Washington Trust Bancorp Inc (WASH) 2022 Q4 法說會逐字稿

Good morning, and welcome to the Washington Trust Bank conference call. My name is Bruno and I will be your operator today. (Operator Instructions) This call is being recorded. And now I would like to hand over to Elizabeth Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel. Please go ahead.

Thank you, Bruno. Good morning, and welcome to Washington Trust Bancorp Inc.'s Fourth Quarter 2022 Conference Call. Joining us today are members of Washington Trust's executive team, Ned Handy, Chairman, Executive and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Mary Noons, Senior Executive Vice President and Chief Retail Lending Officer; and Bill Wray, 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 our earnings press release, which was issued earlier yesterday. And as well as other documents that are 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 pleased to introduce today's host, Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth, and good morning, everybody, and thank you for joining our call. We appreciate your time and interest in Washington Trust. This morning, I'll provide some comments about the fourth quarter as well as our thoughts on the current environment. Ron Ohsberg will then discuss our financial performance. And afterwards, Mark Gim, Mary Noons and Bill Wray will join us to answer any questions you may have about the quarter. Before I turn to our quarterly results, I'd like to make a few brief comments. In December, we announced that Mark Gim will retire as President and Chief Operating Officer this April, and that he has immediately been elected to our Board of Directors.

I'd personally like to thank Mark for all the contributions he's made to Washington Trust over the past 3 decades. During his tenure, he's provided great strategic vision and led key business line growth. And we look forward to his continued guidance as a member of our Board. It's also my pleasure to introduce Mary Noons, who will become the first female President and Chief Operating Officer in Washington Trust's 222 year history upon Mark's retirement. Mary is another Washington Trust veteran and over her 30-year career played a key role in the successful revenue growth and market expansion of our retail lending operations. She is a proven leader, a strategic thinker and has a passion for service excellence and process improvement, and I look forward to working alongside her.

I'll now turn to our quarterly results. I'm pleased to report that Washington Trust posted sound fourth quarter net income of $16.6 million or $0.95 per diluted share. Total loans grew by 5% in the quarter and 20% for the full year 2022, reaching a record high balance at year-end. While increasing wholesale funding balances and costs challenged net interest margin in the quarter, this robust loan growth helped deliver near-record quarterly net interest income, attracted new customers and position the balance sheet for long-term success. Our main noninterest income drivers, wealth management and mortgage banking were both under pressure in the quarter.

Rising interest rates had an expected impact on mortgage revenues in the quarter despite strong loan production. Wealth management revenues were affected by lower levels of assets under administration, resulting from market pressures and from the departure of client-facing advisers from our Wellesley office, which we previously reported on our Q3 call. Ron will provide more details in his comments.

We are pursuing legal remedies associated with this matter and remain committed to servicing our wealth management clients and growing this key line of business. Expenses were up slightly in the quarter but included a $600,000 contribution to our charitable foundation. This allows us to continue our tradition of assisting the organizations that provide health and human service housing and other support to those in need in our local communities. I'm proud to report that our Board approved a strategic diversity, equity and inclusion plan, and we launched our employee-driven DE&I counsel in the quarter.

I very much look forward to working with this team to ensure that ours is an accepting inclusive workplace built to reflect and benefit our employees, customers and the communities we serve. We continue to take a long-term view and will be protective of credit and capital as we consider avenues for growth.

The current period of continued, although moderating inflation and the result in unpredictable rate environment are challenging in the short run, but they are temporary. We continue to invest in talent to support growth and are also focused on rational technology investments to improve the customer experience and to ensure a secure operating environment. At this point, I'll turn the call over to Ron for an in-depth review of our financial performance. Ron?

