Washington Trust Bancorp Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 8 speakers on the call.

Operator

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

Operator

Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer, Ms. Echol.

Speaker 1

Thank Good morning and welcome to Washington Trust Bancorp Bank's conference call for the Q4 and Year End 2023. Joining us this morning are members of Washington Trust Executive team Ned Handy, Chairman and Chief Executive Officer Mary News, President and Chief Operating Officer and Ron Osborne, 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. Our complete safe harbor statement is contained in our earnings release, which was issued yesterday, as well as other documents that we file with the SEC. All of these materials and public filings are available on our Investor Relations website at ir.washtrust.com.

Speaker 1

Washington Trust trades on the NASDAQ under the symbol WASH. I'm pleased now to introduce Washington Trust Host, Washington Trust Chairman and Chief Executive Officer, Ned Handy.

Speaker 2

Thank you, Beth. Good morning, everybody, and thanks for joining us for our call. We definitely appreciate your time and interest. And I know, we have a busy morning this morning. So I'm going to be fairly quick in my comments.

Speaker 2

Then Ron will dive into the Q4 performance and then Mary Nunes and Bill Ray will join us for Q and A. We continue to be focused on ensuring a durable balance that is positioned to take advantage of opportunity as external conditions improve. We're concentrating on capital, credit, deposits and expense management all to prepare for what we believe will be a steadily improving external environment throughout 2024. In that way, we'll remain positioned to resume growth of our long term focused profitable relationship driven company. On the capital front, we've slowed asset growth and are managing our funding base and expenses to build earnings capacity.

Speaker 2

Our lenders are primarily focused on managing existing credit, raising deposits and attending to the needs of our all important customer base. We're emphasizing deposit growth and are looking at deposit oriented segments of the economy. We've made some technology investments to supplement our deposit growth strategies including the addition of an omnichannel automated deposit account opening tool. Our deposit franchise remains strong, although understandably more expensive. We remain committed to incremental branching and are pleased that our 3 newest branches opened within the past 2 years have almost $130,000,000 in aggregate deposits.

Speaker 2

Our average branch size remains above $200,000,000 We held in market deposits steady in the 4th quarter in a very competitive landscape and through our continued efforts focus, we will drive growth in future periods. While there are signs of a stabilizing economy, it is difficult to gain short term certainty about rates, inflation, the credit cycle and other aspects of the general economy. Our focus is on what we can control and on protecting and enhancing our customer base the experience they have with us. Included in our expense focus is a detailed look at our real estate footprint, both leased and owned. We will right size our footprint and look at appropriate ways to unlock capital and reduce expenses where able.

Speaker 2

Our employees always provide reason to be both according to our customers and reflected in the recognition we've received from Newsweek, Forbes, American Banker and Blue Cross as a great and healthy place to work. In summary, we are positioned to ensure stability and to regain our customary strength in the quarters ahead. We have a strong and dedicated team, a known brand, very strong sufficient capital and an appropriate short term strategy to weather the current challenges and to enhance franchise value. At this point, I'll turn it over to Ron for a more detailed review of

Speaker 3

the quarter. Ron? Okay. Thank you, Ned. Good morning, everyone, and thanks for joining us.

Speaker 3

As Ned mentioned, 4th quarter net income was $12,900,000 or $0.76 per diluted share. This includes a tax item of $3,300,000 that added $0.19 to EPS. Net interest income was $32,700,000 down by $1,100,000 or 3%. The margin was 188 down by 9 basis points. Average earning assets increased by $103,000,000 and the yield on those assets was $481,000,000 up by 12 basis points.

