Washington Trust Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 reported a net loss of $60.8M (−$3.46 diluted EPS) driven by deliberate balance sheet repositioning; adjusted net income was $10.4M ($0.59 diluted EPS), with net interest margin rising 10 bps to 1.95%.
• Management executed a $70.5M equity raise, sold $409M of low-yielding securities and committed to sell $345M of 3.02% residential mortgages (sale closed Jan 24, 2025), reinvesting into 5.30% securities and paying down wholesale funding—expected to lift NIM through 2025.
• CFO guided NIM to 2.30–2.35% in Q1 2025, improving to 2.45–2.50% in Q4 2025; FY25 effective tax rate ~22.5%; quarterly salaries/benefits ~$23.5M and other expenses ~$13.5M; dividend maintained at $0.56/share.
• Asset quality improved: nonaccrual loans fell to 0.45% of loans (from 0.56% in Q3), past dues dropped to 0.23% (from 0.37%); office CRE resolution and lab leasing progress support credit normalization into 2025.

What Went Well and What Went Wrong

What Went Well

• Net interest margin expanded to 1.95% (+10 bps q/q) as lower deposit/wholesale costs and repositioning benefits began to accrue; NII rose 2% q/q to $32.9M.
• Credit metrics improved: nonaccrual loans down to $23.3M (0.45% of loans) and past due loans to $12.0M (0.23% of loans); office CRE classifications declined q/q.
• Management executed strategic capital actions: $70.5M equity raise and asset sales expected to “favorably impact future revenues and provide additional capacity for growth and investment” (CEO quote).

What Went Wrong

• Reported noninterest income swung to a loss (−$77.9M) due to $93.9M pre-tax losses on securities and loan sales tied to repositioning, producing a GAAP net loss of $60.8M.
• Book value per share fell to $25.93 from $29.44 q/q, reflecting the GAAP loss, despite capital raise; tangible book per share dropped to $22.46.
• Net charge-offs rose to $1.9M in Q4 (full-year $2.0M), concentrated in office CRE; provision increased to $1.0M (vs. $0.2M in Q3).

Transcript

Operator (participant)

Good morning and welcome to Washington Trust Bancorp's Conference Call. My name is Lydia and I'll be your operator today. If participants need assistance during the call at any time, please press star zero. Participants interested in asking a question at the end of the call should press star one to get in the queue. As a reminder, today's call is being recorded. I'd now like to turn the call over to Sharon Walsh, Senior Vice President, Marketing Strategy and Planning. Please go ahead.

Sharon Walsh (SVP of Marketing Strategy and Planning)

Thank you, Lydia. Good morning and welcome to Washington Trust Bancorp's Conference Call for the fourth 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, 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 (CEO)

Thank you, Sharon. Good morning and thank you for joining our fourth quarter conference call. We respect and appreciate your time and 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. We previously announced a December capital raise of $70.5 million and subsequent balance sheet repositioning, which entailed selling lower yielding securities and loans and reinvesting into higher yielding securities and paying down expensive wholesale funding. The security sale and reinvestment occurred in the fourth quarter and the loan sale pricing was locked in the fourth quarter, but the actual sale of the loans occurred last week. The reduction of maturing wholesale funding will occur over the next few months and Ron will provide some detail beyond that.

Though this initiative resulted in a loss recognized in the fourth quarter, it will favorably impact future revenues and provide additional capacity for growth and investment. These actions, combined with positive organic momentum preceding them, have further strengthened our financial foundation, allowing us to focus on providing enhanced value for shareholders as well as the customers and communities we serve. I'd like to take this opportunity to thank our shareholders who showed tremendous support for this strategy. Again, Ron will provide details on the impact. I'm also very pleased to mention that in the fourth quarter we hired a new head of retail banking. Michelle Kyle, a Rhode Island native, joined us from Digital Federal Credit Union, where she led retail branch services, business development, and customer experience. We very much look forward to Michelle's impact on our deposit growth strategies.

I'll now turn the call over to Ron for some more detail on the quarter. We'll then be glad to address any questions. Ron?

Ron Ohsberg (CFO)

Thanks, Ned, and good morning, everyone. As Ned said, we reported a net loss of $60.8 million, or $3.46 per share, in the fourth quarter. Excluding the balance sheet repositioning asset losses, adjusted net income amounted to $10.4 million, or $0.59 per share. Net interest income was $32.9 million, up by $674,000, or 2%. The margin was 1.95%, up by 10 basis points. This improvement reflected the net effect of lower rates and the partial impact of the balance sheet repositioning on the margin. Adjusted non-interest income amounted to $16 million and was modestly down by $229,000, or 1%. Wealth management revenues were $10 million, up by $60,000, or 1%. And spot AUA balances totaled $7.1 billion at the end of the year. Mortgage banking revenues totaled $2.8 million, down by $18,000, or 1%. Turning to non-interest expenses, these totaled $34.3 million and were down by $212,000, or 1%.

