Washington Trust Bancorp Inc
NASDAQ:WASH
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Washington Trust Bancorp Inc
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Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Brika, and I will be your operator today. [Operator Instructions] Today's call is being recorded. And now I would like to 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 2024 first quarter. Joining us this morning are members of Washington Trust's 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 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 earlier this morning as other documents -- 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 Chief Executive Officer, Ned Handy.
Thank you, Beth, and good morning, and thank you all for joining our first quarter conference call. We appreciate your time and interest in Washington Trust. I'll provide brief comments, and then Ron Ohsberg will offer more detail regarding our first quarter performance. After our prepared remarks, Mary Noons and Bill Wray will join us for the Q&A session.
Our primary focus continues to be on ensuring the strength of our balance sheet while we work towards regaining historic levels of profit generation. We continue our concentration on capital, credit, deposit growth and expense management, controlling what we can as the administration in Washington works to balance interest rates and inflation risk.
We are positioning to take advantage of prudent growth opportunities as they present themselves going forward. We will soon roll out some deposit-related enhancements to power our deposit growth strategies, including the addition of an omnichannel automated deposit account opening tool.
Overall, this quarter reflected the value of our diversified revenue base as our fee businesses somewhat offset continued margin pressure. It also reflected some good work the team has done to manage expenses in this inflationary environment.
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 might have. Ron?
Okay. Thanks, Ned, and good morning. First quarter net income was $10.9 million or $0.64 per diluted share. Net interest income was $31.7 million, down by about $1 million or 3%. The margin was 1.84%, down by 4 basis points. Average earning assets increased by $23 million in the quarter and had a yield of 4.93%, up by 12 basis points. On the funding side, average wholesale funding rose by $122 million, and average in-market interest-bearing deposits decreased by $21 million.
The rate on interest-bearing liabilities increased by 14 basis points to 3.63%. Prepayment fee income was $20,000 in the first quarter and $27,000 in the fourth quarter, no impact to margin in either period.
Noninterest income comprised 35% of total revenues and amounted to $17.2 million, up by $3.9 million or 29% from Q4. The first quarter included $2.1 million associated with the litigation settlement. Excluding this, noninterest income was up by $1.8 million or 13% from Q4.
Wealth management revenues were $9.3 million, up by $457,000, and end-of-period AUA totaled $6.9 billion, up by $270 million or 4%.
Mortgage banking revenues totaled $2.5 million, up by $952,000. 76% of our originations in the quarter were salable compared to 66% in the fourth quarter.
Turning to expenses. These were up by $1.8 million or 5% from the fourth quarter. Salaries expense increased by $3.3 million or 18%. Recall that last quarter, we reversed $3.4 million in compensation accruals, which lowered fourth quarter expenses. Excluding this, salaries expense actually declined a bit.
Other noninterest expenses were down by $1.3 million or 35%, largely due to a $1 million contribution made to our charitable foundation in the fourth quarter. In the first quarter, the effective tax rate was 20.6%. We estimate our full year 2024 effective tax rate to be 21%.
Turning to the balance sheet. Total loans were up by $31 million (sec) [ $38 million ] or 1% from December. Total commercial loans increased by $60 million, while residential loans declined by $19 million.
In-market deposits were essentially flat, down $20 million from December 31.
Turning to asset quality. Asset quality improved quarter-over-quarter. Nonaccruing loans were 54 basis points on total loans compared to 79 basis points at year-end, and past due loans as a percentage of loans were 18 basis points compared to 20 basis point at year-end. We had 0 commercial real estate delinquencies.
The allowance totaled $41.9 million or 74% (sec) [ 0.74% ] of total loans and provided NPL coverage of 136%. The first quarter provision for credit losses was a charge of $700,000, and we had net charge-offs of $52,000 in the quarter. And at this time, I will turn the call back to Ned.
Thanks, Ron, and we'll now take questions.
[Operator Instructions] We will take the first question from Mark Fitzgibbon of Piper Sandler.
I wondered if you could share with us, was the $2.1 million litigation settlement that you had related to the wealth management business, or was that something else?
