Washington Trust Bancorp - Q4 2023
January 25, 2024
Transcript
Operator (participant)
Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Seb, 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 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.
Elizabeth Eckel (EVP, Chief Marketing and Corporate Communications Officer)
Thank you. Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call for the Q4 and year-end 2023. Joining us this morning are members of Washington Trust executive team, Ned Handy, Chairman and Chief Executive Officer, Mary Noons, President and Chief Operating Officer, and 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 actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in our earnings release, which was issued yesterday, as well as other documents that we file with the SEC. All of these materials and public filings are available on our investor relations website at ir.washtrust.com. Washington Trust trades on the NASDAQ under the symbol WASH. I'm pleased now to introduce Washington Trust host, Washington Trust Chairman and Chief Executive Officer, Ned Handy.
Edward Handy III (Chairman and CEO)
Thank you, Beth. Good morning, everybody, and thanks for joining us for our call. We definitely appreciate your time and interest, and I know we have a busy morning this morning, so I'm going to be fairly quick in my comments then Ron will dive into the Q4 performance, and then Mary Noons and Bill Wray will join us for Q&A.
We continue to be focused on ensuring a durable balance sheet that is positioned to take advantage of opportunity as external conditions improve. We're concentrating on capital, credit, deposits, and expense management, all to prepare for what we believe will be a steadily improving external environment throughout 2024. In that way, we'll remain positioned to resume growth of our long-term focused, profitable, relationship-driven company. On the capital front, we've slowed asset growth and are managing our funding base and expenses to build earnings capacity.
Our lenders are primarily focused on managing existing credit, raising deposits, and attending to the needs of our all-important customer base. We're emphasizing deposit growth and are looking 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 omni-channel automated deposit account opening tool.
Our deposit franchise remains strong, although understandably more expensive. We remain committed to incremental branching and are pleased that our 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 Q4 in a very competitive landscape, and through our continued efforts and focus, we will drive growth in future periods.
While there are signs of a stabilizing economy, it is difficult to gain short-term certainty about rates, inflation, the credit cycle, and other aspects of the general economy. Our focus is on what we can control and on protecting and enhancing our customer base 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. We will rightsize our footprint and look at appropriate ways to unlock capital and reduce expenses where able.
Our employees always provide reason to be optimistic, both according to our customers and reflected in the recognition we've received from Newsweek, Forbes, the American Banker, and Blue Cross as a great and healthy place to work.
In summary, we are positioned to ensure stability and to regain our customary strength in the quarters ahead. We have a strong and dedicated team, a known brand, very strong credit statistics, sufficient capital, and an appropriate short-term strategy to weather the current challenges and to enchant-- and, and enhance franchise value. At this point, I'll turn it over to Ron for a more detailed review of the quarter. Ron?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Okay. Thank you, Ned. Good morning, everyone, and thanks for joining us. As Ned mentioned, Q4 net income was $12.9 million or $0.76 per diluted share. This includes a tax item of $3.3 million that added $0.19 to EPS.
Net interest income was $32.7 million, down by $1.1 million or 3%. The margin was 1.88, down by 9 basis points. Average earning assets increased by $103 million, and 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 in-market interest-bearing deposits increased by $21 million. The rate on interest-bearing liabilities increased by 23 basis points to 3.49. Prepayment fee income was $27 thousand in the Q4 and $71 thousand in Q3, neither having any impact to margin.
Non-interest income was comprised 29% of total revenues and amounted to $13.3 million, down by $1.9 million or 13%. Wealth management revenues were $8.9 million, down $67 thousand or 1%, reflecting a decrease of $58 million or 1% in average AUA balances. End of period AUA totaled $6.6 billion, up by $457 million or 7%, mainly reflecting market appreciation of $503 million. Mortgage banking revenues totaled $1.6 million, down by $554,000 or 26%. Of note, 64% of our originations in the quarter were saleable, compared to 33% in the Q3, and we expect the improvement in that ratio to continue.
