Washington Trust Bancorp Q3 2024 Earnings Call Transcript

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October 22, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to Washington Trust Bancorp, Inc. Conference Call. My name is Lydia, and I'll be your operator today. As a reminder, today's call is being recorded. Now I'll turn the call over to Sharon Walsh, Vice President, Director of Marketing Strategy and Planning.

Operator

Ms. Walsh, please go ahead.

Speaker 1

Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc. Conference call for the Q3 of 2024. Joining us this morning are members of the Washington Trust Executive team Ned Handy, Chairman and Chief Executive Officer Mary 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 our 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.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust Chairman and Chief Executive Officer, Ned Handy. Ned?

Speaker 2

Thank you, Sharon. Good morning and thank you for joining our Q3 call. We respect and appreciate your time very much and your interest in Washington Trust. I'll briefly comment on the quarter and then Ron will provide more detail on the financial results. After our prepared remarks, Mary and Bill will join us for the Q and A session.

Speaker 2

I'm pleased to report that our efforts to build balance sheet strength and to rebuild our earnings capacity while managing credit closely and proactively continues to pay off. Although margin is not yet where we want it, it has stabilized. Our fee businesses are performing well. The current Fed action on rates and the implied improved economic outlook are helping to build our mortgage pipeline and support continued market appreciation in Wealth Management AUA. We continue to be prudent on the expense front and still our strong customer focused teams and modest technology investments have delivered encouraging activity and growth in the quarter.

Speaker 2

Our customer franchise remains strong and we believe will remain as such as our team prudently manages through the current Fed pivot. In addition to in market deposit growth in the quarter, Ron will report improved capital ratios, continued strong credit statistics and controlled expenses. In September, we opened a full service branch in the only Louisville neighborhood of Providence and already see it as a catalyst for community strength and potential for a great new customer base. Although we don't currently have additional branch expansion plans, our team continues our dedicated focus on caring for the customers and communities we serve. I'll now turn the call over to Ron for some more detail on the corner, and then we'll be glad to address any questions you have.

Speaker 2

Ron? Okay.

Speaker 3

Thanks, Ned, and good morning, everyone. Net income for the Q3 was $11,000,000 or $0.64 per share. Net interest income was $32,300,000 up by $677,000 or 2 percent from the preceding quarter. The margin was $185,000 up by 2 basis points. There were no prepayment penalties prepayment fee income in the Q3 compared to $46,000 in Q2.

Speaker 3

Non interest income comprised let's see, I just lost my place. Non interest income comprised 34 percent of revenue and amounted to $16,300,000 down by $388,000 or 2%. Included in the Q2 was a $988,000 gain on the sale of our operations center. Excluding this, non interest income was up by $600,000 or 4%. Wealth Management revenues were $10,000,000 up by $311,000 or 3%.

Speaker 3

AUA totaled $7,100,000,000 up by $249,000,000 or 4%. Mortgage banking revenues totaled $2,900,000 up by $105,000 or 4%. And our mortgage pipeline at September 30 was $107,000,000 up 2% from the end of June. Non interest expenses were up $594,000 or 2% from Q2, including an increase in advertising and promotion expense of about $196,000 due to timing. The 3rd quarter effective tax rate was 20.6 percent and for 2024, we expect it to be 21%.

Speaker 3

Turning to the balance sheet, total loans were down by $114,000,000 or 2%. Commercial loans decreased by $82,000,000 or 3 percent or residential decreased by $29,000,000 or 1%. In market deposits, which exclude wholesale broker time deposits, were up by $155,000,000 or 3%. Wholesale broker deposits were up $41,000,000 and FHLB borrowings were down by $250,000,000 Our loan to deposit ratio decreased from $113,000,000 to $106,000,000 Total equity amounted to $502,000,000 up by $31,000,000 from the end of the Q2. Our asset and credit quality metrics remain solid.

Speaker 3

Non recurring loans were 55 basis points and past due loans were 37 basis points on total loans. The increase in past due loans was largely due to 1 commercial real estate loan that has been on non accrual status since the Q4 and is now past maturity. We do expect that credit to be resolved in the 4th quarter. The allowance totaled $42,600,000 or 77 basis points of total loans and provided NPL coverage of 137 percent, and we had net charge offs of $48,000 in the 3rd quarter and $127,000 on a year to date basis. And at this time, I'll turn the call back to Ned.

Speaker 2

Thanks, Ron. And now we'll open it up to questions, Lydia.

Operator

Thank Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Speaker 4

Hey, guys. Good morning. Good morning, Mark. Ron, I think I missed your comment on the commercial pipeline. I think you said $107,000,000 mortgage pipeline.

Speaker 4

Did you mention the size of the commercial pipeline?

Speaker 3

I didn't. And it's $90,000,000 and that's up from $45,000,000 in the second quarter.

Speaker 4

And what rough average rate would you guess is on that pipeline?

Speaker 3

Most of what we're doing is, I would say, FHLB plus 150, excuse me, 250.

