Washington Trust Bancorp, Inc. (WASH) Q1 2023 Earnings Report, Transcript and Summary

Hello, and welcome to the Q1 2023 Washington Trust Bancorp, Inc. Earnings Conference Call. My name is Lauren and I'll be your coordinating your call today. There'll be an opportunity for questions after the end of the presentation. [Operator Instructions] I will now hand you over to your host, Elizabeth Eckel, Execuitve Vice President, Chief Marketing & Corporate Communications Officer to begin. Elizabeth, please go ahead.

Thank you, Lauren. Good morning, and welcome to Washington Trust Bancorp, Inc.'s first quarter 2023 conference call. Joining us this morning are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; Mary Noons, who is our incoming President and COO, who will be succeeding Mark Gim, who has tiring effective with tomorrow's Annual Meeting 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 this morning, 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 and thank you for joining our first quarter call. We appreciate your time and your interest in Washington Trust. I'll provide some comments about the first quarter, as well as some thoughts on the current environment. Ron Ohsberg will then discuss our financial performance and afterward Mary Noons and Bill Wray will join us and will answer any questions you may have about the quarter. As Ron will walk through in detail, our first quarter was impacted by the combination of steep interest rate increases and extreme deposit competition. Given the strength of our customer relationships, we were able to keep deposit levels intact, but we experienced both product mix changes and beta increases across all products. On a positive note, we've maintained a relatively low level of uninsured and unprotected deposits, which Ron will detail in his comments. Also in the quarter, we saw 1.4% lift in net new retail households, which is an improvement over the prior four quarters. Washington Trust posted first quarter net income of $12.8 million or $0.74 per diluted share, compared to $16.6 million or $0.95 per diluted share in the prior quarter. Total loans grew by 2% or $118 million and end market deposits were essentially flat in the quarter. Asset yields, although improving, did not keep up with funding cost increases in the quarter. Our balance sheet remains strongly positioned for long-term performance. Our liquidity, capital and credit positions are strong. Our CRE loan portfolio remains in sound condition, our office loans at 14% of overall CRE exhibited 1.74 times average debt service coverage, 58% weighted average loan to value at 12/31/22. 36% of the square footage is subject to rollover risk in the next three years, a risk that we monitor closely. 11 of the 53 loans mature in the next three years. We regularly stress interest rates to assess refinance risk. In all, we're comfortable with the current state of our office book and we'll be happy to provide additional CRE details during the Q&A session. Both our wealth and mortgage businesses were up slightly quarter-over-quarter and remain well positioned when markets and rates rebalance. We attracted new talent in our mortgage business, including our new division head, Rolando Laura, who has started today. Rolando is a long career in mortgage banking most recently with Wells Fargo. In the quarter, we continued to take steps to ensure our long-term success. We opened our Barrington, Rhode Island branch last week, our recent East Greenwich and Cumberland branches surpassed $50 million and $20 million in deposits respectively. Reaffirming our confidence that over time we can grow deposits in our Rhode Island footprint by extending geographically within the states. We look forward to opening our new Olneyville branch in Providence and our Smithfield branch. We made incremental technology invest in the quarter to further our commitment to provide customers and prospects with a digital experience as satisfying as the personal service we've provided for 223-years. We remain steadfast in our intent to serve our customers, existing and new through all times, turbulent or otherwise. As a community bank, what we do for our customers, communities and shareholders is permanent. While interest rate inversions and inflation are transient. For this reason, we will continue to make loans to creditworthy borrowers and we will continue to be protective of capital as we grow. Current conditions are challenging in the short run, but we're positioned to weather this storm and thrive thereafter. I'll now turn the call over to Ron for an in-depth review of our financial performance. Ron?

