Washington Trust Bancorp, Inc. (NASDAQ:WASH) Q2 2022 Earnings Conference Call July 26, 2022 8:30 AM ET
Company Participants
Elizabeth B. Eckel – Senior Vice President, Chief Marketing & Corporate Communications Officer
Ned Handy – Chairman & Chief Executive Officer
Ron Ohsberg – Senior Executive Vice President, Chief Financial Officer & Treasurer
Mark Gim – President & Chief Operating Officer
Conference Call Participants
Mark Fitzgibbon – Piper Sandler
Damon DelMonte – KBW
Laurie Hunsicker – Compass Point
Operator
Good morning and welcome to Washington Trust Bancorp Inc.’s Conference Call. My name is Melissa. I’ll be your operator today. [Operator Instructions] Today’s call is being recorded.
And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel?
Elizabeth B. Eckel
Thank you, Melissa. Good morning, everyone, and welcome to Washington Trust Bancorp Inc.’s 2022 second quarter conference call. Joining us for today’s call are members of Washington Trust’s 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 Ray, 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 the call. Our complete Safe Harbor statement is contained in our earnings press release, which was issued yesterday afternoon, as well as other documents that are filed with the SEC. 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 now pleased to introduce today’s host, Washington Trust’s Chairman and CEO, Ned Handy.
Ned Handy
Thank you, Beth, and good morning and thank you for joining our second quarter call. We appreciate your time and continued interest in Washington Trust. I’ll provide some commentary on the second quarter and our view of the current environment and then Ron Ohsberg will review our financial performance. After our remarks, Mark Gim and Bill Ray will join us and we will all answer any questions you may have about the quarter.
I’m pleased to report that Washington Trust posted solid second quarter results with a net income of $20 million or $1.14 per diluted share, compared with $16.5 million or $0.94 per diluted share in the prior quarter.
In the quarter, our results benefited from interest rate movements, offsetting fee pressure in our wealth and residential mortgage businesses. While our wealth management net new business and our mortgage portfolio volume were both strong in the quarter, market conditions negatively impacted fee revenues.
The fundamentals of our customer-facing businesses are very strong. Continued expense management assisted in the results. The diversity of our revenue streams, combined with credit discipline and strategic balance sheet positioning enabled us to deliver a strong quarter.
Total loans were up 5% in the quarter, primarily due to strong growth in our residential portfolio. Both residential and commercial loan pipelines remained strong. And despite the continued payoff pressure that muted commercial growth in the first half of 2022, we remain confident that we will see mid-single-digit commercial loan growth for the full year.
New loan formation has been strong all year and the commercial pipeline remains near its historic high point. With expectations that prepayments will moderate with rising rates, we expect to see strong net commercial growth in the second half.
Overall, credit has remained very strong. Our commercial loan book has no nonaccruals and virtually zero delinquency at quarter end. Our consumer lending is almost entirely secured by residential properties in nearby markets, with excellent asset quality metrics built on sound underwriting standards and practices. Ron will provide some detail on our credit statistics and provide some comments on our provisioning and reserve positioning.
While the pandemic is clearly not over, the financial programs designed to help our clients through the most difficult times, like loan deferments and the PPP program, have successfully culminated.
We have no loans remaining in deferral status and only five PPP loans remaining in the forgiveness process of the nearly 3,000 that originated between the two phases. We are proud of our attentive approach to assisting both new and existing customers and feel that our franchise has been strengthened by our comprehensive response.
Over the past few years, we have invested in incremental improvements in all of our business units, both in product and process, with an eye toward continuous enhancement of our customers’ and employees’ experience.
We’ve made appropriate investments in building our capacity to enable a highly productive hybrid work environment, allowing our teams to meet their customers when, how and where the customers prefer.
Our technology investments continue to provide us a firm foundation for growth, while continually improving our system resiliency. We are intent on delivering the best balance between digital access and personal service to accommodate our evolving customer requirements.
