Q4 2023 Washington Trust Bancorp Inc Earnings Call

Participants

Mark Fitzgibbon; Director; Piper Sandler & Co

Presentation

Operator

Good morning and welcome to Washington Trust Bancorp Inc.'s conference call. My name is Seth, and I will be your operator today. (Operator Instructions) 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.

Thank you. Good morning and welcome to Washington Trust Bancorp Inc.'s 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 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 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 filed 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's host, Washington Trust's Chairman and Chief Executive Officer, Ned Handy.

Thank you Beth. Good morning, everybody, and thanks for joining us for our call. And 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 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 external environment throughout 2024 and that we will 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 omnichannel 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 fourth quarter 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 as 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. We're 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, American Banker and Blue Cross has 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 and known brand, very strong credit statistics, sufficient capital in an appropriate short-term strategy to weather the current challenges and to enhance franchise value.
At this point, I'll turn it over to Ron for a more detailed review of the quarter.

Thank you, Ned. Good morning, everyone, and thanks for joining us. As Ned mentioned, fourth-quarter 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 188, down by 9 basis points. Average earning assets increased by $103 million, and the yield on those assets was for 481 up by 12 basis points.
On the funding side, average wholesale funding rose 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 349. Prepayment fee income was $27,000 in the fourth quarter and $71,000 in Q3, neither having any impact to margin.
Noninterest income 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 $67,000 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 third quarter, and we expect the improvement in that ratio to continue.
Derivative income totaled $112,000 in the fourth quarter 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 noninterest 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 increase 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. We estimate our full-year 2024 effective tax rate to be 21.2%.
Now turning to the balance sheet. Total loans were up by $7 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 were up by $7 million.
In market deposits, we're 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 of 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 ALCI due to an increase in the fair value of AFS securities. This was partially offset by $9.6 million in dividend.
Regarding asset quality, nonaccruing loans were 79 basis points and past-due loans were 20 basis points of total loans. The increase in nonaccruing loans was largely due to one loan that was placed on nonaccrual in the fourth quarter. This loan was current at December 31. The allowance totaled $41.1 million or 73 basis points of total loans. The fourth quarter 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 fourth quarter compared to $30,000 in Q3, and year-to-date net charge-offs totaled $520,000.
And at this time, I will turn the call back to Ned.

Thank you, Ron, and we can go right to questions.

Question and Answer Session

Operator

(Operator Instructions) Mark Fitzgibbon, Piper Sandler.

Mark Fitzgibbon

Good morning, and 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?

Yes, so on if you take our fourth quarter total expenses and you back out the charitable contribution and you back out the , the incentive reversal. That's a good run rate going into 2024 or so and annualize that fourth quarter normalized. And that's our expense estimate for the year. So so far, so business so I'm sorry. So roughly about $30 million a quarter, I think it's about 35 million a quarter.

Mark Fitzgibbon

I'm sorry, you're right, yes.

Okay.

Mark Fitzgibbon

And then secondly, how are you what is your net interest margin outlook over the next quarter or two? And what does that assume for them?
Fed actions?

Yes, so on, we're looking at them in the first quarter of one 80 to 1 85. And we continue to see a lot of competitive pressure on deposits is there's a lot of exception pricing going on. We continue to see mix shift from from DDA into CDs, et cetera. So we expect to see that that continued pressure on the margin, at least in the first quarter. We are budgeting three Fed rate reductions, and we think that that should give us some lift in the second half of the year.

Okay.

We have a lot or any color with us regard one month apart market, sorry.
Yes, Mark, I was just going to give a little bit more color on that. So we do have a large 1.81 0.9 billion or one month, so for a portfolio. So when the Fed does begin to cut rates, if they do, that will reprice immediately and keep most of our wholesale funding pretty short and so it will it will catch up, but it won't be instantaneous. So if they cut in March, we'll see a reset on that loan book on April first.
And then we'll just need to reprice our liabilities down.

Mark Fitzgibbon

Okay. And then I'm wondering if you could give us any color on that one commercial real estate loan that you put on nonaccrual Yes.

Bill, do you want to handle that?
Sure.

Mark Fitzgibbon

It's basically our exposure is 11 million. It's a recently renovated mixed-use office retail building in Greater Boston, and they had leased the first floor up bind to a restaurant. They've had difficulty with the other three floors getting office tenants to the borrower. A very we've 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 expected to close this quarter, a sale that closed this quarter. That will take us out without principal loss. However, there's always you never know when a deal is going to close. But at this point, it's on have a path to resolution within the first quarter.
Okay, great. And then last question I had, Tom, your dividend payout ratio on a core basis this quarter was 98% and with the margin likely to come under a little more pressure in coming quarters and expenses kind of in that 35 million level, it would imply that you go over 100% payout ratio in the first quarter, how do you feel about the sustainability of the payout ratio or the dividend level?

