Washington Trust Bancorp - Q3 2024
October 22, 2024
Transcript
Operator (participant)
Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Lydia, 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 call should press star followed by one to get in the queue. 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. Ms. Walsh, please go ahead.
Sharon Walsh (Senior VP and Director of Marketing and Corporate Communications)
Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp Inc's Conference Call for the Third Quarter of 2024. Joining us this morning are members of the Washington Trust executive team, Ned Handy, Chairman and Chief Executive Officer, Mary Noons, President and Chief Operating Officer, Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer, and Treasurer, and Bill Wray, 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. 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?
Edward O. Handy III (Chairman & CEO)
Thank you, Sharon. Good morning, and thank you for joining our third quarter 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&A session. 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. 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 Olneyville 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 quarter, and then we'll be glad to address any questions you have. Ron?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Okay. Thanks, Ned, and good morning, everyone. Net income for the third quarter was $11 million and $0.64 per share. Net interest income was $32.3 million, up by $677,000 or 2% from the preceding quarter. The margin was 1.85%, up by 2 basis points. There were no prepayment penalties, prepayment fee income in the third quarter compared to $46,000 in Q2. Non-interest income comprised 34% of revenue and amounted to $16.3 million, down by $388,000 or 2%. Included in the second quarter was a $988,000 gain on the sale of our operations center.
Excluding this, non-interest income was up by $600,000 or 4%, while management revenues were $10 million, up by $311,000 or 3%. AUA totaled $7.1 billion, up by $249 million or 4%. Mortgage banking revenues totaled $2.9 million, up by $105,000 or 4%, and our mortgage pipeline at September 30 was $107 million, 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 third quarter effective tax rate was 20.6%, and for 2024, we expect it to be 21%.
Turning to the balance sheet, total loans were down by 114 million or 2%. Commercial loans decreased by 82 million or 3%, while residential decreased by 29 million or 1%. In-market deposits, which exclude wholesale brokered time deposits, were up by 155 million or 3%. Wholesale broker deposits were up 41 million, and FHLB borrowings were down by 250 million. Our loan-to-deposit ratio decreased from 113 to 106. Total equity amounted to 502 million, up by 31 million from the end of the second quarter. Our asset and credit quality metrics remain solid. Non-accrual 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 one commercial real estate loan that has been on non-accrual status since the fourth quarter and is now past maturity. We do expect that credit to be resolved in the fourth quarter. The allowance total, $42.6 million, or 77 basis points of total loans and provided NPL coverage of 137%. And we had net charge-offs of $48,000 in the third quarter and $127,000 on a year-to-date basis. And at this time, I'll turn the call back to Ned.
Edward O. Handy III (Chairman & CEO)
Thanks, Ron. And now we'll open it up to questions, Lydia.
Operator (participant)
Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your devices are muted locally when it's your turn to speak. If you change your mind or your question's already been answered, you can withdraw your question by pressing star followed by the number two. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.
Mark Fitzgibbon (Managing Director and Equity Research)
Hey, guys. Good morning. Ron-
Ronald S. Ohsberg (Senior Executive VP and CFO)
Morning, Mark.
Mark Fitzgibbon (Managing Director and Equity Research)
I think I missed your comment on the commercial pipeline. I think you said a $107 million mortgage pipeline. Did you mention the size of the commercial pipeline?
Ronald S. Ohsberg (Senior Executive VP and CFO)
I didn't, and it's $90 million, and that's up from $45 million in the second quarter.
Mark Fitzgibbon (Managing Director and Equity Research)
What rough average rate would you guess is on that pipeline?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Most of what we're doing is, I would say, FHLB plus 150, excuse me, 250.
Mark Fitzgibbon (Managing Director and Equity Research)
Okay, great. And then secondly, I noticed cash balances were, you know, up about $200 million. Will that normalize in the fourth quarter, or you just feel like running-
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yes
Mark Fitzgibbon (Managing Director and Equity Research)
... the higher cash balances right now makes sense?
Ronald S. Ohsberg (Senior Executive VP and CFO)
It will. Yeah, no, that's, that's just timing.
We replenished brokered CDs in the third quarter, and we also had some loan payoffs, and we used that cash to pay down FHLB. We've paid down maturing brokered CDs as well. So no, we would plan to run that down to about $100 million.
Mark Fitzgibbon (Managing Director and Equity Research)
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, you know, what you think the trajectory of the margin is likely to look like in the next quarter or two?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah. So, you know, as I mentioned on the June call, rate reductions will likely reduce net interest income a bit in the fourth quarter. I would say maybe in the $500,000-$1 million 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, you know, and keeping an eye on the competition and being mindful of customer retention. You know, I think we're doing a good job of repricing 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.