We continue our efforts to be convenient to our customers and we’ll open a branch in Cumberland, Rhode Island in early August. And we opened a commercial lending office in New Haven, Connecticut yesterday. The New Haven office is adjacent to our existing wealth management office, enabling our strategy of relationship building between those two business units to thrive. We will also house some residential mortgage loan officers in that office.
Our teams have positioned all of our businesses to weather any current economic challenges and to excel as and when the business climate improves. And there are challenges in the current economy. The discouraging impact inflationary pressures on segments of the population that can least absorb it and the general pressure on consumer spending, have negatively impacted GDP growth expectations. The Fed will likely stay aggressive in combating inflation throughout 2022.
While there is speculation that we are already in a recession, there are also signs that a soft landing is still possible. Pent-up, consumer demand, strong labor markets and relatively sound corporate balance sheets, combined with the remaining ARPA funds available in most municipalities, might provide cushioning. Unemployment rates in our markets are matching all-time lows. For example, employment levels are significantly favorable to pre-pandemic levels. As supply chain issues and general supply scarcity resolved, the current levels of demand may provide positive momentum, as recovery begins.
With that, I’ll turn the call over to Ron for comments on the second quarter financial results. Ron?
Ron Ohsberg
Thank you, Ned. Good morning everyone and thank you for joining us on our call today. As Ned mentioned, net income was $20 million or $1.14 per diluted share for the second quarter, and this compared to $16.5 million or $0.94 for the first quarter. Net interest income amounted to $37.5 million, up by $2.4 million or 7% from the preceding quarter. The net interest margin was $2.71, up by 14 basis points. Net interest income benefited from PPP fees, which totaled $323,000 and had a two-basis point benefit to the margin. This compared to $819,000 and six basis points in the first quarter.
We do not expect PPP fees to impact the margin in future periods, as an immaterial amount of PPP loans remains on June 30. Prepayment fee income was modest at $62,000 in the second quarter and $76,000 in the preceding quarter, having a zero-basis point impact to the margin. Excluding these — both of these items, the margin increased by 17 basis points from $2.51 to $2.68. Average earning assets increased by $25 million. The yield on earning assets was 3.03% for the second quarter, up by 20 basis points.
On the funding side, average in-market deposits rose by $151 million, while wholesale funding sources decreased by $82 million. The rate on interest-bearing liabilities increased by nine basis points to 0.42%. Noninterest income comprised 30% of total revenues in the second quarter and amounted to $15.9 million, down by $1.3 million or 8%. Wealth management revenues were $10.1 million, down by $465,000 or 4%. This included a decrease in asset-based revenues, which were down by $570,000 or 6% from the preceding quarter. The decrease was partially offset by an increase in transaction-based revenues of $105,000, largely due to higher tax servicing fee income. Tax fees are seasonal and concentrated in the first half of the year.
The decrease in asset-based revenues correlated with a decrease in the average balance of assets under administration or AUA, which was down by $490 million or 7%. June 30 end of period, AUA balances totaled $6.7 billion, down by $843 million or 11% from March 31, largely due to market depreciation. Net new business was positive and was offset by routine client withdrawals.
Our mortgage banking revenues totaled $2.1 million in the second quarter, down by $1.4 million or 41% from the first quarter. Mortgage loans sold, totaled $80 million in the second quarter, down by $50 million or 39%. Note however, that overall loan origination activity was strong and amounted to $350 million in the second quarter, up by $79 million or 29%. A higher percentage of loans are being placed into the portfolio, leading to lower sales gains.
Market competition has also been compressing the sales yield as expected. Our mortgage origination pipeline at June 30 was $234 million, up by $24 million or 12% from $210 million at the end of March. Loan related derivative income was $669,000, up by $368,000 from the preceding quarter reflecting increased customer swap transactions.
Regarding noninterest expenses these were down by $142,000 or 0.5% from the first quarter. Salaries and employee benefits expenses decreased by $621,000 or 3% in the second quarter, reflecting lower payroll taxes and a reduction in share-based compensation expenses. In addition, we benefited from higher deferred labor costs, which is a contra expense, and which was partially offset by higher mortgage commissions.
