Q4 2023 Washington Trust Bancorp Inc Earnings Call
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Good morning, and welcome to Washington Trust Bancorp, Inc. 's Conference call. My name is Seth and I'll 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 coal should press star one to join the queue.
Today's call is being recorded I will now turn the call over to Elizabeth B Eckel Executive Vice President Chief marketing and corporate Communications Officer Ms Eckel.
Okay.
Thank you good morning, and welcome to Washington Trust Bancorp, Inc. Com.
Conference call for the fourth quarter and year end 2023, joining us. This morning are members of Washington Trust Executive team, Ned Handy, Chairman and Chief Executive Officer, Mary Noon, President and Chief operating Officer, and Ron Osborne Senior Executive Vice President and Chief Financial Officer, and Treasurer and Bill rate.
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.
Ned Handy: 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 Dot Wash Trust Dotcom, Washington Trust trades on the NASDAQ under the symbol wash I'm pleased now to <unk>.
Ned Handy: Produce Washington Trust host, Washington, Washington Trust, Chairman, and Chief Executive Officer, Ned Handy.
Ned Handy: You bet good morning, everybody and thanks for joining us for our call.
Ned Handy: Definitely I 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, then Ron will.
Edward O. Handy III: Dive into the fourth quarter performance, and then Mary Nunes and Bill Ray will join us for Q&A, we continue to be focused on ensuring a durable balance sheet that is positioned to take advantage of opportunities 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.
Ron: Moving external environment throughout 2024 and.
Edward O. Handy III: And that way, we will remain positioned to resume growth of our long term focused profitable relationship driven company.
Ron: Capital front, we've slowed asset growth and are managing our funding base and expenses to build earnings capacity.
Mary Nunes: 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 are looking particularly 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.
Sure.
Edward O. Handy III: Our deposit franchise remains strong although understandably more expensive we remain committed to incremental branching and are pleased that our three newest branches opened within the past two years have almost $130 million in aggregate deposits. Our average branch size remains above $200 million, we held in market deposits steady in the fourth quarter and a very.
Edward O. Handy III: The competitive landscape and through our continued efforts and focus we will drive growth in future periods.
Edward O. Handy III: 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.
Edward O. Handy III: Focus is on what we can control and on protecting and enhancing our customer base and the experience. They have with US included in our expense focus is a detailed look at our real estate footprint, both leased and owned.
Edward O. Handy III: We will rightsize, our footprint and look at appropriate ways to unlock capital and reduce expenses we're able.
Edward O. Handy III: Our employees always provide reason to be optimistic both according to our customers and reflected in the recognition. We've received from Newsweek Forbes American banker and Blue Cross is a great and healthy place to work.
Edward O. Handy III: In summary, we are positioned to ensure stability and to regain our customary strengths in the quarters ahead, we have a strong and dedicated team of known brand very strong credit statistics sufficient capital in an appropriate short term strategy to weather the current challenges and to enchant.
Edward O. Handy III: Enhance franchise value.
Edward O. Handy III: I will turn it over to Ron for a more detailed review of the quarter right. Okay. Thank you, Matt Good morning, everyone and thanks for joining us as Ned mentioned fourth quarter net income was $12 9 million or <unk> 76 per diluted share, which includes the tax item of $3 3 million that added <unk> 19 cents to EPS.
Ron: Net interest income was $32 7 million down by $1 1 billion or 3%. The margin was 188 down by nine basis points.
Average, earning assets increased by $103 million in the yield on those assets was $4 81 up by 12 basis points on the funding side average wholesale funding grows by $105 million and average end market interest bearing deposits increased by $21 million the rate on interest bearing liabilities increased by 23 basis points to $3 49.
Ron: Prepayment fee income was 27000 in the fourth quarter and 71000 in Q3, neither having any impact to margin.
Ron: Yeah.
Ron: Noninterest income was comprised 29% of total revenues amounted to $13 3 million down by $1 9 million or 13%.