Mark Fitzgibbon (Managing Director and Equity Research)
So do you expect the margin to be down a little bit in the fourth quarter, or is that?
Ronald S. Ohsberg (Senior Executive VP and CFO)
I'm sorry. Yeah, I didn't answer that part. So, we expect the margin to be about flat.
Mark Fitzgibbon (Managing Director and Equity Research)
And then start to rise in the year, you know, sort of first quarter, you think?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah, I think going into twenty twenty-five, assuming the Fed continues to cut, we expect the margin to expand. Now, keep in mind that every time it cuts, we have, we just kind of start the whole repricing thing all over again. So, you know, we just have to work through that. But on a net basis, yes, the margin will expand as rates come down.
Mark Fitzgibbon (Managing Director and Equity Research)
Okay. And then, from your comments, you seem to suggest that $10.5 million loan that is 30 days delinquent will resolve in the fourth quarter. What, what gives you such confidence in that?
Ronald S. Ohsberg (Senior Executive VP and CFO)
We've been negotiating that for quite some time and feel like we're very close to a resolution.
Mark Fitzgibbon (Managing Director and Equity Research)
Okay. And then lastly, could you talk a little bit about the $42 million of office loans that are classified, maybe what the maturity schedule on those look like?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah. Bill, do you want to take that one?
William K. Wray (Senior Executive VP and Chief Risk Officer)
Sure. We have a couple. One has matured. That's the one that's resolution is imminent. Another will be maturing this quarter, and then one more in 2026. So fairly near term, our approach to maturity on all office is that essentially it's a life sentence, and we have to be working with our borrowers to, you know, 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 million 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.
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.
Mark Fitzgibbon (Managing Director and Equity Research)
Great. Thank you.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Thanks, Mark.
Operator (participant)
Our next question comes from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte (Managing Director and Equity Research)
Hey, good morning, guys. Hope everybody's doing well. So first question-
Ronald S. Ohsberg (Senior Executive VP and CFO)
Morning, Damon.
Damon DelMonte (Managing Director and Equity Research)
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. Is this a function of you guys kind of pulling back and just letting maturities kind of naturally, you know, occur during the quarter? Or were there some surprises late in the quarter that led to the decline?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah, 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, and we also managed out a few credits intentionally. But we think that's behind us now, and we're expecting to start to ramp up underwriting in the fourth quarter.
Damon DelMonte (Managing Director and Equity Research)
Should we expect higher growth to end in the year?
William K. Wray (Senior Executive VP and Chief Risk Officer)
Yeah, I would say that the $90 million commercial pipeline is a 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 one or two percent, low single-digit growth in the fourth quarter, and we'll carry that on into 2025. So the teams are back out and, you know, we feel good about that. But I think we'll have. I would say sort of muted growth for the next quarter or two, and then back to normal.
Damon DelMonte (Managing Director and Equity Research)
Got it. And Ron, your comments on the NII outlook, does that reflect the expectation of the growth that you guys just described?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah. I mean, the fourth quarter growth won't help us a lot in the fourth quarter just due to the timing of the disbursements on that. So that's more of a jumping off into twenty twenty-five. But yeah. I mean, it yes, it's gonna be, you know, accretive to net interest income going forward.
Damon DelMonte (Managing Director and Equity Research)
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 nine thirty?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Unfortunately, I don't have that at my disposal.
Damon DelMonte (Managing Director and Equity Research)
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 fourth quarter, and that's kinda how we think about twenty twenty-five. Do you think you're able to kinda keep it in this, you know, thirty-four and a half-ish range going forward, or do you expect it to kinda trend higher?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah, 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 fourth quarter to be in line with the third quarter.
Damon DelMonte (Managing Director and Equity Research)
Great. Okay, that's all that I had. Thank you very much.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah.
William K. Wray (Senior Executive VP and Chief Risk Officer)
Thanks, Damon.
Operator (participant)
Our next question comes from Laurie Hunsicker with Seaport Research Partners. Please go ahead.
Laurie Hunsicker (Senior Financials Banks Analyst)
Yeah. Hi, thanks. Good morning.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Hi, Laurie.
Laurie Hunsicker (Senior Financials Banks Analyst)
Staying on margin for... Good morning, Ron. Do you have the spot margin for September?