Advertising and promotion expense was up $373,000 from the preceding quarter largely due to timing. Income tax expense was $5.3 million for the second quarter. The effective tax rate was 21.1%. We expect our full-year 2022 effective tax rate to be approximately 21.5%.
Now turning to the balance sheet. Total loans were up by $196 million or 5% from March 31st and by $180 million or 4% from a year ago. Excluding PPP, loans increased by $207 million or 5% from Q1 and were up by $325 million or 8% from Q2 2021. In the second quarter, total commercial loans decreased by $14 million or 1%, which included a reduction in PPP loans of $11 million.
Within this category CRE loans decreased by $19 million. Payments of $121 million were partially offset by a new loan volume of $102 million. C&I loans excluding PPP increased by $16 million. Residential loans increased by $188 million or 11% from March 31st. Originations for retention and portfolio were $268 million, up $99 million or 60%. And consumer loans were up by $21 million or 8% reflecting growth in home equity.
Investment securities were up by $12 million or 1% from March 31st. Purchases of debt securities were partially offset by a temporary decline in fair value as well as routine pay downs and mortgage backed securities. End market deposits were down by $178 million or 4%. The decrease was concentrated in rate-sensitive institutional money market accounts and included seasonal withdrawals by municipalities in the higher end. End market deposits were up by $555 million or 14% from a year ago.
Wholesale brokered deposits were up by $57 million in the second quarter and FHLB borrowings were up by $273 million. Total shareholders’ equity amounted to $477 million on June 30, down by $37 million from the end of Q1. This was largely due to a temporary decrease in the fair value of available-for-sale securities.
In the second quarter we repurchased 175,000 shares at an average price of $48.93 and a total cost of $8.6 million under our stock repurchase program, including third quarter repurchases we are at a total of 194,000 shares at an average price of $48.82 for a total of $9.5 million. We do not expect to go much higher than that. Washington Trust remains well capitalized. And our second quarter dividend declaration of $0.54 per share was paid on July 8th.
Regarding asset quality, non-accruing loans were 0.28% of total loans compared to 0.29% on March 31st. Past due loans were 0.19% of total loans compared to 0.16%. At June 30, virtually all of these loans were residential and home equity.
The allowance for credit losses on loans totaled $36.3 million or 81 basis points of total loans and provided NPL coverage of 293% as compared to $39.2 million or 92 basis points on March 31st. The second quarter provision for credit losses was a negative $3 million, compared to a $100,000 positive provision in the preceding quarter. This reflects continued low loss rates, solid asset and credit quality metrics as well as our current estimate of forecasted economic conditions. We had net recoveries of $10,000 in Q2 compared to net recoveries of $148,000 in Q1.
This concludes my prepared remarks. And at this time, I will turn the call back to Ned.
Ned Handy
Thank you, Ron and we will now gladly take questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll be taking our first question today from Mark Fitzgibbon of Piper Sandler. Mark, over to you.
Mark Fitzgibbon
Hi. Good morning and thanks for taking my question.
Ned Handy
Good morning, Mark.
Mark Fitzgibbon
Ron, I apologize I missed part of your comments on the capital steps. So I’ll just ask you. I know that ALCL was a big factor and it’s, obviously, temporary. But with the TCE ratio below 7% now, I guess, I’m curious how will you be comfortable taking that?
Ron Ohsberg
Yes. So thanks, Mark. So we view unrealized losses on investment securities that results from higher interest rates as it is — having a transitory effect on GAAP capital. That’s why regulatory capital ratios allow for an AOCI opt out for these unrealized losses. And we view capital adequacy through our regulatory capital wins because we have the ability and intent to hold those securities until maturity and thus avoid losses. So our position on that is — we’re not overly concerned about this temporary impact on GAAP capital.
Mark Fitzgibbon
I guess, I’m curious then why not — categorize them as held to maturity if you intend to hold them to maturity.