Wealth management revenues were $8 9 million down 67000, or 1%, reflecting a decrease of $58 million or 1% and average balances in the period totaled $6 6 billion up by $457 million or 7%.
Ron: Reflecting market appreciation of $503 million.
Ron: Mortgage banking revenues totaled $1 6 million down by 554000 for 26%.
Ron: Of note, 64% of our originations in the quarter were favorable compared to 33% in the third quarter and we expect the improvement in that ratio to continue.
Ron: Okay.
Ron: Derivative income totaled 112000 in the fourth quarter down by 970000.
Ron: We do expect minimal <unk>.
Riveted gains in 2024.
Regarding expenses these were down $1 8 million or 5% from Q3 salaries expense decreased by $3 2 million or 15% reflected a $3 $4 million in reductions to performance based compensation accruals for the year. These reductions totaled $5 4 million.
Edward O. Handy III: Other noninterest expenses were up by $1 3 million or 56%, reflecting a $1 million contribution to our charitable foundation.
Edward O. Handy III: Income taxes were a net benefit of $774000 as noted in our release. This included a $3 $3 million reduction in tax expense due to a change in Massachusetts tax law. This increase this increase Q4 and full year EPS by <unk> 19.
Edward O. Handy III: Excluding this adjustment the effective tax rate for Q4 would have been 24% compared to 28% for Q3, and we estimate our full year 2024 effective tax rate to be 21, 2%.
Edward O. Handy III: Now turning to the balance sheet total loans were up by $37 million or 1% from September 30, and by $538 million or 11% from a year ago in the fourth quarter total commercial loans increased by $36 million or 1% essentially all in commercial real estate residential loans decreased by 7 million consumer loans.
Edward O. Handy III: Were up by $7 million in market deposits were down by $53 million or 1% from September 30, and up by $33 million or 1% from a year ago.
Edward O. Handy III: Uninsured and uncollateralized deposits are estimated to be 18% of total deposits.
Edward O. Handy III: Average deposit account balances 36000, and we have $1 $9 billion of contingent liquidity.
Edward O. Handy III: Total equity amounted to $473 million up by $41 million from the end of Q3. This included quarterly net income of $12 9 million and a $44 million increase in OCI due to an increase in the fair value of <unk> Securities.
Edward O. Handy III: This was partially offset by $9 $6 million in dividend.
Edward O. Handy III: Regarding asset quality non accruing loans were 79 basis points and past due loans were 20 basis points of total loans. The increase in non accruing loans was largely due to one pre loan that was placed on nonaccrual in the fourth quarter. This loan was current at December 31.
Edward O. Handy III: The allowance totaled $41 1 million or <unk> 73 basis points of total loans, the fourth quarter provision for credit losses was a charge of $1 2 million up by 700000.
Edward O. Handy III: From the provision recognized in Q3, we had net charge offs of 406000 in the fourth quarter compared to 30000 in Q3 and year to date net charge offs totaled 540000.
Edward O. Handy III: And at this time I will turn the call back to Matt.
Edward O. Handy III: Thank you Ron and we can go right to questions.
Edward O. Handy III: Okay.
Edward O. Handy III: Thank you so if you'd like to ask a question. Please press star one on your telephone keypad now or have you changed your mind on wish to withdraw your question. Please press star two.
Edward O. Handy III: First question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead.
Edward O. Handy III: Okay.
Edward O. Handy III: Okay.
Mark Thomas Fitzgibbon: Good morning, Mark.
Mark Thomas Fitzgibbon: Good morning.
Mark Thomas Fitzgibbon: You guys did a nice job on expenses in the fourth quarter I guess I was curious on your thoughts for expense growth in 2024.
Mark Thomas Fitzgibbon: Yeah. So.
Mark Thomas Fitzgibbon: If you take our fourth quarter total expenses and you back out.
Edward O. Handy III: The charitable contribution and you back out the.
