Washington Trust Bancorp Q3 2023 Earnings Call Transcript

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October 24, 2023

There are 8 speakers on the call.

Operator

Good morning and welcome to the Washington Trust Bancorp, Inc. Conference Call. My name is Emily and I will be your operator today. Today's call is being recorded. And now I will turn the call over to Elizabeth B.

Operator

Eckel, Executive Vice President, Chief Marketing and Corporate Communications. Ms. Echols?

Speaker 1

Thank you, Emily. Good morning, and welcome to Washington Trust Bancorp, Inc. 3rd quarter 2023 conference call. Joining us this morning are members of Washington Trust's executive team Ned Handy, Chairman and Chief Executive Officer Barry Nunes, President and Chief Operating Officer Ron Osberg, 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 today's call.

Speaker 1

Our complete Safe Harbor statement is contained in our earnings release, which was issued yesterday, As well as other documents that are filed with the SEC. All of these materials and other public filings are available on our Investor Relations website at ir.wash trust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust Chairman and CEO, Ned Handy.

Speaker 2

Thank you, Beth. Good morning and thank you for joining our Q3 conference call. We appreciate your time and interest in Washington Trust. During my remarks this morning, I'll provide comments about our Q3 results in context with the market conditions we're seeing as well as an update on our current focus for value creation. Then Ron Osberg will offer more detail regarding our Q3 performance.

Speaker 2

And after our prepared remarks, Mary Nunes and Bill Ray will join us for the Q and A session. In the Q3, our team did a solid job of managing through the current challenging market dynamics, while executing our long term strategy, Which is to build a sustainably relevant consistently profitable and relationship driven regional financial services organization. We remain laser focused on all approaches to achieving end market deposit growth, including technology investment, product development, branch expansion and sales management. We grew end market deposits in the 3rd quarter in a very competitive landscape and through our continued efforts and focus should drive additional growth in future periods. During the suppressed earnings cycle, we are committed to building capital.

Speaker 2

In the short run, this means shifting our lending activity to Primarily supporting existing customers with high quality credit that contributes to our capital. As such, we expect loan growth to slow measuredly. We remain entirely attentive to call quality credit both new and existing. Our underwriting and portfolio management standards although always prudent Have tightened to reflect the uncertainty of the markets we serve. We will provide more detail in the Q and A session.

Speaker 2

We continue to operate in a challenging economic environment Financial markets in flux and geopolitical instability increasing. While these macro level headwinds have affected earnings and do not appear likely to abate for some time, We remain confident that Washington Trust is positioned to weather this storm and emerge even stronger. We have a proven business model with diverse revenue streams, disciplined credit culture And we continue to make progress executing our strategy to further strengthen our market opportunities and enhance the value that we deliver to our people, our customers, Our communities and our shareholders. Moving on to the quarter. Ron will soon take you through a detailed review of our financial performance, but here are a few High level points from the quarter.

Speaker 2

First, our 3rd quarter results, while they were not up to our historical standards, they were in line with both the prior quarter and expectations. We posted 3rd quarter net income of $11,200,000 or $0.65 per diluted share, about flat with $11,300,000 or $0.06 per diluted share in the 2nd quarter. Our margin remains under pressure from the competitive interest rate environment. On a positive note, our Wealth Management division delivered steady revenues and we continue to tightly manage expenses. Turning to deposit growth, which is core to our strategy.

Speaker 2

We made good progress in the Q3. Our deposit franchise is strong, Intact and growing albeit more expensive with understandable product shift in the current rate environment. Our branching strategy continues to be successful with average size at $209,000,000 and deposits at our 3 newest branches stand at $70,000,000 after 2 years, $28,000,000 after just 1 year $11,000,000 after only 5 months. As mentioned on previous calls, we plan to open a new branch The Olneyville section of Providence in early 2024 and one in Smithfield, Rhode Island also in the Q1. Finally, our credit remained strong during the quarter and we consider managing credit risk and overall balance sheet strength through this challenging point in the cycle and imperative For positioning Washington Trust for long term performance.

