Earnings Call Transcript
WASHINGTON TRUST BANCORP INC (WASH)
Earnings Call Transcript - WASH Q2 2024
Operator, Operator
Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Lydia and I will be your operator today. As a reminder, today's call is being recorded. I'd now like to turn the call over to Elizabeth Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Please go ahead.
Elizabeth Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer
Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call for the second quarter of 2024. 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 our 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 Chairman and Chief Executive Officer, Ned Handy. Ned?
Ned Handy, Chairman and Chief Executive Officer
Thank you, Beth. Good morning and thank you for joining our second 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 second quarter performance. After our prepared remarks, Mary Noons and Bill Wray will join us for the Q&A session. We continue to prioritize building balance sheet strength, managing credit, controlling expenses, and positioning to be opportunistic for earnings growth as the economy and interest rates allow. Capital ratios improved somewhat in the quarter as we deemphasized asset growth and stabilized earnings in the quarter. Credit remains strong and expenses are down quarter-over-quarter. We've introduced new deposit growth-oriented tools to enhance our customers' experience in online account opening, bank switching, and to reward our customers for referrals. We look forward to opening a new branch in the Olneyville section of Providence next month. Other than this branch, we have no other planned branch expansion at this time. In recent years, we shifted much of our operations to the cloud, allowing us to make a strategic decision to sell our operations center and consolidate team members into existing offices. We continue to review every owned or leased space for optimization of our occupancy efficiency. With continued pressure in the margin, our fee-based businesses in wealth and mortgage performed well and generated higher revenues in the quarter. Again, continued expense discipline and our diversified revenue base contributed nicely to this quarter's results. 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. Ron?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Thanks, Ned, and good morning, everyone. Second quarter net income was $10.8 million or $0.63 per share. Net interest income was $31.6 million and the margin was 1.83%. Average earning assets increased by $7 million and had a yield of 4.97%, up by 4 basis points. On the funding side, average in-market interest-bearing deposits increased by $36 million and average wholesale funding decreased by $25 million. The rate on interest-bearing liabilities increased by 5 basis points to 3.68%. Prepayment fee income was $46,000 in the second quarter and $20,000 in the first quarter, neither with any impact on the margin. Non-interest income comprised 35% of revenue and amounted to $16.7 million, down by $503,000 or 3% from Q1. Included in the second quarter was a $988,000 early gain on the sale of our operations center, while the first quarter included $2.1 million in settlement income. Excluding these items, non-interest income was up by $609,000 or 4%. Wealth management revenues were $9.7 million, up by $340,000 or 4%. This included an increase of $190,000 in seasonal transaction-based revenues, largely from tax servicing, as well as an increase of $150,000 in asset-based revenues, which correlated to an increase of 1% in average AUA balances. Mortgage banking revenues totaled $2.8 million, up by $255,000 or 10%. Realized gains were $2.2 million, up by 39%. Turning to expenses. Non-interest expenses were down $453,000 or 1% from Q1. Salaries expense decreased by $515,000 or 2% reflecting lower staffing levels and payroll tax expense, partially offset by higher mortgage commissions. In the second quarter, the effective tax rate was 21.8%. We estimate our full-year 2024 effective tax rate will be 21.2%. Turning to the balance sheet. Total loans were down by $56 million or 1% from March 31. In the second quarter, total commercial loans decreased by $22 million or 1% and residential loans decreased by $27 million, also 1%. In-market deposits, which exclude wholesale broker time deposits, were seasonally down by $37 million from March 31. Wholesale broker deposits were down by $355 million and Federal Home Loan Bank borrowings were up by $310 million from March 31, reflecting a shift in wholesale funding mix based on pricing. Our loan-to-deposit ratio increased in the quarter due to the reduction in broker deposits. We have since replenished broker deposits in the third quarter. Turning to asset quality. These metrics remain solid. Non-accruing loans were at 54 basis points and past due loans were at 21 basis points as a percentage of total loans. The allowance totaled $42.4 million or 75 basis points of total loans and provided NPL coverage of 139%. We had net charge-offs of $27,000 in the second quarter and $79,000 year-to-date. And at this point, I will turn the call back to Ned.