Thank you, Ned, and good morning, everyone. Thank you for joining us on our call today. As Ned mentioned, fourth quarter net income was $16.6 million or $0.95 per diluted share. Net interest income was $41.3 million, down $700,000 or 2% from the preceding quarter. The net interest margin was 2.65%, down 17 basis points. Strong loan growth was funded mainly from increasingly expensive wholesale sources. Deposit betas were also higher than expected. Average earning assets increased by $294 million. The yield on earning assets was 3.94%, up by 45 basis points. On the funding side, average end market deposits increased by $84 million and average wholesale funding sources rose by $220 million. The rate on interest-bearing liabilities increased by 78 basis points to 1.64%. Repayment fee income was modest at $15,000 and PPP fees in the quarter were $59,000 and collectively, that added 1 basis point to the margin.

Turning to noninterest income. This comprised 25% of total revenues in the fourth quarter and amounted to $13.8 million, down $2 million or 13% from Q3. Wealth management revenues were $8.6 million, down by $901,000 or 9%. the decrease in revenues corresponded with a decrease in average AUA balances, which were down $527 million or 8%. December 31 end-of-period AUA totaled $6 billion, down $361 million or 6% from September 30, reflecting net planned asset outflows of $673 million, partially offset by net investment appreciation of $312 million.

AUA declined by $604 million due to client asset withdrawals related to the advisers that left the company at the end of Q3. This resulted in a prorated reduction of revenues of approximately $525,000 in the fourth quarter. The full run rate quarterly revenue loss related to these withdrawals is estimated to be $876,000 or an incremental $351,000 over Q4.

Since the end of 2022, we have been notified of additional client withdrawals totaling approximately $55 million with an estimated Q1 for rated revenue loss of $40,000. Mortgage banking revenues totaled $1.1 million, down by $944,000 or 46%. Realized gains were $1 million, down $726,000 or 42%.

Mortgage loans totaled -- Mortgage loans sold totaled $55 million in the fourth quarter, down by $21 million or 28%. Market competition has continued to compress the sales yield. Total mortgage originations were $268 million, down by 11%, and we placed 85% of mortgage originations in the portfolio compared to 74% in the preceding quarter. Our mortgage origination pipeline at December 31 was $102 million, which was down $62 million or 38% from the end of September.

Regarding noninterest expenses, during the fourth quarter, we contributed $600,000 to our charitable foundation. Excluding this item, noninterest expenses were down $308,000 or 1%. Salaries expense decreased by $797,000 or 4%, reflecting adjustments to performance-based compensation accruals, lower wealth management compensation and volume-related decreases in mortgage compensation. Legal added professional fees increased by $294,000 or 42%, reflecting higher legal expenses.

Now turning to the balance sheet. Loan growth was strong. Total loans were up $261 million or 5% from September 30 and by $837 million or 20% from a year ago. In the fourth quarter, total commercial loans increased by $70 million or 3%, within this category, commercial real estate loans increased by $66 million, with additions of $146 million, partially offset by payments of about $80 million.

And C&I increased by $4 million as new volume of $48 million was offset by payments of $44 million. Residential loans increased by $179 million or 8% from September 30 and by $596 million or 35% from the end of 2021. In-market deposits were up by $34 million or 1% compared to September 30 and by $196 million or 4% from a year ago. Brokered deposits were down by $85 million in the fourth quarter, while FHLB borrowings were up by $280 million. Regarding asset quality, it remains strong. Non-accruing loans were 0.25% and past due loans were 0.23% of total loans.

The allowance totaled $38 million or 74 basis points of total loans and provided NPL coverage of 296%. The fourth quarter provision for credit losses was a charge of $800,000, consistent with Q3 and reflects loan growth, continued negative trends in forecasted macroeconomic conditions and strong asset and credit quality metrics. We had net recoveries of $264,000 in the fourth quarter and year-to-date recoveries of $368,000. And at this time, I will turn the call back to Ned.

Thank you, Ron, and we will now take questions.

(Operator Instructions) Our first question today is from Laurie Hunsicker from Compass Point.

Mark, I just want to say it's been absolutely lovely working with you. And wishing you all the best, glad you're staying on the Board and welcome Mary. So funding, maybe we can start there. Can you take us through your thoughts on using brokerage CDs to how that will continue with the trajectory there is going to look like and maybe a spot margin for the month of December? And any forward guidance you can give us for margin, that would be super helpful.

