Q3 2023 Washington Trust Bancorp Inc Earnings Call
Good morning, and welcome to the Washington Trust Bancorp, Inc. 's Conference call. My name is Emily and I will be your operator today.
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And now I will turn the call over to Elizabeth B, Eckel Executive Vice President Chief marketing and corporate Communications Officer Ms Echo.
Thank you Emily Good morning, and welcome to Washington Trust Bancorp, Inc. Third quarter 2023 conference call. Joining us. This morning are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer, Barry Nunes, President Chief Operating Officer, Ron Osberg Senior Executive Vice President.
Chief Financial Officer, and Treasurer, and Bel 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.
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 Dot Wash Trust Dotcom, Washington Trust trades on NASDAQ under the symbol wash I'm now pleased to introduce todays host, Washington trusts, Chairman and CEO Ned handy.
Thank you Beth good morning, and thank you for joining our third quarter Conference call. We appreciate your time and interest in Washington Trust.
During my remarks. This morning, I will provide comments about our third quarter results in context with the market conditions, we're seeing as well as an update on our current focus for value creation.
And then Ron Osberg law for more detail regarding our third quarter performance and after our prepared remarks, Mary Nunes and Bill Ray will join us for the Q&A sessions.
In the third quarter, our team did a solid job of managing through the current challenging market dynamics, while executing our Lawrence 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 in market deposit growth.
Including technology investment product development branch expansion and sales management, we grew end market deposits in the third quarter in a very competitive landscape and through our continued efforts and focus should drive additional growth in future periods.
Emily: Good morning and welcome to the Washington Trust Bancorp Inc. Conference School. My name is Emily and I will be your operator today. If participants need assistance during the call at any time, please press star zero. Participants interested in asking a question at the end of the call should press star one to get into the queue. Today's call is being recorded.
During the suppressed earnings cycle, we're committed to building capital 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 measured Lee we remain entirely attentive to call quality credit, both new and existing.
Elizabeth Eckel: And now I will turn the call over to Elizabeth B. Eckel, Executive Vice President Chief Marketing and Corporate Communications Officer, Miss Eckel. Thank you, Emily.
Elizabeth Eckel: Good morning and welcome to Washington Trust Bancorp Inc. 3rd quarter, 2023 conference call. Joining us this morning are members of Washington Trust Executive Team, Ned Handy, Chairman and Chief Executive Officer, Mary Noons, President, 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 today's call.
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&A session.
We continue to operate in a challenging economic environment with financial markets influx and geopolitical instability increasing.
These macro level headwinds are 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.
Elizabeth Eckel: 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 file links are available on our investor relations website at ir.washstrust.com. Washington Trust trades on Nasdaq under the symbol wash.
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.
Edward Handy: I'm now pleased to introduce today's host Washington Trust Chairman and CEO Ned Handy. Thank you, Beth. Good morning and thank you for joining our 3rd quarter conference call. We appreciate your time and interest in Washington Trust. During my remarks this morning, I'll provide comments about our 3rd quarter results in context with the market conditions we're seeing, as well as an update on our current focus for value creation. Then Ron Ohsberg will offer more detail regarding our 3rd quarter performance, and after our prepared remarks, Mary Noons and Bill Ray will join us for the Q&A session.
First our third quarter results, while they were not up to our historical standards. They were in line with both the prior quarter and expectations. We posted third quarter net income of $11 2 million or <unk> 65 per diluted share about flat with $11 3 million or <unk> 66 per diluted share in the second quarter, our margin remains under pressure.
From a 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 which is core to our strategy. We've made good progress in the third quarter, our deposit franchises strong intact and growing, albeit more expensive with understandable product shipped in the current rate environment.
Edward Handy: In the 3rd quarter, 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 in market deposit growth, including technology investment, product development branch expansion and sales management. We grew in market deposits in the 3rd quarter in a very competitive landscape, and through our continued efforts in focus should drive additional growth in future periods.
Branching strategy continues to be successful with average size of $209 million and deposits at our three newest branches stand at $70 million. After two years $28 million. After just one year and $11 million after only five months.
As mentioned on previous calls we plan to open a new branch in the only real section of Providence in early 2024, and one in Smithfield, Rhode Island also in the first quarter.
Edward Handy: During this suppressed earning cycle, we are committed to building capital. 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 measurably. We remain entirely attentive to call quality credit, both new and existing are underwriting and portfolio management standards, although always prudent, have tightened to reflect the uncertainty the markets we serve.
Finally, our credit remains 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 before I turn the call over to Ron I'd like to briefly mentioned some important progress we've 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.
Edward Handy: We will provide more detail in the Q&A session. We continue to operate in the challenging economic environment with financial markets and 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 can 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 shareals.