Speaker 2

Before I turn the call over to Ron, I'd like to briefly mention some important progress we made in Executing several key strategic priorities during the quarter. These achievements advance our mission to deliver what today's banking consumers want, need and value Digital offerings, high touch service and competitive products and pricing. During the quarter, we made advancements in expanding our digital presence. We understand technology is dominating every aspect of our lives and banking is no different. Consumers are demanding convenient digital offerings and Washington Trust is focused on being there With the right offerings to meet that demand, whether it involves enhancing online deposit account opening or providing seamless continuous Expedited services across delivery channels.

Speaker 2

Throughout our history, Washington Trust has joined a strong brand reputation in our core markets. Recently, we launched a new brand positioning statement, What we value is you, supported by a multimedia advertising Campaign designed to reach and enhance our presence both digitally and throughout our expanded market area. What we value as you It's a powerful phrase that embodies the spirit and purpose of Washington Trust and helps illuminate the importance we place on our employees, customers And communities as drivers of shareholder value. Our new campaign promotes Washington Trust's comprehensive financial solutions including checking and savings accounts, Digital Banking Services, Home Lending and Business Banking and it highlights our current deposit special offers. These are certainly unusual times, but we believe we have the right strategy and the right team in place to weather the current macro dynamics, We're capitalizing on market trends and the strengths of our bank.

Speaker 2

I'll now turn the call over to Ron for an in-depth review of our financial performance. Ron?

Speaker 3

Thank you, Ned. Good morning everyone and thank you for joining our call. As Ned mentioned, net income was $11,200,000 or $0.65 per diluted share. Net interest income was $33,800,000 up by $251,000 or 1% from the preceding quarter. The margin was 197, down by 6 basis points.

Speaker 3

Average earning assets increased by 167,000,000 And the yield on earning assets was 4.69%, up by 16 basis points. On the funding side, average end market Interest bearing deposits increased by $77,000,000 and average wholesale funding rose by $83,000,000 The rate on interest bearing liabilities increased by 24 basis Points to $3.26 Prepayment fee income was $71,000 in the 3rd quarter $50,000 in the 2nd quarter. Net interest excuse me, non interest income comprised 31% of total revenues and amounted to $15,200,000 Up by $901,000 or 6 percent from Q2. Wealth Management revenues were $8,900,000 down by $100,000 or 1%. This included transaction based revenues, which were down $221,000 primarily in seasonal tax servicing fee income, which is concentrated in the first half of the year.

Speaker 3

Asset based revenues were up by $121,000 or 1% with a corresponding increase in average AUA balances, Which were up by $140,000,000 or 2 percent. And a period AUA totaled $6,100,000 down by $219,000,000 Or 3% from June 30, reflecting market depreciation of $154,000,000 and net client asset outflows of 65,000,000 Mortgage banking revenues totaled $2,100,000 up by $355,000 or 20%. Mortgage loans sold totaled $89,000,000 in the 3rd quarter, up by $24,000,000 Total originations were $240,000,000 up by 13,000,000 Our mortgage pipeline at September 30 was $98,000,000 down by $67,000,000 or 41 percent from the end of June. Loan related derivative income totaled $1,100,000 up by 835,000 Regarding non interest expenses, these were up by $1,400,000 or 4%. Salaries expense increased by $1,000,000 or 5%.

Speaker 3

In the Q2, we reduced performance based compensation accruals by $1,400,000 Advertising and promotion expense also increased by 2,000 primarily due to timing. Now turning to the balance sheet. Total loans were up by 230,000,000 4% from June 30 and by $762,000,000 or 16% from a year ago. In the 3rd quarter, total loans increased by 123 1,000,000 or 5 percent essentially all in commercial real estate. Residential loans increased by $101,000,000 or 4%.

Speaker 3

End market deposits were up by $35,000,000 or 1 percent from June 30 and up by $121,000,000 or 3% from a year ago. Wholesale broker deposits were up $67,000,000 and FHLB borrowings were up by $80,000,000 from June 30. As far as deposit and liquidity metrics are concerned, Uninsured and uncollateralized deposits are estimated to be 18% of total deposits. Our average Deposit size is $37,000 and we have $1,800,000,000 in contingent liquidity. Total equity amounted to $431,000,000 September 30, down by $28,000,000 from the end of Q2.