Speaker 4

Okay, great. And then secondly, I noticed cash balances were up about 200,000,000 to up about 200,000,000. Will that normalize in the 4th quarter or you just feel like running higher cash balances right now makes sense? It will.

Speaker 3

Yes. No, that's just timing. We did replenish brokered CDs in the Q3 and we also had some loan payoffs and we used that cash to pay down FHLB. We've already run some and we've paid on maturing brokered CDs as well. So no, we would plan to run that down to about $100,000,000

Speaker 4

Okay. And then I wonder if you could help us think about sort of how quickly you're able to take deposit costs down and what you think the trajectory of the margin is likely to look like in the next quarter or 2?

Speaker 3

Yes. So as I mentioned on the June call, rate reductions will likely reduce net interest income a bit in the Q4. I would say maybe in the $500,000 to $1,000,000 range as deposit betas are going to lag the loan betas. But I can tell you that on the way down, those deposit betas will be a lot higher than they were on the way up. We have been aggressively looking at our money market deposits and keeping an eye on the competition and being mindful of customer retention.

Speaker 3

I think we're doing a good job of re pricing those money markets down. But there is still a little bit of a lag compared to where we are on the loan. So that will probably impact us a bit, but we view that as timing. Our balance sheet is liability sensitive and the rate reductions will definitely help us.

Speaker 4

So do you expect the margin to be down a little bit in the Q4? Is that

Speaker 3

I'm sorry. Yes, I didn't answer that part. So we expect the margin to be about flat.

Speaker 4

And then start to rise in the sort of Q1 you think?

Speaker 3

Yes. I think going into 2025, assuming the Fed continues to cut, we expect the margin to expand. Now keep in mind that every time it cuts, we kind of start the whole repricing thing all over again. So we just have to work through that. But on a net basis, yes, the margin will expand as rates come down.

Speaker 4

Okay. And then from your comments, you seem to suggest that $10,500,000 loan that is 30 days delinquent will resolve in the Q4. What gives you such confidence in that?

Speaker 3

We've been negotiating that for quite some time and feel like we're very close to a resolution.

Speaker 4

Okay. And then lastly, could you talk a little bit about the $42,000,000 of office loans that are classified, maybe what the maturity schedule on those look like?

Speaker 3

Yes. Bill, do you want to take that one?

Speaker 5

Sure. We have a couple. 1 has matured. That's the one that's resolution is imminent. Another will be maturing this quarter and then one more in 26.

Speaker 5

So fairly near term, our approach to maturity on all offices that essentially it's a life sentence and we have to be working with our borrowers to credit enhance as we hit maturity. So we're not expecting there's any kind of magic market that's going to take us out with a refi or sale. That said, we are getting a resolution or we have an agreement to get a resolution on about $10,000,000 of the classified this quarter. And the others are all current and we're working with guarantors and borrowers to kind of structure, enhance and keep them moving. So we've done a maturity wall assessment.

Speaker 5

We had it done by an outside third party firm to stress test everything we have rolling within the next couple of years and no surprises and fairly strong results from their standpoint. So we feel like we're on top of that.

Speaker 4

Great. Thank you. Thanks, Mark.

Operator

Our next question comes from Damon Delmont with KBW. Please go ahead.

Speaker 6

Hey, good morning guys. Hope everybody is doing well. So first question, I just want to talk a little bit about the loan growth good morning. Talk a little bit about loan growth during the quarter with balances being down. I believe it was driven by CRE.

Speaker 6

Is this a function of you guys kind of pulling back and just letting maturities kind of naturally occur during the quarter or were there some surprises late in the quarter that led to the decline?

Speaker 3

Yes. So I would say it's a couple of things. I think coming into this year, I think we told you we were going to pull back a bit on our origination activity. So that's kind of being reflected in the numbers you see. It's normal pay downs.

Speaker 3

And we also managed out a few credits intentionally. But we think that that's behind us now and we're expecting to start to ramp up underwriting in the Q4.

Speaker 6

Should we expect that to grow that?

Speaker 2

Yes. I would say that the $90,000,000 commercial pipeline is the result of a renewal of kind of growth and our teams being out there with the door open for new opportunities and it will grow beyond that. But we expect kind of 1% or 2% low single digit growth in the Q4 and we'll carry that on into 2025. So the teams are back out and we feel good about that. But I think we'll have, I would say, sort of muted growth for the next quarter or 2 and then back to normal.

Speaker 6

Got it. And Ron, your comments on the NII outlook, does that reflect the expectation of the growth that you guys just described?

Speaker 3

Yes. I mean, the 4th quarter growth won't help us a lot in the Q4 just due to the timing of the disbursements on that. So that's more of a jumping off into 2025. But yes, I mean, yes, it's going to be accretive to net interest income going forward.

Speaker 6

Got it. Okay. And then I think your interest bearing deposit costs for the quarter were 3.28%. Do you happen to have the spot rate at 9:30?

Speaker 3

Unfortunately, I don't have that at my disposal.

