Sharon walsh; Vice President, Director of Marketing Strategy and Planning; Washington Trust Bancorp Inc
Edward Handy; Chairman of the Board, Chief Executive Officer of the Corporation and the Bank; Washington Trust Bancorp Inc
Ronald Ohsberg; Chief Financial Officer, Senior Executive Vice President, Treasurer of the Corporation and the Bank; Washington Trust Bancorp Inc
William Wray; Executive Vice President, Chief Risk Officer of the Bank; Washington Trust Bancorp Inc
Good morning and welcome to Washington Trust Bancorp Inc conference call.
My name is Lydia and I'll be your operator today.
(Operator Instructions). As a reminder, today's call is being recorded.
Now I'll turn the call over to Sharon Walsh, Vice President, Director of Marketing Strategy and Planning, Miss Walsh. Please go ahead.
Thank you Lydia. Good morning and welcome to Washington Trust Bancorp Banks conference call for the third quarter of 2024. Joining us this morning are members of the Washington Trust executive team, Ned Handy Chairman and Chief Executive Officer, Mary Noons, President and Chief Operating Officer, Ronald Osberg, senior executive Vice President, Chief Financial Officer and treasurer and William 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 dot Washtrust dotcom, 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.
Thank you, Sharon. Good morning and thank you for joining our third quarter call. We respect and appreciate your time very much and your interest in Washington Trust. I'll briefly comment on the quarter and then Ron will provide more detail on the financial results. After our prepared remarks, Mary and Bill will join us for the Q&A session.
I'm pleased to report that our efforts to build balance sheet strength and to rebuild our earnings capacity while managing credit closely and proactively continues to pay off. Although margin is not yet where we want it. It has stabilized our fee, businesses are performing well. The current fed action on rates and the implied improved economic outlook are helping to build our mortgage pipeline and support continued market appreciation in wealth management A U A.
We continue to be prudent on the expense front and still our strong customer focused teams and modest technology investments have delivered encouraging activity and growth in the quarter.
Our customer franchise remains strong and we believe will remain as such as our team prudently manages through the current fed pivot.
In addition to in market deposit growth in the quarter Ron will report improve capital ratios, continued strong credit statistics and controlled expenses.
In September, we opened a full service branch in the Olneyville neighborhood of Providence and already see it as a catalyst for community strength and potential for a great new customer base. Although we don't currently have additional branch expansion plans. Our team continues our dedicated focus on caring for the customers and communities we serve.
I'll now turn the call over to Ron for some more detail on the corner and then we'll be glad to address any questions you have,
Ronald Ohsberg
Okay, thanks. Net and good morning everyone. Net income for the third quarter was $'11 million.64 per share. Net interest income was $32.3 million up by $677,000 or 2% from the preceding quarter. The margin was 185 up by two basis points. There were no prepayment penalties, prepayment fee income in the third quarter compared to $46,000 in Q2 non interest income comprised.
Let's see, I just lost my place.
Non-interest income comprised 34% of revenue and amounted to $16.3 million down by 388,000 or 2%. Included in the second quarter was a $988,000 gain on the sale of our operations center, excluding this non-interest income was up by $600,000 or 4%. Wealth management revenues were $10 million up by $311,000 or 3%.
A U A totaled $7.1 billion . Up by $249 million or 4%.
Mortgage banking revenues totaled $2.9 million up by $105,000 or 4% in our mortgage pipeline at September 30 was $107 million . Up 2% from the end of June.
Non-interest expenses were up for $594,000 or 2% from Q2 including an increase in advertising and promotion expense of about $196,000. Due to timing the third quarter, effective tax rate was 20.6%. And for 2024 we expect it to be 21%.
Turning to the balance sheet. Total loans were down by $114 million or 2%. Commercial loans decreased by $82 million or 3% or residential decreased by '$29 million or 1% in market deposits which exclude wholesale broker time deposits were up by $155 million or 3%.
Wholesale broker deposits were up $41 million and FHLB borrowings were down by $250 million . Our loan to deposit ratio decreased from 113 to 106 total equity amounts to $502 million up by $31 million from the end of the second quarter.
