Washington Trust Bancorp Inc

NASDAQ:WASH

Good morning, and welcome to the Washington Trust Bancorp, Inc.'s conference call. My name is Jane, and I will be your operator for today. [Operator Instructions] 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.

Thank you, Jane. Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call for the first quarter of 2025. Joining us this morning are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer; Mary Noones, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Ray, 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's Chairman and Chief Executive Officer, Ned Handy. Ned?

Thank you, Sharon, and good morning, and thank you all for joining our first 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. And after our prepared remarks, Mary and Bill will join us for the Q&A session. .

Washington Trust's first quarter 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. End market deposits reached an all-time high of $5.013 billion. 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?

Yes. Thanks, Ned, and good morning, everyone. For the first quarter, we reported net income of $12.2 million or $0.63 per share excluding 2 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, 5 branch locations with the total net book value of $4.8 million were reported as held for sale at December 31. Sale-leaseback transactions were completed in Q1 and a pretax net gain on the sale of these properties totaling $7 million was recognized within noninterest income. Excluding infrequent transactions, adjusted net income amounted to $15.6 million and was down $394,000 or 2%. The 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 March 31 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, planned assets were distributed in Q1, which resulted in a pretax noncash pension settlement charge of $6.4 million being recognized within noninterest expenses.

This charge reflected the recognition of pretax actuarial losses previously reported as a reduction in AOCI. Excluding the pension settlement, adjusted noninterest 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 first quarter 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 December 31. This included a 1% reduction in residential loans as well as a 1% reduction in commercial loans due to higher-than-expected paydowns.

End 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 March 31, up by $22 million from the end of Q4. The dividend remained at $0.56 per share and for regulatory capital, CET1 improved 56 basis points to 11.76% and total risk-based capital improved by 66% to 13.13%.

Our asset and credit quality metrics remained solid. Nonaccruing loans were 0.42% at March 31, 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 first quarter provision for credit losses was $1.2 million. This reflected loss allocations on individually analyzed nonaccruing commercial loans and reflected our estimate of forecasted economic conditions. We had net charge-offs of $2.3 million in the first quarter. And at this point, I will turn the call back to Ned.

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

[Operator Instructions] Our first question comes from Mark Fitzgibbon with the company Piper Sandler.

Ron, I was curious how much will the quarterly operating costs 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. .

Yes. So the -- 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.

Okay. And what about the pension curtailment impact?

Yes. I don't -- there's really no ongoing expense related to the pension. And again, any -- that was all factored into guidance that we gave at year-end.

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

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

Yes. 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 first quarter. So 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. But that early stage is growing as well. So I feel confident that the low single-digit guidance we gave well 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?

Sure. So we're 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's up from where it was at [ 331 ]

Okay. Great. And then, 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?

Yes. So we're thinking -- well, obviously, a lot of uncertainty with the Fed's rate policy. So I'd like to just limit my guidance to the second quarter. And we're looking at [ 235 ] for the quarter, and then we'll see what happens. .

Okay. Fair enough. And then 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?

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

Right. But 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?

Yes. Well, it could -- we'll just have to see when we get there.

Next question comes from Damon Delmonte with the company KBW.

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

Yes. So we -- historically, we were pretty asset-sensitive, and we straight away from that. And 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. So we're much closer to rate neutral, I would say. So if we did see some good benefit in the fourth quarter from the Fed cutting, the 100 basis points that they did. I think there's less upside to future rate reductions for us to improve the margin. And so as I mentioned, we're seeing 5 or 6 basis points improvement in Q2, and we'll just be working hard if the Fed cuts to manage our deposit costs down as quickly and as much as we can. I don't think you'll see that -- I don't think you'll see the expansion that we saw in the third and fourth quarter, just because of the restructuring.

Got it. Okay. That's good. And then you guys had some good in-market core deposit growth this quarter. What kind of drove that? And has there been a shift in approach to gathering local deposits? Or can you just provide a little color on that?

Yes. So a couple of things. So we had good growth in the quarter. About half of that was a single relationship, so I'll put that out there. So 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. And we tried a couple of promotions in the quarter on both the CD and on the money market side and so a good deposit growth. So we'll see if we're able to maintain that.

Our next question comes from Laura Hunsicker with company Seaport, Research Partners

Just going back to expenses. So when in the quarter did the sale leaseback happen?

Well, that happened in February and March.

Okay. So we really didn't see that [indiscernible]. So when we think about it, and you just sort of reiterated, obviously, similar guidance to what you gave out last quarter, you're still thinking as we're looking at the core number here, the $35.8 million probably still jumps to about $37 million, even though things like [ no removal ] et cetera come out?

Yes. So 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% in the first quarter, but the $13.5 million, I think, is a good estimate for the nonsalary expense line.

Okay. And then what -- the $2.7 million other other, was there anything nonrecurring in that and that compares to $2 million in the fourth quarter?

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

Okay. And then last question on expenses here. You're still planning to make a charitable foundation contribution in the fourth quarter? is that right?

Yes.

just to make 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?

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

2.31%. Okay, great. And then going to to credit, and I appreciate all the details you gave, but can you just refresh us specifically on some of these office properties? And then 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? And I guess, specifically around the loans that I would love a refresh. I know you had end user numbers from last quarter, $7.8 million Class B that was 50% vacant. It was still performing? Is it -- how do you think about that? I mean 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 in the last -- on that big one, that [ 20.5 million ] [indiscernible]. Any new news on that, any new appraisal? I think that's due in the fourth quarter unless there's been some restructuring movement. Just anything on those 4 properties would be super helpful.

Yes. I'll turn it over to Bill. I mean we did see a reduction, Laura. And within nonaccrual, it's one relationship that has 2 loans that has 3 buildings in there. And so 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 second quarter. And we did take a charge-off on the other loan that is secured by the 2 properties. So that's the only change quarter-over-quarter in the reported balances. But Bill, I'll just let you provide a little bit of color on the loans that we're talking about.

Sure, Ron. So as Ron said, about of that nonaccrual we -- 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. And then we'll have the remaining nonaccrual that's the other half of that relationship. And 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've mentioned before, to build out spec suites. So that seems to be getting them some momentum. So -- and the borrower has been supportive all along. So again, we believe that's on the upswing and is in good shape. And over time, as these leases convert from LOI into sign leases would be reevaluating the classification on that. And then was there another you had a question on?

Yes. Well, just on that [ $2.5 million lab ], is that still due in the fourth quarter? Or is there any movement on extending that?

Let's see. We did 2 1-year extensions that went through 2026 as they put in a very significant amount of equity to do that. So I think if I'm remembering it right just to make sure this will be early 2026 when this comes back up.

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

Okay. Yes, I'm sorry.

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

Okay. Got you. And is that still -- I mean I had it in my notes that was sitting around 70% vacant. Is that still the case? Or has that improved took off?

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

So it's gotten better. Okay. Okay. That's great. I really, really appreciate the details there. And then just last question for you. with sort of earnings clarity, dividend coverage clarity, et cetera, really, really starting to shine and the fact now that your stock is 20-plus percent lower than where you did the spot. How do you think about buybacks? How does the Board think about buybacks?

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

Yes. So we so we don't have a plan currently in place, Laura, but it is something that we're looking at.

[Operator Instructions] I'd like to pass the conference over to our hosting team for closing remarks.

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

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