Washington Trust Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 adjusted diluted EPS was $0.61, slightly below S&P Global consensus of $0.63*; GAAP diluted EPS was $0.63. Revenues (NII + noninterest) materially beat consensus at $57.9M vs $53.2M*.*
• Net interest margin expanded 34 bps sequentially to 2.29% on the back of balance sheet repositioning; CFO guided Q2 NIM to ~2.35%, with March spot NIM at 2.31%.
• In‑market deposits rose 4% q/q to $5.013B as wholesale brokered deposits fell 91% to $27M and FHLB advances were reduced 24% to $850M, enhancing funding mix and capital ratios (CET1 11.76%, TRBC 13.13%).
• Management reiterated the $0.56 quarterly dividend and expects payout ratio to move to the mid‑ to low‑80s by year‑end; buybacks are under consideration but no plan is in place.

What Went Well and What Went Wrong

What Went Well

• Net interest income rose 11% q/q to $36.4M and NIM expanded to 2.29%, reflecting the sale of lower‑yielding assets, reinvestment into higher‑yielding securities, and pay‑down of high‑cost wholesale funding.
• In‑market deposits hit an all‑time high of $5.013B, supported by targeted deposit promotions and new retail sales officers; roughly half of Q1 growth came from one relationship, with the remainder organic.
• Capital improved: CET1 increased to 11.76% (+56 bps q/q) and total risk‑based capital to 13.13%, with contingent liquidity covering 161% of uninsured deposits (post‑exclusions).

Management quotes:

• “Washington Trust’s first quarter results reflected our effective focus on our balance sheet, resulting in expansion of net interest margin and in‑market deposit growth.” — CEO Edward O. Handy III.
• “We’re looking at [NIM] 2.35 for the [second] quarter… we’re much closer to rate neutral [post‑restructuring].” — CFO Ronald Ohsberg.

What Went Wrong

• Noninterest income fell 2% q/q on an adjusted basis; wealth management revenues decreased 2% and mortgage banking revenues fell 19% on lower secondary market loan sales.
• Total loans declined 1% q/q to $5.096B as commercial and residential portfolios contracted; net charge‑offs rose to $2.304M, concentrated in office CRE.
• A pre‑tax non‑cash pension settlement charge of $6.4M increased noninterest expense; sale‑leaseback transactions added an estimated ~$0.7M annual net occupancy cost.

Transcript

Operator (participant)

Today's call is being recorded, and now I will turn the call over to Sharon Walsh, SVP, Director of Marketing and Corporate Communications. Sharon, you may proceed.

Sharon Walsh (SVP and Director of Marketing and Corporate Communications)

Thank you, Jayla. Good morning and welcome to Washington Trust Bancorp's conference call for the Q1 of 2025. Joining us this morning are members of Washington Trust 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 earlier today, 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 CEO)

Thank you, Sharon, and good morning, and thank you all for joining our Q1 conference call. We respect and appreciate your time and interest in Washington Trust. I'll briefly comment on the quarter, 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. Washington Trust's Q1 results show the positive effects of our Q4 balance sheet restructuring, with improvements in NIM, loan-to-deposit ratio, dividend coverage, and capital. We also saw our deposit growth strategies deliver results in both in-market deposits and new households. In-market deposits reached an all-time high of $5,013,000,000. While intentional reduction in our residential mortgage portfolio, elevated payoffs in our CRE book and reduced line utilization outstripped new loan fundings in the quarter, pipelines continue to build, and we expect low single-digit growth to be achievable.

Our retail branches continue to compete well in the neighborhoods they serve, and we've now supplemented them with a team of retail sales officers, full-time sales professionals dedicated to surfacing loan and deposit opportunities complementary to our branch business and commercial bankers. Our teams continue to listen to our customers and prospects and to build solutions to the varied challenges and opportunities that arise in uncertain times. We remain committed in service to all the communities, customers, and stakeholders who count on our consistent presence and performance. I'll now turn the call over to Ron for additional details on the quarter. We'll then be glad to address any questions. Ron?