Speaker 3

On the funding side, average wholesale funding grows by $105,000,000 and average in market interest bearing deposits increased by $21,000,000 The rate on interest bearing liabilities increased by 23 basis points to 3.49%. Prepayment fee income was $27,000 in the 4th quarter 71,000 in Q3, neither having any impact to margin. Non interest income was comprised 29% of total revenues and amounted to $13,300,000 down by $1,900,000 or 13%. Wealth Management revenues were $8,900,000 down $67,000 or 1%, reflecting a decrease of $58,000,000 or 1% in average AUA balances. End of period AUA totaled $6,600,000,000 up by $457,000,000 or 7%, mainly reflecting market appreciation of $503,000,000 Mortgage Banking Revenues totaled $1,600,000 down by $554,000 or 26%.

Speaker 3

Of note, 64% of our originations in the quarter were saleable compared to 33% in the 3rd quarter and we expect the improvement in that ratio to continue. Derivative income totaled $112,000 in the 4th quarter, down by $970,000 We do expect minimal derivative gains in 2024. Regarding expenses, these were down $1,800,000 or 5% from Q3. Salaries expense decreased by $3,200,000 or 15 percent and reflected a $3,400,000 in reductions to performance based compensation accruals. For the year, these reductions totaled $5,400,000 Other non interest expenses were up by $1,300,000 or 56%, reflecting a $1,000,000 contribution to our charitable foundation.

Speaker 3

Income taxes were a net benefit of 774,000 As noted in our release, this included a $3,300,000 reduction in tax expense due to a change in Massachusetts tax law. This increased Q4 and full year EPS by $0.19 Excluding this adjustment, the effective tax rate for Q4 would have been 20.4% compared to 20.8% for Q3 and we estimate our full year 2024 effective tax rate to be 21.2%. Now turning to the balance sheet, total loans were up by $37,000,000 or 1% from September 30 and by 538 from a year ago. In the Q4, total commercial loans increased by $36,000,000 or 1%, essentially all in commercial real estate. Residential loans decreased by $7,000,000 Consumer loans were up by $7,000,000 In market deposits were down by $53,000,000 or 1% from September 30 and up by $33,000,000 or 1% from a year ago.

Speaker 3

Uninsured and uncollateralized deposits are estimated to be 18% of total deposits And our average deposit account balance is $36,000 and we have $1,900,000,000 of contingent liquidity. Total equity amounted to $473,000,000 up by $41,000,000 from the end of Q3. This included quarterly net income of 12,900,000 $44,000,000 increase in AOCI due to an increase in the fair value of AFS securities. This was partially offset by $9,600,000 in dividend. Regarding asset quality, non accruing loans were 79 basis points and past due loans were 20 basis points of total loans.

Speaker 3

The increase in non accruing loans was largely due to 1 pre loan that was placed on non accrual in the Q4. This loan was current at December 31. The allowance totaled $41,100,000 or 73 basis points of total loans. The 4th quarter provision for credit losses was a charge of $1,200,000 up by $700,000 from the provision recognized in Q3. We had net charge offs of 406,000 in the 4th quarter compared to 30,000 in Q3 and year to date net charge offs totaled 520,000.

Speaker 3

And at this time, I will turn the call back to Ned.

Speaker 2

Thank you, Ron. And we can go right to questions.

Operator

The first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead.

Speaker 2

Good morning, Mark.

Speaker 4

Good morning. You guys did a nice job on expenses in the Q4. I guess I was curious on Your thoughts for expense growth in 2024?

Speaker 3

Yes. So If you take our 4th quarter total expenses and you back out the charitable contribution and you back out The incentive reversal, that's a good run rate going into 2024. So annualized that 4th quarter normalized and our expense estimate for the year. So, so fast.

Speaker 4

I'm sorry, so roughly about $30,000,000

Speaker 3

I think it's about $35,000,000 a quarter.

Speaker 4

I'm sorry, you're right. Yes. Okay. And then secondly, How are you what is your net interest margin outlook over the next quarter or 2? And what does that assume for Fed actions?