Our asset and credit quality metrics remain solid not occurring. Loans were 55 basis points and past due loans were 37 basis points on total loans. The increase in past due loans was largely due to one commercial real estate loan that has been a non accrual status since the fourth quarter and is now past maturity. We do expect that credit to be resolved in the fourth quarter.
The allowance total $42.6 million or 77 basis points of total loans and provided NPL coverage of 137%. And we had net charge offs of $48,000 in the third quarter and $127,000 on a year-to-date basis. And at this time, I'll turn the call back to
Edward Handy
Thanks Ron. And now we'll open it up to questions Lydia.
Operator
Thank you.(Operator Instructions)
Yes.
Our first question today comes from Mark Fitzgibbon with Piper Sandler.
Please go ahead. Your line is open.
Mark fitzgibbon
Hey guys, good morning. Ron, I think I missed your comment on the commercial pipeline. I think you said $107 million mortgage pipeline did you mention the size of the commercial pipeline?
Ronald Ohsberg
I, I didn't and it's, it's $90 million and that's up from $45 million in the second quarter.
Mark fitzgibbon
And what rough average rate would you guess is on that pipeline?
Ronald Ohsberg
Most of what we're doing is I would say FHLB plus 150 I'd just say 250.
Mark fitzgibbon
Okay, great. And then secondly, I noticed cash balances were, you know, up about $200 to up about $200 million . Will that normalize in the fourth quarter or you just feel like running the higher cash balances right now? Makes sense. It will.
Ronald Ohsberg
Yeah. No, that's, that's just timing. We did replenish, we replenished brokered CDS in the third quarter and we also had some loan payoffs and we use that cash to pay down FHLB. We've already run some of and, and, and we paid down maturing, brokered CDS as well. So, no, we, we would plan to run that down to about $100 million .
Mark fitzgibbon
Okay.
And, and then I wonder if you could help us think about sort of how quickly you're able to take deposit costs down and you know what you think the trajectory of the margin is, is likely to look like in the next quarter or two.
Ronald Ohsberg
Yeah. So, you know, as I mentioned on the June call rate reductions will likely reduce net interest income a bit in the fourth quarter. I, I would say maybe in the $500,000 to a million dollar range as deposit are going to lag the loan bait is, but I can tell you that on the way down, those deposit beers would be a lot higher than they were on the way up. We have been aggressively looking at our money market deposits and, you know, and keeping an eye on the competition and, and being mindful of, of customer retention. You know, I think we're doing a good job of, of repricing those money markets down. But there is still a little bit of a lag compared to where we are on the, on the loan. So that will probably impact us a bit. But we, we view that as timing our balance sheet is liability sensitive and the rate reductions will definitely help us.
Mark fitzgibbon
So do you expect the margin to be down a little bit in the fourth quarter? Is that,
Ronald Ohsberg
I'm sorry,
I, yeah, I didn't answer that part so that we expect the margin to be about flat
Mark fitzgibbon
And then start to rise in the, you know, sort of first quarter you think?
Ronald Ohsberg
Yeah, I, I think going into 2025 assuming the fed continues to cut, we expect the margin to expand. Now keep in mind that every time it cuts, we have, we kind of start the whole repricing thing all over again. So, you know, we just have to work through that, but on a net basis, yes, the margin will expand as rates come down.
Mark fitzgibbon
Okay.
And then, I, from your comments, you seem to suggest that $10.5 million loan that, is 30 days delinquent will resolve in the fourth quarter. What, what gives you such confidence in that?
Ronald Ohsberg
We've been negotiating that for, for quite some time and, and feel like we're very close to to a resolution.
Mark fitzgibbon
Okay.
And then lastly, could you talk a little bit about the, the $42 million of office loans that are classified, maybe what the maturity schedule on those look like?
Ronald Ohsberg
Yeah, bill. Do you want to take that one?
William Wray
Sure. We have a couple, one has matured, that's the one that's resolution is imminent.
Another will be maturing this quarter.