Ron Ohsberg (SEVP and CFO)

Yep. Thanks, Ned, and good morning, everyone. For the Q1, we reported net income of $12.2 million, or $0.63 per share. Excluding two infrequent transactions that I will discuss shortly, adjusted net income amounted to $11.8 million, or $0.61 per share. Net interest income was $36.4 million, up by $3.5 million, or 11% on a linked quarter basis. The margin was 2.29%, up by 34 basis points, reflecting benefits from the recent balance sheet repositioning transactions. Turning to fees, as previously disclosed, five branch locations with a total net book value of $4.8 million were reported as held for sale on 31 December 2024. Sale-leaseback transactions were completed in Q1, and a pre-tax net gain on the sale of these properties totaling $7 million was recognized within non-interest income. Excluding infrequent transactions, adjusted net income amounted to $15.6 million and was down $394,000, or 2%.

Wealth management revenues were $9.9 million, down by $158,000, or 2%, and mortgage banking revenues totaled $2.3 million, down $544,000, or 19%. Our mortgage pipeline at 31 March 2025 was $95 million, up by $35 million, or 59% from the end of December. Turning to expenses, in connection with our previously disclosed termination of our qualified pension plan, plan assets were distributed in Q1, which resulted in a pre-tax non-cash pension settlement charge of $6.4 million being recognized within non-interest expenses. This charge reflected the recognition of pre-tax actuarial losses previously reported as a reduction in AOCI. Excluding the pension settlement, adjusted non-interest expenses totaled $35.8 million, up by $1.5 million, or 4% compared to Q4. Salaries and employee benefits expense was up $547,000, or 3%, which includes higher payroll taxes due to the start of the new calendar year.

Income tax expense in the Q1 totaled $3.5 million, and the effective tax rate was 22.3%. Our full-year effective tax rate is expected to be 22.4%. Turning to the balance sheet, total loans were down by $42 million, or 1% from 31 December 2024. This included a 1% reduction in residential loans, as well as a 1% reduction in commercial loans due to higher-than-expected paydowns. In-market deposits were up by $195 million, or 4%. Brokered deposits were down by $270 million, and FHLB borrowings were down by $275 million, reflecting increases in deposits and the redeployment of cash resulting from the balance sheet repositioning. Our loan-to-deposit ratio decreased from 105.5% to 100.7%. Total equity amounted to $522 million at 31 March 2025, up by $22 million from the end of Q4. The dividend remained at $0.56 per share.

For regulatory capital, CET1 improved 56 basis points to 11.76%, and total risk-based capital improved by 66 basis points to 13.13%. Our asset and credit quality metrics remained solid. Non-accrual loans were 0.42% at 31 March 2025, and past-due loans were 0.20% on total loans. The allowance totaled $41.1 million, or 81 basis points of total loans, and provided NPL coverage of 190%. The Q1 provision for credit losses was $1.2 million. This reflected loss allocations on individually analyzed non-accrual commercial loans and reflected our estimate of forecasted economic conditions. We had net charge-offs of $2.3 million in the Q1. At this point, I will turn the call back to Ned.

Ned Handy (Chairman and CEO)

Thank you, Ron. At this point, we'll open it up for questions.

Operator (participant)

At this time, if you would like to ask a question, it is star followed by one on your telephone keypad. If for any reason you would like to remove that question, it is star followed by two. Again, to ask a question, it is star one. I'll pause briefly here as questions are registered. Our first question comes from Mark Fitzgibbon with the company Piper Sandler. Mark, your line is now open.

Mark Fitzgibbon (Head of FSG Research)

Hey, guys. Good morning.

Ron Ohsberg (SEVP and CFO)

Morning, Mark.

Ned Handy (Chairman and CEO)

Hey, Mark.

Mark Fitzgibbon (Head of FSG Research)

Hey, Ron. I was curious, how much will the quarterly operating cost be impacted as a result of the sale-leaseback and the pension curtailment, or maybe asked a different way, what do you think sort of run rate operating expenses will look like going forward?

