Earnings Call Transcript
WASHINGTON TRUST BANCORP INC (WASH)
Earnings Call Transcript - WASH Q1 2025
Operator, Operator
Good morning, and welcome to the Washington Trust Bancorp, Inc.'s Conference Call. My name is Jayla, and I'll be your operator today. Today's call is being recorded. And now I will turn the call over to Sharon Walsh, Senior Vice President, Marketing Strategy and Planning. Please go ahead.
Sharon Walsh, Senior Vice President, Marketing Strategy and Planning
Thank you, Jayla. 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 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 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?
Ned Handy, Chairman and CEO
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. In-market deposits reached an all-time high of $5.13 billion. While intentional reduction in our residential mortgage portfolio, elevated payoffs in our CRE book, and reduced line utilization outstrip 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.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
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 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 at December 31. 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 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, 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 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. In-market deposits were up by $195 million or 4%. Broker 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 remain solid. Non-accruing 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 MPL coverage of 190%. The first quarter provision for credit losses was $1.2 million, this reflected loss allocations on individually analyzed non-accruing 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.
Ned Handy, Chairman and CEO
Thank you, Ron. And at this point, we'll open it up for questions.
Operator, Operator
Our first question comes from Mark Fitzgibbon with the company Piper Sandler. Mark, your line is now open.
Mark Fitzgibbon, Analyst
Hey, guys. Good morning.
Ned Handy, Chairman and CEO
Good morning, Mark.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Hey, Mark.
Mark Fitzgibbon, Analyst
Hey, Ron, I was curious, how much will the quarterly operating cost be impacted as a result of the sale lease back and the pension curtailment? Or maybe asked it in a different way, what do you think sort of run rate operating expenses will look like going forward?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
The sale lease back contributes approximately $700,000 annually to occupancy and equipment costs, and this was already included in the guidance we provided in January.
Mark Fitzgibbon, Analyst
Okay. And what about the pension curtailment impact?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes, I don't believe there are any ongoing expenses related to the pension. That was all included in the guidance we provided at year-end.
Mark Fitzgibbon, Analyst
Okay.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
And I would just say, Mark, the guidance I gave at the end in the first quarter is for expenses, both on the salary line and on the other expense line is consistent.
Mark Fitzgibbon, Analyst
Okay, great. And then secondly, I know, Ned, you mentioned that the pipelines were strong. Can you give us any color on size and complexion?
Ned Handy, Chairman and CEO
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 is still reachable and there's a lot of good activity going on. Mary, I don't know, on the residential side, do you want to?
Mary Noons, President and COO
Sure, so we're hitting the seasonal period where it starts to grow on the residential side. Again, a lot of that is going towards fee generation, but it's up from where it was at $3.31.
Mark Fitzgibbon, Analyst
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?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
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 $2.35 for the quarter. And then we'll see what happens.
Mark Fitzgibbon, Analyst
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?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes, we'd like to see it lower, obviously, as we've said, we have no intention of reducing it. So from this point forward, I think that the point is to be improving that 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 likely to increase the dividend anytime soon, for sure.
Mark Fitzgibbon, Analyst
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?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes. Well, it could. You know, we'll just have to see when we get there.
Mark Fitzgibbon, Analyst
Okay. Thank you.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes.
Operator, Operator
And the question comes from Damon DelMonte with the company KBW. Damon, your line is now open.
Damon DelMonte, Analyst
Thank you, good morning. So just wanted to circle back on the margin. You know, if we do see a couple rate cuts in the latter part of this year, how has your interest rate sensitivity changed given the restructuring and other items that have occurred in the last few months for you guys?
Ned Handy, Chairman and CEO
Yes. So, you know, historically, we were pretty asset-sensitive and we strayed away from that and I would say even went 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, you know, 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.
Damon DelMonte, Analyst
Got it. Okay.
Ned Handy, Chairman and CEO
But I don't think you'll see that. Yes, I don't think you'll see the expansion that we saw in the third and fourth quarter just because of the restructuring.
Damon DelMonte, Analyst
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 could you just provide a little color on that?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
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. We tried a couple of promotions in the quarter up 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.
Damon DelMonte, Analyst
Got it. Okay, great. That's all that I had for now. Thank you.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Great. Thanks, Dan.
Ned Handy, Chairman and CEO
Thanks, Dan.
Operator, Operator
Our next question comes from Laurie Hunsicker with the company Seaport Research Partners. Laurie, your line is now open.