Sure. So we view brokered CDs and FHLB. We always separate that out from what we call in market deposits. And we view brokered CDs and FHLB kind of fungible funding sources. Brokered CDs have lately trended lower cost than FHLB, but there's less inventory out there.

So I would say we would take full advantage of all the brokered CDs that we can collect. And FHLB is a little more instantaneous. You call, you get the funding the same day. It's a little harder to get those brokered CDs in, and there's more competition out in the market to get them. But I would say we would rely on those as much as we can. We're looking in the first quarter for guidance in a range of about $2.50% to 2.55%.

Great. And then can you just remind me, your brokered CD balances, I know in September was $422 million where it came in at December?

Yes.

I can follow up with you offline. I just wanted to get that. Maybe any thought...

$358 million at the end of December.

Okay. Great. And then just lastly, can you comment on how we should think about expenses expense growth for full year '23, obviously, a lot of moving parts. And just also wondering, with the pressure on expenses, has that slid your branch plans at all? Or how we should think about that?

Yes. So I think our guidance on expense, we'll keep that mainly to the first quarter, and we're looking at a 2%, 2.5% increase in Q1, mainly as we have merit increases implemented in payroll tax resets and those types of things. For the full year, the branch -- we expect the new branch impact and those branches will open later in the year. That's $1 million. And also, we have new FDIC insurance expense coming in at $1.4 million that was not in the 2022 run rate.

Laurie, this is Mark. I'll just comment on the branch timing. We have to balance the expense of opening branches in the short term against the long-term value of increasing our deposit gathering radius. And scope. So I think we're mindful of trying to balance near-term costs in a challenging economic environment against the long-term value of improving our funding base, which remains a strategic priority for us. Branches are part of that so is commercial deposit gathering and cash management. And we have a really substantial focus on that from a strategic point of view. So branch opening timing might vary a little, but it would really be more based on when it's feasible as opposed to a desire to minimize near-term cost.

Our next question is from Mark Fitzgibbon from Piper Sandler.

And let me echo Laurie's comments. Congratulations to Mark and also congratulations to Mary on your new role. Ned, I wonder if you can help us think about how you're thinking about your loan-to-deposit ratio. I think it's 102% right now. Is that likely to serve as sort of a governor on balance sheet and loan growth in coming quarters?

Yes. I don't think so. I mean I think we've got a strong commercial pipeline and strong not as strong as historic resi pipeline. And we think we have to continue to serve our customers and prospects in the marketplace. We need to focus on deposit gathering, Mark, and fund that loan growth in a better fashion than we have been able to and certainly in the recent quarter. Obviously, in the fourth quarter, we had huge loan growth at a time when the funding source available to us was borrowed funds and/or increasingly expensive deposit base.

So not the perfect scenario. So I think more focus on growing the deposit side of that question than reducing the loan side in the short run. We think positioning the balance sheet for the long term is important serving the customers continues to be important. We can't choose when to service them. We need to stay in the marketplace and stay active. But at the end of the day, we do have to be focused on loan-to-deposit ratio. And at some point, it could become a governor. I don't see that in the near term.

Okay. I guess I was just thinking about like your capital ratios are not as high as they've been historically sort of 580 TCE ratio. I know the regulatory ratios look good. But I just wondered if it maybe made sense to kind of slow growth a little bit on the loan side to let deposits catch up and like capital ratios build, particularly if we're going into a more difficult economic period.

So Mark, this is Mark Gim. I'll take just a shot at the question about loan growth and kind of how we try to think of it in terms of long-term opportunities. Our credit quality standards have not changed at all, and we're very mindful of the economic environment in 2023 and 2024 might worsen if the U.S. and global economies slip into recession. That said, we're seeing opportunity, particularly on the commercial side of the house from customers who we have not seen before, who are very high credit quality.

And we think the ability to establish some of those relationships for the long term, when we might not have had that opportunity is something we need to follow up on. I'll turn it to Ron for comments on capital and the difference between TCE and our regulatory capital ratios. But just with -- again, with a comment that we're very focused on credit quality. We're very proactive about trying to identify potential risks long before they happen. So we don't go into this lightly.