Yes, it was.
So is that -- all the litigation surrounding those people leaving, has that been fully resolved with this settlement?
Yes. That's the final resolution of it.
Okay. And then secondly, Ron, I wondered if you could share with us your sort of thoughts on the outlook for the net interest margin. I think last quarter, you had suggested you were assuming 325-basis-point cuts in rates. Has that thinking changed as well?
Yes. I mean we're thinking our most recent forecast had 2% and a little later. I think there's still a lot of uncertainty about what the Fed is going to do. So I can provide you guidance. We think that the second quarter will be 1.80% plus or minus a small range around that.
Okay. And then I think in the past quarter, you had also talked about an expense run rate in that sort of $35 million range, which incorporated the 2 branches you've opened thus far this year. Any other tweaks to that? Or do you still feel like that's a $34.5 million, $35 million run rate range for expenses in the second quarter?
Yes. I think $35 million is a good number, Mark. It's a little higher than we did in the first quarter. We will have some seasonal mortgage commission activity going through, probably have a little higher mortgage banking revenue in the second quarter as well due to seasonality.
Okay. And just to pivot back to wealth management. It looked like client flows continue to be negative. They're sort of 2x what they were last quarter. I guess I'm curious, have you lost any more teams or producers in that business? And kind of what's the plan to sort of turn those flows positive again?
Yes. So no, the previously announced attrition is behind us. I would say, look, it was just a higher than normal -- people have life events. For instance, there was 1 state payout of $25 million included in the quarter and those things happen. There's nothing unusual happened in the quarter.
But I guess the point I'm getting at is client flows have been negative for as far back in time as the eye can see it seems. Is there a point at which that will stop? Is there some kind of plan to bring in new people to generate new business flows or...
Yes. Well, that's a net number, Mark. So we do have new business all the time. I would also say that we have fairly comprehensive granularity in our disclosures, and we've kind of looked at some other competitors and really very few institutions provide the level that we so. So I don't think that we're unusual in that regard to see client outflows, but we certainly are disclosing them when they occur.
And Mark, this is Ned. I would tell you, we're always looking at staffing levels and looking at incentive plans and whether we've got the right mix on both sides. And so we're always interviewing new people. We've got some -- the private clients group has an opening in it right now that we're recruiting for. I think -- so there's always a look at the sales approach. And it's a tough business to grow organically. We'd much rather be in it at scale as we are than not and be there to take advantage of market help when it's there, but we understand that we've got to always focus on whether we've got the right mix in place to grow it organically.
Okay. And then last question I have, and it's -- I sort of asked the variation on it last quarter. If you look at your capital ratios, they're pretty low relative to peers. And if you look at sort of the core dividend payout ratio this quarter, excluding the litigation settlement, your payout ratio was about 104%. I guess I'm curious, why not cut the dividend in order to preserve capital given that we are in kind of unusual times where there could be things that pop up and become challenging? Why continue to pay out at this elevated level and really strain your capital ratios?
Yes. So I would say that we consider the dividend to be a key component of our shareholder return. We don't believe that the current level of revenue is permanent. We do believe that revenues will recover at some point. We probably need some help with interest rates, and no one knows what the timing of that would be. If we were to cut the dividend, that would really have a very modest impact on capital accretion, in my view. We do have the earnings and the capital to sustain the dividend, and our intention is to maintain the dividend.
But I think, in your prepared remarks, you talked about opportunistically growing the balance sheet. I guess I'm curious then how much lower would you be willing to take the capital ratios?
Yes. So we're focused on the total risk-based capital ratio right now, and that improved by 4 basis points in the quarter. So that's -- we've stabilized that ratio, and we expect to see some modest improvement in that ratio going forward, and that gives us adequate capital to sustain the dividend.
But Mark, my comment about opportunistic growth was a little further down the line, more of a longer-term view. We've definitely slowed down our WA growth and, in fact, are looking to reduce it to help with the capital picture. Earnings, of course, is the best way to get there. And so we're doing everything we can on the expense side to help on the earnings front. And we feel like we're controlling what we can in order to build capital ratios back up, but that's certainly our intent prior to opportunistic growth.