Speaker 3

This included a decrease in the AOCI component of shareholders' equity, Largely due to a decline in the fair value of available for sale securities. It also declined due to $9,600,000 in quarterly dividend declarations and these decreases were partially offset by quarterly net income of 11,200,000 Regarding asset quality, non accruing loans were 0.60% and past due loans were 0.17% of total loans. The increase in non accruing loans was largely due to 2 commercial real estate loans that were placed on non accrual status in the 3rd quarter. Both of these loans are current. The allowance totaled $40,200,000 or 72 basis points on total loans and provided NPL coverage of 119%.

Speaker 3

The 3rd quarter provision for credit losses was a charge of $500,000 down by $200,000 from the provision recognized in the 2nd quarter. The provision for credit losses in the 3rd quarter was composed of a provision for credit losses on loans of $900,000 and a negative provision Credit losses on unfunded commitments of $400,000 We had net charge offs of $30,000 in the 3rd quarter compared to $37,000 in Q2, and year to date Net charge offs totaled $114,000 And at this point, I'll turn the call back to Ned.

Speaker 2

Thank you, Ron. We'll now take questions.

Operator

Thank Our first question today comes from the line of Mark Fitzgibbon with Piper Sandler. Mark, please go ahead. Your line is now open.

Speaker 4

Hey, guys. Good morning.

Speaker 2

Good morning, Mark.

Speaker 4

Good morning. Ron, I wondered if you could help us think about the margin and maybe how much I know that the rate of decline in the margin slowed, but Where do you think the margin ultimately bottoms out? How much lower is it likely to go?

Speaker 3

Yes. We expect it to trend lower In the Q4 towards the 1.9%, so kind of lower from here, Could call it 1.9 plus or minus?

Speaker 4

And you think that's a sort of a bottoming point for No, I

Speaker 3

don't know if it's a bottom. I mean, we continue to see migration of deposits From lower cost options to higher cost products. So I don't think we're unusual in that regard, but yes, we continue to see some funding pressure. Okay.

Speaker 4

Secondly, on sort of the cost side of things, given the margin pressure And your plans to open some new branches, it strikes me that it will be hard to reduce costs. Can you talk about what your plans are there? Maybe what a Trajectory might be whether you have a sort of a target in mind for your costs going forward?

Speaker 3

Yes. So we're not ready really to talk about 2024 yet. Ned mentioned Our marketing push, I would expect marketing to go up somewhat in the Q4 as we continue to roll that campaign out. The branches will start to the branches that we're opening in the Q1 will have an impact on Q4 took about $200,000 worth in the 4th quarter. We also are committed to increasing our charitable foundation contribution.

Speaker 3

So, haven't decided exactly how much that would be, but we're thinking it's at least $500,000 in the 4th quarter.

Speaker 4

Okay. But Mark, there's no

Speaker 2

Yes, Mark, I just wanted to add. I mean, we're looking at Everything we can on the expense side, attrition, whether we fill positions, we're looking at all of the real estate That we still own and whether there's strategies around that, that makes sense. So We are focused on everything we can be focused on to control expenses.

Speaker 3

Okay.

Speaker 4

But it feels like Ned there's not as much wiggle room on the cost side maybe As you'd like and the margin continues to be pressured, the wealth business continues to be pressured and mortgages is Rate dependent. So I guess the question I have is, if earnings fall below the dividend, would you cut the dividend?

Speaker 3

Yes. So Mark, the dividend is really capital related. So As long as we have sufficient capital to pay the dividend, we're committed to paying the dividend.

Speaker 4

Okay. And you talked a little bit about slowing the growth. Does that mean stopping the growth? I mean, because your capital ratios Or optically pretty light already and have come down a lot by some of the growth that you've put on. What should we assume for sort of balance sheet or loan growth going forward?

