Washington Trust Bancorp Inc
NASDAQ:WASH
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Washington Trust Bancorp Inc
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Good morning and welcome to Washington Trust Bancorp, Inc.’s Conference Call. My name is Carla. I will be your operator today. [Operator Instructions] And now, I will turn the call over to Elizabeth B. Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel?
Thank you. Thank you, Carla. Good morning and welcome to Washington Trust Bancorp, Inc.’s second quarter 2023 conference call. Joining us this morning are members of Washington Trust’s executive team, Ned Handy, Chairman and Chief Executive Officer; Mary Noons, President, 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.
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 am now pleased to introduce today’s host, Washington Trust Chairman and CEO, Ned Handy.
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 will provide some comments about the second quarter as well as some thoughts on the current operating environment. And then Ron Ohsberg will then discuss the financial performance and Mary Noons and Bill Wray 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 $0.66 per diluted share compared to $12.8 million or $0.74 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 helped us totally on maintaining and strengthening our customer franchise and balancing prudent decisions about credit, capital, liquidity and the investment in 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 are 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 have been open for 27 months, 11 months and 13 weeks respectively. We have two additional branches in process in the only ville 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 CRE at June 30, 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 will provide additional free detail during the Q&A session.
We continue to assess and improve our digital offerings to ensure that our customers can access us easily and enjoy a digital experience as satisfying as the personal service for which we are renowned. We are 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 am 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 have 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 will now turn the call over to Ron for an in-depth review of our financial performance in the quarter. Ron?
Okay. Thank you, Ned. Good morning, everyone and thank you for joining us. As Ned mentioned, net income was $11.3 million or $0.66 per diluted share. Net interest income was $33.5 million, down by $3.7 million or 10% from the preceding quarter. The net interest margin was 2.03%, down by 30 basis points and in line with guidance. Average earning assets increased by $173 million. The yield on earning assets was $453 million, 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 3.02%. Prepayment 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, 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 advisers that left the company at the end of the third quarter.
Mortgage banking revenues totaled $1.8 million, up by $508,000 or 41%. The 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 31 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%. End market deposits were up by $53 million or 1% from March 31 by $165 million or 4% from a year ago. Wholesale brokered deposits were down $7 million while FHLB borrowings were up by $115 million. As far as deposit and liquidity metrics are concerned, uninsured/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.
Thank you, Ron. And Carla, we can go to questions now.
Thank you. [Operator Instructions] Our first question is from Mark Fitzgibbon from Piper Sandler. Your line is now open. Please go ahead.
Hey, guys. Good morning.
Good morning, Mark.
Good morning, Mark.
Hey, Ron, I wonder if you could help us think about the net interest margin maybe in the third quarter or even for the back half of the year. I’m assuming we’re to see a little bit more compression given funding challenges. Can you help us think through the magnitude of the compression?
Yes. 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.
Okay. And then a little bit more compression, you think, in 4Q?
Yes. So I would say our guidance for the remainder of the year will be around 2%.
Okay. 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?
Yes. 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 yes, 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.
Roughly how much was the accrual reversal?
So we did $1.9 million in reversals.
Okay. And then I wondered if you could help us think about sort of capital ratios and how will you 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.
Yes. So I don’t really necessarily have a target for you at this point. We do quarterly stress testing on capital. 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. 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. We are a community bank and we will act appropriately to meet the credit needs of our customers. So we have internal conversations about the level of loan growth I think we are becoming more selective, particularly on the commercial side. Residential, we think we have a good mortgage operation. We want to maintain that operation. So, we are kind of giving what the markets – we are kind of taking what the market is giving us in that regard right now. But we do believe that we have got the capital to maintain what we are doing, and we will adjust accordingly as we move forward if we think there is an issue.
So, in that same vein, 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?
No. No, we have no plans to cut the dividend. Yes, we agree that the payout ratio is higher than we would 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 worked through that, and we expect that we will be able to work through it now.
Thank you.
Yes.
Thanks Mark.
Thanks Mark. [Operator Instructions] Our next question is from Damon DelMonte from KBW. Your line is now open. Please go ahead.
Hey. Good morning everyone. I hope everyone is doing well today.
Good morning Damon.
So, just wanted to start off on – good morning. Just want to start off on the loan growth side. I mean a pretty solid quarter, around 12% linked 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 have been able to kind of add to the consumer side pretty consistently. So, just didn’t know kind of what your thoughts were over the next couple of quarters.
Yes. Damon, it’s Ned. I will start on the commercial side. The pipeline, maybe not surprisingly is very strong. We are seeing a lot of opportunity partly because others are probably passing on things that they might not have in other times. And so 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 are 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 will 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 getting the right kind of yield out of the book, looking for deposit opportunities, in particular, along with commercial loans. And so we will hit our projected growth rates. We might exceed them a little bit just because of the opportunity. And then I know Mary Noons is with us, and she will talk about resi. I know we are tilting the pipeline towards salable assets, and that showed up a little more in the second quarter than the first quarter, but Mary?
Good morning Damon, this is Mary.
Good morning Mary. How are you?
So, we have – I am good, how are you doing?
Great.
We have pretty much doubled our for sale production since February. And there is a lot of levers we can use to moderate the mortgage production. And one of the things that we have done is we have 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 the fourth quarter, we are 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 line.
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?
Yes. As it looks right now, that’s what we are thinking. This stuff can change very rapidly. We have 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 are forecasting is that we are going to have solid gains for the fourth quarter.
Got it. Okay. And then with regards to credit, I mean obviously, very strong trends continue. From a provisioning standpoint, Ron, you kind of look at the provision is 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?
Yes.
Okay. Great.
I think I can elaborate if you want. But yes, it’s basically on growth. So, I mean we – CECL all the macroeconomic forecasting is kind of built into the computation. So, 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.
Got it. Okay. And then just to circle back on the expenses. So, I think you noted about $1.9 million of accrual reversals this quarter. So, when you kind of factor that in, plus some higher marketing costs, I mean you are probably talking somewhere in the upper $34 million range, closer to $35 million per quarter over the back half of the year. Does that sound reasonable?
Yes, I think that sounds about right.
Okay. Great. Well, that’s all I had. So, thank you very much.
Yes.
Thanks Damon.
[Operator Instructions] We have no further questions. I would like to hand back to Ned for any closing remarks.
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 will be there to help people prosper through thick and thin with prudent and productive extensions of credit. We are 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.
This concludes today’s call. Thank you for joining. You may now disconnect your lines.