Earnings Call Transcript
WASHINGTON TRUST BANCORP INC (WASH)
Earnings Call Transcript - WASH Q4 2025
Operator, Operator
Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Lydia, and I'll be your operator today. As a reminder, today's call is being recorded. And now I'll turn the call over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications. Please go ahead.
Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications
Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the Fourth Quarter of 2025. Joining us this morning are members of Washington Trust's 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. 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?
Edward Handy, Chairman and Chief Executive Officer
Thanks, 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 begin with a brief overview of our results, and then Ron will provide more detail on our financial results for the quarter and the year. After our remarks, Mary and Bill will join us for the Q&A session. This quarter's results reflected continued earnings momentum and improving profitability. The quarter's performance was driven by margin expansion, continued in-market deposit growth and increased revenues from wealth management. We closed out the year with a well-positioned balance sheet, a normalized provision for credit losses and improved asset quality metrics. During 2025, we laid important groundwork for future growth with targeted investments in our Wealth Management and Commercial Banking business lines. This included the wealth asset purchase from Lighthouse Financial Management and the hiring of our new Chief Commercial Banking Officer, Jim Brown, who has an extensive network and proven record in leading high-performing commercial banking teams. In this new year, we are continuing to build upon the positive momentum from these strategic investments. Last week, we brought on a dedicated institutional banking team to serve education, health care and nonprofit providers throughout the Northeast region. This investment in our commercial banking business will help improve our balance sheet with high-quality C&I loans and strong deposit opportunities. We also expect to see wealth management opportunities come about. The ability to scale this high-quality new client base with an efficient staffing model will enhance earnings going forward. We're very excited about this key addition to Jim's commercial team and the growth potential that lies ahead. We're also looking forward to our de novo branch opening later this year in one of Rhode Island's fastest-growing communities, the city of Pawtucket, which will increase our presence in the northern part of the state. All these efforts will enhance our value as a full-service community bank and long-term partner to our customers and provide a solid foundation for the year ahead. With that, I'll turn the call over to Ron for some additional details on the quarter and the year. We'll then be glad to address any of your questions. Ron?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Ned, and good morning, everyone. In the fourth quarter, we reported net income of $16 million or $0.83 per share compared to $10.8 million or $0.56 per share for the preceding quarter. On an adjusted basis, EPS was up 41% compared to last year's fourth quarter. Net interest income was $40.7 million, up by 5% from Q3 and 24% year-over-year. The margin was 2.56%, up by 16 basis points and up by 61 basis points year-over-year. A better funding mix with higher in-market deposits and lower wholesale funding as well as deposit rate management contributed to this improvement. Q4 included $516,000 of loan prepayment fee income, which benefited the NIM by 3 basis points. Noninterest income was up 5% compared to Q3 and up by 15% year-over-year on an adjusted basis. Wealth management revenues were up 5% and average AUA for the fourth quarter increased by 4% and 9% year-over-year. Mortgage banking revenues totaled $3.3 million, down seasonally by 7% and up 14% year-over-year. Origination and sales volumes increased by 21% and 25%, respectively. Our mortgage pipeline at December 31 was $81 million, down seasonally by 37% from the end of September. Full year mortgage originations totaled $667 million, up by 31% from 2024. Q4 loan-related derivative income was up by $810,000 in the quarter. Noninterest expense totaled $38 million in Q4, up by 6%. On a full year adjusted basis, noninterest expense was up by 7%. In the fourth quarter, salaries and benefits expense was up by $973,000 or 4%, reflecting higher levels of performance and volume-based compensation as well as increased staffing. Other noninterest expenses were up by $1.3 million in Q4, largely due to a $1 million contribution made to our charitable foundation. Our full year effective tax rate was 22.5%. We expect our full year 2026 rate to be approximately 22%. Turning to the balance sheet. Total loans were stable, increasing modestly by $12 million from September 30. End market deposits were up by 1% from the end of Q3 and 9% year-over-year, and wholesale funding was down $165 million or 21% from the end of September. Total equity amounted to $544 million, up by $11 million from the end of Q3. The dividend remained at $0.56 per share. Turning to credit. In the fourth quarter, the provision for credit losses normalized and our asset quality metrics improved. At December 31, nonaccruing loans were 25 basis points on total loans. Nonaccruing commercial loans were 0. Past due loans were 22 basis points on total loans. There was one CRE loan past due at December 31, and that was brought current in January. And we had net recoveries for the quarter of $160,000. And at this point, I'll turn the call back to Ned.