During the quarter, we made advancements in expanding our digital presence. We understand technology is dominating every aspect of our lives in banking is no different consumers are demanding convenient digital offerings in 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.
<unk> expedited services across delivery channels.
Throughout our history, Washington Trust has joined a strong brand reputation in our core markets.
Edward Handy: Brothers. 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. First, our third quarter results, while they were not up to our historical standards, they were in line with both the prior quarter and expectations. We posted third quarter net income of 11.2 million or 65 cents per diluted share about flat with 11.3 million or 66 cents per diluted share on the second quarter.
Recently, we launched the new brand positioning statement, what we value as 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 as powerful as a powerful phrase that embodies the spirit and purpose of Washington Trust and helps eliminate the importance we place on our employees customers and communities as drivers of shareholder value.
New campaign promotes Washington Trust comprehensive financial solutions, including checking and savings accounts digital banking services home lending and business banking and it highlights our current deposit special offers.
Edward Handy: 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 which is core to our strategy, we made good progress in the third quarter. 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 million and deposits at our three newest branches stand at $70 million after two years, $28 million after just one year, and $11 million after only five months.
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, while capitalizing on market trends and the strengths of our bank.
I'll now turn the call over to run for and into and depth review of our financial performance run.
Thank you Matt Good morning, everyone and thank you for joining our call as Ned mentioned net income was $11 2 million or <unk> 65 per diluted share.
Net interest income was $33 8 million.
Edward Handy: As mentioned on previous calls, we planned open a new branch in the Onlyville section of Providence in early 2024, and one in Smithfield, Rhode Island, also in the first quarter. Finally, our credit remains 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 the future. 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.
Okay.
By 251000 or 1% from the preceding quarter. The margin was 197 down by six basis points average, earning assets increased by $167 million and the yield on earning assets was $4 69 516 basis points.
On the funding side average end market interest bearing deposits increased by $77 million in average wholesale funding rose by $83 million.
The rate on interest bearing liabilities increased by 24 basis points to $3 26.
Edward Handy: 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 convenience. Having a 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.
Payment fee income was 71000 in the third quarter and 50000 in the second quarter.
Net interest excuse me noninterest income comprised 31% of total revenues amounted to $15 2 million up by 901000 or 6% from Q2 wealth.
Wealth management revenues were $8 9 million down by 100000 or 1%. This included transaction based revenues, which were down 221000, primarily in seasonal tax servicing fee income, which is concentrated in the first half of the year.
Edward Handy: Throughout our history, Washington Trust is 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 is you, is 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.
Asset based revenues were up by 121000 or 1% with a corresponding increase in average balances, which were up by $140 million or 2%.
End of period totaled $6 1 million down by $219 million or 3% from June 30, reflecting market depreciation of $154 million and net client asset outflows of $65 million.
Mortgage banking revenues totaled $2, one up by 355000 or 20% mortgage loans sold totaled $89 million in the third quarter up by $24 million.
Edward Handy: 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, while capitalizing on market trends, and the strengths of our bank.
Total originations were $240 million up by $13 million.
Our mortgage pipeline at September 30 was $98 million down by $67 million or 41% from the end of June .
Loan related derivative income totaled $1 1 million up by 835000.
Ronald Ohsberg: I'll now turn the call over to Ron for an end-up through the overview of our financial performance. Ron? Thank you, Ned. Good morning, everyone, and thank you for joining our call. As Ned mentioned, Ned's income was $11.2 million or 65 cents per diluted share. Ned's income was $33.8 million. [inaudible] The rate on interest bearing liabilities increased by 24 basis points to 326, prepayments the income with 71,000 in the third quarter and 50,000 in the second quarter.
Okay.
Regarding noninterest expenses these were up by $1 4 million or 4% salaries expense increased by $1 million or 5% in the second quarter, we reduced performance based compensation accruals by $1 4 million.
Advertising and promotion expense also increased by 362000, primarily due to timing.
Now turning to the balance sheet.
Total loans were up by $230 million or 4% from June 30, and by $762 million or 16% from a year ago in the third quarter total loans increased by $123 million.
Four 5% essentially all in commercial real estate residential loans increased by $101 million or 4%.
In market deposits were up by $35 million and 1% from June 30, and $121 million or 3% from a year ago wholesale broker deposits were up $67 million and <unk> borrowings were up by $80 million from June 30.
Ronald Ohsberg: That interest, excuse me, non-interest income comprised 31% of total revenues and amounted to 15.2 million up by 901,000 or 6% from Q2, wealth management revenues were 8.9 million 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. Asset based revenues were up by 121,000 or 1% with a corresponding increase in average AUA balances, which were up by 140 million or 2%, and a period AUA total 6.1 million down by 219 million or 3% 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 37000, and we have $1 $8 billion in contingent liquidity.