Speaker 3

Yes. So, we're looking at NIM in the Q1 of 180 to 185. We continue to see a lot of competitive pressure On deposits, there's a lot of exception pricing going on. We continue to see mix shift from DDA into CDs, etcetera. So we expect to see that continued pressure on the margin at least in the Q1.

Speaker 3

We are budgeting 3 Fed rate reductions, and we think that that should give us some lift in the second half of the year.

Speaker 4

Okay. And then could you

Speaker 3

share any color with us regarding Mark, we

Speaker 4

Sorry.

Speaker 3

Yes, Mark, I was just going to give a little bit more color on that. So we do have a large $1,800,000,000 1 point 9 $1,000,000,000 1 month sulfur portfolio. So when the Fed does begin to cut rates, if they do, that will reprice immediately. We keep most of our wholesale funding pretty short. So it will catch up, but it won't be instantaneous.

Speaker 3

So if they cut in March, We'll see a reset on that loan book on April 1, and then we'll just need to reprice our liabilities down.

Speaker 4

Okay. And then I wondered if you could give us any color on that one commercial real estate loan that you put on non accrual?

Speaker 3

Yes. Bill, do you want to handle that? Sure.

Speaker 5

It's basically our exposure is 11,000,000. It's a recently renovated mixed use office retail building in Greater Boston. They had leased The first floor up buying to a restaurant, they've had difficulty with the other 3 floors getting office tenants. So the borrower are very who's got a lot of money in this deal, more than we do at this point, has gone through an orderly liquidation process. We have incredible bids.

Speaker 5

We expect it to close this quarter, a sale to close this quarter that will take us out without principal loss. However, there's always you never know when a deal is going to close, but at this point it's on a path to resolution within the Q1.

Speaker 4

Okay, great. And then last question I had, your dividend payout ratio on a core basis this quarter was 98%. And with the margin likely to come under a little more pressure in coming quarters and expenses kind of In that $35,000,000 level, it would imply that you'd go over 100% payout ratio in the Q1. How do you feel about the sustainability of the payout ratio

Speaker 2

or the dividend level?

Speaker 3

Yes. Sure. I mean, our payout ratio was high. We realized that. We believe that we remain well capitalized and we believe that the dividend is sustainable even if we, I would say temporarily go over 100%.

Speaker 3

We're still prepared to maintain that we are fully expecting to maintain the dividend.

Speaker 4

Thank you.

Operator

Our next question comes from Laurie Hunsicker from Seaport Research Partners. Please go ahead.

Speaker 6

Yes. Hi, thanks. Good morning. Just going back to expenses here. So the charitable foundation Charge of $1,000,000 How should we think about that in your numbers going forward?

Speaker 6

Is that something we're going to see recurring in the Q4 every year? Is it going to be less? How do you think about that?

Speaker 3

Yes. So I would say, Laurie, we kind of guided to more in the $500,000,000 range the last time we talked about this. And with the tax Benefit that we recorded, we topped that up to $1,000,000 So that should carry us through 2024 and into 2025. So at this point, we're not really expecting to add more to that in calendar year 2024 at this point. At some point, we'll have to put more in as we disperse the funds.

Speaker 3

But yes, we intentionally topped that $1,000,000 that contribution up to

Speaker 6

$1,000,000 Got it. Got it. Okay. So just back to The expense guide that you gave Mark here. I'm just trying to sort of sort through that.

Speaker 6

So looking at $32,600,000 backing out $1,000,000 I'm down to 31 point How am I going from $31,600,000 And I realize you've got some new branches coming online, so maybe you can comment on that. But how do you go from $31,600,000 per quarter up to $35,000,000 per quarter. Can you help us think about that? What am I missing?

Speaker 3

Yes. So Laurie, we had a credit go through the expense line of $3,400,000 in the 4th quarter. So strip that out and 4th quarter is more like $35,000,000

Speaker 6

Got it. Okay.

Speaker 3

We have the incentive reversal.

Speaker 6

Okay. And then your

Speaker 3

Yes. Yep.

