WASH (2020 - Q4)

Good morning. And welcome to Washington Trust Bancorp Incorporated Conference Call. My name is Chuck. I will be your operator today. [Operator Instructions] Today’s call is being recorded. And now I will turn the call over to Ms. Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel. Elizabet

Thank you, Chuck. Good morning, everyone, and welcome to Washington Trust Bancorp Inc.’s conference call and fourth quarter and full year 2020. Joining us on 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. As a reminder, 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 Washington Trust press -- earnings press release that was issued yesterday and with other documents that we filed with the SEC. We encourage you to visit our Investor Relations site at ir.washtrust.com to view our complete Safe Harbor statement and all of these public filings. Washington Trust trades on NASDAQ under the symbol WASH. And now I am pleased to introduce the host for today’s call, Washington Trust’s Chairman and CEO, Ned Handy.

Thank you, Beth, and good morning, and thank you for joining us on today’s call. I’d like to start by wishing you all the very best in this New Year. We’re all thrilled we’re in the New Year. We hope that you and your families have stayed safe throughout this pandemic and we’re all grateful that the vaccination campaign is underway, with hopes that it will bring some normality back to us all soon. So 2020 was a year like no other, marked by unprecedented challenges, disruption and uncertainty. Yeah, Washington Trust did strong and prevailed just as we’ve done so many times before in our 220-year history. I’m really proud of the work our team has done to help our customers and our communities get through these ongoing challenges. I know that by embracing our responsibility and being a proactive part of the solution, we’ve created more value in the Washington Trust franchise. This morning, I’ll provide some 2020 highlights and Ron Ohsberg will review our fourth quarter and year-end financial results. After our prepared remarks, Mark Gim and Bill Wray will join us for a question-and-answer session. I’m pleased to report that Washington Trust ended 2020 with another solid performance, posting fourth quarter earnings of $18.6 million or $1.07 per diluted share. These results contributed to a strong full year 2020 earnings of $69.8 million or $4 per diluted share, compared to $69.1 million or $3.96 per diluted share reported for 2019. Our success in 2020 was due to several things, the spirit and resilience of our dedicated team of employees who maintained high service levels and businesses usual operations during a major pandemic. The strength, stability and improvement in our balance sheet and the multiple facets of our business which during continued low interest rates and an uncertain operating environment enabled us to achieve these earnings, and the loyalty and perseverance of our customers who have trusted us to help them through these difficult times. Washington Trust strong corporate governance and enterprise risk management practices, which specifically address and test our business continuity plan ensured our preparedness for this crisis. Strategic technological investments made in recent years, also enabled us to quickly, securely and flawlessly transition business operations to a remote working environment. Over the past year, we’ve learned many lessons, including just how much our customers value our personal service. In 2020 Washington Trust like the rest of the industry, saw increased customer use of digital banking, online account opening and other technological conveniences. We remain committed to and will keep pace with these technological developments, as we know this trend will continue. However, we also know that when customers need financial advice, they prefer a human connection and want to have a real conversation with a trusted advisor, whether it’s in person, by phone or through video conferencing. We take great pride in the relationships we’ve built with our customers and strive to provide a high level of personal service. In fact our Net Promoter Scores which consistently ranked -- rank us higher than the industry averages for customer satisfaction actually increased during the pandemic. Looking forward, we will continue to measure customer satisfaction and monitor trends to ensure we’re consistently improving the customer experience across all delivery channels and business lines. Let me take a few moments to share some of the business lines highlights from 2020. Loan outstandings grew 8% in 2020 aided by PPP fundings, but challenged by prepayment fees on the retail side and payoffs on the commercial side. Our credit formation was up about 35% over 2019. I’d like to take a moment to acknowledge the efforts of our lending team, branch staff, customer service center and all of the employees throughout the bank who went the extra mile to assist borrowers both customers and non-customers with PPP loans. I’ve personally spoken with several local borrowers who are grateful for the advice and guidance they received from us and as a result of the personal attention they received have committed to further building their