Ned Handy, Chairman and Chief Executive Officer
Thank you, Ron. I know you're all busy this morning, so we will go right ahead and turn it to questions. So Lydia, please open the lines.
Operator, Operator
Thank you. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.
Mark Fitzgibbon, Analyst
Hey guys, good morning.
Ned Handy, Chairman and Chief Executive Officer
Good morning, Mark.
Mark Fitzgibbon, Analyst
Good morning, Ned. It looked like you replaced $300 million or so of brokered deposits with FHLB advances. And I know, Ron, you had said that you replaced those subsequently. But what was the rough difference in rate between the broker deposits and the FHLB advances?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Mark, it could be 10 to 15 basis points. I mean, we look at those as pretty much interchangeable sources of funding. So whichever is cheaper is where we tend to go.
Mark Fitzgibbon, Analyst
The loan-to-deposit ratio, because of that movement is starting to creep up a little bit, I think it was 113%. How high are you willing to let that go?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes, it's back down to 107% right now after we added those deposits back. So listen, we don't want the ratio to be any higher than it is now to be honest, I mean, we're trying to bring deposits in just like everyone else.
Ned Handy, Chairman and Chief Executive Officer
And we emphasize asset growth, Mark, I think you saw loans down in the quarter. We'd love to be at 100% or below, but that's the challenge as it is for a lot of folks. Deposit growth continues to be our number one priority. And we're focused on that both in our cash management area and obviously in the retail side of the bank. So I think where we are now is we're comfortable with it, but we'd like to maintain or reduce.
Mark Fitzgibbon, Analyst
Okay. And then you had again a bit of an outflow in the wealth management business. I think it was $163 million. Any more departures of relationship people in the wealth management business recently?
Mary Noons, President and Chief Operating Officer
Hi Mark, this is Mary Noons. I'll address that question. We experienced the departure of two advisors and had the unfortunate, unexpected passing of one of our advisors. These departures were not related; one occurred in the first quarter and the other in the second quarter, so there is no ongoing trend. This happened in our Rhode Island offices, where we operate on a team-based approach, resulting in minimal client outflow. We have thoroughly examined the outflow composition and are not identifying any trends. The instances were mainly due to client passings that led to the closure of estates, along with some higher-than-usual client expenses, but we are closely monitoring the situation.
Mark Fitzgibbon, Analyst
Okay. And then, Ron, I wondered if you could share with us some thoughts on the outlook for the NIM, assuming maybe one Fed cut in September, and also the outlook for expenses in the third quarter.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. So I'm only going to go out one quarter on the NIM, and we think NIM in Q3 will be pretty much in line with Q2. I don't think at this point anyone really knows what the Fed is going to do and when they do start to reduce rates. As you know, we have a large commercial loan book of one-month silver, so out of the gate, we'll probably see net interest income come down a little bit as we let our funding start to reprice. So I think it could be a little choppy for a couple of quarters, depending on how many rate cuts come through. And the timing of those overall lower rates are beneficial to us. Most of our funding is short-term, most of that maturity funding is short-term, and we have a lot of money markets that can be repriced down as well. So not giving any fourth quarter guidance yet, but we think Q3 will be in line with Q2.
Mark Fitzgibbon, Analyst
Okay. Great. And then lastly, and I know you build capital a little bit this quarter, but what are your thoughts on sort of the current capital position? Would you contemplate raising some capital given the more challenging environment? Do you have a target for the CET1 or some other capital ratio?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. If you look back, we've seen sequential improvements in our regulatory capital ratios. For the past three or four quarters, we've slowed down asset growth, as Ned mentioned. We plan to maintain this approach and expect to improve our capital on a linked quarter basis moving forward. Personally, I would like to see our total risk-based capital reach about 12%. Achieving that will take some time.