Total equity amounted to $431 million at September 30 down by $28 million from the end of Q2. This included a decrease in the OCI component of shareholders' equity largely due to a decline in the fair value of available for sale Securities.
Hi.
It also declined due to $9 6 million in quarterly dividend declarations and these decreases were partially offset by quarterly net income of $11 2 million.
Ronald Ohsberg: Reflecting market depreciation of 154 million in net client asset afro is at 65 million. Mortgage banking revenues total 2.1 up by 355,000 or 20%, mortgage loan sold total of 89 million in the third quarter up by 24 million, total originations were 240 million up by 13 million. Our mortgage pipeline at September 30 was 98 million down by 67 million or 41% on the end of June. We're going related to derivative income total but 1.1 million up by 835,000.
Regarding asset quality non accruing loans were six zero percent and past due loans were one 7% of total loans the increase in non accruing loans was largely due to two commercial real estate loans that were placed on nonaccrual status in the third quarter. Both of these loans are current.
The allowance totaled $40 2 million or 72 basis points on total loans and provided NPL coverage of 119% to.
The third quarter provision for credit losses was a charge of 500000 down by 200000 from the provision recognized in the second quarter.
Our vision for credit losses in the third quarter was composed of a provision for credit losses on loans of 900000 in a negative provision for credit losses on unfunded commitments of 400000.
Ronald Ohsberg: Regarding nine interest expenses, these were up by 1.4 million or 4%, salaries expense increased by 1 million or 5%. In the second quarter, we reduced performance based compensation accruals by 1.4 million, advertising and promotion expense also increased by 362,000 primarily due to timing. Now turning to the balance sheet total loans were up by 230 million or 4% from June 30 and by 762 million or 16% from a year ago. In the third quarter total loans increased by 123 million or 5%, essentially all in commercial real estate, residential loans increased by 101 million or 4%.
We had net charge offs of 30000 in the third quarter compared to 37000 in Q2 and year to date net charge offs totaled 114000.
And at this point I will turn the call back to Ed.
Thank you Ron.
Well now take questions.
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Ronald Ohsberg: In market deposits were up by 35 million or 1% from June 30 and by 121 million or 3% from a year ago, wholesale broker deposits were up 67 million and FHLB barings were up by 80 million 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 1.8 million in contingent liquidity.
Our first question today comes from the line of Mark Fitzgibbon with Piper Sandler.
Mark. Please go ahead. Your line is now open.
Hey, guys good morning.
Good morning, Mark.
Ron.
Good morning.
Ron I wondered if you could you could help us think about the margin and maybe how much I know that the rate of decline in the margin slowed but.
Ronald Ohsberg: Total equity amounted to 431 million at September 30, down by 28 million from the end of Q2. This included a decrease in the AOCI component of shareholder's equity, largely due to a decline in the fair value available for sale security. It also declined due to 9.6 million in quarterly dividend declarations, and these decreases were partially upset by quarterly net income of 11.2 million. Regarding asset quality, nonoccurring loans were 0.60 percent, and past due loans were 0.17 percent of total loans.
Where do you think the margin ultimately bottoms out how much lower is likely to go.
Yeah, Yeah, we expect it to trend lower in the fourth quarter towards the one nine <unk>.
So kind of kind of.
Lower from here.
Call It one nine plus or minus.
And you think that's sort of a bottoming point for the for the morning, I don't know if its a bottom I mean.
We continue to see migration of.
Deposits from lower cost options to higher cost products. So.
Ronald Ohsberg: The increase in nonoccurring loans was largely due to two commercial real estate loans that were placed on nonocural status in the third quarter, both of these loans are current. The allowance total 40.2 million, or 72 basis points on total loans, and provided MPL coverage of 119 percent. The third quarter provision for credit losses was a charge of 500,000 down by 200,000 from the provision recognized in the second quarter. The provision for credit losses in the third quarter was composed of a provision for credit losses on loans of 900,000 in a negative provision for credit losses on unfunded commitments of 400,000. We had net charge drops of 30,000 in the third quarter, compared to 37,000 in Q2 in year-to-date net charge drops total 114,000, and at this point I'll turn the fallback to net.
I don't think we're unusual in that regard, but yes, we continue to see some funding pressure.
Okay.
And 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'll be hard to reduce costs can you talk about what your plans are there maybe would trajectory might be whether you have.
No.
Sort of a target in mind for your for your for your costs going forward.
Yeah. So we're not ready really to talk about 'twenty 'twenty four yet.
Ned mentioned.
Our marketing push I would expect marketing to go up somewhat in the fourth quarter as we continue to roll that campaign out.