banking relationships with us. We continue to assist local borrowers with PPP forgiveness and with the second round of PPP loans. And Ron will provide a more detailed update of our PPP lending program shortly. We continue to be satisfied with overall credit quality of our loan portfolios and Ron provides some more details in his comments. We also recognize that we’re not through with this pandemic. We’ve cleared about $500 million in deferments through year end and have another $200 million or so to clear. We know the assets and follow them very closely. Ron will give you some more information and we’ll be happy to answer any questions you may have during the Q&A session. Total deposits at December 31, 2020, were up 25% from a year prior and in-market deposits, which exclude wholesale broker time deposits grew by 18% in 2020. The growth in deposits allowed us to reduce federal home loan bank borrowings, improve our loan to deposit ratio and since interest rates have remained low, decrease our funding costs to help offset continued margin pressure and improve our balance sheet for what comes ahead. A year ago we were discussing the industry-wide need for deposits. Today we’re reporting all-time high level of deposits including low cost core checking and savings accounts and increased money market balances. Consumers started curtailing their spending habits and shifted to saving and liquid deposit accounts given the continued economic uncertainty resulting from the pandemic. In 2020, we found new ways to encourage customers to save. We introduced Add-It-Up, a program which automatically rounds up debit card purchases to the next dollar and transfers the difference into another Washington Trust account. The program has not only helped increase savings balances, but also improved debit card and checking account activation. As I’ve mentioned on previous calls, we consider our branch employees frontline heroes, because they have continued to work throughout the pandemic, smiling beneath their masks and assisting customers through plexiglass dividers and drive-through backing windows. And while banks across the nation and locally have announced plans to close branches, Washington Trust remains committed to expanding our network as branch banking remains an important part of our community engagement and our delivery strategy. In 2020, we broke ground for our East Greenwich branch. We believe there’s a great deal of opportunity in this market and look forward to a spring 2021 opening. And while the pandemic and social distancing protocols may still be in place when we open our East Greenwich branch doors, I know customers will be welcomed into a safe and friendly environment and feel human connection with our team. Our mortgage banking team also deserves recognition for the incredible results they produced in 2020. Not only did mortgage originations and sales volumes reach record levels in 2020, but mortgage banking revenues totaled a record $47.4 million for the full year 2020, up 220% from 2019. Low interest rates drove increase mortgage demand in early 2020, but the onset of the pandemic was a cause for concern. Our residential mortgage team continued to work diligently and didn’t miss a beat when employees were forced to work remotely. Throughout the pandemic rates remained low and a new work-from-home trend resulted in significant new growth in single-family home purchases and mortgage refinancing. Our mortgage team has worked extremely hard and there’s some indication that mortgage banking activity -- activities may start to normalize in 2021. But it’s difficult for us to predict what will happen for the full year. Ron will provide some further color in his comments. Our wealth management divisions assets under administration reached a record $6.9 billion at December 31st, up 7% from the end of 2019, position us -- position -- positioning us very well to head into 2021. Throughout the year we provided ongoing advice and guidance to help our clients plan for a better understand -- and better understand market volatility and economic uncertainty. Once our wealth management advisors began working remotely, we became even more attentive with our clients and proactive with our communications, conducting video conferences and webinars and providing frequent market updates. We also saw an increase in our clients’ use of our online portals, viewing their portfolio status, accessing statements and communicating with our advisors. Our wealth management division continues to be a key part of our diversified business model, providing a consistent stream of non-interest income to our company. Ron will provide more detail on our expenses, but I’m proud that we continue to operate our business efficiently, while prioritizing expenditures to ensure outstanding and safe customer experiences, as well as the continued well being and development of our employee team. As a testament to these efforts we were recognized as one of the best places to work in Rhode Island for the 10th straight year and one of the best banks to work for by American Banker, being the only bank in Rhode Island on that list. I’ll now turn the call over to Ron for a review of our financial performance. Ron?

Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $18.6 million or $1.07 per diluted share for the fourth quarter. This compared to $18.3 million and $1.06 for the third quarter. Full year 2020 net income was $69.8 million or $4 per diluted share, compared to $69.1 million or $3.96 per diluted share reported for the prior year. Net interest income amounted to $32.2 million in the fourth quarter, up by $589,000 or 2%. Net interest margin was 2.39%, up by 8 basis points. In the fourth quarter PPP for -- PPP loan forgiveness commenced. As a result, net interest income benefited from accelerated net deferred fee amortization of $423,000, 3-basis-point benefit to the margin. Commercial loan prepayment penalty fee income was modest and totaled $123,000 in the fourth quarter, compared to $33,000 in the third quarter. Average earning assets decreased by $82 million, mainly due to a decrease of $71 million in average loans and the yield on earning assets decreased by 6 basis points to 2.92%, due to higher levels of prepayments on residential mortgages and mortgage-backed securities. On the funding -- market deposits rose by $110 million, while wholesale funding sources decreased by $199 million. The rate of interest-bearing liabilities declined by 18 basis points to 0.67%. Non-interest income comprised 46% of total revenues in the fourth quarter and amounted to $27.7 million, up by $2.3 million or 9%. Included in other non-interest income in the fourth quarter was a gain of $1.4 million associated with the sale of our limited partnership interest and a low income housing tax credit. Excluding this game, non-interest income was up by $859,000 or 3% from the prior quarter. Also note that we have an offsetting expense item to this gain. Our mortgage banking revenues totaled $14.1 million in the fourth quarter. This included net realized gains on loan sales of $13.4 million. Realized gains declined by $886,000 or 6% from the prior quarter, reflecting lower sales volume, partially offset by a higher sales yield. Mortgage loan sold totaled $318 million, down by $36 million or 10% from the all-time quarterly high reported last quarter. Net unrealized gains included in mortgage banking revenues increased on a linked quarter basis, reflecting an increase in the fair value of mortgage loan commitments as of December 31st. Full year 2020 mortgage banking revenues totaled $47 million, excuse me, up by $3 -- $32.6 million or 220% from a year ago. The volume of both mortgage originations and sales reached record highs in 2020. Mortgage loan originations amounted to $1.7 billion in 2020, up from $945 million in the prior year and mortgage loans sold totaled $1.1 billion in 2020, up from $591 million in 2019. Our mortgage origination pipeline at December 31st was about $323 million, which is 85% higher than it was at this time a year ago. Wealth management revenues were $9.2 million in the fourth quarter, up by $252,000 or 3%. This was due to an increase in asset base revenues, which were up by $280,000 or 3% in the preceding quarter. The increase in asset base revenues correlated with the increase in average -- the average balance of assets under administration, which were up by $213 million or 3%. The December 31st end of period balance of assets under administration totaled a record $6.9 billion, up by $471 million or 7% from September 30th, reflecting financial market appreciation. Loan related derivative income amounted to $173,000. This was down by $1.1 million on a linked quarter basis reflecting a lower volume of swap transactions. Regarding non-interest expenses, total expenses were up by $1.8 million or 5% from the third quarter. Included in the fourth quarter, we recognized $1.4 million of debt prepayment penalty expense associated with the payoff of higher rate FHLB advances. Excluding this, non-interest expenses