Ron Ohsberg (SEVP and CFO)

Yeah. On an annual basis, the sale-leaseback adds about a net $700,000 to occupancy and equipment, but that was all embedded in the guidance that we gave in January.

Mark Fitzgibbon (Head of FSG Research)

Okay. What about the pension curtailment impact?

Ron Ohsberg (SEVP and CFO)

Yeah. There's really no ongoing expense related to the pension. Again, that was all factored into guidance that we gave at year-end.

Mark Fitzgibbon (Head of FSG Research)

Okay.

Ron Ohsberg (SEVP and CFO)

I would just say, Mark, I would just say that the guidance I gave at the end in the Q1 for expenses, both on the salary line and on the other expense line, is consistent.

Mark Fitzgibbon (Head of FSG Research)

Okay. Great. Secondly, I know, Ned, you mentioned that the pipelines were strong. Can you give us any color on sort of size and complexion?

Ned Handy (Chairman and CEO)

Yeah. Mark, it's a little over $100 million on the commercial side, which is not historic highs but maintained despite about $50 million of formation in the Q1. You know we're kind of in rebuild mode. The early stages of the pipeline are stronger. We don't typically report on proposals out. We report on stuff where proposals have been accepted. That early stage is growing as well. I feel confident that the low single-digit guidance we gave is still reachable, and there's a lot of good activity going on. Mary, I don't know, on the resi side, do you want to?

Mary Noons (President and COO)

Sure. We are hitting the seasonal period where it starts to grow on the resi side. Again, a lot of that is going towards fee generation, but it is up from where it was at 31 March 2025.

Mark Fitzgibbon (Head of FSG Research)

Okay. Great. Ron, assuming we follow the forward curve, I assume you think the net interest margin will continue to steadily rise a few basis points a quarter across the remainder of the year. Is that a fair statement?

Ron Ohsberg (SEVP and CFO)

Yeah. So we're thinking, obviously, a lot of uncertainty with the Fed's rate policy. I'd like to just limit my guidance to the Q2, and we're looking at 2.35% for the quarter, and then we'll see what happens.

Mark Fitzgibbon (Head of FSG Research)

Okay. Fair enough. Lastly, I guess I was curious what your longer, maybe intermediate-term or longer-term expectations or targets would be for the dividend payout ratio. Where would you like to see that?

Ron Ohsberg (SEVP and CFO)

Yeah. We'd like to see it lower, obviously. As we've said, we have no intention of reducing it. From this point forward, I think the point is to be improving net income and bringing the ratio down. We expect to be certainly in the mid to low 80% by the end of the year, and we'll see where it goes from there. Not likely to increase the dividend anytime soon, for sure.

Mark Fitzgibbon (Head of FSG Research)

Right. Do you feel like that could constrain your ability to grow when the environment starts to get better if you've got such a high payout ratio?

Ron Ohsberg (SEVP and CFO)

Yeah. It could. We'll just have to see when we get there.

Mark Fitzgibbon (Head of FSG Research)

Okay. Thank you.

Ron Ohsberg (SEVP and CFO)

Yep.

Operator (participant)

The next question comes from Damon DelMonte with the company KBW. Damon, your line is now open.

Damon DelMonte (Managing Director of Equity Research)

Thank you. Good morning. I just wanted to circle back on the margin. If we do see a couple of rate cuts in the latter part of this year, how has your interest rate sensitivity changed given the restructurings and other items that have occurred in the last few months for you guys?

Ron Ohsberg (SEVP and CFO)

Yeah. Historically, we were pretty asset-sensitive, and we strayed away from that. I would say even with liability-sensitive, probably at an inopportune time, for sure. The restructuring that we did took a lot of that liability sensitivity off. We are much closer to rate neutral, I would say. We did see some good benefit in the Q4 from the Fed cutting the 100 basis points that they did. I think there is less upside to future rate reductions for us to improve the margin. As I mentioned, we are seeing five or six basis points improvement in Q2, and we will just be working hard if the Fed cuts to manage our deposit costs down as quickly and as much as we can.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay.

