Earnings Call Transcript - WASH Q1 2024

Operator, Operator

Good morning and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Priyanka 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?

Elizabeth B. Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer

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 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.

Ned Handy, Chairman and Chief Executive Officer

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 of 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 omni-channel 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

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, with no impact to margin in either period. Non-interest 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, non-interest 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 saleable 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 non-interest 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, 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 31st. Turning to asset quality, asset quality improved quarter over quarter. Non-accruing loans were 54 basis points on total loans compared to 79 basis points at year-end. Past due loans as a percentage of loans were 18 basis points compared to 20 basis points at year-end. We had zero commercial real estate delinquencies. The allowance totaled $41.9 million or 74% of total loans and provided NPL coverage of 136%. The first quarter provision for credit losses was a charge of $700,000. We had net charge-offs of $52,000 in the quarter. At this time, I will turn the call back to Ned.

Ned Handy, Chairman and Chief Executive Officer

Thanks, Ron. And we'll now take questions.

Operator, Operator

Thank you. Operator Instructions. We will take the first question from Mark Fitzgibbon of Piper Sandler. Your line is now open.

Mark Fitzgibbon, Analyst

Hey, guys. Good morning.

Ned Handy, Chairman and Chief Executive Officer

Hey, Mark.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Hey, Mark.

Mark Fitzgibbon, Analyst

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?

Ned Handy, Chairman and Chief Executive Officer

Yes, it was.

Mark Fitzgibbon, Analyst

So is that all the litigation surrounding those people leaving, has that been fully resolved with this settlement?

Ned Handy, Chairman and Chief Executive Officer

Yes, that's the final resolution of it.

Mark Fitzgibbon, Analyst

Okay. And then secondly, Ron, I wondered if you could share with us your 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

We are currently forecasting the second quarter to be around 1.80%, with a small range of variation, but there is still considerable uncertainty regarding the Federal Reserve's actions.

Mark Fitzgibbon, Analyst

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 two 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah, 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. We'll probably have a little higher mortgage banking revenue in the second quarter as well.

Mark Fitzgibbon, Analyst

Okay.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Due to seasonality.

Mark Fitzgibbon, Analyst

Okay. And then just to pivot back to wealth management, it looked like client flows continued to be negative. They were 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah. 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 one estate payout of $25 million included in the quarter and those things happen. There's nothing unusual happened in the quarter.

Mark Fitzgibbon, Analyst

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…?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah, 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 do. 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.

Ned Handy, Chairman and Chief Executive Officer

And, Mark, this is Ned. I would tell you we're always reviewing staffing levels and incentive plans to ensure we have the right mix on both sides. We are continuously interviewing new candidates. The private clients group currently has an opening that we are actively recruiting for. There's always an evaluation of our sales strategy, and it's challenging to achieve organic growth in this business. We prefer to operate at scale as we currently do, so we can capitalize on market opportunities when they arise, but we recognize the need to continually assess whether we have the right combination in place to grow organically.

Mark Fitzgibbon, Analyst

Okay. And then last question I have, and I sort of asked a 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 litigation settlement, your payout ratio is 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah. 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.

Mark Fitzgibbon, Analyst

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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

We are currently concentrating on the total risk-based capital ratio, which improved by 4 basis points this quarter. We have stabilized that ratio, and we anticipate some modest improvement moving forward. This provides us with sufficient capital to maintain the dividend.

Ned Handy, Chairman and Chief Executive Officer

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.

Mark Fitzgibbon, Analyst

Thank you.

Ned Handy, Chairman and Chief Executive Officer

Thanks, Mark.

Operator, Operator

Thank you. We now have Damon DelMonte of KBW.

Damon DelMonte, Analyst

Hey, good morning, guys. Hope you're both doing well today. 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.

Ned Handy, Chairman and Chief Executive Officer

Thank you, Damon. In the second quarter, we will begin implementing some of the technology we've invested in, specifically an automated account opening system that allows for an omni-channel experience. We are particularly excited to launch this on the consumer side, with a potential rollout for the business side in late Q2 or Q3. Additionally, we have developed a switch platform aimed at easing the process for customers to transition to us, which we plan to introduce this quarter. Another initiative is the Refer a Friend program, a deposit referral mechanism that we will also be introducing. These investments underscore our commitment to fostering a sales culture centered on deposit growth, which has been our top priority since my tenure began and continues to be paramount in improving our funding mix. Therefore, all employees, including our commercial lenders, are focusing more on attracting deposits rather than lending. Our cash management team is dedicated to enhancing commercial cash management, and our municipal group within that team is specifically targeting an increase in municipal deposits. We are certainly aiming to expand our deposit base. From an expectation perspective, we have remained fairly flat this year, and targeting 1% to 2% growth would be a positive goal for the year, although we have higher aspirations for the long term. It is essential for us to pivot the company's funding more towards deposits and reduce reliance on borrowed funds.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah. 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.

Damon DelMonte, Analyst

Got you. Okay. Appreciate that color. And then with regards to 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 would 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?

Ned Handy, Chairman and Chief Executive Officer

Yeah, 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 on our pipeline. Our commercial pipeline is virtually zero 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'll be offset by amortization.

Damon DelMonte, Analyst

Got it. As you manage growth, is there a strategy to ensure you don't turn away potential customers seeking credit? Will the overall effect be neutral since you might be discontinuing some relationships while forming new, stronger ones or enhancing existing strong ones? What’s the strategy to achieve that balance?

Ned Handy, Chairman and Chief Executive Officer

That's a great question. Yes, we plan to sell some participation interest in existing loans while ensuring we maintain our customer relationships. We are allowing certain non-core loans to mature and pay off instead of refinancing them. It's a mix of strategies with the focus on the customer, ensuring we support those who need us most. Moving forward, we expect to be more of a lead participation sold lender than before and will avoid purchasing participations that don't come with deposits or additional business opportunities. It's a bit of everything, but we remain attentive to maintaining strong customer relationships.

Damon DelMonte, Analyst

Got it. Okay. And then just lastly on the provision outlook, good improvement there on 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yes. Yes. And just in terms of guidance, I mean, I think we told you $1 million a quarter in 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.

Damon DelMonte, Analyst

Got it. Okay, that's all that I had. Thanks a lot. Appreciate it.

Ned Handy, Chairman and Chief Executive Officer

Thanks, Damon.

Operator, Operator

Thank you. Operator Instructions. We have had no further questions registered, so I'd like to hand it back to the management team.

Ned Handy, Chairman and Chief Executive Officer

Well, thank you all for joining us today. I hope we 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.

Operator, Operator

Thank you all for joining today's conference call with the Washington Trust Bancorp, Inc. Today's call has now concluded and you may now disconnect your lines.