We now have Damon DelMonte of KBW.
Just wanted to see if we could get a little bit more color, Ned, on your comment about the deposit strategy that you guys are going to be rolling out. Is that a second quarter event? Is that a second half event? What are the expectations? And kind of what are the means that you're going to use to do that?
Thanks, Damon. Yes, so second quarter, we'll see actual turning the switch on and some technology that we've invested in, an omnichannel automated account opening technology that we're really excited to start. We'll start on the consumer side and then roll out the business side probably in either late Q2 or Q3. We are -- we've also invested in a switch platform to help customers switch to us more easily. That will be rolled out this quarter. And we've got 1 other piece of technology, which is called Refer a Friend, which is another sort of deposit referral mechanism that we're rolling out.
So those are the investments. But on the -- on sort of the sales culture side, we've got everybody in the company focused on deposit growth. We think it's our -- yes, it's been our number one priority for as long as I've been here. It continues to be our number one priority to get our funding mix better. And so everyone, including all the commercial lenders, are focused more on deposit gathering than they are on lending. Our cash management team is focused even more on commercial cash management, but also our municipal group within the cash management team are focused on growing our municipal deposits.
So we're -- obviously, we want to grow the deposit base. And Ron, I think from an expectation standpoint, we're basically flat so far this year. I think 1% or 2% growth would be a great target for the year, but we're -- we've got much bigger hopes than that in the long run. We really need to turn the funding of the company more towards deposits, away from borrowed funds.
Yes. So just to level set expectations, we don't expect to see dramatic changes in our deposit base in the short term. Rhode Island is a pretty slow growth state in that regard. But we are, I think, setting some cultural changes and some technology changes. It's going to come through, I think, taking market share from others. And that's not easy to do, and everyone is trying to do the same thing right now. And so we're going to have to be better at it than they are. So we'll see what happens in the coming quarters.
Got you. Okay. Appreciate that color. And then with regards to the loan growth and kind of outlook for that, I think you had 3% linked quarter annualized growth here in the first quarter. I think the expectation was that loans was kind of be flat for the year, 3% on the commercial side, 3% runoff on the consumer side. Has that shifted at all because of the results here in the first quarter? Or do you still kind of expect balances to ultimately be flat throughout the year?
Yes. So I would say, in the January call, we told you that we had a committed pipeline of construction advances and that made up most of the growth. We did do a couple kind of one-off things that we still had in our pipeline. Our commercial pipeline is virtually 0 at this point in time, maybe a one-off here or there. So I think it's just burning off. I think we had $240 million of construction advances kind of budgeted over the course of the year and that will be offset by amortization on the resi and on the consumer side to some degree. I mean I think we're showing flat growth for the year. Yes.
Got it. And as you manage the growth, I mean, is there an approach to not turn away quality customers that could be seeking credit? I mean, are you -- is it like net-net kind of going to be 0 because you're maybe moving away from some relationships and adding new ones that are strong, or adding 2 current ones that are strong? Or what's the approach to kind of balance the growth where you don't turn off the spigot and upset people?
Right. That's a great question. And yes, so we're -- all of what you mentioned. We're going to sell some participation interest in existing loans to create dry powder to make sure that we can help our strongest customers. Yes, we definitely want to keep the customer franchise in place, but we're also allowing some noncore type loans that mature, we're allowing them to pay off rather than refi them. So I think it's a combination of all the above with the customer at the center and making sure that we're there for customers that need us most.
And again, I think, going forward, we'll probably be more of a lead participation sold lender than we have been in the past, and we certainly won't be buying participations that don't come with deposits and the ancillary business opportunities. So I think it's a little bit of everything, Damon, but yes, definitely sensitive to customer relationships.
Got it. Okay. And then just lastly on the provision outlook, good improvement there in NPAs during the quarter. Kind of given the outlook for loan growth, do you feel comfortable at the 74-basis-point reserve level absent any types of credit deterioration?
Yes. Yes. And just in terms of guidance, I mean, I think we told you $1 million a quarter at the January call. I would just stick with that. We came in a little better than that this quarter. And it's probably a good assumption.