Speaker 2

Yes. Mark, this is Ned. We have construction loans in process, so stopping the Growth is probably not realistic, but low very low single digit growth I expect here forward we're But for taking care of existing customers and booking accretive Assets that help earnings, we are just kind of pencils down. So we had a big pipeline coming into this quarter That mostly existing customers that we took care of, but we recognize The levels of growth that we showed in the quarter, we will not be showing that going forward. We need to rebuild Earnings and capital and we need to make sure that the loan books help on that front.

Speaker 4

Ned, I guess I'm curious, I'm sort of scratching my head. You guys have grown your office loan portfolio this year by 12%. It just seems like an inopportune time to be doing that. Can you help us sort of understand better why you would want to do that given the capital ratios are tight and You're trying to conserve capital there?

Speaker 2

That's a fair question. We have no expectations of growing the office book. And I'm going to ask Bill to just talk about the details on the office project that we did in the quarter.

Speaker 5

Right. It was really one deal with an extremely strong sponsor and amazing deal metrics. So in the never say never category, this is one we felt was the right thing to do. You had a 16% going in debt yield, about a 50% LTV, 2.0 coverage, No tenant concentrations. So it was a deal that made sense.

Speaker 5

And so it's certainly we never want to be a bank that Just puts up the Heisman and says stay away, and it's just not the right way to treat our market. So this was one of those deals that was a real Sure, to pick. And we also got really good structure in terms of a guarantee on this. So, we certainly I haven't seen any office deals in a while. This was This got in the pipeline quite a while ago.

Speaker 2

And just to give you a sense, Mark, we came into the quarter with a pipeline that was north of $300,000,000 Our pipeline right now is below $100,000,000 on total

Speaker 4

real time. Okay. Last question Okay. Last question is, I wonder if you could give us a little more detail on those 2 non performing loans In the commercial real estate bucket, maybe some color around what's going on there because I think Ron mentioned that they're performing, But you put them on non accrual. What's going on with those?

Speaker 4

Right.

Speaker 5

This is Bill again. So one of them The senior housing facility LTV of 59%, been challenged on vacancy, been challenged also with staffing costs. A lot of these places have had a real Difficulty hiring people have had huge agency staffing, which has put a lot of pressure on their bottom line. It's had millions and millions of Sponsor support over the last couple of years, but was it matured, and so the non accrual was based on that. It is current.

Speaker 5

We're now discussing A forbearance possibly going to IO for a while until that's on recover. But again, a solid deal with a strong sponsor, but the non Crew was tripped by the maturity and then the fact that we had to get the forbearance in place. The other one is, a couple of Class B office properties. Occupancy around 60%, still getting sponsor support, still current. We believe that they'll Get through this okay, and we're talking right now about a potential modification to interest only for a while.

Speaker 5

But again, we felt it was prudent on those To go non accrual as well. So but as I said, both of them, as you noted, are fully performing and haven't missed a payment.

Speaker 4

Thank you.

Speaker 2

Thanks Mark.

Operator

Our next question comes from the line of Damon DelMonte with KBW. Please go ahead. Your line is now open.

Speaker 6

Hey, good morning guys. Thanks for taking my call. Just to kind of follow-up on the credit discussion there. If you look at the If you look at the loan loss reserve, it's around 72 basis points. Are there any other credits, I guess, first that Are starting to pop up on the screen as maybe being concerning.

Speaker 6

And then as you look at the kind of broader credit picture and economic picture, do you still feel comfortable with the reserve That's well below 1%.

Speaker 3

Yes, Damon, I'll start with that and hand it off to Bill. Yes, I mean we do a very, very detailed review of our portfolio each quarter. And yes, we know 72 is probably on the lower end of the peer group range, but given the quality of our portfolio and Our understanding of it, we're comfortable with that level. Bill?

Speaker 5

Sure. Again, very comfortable with the level. It's Under CECL, it's a forward looking estimate of lifetime losses in the portfolio. If you look at our losses, and we tend to be aggressive about recognizing losses when they occur, We're almost literally none for the year. Almost if we haven't lost the $40,000,000 we have on our reserve over the last 20 years.