Unknown Executive: Thank you, Ron. We'll now take questions. Thank you. If you would like to ask a question today, please do so now by pressing Start, followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, that is Start, followed by two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally.
The branches will start to the branches that we're opening in the first quarter, we will have an impact on Q4.
About $200000 worth.
In the fourth quarter.
We also are committed to increasing our.
Charitable Foundation contribution.
So havent decided exactly how much that would be but we're thinking it's at least 500000 in the fourth quarter.
Mark Fitzgibbon: Our first question today comes from the line of Mark Fitzgibbons with Piper Sandler. Mark, please go ahead. Your line is now open. Hey, guys. Good morning. Good morning, Mark. Ron, good morning.
Okay, Mark given that.
Okay.
Yes, Mark I, just I just wanted to add I mean, we're looking at.
Ronald Ohsberg: 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? Yeah. We expect it to trend lower in the fourth quarter towards the 1.9 percent, so kind of lower from here, could call it 1.9 plus or minus. And you think that's a sort of a bottoming point for the more?
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.
Whether whether theres strategies around.
That that makes sense. So we're.
We are focused on everything we can be focused on.
Two to control expenses.
Okay, but it feels like Ned.
Not as much wiggle room on the cost side, maybe is as you'd like.
Ronald Ohsberg: No, I don't know if it's the 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 yeah, we continue to see some funding pressure. Okay.
Margin continues to be pressured the wealth business continues to be pressured in mortgages.
No.
Rate dependent so I guess the question I have is if earnings fall below the dividend would you cut the dividend.
Yeah.
Yeah, So mark the dividend is really capital related so.
Ronald Ohsberg: And 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'll 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 cost going forward? Yeah. So we're not ready, really, to talk about 2024 yet. And Ned mentioned, you know, our marketing push, I would expect marketing to go up somewhat in the fourth quarter as we continue to roll that campaign out.
As long as we have sufficient capital to pay the dividend we're committed to paying the dividend.
Okay.
And you talked a little bit about slowing the growth does that mean stopping the growth I mean, because your capital ratios or 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, our loan growth going forward, yes, Mark Mark This is net.
We have construction loans in process, so stopping stopping that growth is probably not realistic, but but low very low single digit growth I expect here forward.
Ronald Ohsberg: The branches will start to, the branches that we're opening in the first quarter will have an impact on Q4, about $200,000 worth in the fourth quarter. We also are committed to increasing our charitable foundation contribution. So I haven't decided exactly how much that would be, but we're thinking it's at least $500,000 in the fourth quarter. Okay.
But for taking care of existing customers in and booking.
Accretive.
<unk> that helped earnings were we are just kind of pencils down so.
We had a big pipeline coming into this quarter.
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 we need to rebuild.
Edward Handy: Mark, this is... Yeah, Mark, I just wanted to add, I mean, we're looking at everything we can on the expense side attrition, you know, whether we fill positions, we're looking at all of the real estate that we still own and whether, you know, there's strategies around that that makes sense. So we're, we're, we are focused on everything we can be focused on to, to, to control expenses.
Earnings and capital in.
We need to make sure that the loan books helped on that front.
No I guess I'm curious I am sort of scratching my head you guys have grown your office loan portfolio. This year by 12%. It just seems like an opportune 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 tightened youre trying to conserve capital there.
That's a fair question, we have no expectations of growing the office book.
Edward Handy: Okay. But, but it feels like Ned, you know, there's, there's not as much wiggle room on the cross side, maybe as, as you'd like, and, you know, the margin continues to be pressured, the wealth business continues to be pressured, and mortgage is, you know, rate dependent. So I guess the question I have is, you know, if earnings fall below the dividend, would you cut the dividend? Yeah. So, 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.
And I'm going to ask Bill to just talk about the details on the <unk>.
Office project that rate in the quarter. It was really one deal with an extremely strong sponsor an amazing deal metrics. So and then never saying never category. This is one we felt it was the right thing to do you had a 16% going in debt yield.
About a 50% LTV.
To point out coverage.
No tenant concentrations. So it was a deal that made sense and so it's certainly we never want to be a bank that.
Just puts up the Heisman incentives 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 cherry to pick and we also got really good structure in terms of the guarantee on that so.
Edward Handy: Okay. And, and you talked a little bit about slowing the growth. Does that mean stopping the growth? I mean, because your capital ratios are, are 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 long growth going forward?
We certainly I havent seen any office deals in a while this was this has gotten a pipeline quite a while ago and just to give you a sense Mark we came into the quarter with a pipeline that was north of $300 million our pipeline right now is below a $100 million.