Edward Handy, Chairman and Chief Executive Officer
Thank you, Ron, and we'll now take any questions you might have.
Operator, Operator
Our first question today comes from Mark Fitzgibbon with Piper Sandler.
Mark Fitzgibbon, Analyst
I guess first question, Ron, I'm curious how you're thinking about the margin? Do you feel like that sort of mid-2.50% level is kind of sustainable, as we move into the early part of 2026?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
I do, Mark. And I can give you kind of the full year outlook on the NIM. I think you're all aware of the swap termination that will happen at the end of April. So I'll talk about that first. So in the second quarter, we expect the margin to increase 9 basis points related to that item and another 4 basis points in the third quarter. So that's a run rate benefit of 13 basis points that will be fully baked in, in the third quarter. Outside of that, if we talk about organic expansion, we're projecting 3 to 4 basis points per quarter. That is assuming no changes in the Fed funds rate. So that would bring our Q4 estimate to 2.78% to 2.82%.
Mark Fitzgibbon, Analyst
Okay. Great. Secondly, I guess, I know credit is really good here, but optically, the reserve looks a little light relative to your peers. How do you guys think about that? And is there a conscious plan to sort of nudge that up over time with maybe qualitative factors?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Bill, do you want to jump in on that?
William Wray, Senior Executive Vice President and Chief Risk Officer
Sure. Mark, we, as you know, follow the CECL guidelines, which essentially say this is our lifetime loss estimate. And we are on the lower side of the spectrum with our peers, although not unduly so. We run the numbers. We look at our history, and we're very comfortable that it's adequate for our portfolio. And so I think you can expect it may tick up a few bps, tick down a few bps here or there, but we're comfortable in that mid-70 coverage range just based on our portfolio and the loss estimates for it. But it obviously is something we spend a lot of time on, and we'll be more conservative on the call side when it's merited.
Mark Fitzgibbon, Analyst
Okay. Great. And then...
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
I'm sorry, Mark. I would just make one other point. I mean we still have a relatively large residential portfolio. And so the reserve allocation on that is less than commercial, right? And we'd like to see our residentials come down, to be honest, but that does have an impact on the weighted average reserve coverage.
Mark Fitzgibbon, Analyst
Okay. Great. Ned, in your opening comments, you mentioned that there are potential opportunities in wealth management. Should we understand that as you considering potential mergers and acquisitions in that area, or is it more about organic hiring and similar initiatives?
Edward Handy, Chairman and Chief Executive Officer
Actually, Mark, I was specifically referring to the institutional banking team, which primarily serves the higher-end not-for-profit sector. This focus is really on endowments and retirement funds that may accompany growth in that portfolio.
Operator, Operator
Our next question comes from Damon DelMonte with KBW.
Damon Del Monte, Analyst
I just want to kind of start off with the outlook on expenses, kind of good control going in here to year-end. Kind of Ron, just wondering what your thoughts are on kind of the full year outlook and maybe any variability from a quarter-to-quarter perspective?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. So Damon, I guess I'll break it down into salaries and benefits versus all other expenses. In Q1, we're looking at a 6% increase in expenses, which factors in annual merit raises, which come into play at the beginning of the year, FICA resets and those types of things. But we've also made this investment in the institutional team that's coming on board. We also have, I think, as everyone probably has increased medical insurance, those types of things. So that's what we're kind of seeing for Q1 on the salaries and benefits line. All other expenses, we're looking at year-over-year, like a 5% increase. And we also have the branch coming online. So that's going to add to our both our salary run rate as well as our expense run rate, calling it, a total of $600,000 over the course of the year, starting in late summer, early fall.