Speaker 5

And so we're in no way complacent about credit, but our quantitative models are built to have conservative estimates in them. We've got Good qualitative reserves as well. So we are extremely comfortable where we are, and we have outperformed The industry on credit issues, it threw ups and downs for quite a while. If you look at our delinquencies, they're essentially Nonexistent on the commercial side, they are light on the others. We do stress tests consistently, both Top down and bottom up using a 3rd party, and the numbers tell us that we are in good shape on the reserve side.

Speaker 5

So yes, we do feel comfortable.

Speaker 6

Okay. That's helpful. Appreciate that color. And then I guess on the margin front to go back to that, I guess, Ron, you guys have added a lot of wholesale borrowings. And if loan growth is slowing, Is there an opportunity to maybe take cash flows from the securities portfolio and reduce some of the higher cost borrowings?

Speaker 6

Or have you even Considered maybe selling a portion of the securities to kind of accelerate the ability to repay borrowings and get some relief on the margin?

Speaker 3

Yes. We've been not reinvesting our investment security cash flows since the 1st quarter, so the securities portfolio is in runoff mode at the moment to do just exactly what you said to use that to pay down Those wholesale borrowings. And as Ned mentioned, we're slowing the loan growth down right now. So The growth in reliance on wholesale should be coming down.

Speaker 6

Okay. And If the Fed does end up cutting rates in the back half of twenty twenty four, how do you feel the balance sheet is positioned for something like that? You think your margin would I mean could that be like a built in inflection point for you if nothing else changes, if the margin just keeps drifting lower like at that point You're poised to benefit?

Speaker 3

Yes. So an abrupt change in rates is Felt immediately in our sulfur book, our prime and sulfur loans are about 1,800,000,000 So those tend to reprice immediately. We would have to ratchet down our deposit and wholesale borrowing costs. It doesn't happen Quite as quickly as it does with the loan book. Overall, I think that would be a net positive for us.

Speaker 3

It wouldn't happen Immediately though, it would bleed in over a period of quarters.

Speaker 6

Got it. Okay. And then just lastly on the expense front, yes, I appreciate the commentary before on that. So You kind of feel like this mid-thirty four ish range to $30,000,000 to $35,000,000 a quarter is a reasonable Level, given what you guys have going on with the branch openings and other strategic efforts?

Speaker 3

Like I said, the Q4 should look like the Q3 except for the few items that I mentioned. And then things will reset With merit raises and so forth back in the Q1 and branch costs will be higher in the Q1 than they were in the Q4, but Not really prepared to go into 2014 on this call. 24. What did I say, 2024. 2020.

Speaker 6

I know what you're saying.

Speaker 3

Thank you.

Speaker 5

So,

Speaker 3

yes, yes, we're just kind of looking at Q4 right now and just positioning ourselves for next year.

Speaker 6

Got it. Okay. That's all that I had. Thank you very much. Okay.

Speaker 6

Thanks, Damon.

Operator

Our next question comes from the line of Laurie Hunsicker with Seaport Research Partners. Laurie, please go ahead. Your line is now open.

Speaker 7

Great. Hi. Thanks. Good morning. Good morning, Laura.

Speaker 7

Just to follow-up on expenses, I know you guys used to do the charitable foundation contribution. Are you thinking about that more as that'll be an ongoing Q4 event? Or is that going to bleed through into all quarters? Would there just be a Ongoing quarterly contribution or how should we be thinking about modeling that?

Speaker 3

I think we're going to do with Kind of a single contribution to the foundation to keep it going for a while. And so we just need to determine how How big that contribution will be in the Q4? And I think it will be at least $500,000

Speaker 7

Okay. But I mean that will be an ongoing Q4 event as We look out similar to

Speaker 3

the historical quarter. As of today, that's a fair assumption, yes.

Speaker 7

Got it. Got it. Okay. And then just going back to deposits, you had a really nice jump in deposits. Can you talk about It's sort of 2 things.