Derivative income totaled $112,000 in the Q4, down by $970,000. We do expect minimal derivative gains in 2024. Regarding expenses, these were down $1.8 million, or 5% from Q3. Salaries expense decreased by $3.2 million, or 15%, and reflected a $3.4 million in reductions to performance-based compensation accruals. For the year, these reductions totaled $5.4 million. Other non-interest expenses were up by $1.3 million, or 56%, reflecting a $1 million contribution to our charitable foundation.
Income taxes were a net benefit of $774,000. As noted in our release, this included a $3.3 million reduction in tax expense due to a change in Massachusetts tax law. This increased, this increased Q4 and full-year EPS by $0.19. Excluding this adjustment, the effective tax rate for Q4 would have been 20.4% compared to 20.8% for Q3, and we estimate our full-year 2024 effective tax rate to be 21.2%.
Now, turning to the balance sheet, total loans were up by $37 million, or 1% from September 30, and by $538 million or 11% from a year ago. In the Q4, total commercial loans increased by $36 million, or 1%, essentially all in commercial real estate. Residential loans decreased by $7 million. Consumer loans 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.
Uninsured and uncollateralized deposits are estimated to be 18% of total deposits, and our average deposit account balance is $36,000, and we have $1.9 billion in contingent liquidity. 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 AOCI due to an increase in the fair value of AFS securities. This was partially offset by $9.6 million in dividends.
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-accrual loans was largely due to one particular loan that was placed on non-accrual in the Q4. This loan was current at December 31. The allowance totaled $41.1 million, or 73 basis points of total loans.
The Q4 provision for credit losses was a charge of $1.2 million, up by $700,000 from the provision recognized in Q3, and we had net charge-offs of $406,000 in the Q4, compared to $30,000 in Q3. In year-to-date, net charge-offs totaled $520,000. At this time, I will turn the call back to Ned.
Edward Handy III (Chairman and CEO)
Thank you, Ron, and we can go right to questions.
Operator (participant)
Thank you. So if you'd like to ask a question, please press star one on your telephone keypad now, or if you change your mind and wish to withdraw your question, please press star two. The first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead.
Edward Handy III (Chairman and CEO)
Morning, Mark.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Good morning. You guys did a nice job on expenses in the Q4. I guess I was curious on your thoughts for expense growth in 2024.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. So, if you take our Q4 ex- total expenses, and you back out the charitable contribution, and you back out the incentive reversal, that's a good run rate going into 2024. So annualize that Q4 normalized, and that's our expense estimate for the year. So far.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
I'm sorry, so roughly about $30 million a quarter?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
I think it's about $35 million a quarter.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
I'm sorry. You're right. Yep. Okay, and then, secondly, what is your net interest margin outlook over the next quarter or two, and what does that assume for, you know, Fed actions?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. We're looking at a NIM in the Q1 of 1.80%-1.85%. You know, we continue to see a lot of competitive pressure on deposits. There's a lot of exception pricing going on. We continue to see mix shift from, you know, from DDA into CDs, et cetera. We expect to see that continued pressure on the margin, at least in the Q1. We are budgeting three Fed rate reductions, and we think that should give us some lift in the second half of the year.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Okay.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
You know, we have a lot of-
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Can you share any color with us regarding?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
One month. Mark, Mark, quick.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Sorry.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, Mark, I was just, I was just gonna give a little bit more color on that. We do have a large, you know, $1.8-$1.9 billion, one-month SOFR portfolio. So when the Fed does begin to cut rates, if, if they do, you know, that will reprice immediately. We keep most of our wholesale funding pretty short. So it will, it will catch up, but it, it won't be instantaneous. You know, if they cut in March, you know, we'll see a reset on that, on that loan book on April 1, and then, we'll just need to reprice our liabilities down.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
... 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?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, Bill, do you want to handle that?
William Wray (Senior EVP and Chief Risk Officer)
Sure. It's basically our exposure is $11 million. It's a recently renovated mixed-use office retail building in Greater Boston. They had leased the first floor up fine to a restaurant they've had difficulty with the other three floors getting office tenants, so the borrower, a very who's got a lot of money in this deal, more than we do at this point, has gone through an orderly liquidation process.