Ron Ohsberg
Yes. I know some banks are doing that and we feel like that’s an accounting exercise and it doesn’t really affect how we run the business. So we’ve elected to not do that.
Mark Fitzgibbon
Okay. So this isn’t going to really affect your expectations for balance sheet growth at all?
Ron Ohsberg
No. No we believe our capital is more than adequate to support growth.
Mark Fitzgibbon
Okay. And then secondly, I saw that you guys bought back some stock during the quarter. And, I guess, I’m just wondering if you could, kind of, help us understand the math how it makes sense buying back shares at the north of two times tangible book value. How do you kind of look at the buyback?
Ron Ohsberg
Sure. Yes. So Mark we’re very focused on shareholder return. And, I guess, I have a couple of points to make about that. First our regulatory capital has been building steadily throughout the COVID period. Total risk-based capital grew from 13.51% at December 31, 2020 to 14.15% in March of 2022. And that’s just in excess of what we believe we need to run and grow the business.
So the next thing that we do is we evaluate our options to deploy excess capital. Our preference is organic growth and we will continue to pursue that in accordance with our disciplined approach. The more the better assuming our discipline, but earnings have been growing faster than the balance sheet and thus generating additional capital which is really not a bad problem to have.
The next thing we will look at is prudent dividend payouts. Our dividend payout ratio is typically in the 50% range. Backing out this quarter’s reserve release it was about 53%. That’s a substantial payout. It’s near the upper end of what we believe to be prudent and also provides a dividend yield of 4.3%. So finally, we consider share repurchases with which we just returned $9.5 million to our investors, which is an amount in excess of our second quarter dividend.
So channeling that level of return through regular dividend increases is really not feasible given our existing payout ratio. And we consider a special dividend to be inferior to repurchases because the special dividend lacks tax optionality to our investors as well as the lack of an EPS benefit.
The last point I would make about these repurchases is our average purchase price was $48.82, which was at a 20% discount to where we were trading in January. So we feel comfortable that this is an appropriate and prudent technique to return capital to shareholders.
Mark Fitzgibbon
Okay. And then I wondered if you can help us think about the provision. I guess, I’m curious are we getting close to the end of the line with reserve releases given that loan growth has started to pick up here and your reserve ratios are starting to come down to probably a more peer-like level?
Ron Ohsberg
Yes. Yes. I mean, look, we maintain a level of reserves commensurate with our best estimate of credit risk in accordance with GAAP. The provision going forward will be dependent on loan growth, economic outlook and historical loss rates. We expect mid-single-digit loan growth and credit to remain stable at this time, but we’re obviously monitoring economic data in geopolitical events as well as inflation in the Fed’s policy response and how these might affect credit quality.
So yes. I mean we’re – every quarter we assess where we think we are from a risk perspective and that led to the reversal this quarter. Mark I guess, I would just follow that up by saying that since the onset of COVID, we’ve added about $12.4 million of reserves. Cumulatively, we’ve now reversed $7.8 million of that. So we’re still higher by $4.6 million versus our pre-pandemic level. So no crystal ball as to where things are headed but we think that this is the right level of reserves for us right now.
Mark Fitzgibbon
I guess, where I’m headed with it Ron is I know you – everybody’s kind of boxed in a little bit with CECL, but you grew loans a pretty good chunk here. And it’s just hard to imagine that you view the economic environment as better today than it was three months ago. And so I’m just wondering what kind of flexibility you have within the accounting rules to be able to resume provisioning?
Ron Ohsberg
Yes. So Mark, a very healthy percentage of our allowance is qualitative in nature. And our loss – our historical loss rates are extremely low. You can tell by our experience with year-to-date net recoveries. We look at – we assess the risk that we have in our portfolio and we establish a corresponding reserve.
Mark Fitzgibbon
Okay. Great. And then just last question. Your thoughts on the margin. I heard your comments about PPP and I know you had about $1 million of prepayment penalty income in the quarter but the core margin going forward? Any thoughts would be helpful. Thank you.