[Operator Instructions] And we will move on to the next question, which is from Laurie Hunsicker of Seaport Research.
Just wondered if we could go back to the margins. Do you have -- Ron, do you have the spot margin for the month, month of March?
Yes. Yes, it was 1.80%.
It was 1.80%. Okay. And in your comments, you said 2Q margin 1.80% plus or minus. How should we think about a little bit further out given this higher for longer? What does the back half of '24 look like?
Yes. Yes. So I mean, we're still experiencing the same issues that other banks are with regard to mix shift between deposit categories. And I think the longer the Fed delays, the more that mix shift is kind of allowed to happen. We do think it would be helpful to see a cut to start to reorient customer expectations around what their rates will look like. We've kept things on the wholesale side pretty short and our CD maturities are pretty short. So when the Fed starts to cut, we will be able to react in a reasonable period of time to try to reduce our funding costs. But yes, I mean, I think the longer it takes, it continues to put pressure on the margin for sure.
Got you. Okay. That makes sense. And just can you remind us, you've got another branch, I think, that's coming online in a few quarters. What is the latest, and where is that?
Yes. The branch in Olneyville, which is a section of Providence, is due to come online in the second quarter, but probably towards the end of it, I think.
I think [ we are more in ] third quarter.
Beginning of the third quarter.
Are we? July? Sorry, beginning of third quarter. So it's been quite a process of getting all the approvals we need despite the fact that it was a bank branch to start with. But it's a fairly sizable renovation, and we're really excited to get that branch open. It's right in the heart of downtown Providence and serve a great part of the population. So -- and other than that, we don't have any other branches in sight right at the moment. Yes, the Smithfield branch, which you've heard us talk about, opened in the first quarter.
Okay. Got you. And then your $35 million quarterly expense run rate, does that have the the new Olneyville branch fully baked in? Or how should we be thinking about that?
Yes, that's in there.
That's in there. Okay. Perfect. And then just last, if we could get an office refresh, I mean your credit is pristine. I guess, outside of office, office is 2/3 of your nonperformers. Can you just update us specifically that $18.7 million, any sort of new news there, I guess, remind us? And then also, that's the Class B and then also the lab space, the $19 million that's sitting in classified. Just any color you can provide us would be super helpful.
Bill, you want to take that one?
Sure. Sure. So the lab space is a large property that we are working with the sponsor now, who's going to put in a big chunk of cash to build out some spec suites. So we are comfortable with where it is. We're comfortable with the market. It's a large participation with both a strong sponsor and a strong participation partner. So I think it's more than repositioning this and the fact that the sponsor is ready to put $20 million into this to boost leasing is a good sign. So we feel, again, comfortable about this. And it -- there might be an opportunity for an upgrade because there's been a recent appraisal that looks strong. But it stands where it stands for now. But it looks like the vectors are moving in the right direction on that.
On the nonaccrual side, for Class B, you asked about the $18.7 million, we have a deal, it looks like, that will probably cut that about in half, but that's -- I can't -- it's never closed until it's closed. So I don't want to provide any timing or anything more specific on that. But we feel comfortable that, again, the vectors are moving in the right direction. We also recently, and we do this every quarter, have gone through all of our office maturities for the next 8 quarters to see if there's anything we can get ahead of, anything we should be concerned about that should result in accounting moves. Just went through that process, and there's -- we feel very comfortable about 1/2 to 2/3 of it. The remaining part of it are the ones that have already started to be addressed on this chart here. So we are watching office like a hawk, and we think that our accounting for it has been conservative, and we see, again, improvements coming in the next couple of quarters.
[Operator Instructions] We have had no further questions registered. So I'd like to hand it back to the management team.
Well, thank you all for joining us today. I hope we've presented a clear picture of the current state and recent performance and our intentions going forward. And we always appreciate your time and your interest and look forward to speaking with you again soon. Take care, everybody.
Thank you for joining today's conference call with Washington Trust Bancorp, Inc. Today's call has now concluded, and you may now disconnect your lines.