Yes, sure. I mean, our payout ratio was high. We realize that we believe that we are we remain well-capitalized and we believe that the dividend is sustainable. Even if we are, I would say, temporarily go over 100%, but we're still prepared to maintain that we are are we expecting to maintain the dividend.

Mark Fitzgibbon

Thank you.
Yes.

Thanks, Mario.

Operator

Laurie Hunsicker, Seaport Research Partners.

So hi, thanks. Good morning. I'm just going back to extend over here to the Charitable Foundation. Are the $1 million? How should we think about that in your numbers going forward? Is that something we're going to see occurring in the fourth quarter every year. Is that going to be think about that?

Yes. So I would say, Laurie, we kind of guided to more in the 500 range for us and we talked about this. And 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. And so at this point, we're not we're not really expecting to add more to that or add in calendar year 2024 at this point for Tom, at some point, we'll have to put more in as we disperse the funds. But yes, we intentionally top that that contribution up 2 million Got it.

Got it.

Okay.

So just back to the AM, the expense guide that you gave mark here, I'm just trying to kind of sort of sort through that. So looking at 32.6 backing out $1 million, down 31.6. How am I going from 31.6? And I realize you've got some new branches coming online. Maybe you can comment on that, but how do you go from EUR31.6 million per quarter up to SEK35 million? Can you help us think about that?

What am I missing here, sir?
Yes. So see.
Yes, yes, sorry. We had a credit go through the expense line of 3.4 million in the fourth quarter. So strip that out in Q4 is more like $35 million.

Got it. Okay. Family against center reverse attachment point plan amendment or?

Yes, yes, yes.

And remember that was great. And then the other other income line of 83,000 looked like was there was there any one-time charges that ran through that?

Yes, there was a we did seven or $9,000 valuation reserve or.
Yes, yes, we set up a $300,000 valuation reserve on an asset and there.

Okay. And then back over to NAM., do you have a December, but the margin?

Yes, it was one.
82.

Okay. And then just last sort of maybe a general question. We've seen some banks take some restructuring within the securities book. How do you guys think about that as well filing?

Yes. I mean, we've kicked that around a lot on. We've not decided to do that I don't think we're planning to do that. We had a nice recovery in our investment portfolio in the fourth quarter.
Tom, now I understand some of the merits of why banks are doing it, Suisse.
Yes, I don't think we're going to do it all.

Okay, great. Thanks for taking my questions.

Yes, you have to anchor it.

Operator

Damon DelMonte, KBW.

Mark Fitzgibbon

Hey, everybody. This is mattering filling in for Damon Delmonte. I hope everybody's doing well. You guys mentioned you're slowing asset growth that came out on loan growth this quarter. So I was just hoping I was just hoping if you can your thoughts on full year loan growth for 2024?

Yes. I would say on a net basis, it's going to be about 0%. So we're looking at commercial growth. We had some we're not doing a lot of originations right now. We did have a fairly sizable construction, our previously committed construction pipeline, and that's going to add about $240 million of advances during the year. That will be partially offset by amortization and paydowns on, but that will 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.

Mark Fitzgibbon

Okay, got it. And 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.

But yes, I think we're thinking a slight build in if you wanted to put in 1 million a quarter we're not seeing any of that particular troubled. It just feels like it needs to be a little higher than say like the $0.5 million run rate that we've had, of course, this quarter was a little higher, but we're we're thinking about $1 million a quarter.

Mark Fitzgibbon

Okay.

Got it.

Operator

Thank you.

It takes about at the outset as Matt just said.

Okay.

I just wanted to give you a little bit more color on what I outlined on expenses so that.
Yes, so that on that 0% expense growth also includes about a 1.5 million additional expense related to the de novo branches.

So that's covered, Craig.

Operator

We have a follow up question from Laurie of Seaport Research. Please go ahead.

Yes, we do front and yes, I was I was actually just having you guys back on me on any expense related to brands and styles. What is what is the timing on de novo branches opening in 2024, how you're thinking about that?

Yes, Ned?

Yes, hey, Laurie, it's Ned. And one in the first quarter, actually one and end of January and one in the first quarter were essentially April. And as Ron just pointed out in his expense comments, we have covered the cost of those of those new branches so they're built into that expense base.

Perfect.
Right. Thanks.

Operator

You also have a follow-up from Mark Fitzgibbon at Piper Sandler. Please go ahead.

Hey, guys.

Mark Fitzgibbon

I was wondering if you could comment on your capital position and whether you were thinking about raising additional capital?

Yes, we're not on 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.
Yes.

Thank you.
Yes.

Operator

As one last reminder, for any further questions, please press so I want on your telephone keypad now.
Okay.
We have no further questions on the call.
Well, thank you.

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

Yes, this concludes the conference call. Thank you all very much for joining.

And you may now disconnect my low to no concludes the conference call.

Operator

Thank you all very much for joining, and you may now disconnect.