Earnings Call Transcript - WASH Q3 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. Today's call is being recorded. And now I'll turn you over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications to begin. Please go ahead.

Sharon Walsh, SVP, Director of Marketing and Corporate Communications

Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the Third 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 the 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?

Edward Handy, CEO

Thank you, Sharon. Good morning, and thank you for joining our third quarter conference call. We respect and appreciate your time and your interest in Washington Trust. I'll briefly comment on our financial results, and then Ron will provide more details on the quarter. After our remarks, Mary and Bill will join us for the Q&A session. This quarter, we realized net income of $10.8 million. We resolved two credit exposures that resulted in an elevated provision for credit losses this quarter as we detailed in an 8-K filed earlier this month. That said, we are confident in our current portfolio quality and that we will continue our long track record of strong credit performance. This quarter, we saw strong performance across our core business lines with increases in margin, wealth revenues, and mortgage revenue. We also saw in-market deposit levels increase and AUM growth. This performance underscores our continued commitment to long-term value creation. Additionally, this quarter, we made several key investments to drive growth. We completed an asset purchase from Lighthouse Financial Management, which added AUM of approximately $195 million. This transaction also added four advisory and tax planning team members to our Wealth Management division. We also hired Jim Brown as Senior Executive Vice President and Chief Commercial Banking Officer. Jim has more than 38 years of experience in the financial services industry, an extensive network, and a proven track record in leading high-performing commercial banking teams. He's focused on building and deepening our commercial relationships and will be working closely with our wealth division on continuing to integrate these services. We're pleased with the direction we are headed in and excited about our investments in future growth. We look forward to continuing to build long-term relationships with our customers and support their financial service needs throughout their lives, whether they are buying a home, starting a business, or investing in their future. I'll now turn the call over to Ron for some additional details on the quarter. We'll then be glad to address any of your questions. Ron?

Ronald Ohsberg, CFO

Okay. Thanks, Ned, and good morning, everyone. For the third quarter, we reported net income of $10.8 million or $0.56 per share compared to $13.2 million or $0.68 per share for the preceding quarter. Pre-provision pretax revenue, or PPNR, was up 17% from Q2 and 48% compared to the third quarter of last year. As previously disclosed, we resolved two significant credit exposures this quarter, which resulted in an elevated provision for credit losses. Net interest income in Q3 amounted to $38.8 million, up by $1.6 million or 4% on a linked-quarter basis and by $6.6 million or 20% year-over-year. The margin was 2.40%, up by 4 basis points and up by 55 basis points compared to last year. Noninterest income comprised 31% of revenue in Q3, up 3% compared to Q2 and up 8% year-over-year. Wealth management revenues were up 3%. This includes a 6% increase in asset-based revenues in Q3, reflecting market appreciation and the purchase of $195 million of managed assets from Lighthouse Financial Management. End-of-period AUA totaled $7.7 billion, up $501 million or 7%. Mortgage banking revenues totaled $3.5 million, up 15% for the quarter and 22% year-over-year. Noninterest expense totaled $35.7 million in Q3, down by $804,000 or 2%. Salaries and employee benefits expense was down by $351,000 or 2%, reflecting lower levels of performance-based compensation. Outsourced services declined by $284,000 or 6% due to lower third-party software costs and volume-related changes. Our full year effective tax rate is expected to be 22.5%. Turning to the balance sheet. Total loans were down by $18 million. In-market deposits were up $179 million or 4% from the end of Q2 and up by $431 million or 9% year-over-year. Wholesale funding was down 21% compared to June and 53% compared to last September, and our loan-to-deposit ratio decreased 3.8 percentage points to 98% as of September 30. Total equity amounted to $533 million, up by $6 million from the end of Q2. The dividend remained at $0.56 per share. In Q3, we repurchased 237,000 shares at an average price of $27.18 per share at a total cost of $6.4 million. We repurchased an additional 21,000 shares in October at $26.98 per share to complete our $7 million internal allocation to this program. The dividend yield on these repurchases was 8.26%, which will reduce dividend payouts by about $600,000 annually. As I mentioned earlier, we resolved two significant credit exposures this quarter. We recorded charge-offs of $11.3 million on these loans and provided additional details in a Form 8-K filed on October 8. We have a well-established process to monitor credits and asset quality and do not believe that this quarter's results are indicative of any adverse credit trend. At September 30, nonaccruing loans were 27 basis points on total loans and were concentrated in collateralized residential and consumer loans. Nonaccruing commercial loan balances amounted to $1 million. Past due loans were 16 basis points of total loans and were essentially all collateralized residential and consumer. Nonaccruing loans and past due loans are down 55% and 60% compared to last September. The allowance totaled $36.6 million or 71 basis points of total loans and provided NPL coverage of 261%. And at this time, I will turn the call back to Ned.

Edward Handy, CEO

Thank you, Ron. We'll now take any questions you might have about the quarter. Thanks, Lydia.

Operator, Operator

Our first question today comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon, Analyst

Ned, I wonder if you could share with us how much you have in remaining shared national credits, how big that book is?

Edward Handy, CEO

Yes. I'm going to turn to Bill on that, but it's a pretty limited portfolio.

William Wray, CRO

It is. It's about $173 million, and it's split between C&I and commercial real estate.

Mark Fitzgibbon, Analyst

Okay. And then secondly, Bill, while I've got you, I think last quarter in response to another analyst question, you said we have appropriate specific reserves on that one credit. I think you had $2.3 million against it. What changed from then until now that caused you to have to take another $6 million charge-off on that loan?

