Earnings Call Transcript - WASH Q4 2024

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. I'd now like to 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, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'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's Chairman and Chief Executive Officer, Ned Handy. Ned?

Ned Handy, Chairman and Chief Executive Officer

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 securities 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 Kile, 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 Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

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 noninterest 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 noninterest 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 around 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%. In-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-deposits ratio decreased from 106.2% to 105.5%. Our asset and credit quality metrics remain solid. Non-accruing 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 basis points at September 30. The allowance totaled $42 million or 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. At this time, I'll turn the call back to Ned.

Ned Handy, Chairman and Chief Executive Officer

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

Operator, Operator

Thank you. We have a question from Laurie Hunsicker with Seaport Research Partners. Your line is open. Please go ahead.

Laurie Hunsicker, Analyst

Yeah, hi. Thanks. Good morning, Ned and Mary and Ron 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 paydown 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, et cetera? 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.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

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

Laurie Hunsicker, Analyst

And is that May 1?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah.

Laurie Hunsicker, Analyst

Okay. And that's still 12 basis points?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah, what we published hasn't changed. So, 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% to 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. So that will bring our earning asset balances down somewhat. 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?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

The Federal Reserve cut rates four times, and while this is reflected in the numbers I just shared, we still have some short-term wholesale funding, particularly brokered CDs, maturing in the coming months that will be repriced. Additionally, our regular retail CDs will also reprice downward. I know you have inquired about brokered CDs before; we will utilize them when it is beneficial. Currently, brokered CDs are slightly more costly than FHLB, but if that situation changes, we will depend on them more. However, the overall trend is to decrease reliance on wholesale funding.

Laurie Hunsicker, Analyst

Okay. And then, on capital, I just want to clarify, the 2.199 million share issuance in December, does that include these two?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Say that again, Laurie?

Laurie Hunsicker, Analyst

Is the issue reflected in the numbers?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

I'm sorry, Laurie. I couldn't hear you.

Laurie Hunsicker, Analyst

Okay. Perfect. That's helpful. That's as of December 31. Okay. And then, Ned, just a question for you on dividend. Obviously, it's looking substantially safer. Can you just comment on that and target payout ratio, how you're thinking about that?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yes, we're not planning on making any changes to the dividend, Laurie.

Laurie Hunsicker, Analyst

Perfect. Okay. And the credit...

Ned Handy, Chairman and Chief Executive Officer

Yeah, it's an important part of this trend. Go ahead, Ron.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

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

Laurie Hunsicker, Analyst

Perfect. Okay. And on 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 great. 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. I love your chart, but just wanted a little color on those two things.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Bill, do you want to take that?

Bill Wray, Senior Executive Vice President and Chief Risk Officer

This is Bill. I can address that. The charge-off was about half of the total non-accrual resolution. The other item you mentioned is actually set to be resolved, likely by late this quarter but more probably next quarter. We're closely monitoring all of these situations and are seeking to resolve them quickly. We hope to maintain these numbers at low levels.

Laurie Hunsicker, Analyst

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

Bill Wray, Senior Executive Vice President and Chief Risk Officer

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

Laurie Hunsicker, Analyst

That's under agreement. 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 that 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 Vice President and Chief Risk Officer

We do not maintain a specific reserve for office space and do not treat it as a separate segment since it does not operate under CECL due to insufficient data. However, our commercial real estate segment, which includes office space, likely has around 125 basis points of reserve. We manage office space within that segment by utilizing call factors to account for the stress on appraisals and other related aspects. So, while there is no dedicated reserve for office space, our commercial real estate segment is adequately reserved. Regarding the large lab space, it is currently over 50% occupied. Although leasing activity has been slow this quarter, we are beginning to see an uptick in interest for 2025.

Laurie Hunsicker, Analyst

Okay. Great. Thanks.

Operator, Operator

We have a question from Damon DelMonte with KBW. Please go ahead. Your line is open.

Damon DelMonte, Analyst

Hey, good morning, everyone. Hope you are all doing well. Sorry, I thought I had queued in. I am wondering why I wasn't being called on but apparently, I didn't queue it though. 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 like 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 do you think it's still more of a kind of a conservative approach for a few more quarters?

Ned Handy, Chairman and Chief Executive Officer

It's a great question, Damon. We're in the process of rebuilding our pipeline. In 2024, we intentionally slowed down loan growth. Now, the pipeline is recovering, and we see opportunities ahead. We're projecting modest loan growth around 3% in the commercial sector, with a preference for commercial and industrial loans. Currently, our pipeline is focused on C&I. While we are mindful of our commercial real estate concentration limit, which is over 3.50%, there are no significant concerns on that front. We are actively looking at real estate deals and finding good opportunities with reasonable pricing and favorable structures. We're calibrating our growth strategy, aiming to focus on C&I since it typically generates more deposits. Funding loan growth appropriately is our priority. The interest rate environment is intriguing, as there are more fixed-rate requests as people consider the long-term outlook on rates. We believe there may be potential upside to our current projections, although we are currently estimating about 3% loan growth in the commercial sector. As for residential loans, I'll let Mary elaborate, but we've been managing our existing portfolio while shifting our residential operations towards sales, anticipating that about 75% of the volume will be sold, meaning that side of the balance sheet won't grow. Additionally, we expect a slight reduction in the portfolio over the next couple of quarters.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yeah, that's right.

Ned Handy, Chairman and Chief Executive Officer

Hope that helps, Damon?

Damon DelMonte, Analyst

It does. Yeah. Okay. Perfect. And then, with regards to expenses, Ron, I mean, how are you kind of thinking about it from like a year-over-year perspective of growth? If you were at $137 million for '24, I mean, is it reasonable for kind of 2% to 4% type of growth over the next year?

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

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% to 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 at about $13.5 million per quarter. So, increased NIM, increased fee revenue, but we are also seeing an expense increase.

Damon DelMonte, Analyst

Got it. So, adding those two amounts brings us to around $37 million. That makes sense. You're receiving relief on the revenue side, allowing for reinvestment into the entire franchise after a more cautious approach in the past couple of years. That probably covers everything, as I intended to ask about the fee income too, and you provided insights on that. I think that's it; all other questions have been addressed. Thank you for the information and insights today.

Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Great. Thank you, Damon.

Ned Handy, Chairman and Chief Executive Officer

Thanks, Damon. Appreciate it.

Operator, Operator

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, Chairman and Chief Executive Officer

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 22 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, Operator

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