Washington Trust Bancorp Inc
NASDAQ:WASH
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Washington Trust Bancorp Inc
Earnings Call Analysis
Q4-2023 Analysis
Washington Trust Bancorp Inc
The executives of the company shared a careful analysis of the revenue and earnings. While specific figures were not quoted in the visible parts, the discussion highlighted static expense estimates, with approximately $35 million expected per quarter. Regarding revenue, the company appears conservative and urges caution, suggesting that investors should consider a flat or moderate outlook.
The company anticipates a Net Interest Margin (NIM) in the 1.80% to 1.85% range for the upcoming quarter. They highlighted competitive pressures, especially in deposits, alongside a shift from Demand Deposit Accounts (DDAs) to Certificates of Deposit (CDs), which could continue to compress margins. However, the executives are optimistic about potential lift from three anticipated Federal Reserve rate reductions in the second half of the year, which could alleviate some pressure.
One troubling commercial real estate loan in Greater Boston, worth $11 million, was reported. The company expects to resolve this without principal loss within the first quarter. Conversely, the dividend payout ratio was a concern as it reached 98%, nearing the threshold of 100% due to margin pressures and stable expenses. The executives, however, expressed confidence in the capitalization levels and the sustainability of the dividend, even if the payout ratio temporarily exceeds 100%.
An unexpected increase in charitable foundation contributions surged to $1 million this quarter, though this is not expected to recur annually. The company suggests a future guide closer to $500,000, offset by tax benefits. For subsequent years, no additional contributions are expected until at least 2025. Quarterly expenses are projected to be around $35 million, including an extraordinary credit event which impacted the previous quarter's expense line.
The company is experiencing slowed loan growth, with a near-zero net growth expected due to a decline in residential and consumer lending, balanced by modest commercial growth from a committed construction pipeline. The provision expense is anticipated to be a slight build, estimated at about $1 million per quarter, suggesting a conservative approach to credit risk amid market uncertainties.
There are no plans to raise additional capital as the institution is curtailing loan originations, which should stabilize capital ratios. The executives anticipate an improvement in capital positions over the second half of the year. Moreover, no major restructuring within the securities book is planned despite market trends, with the leadership preferring to rely on the recovery of their investment portfolio observed in the last quarter.
Expansion efforts are visible with the opening of new branches, one at the end of January and another by the end of the first quarter or early April. These plans are already factored into the expense guide, demonstrating the company's strategic investment in growth despite the broader trends of caution and consolidation.
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Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Seb, 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's 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's Chairman and Chief Executive Officer, Ned Handy.
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 fourth quarter 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 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 3 newest branches opened within the past 2 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 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 enhance franchise value. At this point, I'll turn it over to Ron for a more detailed review of the quarter. Ron?
Okay. 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 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 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 3.49%.
Prepayment fee income was $27,000 in the fourth quarter and $71,000 in Q3 neither having any impact to margin. Noninterest 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 $67,000 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 to see 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 -- 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 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. End 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 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 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, 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 1 CRE 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.
[Operator Instructions] The first question today comes from Mark Fitzgibbon from Piper Sandler.
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 if you take our fourth quarter 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 fourth quarter normalized and that's our expense estimate for the year. So, so [ flat ].
I'm sorry. So roughly about $30 million a quarter.
I think it's about $35 million a quarter.
I'm sorry, you're right. Yes. Okay. 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 Fed actions?
Yes. So we're looking at a NIM in the first quarter of 1.80% to 1.85%. 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 DDA into CDs, et cetera. So we expect to see that continued pressure on the margin, at least in the first quarter. We are budgeting 3 Fed rate reductions. And we think that, that should give us some lift in the second half of the year.
Okay. And...
And then we have a lot of...
Can you share any color with us -- sorry.
Yes, Mark, I was just going to give a little bit more color on that. So we do have a large $1.8 billion, $1.9 billion 1-month SOFR portfolio. So when the Fed does begin to cut rates, if they do, that will reprice immediately, we keep most of our wholesale funding pretty short. So 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 1, and then we'll just need to reprice our liabilities down.
Okay. And then I wondered 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. 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 line to a restaurant, they've had difficulty with the other 3 floors getting office tenants. So the borrower are very -- he'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 incredible 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 never know when the deal is going to close. But at this point, it's on a path to resolution within the first quarter.
Okay. Great. And then last question I had. 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'd 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 realized that. We believe that we are -- we remain well capitalized, and we believe that the dividend is sustainable even if we, I would say, temporarily go over 100%, we're still prepared to maintain that -- we are fully expecting to maintain the dividend.
Your next question comes from Laurie Hunsicker from Seaport Research Partners.
Just going back to expenses here. So the charitable foundation surge of $1 million, how should we think about that in your numbers going forward? Is that something we're going to see recurring in the fourth quarter every year? Is it going to be less, how do you think about that?
Yes. So I would say, Laurie, we kind of guided to more in the $500 million 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 as we disburse the funds. But yes, we intentionally topped that $1 million -- that contribution up to $1 million.
Got it. Got it. Okay. So just back to the expense guide that you gave Mark here. I'm just trying to sort of sort through that. So 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?
Yes, so -- yes. So -- Yes, yes. So Laurie, we had a credit go through the expense line of $3.4 million in the fourth quarter. So strip that out in fourth quarter is more like $35 million. [Indiscernible] reverse $3.4 million, yes.
Okay. Great. And then the other, other income line of $83,000 looks like, was there any onetime charges that ran through that?
Yes. There was a -- we did set up a $300,000 valuation reserve. Yes, we set up a $300,000 valuation reserve on an asset in there.
Okay. Great. Okay. And then back over to NIM, do you have a December spot margin?
Yes, it was 1.82%.
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?
Yes. 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 a nice recovery in our investment portfolio in the fourth quarter. I understand some of the merits of why banks are doing it, but it -- I doubt that we're going to do it.
The next question comes from Damon DelMonte from KBW.
This is Matt Renck filling in for Damon DelMonte. You guys mentioned you're slowing asset growth that came through in loan growth this quarter. So just hoping -- I was just hoping we could get 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 -- we're not doing a lot of originations right now. We did have a fairly sizable construction -- previously committed construction pipeline. That's going to add about $240 million of advances during the year.
That will be partially offset by amortization and paydowns. 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 0%.
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?
I think we're thinking a slight build and if you wanted to put in $1 million a quarter, we're not seeing any particular trouble. 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 thinking about $1 million a quarter. Matt, you said -- Okay. I just want to give a little bit more color on expenses. So that -- Yes. So that 0% expense growth also includes about a $1.5 million additional expense related to the de novo branches. So that's covered.
We have a follow-up question from Laurie at Seaport Research.
Yes. Yes, I was actually just hitting you guys back on the expense related to branches. So what is the timing on de novo branches opening in 2024? How are you thinking about that?
Yes...
Laurie, it's Ned. And one in the first -- actually, one at end of January and one end of first quarter, potentially April. And 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.
Also have a follow-up from Mark Fitzgibbon of Piper Sandler.
I was wondering if you could comment on your capital position and whether you were thinking about raising additional capital.
Yes. 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.
[Operator Instructions] Okay. We have no further questions on the call.
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.
This concludes the conference call. Thank you all very much for joining, and you may now disconnect.