Edward O. Handy III: The incentive reversal.
That's a good run rate going into 2024.
Edward O. Handy III: So annualize that fourth quarter normalized and that's our expense estimate for the year.
Edward O. Handy III: So so far.
Edward O. Handy III: Yes.
Edward O. Handy III: I'm, sorry, so so roughly about $30 million a quarter.
Edward O. Handy III: Yeah.
Edward O. Handy III: I think it's about $35 million a quarter.
Edward O. Handy III: Okay.
Edward O. Handy III: Sure.
I'm, sorry, you're right.
Edward O. Handy III: Okay, and then secondly.
Mary Nunes: How are you what is your net interest margin outlook over the next quarter or two and what does that assume for.
Fed actions.
Yeah.
Mary Nunes: So.
We're looking at.
Mary Nunes: NIM in the first quarter of 180 to $1 85.
Mary Nunes: We continue to see a lot of competitive pressure on deposits. There is a lot of exception pricing.
Going on we continue to see mix shift from from DDA into.
Mary Nunes: Cds et cetera.
Mary Nunes: So we expect to see that that continued pressure on the margin at least in the first quarter.
Edward O. Handy III: We are budgeting three.
Edward O. Handy III: Rate reductions.
Edward O. Handy III: And we think that that should give us some lift in the second half of the year.
Edward O. Handy III: Yeah.
Edward O. Handy III: Okay.
We have a lot of any color with us.
Sorry.
Yes, Mark I was just I was just going to give a little bit more color on that so so we do have a large 1819.
Mark Thomas Fitzgibbon: Billion dollar one month's sofa portfolio. So when the fed does begin to cut rates if they do.
Mark Thomas Fitzgibbon: That will reprice immediately we keep most of our wholesale funding pretty short.
Mark Thomas Fitzgibbon: So it will it will catch up but it won't be instantaneous so.
Mark Thomas Fitzgibbon: If they cut in March we will see a reset on the on that loan book on April one.
Mark Thomas Fitzgibbon: And then we will just need to reprice, our liabilities down.
Mark Thomas Fitzgibbon: 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.
Bill: Yes, Bill do you want to handle that.
Bill: Sure.
Bill: It's basically our exposure is $11 million. It's a recently renovated mixed use office retail building in greater Boston.
Bill: <unk> had at least the first floor up bind to a restaurant they have had difficulty with the other three floors getting office tenants to the borrower Gary we've got a lot of money in this deal more than we do at this point.
Edward O. Handy III: It has gone through an orderly liquidation process, we had credible bids we expect it to close this quarter of sale to close this quarter that will take us out with our principal loss. However, theres always.
Edward O. Handy III: Never know when a deal is going to close but at this point it's on.
Edward O. Handy III: Our path to resolution within the first quarter.
Edward O. Handy III: Okay, Great and then last question I had.
Edward O. Handy III: Your dividend payout ratio on a core basis this quarter was 98%.
Edward O. Handy III: And with the margin likely to come under a little more pressure in coming quarters and expenses kind of.
That $35 million level, it would imply that you'd go over 100% payout ratio in the first quarter, how do you feel about the.
Edward O. Handy III: Sustainability of the payout ratio.
Or the dividend level.
Edward O. Handy III: Yeah sure.
Edward O. Handy III: Sure I mean, our payout ratio was high we realize that.
Edward O. Handy III: We believe that we are we remain well capitalized and we believe that the dividend is sustainable even if we.
Edward O. Handy III: I would say temporarily go over 100%.
Edward O. Handy III: Were still prepared to maintain that we are fully expecting to maintain the dividend.
Edward O. Handy III: Thank you.
Edward O. Handy III: Yes. Thanks Marrero next question comes from Laurie Hunsicker from Seaport Research partners. Please go ahead.
Edward O. Handy III: Yes.
Edward O. Handy III: Yeah, Hi, Thanks, good morning.
Edward O. Handy III: Just going back to what's been going on here.