We have credible bids. We expect it to close this quarter, a sale to close this quarter that will take us out without principal loss. However, there's always. You know, you never know when a deal is going to close, but at this point, it's on a path to resolution within the Q1.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Okay, great. Then last question I had, your, your dividend payout ratio on a core basis this quarter was 98%. With, you know, the margin likely to come under a little more pressure in coming quarters and, and expenses kind of, you know, in that $35 million level, it, it would imply that you'd go over 100% payout ratio in the Q1. How do you feel about the, sustainability of the, the payout ratio? or the dividend level?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. Sure. I mean, our payout ratio is high. We realize that. We believe that we are, you know, we remain well-capitalized, and we believe that the dividend is sustainable, even if we, you know, I would say, temporarily go over 100%. We're still prepared to maintain the... We are fully expecting to maintain the dividend.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Thank you.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. Thanks, Mark.
Elizabeth Eckel (EVP, Chief Marketing and Corporate Communications Officer)
Our next question comes from Laurie Hunsicker from Seaport Research Partners. Please go ahead.
Laurie Hunsicker (Seaport Research Partners)
Yeah. Hi, thanks. Good morning. Just going back to expenses here.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Right.
Laurie Hunsicker (Seaport Research Partners)
The charitable foundation charge of $1 million, how should we think about that in your numbers going forward? Or is that something we're going to see-
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
so I-
Laurie Hunsicker (Seaport Research Partners)
-recurring in the Q4 every year? Is it going to be less? How do we think about that?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. I would say, Laurie, we kind of guided to more in the $500,000 range the last time we talked about this, and with the tax benefit that we recorded, we topped that up to $1 million. So that should carry us through 2024 and into 2025. So at this point, we're not really expecting to add more to that in calendar year 2024, at this point. At some point, we'll have to put more in, you know, as we disburse the funds but yeah, we intentionally topped that $1 million, that contribution up to $1 million.
Laurie Hunsicker (Seaport Research Partners)
Got it. Okay, so just back to the expense guide that you gave Mark here. I'm just trying to—just trying to sort through that. If I'm looking at $32.6 million, backing out $1 million, I'm down to $31.6 million. How am I going from $31.6 million—and I realize you've got some new branches coming online, so maybe you can comment on that, but how do you go from $31.6 million per quarter up to $35 million per quarter? Can you help us think about that? What am I missing?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, so Laurie, we had a credit go through the expense line of $3.4 million in the Q4. Strip that out, and Q4 is more like $35 million.
Laurie Hunsicker (Seaport Research Partners)
Got it. Okay, got it.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
We had the incentive reversal-
Laurie Hunsicker (Seaport Research Partners)
Okay.
Elizabeth Eckel (EVP, Chief Marketing and Corporate Communications Officer)
$3.4 million.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
yeah.
Laurie Hunsicker (Seaport Research Partners)
And then your
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yes. Yep.
Laurie Hunsicker (Seaport Research Partners)
Okay, great. Then the other income line of $83,000 looked light. Was there any one-time charges that ran through that?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, there was a, we did set up-
Laurie Hunsicker (Seaport Research Partners)
So in your non-
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
$1,000 valuation reserve. Yeah. Yeah, we set up a $300,000 valuation reserve on an asset in there.
Laurie Hunsicker (Seaport Research Partners)
Okay, great. Okay, and then back over to NIM. Do you have a December spot margin?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, it was 182.
Laurie Hunsicker (Seaport Research Partners)
82. Okay, and then just last sort of maybe general question. We've seen some banks take some restructuring within their securities book how do you guys think about that as you look forward?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, I mean, we've kicked that around a lot. We've not decided to do that. I don't think we're planning to do that. We had, you know, a nice recovery in our investment portfolio in the Q4. You know, I understand some of the merits of why banks are doing it, but it, you know... I doubt that we're going to do it.
Laurie Hunsicker (Seaport Research Partners)
Gotcha. Okay, great. Thanks for taking my questions.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, you're welcome.