were up by $352,000 or 1% from the prior quarter. Salaries and employee benefits expense increased by $183,000 or 1% in the fourth quarter. Income tax expense totaled $5.5 million for the fourth quarter. The effective tax rate was 22.9%, compared to 21.9% in the prior quarter and we expect the full year 2021 effective tax rate to be 22%. Now turning to the balance sheet. Total loans were down by $86 million or 2% from September 30th and up by $303 million or 8% from the end of 2019. In the fourth quarter, commercial loans decreased by $38 million or 2%. Payoffs and pay-downs amounted to approximately $105 million and included $18 million of PPP loans that were forgiven by the SBA. Residential loans decreased by $39 million, reflecting increased payoff activity and consumer loans decreased by $9 million. Investment securities were down by $19 million or 2%. In-market deposits were up by $85 million or 2% from September 30th and up by $573 million or 18% from the end of 2019. This included increases in DDA balances of 31% and savings accounts of 25%. The deposit inflows have allowed us to improve our funding mix by paying down higher cost wholesale advances. Wholesale brokered CDs were up by $7 million in the fourth quarter and FHLB borrowings were down by $120 million. PPPLF borrowings were paid off in the fourth quarter, and therefore, were down by $106 million from September 30th. Total shareholders’ equity amounted to $534 million at December 31st, up by $6.5 million. Washington Trust remains well capitalized, total risk based capital ratio was 13.51% at December 31st, compared to 13.09 at September 30th. The tangible equity to tangible assets ratio was 8.22%, compared to 7.91%. Our fourth quarter dividend declaration of $0.52 per share was paid on January 8th. This reflected a $0.01 increase in Q4. Regarding asset quality, non-performing loans or, excuse me, non-performing assets declined by $1.5 million in the fourth quarter. Non-accruing loans were $0.31% of total loans, compared to 0.34% at the end of Q3. Loans past due 30 days or more were 0.30% of total loans, compared to 0.24% at the end of Q3. Troubled debt restructurings or TDRs increased by $7.1 million from September 30th, largely due to restructurings of two C&I relationships that did not qualify for TDR accounting released. The allowance for credit losses on loans totaled $44.1 million or 105 basis points of total loans and provided NPL coverage of 334%. Excluding PPP loans, the allowance coverage was 110 basis points. The provision for credit losses was $1.8 million, compared to $1.3 million recorded in Q3 and included $1.6 million for loans and $200,000 for unused commitments. Net charge-offs were $118,000, compared to $96,000 in Q3. And finally, I’d like to provide an update on our COVID-19 lending impact. Loan deferment on January 21st totaled $203 million or 5% of total loans outstanding, excluding PPP loans, and down from 10% as of September 30th. This includes $143 million of commercial real estate, $33 million of C&I, $26 million of residential and $1 million of consumer loans. The breakdown of commercial deferments by industry category is presented in a table in our earnings release. We’ll be happy to get into the details during Q&A. As of December 31st, we are reporting 1,700 PPP loans with a carrying value of $200 million. PPP loans with principal balances totaling approximately $18 million were forgiven by the SBA during the fourth quarter. As I mentioned earlier, approximately $425,000 of net deferred fees were accelerated into income. Net deferred, excuse me, net unamortized fees on PPP loans amounted to $3.9 million at December 31st. The timing and recognition of these net fees into the margin will depend upon the pace of loan forgiveness as approved by the SBA. And at this time, I will turn the call back over to Ned.