Yes. Thank you, Ned. Good morning, everyone, and thank you for joining us today. As Ned mentioned, fourth quarter net income was $12.8 million or $0.74 per diluted share. Net interest income was $37.2 million, down by $4.1 million or 10% from the preceding quarter. The net interest margin was 2.33%, down by 32 basis points. Loan growth was funded mainly from increasingly expensive wholesale sources. Deposit betas were also higher-than-expected, we are seeing a remix from lower cost to higher cost deposit types. Average earning assets increased by $251 million. The yield on earning assets was 4.30% for the quarter, up by 36 basis points. On the funding side, average interest bearing in market deposits increased by $29 million and average wholesale funding sources rose by $305 million. The rate on interest bearing liabilities increased by 78 basis points to 2.42%. Non-interest income comprised 26% of total revenues in the first quarter and amounted to $13.3 million, down by $505,000 or 4% from fourth quarter. This was due to lower customer swap income partially offset by a bank owned life insurance payout of $476,000. Wealth Management revenues were $8.7 million, up by $39,000. The average AUA balances were down by $84 million or 1% in the quarter and end of period AUA balance totaled $6.2 billion, up by $201 million or 3% from December 31, reflecting market appreciation of $286 million, partially offset by net client asset outflows of $85 million. Of the $85 million in net outflows $47 million was due to additional client attrition related to the advisors that left the company at the end of the third quarter. This resulted in a prorated reduction of revenues of approximately $52,000 in the first quarter. Since the end of Q1, we've been notified of an additional client withdrawals of $29 million. We estimate an additional Q2 prorated revenue loss of $38,000 related to this attrition. Mortgage banking revenues totaled $1.2 million in the first quarter, up by $142,000 or 13%. Total originations were $138 million, down by $130 million or 49% from the fourth quarter. Our mortgage pipeline at March 31, was $147 million, up by $44 million or 43% from the end of December. Regarding non-interest expenses, during the fourth quarter, we contributed $600,000 to our charitable foundation. Excluding this item, non-interest expenses were up by $805,000 or 2%. Salaries expense increased by $972,000 or 5% reflecting annual merit raises and payroll tax resets. Now turning to the balance sheet. Loan growth was solid. Total loans were up by $118 million or 2% from December 31, and by $944 million or 22% from a year ago. In the first quarter, total commercial loans increased by $33 million or 1%, while residential loans increased by $80 million or 3%. In-market deposits were essentially flat from December 31, down by $66 million or 1% from a year ago. Broker deposits were up by $250 million, while FHLB borrowings were down by $55 million from December 31. As far as deposit and liquidity metrics are concerned, uninsured deposits are estimated to be $1.4 billion or 26% of total deposits. Of this $319 million or 6% are fully collateralized, bringing our unprotected deposit ratio to 20%. Our end market deposits are well diversified by industry. Our average deposit size is $37,000 and we have $1.6 billion in contingent liquidity. Total shareholders' equity amounted to $465 million at March 31, up by $11 million from the end of the fourth quarter. We repurchased 200,000 shares in January and February at a total cost of $8.7 million and an average share price of $43.70. Regarding asset quality, it remains strong non-accruing loans were 27 basis points and past due loans were 15 basis points as a percentage of total loans. The allowance totaled $38.8 million or 74 basis points of total loans and provided NPL coverage of 277%. The first quarter provision for credit losses was a charge of $800,000 consistent with Q4 and we had net charge offs of $47,000 in the first quarter. And at this time, I will turn the call back to Ned.

Thank you, Ron. We can go to questions. Thank you, Lauren.

Thank you. [Operator Instructions] Our first question comes from Mark Fitzgibbon from Piper Sandler. Mark, please go ahead.

Hey guys. Good morning.

Hey, Mark.

Hey, Ned. So I guess it's a question for Ron, I know it's sort of a fluid environment, but can you share any thoughts with us on the outlook for the margin?

Yes. So we think we're going to see some additional compression. I would think that the second quarter would be in the $200 million to $210 million range.

Okay. And given the more challenging revenue environment that we're in right now, do you think there's an opportunity to maybe cut costs a bit more than then you have?

Yes. I mean, we like to think that we run things pretty efficiently, so we don't have any large cost cutting initiatives on the horizon. In fact, we are investing in some new branches as you know. And I guess I would point out that our incremental cost for the balance of 2023 is about $1.6 million related to those new branches. So I wouldn't expect any material cost reductions over the next few quarters.

Yes, Mark, obviously, the mortgage expense is somewhat variable based on volume. But we didn't really build the core fixed cost base in mortgage when we hit the highs during the pandemic. So we don't have a huge CADRI of people to adjust for current conditions. We could slow branches and the hiring associated with branches. We do think it's a valuable part of our deposit gathering strategy, which continues to be our number one priority and it's not just branch based obviously, there are other elements to that. But we don't have a lot of overhang and staffing in any of the divisions. We could slow technology spend, we are looking at doing some incremental spend in the balance of this year. So obviously, we want to position ourselves for doing the things we do best when we come out of this. But are very -- and it's a fair question, we're very aware of the interesting times in which we're operating currently and do need to be careful on where we spend and certainly prioritize.

So, Ned, something you and I've talked a little bit about in the past, you guys continue to branch in Rhode Island and you already have in Rhode Island, I think the third largest deposit market share there. I guess, I'm curious why not expand in Massachusetts or Connecticut where you have almost no share and you already have lots and lots of loan relationships?