Damon Del Monte, Analyst
Got it. Okay. Great. And then kind of can you just give a little update on your outlook with loan growth? Are you optimistic that we can start to get back to that low mid-single-digit range kind of given what you're seeing as well as the recent hires to the commercial lending team? I guess, yes, just some color on the outlook for loan growth would be great.
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Net loan growth at the end of the year didn’t meet our expectations. However, we anticipate a 4% to 5% growth in commercial real estate, which is typical. The commercial and industrial team is expected to exceed that growth rate, though I won't specify a target at this point. They're still getting established. We expect residential lending to continue to decline as it has this year. Overall, we are aiming for a solid 5% year-over-year growth, which shows improvement compared to 2025. We have a lot of confidence in the new team we've brought on, and that’s where we’ll set our target for now.
Edward Handy, Chairman and Chief Executive Officer
Yes. And Damon, I would just elaborate a bit more. We had $180 million of credit formation in the quarter, but we experienced several payoffs, some of which were expected and some were earlier than anticipated. One of those resulted in a considerable prepayment penalty. However, we do not foresee this high level of early prepayment continuing. Our new team has only been with us for 9 days, so we haven't observed any growth in our pipeline yet. I believe we will be in a better position next quarter to discuss our expectations. We have significant optimism. The team is very experienced and has been in the market for a long time, consistently evaluating numerous potential deals. Thus, we have high hopes and expectations, particularly in the C&I space, which we have been addressing for some time as we strategically work to adjust the balance sheet and accelerate growth in that area. The growth Ron mentioned regarding the CRE side is partially due to ongoing concentration levels, so we are proceeding cautiously there and are keen to support this team in achieving success on the C&I front.
Operator, Operator
Our next question today comes from Laurie Hunsicker with Seaport Research Partners.
Laura Havener Hunsicker, Analyst
Just to circle back to the C&I group, can you share with us how many people are there and how much they did last year collectively? Maybe where they...
Edward Handy, Chairman and Chief Executive Officer
I don't have details on what they did last year collectively, but there are four people in the team that came over. We will add a treasury management specialist to that team because of their tendency to deliver deposits. The leader of the group has over 30 years of experience in this space in the Northeast region, is very well known, and has been highly successful at prior institutions. So yes, we're very confident, Laurie. And again, I think they've been here for nine days. Let’s take a little time to build the pipeline up, but we'll report in detail, probably as soon as next quarter.
Laura Havener Hunsicker, Analyst
Okay. And where did they come from?
Edward Handy, Chairman and Chief Executive Officer
They were most recently at Brookline.
Laura Havener Hunsicker, Analyst
Got you. Okay. Got you. So then is that focus basically in the Greater Boston MSA?
Edward Handy, Chairman and Chief Executive Officer
Northeast region. So broader than just the Boston MSA.
Laura Havener Hunsicker, Analyst
Got it. Okay. Regarding expenses, Ron, the 6% increase for the first quarter, that includes the charitable foundation charge, correct? Or are you looking at it in relation to the $38 million?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes.
Laura Havener Hunsicker, Analyst
Okay. Okay. And then how should we think about the charitable foundation charge in '26? I think you previously guided to $500,000, but should we be thinking that at...
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. We penciled in $750,000 for the end of the year.
Laura Havener Hunsicker, Analyst
Okay. Great. And then I guess, branching, obviously, we've got that Pawtucket coming. Is there anything else you're thinking about? Or should we be thinking about kind of maybe one branch in '27 as well? How do you think about that?