And Mark, this is Ned. Obviously, a lot of the asset growth in the fourth quarter was resi and strong high-quality resi. And obviously, we're hopeful that at some point down the road, we'll be back at a point where we're selling the large majority of those loans are not growing the balance sheet as much as we have in the prior 2 quarters. So when that will happen, as anybody's guess, it's obviously rate related. So it's a good question, and I think we have to be thoughtful about all those angles and Ron on the capital front?

Yes. Yes, Mark, I know we share your concern about GAAP capital as it is. And we agree that regulatory capital still is fine. I do believe we have enough capital to support the kind of growth that we've been booking. As far as the residential, those have favorable regulatory capital implications. So I don't see any reason either on the funding side or on the capital side for us to necessarily curtail our lending activities.

Okay. And then last question is on the wealth side. It looked like you had $600 million leave with those full relationship people, and there's another $55 million coming this quarter, it sounds like. How much realistically beyond that is at risk in your view of leaving?

So Mark, this is Mark. I'll take that as best as we can. It's difficult to predict how much will leave. As you know, having non-compete non-solicited agreements in place doesn't necessarily ensure clients will remain with us even though we have been very active in reaching out to clients to a firm that they will -- they know that we're continuing to service them and that they -- for the time being are remaining with us to be serviced. So it's hard to predict. I think we would certainly say we're much closer to the end of that runoff in the beginning, but we don't have any -- it's difficult to give specific guidance.

But did that group of 4 people have a book of $1 billion. I mean we sort of know that it's not going to go past that? Or can you give us a sense for what's the size of the total relationships were.

Yes. As disclosed, collectively, they managed or were associated with about approximately $1 billion in assets as of September 30, 2022. And I think Ron has disclosed how much of client asset withdrawals are there. As a practical matter, we measure and continually refresh our outreach to existing clients, those who have affirmed that they will stay with us for the time being. But we -- and while we're confident in our outreach efforts, I think we're very reluctant to try to give a guidance number as to how much is at risk out of what remains.

(Operator Instructions) Our next question is from Damon DelMonte from KBW.

And echoing everybody's thoughts here. Congrats, Mark, and welcome Mary, look forward to getting to meet you and work with you in the future. So I just wanted to start off by circling back on the margin guidance and outlook. Ron, I think you said you're expecting 2.50% to 2.55% here in the first quarter. Can you give a little bit more forward guidance assuming the Fed stops raising rates here in the first quarter, maybe 2 more 25 basis point hikes, does the margin stabilize at this point? Or does it actually reverse course and start to trend up? Or how should we kind of think about that?

Yes. I think best case, it kind of stabilizes over the next couple of quarters. We still have quite a bit of liability repricing to come. A lot of that in the first quarter. which explains kind of the dip between Q4 and Q1. So we're a little guarded about this. I mean there's a number of different ways interest rates could play out over the course of the year. So that's why we really just kind of prefer to stick to 1 quarter at a time right now.

Okay. Can you give a little color on the rate of new loan production? What the new loans that are coming on the books, but what kind of yields you're getting on those?

Yes. So in the fourth quarter, total commercial loans came in a weighted average of about $566 million, mortgages came in at about $484 million.

And that reflects the average for the quarter, Damon, obviously, as short-term rates have trended up LIBOR-related commercial loans coming on the balance sheet will be at a higher rate at December than they were in October. And then also from a mortgage production perspective, it's important to note that the lead time to book a mortgage typically means that the loans that are hitting the balance sheet are 60 days from 40 to 50 to 60 days rate locks in terms of prior pricing decisions. Mary, maybe you can give some indication of what our current jumbo rates might be that are going in the portfolio ballpark.

Yes. So I'd say that what you saw in rates for fourth quarter certainly will be higher in the first quarter of this year because we had implemented across the board rate increases as funding costs went up and overall mortgage rates went up. Even though we've seen a dip in the conforming rates, we have not adjusted our portfolio rates. So those will continue to be attractive for the first quarter.