Edward Handy III (Chairman and CEO)
Thanks, Laurie.
Operator (participant)
The next question comes from Damon DelMonte from KBW. Please go ahead.
Damon DelMonte (Managing Director of Equity Research)
Hey, everybody. This is Matt Renck, filling in for Damon DelMonte. Hope everybody's doing well. You guys mentioned you were slowing asset growth-
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Hi, Matt
Damon DelMonte (Managing Director of Equity Research)
... and loan growth this quarter. I was just hoping. I was just hoping we could get your thoughts on full year loan growth for 2024.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. I would say on a net basis, it's going to be about 0%... so we're looking at commercial growth. We had, we're not doing a lot of originations right now we did have a fairly sizable construction, you know, previously committed construction pipeline. That's gonna add about $240 million of advances during the year. That'll be partially offset by amortization and pay downs. But that'll give us commercial growth of about 3%, but then we'll have about a 3% decline in resi and consumer. So on a net basis, about zero.
Damon DelMonte (Managing Director of Equity Research)
Okay, got it. Then just, a follow-up on credit with the slower loan growth, how should we think about provision expense? Should we think of it as reserves holding steady or maybe a slight build as credit starts to normalize?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
I think we're thinking, you know, a slight build and if you wanted to put in $1 million a quarter. You know, we're not seeing any-
Damon DelMonte (Managing Director of Equity Research)
Okay
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
... particular trouble. It just feels like it needs to be a little higher than, say, like the $500,000 run rate that we've had. You know, of course, this quarter was a little higher, but we're thinking about $1 million a quarter.
Damon DelMonte (Managing Director of Equity Research)
Okay. Got it. Thank you.
Edward Handy III (Chairman and CEO)
Thanks, Matt.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah. Matt, you're set? Okay. I just want to give a little bit more color-
Damon DelMonte (Managing Director of Equity Research)
Oh, yeah. Sorry, I'll stop then.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
... on expenses. That 0% expense growth also includes about a $1.5 million additional expense related to the de novo branches. So that's covered.
Damon DelMonte (Managing Director of Equity Research)
Great.
Operator (participant)
We have a follow-up question from Laurie at Seaport Research. Please go ahead.
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Mm-hmm.
Laurie Hunsicker (Seaport Research Partners)
Yeah. Hey, thanks, Ron. Yeah, I was actually just hitting you guys back on the expense related to branches. What is the timing on de novo branches opening in 2024? How are you thinking about that?
Ronald Ohsberg (Senior EVP, CFO and Treasurer)
Yeah, Ned.
Edward Handy III (Chairman and CEO)
Yeah. Hey, Laurie, it's Ned. Well, actually, one at end of January and one at end of Q1 or potentially April. As Ron just pointed out, in his expense comments, we have covered the cost of those new branches, so they're built into that expense base.
Laurie Hunsicker (Seaport Research Partners)
Perfect. Great. Thank you.
Edward Handy III (Chairman and CEO)
Thank you.
Operator (participant)
Also have a follow-up from Mark Fitzgibbon at Piper Sandler. Please go ahead.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Hey, guys. I was wondering if you could comment on your capital position and whether you, you were thinking about raising additional capital?
Edward Handy III (Chairman and CEO)
Yeah. We're not. We are curtailing our loan originations pretty significantly. So we're expecting capital ratios to stabilize pretty close to where they are and begin to improve over the second half of the year.
Mark Fitzgibbon (Managing Director and Head of Financial Services Group)
Thank you.
Edward Handy III (Chairman and CEO)
Mm-hmm.
Operator (participant)
There's one last reminder. For any further questions, please press star one on your telephone keypad now. Okay, we have no further questions on the call.
Edward Handy III (Chairman and CEO)
Thank you, all. I know you've got a busy morning. We appreciate you taking the time to be with us, and look forward to talking to you again soon. Have a great day, everybody.
Operator (participant)
This concludes the conference call. Thank you all very much for joining, and you may now disconnect.