And then one more in 2026. So fairly near term, our approach to maturity on all offices that essentially it's a life sentence and we have to be working with our borrowers to you know, credit enhanced as we hit maturity. So we're not expecting there's any kind of magic market that's going to take us out with the refile sale that said we are getting a resolution or we have an agreement to get a resolution on about '$10 million of the classified this quarter and the others are all current and we're working with guarantors and borrowers to kind of structure enhance and and keep them moving. So we've done a maturity wall assessment. We had it done by an outside third party firm to stress test everything we have rolling within the next couple of years and no surprises and fairly strong results from their standpoint. So we, we feel like we're on top of that.
Great. Thank you.
Ronald Ohsberg
Thanks, Mark.
Operator
And next question, our next question comes from Damon Delmonte with KBW.
Please go ahead.
Damon Delmonte
Hey, hey, good morning guys. Hope everybody's doing well. So first question, I just want to talk a little about the loan growth morning, talk a little bit about loan growth during the quarter with balances being down. I believe it was driven by CRE is, is this a function of you guys kind of pulling back and just letting maturities kind of naturally, you know, occur during the quarter or were there some surprises late in the quarter that that led to the decline?
Ronald Ohsberg
Yeah, so I, I would say it's a couple of things, I, I think coming into this year, I think we told you we were going to pull back a bit on our origination activity. So that that's kind of being reflected in the numbers, you see, it's, it's normal pay downs and, and we also managed, managed out a few credits intentionally, but we think that's behind us now and we're expecting to start to ramp up underwriting in the fourth quarter.
Damon Delmonte
It should be in the year.
Edward Handy
Yeah, I, I would say that the $90 million commercial pipeline is, is a result of, of a renewal of kind of growth and, and our teams being out there with the, with the door open for new opportunities and it, it will grow beyond that, but we expect kind of a one or 2% low single digit growth in the fourth quarter and we'll carry that on into 2025. So that the teams are back out and, and, you know, we, we feel good about that, but I think, I think we'll, we'll have I would say sort of muted growth in the next quarter or two and then back to normal.
Damon Delmonte
Got it and, and Ron your, your comments on the outlook. Does that reflect the expectation of, of the growth that you guys just described?
Ronald Ohsberg
Yeah, I mean, the, the fourth quarter growth won't help us a lot in the fourth quarter, just the timing of the disbursements on that. So that, that's more of a jumping off into 2025. But, but yeah, I mean, yes, it's going to be, you know, a creative to net interest income going forward.
Damon Delmonte
Got it. Okay. And then I think your interest bearing deposit costs for the quarter were 3.28%. Do you happen to have the, the spot rate at at 930.
Ronald Ohsberg
Mm. I unfortunately I don't have that at my disposal.
Damon Delmonte
Okay. And then just one last final one on, on expenses. I know you guys are, are focused on, on containing, any material growth here. Just kind of looking for an update here in the fourth quarter and that's kind of how we think about 2025. Do you think you're able to kind of keep it in this, you know, 34.5 ish range going forward or do you expect it to kind of trend higher?
Ronald Ohsberg
Yeah, II, I mean, I think expenses will be higher next year and we're, we're not ready to guide on that yet, but I would expect the fourth quarter to be in line with the third quarter.
Damon Delmonte
Great. Okay, that's all that I had. Thank you very much.
Yeah, thanks
Ronald Ohsberg
Damon.
Operator
Our next question comes from Laurie Hunsicker with seaport research partners. Please go ahead.
Laurie Hunsicker
Yeah. Hi, thanks. Good morning. This thing on margin for, do you have the good morning, Ron. Do you have the, the spot margin for September?
Ronald Ohsberg
Yeah. So we our, our September margin was 191. But keep in mind that that day count on a month by month basis has an impact. So I would say day count is six basis points. So kind of on a normalized basis basis. Call it, you know, call it 185.
Laurie Hunsicker
Okay. Great, thanks. And then just going back to office. I, I guess we're on a bill. Maybe you can help us think about a couple of things. Can you refresh us on?