Ron Ohsberg (SEVP and CFO)

I don't think you'll see the.

Damon DelMonte (Managing Director of Equity Research)

And then.

Ron Ohsberg (SEVP and CFO)

Yeah. I don't think you'll see the expansion that we saw in the Q3 and Q4 just because of the restructuring.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. That's good. You guys had some good in-market core deposit growth this quarter. What kind of drove that? Has there been a shift in approach to gathering local deposits, or if you could just provide a little color on that?

Ron Ohsberg (SEVP and CFO)

Yeah. A couple of things. We had good growth in the quarter. About half of that was a single relationship, so I'll put that out there. The other half of it, I think, was just good, strong organic deposit growth kind of across the board. Ned mentioned that we've hired a couple of retail sales officers to kind of get out there and do a better, more targeted job of bringing in deposits. We're trying a few things on deposit promotion. I can tell you that deposit competition remains very intense. We tried a couple of promotions in the quarter on both the CD and on the money market side. Good deposit growth. We'll see if we're able to maintain that.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. Great. That's all that I had for now. Thank you.

Ron Ohsberg (SEVP and CFO)

Great. Thanks.

Ned Handy (Chairman and CEO)

Thanks, Damon.

Operator (participant)

Our next question comes from Laurie Hunsicker with Seaport Research Partners. Laurie, your line is now open.

Laurie Hunsicker (Senior Analyst)

Great. Hi. Thanks. Good morning.

Ned Handy (Chairman and CEO)

Hi. Good morning, Laurie.

Mary Noons (President and COO)

Just going back to expenses, when in the quarter did the sale-leaseback happen?

Ron Ohsberg (SEVP and CFO)

It happened in February and March.

Laurie Hunsicker (Senior Analyst)

Okay. We really did not see the drag back in. When we think about it, and you just sort of reiterated, obviously, similar guidance to what you gave out last quarter, you are still thinking, as we are looking at the core number here, the $35.8 million, that probably still jumps to about $37 million, even though things like snow removal, etc., come out.

Ron Ohsberg (SEVP and CFO)

Yeah. I think my guidance at year-end was for all other expense, which that would be in there, of about $13.5 million a quarter. We were $13.3 million in the Q1, but the $13.5 million, I think, is a good estimate for the non-salary expense line.

Laurie Hunsicker (Senior Analyst)

Okay. The $2.7 million, the other other, was there anything non-recurring in that that compares to $2 million in the Q4?

Ron Ohsberg (SEVP and CFO)

The other, at year-end, we had some accrual adjustments, and it's all other, right? So there's nothing notable going through there.

Laurie Hunsicker (Senior Analyst)

Okay. And then last question on expenses here. You're still planning to make a charitable foundation contribution in the Q4?

Ron Ohsberg (SEVP and CFO)

Yes.

Laurie Hunsicker (Senior Analyst)

Is that right?

Ned Handy (Chairman and CEO)

Yes.

Laurie Hunsicker (Senior Analyst)

Okay. Just making sure I got that right. Okay. And then just back to margin, and I know you've already touched on this, but do you have a spot margin for March?

Ron Ohsberg (SEVP and CFO)

I do. Yeah. For March, it was 2.31%.

Laurie Hunsicker (Senior Analyst)

2.31%. Okay. Great. Going to credit, and I appreciate all the details you give, but can you just refresh us specifically on some of these office properties? Just help us think about the Class B that dropped from $10 million last quarter down to $7.6 million. Was that all charge-offs, or did something cure, or how should we think about that? I guess specifically around the loans that I would love a refresh. I know you had a—and these are numbers from last quarter—$7.8 million Class B that was 50% vacant. It was still performing. How do you think about that? You had a new non-performer that came in. Is that still planned to resolve in Q2? You obviously had the $3.4 million Class B that was due this quarter. Was that where the charge-offs were?