Ronald S. Ohsberg (Senior Executive VP and CFO)
Yeah. So 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 six basis points. So kinda on a normalized basis, call it, you know, call it 185.
Laurie Hunsicker (Senior Financials Banks Analyst)
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 two Class B properties, I guess, that make up that $21.7 million. Can you just refresh us in terms of vacancy, where you are with that? And then also your Class A lab space, which I think is sitting in that $20.5 million. And I had in my notes that was $18 million, but maybe you can just refresh us in terms of where we are with that. And was that partly being resolved in the fourth quarter, or what exactly was the fourth quarter resolution, the $10.5 million? What exactly is that credit? Yeah.
So, if you could just maybe step us through, because I know there are three or four big loans. Just if you could refresh us on that, and then, you know, vacancies and also maybe any specific reserves on those. Thanks.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Classified. There's three 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. The other remainder of classified, Class B classified, are two properties in Connecticut, one of which is 70% occupied, one of which is 50%, both of which are current, both of which have a guarantor who's continued to keep the properties going. They're pursuing exit strategies by listing them for sale, but that's where those stand. So we're 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 $20.5 million.
That has gone from 0% leased in the last six months to 52% leased, which is a lot. That represents over 100,000 sq ft of leasing. So the property's got a lot of momentum. The borrower put in a very significant equity injection of $20 million 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, and again, until it's 100% leased or at least it's some stabilized number, we're not gonna be making any moves with it at the moment in terms of classification or accounting.
Laurie Hunsicker (Senior Financials Banks Analyst)
Got it. And then Bill, on that loan of $20.5 million, what is the total exposure with all the banks added together? I know it's north of $100 million, but I don't know if you have a current number on that.
William K. Wray (Senior Executive VP and Chief Risk Officer)
I have to get a calculator, but I think it's $174 million.
Edward O. Handy III (Chairman & CEO)
All right. Yeah.
William K. Wray (Senior Executive VP and Chief Risk Officer)
Yes, 174.
Laurie Hunsicker (Senior Financials Banks Analyst)
Okay. Okay, great. And then do you have any specific reserves on either of those Class Bs or this lab?
William K. Wray (Senior Executive VP and Chief Risk Officer)
Not on the loan, not merited. On the Class Bs, we do. Yes, we do, but they're for, you know, 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 to, in case there's any loss. We'll certainly move something into individually impaired and set up individual impairment if we need to. And on those three, there's one for about 5% of the total.
Laurie Hunsicker (Senior Financials Banks Analyst)
Five percent.
William K. Wray (Senior Executive VP and Chief Risk Officer)
There's actually already been a-
There's actually already been a charge-off on one of the other properties that's reflected in the balance.
Laurie Hunsicker (Senior Financials Banks Analyst)
Okay. And then I guess as we're looking at your $3 million office book or 240, excluding medical, what is your reserves on that at the moment?
William K. Wray (Senior Executive VP and Chief Risk Officer)
Our office-
Laurie Hunsicker (Senior Financials Banks Analyst)
Just generally, your overall.
William K. Wray (Senior Executive VP and Chief Risk Officer)
Reserve. 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.
Laurie Hunsicker (Senior Financials Banks Analyst)
Got it. Got it. Okay, and then just last question in terms of the office coming due. So you have a note here, 40% coming due in the next two years. Can you help us think about how that's breaking out in terms of what's coming due in the fourth quarter and then what's coming due next year? Thanks.
William K. Wray (Senior Executive VP and Chief Risk Officer)
It's 20 this quarter, including one that's already matured, and that's the one set for resolution, and then there's 53 for next year.
Laurie Hunsicker (Senior Financials Banks Analyst)
$53 million for next year, and then $20 million in the fourth quarter. It that includes the $10.5 million. Got it.
William K. Wray (Senior Executive VP and Chief Risk Officer)
Yes.
Laurie Hunsicker (Senior Financials Banks Analyst)
Okay. Great. Thanks so much for taking my questions.
William K. Wray (Senior Executive VP and Chief Risk Officer)
Sure.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Thanks, Laurie.
Operator (participant)
Just as a reminder, if you have any questions or follow-ups for the management team, it's star one on your telephone keypad to join the queue. We have no further questions, so I'll pass you back to Ned Handy for any closing comments.
Edward O. Handy III (Chairman & CEO)
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 (participant)
This concludes today's call.
Ronald S. Ohsberg (Senior Executive VP and CFO)
Thanks, Lydia.
Operator (participant)
Thank you for joining. You may now disconnect your line. Thank you very much.