Speaker 6

Okay. And then just one last final one on expenses. I know you guys are focused on containing any material growth here. Just kind of looking for an update here in the Q4 and ask kind of how we think about 2025. Do you think you're able to kind of keep it in this 34.5 ish range going forward?

Speaker 6

Or do you expect it to kind of trend higher?

Speaker 3

Yes. I mean, I think expenses will be higher next year and we're not ready to guide on that yet, but I would expect the Q4 to be in line with the Q3.

Speaker 6

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

Speaker 2

Yes. Thanks, Damon.

Operator

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

Speaker 7

Yes. Hi, thanks. Good morning. Hi, Laurie. Just one thing on margin for do you have the good morning, Ron.

Speaker 7

Do you have the spot margin for September?

Speaker 3

Yes. So we our September margin was 191, but keep in mind that day count on a month by month basis has an impact. So I would say day count is 6 basis points. So kind of on a normalized basis, call it 185.

Speaker 7

Okay, great. Thanks. And then just going back to office, I guess Ron and Bill maybe you can help us think about a couple of things. Can you refresh us on I know you had 2 Class B properties, I guess, that make up that $21,700,000 Can you just refresh us in terms of vacancy, where you are with that? And then also your your class a lab space, which I think is sitting in that 20,500,000.

Speaker 7

And I had in my notes that was 18,000,000, but maybe you can just refresh this in terms of where we are with that. And was that partly being resolved in the Q4 or what exactly was the Q4 resolution, the $10,500,000 what exactly is that credit? Yes. So if you could just maybe step us through because I know there are 3 or 4 big loans, just you could refresh us on that. And then vacancies and also maybe any specific reserves on those?

Speaker 7

Thanks.

Speaker 5

Asafai, there's 3 properties in it. One of them is the one in Boston that is set for resolution, set meaning it's literally going under agreement today and expected to close this quarter. But until it closes, it's not done. But we feel pretty solid about that. That's something that's been going on for a while.

Speaker 5

The remainder of classified B classified are 2 properties in Connecticut, 1 of which is 70% occupied, 1 of which is 50%, both of which are current, both of which have a guarantor who's continuing to keep the properties going. They're pursuing exit strategies by listing them for sale, but that's where those stand. So pretty confident that the Boston property will be done this quarter, but until it closes, we can't say so. On the lab space, that's 20,500,000 dollars That has gone from 0% leased in the last 6 months to 52% leased, which is a lot. That represents over 100,000 square feet of leasing.

Speaker 5

So the property has got a lot of momentum. The borrower put in a very significant equity injection of $20,000,000 to work on specs based build outs. So we believe that's got a lot of traction as evidenced by the leases and by the amount of leasing interest that's out there. All that said, again, until it's 100% leased or at least its own stabilized number, we're not going to be making any moves with it at the moment in terms of classification or accounting.

Speaker 7

Got it. And then Bill, on that loan of $20,500,000 what is the total exposure with all the banks added together? I know it's north of $100,000,000 but I don't know if you have a current number on that?

Speaker 5

I have to get the calculator and divide it. I think it's $174,000,000

Speaker 7

Yes.

Speaker 5

Yes, it's 174. Okay,

Speaker 7

great. And then do you have any specific reserves on either of those Class Bs or this lab?

Speaker 5

Not on the lab, not merited. On the Class Bs, we do on yes, we do. But they're appropriately set by accounting and other rules. So I don't have an aggregate number for those that I'd like to disclose. But we act ahead of time in case there's any loss.

Speaker 5

We'll certainly move something into individually impaired and set up individual impairment if we need to. And on those 3, there's one for about 5% of the total. 5%. There's actually already been a charge off on one of the other properties that's reflected in the balance.

Speaker 7

Okay. And then I guess as we're looking at your $3,000,000 office book or $2.40 excluding medical, what is your reserves on that at the moment?

Speaker 5

Our office Our office reserve factor is 127 basis points, but that's part of our total Commercial Real Estate segment. And then we obviously create individual impairment when needed.

Speaker 7

Got it. Got it. Okay. And then just last question in terms of the office coming due. So you have in a footnote here 40% coming due in the next 2 years.

Speaker 7

Can you help us think about how that's breaking out in terms of what's coming due in the Q4 and what's coming due next year? Thanks.

Speaker 5

It's 20% this quarter, including one that's already matured and that's the one set for resolution and then there's $53,000,000 for next

Speaker 7

year. $53,000,000 for next year and then $20,000,000 in the 4th quarter that includes the 10,500,000 dollars

Speaker 5

Yes.

Speaker 7

Okay, great. Thanks so much for taking my questions.

Speaker 5

Sure. Thanks, Louie.

Operator

We have no further questions. So I'll pass you back to Ned Handy for any closing comments.

Speaker 2

Thanks, Lydia, and thank you all for joining us today. We appreciate your time, your interest in Washington Trust and your questions. We hope we've presented a clear picture of where we are and where we're headed. So thank you very much. Have a great day and we look forward to speaking to you all soon.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your line. Thank you very much.

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Earnings Conference Call
Washington Trust Bancorp Q3 2024
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