Edward Handy: Yeah. Mark, this is net. We have construction loans in process. So stopping, stopping the growth is, is probably not realistic, but, but low, you know, very low single digit growth. I expect to hear forward where, where, but for taking care of existing customers and, and booking accretive assets that help earnings, we're, we are kind of pencils down. So, we had a big pipeline coming into this quarter that, you know, mostly existing customers that we, we took care of, but, but we, we recognize the levels of growth that we showed in the quarter.
Total total total so last question.
Okay last question is I'm wondering if you could give us a little more detail on those two nonperforming loans in the commercial real estate bucket, maybe some color around whats going on there because I think Ron mentioned that they are performing but you put them on nonaccrual with what's going on with us.
This is bill again, so one of them is a senior housing facility LTV of 59% been challenged on vacancy human challenge 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 had millions and millions of <unk>.
Edward Handy: We will not be showing that going forward. We need to, we need to rebuild earnings in capital and, and, you know, we need to, we need to make sure that the loan books help in that, on that front.
Sponsor support over the last couple of years.
But was it matured and so the nonaccrual was based on that it is current we're now discussing.
Edward Handy: Yeah, I guess I'm curious. I'm, 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, you know, why you would want to do that given the capital ratios are tight and you're, you're trying to conserve capital there. That's a fair question. We have no expectations of growing the office book.
A forbearance, possibly go into Io for a wildfire that cover but.
Again, a solid deal with a strong sponsor, but non accrual was stripped by the maturity and then the fact that we had to get to forbearance and place. The other one is a.
Couple of class B office properties.
Occupancy around 60% still gaining sponsor support are still current we believe that they will get through this okay and we're talking right now about a potential modification to interest only for a while but again, we felt it was prudent on those two.
Edward Handy: And I'm going to ask Bill to just talk about the details on the office project that we did in the quarter. It was really one deal with an extremely strong sponsor and amazing deal metric. So in the never say never category, this is one we felt was the right thing to do. He had a 16% going in debt yield, about a 50% LTV, you know, 2.0 coverage, no tenant concentrations. So it was a deal that made sense.
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.
Thank you.
Thanks Mark.
Edward Handy: 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 cherry to pick. And we also got really good structure in terms of a guarantee on that. So we certainly I haven't seen any office deals in a while. This was the pie this got in a pipeline quite a while ago.
Our next question comes from the line of Damon Delmonte with <unk>.
Please go ahead. Your line is now open.
Okay.
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 morning that if you look at the loan loss reserve. It is around 72 basis points.
Are there any other credits I guess first that are.
Ronald Ohsberg: Yeah. And just to give you the sense, Mark, we came into the quarter with a pipeline that was north of 300 million. Our pipeline right now is below 100 million. On total total.
Starting to pop up on the screen as maybe being concerning and then as you look at the kind of broader credit picture and economic picture do you do you still feel comfortable with the reserve.
Unknown Executive: Okay.
Unknown Executive: But last question. Okay.
That's well below 1%.
Unknown Executive: Last question is I wonder if you could give us a little more detail on those two nonperforming loans in the commercial real estate bucket. Maybe some color around, you know, what's going on there?
Yes.
Yes, David I'll start with that and I'll hand, it off to Bill, Yes, I mean, we do a very very detailed review of our portfolio each quarter.
Unknown Executive: Cause I think Ron mentioned that they're performing, but you put them on nonacroll. What's what's going on with those. Right.
And.
Yes, we know 72 is probably on the lower end of the peer group range, but given the quality of our portfolio.
William Wray: This is bill again. So one of them is a senior housing facility, LTV at 59% been challenged on vacancy, been challenged also with staffing costs. A lot of these places have had a real difficulty hiring people. It 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.
Our understanding of it we're comfortable with that level.
Sure again very comfortable with the level, it's under Cecil 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.
<unk>.
William Wray: But was it matured? And so the nonacroll was based on that. It is current. We're now discussing you know, forbearance possibly going to IO for a while, tell that film recover. But you know, us again, a solid deal with a strong sponsor, but the nonacroll was tripped by the maturity. And then the fact that we had to get to fourbearance in place.
Literally none for the year almost.
We haven't lost a $40 million that we have on our reserve over the last 20 years and so we're nowhere completion 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.
William Wray: The other one is a couple of class B office properties. You know, occupancy around 60% still getting sponsor support. Still current. We believe that they'll get through this.
Through ups and downs for quite a while.
Look at our delinquencies there essentially.
Nonexistent on the commercial sides are light on the others, we do stress test consistently both top down and bottom up using a third party and the numbers tell us that we are.
William Wray: Okay. And we're talking right now about a potential modification to interest only for a while. But again, we felt it was prudent on those to go nonacroll as well. But as I said, both of them, as you noted, are fully performing and haven't missed a payment.