Salaries and benefits expense was up by $525,000, or 2%, reflecting adjustments to performance-based compensation accruals. Also, advertising and promotion expense decreased by $297,000 in the fourth quarter due to timing. Adjusted income tax expense amounted to $3.2 million and the adjusted effective tax rate was 23.7% for the fourth quarter. We expect the full year 2025 effective tax rate to be about 22.5%. Turning to the balance sheet, total loans were down by $377 million, or 7%. Residential loans decreased by $403 million, or 16%, largely due to the reclassification of $345 million to loans held for sale. Total commercial loans increased by $29 million, or 1%. And market deposits were up $26 million, or 1%. And brokered deposits were down $82 million, and FHLB borrowings were down by $175 million. Our loan-to-deposit ratio decreased from 106.2 to 105.5. Our asset and credit quality metrics remained solid.

Non-accrual loans were 45 basis points at the end of the year, compared to 56 basis points at September 30, and past due loans were 23 basis points, compared to 37 at September 30. The allowance totaled $42 million, or 0.82% of total loans, and provided NPL coverage of 180%. The fourth quarter provision for credit losses was $1 million. We had net charge-offs of $1.9 million in the fourth quarter and $2 million for the full year of 2024. This time, I'll turn the call back to Ned.

Ned Handy (CEO)

Thanks, Ron. And now, Lydia, we can take questions.

Operator (participant)

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your devices are muted locally when it's your turn to speak. If you change your mind and wish to withdraw your question, please press star followed by the number two. We'll just pause here momentarily. We have a question from Laurie Hunsicker with Seaport Research Partners. Your line's open. Please go ahead.

Laurie Hunsicker (Analyst)

Yeah, hi. Thanks. Good morning, Ned and Mary.

Ned Handy (CEO)

Good morning.

Laurie Hunsicker (Analyst)

And Ron.

Ned Handy (CEO)

Good morning.

Laurie Hunsicker (Analyst)

And Bill. And Sharon. So, hoping, Ron, that you can start with margin and just really help us think about all of the moving parts, especially because some of this obviously isn't even reflected now until the end of January. So, maybe if you could help us quantify it in terms of basis points, the impact on different items, if you have a December spot margin, and then also forward-looking, the impact in terms of the pay down of wholesale funding balances and how you're thinking about that, especially in light of your loan-to-deposit ratio, how do you think about CDs, etc. So, anything you can help us think about on margin. And then also, I just wanted to clarify your swap expiration was supposed to be a 12 basis point pickup starting at the beginning of May. Just wanted to check on that too.

So anything you can help us with in margin would be great.

Ned Handy (CEO)

Yeah. So Laurie, just on that swap piece, that's May of 2026.

Laurie Hunsicker (Analyst)

Is that May 1st?

Ned Handy (CEO)

Yeah.

Laurie Hunsicker (Analyst)

Okay, and that's still 12 basis points?

Ned Handy (CEO)

Yeah. Yeah. What we published hasn't changed.

Laurie Hunsicker (Analyst)

Perfect.

Ned Handy (CEO)

Yeah. The balance sheet repositioning will be very impactful to 2025. We're projecting a NIM of between 2.30% and 2.35% for the first quarter. That will increase over the course of the year to about 2.45%-2.50% in the fourth quarter. Over that span, we expect our average earning assets to be in the $6.3 billion to $6.4 billion range after the settlement of the loans, which we sold on Friday. That'll bring our earning asset balances down somewhat, and the expectation is that we will be paying down primarily FHLB funding over the next couple of months. The spot margin for December was 2.07%.

Laurie Hunsicker (Analyst)

Okay. And then just how are you thinking about deposits and CDs and repricing there?

Ned Handy (CEO)

Yeah, so the Fed's cut four times, and we will continue to see, this is included in the numbers I just gave you, but we still have some short-term maturing wholesale funding brokered CDs over the next few months that will reprice on that, and also, our regular retail CDs will be repricing down. I know you've asked about brokered CDs in the past. We will use those when it makes sense to. Right now, brokered CDs are somewhat more expensive than FHLB, and when that reverses, then we'll rely a little more heavily on that, but the trend on wholesale funding is to be paying it down anyway.

