Washington Trust Bancorp, Inc. (NASDAQ:WASH) Q3 2023 Earnings Call Transcript

Washington Trust Bancorp, Inc. (NASDAQ:WASH) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good morning, and welcome to the Washington Trust Bancorp Inc.’s Conference Call. My name is Emily, and I will be your operator today. [Operator Instructions] Today’s call is being recorded. And now I will turn the call over to Elizabeth B. Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel?

Elizabeth Eckel: Thank you, Emily. Good morning, and welcome to Washington Trust Bancorp, Inc.’s third quarter 2023 conference call. Joining us this morning are members of Washington Trust’s 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 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 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’s Chairman and CEO, Ned Handy.

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’ll 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. Then Ron Ohsberg will offer more detail regarding our third quarter performance. And after our prepared remarks, Mary Noon and Bill Wray 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 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 third quarter on a very competitive landscape and through our continued efforts and focus should drive additional growth in future periods. During this suppressed earnings 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 measuredly. We remain entirely attentive to call quality credit, both new and existing. 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 in flux and geopolitical and stability 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 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 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.

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 $0.65 per diluted share about flat with $11.3 million or $0.66 per diluted share in the second quarter. 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 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 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 Olneyville 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 long-term performance. 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.

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 convenient 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. Throughout our history, Washington Trust has joined a strong brand reputation in our core markets. Recently, we launched a new brand positioning statement.

A customer smiling as he signs a consumer loan agreement in a regional bank branch. Editorial photo for a financial news article. 8k. –ar 16:9

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 as 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. 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.

I’ll now turn the call over to Ron for an in-depth review of our financial performance. Ron?

Ron Ohsberg: Thank you, Ned. Good morning, everyone, and thank you for joining our call. As Ned mentioned, net income was $11.2 million or $0.65 per diluted share. Net interest income was $33.8 million, up by $251,000 or 1% in the preceding quarter. The margin was 1.97 down by 6 basis points. Average earning assets increased by $167 million and the yield on earning assets was $469 million up by 16 basis points. On the funding side, average end market interest-bearing deposits increased by $77 million and average wholesale funding rose by $83 million. The rate on interest-bearing liabilities increased by 24 basis points to $3.26. Prepayment fee income was $71,000 in the third quarter and 50,000 in the second quarter. Net interest – excuse me, noninterest 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 totaled $6.1 million, down by $219 million or 3% from June 30 and reflecting market depreciation of $154 million in net client asset outflows of $65 million. Mortgage banking revenues totaled $2.1 million, up by $355,000 or 20%. Mortgage loans sold totaled $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% from the end of June. Loan-related derivative income totaled $1.1 million up by $835,000. 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 $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%.

In market deposits were up by $35 million or 1% from June 30 and up by $121 million or 3% from a year ago. Wholesale brokered deposits were up $67 million and FHLB borrowings 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 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 AOCI component of shareholders’ equity largely due to a decline in the fair value of available-for-sale securities. It also declined to $9.6 million in quarterly dividend declarations, and these decreases were partially offset by quarterly net income of $11.2 million.

Regarding asset quality, non-accruing loans were 0.60% and past due loans were 0.17% 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%. 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 our provision for credit losses on loans of $900,000 and a negative provision for credit losses on unfunded commitments of $400,000. We had net charge-offs of $30,000 in the third quarter compared to $37,000 in Q2 and year-to-date net charge-offs totaled $114,000.

And at this point, I’ll turn the call back to Ned.

Ned Handy: Thank you, Ron. We’ll now take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Mark Fitzgibbon with Piper Sandler. Mark, please go ahead. Your line is now open.

Mark Fitzgibbon: Hi, guys. Good morning.

Ron Ohsberg: Good morning, Mark.

Mark Fitzgibbon: 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 it is likely to go?

Ron Ohsberg: Yes. Yes, we expect it to trend lower in the fourth quarter towards the 1.9%. So kind of lower from here, call it, 1.9%, plus or minus.

Mark Fitzgibbon: And you think that’s a sort of a bottoming point for the margin.

Ron 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 yes, we continue to see some funding pressure.

Mark Fitzgibbon: 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 will 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?

Ron Ohsberg: Yes. So we’re not ready really to talk about 2024 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. The branches will start to – the branches that we’re opening in the first quarter will have an impact on Q4 took about $200,000 worth in the fourth quarter. We also are committed to increasing our charitable foundation contribution. So haven’t decided exactly how much that would be, but we’re thinking it’s at least $500,000 in the fourth quarter.

Ned Handy: Yes, Mark, I just wanted to add. I mean, we’re looking at 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 and whether there’s strategies around that, that makes sense. So we are focused on everything we can be focused on to control expenses.

Mark Fitzgibbon: Okay. But it feels like, Ned, there’s not as much wiggle room on the cost side maybe as you’d like and the margin continues to be pressured. The wealth business continues to be pressured and mortgage is rate dependent. So I guess the question I have is, if earnings fall below the dividend, would you cut the dividend?

Ron Ohsberg: Yes. 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.

Mark Fitzgibbon: Okay. And you talked a little bit about slowing the growth. Does that mean stopping the growth? I mean, because your capital ratios 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 loan growth going forward?

Ned Handy: Yes. Mark, this is Ned. We have construction loans in process. So stopping the growth is probably not realistic, but low – very low single-digit growth. I expect here forward, we’re but for taking care of existing customers and booking accretive assets that help earnings, we are kind of pencils down. So we had a big pipeline coming into this quarter that 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 rebuild earnings and capital, and we need to make sure that the loan books help on that front.