Ron Ohsberg
Sure. Yes. So we see some continued margin expansion. I think that there is a lot of uncertainty as to the direction that the Fed is actually going to go, especially considering they’re talking about rate cuts in the first quarter of next year. So I’ll give you some guidance just for the third quarter. We think that the margin will expand to $2.75 to $2.80. And just one more follow-up on the credit piece Mark. Yes, we did have some pretty decent loan growth but it was residential. So that’s a relatively lower credit risk asset versus commercial.
Mark Fitzgibbon
Thank you.
Ron Ohsberg
Okay. Thank you.
Operator
Thank you, Mark. Our next question today comes from Damon DelMonte of KBW. Damon, over to you.
Damon DelMonte
Hey, good morning, guys. I hope everybody is doing well today. Just a follow-up on the margin…
Ron Ohsberg
Good morning, Damon.
Damon DelMonte
Good morning. Just a follow-up on the margin question that Mark had just asked. So Ron are you saying $2.75 to $2.80 off of the reported $2.71 [ph] this quarter, or is it off of the core level, when you exclude the repayment income in PPP?
Ron Ohsberg
Yes, I would call that core. We don’t think we’re going to get – we’re not going to get any more help on the margin from PPP, so yes.
Damon DelMonte
Got it. Okay. And then just to kind of continue with the discussion on the reserve level. I think the initial commentary was that pipelines remain strong and you expect the pace of pay downs to slow here in the back half of the year which gives you confidence on that mid-single-digit growth for the year. How do we think about the provision expense if you start to add some higher-risk loans in the commercial side versus the lower-risk residential mortgages that you added this quarter?
Ron Ohsberg
Sure. Yes. Increase in the loan portfolio will increase the provision. And commercial has been – it’s been a headwind for us. Our origination volume has been quite good and pay-offs continue to be high. The pipeline is very – very large. Ned you can comment on this but it’s – we expect some of that to show up on the balance sheet and we’ll increase provisions accordingly.
Ned Handy
Yeah, I would just add all things Dam. Damon, I was just going to comment on the pipeline just to fill in the blanks. I mean, the commercial pipeline is at an all-time high. It’s close to $400 million which is kind of twice normal size. So we have got a lot of activity going on.
Payoffs have continued to be an issue in the first half. But we think that should regulate a little bit with rising rates. And so we still expect to see decent growth. And yeah, all other things being equal I think the reserves will reflect growth rates.
Damon DelMonte
Got it, okay. And if we wanted to try to like estimate a level going forward would you say like a 1% reserve on net growth would be reasonable?
Ron Ohsberg
Yeah. If you want to model that that’s fine, I mean that might be a little high but…
Damon DelMonte
Okay, all right. Fair enough. And then, I believe, you guys said you just opened an office in New Haven Connecticut a loan production office. Can you just talk a little bit about the staffing of that? Do you have people from Rhode Island that are now working out of New Haven, or did you hire some local lenders in the greater Haven area? What’s the staffing situation with that?
Ron Ohsberg
Yeah. It’s a combination of both. So it’s 1,400 feet. It’s not too, giant and it’s adjacent to our Wealth Office in Downtown New Haven and we’ve got a couple of lenders that are on the ground there. We’ve got actually three people that are actually on the ground in Connecticut fully.
We still have some Westerly based lenders that do business in Connecticut, but we’re also interviewing and look to fill a few more seats. So, we expect there will be five or six commercial lenders.
We’ll have some resi lenders in that office from time-to-time out of the Glastonbury office. So yeah, we think it’s putting our feet down in the marketplace and having some permanence there will help with growth.
Damon DelMonte
Okay, great. And then just one final question on the outlook for mortgage banking income, you are obviously down a decent amount this quarter, but you also portfolio a lot of loans. I understand the dynamics of what’s happening in the market.
But how is your pipeline looking especially with your exposure to the Greater Boston area and some of the more affluent areas in Connecticut? Do you think you’ve kind of bottomed at this like $2.1 million level, or do you think that there are still some headwinds ahead?
Ron Ohsberg
Mark, let me just start on that.