I know you had two class B properties. I guess that make up that $21.7 million . Can you just refresh us in terms of vacancy where you are with that?
And then also your, your class a lab space which I think is sitting in that '20 a half million and I had in my notes that was '$18 million, but maybe you can just refresh us in terms of where we are with that. And was that partly being resolved in the fourth quarter or what exactly was the fourth quarter resolution the $10.5 million ? What exactly is that credit? Yeah. So if you could just maybe step us through because I know there are three or four big loans just you could refresh us on that and then, you know, vacancies and also maybe any specific reserves on those.
Thanks
William Wray
Classified. There's three properties in it. One of them is the one in Boston that is set for resolution set, meaning it's literally going under agreement today and expected to close this quarter, but until it closes, it's not done, but we feel pretty solid about that. That's something that's been going on for a while. The other remainder are classified and class B classified are two properties in Connecticut, one of which is 70% occupied, one of which is 50 both of which are current, both of which have a guarantor who's continued to keep the properties going. They're pursuing exit strategies by listing them for sale, but that's where those stand. So we're pretty confident that the Boston property will be done this quarter. But until it closes, we can't say so on the lab space and that's $20.5 million. That has gone from 0% leased in the last six months to 52% leased, which is a lot that represents over 100,000 square feet of leasing. So the property's got a lot of momentum. The borrower put in a very significant equity injection of $20 million to work on specs based buildouts. So we believe that's got a lot of traction as evidenced by the leases and by the amount of leasing interest that's out there. All that said again until it's 100% leased or at least it's some stabilized number. We're not going to be making any moves with it at the moment in terms of classification or, or accounting
Laurie Hunsicker
Got it and then bill on that on that loan of, of $20.5 million. What is, what is the total, what is the total exposure with all the banks added together? I know it's north of $100 million , but I don't know if you have a current number on that.
I
William Wray
Have to get a calculator to buy it. It's a, I think it's $174 million million.
Ronald Ohsberg
Yeah.
William Wray
Okay.
It's 170
Laurie Hunsicker
Four.
Okay, great. And then do you have any specific reserves on either of those class B or this lab?
William Wray
Not on the lab, not merited, on the class B's we do. On. Yes, we do. But they're for, you know, appropriately set by accounting and, and other rules. So I don't have a, I don't have an aggregate number for those that I'd like to disclose. But we, we act ahead of time in case there's any loss, we'll certainly move something into individually impaired and set up individual impairment if we need to. And on those three, there's one for about about 5% of the total.
There's actually already been a, there's actually already been a charge off on one of the other properties that's reflected in the balance.
Laurie Hunsicker
Okay. And then I guess if we're looking at your $3 million office book or 240 excluding medical, what is, what is your reserves on that at the moment?
William Wray
Our office, our office reserve factor is 100 and '27 basis points, but that's part of our total commercial real estate segment.
And then we obviously create individual impairment when needed.
Laurie Hunsicker
Got it.
Got it. Okay. And then just last question in terms of the office coming due. So you haven't known here 40% coming due in the next two years. Can you help us think about how that's breaking out in terms of what's coming due in the fourth quarter and what's coming due next year?
Thanks.
William Wray
It's '20 this quarter, including one that's already matured and that's the one set for resolution and then there's 53 for next year,
Laurie Hunsicker
53 million for next year and then '20 million in the fourth quarter. That includes the 10.5 million million. Got it.
Okay, great. Thanks so much for taking my questions.
Sure.
Edward Handy
Thanks Laurie.
Operator
Just as a reminder, if you have any questions or follow up for the management team, it's star one on your telephone keypad to join the queue.
We have no further questions. So I'll pass you back to Ned handy for any closing comments.
Edward Handy
Thanks Lydia and thank you all for joining us today. We appreciate your time, your interest in Washington Trust and your questions. We hope we've presented a clear picture of where we are and where we're headed. So thank you very much. Have a great day and we look forward to speaking to you all soon.
Operator
Good.
This concludes today's call. Thank you for joining you may now disconnect your line. Thank you very much.