Got it. Okay. That's helpful. And then as you guys think about your deposit betas, this past quarter, I think your total sold deposit linked quarter beta was around 31% and cumulatively around 20%. With the big ramp-up expected here in funding costs in the first quarter, what do you see like your overall beta during the cycle kind of playing out?

Yes. I don't have a calculated beta number to share with you on this call, Damon. But clearly, there is a lot of market competition out there. We have customers coming in asking for rate exceptions depending on the nature of the relationships, we will grant those to retain the deposits, it's competitive. And I think that -- I think betas will go up from here, let's just say that.

Damon, this is Mark. I'll try to give a little -- if I can give a little color on that. Our stance on the retail side has been not to be at the front edge of rate retention but to keep an eye between providing fair rates to customers and maintaining as lower deposit cost of funds as we can, consistent with competitor practices. Probably the highest betas are those for institutional, perhaps municipal or public fund type deposits, one could view those 2 different ways.

As ARPA type funds get released to states, for example, there has been opportunity to bring those in. They are certainly at a higher cost in the short term, but also bring with them the opportunity to bring in noninterest-bearing relationships, for example, and so while the betas on those might be high and then flat to inverted yield curve environment in the long term, we see value in either maintaining those or bringing them on board.

So while we have on the kind of commercial municipal side, a higher beta on the interest-bearing accounts, we view it as a sound business to try to maintain in the long run rather than letting it was using equally priced wholesale funding, but then potentially losing the opportunity to renew or grow that relationship.

Yes. We've got relationships with about 1/3 of the cities and towns in the State of Rhode Island. We'd like to have that be more and we're seeing success on that front. But those are relatively expensive deposits in the short run. On the interest-bearing side, they do tend to come with deposit accounts or DDA accounts, operating accounts. So that's one of several strategies that we hope will be helpful in the long run. But again, to Mark's point, in the short run, they might drive betas up.

Okay. I don't mean to belabor the discussion on the margin here. But looking back at my notes from last quarter, I think the guidance was like 2.85% to 2.90% for the fourth quarter, and it came -- you guys came in at 2.65%. I mean that's a pretty sizable turn of events. And I'm just trying to kind of connect the dots here. So is it fair to say that the loan growth was just really strong, and you just -- you're forced to tap outside sources and higher cost funding and it just had immediate impact on the margin? Is it pretty much as I get that simple?

That's exactly what happened.

Okay. All right. I appreciate that. And then just lastly, on loan growth outlook. You guys seem pretty optimistic here going into '23. Any guidance on kind of full year expectations for the overall portfolio?

Yes. Damon, it's Ned. The pipeline is strong. It was strong at year-end, kind of in the $250 million level. It's grown since then. So we are seeing opportunity. We think we'll be in the sort of mid-single-digit growth range again. We have seen a tapering off somewhat on the payoff side. So that could be helpful. So yes, I think we're going to see strong growth.

And frankly, going into the year with a pipeline that's strong. I think we'll see better growth in the early part of the year than we did last year. Last year, we ramped up towards the end of the year, but we've got some momentum. So I think it will be a little bit more spread out over the course of the year and continue to be strong. Mary, do you want to comment on resi?

Yes. So for resi, we have, I believe, a 13% increase in our volume for what will hit portfolio. What I'm hoping is that, that's a little lower and more go to sales, and we have -- we're working on certain fronts to increase our salable avenues. But we already have a very diverse salable outlet, we're structured to have multiple channels for outlets for our production.

We've just hit a little kink in the yield curve on those. So I think we'll have very strong production. We're very oriented to the purchase market and purchase market in our region is very strong, and it's anticipated to stay that way.

We currently have no further questions. I will now hand back to our speaker for final comments. Elizabeth. Please go ahead.

Ned?

Well, thank you all for joining us. We appreciate your interest and your time, and we look forward to talking again to you in the coming quarters. Meanwhile, we'll be head down and focused on serving our customers well as always. So have a great day, everybody. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.