Speaker 6

Okay. Great. And then the other other income line of 83,000 looked light. Was there Was there any one time charges that ran through that?

Speaker 3

Yes. There was a we did set up a $15,000 $1,000 valuation reserve. Yes, we set up a $300,000 valuation reserve on an asset in there.

Speaker 6

Okay. Great. Okay. And then back over to NIM, do you have a December spot margin?

Speaker 3

Yes, it was 182.

Speaker 6

82. Okay. And then Just last sort of maybe general question. We've seen some banks take some restructuring within their securities book. How do you guys think about that As you look forward?

Speaker 3

Yes. I mean, we've kicked that around a lot. We've not decided to do that. I don't think we're planning to do that. We had a nice recovery in our investment portfolio in the 4th quarter.

Speaker 3

I understand some of the merits of why banks are doing it, but I doubt that we're going to do it.

Speaker 6

Got you. Okay, great. Thanks for taking my questions.

Operator

The next question comes from Damon DelMonte from KBW. Please go ahead.

Speaker 7

Hey, everybody. This is Matt Ranks filling in for Damon DelMonte. Hope everybody is doing well. You guys mentioned you're slowing asset growth. It came from loan growth this quarter.

Speaker 7

So I was just hoping we could Get your thoughts on full year loan growth for 2024?

Speaker 3

Yes. I would say on a net basis, It's going to be about 0%. So we're looking at commercial growth. We had We're not doing a lot of originations right now. We did have a fairly sizable construction previously committed construction pipeline, that's going to add about $240,000,000 of advances during the year.

Speaker 3

That will be partially offset by amortization and pay downs, but that will give us commercial growth of about 3%, but then we'll have about a 3% decline in resi and consumer. So on a net basis about 0.

Speaker 7

Okay, got it. And then just a follow-up on credit with the slower loan growth. How should we think about provision expense? Should we think of it as reserves holding steady or maybe a slight build as credit starts to normalize?

Speaker 3

I think we're thinking a slight build and if you wanted to put in $1,000,000 a quarter, We're not seeing any particular trouble. It just feels like it needs to be a little higher than say like $500,000 run rate that we've had, of course, this quarter was a little higher, but we're thinking about $1,000,000 a quarter.

Operator

Okay, got it. Thank you.

Speaker 3

Thanks, Matt. Yes. Matt, you're set? Okay. I just want to give a little bit more color on expenses.

Speaker 3

Yes. So that 0% expense growth also includes about a $1,500,000 additional expense related to the de novo branches. So that's covered.

Operator

We have a follow-up question from Laurie at Seaport Research. Please go ahead.

Speaker 6

Yeah. Hey. Thanks, Ron. Yeah. I was I was actually just hitting you guys back on the on the expense related to branches.

Speaker 6

So What is the timing on de novo branches opening in 2024? How are you thinking about that?

Speaker 3

Yes. Hi,

Speaker 2

Laurie, it's Ned. And one end of first actually one end of January and one end of first quarter or potentially April. And as Ron just pointed out, in his expense comments, we have covered the cost of those new branches. So they're built into that expense base.

Speaker 6

Perfect. Great. Thanks.

Speaker 2

Thank you.

Operator

Also have a follow-up from Mark Fitzgibbon at Piper Sandler. Please go ahead.

Speaker 4

Hey, guys. I was wondering if you could comment on your capital position and whether you were thinking about raising additional capital?

Speaker 3

Yes, we're not. We are curtailing Our loan originations are pretty significantly. So we're expecting capital ratios to stabilize pretty close to where they are and begin to improve over the second half of the year.

Speaker 4

Thank you.

Operator

Okay. We have no further questions on the call.

Speaker 2

Thank you all. I know you've got a busy morning. We appreciate you taking the time to be with us and look forward to talking to you again soon. Have a great day everybody.

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Earnings Conference Call
Washington Trust Bancorp Q4 2023
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