Mark Gim
Yeah. I’ll take part of that and then turn it back to you Ron.
Ron Ohsberg
Yeah.
Mark Gim
So as you saw during the second quarter our total portfolio origination volumes were very strong. The majority of it was destined for the portfolio was opposed to the pipeline. And part of that Damon is due to a shift in the mix, as adjustable-rate loans have become more attractive than fixed-rate loans.
There is less of a salable market for conforming and certainly most of the sale market for jumbo ARM loans. So shorter-duration high-quality loans have tended to be put in portfolio. I think we feel like we’re kind of approaching a floor level in terms of conventional re-financeable salable agency mortgage loans.
There’s always going to be a certain amount of that. It’s hard to predict any further ahead than Q3. But I think it feels safe to say we’re approaching a kind of trough point in terms of re-financeable loan volume and associated sales gains going into Q3.
We do think though that, unlike some lenders who may be focused exclusively on the originate to sell the ability to originate high-quality loans and what is still a very strong housing market in Massachusetts, Connecticut, Rhode Island with low-risk weights for portfolio is definitely a source of growth that we’re happy to see going. Ron, I don’t know if you have anything to add.
Ron Ohsberg
Yeah. I guess, I would just say Damon that industry-wide I think the NBA [ph] was expecting a 2% decrease in origination volume. Ours went up on a linked quarter basis ours was up 29%. We’re quite pleased with that level of activity.
And just given the pipeline is a little bigger at the end of June than it was in March we think some of that will carry over into Q3. So Q3 probably looks like it’s a little better than Q2 from a revenue standpoint.
We’ve seen a huge shift in the mix from originated to sales to originate to portfolio. But yeah, I think some of that will carry over into Q3. And I don’t think we can really see out further than that.
Damon DelMonte
Got it. Okay. Fair enough. That’s all that I had. Thank you very much.
Ron Ohsberg
Yes. Thanks again.
Ned Handy
Thanks Damon.
Operator
Thank you, Damon. Our next question today comes from Laurie Hunsicker of Compass Point. Laurie over to you.
Laurie Hunsicker
Great. Hi. Thanks. Good morning. I just wanted to go back to credit and certainly your credit is very pristine. You all give a lot of details and we appreciate that. But if you had a sort of a PEG ratio and where your reserves to loans would be, obviously, we saw linked quarter, you went from 92 basis points down to 81. Just looking at where you were in 2019, pre-pandemic you were sitting at 69 basis points. Can you just help us think about — and I realize there’s a lot of things that go into that, but can you help us think about where you would like to see that right now knowing everything that you know just how you think about that?
Ned Handy
Yes. So, I would say — and I don’t want this to sound flip. I would say we are right where we should be based on our interpretation of what we think our credit risk is. So, there isn’t any target ratio. It depends on the size of the portfolio and the dynamics within it. And our assessment is what it is right now at 81, 82 basis points.
Laurie Hunsicker
Okay. Okay. Could you give me a quick refresh — I guess, Ron this is to you or Bill, on the office book and your leverage lending book, can you just remind us where you are in those two categories and what you’re seeing and how you’re thinking about that? Thanks.
Bill Wray
Yes. We have about $227 million of office. It’s all pass rated, so none of it is even special mention or reclassified. It’s all performing, no delinquencies. A refreshed weighted average loan-to-value on that is 68%. So, that reflects any sort of pandemic effects on the office.
The weighted average debt service coverage is about $150. And the nice thing about our office portfolio is it’s mostly kind of decentralized low-rise suburban oriented. We don’t do big floor plate high-rise center city stuff, which is where some of the big issues might be with lease rollovers.
That said of the $227 million, we think of about 20% of it is on the higher risk side because it might be a single tenant. It might have some upcoming rollover risk that might have a vacancy or repositioning that’s going on. Again all performing, nothing delinquent, all pass rated. But so our thinking is about $44 million of that is the kind of stuff we keep an eye on.