Unknown Executive: Thank you.
In good shape on that.
Reserve side, so, yes, we do feel comfortable.
Unknown Executive: Thanks, Mark.
Yeah.
Okay. That's helpful. I appreciate that color.
And then I guess on the 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 slowing.
Damon Delmonte: Our next question comes from the line of Damon Dermont, one day with KVWA.
Damon Delmonte: Please go ahead, your line is now open. Hey, good morning guys. Thanks for taking my call. Just to kind of follow up on the credit discussion there. You know, if you look at the morning net, if you look at the the loan loss reserve, you know, it's around 72 basis points, you know, are there any other credits? I guess first that are starting to pop up on the screen as maybe being concerning. And then as you look at the kind of broader credit picture and economic picture, do you still feel comfortable with the reserve? You know, that's well below 1%.
An opportunity to maybe take cash flows from the securities portfolio and reduce some of the higher cost borrowings or have you even considered maybe selling a portion of the <unk>.
Securities to kind of accelerate the ability to repay borrowings and get some relief on the margin.
Yeah, we've been we've been not reinvesting or.
Investment security cash flows since the first quarter. So so the securities portfolio is in run off mode.
At the moment to do just exactly what you said to use that to pay down.
Those wholesale borrowings.
William Wray: Yeah, Damon, I'll start with that and I'll hand it off to Bill. Yeah, I mean, we do a very, very detailed review of our portfolio each quarter. 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. Sure, again, very comfortable with the level. It's, you know, under sea soil, it's a forward looking estimate of lifetime losses in the portfolio.
And as Ed mentioned, we're at.
Slowing the loan growth down right now so.
The growth in reliance on wholesale should be coming down.
Okay and then.
If the fed does end up cutting rates in the back half of 'twenty four.
How do you feel the balance sheet is positioned for something like that do you think your margins I mean could that be like.
Built in inflection point for you if nothing else changes if the margins keeps drifting lower like at that point youre poised to benefit.
William Wray: 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 million we haven't on reserve over the last 20 years. And so we're no way complacent about credit, but our quantitative models are built to have conservative estimates in them. We've got, you know, good qualitative reserves as well. So we are extremely comfortable where we are and we have outperformed the industry on credit issues.
Yeah.
An abrupt change in rates.
Felt immediately and our sulfur book.
Our prime and so for loans or about $1 billion.
So those tend to reprice immediately.
Would have to ratchet down our our deposit and wholesale borrowing cost it doesn't happen quite as quickly as it does.
With the loan book.
William Wray: You know, it threw ups and downs for quite a while. If you look at our delinquencies, they're essentially, you know, non-existent on the commercial side that are light on the others, we do stress tests consistently both top down and bottom up using a third party. And the numbers tell us that we are in good shape on the reserve side. So yes, we do feel comfortable.
Overall, I think that would be a net positive for us it wouldn't happen immediately though it would bleed in over a period of quarters.
Damon Delmonte: Okay, that's helpful. Appreciate that color.
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 34 ish range to 30 $35 million a quarter is a reasonable.
Level, given what you guys have going on with with the branch openings and other.
Ronald Ohsberg: And then I guess on the on the margin front to go back to that. I guess, Ron, you know, you guys have added a lot of wholesale borrowings and if long growth slowing, you know, is there an opportunity to maybe take cash flows from the securities portfolio and reduce some of the higher cost borrowings or have you even considered maybe selling a portion of the security. So kind of accelerate the ability to repay borrowings and get some relief on the margin.
Strategic effort, yes.
Well like I said, the fourth quarter should look like the third quarter, except for the few items that I mentioned.
And then things will reset with.
With merit raises and so forth back in the first quarter and branch costs will be higher in the first quarter than they were in the fourth quarter, but.
Not really prepared to go into 2014 on this call.
What did I say 2000.
Ronald Ohsberg: Yeah, we've been we've been not reinvesting our investment security cash flows since the first quarter. So the securities portfolios and 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, you know, the growth and reliance on wholesale should be coming down.
2024.
Thanks.
I know.
Yes.
Thank you.
So yes, yes were just kind of look at the Q4 right now in positioning.
Positioning ourselves for next year.
Got it okay.
That's all I had thank you very much.
Okay. Thanks, Dan.
Our next question comes from the line of Laurie Hunsicker with Seaport Research Partners. Laurie. Please go ahead. Your line is now open.
Ronald Ohsberg: Okay, and then, you know, if the Fed does end up cutting rates in the back half of 24, 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 a built-in inflection point for you, if nothing else changes, if the margin keeps drifting lower, like at that point, your place to benefit. Yeah, you know, so an abrupt change in rates is, you know, felt immediately in our sofa book, you know, our prime and sofa loans are about a billion eight.