Speaker 7

Number 1 is, how should we think about when you're going to start to clip broker deposits? And then also, how should we be thinking about Your growth in core deposits, I know that's a real emphasis, but specifically this is a challenging environment. How should we think about that as we look forward?

Speaker 3

Sorry, I missed the part about the brokered deposits.

Speaker 7

Well, your broker deposits linked quarter, you went from 6.01 to 6.68. I mean, where is that going? And then obviously, you had a jump in for deposits. So Help us think about that a little.

Speaker 3

Yes. We're going to manage brokered deposits to about 10% of total assets. So we're near the kind of topped out on brokerage. General deposit growth, I mean, I guess I should Point out in the quarter, we had 1 large institutional deposit withdrawal. It wasn't an expensive deposit, but that was $100,000,000 Of institutional money that had been placed with us, which we knew was somewhat temporary in nature, but it did leave in the 3rd quarter.

Speaker 3

So that contributed to our more muted deposit growth in the quarter. We're very focused on deposit growth and have a number of internal that we're looking at to increase that going forward. So we're not prepared to talk about what the numbers of that might look But I can assure you it's an important priority for us right now. Rhode Island market deposit market does not grow very much And our internal analysis shows that we grow considerably faster than the market as a whole. It has not grown fast enough to keep up with the loan growth that we've been posting.

Speaker 3

That's pretty evident. But Loan growth will be coming down and hopefully if we do what we intend to do deposit growth will pick up.

Speaker 7

Okay. Great. Thanks. And then just going back to the commercial real estate non performers, Ron and Bill, can you help us think about what was the balance on the senior housing facility and then The balance on you mentioned a couple of Class C offices. What was the dollar balance?

Speaker 7

And then what's the debt service coverage ratio looking like? What's the vacancy looking like?

Speaker 2

Hold on.

Speaker 3

Sorry.

Speaker 7

Maybe while you're grabbing those, Ned, can you just Oh, go ahead. Yes, I'm sorry.

Speaker 5

I'm still looking for the hold on a sec. Okay. On the

Speaker 7

You are okay, good. Well maybe you can speak. Senior

Speaker 5

housing facility is was 13,900,000. That was our share. It's a participation. And then the other is The office property is $8,700,000 and that's secured by 2 office buildings.

Speaker 7

Okay. And what is the vacancy on both of those? And what's the debt service coverage? I can follow-up with you after if that's more helpful.

Speaker 6

Yes. I want to make

Speaker 5

sure I give Current versus pro form a on each of those, so we can follow-up and give you those stats.

Speaker 7

Okay, great. And then just one last question, obviously very, very well capitalized here. I realize earnings are bumping up against dividend. But How do you think about the buyback? I mean you've got all your peers seemingly in your geography are now active in some form in a buyback.

Speaker 7

Stock is very, very discounted. From the last point you were looking at it, can you just help us think about that a little bit from the standpoint of your capital? Thanks.

Speaker 3

Yes. We have no intention of doing any buybacks.

Speaker 7

Okay, great. Thanks. I'll leave it there.

Speaker 2

Thanks, Laurie.

Operator

We do not currently have any further questions We have no further questions. So I'll turn the call back over to the management team for any further remarks.

Speaker 2

Thank you, Emily, and thank you all for your time today. This is a certainly these are uncertain times and but we're confident that Washington Trust It's the best alternative for people, business and organizations who seek a higher level of personal guidance, competitive products and stability to make the most of their financial well-being. I want to take this moment to thank our employees for the incredible amount of work they've done through these difficult times. We have a long, long history of managing through challenges. So I'm confident we'll fare well here.

Speaker 2

I also want Thank our customers for knowing us as well as we know you. We learn and get stronger with each experience and we'll do so here as well. And we appreciate the support and assurances we've received from our shareholders and the investor community. Global unrest, economic uncertainty and a stubborn Inverted yield curve are hardships we all have to endure, but with strong partners, patience, prudent decisions and disciplined hard work,

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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Earnings Conference Call
Washington Trust Bancorp Q3 2023
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