William Wray, CRO

Sure. A lot of the other bank groups were in the exact same situation. We were operating off the information we had from our agent bank and the advisers in the context of a Chapter 11. There were two primary means of recovery in Chapter 11, both of which were significantly reduced following the end of the quarter in terms of the outcome. So they came in at about maybe 20% or so of what was expected. We had done our reserving at the end of the second quarter based on what at the time was a fairly conservative view of what the recovery might be. It turns out that was certainly erroneous. And we, along with all the other banks, ended up taking a very significant loss.

Mark Fitzgibbon, Analyst

Okay. And then I guess kind of a similar question on the office building sale, it looked like the reduction in value versus the charge-off necessitated essentially a 70% reduction in the value of the property versus where you were carrying it last quarter. I guess I'm curious, how could you be off by that much if you had recent appraisals and valuations done on it when it went nonaccrual?

William Wray, CRO

Well, as required by accounting, we had this marked to its most current appraised value less selling costs. And that happened to be about one-third of what this property was originally estimated to be. So we had it marked down to what the appraiser suggested was the appropriate time, even considering difficult market conditions. We ended up liquidating it because we weren't seeing any positive momentum. And as you understand, it's very difficult for appraisals of office properties in this market, especially when there's not consistent demand to get the numbers right. So ultimately, we decided that instead of a series of descending appraisals based on limited information, we take an actual note sale offer and dispose of it that way. So that's why that final mark was made.

Mark Fitzgibbon, Analyst

I'm curious about how you have any confidence in the appraisals for your other office portfolios. What makes you feel comfortable that those are accurate numbers?

William Wray, CRO

I believe those are good numbers because there are various properties in different markets. When there's leasing activity, appraisal estimates usually hold more weight. The submarket where the final charge-off occurred was in a Connecticut town that had not completed any office deals or leases in the last two years. Because there were no opportunities for alternative redevelopments, we chose to take the loss and move forward. I also want to mention another property in Connecticut that was in nonaccrual, linked to the same borrower, where we saw some positive momentum and successfully recovered 90% through a short sale. This highlights that it really depends on the specific property and its market. Therefore, I feel very confident in our conservative strategy with our other office properties. We have a thorough process for monitoring our assets that our senior team reviews intensively at least once each quarter, and we feel confident in our numbers.

Mark Fitzgibbon, Analyst

Okay. But in fairness, Bill, you felt comfortable last quarter with the $2.3 million reserve on that loan as well.

Edward Handy, CEO

He was talking about the size of the deal.

Mark Fitzgibbon, Analyst

Got you. Okay. Just changing gears, Ron, I wondered if you could share with us what client flows were in the Wealth Management business this quarter.

Ronald Ohsberg, CFO

Yes. No, we're not doing client flows anymore.

Mark Fitzgibbon, Analyst

Okay. You're just unwilling to share that anymore with us?

Ronald Ohsberg, CFO

Yes. We brought our disclosures in line with our peers.

Mark Fitzgibbon, Analyst

Okay. Lastly, I wonder if you could share with us any thoughts on the margin.

Ronald Ohsberg, CFO

Yes. We're looking at margin expansion in the fourth quarter of, we'll call it, 5 basis points, plus or minus.

Operator, Operator

Our next question comes from Damon DelMonte with KBW.

Damon Del Monte, Analyst

So first question, I just want to talk a little bit about loan growth and kind of how you're looking at your pipelines going into year-end and kind of where you think that would be tracking after kind of a flattish third quarter here?

Edward Handy, CEO

Yes. I think, Damon, we'll stick with the sort of low single-digit growth for the year. We did have a couple of paydowns right at the end of the quarter. The pipeline is still kind of in the $180 million range. So pretty healthy from where it started at the beginning of the year. Really excited that we brought Jim Brown on board. He's got to bring a brand-new Rolodex of opportunities, COIs and the like to the bank, and he's already busy sort of strengthening the existing team and building bridges across our various businesses. And so I'm really excited about the prospects that he brings. But pipeline is healthy other than the formation in the quarter, actually, we had $115 million of new formation. We just had $103 million of payoffs, some of them rather large right at the end of the quarter. So I'm going to stick with that sort of low single-digit growth, and we'll keep the pedal to the metal in the fourth quarter.

Damon Del Monte, Analyst

Got it. Okay. That's helpful. And then maybe one for Ron on the expense side here. With the addition of Lighthouse and then some hires that you guys have made and you kind of look at where expenses are kind of here in this last quarter, I mean, do you kind of expect things to kind of go back up towards like around a $36 million, maybe a little bit higher per quarter level once you kind of readjust for accruals and whatnot?

Ronald Ohsberg, CFO

Yes. Yes. Yes. So Damon, I would say that the guidance that we provided in January was about $37 million per quarter, and we've been running below that pretty consistently for the first three quarters. We do have some timing issues. We're going to have higher levels of marketing in the fourth quarter. We're going to have a $500,000 contribution to our foundation in the fourth quarter. So I would say $37 million, which is kind of what we originally guided in January is close to where we'll be in the fourth quarter.

Damon Del Monte, Analyst

Got it. That's helpful. Lastly, based on your comments about the buyback, it sounds like what you purchased during the quarter along with what you bought in October reached your $7 million internal limit. Should we assume there won't be any additional buybacks for the rest of the year? Is that correct?

Ronald Ohsberg, CFO

Yes. Damon, we'll always look at it. I can tell you that we did what we said we were going to do, and we're going to take a pause right now. And we'll continue to reevaluate whether it makes sense to do more and balance that off against redeploying our capital back into growth. So at this point in time, we have no plans to do additional share repurchases.

Operator, Operator

We'll move to our next question from Laurie Hunticker with Seaport Research.