I think it's a great question. We do need to solve for deposit gathering outside of Rhode Island, which we do now digitally and through remote deposit capture and through our cash management suite. Markets really, it's expense where we don't -- we're not as confident in our brand recognition. And it's expensive marketing in both the Massachusetts and Connecticut markets, which are spread out media markets, Rhode Island is a pretty tight market. It's something we have to keep our eye on. Although, I will tell you at the same time, we think we need to laser focus on Rhode Island and get our -- we maintain our third place in market share, but grow it. And, you know, there is, it’s -- if we can gain 5 points in Rhode Island, share, that's $1 billion of deposits, that's valuable to us. We don't have an endless list of branch locations, but there are markets in Rhode Island like Barrington where we just opened this week that we have not been physically present and inner city Providence, we can do more and Smithfield is another location that's a great Providence suburban location that will bring value. So part of the branching is expanding our, sort of, brand halo and brand awareness into the northern part of the state. And we need to do that before -- we think before we focus on how to get outside of Rhode Island with ranching. Our one branch in Mystic, Connecticut is very successful. We like it. There's no reason to think over time we shouldn't be able to branch nearby, but outside of Rhode Island.

Okay. And then last question is around buybacks should we assume that buybacks are going to be modest going forward given the TCE ratio and the fact that the dividend payout ratio is pretty high at this point?

Yes. Yes. Mark, we have no plans to do any additional buybacks at this time.

Thank you.

Thanks, Mark.

Thank you. [Operator Instructions] Our next question comes from Damon DelMonte from KBW. Damon, please go ahead.

Hey, good morning, guys. I hope you're all doing well, and thanks for taking my questions. I guess first on the margin and the outlook there [Multiple Speakers]. Good morning. Ron, could you give a little further outlook? I mean, do you think that after second quarter, you've kind of caught up on all the -- on all of the repricing on the funding side of things and we should potentially see the margin bottom here in the second quarter? Do you think that kind of trails into the back after the year as well?

My personal view is that I would not expect necessarily that the second quarter would bottom, and I think that's really irrespective of whatever the Fed does. I mean even if the Fed pauses, the way I look at what's happening in the industry. I think that there's additional momentum behind deposit repricing going forward as customers continue to seek higher returns on their money. So I'm not prepared to go further out on the calendar with regard to margin.

Okay. Fair enough. Can you -- do you have the March 31 -- for the -- the month of March rates on money markets and CDs?

Are you talking about, yes, I do have that. So money market…

So like you have the average balance sheet?

Our money market. Yes, yes, yes. So our average money market rate was $280 million.

And what was the other.

CD?

CDs?

CD, yes.

Our in market CDs were $259 million.

Okay. All right, great. And then with respect to the outlook for loan growth, strong start to the year. How do you, kind of, see based on your pipelines today things playing out over the next few quarters?

Yes, Damon, it’s Ned. The pipelines are still pretty strong, commercial is a little over $200 million Resi is in the mid-$150 million, I think or $147 million. So they're still strong, we're being careful, we're being thoughtful about how we deploy capital on the lending front given the current conditions. Credit is very strong. Now we don't want to disrupt that. Probably more focused on customers than prospects and certainly more focused on loan relationships that bring deposits with them. So I think that there's, sort of, a natural slowdown throughout the course of this year despite the pipelines. And I think sort of mid-single-digit growth, which is what we've talked about is still achievable at that rate given the 2% we grew in the first quarter. So I don't think it's a big difference, but I would tell you that we're being very careful and thoughtful about where and how we land on the commercial side, Mary. I don't know if you want to talk about resi?

Yes. So on the mortgage side, we definitely are looking to originate more saleable loans, that's largely dependent on how the conforming rates rise and fall. They did dip a little bit into the first quarter and have come back up a little bit by maybe 3.8%, but we're managing that pretty carefully.

Got it. Okay, that's all that I have for now.

Great. Thanks, Damon.

Thank you. We have no further questions. So I'll now hand back over to Ned Handy for closing remarks.

Thank you, Lauren. And thank you all. We certainly appreciate your time with us this morning. We had a mixed first quarter largely due to the challenges of the inflation driven rate environment. But we're confident that our diversified business model, our disciplined credit culture and our strong capital base will carry us through this period as it has in prior economic cycles. I'm proud of our team and their commitment to help each other and our customers through these challenging times. We appreciate your interest, your questions and your support. So have a great day and we'll talk to you soon.

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