2023-11-03 16:52:11 ET
Summary
- Washington Trust Bancorp's financial performance remains stable, meeting expectations despite not matching historical standards.
- The company's deposit franchise is strong and growing, indicating effective branching strategies and the ability to generate and manage deposits effectively.
- Washington Trust has a strong dividend over 9%.
I originally wrote about Washington Trust Bancorp, Inc. ( WASH ) back in August of 2023 and claimed it was a buy because the dividend was unlikely to be cut. You can read about my thoughts here . Since that article, the stock has continued to fall, but the dividend has remained uncut. This has made WASH an even better deep value opportunity and I now believe it is a strong buy with a dividend over 9%.
Seeking Alpha
October, 24th, 2023 Earnings Call Highlights:
CEO Ned Handy
-
"Our third-quarter results, while they were not up to our historical standards, they were in line with both the prior quarter and expectations."
-
"We posted third quarter net income of $11.2 million or $0.65 per diluted share, about flat with $11.3 million or $0.66 per diluted share in the second quarter."
Washington Trust's financial performance remains stable and is not deteriorating. Its recent results met expectations, even though they didn't match historical standards. By stating the net income figures for the third and second quarters and demonstrating a consistent performance, it appears as though WASH is making the best of a bad environment. For deep value investors such as myself, it shows that the company's financials are being closely monitored and managed at this time. I would also say that it means that there is reason for concern if the current environment becomes the new normal long into the future, which I doubt.
-
"Our deposit franchise is strong, intact, and growing, albeit more expensive with an understandable product shift in the current rate environment."
-
"Our branching strategy continues to be successful with an average size of $209 million and deposits at our three newest branches stand at $70 million after two years, $28 million after just one year and $11 million after only five months."
Washington Trust's deposit franchise remains strong despite the changing rate environment. The specific data about deposit growth indicates that their branching strategy is effective and should continue to be effective. We can use this information to assess the company's ability to generate and manage deposits effectively. Location and reliability continue to be strengths for this small regional bank.
-
"Throughout our history, Washington Trust has joined a strong brand reputation in our core markets."
-
"Recently, we launched a new brand positioning statement. What we value is you, supported by a multimedia advertising campaign designed to reach and enhance our presence both digitally and throughout our expanded market area."
The historical reputation of Washington Trust in their core markets is excellent, as is their growth over time. Their proactive approach to enhancing their brand presence, focusing on both digital and expanded market areas, has allowed them to navigate difficult times in the past and continues to serve the bank well. This methodology shows that the company is invested in strengthening its brand, which can be crucial for attracting and retaining customers. It also demonstrates that the bank is capable of pivoting during difficult times and providing excellent service.
-
"These are certainly unusual times, but we believe we have the right strategy and the right team in place to weather the current macro dynamics while capitalizing on market trends and the strengths of our bank."
-
"We understand technology is dominating every aspect of our lives, and banking is no different."
The company's confidence in its strategy and team to navigate challenging times means the bank can come out of this difficult period stronger than before, in my opinion. While less disciplined banks may end up failing, WASH should continue to steadily grow market share. The importance of embracing technology in banking and aligning with market trends moving forward cannot be discounted. I believe this demonstrates the company's adaptability and alignment with industry changes.
Ron Ohsberg CFO
-
"Net income was $11.2 million or $0.65 per diluted share. Net interest income was $33.8 million, up by $251,000 or 1% in the preceding quarter."
-
"The margin was 1.97 down by 6 basis points. Average earning assets increased by $167 million and the yield on earning assets was $469 million, up by 16 basis points."
Ron Ohsberg's statements focus on the financial performance of Washington Trust, particularly highlighting net income and net interest income figures. The provided quote supports this claim by presenting detailed numbers related to the margin, earning assets, and yield on earning assets. This data helps deep value investors assess the company's financial stability and performance, which is crucial for their investment decisions.
-
"Noninterest income comprised 31% of total revenues and amounted to $15.2 million, up by $901,000 or 6% from Q2."
-
"Mortgage banking revenues totaled $2.1 million, up by $355,000 or 20%. Mortgage loans sold totaled $89 million in the third quarter, up by $24 million."
What becomes apparent is the significance of noninterest income in Washington Trust's total revenues, and the quote provides specific numbers on the increase in mortgage banking revenues and loans sold. The company's diverse revenue streams and growth in key areas like mortgage banking show the company’s plans but also raise concerns if the housing market is negatively impacted by continued higher interest rates.
-
"Regarding asset quality, non-accruing loans were 0.60% and past due loans were 0.17% of total loans. The increase in non-accruing loans was largely due to two commercial real estate loans that were placed on nonaccrual status in the third quarter."
-
"Both of these loans are current. The allowance totaled $40.2 million or 72 basis points on total loans and provided NPL coverage of 119%."
The asset quality and the increase in non-accruing loans could present a future problem. The details about the non-accruing loans and the allowance, emphasizing that the loans placed on nonaccrual status are current shows that the problem could get worse. This information is crucial to assess the credit quality of the company's loan portfolio.
-
"The provision for credit losses in the third quarter was composed of our provision for credit losses on loans of $900,000 and a negative provision for credit losses on unfunded commitments of $400,000."
-
"We had net charge-offs of $30,000 in the third quarter compared to $37,000 in Q2 and year-to-date net charge-offs totaled $114,000."
Ohsberg's comments highlight the provision for credit losses and its components. The quote provides data on net charge-offs in the third quarter and year-to-date. This information shows us the company's approach to managing credit risk and the impact on its financials. I happen to believe that the charge-offs appear reasonable
The Dividend
Ron Ohsberg provided this answer to a question regarding the dividend, “Yes. So Mark, the dividend is really capital related. So as long as we have sufficient capital to pay the dividend, we're committed to paying the dividend.” This answer was a slight change from previous comments regarding the safety of the dividend. It makes me believe that in the short term the dividend is safe, but if the economic environment does not improve for banks over the long term it could be at risk. Keeping track of the company’s working capital throughout 2024 will be important. Given the conservative steps the bank is currently taking, it appears that WASH is dedicated to trying to maintain the dividend unless it becomes impossible to do so.
Final Thoughts
When a good company trades at a fair price, it is worth an investment. When a good company trades at an even lower price, it should be viewed as a better deal. Too many times, investors seem more interested in stocks after they double in price as compared to when a stock price is cut in half. As a deep value investor, I find this lack of strategy to be akin to madness. I like WASH as a company. As its price has continued to drop, I like it more as an investment. If WASH maintains the dividend, current buyers will be paid handsomely to wait for the rebound.
While there remain many macro concerns regarding treasury values, high interest rates, and the potential collapse of commercial real estate, I still believe WASH is a good company. The steps management is taking should allow them to weather the storm and potentially come out stronger than before.
For further details see:
Washington Trust: Good Company With A Strong Dividend, Trading At A Great Value