Mark Fitzgibbon, Analyst
Thank you.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Mark, you asked about expenses, so we're expecting Q3 to be about $35 million. Mortgage commissions will be a little higher, advertising will be a little higher in the quarter, and then we expect expenses to come down a bit in the fourth quarter.
Operator, Operator
Thank you. Our next question is from Damon DelMonte with KBW. Please go ahead. Your line is open.
Damon DelMonte, Analyst
Hey, good morning, everyone. I hope everybody's doing well, and thanks for taking my questions here. Just to follow up on the expenses, you mentioned earlier that we saw this quarter with the realized gain on the sale of the operations center. Are you expecting any material cost savings related to that? And how does that figure into the outlook?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes, that's already incorporated. And now I'm thinking off the top of my head, I think it's about $200,000 to $300,000 of expenses annually, but that's already baked in.
Damon DelMonte, Analyst
Okay. Got it. Okay. And then with regards to your outlook for credit, I mean, things continue to trend pretty favorably there, low charge-offs, and obviously the provision remains on the lower side given the slower loan growth. Are there any areas of the portfolio where you're seeing some stress, particularly in the commercial real estate side?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Bill, you want to take that?
Bill Wray, Senior Executive Vice President and Chief Risk Officer
Sure. I think the one everyone pays attention to is office. We pay attention to office a lot. We essentially, in the next couple of years have about a dozen maturities, each of which we know, we don't even think of them as on a portfolio basis, but we're not seeing any trends anywhere else in the portfolio. And even within office, we're kind of handling them one at a time, and a couple of them are going to limp their way forward. But we think we understand the issues, we understand the assets and the borrowers, and we don't see any particular adverse trends that aren't already reflected in our accounting.
Damon DelMonte, Analyst
Got it. Okay. That's helpful. Thank you. And then just on fee income, I guess, I think, Ron, you alluded to a little bit higher comp related to mortgage banking here in the third quarter. I guess, how are you thinking about overall fee income in the back half of the year? Do you feel like the impact from the loss AUM and the wealth management kind of been reflected in the fees, or should we expect some bit of a decline there?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Our wealth income largely depends on markets; I think out of the gate, I would expect Q3 to look somewhat similar to Q2 in terms of wealth revenue. We expect mortgage to be up maybe 5% to 10% just on higher volume in the third quarter.
Mary Noons, President and Chief Operating Officer
Yes, we implemented a fee increase that should begin to appear in the numbers for the third and fourth quarters.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
On the wealth side.
Damon DelMonte, Analyst
Got it. Well, great. That's all that I have. Thank you very much.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Thanks, Damon.
Operator, Operator
And our next question today comes from Laurie Hunsicker with Seaport Research. Your line is open.
Laurie Hunsicker, Analyst
Yes. Hi, good morning.
Ned Handy, Chairman and Chief Executive Officer
Hi, Laurie.
Laurie Hunsicker, Analyst
I'm hoping we can just go back to wealth management. The two advisors that departed, how much did they actually manage?
Mary Noons, President and Chief Operating Officer
Well, we manage as a team, so their advisors as part of a trust officer and portfolio manager and associate team. I don't have the numbers relevant to their portfolios, but I will say that the runoff has been minimal, and it's because of that approach. It's not very unlike the departures that had happened in our Wellesley area. So we're confident that that's not going to be a big contributor to any runoff.
Laurie Hunsicker, Analyst
Got it. And then…
Ned Handy, Chairman and Chief Executive Officer
And Laurie, Mary mentioned the two departures and the one unexpected death. We have also brought on two investment advisors during the first two quarters, so we're net down by one.
Laurie Hunsicker, Analyst
Okay. Got you. And then just, Mary, just to frame it, the $163 million of client outflows in 2Q, how much was related to those two advisors? I mean, I know you said minimal, but it was just one of the larger quarterly sheets, seems I'm just trying to understand that.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Yes. So Laurie, that number is really net of three things, right? And we don't usually get into this level of detail, but you get new business, you got lost business, and you've got routine flows where clients are living their lives and spending their money. So in the second quarter, I will just say that that new business and lost business was a net zero.