Edward O. Handy III: Charitable Foundation.
Edward O. Handy III: How should we think about that in your numbers selling fireeye.
Is that something organically.
Edward O. Handy III: The fourth quarter every year is that kind of thing.
Edward O. Handy III: About that.
Yeah.
Edward O. Handy III: Yes, so I would say Laurie we kind of guided to more on the 500 range last time, we talked about this in with the tax.
Benefit that we recorded we topped that up to $1 million, so that that should carry us through 2024 and into 2025.
Edward O. Handy III: So at this point, we're not we're not really expecting to add more to that.
Laurie Havener Hunsicker: In calendar year 2024 at this point.
Edward O. Handy III: At some point, we will have to put more in.
Edward O. Handy III: As we disbursed the funds but.
Edward O. Handy III: Yeah, we intentionally top that million dollars that.
Edward O. Handy III: That contribution up to a million dollars.
Edward O. Handy III: Okay.
Edward O. Handy III: Got it got it okay. So just back to the expense.
Edward O. Handy III: The expense guide that you gave mark here I'm, just trying to kind of try to do that.
Edward O. Handy III: Now looking at 32 point backing out the $1 million down to 31.
Edward O. Handy III: How am I going from $31, six and I realize you've got some new branches coming online and maybe you can comment on that but how do you go from 31.
Edward O. Handy III: In the quarter at $35 million project can you help us think about that what Amanda yes.
Edward O. Handy III: Yes.
Edward O. Handy III: Yeah. So Larry we had a credit go through the expense line of $3 4 million in the fourth quarter.
Larry: So so so so strip that out in fourth quarter is more like $35 million.
Larry: Got it okay. Thank me at the outset of reverse.
And then.
Larry: Yes.
Larry: Yes.
Larry: Okay, Great and then the other other income line.
Edward O. Handy III: Of 83000 light was there was there any one time charges that ran through that.
Edward O. Handy III: Yes, there was a we did $79000 valuation reserve.
Edward O. Handy III: Yes, yes, we set up a $300000 valuation reserve on an asset in there.
Edward O. Handy III: Okay.
Edward O. Handy III: Okay, and then back over to Ma'am do you have a December spot margin.
Edward O. Handy III: Yes.
Yes, it was 182.
Okay. Okay, and then just last sort of maybe general question.
Edward O. Handy III: Some banks take.
Edward O. Handy III: Some restructuring with the next Securities book, How do you guys think about that.
Edward O. Handy III: That's part one.
Edward O. Handy III: Yeah, I mean, we've kicked that around a lot.
Edward O. Handy III: We have not decided to do that I don't think we're planning to do that.
Edward O. Handy III: We had a nice recovery in our investment portfolio in the fourth quarter.
Edward O. Handy III: I understand some of the merits of why banks are doing.
Edward O. Handy III: Yes.
Edward O. Handy III: I doubt that we're going to do it.
Gotcha.
Edward O. Handy III: Okay, great. Thanks for taking my question.
Edward O. Handy III: Thanks, Laura.
Edward O. Handy III: The next question comes from Damon Delmonte from <unk>. Please go ahead.
Edward O. Handy III: Yes.
Hey, everybody. This is Matt rank filling in for David del Monte I Hope everybody is doing well.
Matt Rank: You guys mentioned, you're slowing asset growth loan growth this quarter. So I was just hoping.
Matt Rank: Hi, I was just hoping we could get your thoughts on full year loan growth for 2024.
Matt Rank: Sure.
Matt Rank: Yeah, I would say on a net basis, it's going to be about zero percent.
Matt Rank: So we're looking at commercial growth we had.
Matt Rank: Yeah.
Matt Rank: We're not doing a lot of originations right now we did have a fairly sizable construction.
Matt Rank: Previously committed construction pipeline.
Matt Rank: That's going to add about $240 million of advances during the year.
Matt Rank: That will be partially offset by amortization and pay downs.