Laurie Hunsicker (Analyst)

Okay. Okay, and then on capital, I just want to clarify the 2.199 million issuance in December. Does that include the shoe?

Ned Handy (CEO)

Say that again, Laurie.

Laurie Hunsicker (Analyst)

Is the shoe already in those numbers?

Ned Handy (CEO)

I'm sorry, Laurie.

Laurie Hunsicker (Analyst)

Does it include the shoe?

Ned Handy (CEO)

Yes. The additional is the shoe.

Ron Ohsberg (CFO)

It included the shoe upsize.

Ned Handy (CEO)

Yes. Yes. I'm sorry. I couldn't hear you clearly, but yeah.

Laurie Hunsicker (Analyst)

Okay. So that's all done.

Ned Handy (CEO)

Yep. Yep. It's all done.

Laurie Hunsicker (Analyst)

Okay. So that's all collected as of December 31st. Okay. And then, Ned, just a question for you on dividend. Obviously, it's looking substantially more safe. Can you just comment on that and target payout ratio, how you're thinking about that?

Ron Ohsberg (CFO)

Yeah.

Ned Handy (CEO)

Yeah.

Ron Ohsberg (CFO)

Laurie, it's an important part of this trend.

Ned Handy (CEO)

Go ahead, Ron.

Ron Ohsberg (CFO)

Yeah. So.

Ned Handy (CEO)

Yeah. No.

Ron Ohsberg (CFO)

Yeah. We're not planning on making any changes to the dividend, Laurie.

Laurie Hunsicker (Analyst)

Perfect. Okay.

Ned Handy (CEO)

But the coverage is better.

Laurie Hunsicker (Analyst)

And the credit.

Ned Handy (CEO)

But the coverage ratio is obviously better.

Laurie Hunsicker (Analyst)

Right. Much better. Okay. Just wanted to hear it from you. Okay. Credit, can you just help us think about a couple of things, I guess, with respect to office? The $10.5 million resolution, that's awesome. You stated that was coming. It came. How much in charge-offs was that this quarter and any color you can give us there? And then, I guess, more broadly, the $3.3 million that's new to non-accruals, is that a Class B office? I'm just looking at that line item. Love your chart, but just wanted a little color on those two things.

Ned Handy (CEO)

Bill, do you want to take that?

Bill Wray (Senior Executive VP and Chief Risk Officer)

This is Bill. Yeah, I can jump in. The charge-off was about the non-accrual resolution was about half of the total. And so the other one you talked about that came in is actually under agreement to be resolved, probably. I would guess late this quarter, but more likely next quarter. So again, with all of these, we're paying a lot of attention. We're looking for expeditious resolution. So we're hoping to continue to keep these numbers at these low levels.

Laurie Hunsicker (Analyst)

Okay. Great. And the $3.3 million, that was in office. Is that correct?

Bill Wray (Senior Executive VP and Chief Risk Officer)

Yes. That's the one that's under agreement.

Laurie Hunsicker (Analyst)

That's under agreement. Okay. Okay. Great. And then just two more office questions. What is your overall office reserve now? And then also, do you have any kind of a refresh on the leasing, that $20.5 million lab, which had gone sort of from zero to—I had in my notes 52% as of last quarter. Do you have a refresh on that number? Thanks.

Bill Wray (Senior Executive VP and Chief Risk Officer)

Sure. The first one, we don't carry a specific reserve against office. We don't manage it as a segment because it doesn't work under C&I. We don't have an update to drive it. But our CRE segment, which includes office, I think has, I'm just guessing here, about 125 basis points of reserve. And then the way we manage office within that is we use qual factors to reflect the fact that appraisals and other things are definitely under stress. So that's, again, no specific office reserve, but our CRE segment is very adequately reserved. And then your other question was on the large lab space, which is now more than 50% occupied. Leasing activity has been slow this quarter. They're starting to see it pick up already for 2025, though. So we feel they're especially with the significant investment. Okay.

Laurie Hunsicker (Analyst)

Great. Thank you.

Operator (participant)

Thank you. As a reminder.

Ron Ohsberg (CFO)

Thanks, Laurie.

Operator (participant)

Please press star followed by one to ask a question. We have a question from Damon DelMonte with KBW. Please go ahead. Your line is open.

Damon DelMonte (Managing Director of Equity Research)

Hey. Good morning, everyone. Hope you're all doing well. Sorry. I thought I had queued in.

Ron Ohsberg (CFO)

Oh, yeah.