I mean, if you could just help us think about that. Then that last one, that big one, that $20.5 million lab, any new news on that? Any new appraisal? I think that's due in the Q4 unless there's been some restructuring movement. Just anything on those four properties would be super helpful.

Ron Ohsberg (SEVP and CFO)

Yeah. I'll turn it over to Bill. I mean, we did see a reduction, Laurie. And within non-accrual, it's one relationship that has two loans that has three buildings in there. One of them has been under P&S. I think we talked about that on the call. That's about $3.3 million, I believe. It's still on track to settle, to close out in the Q2. We did take a charge-off on the other loan that is secured by the two properties. That's the only change quarter-over-quarter in the reported balances. Bill, I'll just let you provide a little bit of color on the loans that we're talking about.

Bill Wray (SEVP and CRO)

Sure, Ron. As Ron said about that non-accrual, again, it'll close when it closes, but we believe it is very likely that we'll get that knocked down by about $3.3 million. Then we'll have the remaining non-accrual that's the other half of that relationship. That is where the charge-off was that was driven by an appraisal. It's being marketed for sale. We think it's at a reasonable level to be disposed, but we'll see when the offers come through. With regard to the large asset, that is over half leased now, just over half leased. There are active lease proposals in place. The borrower put a lot of money in, as we mentioned before, to build out spec suites. That seems to be getting them some momentum. The borrower's been supportive all along.

We believe that's on the upswing and is in good shape. Over time, as these leases convert from LOI into signed leases, we'd be reevaluating the classification on that. Was there another part that you had a question on?

Laurie Hunsicker (Senior Analyst)

Yeah. Just on that $20.5 million lab, is that still due in the Q4, or is there any movement on extending that?

Bill Wray (SEVP and CRO)

Let's see. We did two one-year extensions that went through 2026 as they put in a very significant amount of equity to do that. I think, if I'm reading it right, just to make sure, this will be early 2026 when this comes back up.

Ron Ohsberg (SEVP and CFO)

Bill, I think it's the end of 2026.

Bill Wray (SEVP and CRO)

Okay. Yep. I'm sorry. I was reading that wrong.

Laurie Hunsicker (Senior Analyst)

Sorry. I'm hitting you guys with a lot of detailed questions. Bill, just to go back to the one that you took the charge-off on, which loan was that? Was that the Class B office that was due this quarter?

Bill Wray (SEVP and CRO)

Yes.

Laurie Hunsicker (Senior Analyst)

Okay. Gotcha. Is that still—I mean, I had in my notes that it was sitting around 70% vacant. Is that still the case, or has that improved at all?

Bill Wray (SEVP and CRO)

It's 50%. Again, thankfully, through all these, they continue to pay. They're still current, but it's 50% occupied at this point.

Laurie Hunsicker (Senior Analyst)

It's gotten better. Okay. Okay. That's great. I really, really appreciate the details there. Ned, just last question for you. With sort of earnings clarity, dividend coverage clarity, etc., really, really starting to shine in the fact now that your stock is 20%+ lower than where you did the spot. How do you think about buybacks? How does the board think about buybacks? Thanks.

Ned Handy (Chairman and CEO)

Yeah. It's certainly something we need to think about. It goes to best use of capital. We want to be careful about it. As I think you know, and Ron, you should talk about the current state of approvals. I mean, I know we let the approval.

Ron Ohsberg (SEVP and CFO)

Yeah. We don't have a plan currently in place, Laurie, but it is something that we're looking at.

Laurie Hunsicker (Senior Analyst)

Okay. Great. That's helpful. Thanks for taking my questions.

Ned Handy (Chairman and CEO)

Yeah. Thanks, Laurie.

Operator (participant)

If I'm done, no more questions for us in queue. Again, if you'd like to ask a question, please star followed by one. There are no more questions for us in queue. I'd like to pass the conference over to our hosting team for closing remarks.

Ned Handy (Chairman and CEO)

Thank you all for joining us. We appreciate your time and your interest, and look forward to talking again soon. Have a great day, everybody.

Operator (participant)

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.