Edward Handy, Chairman and Chief Executive Officer
Yes. For 2026, Pawtucket is in the plans, and Michelle Kyle, our Head of Retail Banking, has created a strategy that we're currently reviewing. This may not include full-service branches but could involve alternative solutions such as ATMs and similar options that she is outlining. While there's nothing additional planned for 2026, I believe it's fair to say we will keep investing in our retail presence in later years. Historically, we've opened one or two branches each year for the past five years, and I think that pace is likely to continue, although the format may vary.
Laura Havener Hunsicker, Analyst
Okay. Okay. That's great. And obviously, credit, you're probably one of the few banks in the entire country with 0 CRE nonperformers, 0 C&I nonperformers and booking recoveries. But just a very quick question. The $6 million of office classified, any color on that? And when does that mature?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Bill, do you want to take that one?
William Wray, Senior Executive Vice President and Chief Risk Officer
Sure. Sure. That matures in 2031. So plenty of running room there, extremely strong with dedicated sponsors. Occupancy right now is in the mid-40%, but growing. So the building is getting close to breakeven. I think it's just going to be a long, slow nursing process, but the sponsors are fully committed, and they are building it up slowly. So we feel comfortable about it. That's why it's accruing. And by the way, it's completely current. So we think we're going to nurse our way through on this one.
Laura Havener Hunsicker, Analyst
Great. Great. Well, congratulations on credit. Really, really great. Okay. So putting it all together, your earnings power, obviously, very, very strong. In 3Q, you had dialed back comments around buybacks, and we're seeing buybacks ramp up across the board. As we're looking here, your CET1 almost 12%, your risk-based 13%. I mean why wouldn't you revisit buybacks here? How do you think about that?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. Laurie, I think it's our kind of our standard answer that we take it under consideration all the time and taking into account other ways that we think that we need to deploy capital. So not saying that we're going to do more and not saying that we won't, but we'll just have to take that as it comes.
Laura Havener Hunsicker, Analyst
Okay. And then just remind me, what's existing in your current authorization?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
I don't have that information off the top, Laurie. I have to look that up.
Operator, Operator
And our next question comes from Ross Haberman with Rlh Investments.
Ross Haberman, Analyst
Most of my questions have been answered. Could you just talk about your wealth management and what you're doing to basically expand that a little faster in '26?
Edward Handy, Chairman and Chief Executive Officer
Thank you, Ross. We've brought on some business development officers and, while we need more than 9 days to determine their impact, we are optimistic that this team, which is primarily focused on the nonprofit sector, will help us leverage opportunities within that client base, including higher education, healthcare, and private schools, which typically have endowments and retirement plans. Regarding mergers and acquisitions, we are pleased with the Lighthouse deal we completed in 2025 as part of our ongoing strategy. It's not our main focus at the moment given the high prices, so we must approach opportunities carefully, considering price, culture, and fit. We are satisfied with the acquisition we made in 2025 and are not actively seeking new opportunities, but we remain open to smaller tuck-in transactions that align with our market approach and operational style.
Ross Haberman, Analyst
And just one follow-up, sorry.
Edward Handy, Chairman and Chief Executive Officer
I was just going to say...
Ross Haberman, Analyst
Return on assets?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
On wealth?
Ross Haberman, Analyst
On wealth, is your average fee structure somewhere between 0.5 and 100 basis points?
Ronald Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer
Yes. I would say all in on average, it's about, I think, 60 basis points.
Edward Handy, Chairman and Chief Executive Officer
Yes.
Ross Haberman, Analyst
Got it. Okay. I'm sorry, I cut you guys off. You were going to say something, I apologize.
Edward Handy, Chairman and Chief Executive Officer
No, no. You got the 60 basis points, right?
Operator, Operator
Thank you, Lydia, and thank you all. As we move into the new year, we remain committed to delivering value as a full-service community bank and long-term financial partner to our customers with a disciplined focus on long-term performance. So really appreciate your time today and your interest and support, and we look forward to speaking to you all again soon. Have a great day, everybody. This concludes our call today. Thank you very much for joining. You may now disconnect your lines.