Yeah.
Great Hi, Thanks, good morning.
Just a follow up on expenses.
And you guys can do the charitable foundation contribution are you thinking about that more as that'll be an ongoing fourth quarter event or is that going to bleed through in all quarters, but there just.
Ongoing quarterly contribution or how should we be thinking about modeling that.
I think we're going to do with kind.
Kind of a single contribution to the foundation to keep it going for a while.
Ronald Ohsberg: So those tend to reprise, you know, 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 block. Overall, I think that would be a net positive for us. It wouldn't happen immediately, though, it would bleed in over a period of quarter.
And so we just need to determine how big that contribution will be in the fourth quarter and I think it'll be at least 500000.
Okay, and that'll be an ongoing fourth quarter event as we look out in the market.
I think thats correct as of today I think thats as of today, that's a fair assumption yes.
Yeah.
Got it got it Okay, and then just going back to the deposits you had a really nice jump in deposits can you talk about.
Ronald Ohsberg: And then just last the end on the expense front. Yeah, I appreciate the commentary before on that. So you kind of feel like this mid 34th range to 35 million a quarter is a reasonable level, given what you guys have going on with with the branch openings and other, you know strategic effort. Yeah. Like I said, you know, the fourth quarter should look like the third quarter except for the few items that I mentioned.
It's sort of two things.
One is how should we think about when youre going to start to.
The clip broker deposits and then also how should we be thinking about growth and quite a positive I know that the real emphasis but specifically this is a challenging environment. How should we think about that as they look forward.
Sorry, I missed the part about the brokered deposits.
Ronald Ohsberg: And then, you know, things will reset, you know, with with merit raises and so forth back in the first quarter and branch costs will be higher in the first quarter than they were in the fourth quarter, but not really prepared to go into 2014 on this call 24. What did I say, 24, 24, 24? I know.
Well your brokerage deposits linked quarter, you went from 601 to 668.
Yes.
Obviously, you had quite a bad that's helped.
Help us think about that a little.
Yes, we're going to manage brokered deposits to about 10% of total assets.
So we're near that.
Kind of topped out on brokerage.
Ronald Ohsberg: Thank you. So, yeah, yeah, we're just kind of looked at the queue for right now and in dispositioning ourselves for next year. Got it.
Okay General deposit growth I mean, I guess I should point out in the quarter, we had one large institutional deposit withdraw it wasn't.
Inexpensive deposit, but that was a $100 million.
Damon Delmonte: Okay. That's all that I had. Thank you very much.
Of institutional money that had been placed with us, which we knew was with somewhat temporary in nature, but it did leave in the third quarter.
Lori Huntsicker: Next question comes from the line of Lori Huntsicker with seaport research partners. Lori, please go ahead. Your line is now open. Great. Hi. Thanks. Good morning.
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 things that we're looking at to increase that going forward.
Lori Huntsicker: Just to follow up on expenses and that you guys used to do the charitable foundation contribution, are you thinking about that more as that'll be an ongoing fourth quarter event or is that going to bleed through into all quarters, but they're just be an ongoing quarterly contribution. Or how should we be thinking about modeling that? I think we're going to do with kind of a single contribution to the foundation to keep it going for a while.
So we're not prepared to talk about what with.
But the numbers of that might look like but I can assure you. It's an important priority for us right now.
Rhode Island market.
Parts of the market does not grow very much.
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.
Lori Huntsicker: And so we just need to determine how big that contribution will be in the fourth quarter and I think it'll it'll be at least 500,000. Okay, but I mean, that'll be an ongoing fourth quarter event as we look out similar to I think as of today, I think that's as of today, that's a fair assumption. Yeah. Got it. Okay.
Pretty evidenced.
Loan growth will be coming down and hopefully if we do what we are.
I intend to do deposit growth will pick up.
Okay great.
Great. Thanks, and then.
Just going back to the commercial real estate non performers.
And then Brian and Bill can you help us think about what was the balance on the senior housing facility and then the <unk>.
Lori Huntsicker: And then just going back to deposits, you had a really nice jump in deposits. Can you talk about it's sort of two things. Number one is, how should we think about when you're going to start to flip broker deposits and then also how should we be thinking about your growth in court deposits. I know that's a real emphasis, but you know, specifically, this is a challenging environment. How should we think about that as we look forward?
And finally, you mentioned a couple of class the opposite of what was the dollar balance and then what's the debt service coverage ratio is looking like with the vacancy looking like.
Cool.
Alright.
While you are wrapping those net can you comment Oh go ahead I'm sorry.