Damon DelMonte (Managing Director of Equity Research)

Wondering why I wasn't being called on, but apparently, I didn't queue in, so. In any event, thanks for all the color on the outlook for the margin and the expected impact from the restructuring. That was very helpful. Just kind of wondering what your thoughts are now that that's behind you as far as loan growth and opportunities. Now that you've kind of freed up some capacity on the balance sheet and some restraint on the margin, do you feel like loan growth kind of going forward could kind of go back to what we've seen in years past, or you think it's still more of a kind of a conservative approach for a few more quarters?

Ned Handy (CEO)

Yeah. It's a great question, Damon. So we're building back the pipeline. You know in 2024, we purposely kind of slowed down the loan growth side of things, and so the pipeline's coming back. We're seeing opportunity. We're kind of thinking about lowish, 3%-ish loan growth over the period on the commercial side. We'd like to lean that towards C&I. The pipeline right now is leaning towards C&I. We've got the CRE concentration limit that we're aware of. There's no issue there, but it's over 350. And so we need to be careful on that front. We are still out looking at real estate deals. We're seeing opportunity. The pricing is decent. The structure's good. So we're calibrating the growth there, wanting to make loans, wanting to, again, focus on C&I because it tends to bring more deposits with it.

Our priority is on the funding side of things and making sure we fund loan growth appropriately. It's an interesting interest rate environment to figure out. We're seeing more fixed-rate requests as people are wondering about the longer-term picture of rates. And so it's an interesting environment, but there is opportunity, and we think there might be upside opportunity to our current sightline, but the current sightline is kind of 3% on the commercial side. Resi, I should let Mary talk about, but Resi, we've been sort of running off the existing portfolio and then tilting the mortgage operation towards sales. So we're still thinking kind of 75% of the volume will be sold so that that side of the balance sheet won't grow. And Ron, I think we're actually, we're thinking that we'd have mild reduction in the portfolio over the next couple of quarters, correct?

Ron Ohsberg (CFO)

Yeah. That's right.

Ned Handy (CEO)

In the Resi portfolio.

Damon DelMonte (Managing Director of Equity Research)

Got it.

Ned Handy (CEO)

Hope that helps, Damon.

Damon DelMonte (Managing Director of Equity Research)

It does. It does. Yeah. Okay. Perfect. And then with regards to expenses, Ron, I mean, how are you kind of thinking about it from a year-over-year perspective of growth? If you were at $137 million for 2024, I mean, is it reasonable for kind of 2%-4% type of growth over the next year?

Ron Ohsberg (CFO)

Yeah, so yeah, with regard to guidance for the rest of the year, let me bring revenue in there as well, so for wealth, as you know, that largely tracks what the market does. We're assuming about a 5% increase in wealth revenue year over year. Mortgage, largely dependent on market conditions and what origination volume could be, but we are projecting, call it, a 5%-10% revenue growth on the mortgage line. We do need to reset expectations around salaries and benefits run rate, so in addition to annual merit raises, which you kind of just referred to, we are also restoring our incentive comp to normal after two years of substantially reduced levels, and we're also making some people investments that we've been holding off on. We've reduced our headcount by about 40 people over the past two years.

So we're going to do some reinvestment back there. Mortgage commissions will also track the mortgage gains, and those are seasonally concentrated in the second and third quarter. So all in, we're looking at an increase to our run rate on salaries and benefits and projecting, call it, $23.5 million per quarter. All of our other expenses are estimated about $13.5 million per quarter. So increased NIM, increased fee revenue, but we are also seeing an expense increase.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. So add those two. It's like 37. Okay. All right. So that makes sense. So I mean, yeah, you're getting the relief on the top side. So you can reinvest it into the rest of the franchise after taking a more conservative approach the last couple of years. Okay. Makes sense. I guess that probably covers it because I was going to ask about the fee income as well, and you kind of trumped me on that and gave us some insight on that. So yeah, I think that's it. Everything else has been asked and answered. So thank you very much for the color and insight today.

Ron Ohsberg (CFO)

Great. Thank you, Damon.

Ned Handy (CEO)

Thanks, Damon. Appreciate it.

Operator (participant)

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 (CEO)

Thanks, Lydia. And thank you for joining us today. I hope we've presented a clear picture of our current state, the positive impact of the fourth quarter capital raise, and our plans going forward. I'd also like to note that on August 22nd of 2025, Washington Trust will celebrate our 225th year. And as we mark this occasion, we're focused on continuing our legacy of making a meaningful difference in the places we live and work and enhancing value for our shareholders, our customers, employees, and the communities we serve. So we appreciate your time very much today and look forward to speaking with you again soon. Have a great day, everybody.

Operator (participant)

This concludes our call. Thank you very much for joining. You may now disconnect your line.