continue. All signs are that we'll do as much as or more than we did last year and derivative income comes along with new volume, with rates positioned where they are, I think it's an attractive opportunity for our customer base and many of them choose to go that route to fix a rate. So we expect that, that will continue.

Okay. And was there any seasonality in Q4? Do you expect like it's a run based on that number or maybe a lower level?

Yes. We funded nearly $100 million in the month of December alone. So the fourth quarter was a pretty big quarter for volume and derivatives. I think it's probably safe to say that it will spread out throughout the course of the year depending on when the volume comes on board. It's hard to nail it to a quarter, but I would suggest spreading it out over the course of the year.

(Operator Instructions) We currently have no further questions. I will hand over back to Ned Handy for any final remarks.

Well, thank you all for joining us. We really appreciate your time and your interest in Washington Trust. And we look forward to seeing you soon, hopefully, and certainly talking to you soon. So have a great day, everybody.

This concludes today's call. Thank you so much for joining. You may now disconnect your lines.