Lori Huntsicker: Sorry, I missed the part about the broker deposits. Well, you're broker deposits in quarter, you went from 601 to 668, I mean, where are you going? Obviously, you had a jump in. Help us think about that a little. Yeah, we're going to manage broker deposits to about 10% of total assets. So we're we're near the kind of topped out on brokerage. General deposit growth, I mean, I guess I should, you know, point out in the quarter, we had one large institutional deposit withdrawal, and inexpensive deposit, but that was $100 million of institutional money that had been placed with us, which knew was somewhat temporary in nature, but it did leave in the third quarter.
Okay.
They are still looking for the <unk>.
Okay.
Okay, well maybe I'll.
Yes, I had a senior housing facility as was $13 9 million.
That was our share it's a participation.
And then the other is the.
The office property is $8 7 million net secured by two office buildings.
Okay, Okay, and what what is the what is the vacancy on both of those and what's the debt service coverage.
Alright can follow up with you after that.
Yes, I want to make sure I give you.
Current versus pro forma on each of those so we can follow up and give you those stats.
Lori Huntsicker: 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 things that we're looking at to increase that going forward. So we're not prepared to talk about what, you know, what the numbers of that might look like, 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, you know, considerably faster than the market as a whole.
Okay, Great and then just one last question.
Obviously, very very well capitalized here.
I realized earnings are bumping up against dividend, but yes.
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 and buybacks. The stock is very very discounted.
And 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.
Yeah, we have no intention of doing any buybacks.
Lori Huntsicker: It has not grown fast enough to keep up with the long growth that we've been posting. You know, that's pretty evident. One growth will be coming down and hopefully if we do what we're intent to do deposit growth, we'll pick up.
Okay, great. Thanks, I'll leave it there.
Okay.
Lori Huntsicker: Okay, great. Thanks.
Thanks, Laura.
We do not currently have any further questions registered as a final reminder, if you would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad.
Lori Huntsicker: And then just going back to the commercial real estate now performers. You know, Ron and Bill, can you help us think about what was the balance on on the senior housing facility and then the balance on you mentioned a couple of classes. The offices, what was the dollar balance and then what's the debt service coverage ratio looking like? What's the vacancy looking like? Maybe while you're grabbing those, can you just comment?
Lori Huntsicker: Oh, go ahead. Yeah, I'm sorry. They're still looking for the whole on the set. Okay, on the. You are good. Well, maybe senior. Oh, yeah, go ahead. The senior housing facility is was 13.9 million. That was our share. It's a participation. And then the other is the office property is 8.7 million. That's secured by two office buildings. Okay, and what's what is the what is the vacancy on both of those? What's the debt service coverage? Or I can follow up with you after if that's for help.
Okay.
We have no further questions I will turn the call back over to the management team for any further remarks.
Yeah.
Thank you Emily and thank you all for your time today.
This is a certainly these are uncertain times, but we're confident that Washington Trust is the best alternative for people businesses and organizations to seek a higher level of personal guidance competitive products and stability that make the most of their financial wellbeing.
I wanted 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.
Also want to thank our customers for knowing us as well as we know you.
Learning gets stronger with each experience.
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 in a stubborn inverted yield curve or hardships, we all have to endure but with strong partners patients prudent decisions and disciplined hard work, we will gain strength and be positioned well for much better times ahead. So thank you all for your time. This morning have a great day.
William Wray: Yeah, I want to make sure I give you, you know, current versus pro form on each of those so we can follow up and give you those stats. Okay, great.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Edward Handy: And then just one last question. Obviously very, very well capitalized here. You know, realized 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 and a buyback stock is very, very discounted from the last point you were looking at. Can you help us think about that a little bit from the standpoint of your capital? Yeah, we have no intention of doing any buybacks.
Lori Huntsicker: Okay, great. Thanks.
Yeah.
Ladies they'll call and you may now disconnect your lines.
Lori Huntsicker: I'll leave it there. Thanks, Laurie.
Unknown Executive: We do not currently have any further questions registered as a final reminder. If you would like to ask a question today, please do so now by pressing start. Follow by the number one on your telephone key pads. Thank you.
Unknown Executive: We have no further questions.
Edward Handy: I'll turn the clip back over to the management team for any further remarks. Thank you, Emily, and thank you all for your time today. This is a certainly, these are uncertain times, but we're confident that Washington Trust is the best alternative for people business and organizations to 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.
Edward Handy: We have a long, long history of managing through challenges, so I'm confident we'll fare well here. I also want to 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 or hardships we all have to endure. But with strong partners, patience, prudent decisions, and discipline, hard work, we will gain strength and be positioned well for much better times ahead.
Unknown Executive: So thank you all for your time this morning. Have a great day.
Unknown Executive: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines. Those are cool and you may now disconnect your lines.