Thanks, Ron. 2020 was certainly a whirlwind but it turned out to be a strong year for Washington Trust. We were profitable. We would remain well capitalized. We maintained credit quality and announced an increase dividend for our shareholders, which was recently paid in early January. We faced numerous challenges in 2020 and met them head on. I’m grateful to our team for their work and their support. 2021 promises to be another challenging years, we will continue to deal with the pandemic and its ongoing and after effects. Interest rates remain low and continue to pressure margins. And we must anticipate changes the new Biden administration may make that could affect our industry. We learned a lot of lessons in 2020 and we’ll use that knowledge to help our move -- our company move forward in 2021. Again, thanks for your interest in the company and we’re happy to turn to questions-and-answers now.

[Operator Instructions] And our first question will come from Mr. Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Good morning, Mark.

Hi.

Good morning, Mark.

First question, I just want to follow up Ron, one of the things you mentioned on loan deferrals. So the $203 million in deferrals you have outstanding, when did those expire? And I guess I’m curious, are most of those paying interest at this point?

Yeah. Bill, I -- Bill is on our -- on the phone and he can probably talk about the components of the deferral. We’re looking, I would say, Mark, that our deferrals might be extending a little longer than others are in the industry, we’re well aware of that. We’re looking at about $76 million that would roll-off basically in the first quarter and then the balance would roll-up by the end of the year.

Yeah. Mark, it is Ned. I’ll just add some color. We’ve got a fair number of -- about nine hotels in that mix. Those are just going to take a while longer to come back. We know them well. We know and Bill can give some more specific color if wanted, but those we extended out some right to the end of the year. So we’re going to, I think, we started a little higher than some our universe and I think we’ve cleared $500 million. We got another $200 left. We were watching them very closely and in touch with the borrowers regularly and it’ll take a while, but we’ve got a chunk that are going to come off in the first quarter and then the balance of them we’ve got scheduled out through the remainder of the year.

And do you have a sense for what percentage of those are paying some kind of paying interest only?

On the -- yeah. This is Bill. On the commercial side, about half of them are paying interest only, about half are both P&I deferments. On the resi side, they’re generally just full P&I.

Okay. And then changing gears a little bit, on the mortgage business, obviously, you had a banner year in 2020. I think revenues about tripled versus ‘19. I guess as we move into ‘21, at some point, you think volumes would start to come down? How do you all model out mortgage revenues and environment like this?

Yeah. I can take a shot at that.

Mark, go ahead.

Mark, if you want to take it. Go ahead.

Yeah. Mark, this is Mark Gim. I will just try to provide a big picture outlook for what we think 2021 will shape up like and then Ron can take it from there. Obviously, as you say, at some point, it feels like the mortgage banking train should start to slow down to normal levels. That said, as we finish the end of the fourth quarter, we found that pipeline volumes going into January and February have been very strong, more characteristic of what we saw at the beginning of the fourth quarter. And this is the combination of purchase activity, but still a lot of refinancing activity, more of which is saleable. So, although we share your thoughts that at some point, this has to slow down, it looks really like the first quarter is shaping up to be another fairly strong one. And the residential housing markets in New England and our markets in particular have been very robust. Normally, Mark, this would be a time of year in January, where you would expect purchase and home buying activity to interest to slow down, but it really has not yet. So a limitation on housing stock in our markets and very strong demand for housing mean that this may continue to go at least for the first quarter or perhaps even the first half of the year. Ron?

Yeah. Mark, I mean, Mark has given, I guess, as I think about this, it looks like Q1 is likely to look similar to Q4. The Mortgage Bankers Association is forecasting reduction in mortgage volume across the industry of 20% to 25% compared to last year. So we take that into account. I think it’s premature for us to try to give you a full year forecast on mortgage. We are aware that there’s sentiment out there that this will start to cool off by the end of the year. We don’t know exactly when that will happen, though.

Okay. Great. And then, I was curious, Ron, if you could give us some perspective on the core margin going forward, maybe excluding the impact of PPP, what you’re thinking and what the trend of the margin might be?

Yeah. So excluding PPP, we would expect some modest expansion in the margin in the first half of the year. We still have some opportunity to lower funding costs and we will do that. We are still seeing pressure in asset yields due to prepayments on residential mortgages and mortgage backed securities and that will likely continue throughout the year. So as I think about it, I think, we’ll be trending up modestly, maybe to the 240 range for the first half of the year and then maybe trending back down towards the 235 range in the second half of the year.

Okay. Great. And then, lastly, I wonder if you could share with us your thoughts, maybe at a high level on the branch network in light of sort of the digitization of the business that we’re seeing out there and lots of your competitors closing branches? How are you all thinking about your branch network?

Mark do you want to…

This is Mark Gim. Let me…

Yeah. Go ahead.

Yes. I would like to start on that. We’re well aware of the trends in the industry towards branch closures, particularly among those banks with larger numbers and smaller sizes. And we’re also very aware that customers are increasingly moving to the digital transactions and online transactions. That said, from a relationship and an account opening aspect, really over the last couple of years, we haven’t seen very much change in in-branch activity for people coming in to open loans or open deposits. We certainly have seen a shift of transactional-based business from people handing pieces of paper over a counter to receive other pieces of paper. That’s shifting more towards online and that’s certainly something that we’re aware of. That said, we have 23 total branches, 12 of them have over $100 million of deposits, six of them have over $200 million of deposits. And we’re talking core deposit levels as opposed to brokerage or municipal. So, we do think that in the markets we serve with 23 branches and a 24th opening, there is room for a deliberate and careful pace of expansion, especially when some of our bigger competitors are cutting down sizes of smaller branches to economize on costs. So we think that it’s a blend of technology and human service that will help us expand at least in our footprint. Again, given our both our average branch size and the trajectory -- the growth trajectory of existing locations, we don’t view it is as imprudent to selectively expand the network in Rhode Island where our biggest competitors have and citizens have far more branches and far more share that’s available to take from that.

Ned, I don’t know if you have anything else to add to that.

No. I think you covered it well. I mean, we’ll be very deliberate as we always have been. This is not a huge part of our strategy. But we do think that our customer base likes a human connection and we are still five or six greater providence suburbs that we’re not in and where we are in the -- have physical presence, we compete very well against any of our competitors. And it’s a 65% market share still in Citizens and BofA, and we think we can we can chip away at that and it’s a $31 billion market. And so a small percentage market gain for us is meaningful.

Thank you.

Yeah. No problem. Thanks, Mark.

The next question will come from Laurie Hunsicker with Compass Point. Please go ahead.

Yeah. Hi. Thanks. Good morning.

Good morning, Laurie.

Good morning, Laurie.

If we could go back to PPP for a moment, so of your $200 million of PPP loans that remain, how much in fees are still associated with that, unamortized fees?

$3.9 million.

$3.9 million. Okay. And then, super helpful you gave us a 3-basis-point impact or $423,000 this quarter? How much was that? What was the corresponding impact in 3Q?

We didn’t have any in 3Q.

Nothing in 3Q. Okay. Great. And then can you just remind us in terms of the CDs, what are re-pricing this quarter and next quarter?

Yeah. We have about $750 million of not just CDs but FHLB borrowings that we think we can re-price down. In -- as we discussed on our earlier remarks, we did pay-down some higher expense FHLB. And we would consider doing that as well. So that that’s kind of our opportunity to bring some of our funding costs down in the first quarter and second quarter.

Okay. Great. And then what -- just what would be the net impact? What are you expecting in terms of the cost save there?

Well, I don’t have that broken out specifically, Laurie. But we think our core margin will trend up to the $240 range as a result of implementing those.

Right. Okay.

Interest…

Yeah. I heard you say that earlier. Okay. That’s super helpful. On the expense…

Yeah.

… side, wondered if you could just go back to what you referenced from the standpoint that the gain on the sale of the limited partnership had an offsetting…

Yeah.

… expense, maybe I’ve heard that right, and if so, how much was that expense?

Yeah. So I was really referring to the breakage penalty in the FHLB. So we had to think about it…

Oh! Got it.

… as a one-time income of 14 and a one-time expense of 14 [ph].

Offset. Okay. I thought it was actually related to. Okay. Perfect. No. That makes sense. Okay. And then just last question, I know you announced the 5% buyback, but it looks like none was done in this current quarter. How are you thinking about that? And first of all, is that right? And then second of all, how are you thinking about that? Thanks.

Yeah. So that is correct. We have not done any and we think that that the ability to buy back shares is an important option for us to have. Our stock price has actually recovered a bit since we announced the share buyback program. So I would say, at this price level, we really don’t have any intentions at the moment to be repurchasing shares.

Great. Thanks. I will leave it there.

Yeah. Laurie, this is Mark. Just -- okay.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ned Handy for any closing remarks. Please go ahead.

Well, thank you all very much. We do appreciate your time and your interest, and we wish you a more normalized 2021. We hope for all the best and we will talk again soon. So thank you and have a great day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.