And so we’ll — what we’ll do in a case like that is we’ll do a targeted credit review. We look at those loans and make sure they’re getting the kind of scrutiny that they deserve. So, that’s an overview of our office portfolio. Any other — anything else you want to know about that Laurie?
Laurie Hunsicker
No, just do you have a refresh on your leveraged lending book?
Ned Handy
Yes. We don’t really do leverage lending. So, in our entire commercial portfolio, we have one loan that would be classified as highly leveraged, meaning leverage of 3x or greater. And that’s $1.65 million and it’s a part of a much larger much more well-secured relationship related to a recent M&A deal. So, that’s 0.2% of our risk-based capital because we do measure our concentration there. So, again it’s almost non-existent, which is one of the reasons we feel very good about our credit status.
Laurie Hunsicker
That’s helpful. Okay, great. Last question Ron. Can you help us think about expense guide? How we should be looking at it for next year? Thanks.
Ron Ohsberg
Well, yes. So, I’m not ready to talk about 2023. I would say when we think about expenses we have a lot of variable costs that kind of run through our expense base tied to fees, particularly on the mortgage side. So, excluding that kind of that variable cost component year-over-year 2022 versus 2021 and excluding the prepayment expenses that we incurred last year, looking at a 5% to 6% year-over-year increase.
When you layer on those variable-type costs such as mortgage commissions, deferred labor, overtime and incentives, and those kinds of things, kind of brings year-over-year to breakeven.
Laurie Hunsicker
Breakeven — sorry, breakeven in terms of?
Ron Ohsberg
Yes. So, our total expense base, including variables, which is declining, will be breakeven 2022 versus 2021.
Laurie Hunsicker
Got it. Got it. It’s great.
Ron Ohsberg
It’s flat.
Laurie Hunsicker
Okay. Okay, great. Thanks for taking my question.
Ron Ohsberg
Sure.
Operator
Thank you, Laurie. We’ll take our last question today, which is a follow-up from Mark Fitzgibbon of Piper Sandler. Mark, back to you.
Mark Fitzgibbon
Hey, guys. Thanks. Just one additional question maybe for Mark. Given the downdraft in the markets we had sort of in the first half of this year, I was curious what customer behavior looks like in the wealth management business. Are those customers sort of reshuffling assets staying put, or are they adding risk taking risk off? Thank you.
Mark Gim
It’s a good question Mark. We haven’t seen very much customer concern about being invested. On a core basis, as Ron mentioned in his opening comments, net new customer flows were strong, and particularly in relationships where we have more than one component of business with the customer, for example, commercial financing in the past leading to wealth management with issues like say business succession, pipeline flows have been good and we feel confident about that.
Behaviorally, I think customers are not really pushing a panic button. We haven’t seen as much money in motion due to concerns about returns of the way money is being managed compared to say 2008 or 2010. I think we’re, obviously, in a correction phase for financial markets. A lot of that is around the Fed and the potential of a future recession the Fed, overshoots or doesn’t manage inflation correctly.
But it feels like while customers are taking a little bit of risk appetite off the table, there’s not been a real wholesale change. And part of that is due to how we advise people to manage money, which is the way we manage the company for the long run. So, I guess I would say, caution around the path of equity markets over the next 18 to 24 months, but we’re not seeing people head for total safety and bonds or cash.
Mark Fitzgibbon
Thank you.
Mark Gim
Does that answer the question?
Mark Fitzgibbon
It does. Thank you.
Mark Gim
Operator
Thank you, Mark. That was our final question today. I would like to turn the call back to Ned Handy. Ned, back to you.
Ned Handy
Thanks very much, and thank you all for joining us. We do appreciate you taking the time with us this morning to understand our positioning. We had a strong quarter, and we think our balance sheet and capital position and credit quality remain strong, and that our diversified business model will continue to be supportive.
Before closing, I wanted to once again thank all our employees for their consistent care and concern for each other and for our customer base. And we’ve got a great team and they’re doing a wonderful job in a difficult time. So, thank you all. Have a great day.
Operator
This concludes the call today. We thank you all for joining. You may now disconnect.
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