Matt Rank: But that will give us commercial growth of about 3%, but then we'll have about a 3% decline in resi and consumer.
Matt Rank: So on a net basis about zero.
Matt Rank: Yeah.
Matt Rank: Okay got it and then just a few.
Matt Rank: 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.
Matt Rank: Yeah.
Matt Rank: But I think we're thinking.
Matt Rank: Might build and if you wanted to put in a $1 million a quarter.
Matt Rank: We're not seeing any.
Matt Rank: Particular trouble.
Matt Rank: It just feels like it needs to be a little higher than say like the $5 million run rate that we've had of course this quarter was a little higher but where.
Matt Rank: Where we're thinking about a million dollars a quarter.
Matt Rank: Okay got it thank you.
Thanks, Matt.
Matt Rank: Matt you said okay.
Matt Rank: I just wanted to give a little bit more.
Matt Rank: On expenses.
Matt Rank: Yeah, so that.
Matt Rank: Yes.
Matt Rank: That is zero percent expense growth also includes about a $1 $5 million additional expense related to the de novo branches.
So that's covered.
Matt Rank: Sure.
Matt Rank: Great.
Matt Rank: We have a follow up question from Laurie at Seaport Research. Please go ahead.
Matt Rank: Mhm.
Laurie: Yeah, Hey, Thanks, Ron.
Laurie: I would like to just holding you guys back on the.
Laurie: On the expense related to the branches. So what is what is the timing on de Novo branches opening in 2020 for how youre thinking about that.
Laurie: Yeah.
Yes.
Laurie: Yeah.
Edward O. Handy III: Yes, Hey, Laurie its Ned.
One in the first quarter actually one in end of January and one in the first quarter.
Edward O. Handy III: Essentially April.
Edward O. Handy III: And as Ron just pointed out.
Edward O. Handy III: Expense comments, we have covered the cost of those of those new branches. So they are built into that expense base.
Edward O. Handy III: Yes.
Edward O. Handy III: Yes.
Edward O. Handy III: Perfect all right. Thanks.
Edward O. Handy III: Yeah.
Edward O. Handy III: Thank you.
Edward O. Handy III: We also have a follow up from Mark Fitzgibbon of Piper Sandler. Please go ahead.
Edward O. Handy III: Yeah.
Mark Thomas Fitzgibbon: Hey, guys I was wondering if you could comment on your capital position and whether you you were thinking about raising additional capital.
Mark Thomas Fitzgibbon: Yes.
We're not.
Mark Thomas Fitzgibbon: We are curtailing our loan originations are pretty significantly.
Mark Thomas Fitzgibbon: 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.
Mark Thomas Fitzgibbon: Okay.
Mark Thomas Fitzgibbon: Thank you.
Mark Thomas Fitzgibbon: Okay.
Mark Thomas Fitzgibbon: Yes.
Mark Thomas Fitzgibbon: Hmm.
Mark Thomas Fitzgibbon: Yes.
Mark Thomas Fitzgibbon: That's one last reminder, for any further questions. Please press star one on your telephone keypad now.
Mark Thomas Fitzgibbon: Okay.
Mark Thomas Fitzgibbon: Yeah.
Mark Thomas Fitzgibbon: Okay. We have no further questions on the call.
Mark Thomas Fitzgibbon: Yeah.
Mark Thomas Fitzgibbon: Thank you all I know you've got a busy morning. We appreciate your taking the time to be with us and look forward to talking to you again soon.
Mark Thomas Fitzgibbon: Have a great day everybody.
Mark Thomas Fitzgibbon: Yeah.
Mark Thomas Fitzgibbon: Okay.
Mark Thomas Fitzgibbon: This concludes the conference call. Thank you all very much for joining and you may now disconnect.
Mark Thomas Fitzgibbon: [music]. Please the conference call. Thank you all very much for joining and you may now disconnect.
Mark Thomas Fitzgibbon: Yeah.