Laurie Hunsicker, Analyst
Great. Hi, thanks. Good morning.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Hi, Laurie.
Ned Handy, Chairman and CEO
Good morning, Laurie.
Laurie Hunsicker, Analyst
Just going back to expenses, so when in the quarter did the sale lease back happen?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Well, it happened in February and March.
Laurie Hunsicker, Analyst
Okay, so we really didn't see the drag back in. So when we think about it and we just sort of reiterated, obviously, similar guidance to what you gave out last quarter, you're still thinking, you know, as we're looking at the core number here, the $35.8 million, that probably still jumps to about $37 million, even though things like no removal, etc. come out?
Ned Handy, Chairman and CEO
Yes. So, I think my guidance at year-end was for all other expense, which that would be in there, about $13.5 million a quarter. We were $13.3 in the first quarter, but the $13.5, I think, is a good estimate for the non-salary expense line.
Laurie Hunsicker, Analyst
Okay, and then what the $2.7 million, the other, other, was there anything non-recurring in that that compares to $2 million in the fourth quarter?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
You know, the other, other, at year-end we had some accrual adjustments and, you know, there's, it's all other, right? So there's nothing notable going through there.
Laurie Hunsicker, Analyst
Okay. And then last question on our census here. You're still planning to make a charitable foundation contribution in the fourth quarter? Is that right?
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes.
Laurie Hunsicker, 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, Senior Executive Vice President, CFO and Treasurer
I do. Yes, for March it was 2.31.
Laurie Hunsicker, Analyst
Okay, great. Moving on to credit, I appreciate all the details you've provided. Can you update us specifically on some of these office properties, particularly regarding the Class B that decreased from $10 million last quarter to $7.6 million? Was that entirely due to charge-offs, or did something improve? How should we interpret that? Also, regarding the loans, I would like an update. I know there's a Class B that was $7.8 million and 50% vacant but still performing. How do you view that situation? You mentioned a new non-performer that came up; is it still on track to be resolved in the second quarter? Additionally, you had a $3.4 million Class B due this quarter—did the charge-offs come from that? If you could clarify these points. And lastly, regarding the $20.5 million property, do you have any updates or new appraisals? I believe that's due in the fourth quarter unless there have been any restructuring changes. Any information on these four properties would be greatly appreciated.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes. I'll turn it over to Bill. I mean, we did see a reduction, Laurie, in non-accrual, it's one relationship that has two loans, that has three 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's secured by the two 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.
Bill Wray, Senior Executive Vice President, Chief Risk Officer
Sure, Ron. So as Ron said, about of that non-accrual, 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 non-accrual 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, and as we mentioned before, to build out spec suites. So that seems to be getting them some momentum. So, and the borrower's 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 signed leases, you know, we'd be reevaluating the classification on that. And then was there another property you had a question on?
Laurie Hunsicker, Analyst
Yes, on that $20.5 million flap is that still due in the fourth quarter or is there any movement on extending that?
Bill Wray, Senior Executive Vice President, Chief Risk Officer
Let's see we did it, we did two one-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 moving it right, just to make sure this will be early 2026 when this comes back up.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Bill, I think it's the end of 2026.
Laurie Hunsicker, Analyst
I'm sorry, but I'm hearing you guys with a lot of detailed questions. And 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, Senior Executive Vice President, Chief Risk Officer
Yes.
Laurie Hunsicker, Analyst
Okay, got you. And is that still, I mean, I had in my notes I was sitting around 70% vacant. Is that still the case or has that improved at all?
Bill Wray, Senior Executive Vice President, Chief Risk Officer
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.
Laurie Hunsicker, Analyst
So it's gotten better. Okay, that's great. I really, really appreciate the details there. And then Ned, just last question for you. You know with sort of earnings clarity, dividend coverage clarity, etc., really starting to shine and the fact now that your stock is 20% plus 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
Yes, it's certainly something we need to think about and, you know, it goes to best use of capital. You know, 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, Senior Executive Vice President, CFO and Treasurer
Yes, so we don't have a plan currently in place, Laurie, but it is something that we're relooking at.
Laurie Hunsicker, Analyst
Okay, great. That's helpful. Thanks for taking my questions.
Ron Ohsberg, Senior Executive Vice President, CFO and Treasurer
Yes.
Ned Handy, Chairman and CEO
Thanks, Laurie.
Operator, Operator
It sounds, there are no more questions registered in the queue. I would like to pass the conference over to our hosting team for closing remarks.
Ned Handy, Chairman and CEO
Well, 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, Operator
That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.