Laurie Hunsicker, Analyst
Okay. That's helpful. Okay.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
That's nothing out of the ordinary. Everything's quite typical.
Laurie Hunsicker, Analyst
Got you. Okay. And then just going back to non-interest income kind of along the lines of Damon's question, but maybe just thinking more top-level, because I know obviously the June has the tax prep in it for stripping out some of the noise, the sale of facilities, et cetera. How do you think about where that overall number is looking for 3Q netting everything out, is $15.5 million a good number, or how should we be thinking about that?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Like I said, I think wealth will track in Q3, close to Q2, and we expect mortgage to be up about 5% to 10%.
Laurie Hunsicker, Analyst
Okay. And then
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
We're not doing much of anything on the swap side because we're not originating those types of loans right now, so.
Laurie Hunsicker, Analyst
Got it. Okay. So that'll be close to this level. Okay. Got it. That's super helpful. And then in terms of sale of other facilities, can you help us think about that a little bit? What else is there potentially to sell? Are you expecting more gains as we look toward the back half of this year?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. No. I mean, we have considered from time to time doing some sale leasebacks, so we could implement that. We have no specific plan to do that at the moment, but that could generate some gains for us at some point. There are no other kind of excess facilities that we have right now that we're intending to dispose of.
Laurie Hunsicker, Analyst
Got it. And then just one last question on the office segment. I know you might not be able to provide all the details, and I appreciate the information included in the release. Regarding the $18.4 million currently on non-accrual cash fee, could you update us on that with respect to vacancy and any developments? What are your thoughts on this?
Bill Wray, Senior Executive Vice President and Chief Risk Officer
Sure. I'll take that, Laurie. This is Bill. That's two properties, one of which is 50% vacant, the other which is only tenanted with street front retail right now. The latter property, there looks like there's some resolution potential, but again, we never want to count it until it's over. So there's some movement on that. We feel good about both properties, not the fact that they're non-accrual, but that they're stable to improving. So that's where they stand.
Laurie Hunsicker, Analyst
Okay. And those are both the office buildings are located in suburban Connecticut, is that correct?
Bill Wray, Senior Executive Vice President and Chief Risk Officer
We have two properties, one in suburban Connecticut and the other in the Boston Metro area. I want to highlight that we have no delinquencies. Even though these properties are on non-accrual status, they continue to perform well. They can be described as performing non-performers.
Laurie Hunsicker, Analyst
Got it. Okay. The 32% of your portfolio is maturing in the next two years, but how does that look if we consider the upcoming one, two, or three quarters? What is the maturity status around that?
Bill Wray, Senior Executive Vice President and Chief Risk Officer
Actually, they are mostly the properties we just discussed, with a couple of non-accruals. There isn't much coming up in the next few quarters, but let me address maturities for a moment. We consider office properties as essentially a long-term commitment. There isn't a straightforward exit market available. Therefore, we approach each property with the assumption that we will hold it until maturity and beyond. This is how we manage credit and collaborate with the sponsor. If interest rates decrease and a refinancing market emerges at some point, that would be beneficial. However, we assume that we need to stay the course with the sponsors on these properties.
Laurie Hunsicker, Analyst
Got it. Okay. Got it. That’s helpful. Thank you very much.
Ned Handy, Chairman and Chief Executive Officer
Thanks, Laurie.
Operator, Operator
Thank you. We have no further questions in the queue. So I'll turn the call back over to Ned Handy for any closing comments.
Ned Handy, Chairman and Chief Executive Officer
Well, thank you all for joining us today. We certainly appreciate your time and your interest in Washington Trust, and we look forward to speaking to you all again soon. So have a great day, everybody.
Operator, Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines.