Washington Trust Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning. And welcome to Washington Trust Bancorp Incorporated Conference Call. My name is Chuck. I will be your operator today. 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.

[Elizabeth Eckel:]

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.

[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.

[Ron Ohsberg:]

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.

[Ned Handy:]

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:]

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

[Mark Fitzgibbon:]

Hey, guys. Good morning.

[Ned Handy:]

Good morning, Mark.

[Mark Gim:]

Hi.

[Ron Ohsberg:]

Good morning, Mark.

[Mark Fitzgibbon:]

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?

[Ron Ohsberg:]

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.

[Ned Handy:]

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.

[Mark Fitzgibbon:]

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

[Bill Wray:]

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.

[Mark Fitzgibbon:]

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?

[Ron Ohsberg:]

Yeah. I can take a shot at that.

[Ned Handy:]

Mark, go ahead.

[Ron Ohsberg:]

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

[Mark Gim:]

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?

[Ron Ohsberg:]

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.

[Mark Fitzgibbon:]

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?

[Ron Ohsberg:]

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.

[Mark Fitzgibbon:]

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?

[Ned Handy:]

Mark do you want to…

[Mark Gim:]

This is Mark Gim. Let me…

[Ned Handy:]

Yeah. Go ahead.

[Mark Gim:]

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.

[Mark Gim:]

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

[Ned Handy:]

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.

[Mark Fitzgibbon:]

Thank you.

[Ned Handy:]

Yeah. No problem. Thanks, Mark.

[Operator:]

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

[Laurie Hunsicker:]

Yeah. Hi. Thanks. Good morning.

[Ned Handy:]

Good morning, Laurie.

[Ron Ohsberg:]

Good morning, Laurie.

[Laurie Hunsicker:]

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?

[Ron Ohsberg:]

$3.9 million.

[Laurie Hunsicker:]

$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?

[Ron Ohsberg:]

We didn’t have any in 3Q.

[Laurie Hunsicker:]

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?

[Ron Ohsberg:]

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.

[Laurie Hunsicker:]

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

[Ron Ohsberg:]

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.

[Laurie Hunsicker:]

Right. Okay.

[Ron Ohsberg:]

Interest…

[Laurie Hunsicker:]

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

[Ron Ohsberg:]

Yeah.

[Laurie Hunsicker:]

… 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…

[Ron Ohsberg:]

Yeah.

[Laurie Hunsicker:]

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

[Ron Ohsberg:]

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

[Laurie Hunsicker:]

Oh! Got it.

[Ron Ohsberg:]

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

[Laurie Hunsicker:]

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.

[Ned Handy:]

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.

[Laurie Hunsicker:]

Great. Thanks. I will leave it there.

[Mark Gim:]

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

[Operator:]

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.

[Ned Handy:]

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.

[Operator:]

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