Washington Trust Bancorp, Inc.

communications. Darren, you may proceed.

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 Washington Trust Executive Team, Ned Handy, Chairman and Chief Executive Officer, Mary Nunes, President and Chief Operating Officer, Ron Osberg, 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 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. In-market deposits reached an all-time high of $5.13 billion. While intentional reduction in our residential mortgage portfolio, elevated payoffs in our Cree 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. We'll then be glad to address any questions.

Ron? Tom Petrie, 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 link quarter basis. The margin was 229, 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 31st. 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 31st 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 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 31st. This included a 1% reduction in residential loans as well as 1% reduction in commercial loans due to higher than expected pay downs. 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. A loan-to-deposit ratio decreased from 105.5 to 100.7%. Total equity amounted to $522 million at March 31st, 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-occurring loans were 0.42% at March 31st, 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.

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

At this time, if you'd like to ask a question, it is star followed by one on your telephone keypad. If for any reason you would like to remove that question, it is star followed by two. Again, to ask a question, it is star one. I'll pause briefly here as questions are registered. Our first question comes from Mark Fitzgibbon with the company Piper Sandler. Mark, your line is now open.

Hey, guys. Good morning. Good morning, Mark. Hey, Mark. Hey, 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, you know, what do you think sort of run-rate operating expenses will look like going forward?

Yeah, so 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?

Yeah, there's really no ongoing expense related to the pension. And, again, that was all factored into guidance that we gave at year-end.

Okay.

And I would just say, Mark, I would just say that the – The guidance I gave at the end in the first quarter is it 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?

Yeah, 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 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.

OK, 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?

Yeah. 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?

Yeah, we'd like to see it lower, obviously. We, you know, as we've said, Ed, and, you know, we have no intention of reducing it. So that from this point forward, I think that the point is to be improving net income and bringing the ratio down. So, you know, we expect to be certainly in the, you know, Michael Leccese, M.D.: : mid to low 80s, by the end of the year and we'll see where it goes from there. Michael Leccese, M.D.: : Not not. Michael Leccese, M.D.: : Like the dividend anytime soon for sure.

Michael Leccese, M.D.: : Right, but do you feel like. Michael Leccese, M.D.: : That could constrain your ability to grow when the environment starts to get better if if you've got such a high payout ratio.

Michael Leccese, M.D.: : yeah well it could. Michael Leccese, M.D.: : You know what we'll just have to see when we get there.

Michael Leccese, M.D.: : Okay. Thank you.

Yeah. Our next question comes from Damon Del Monte with the company KBW. Damon, your line is now open.

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, you know, how has your interest rate sensitivity changed given the, you know, the restructurings and other changes items that have occurred in the last, you know, few months for you guys.

Yeah. So we, we, you know, historically we were pretty asset sensitive and we strayed away from that. Uh, and, and I would say even, even with liability sensitive probably, you know, at an inopportune time for sure. Um, the, the restructuring that we did, uh, took a lot of that liability sensitivity off. So, so we're much closer to, to, to rate neutral, I would say. So 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. know so like as i mentioned you know we're seeing you know five or six basis points improvement in q2 and we'll just be you know working hard if the fed cuts uh to manage our deposit costs down as as quickly and as much as we can got it okay but i don't think you'll see that yeah i don't think you'll see the expansion uh that we saw in the third and fourth quarter um just just because of the restructuring got it okay um that's good and then um

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?

Yeah, so a couple 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, you know, more targeted job of bringing in deposits. We're trying a few things on deposit promotion. I can tell you that deposit competition, you know, remains very intense. And, you know, we tried a couple of promotions in the quarter on both the CD and on the money market side.

saw good deposit growth um so we'll see if we're able to maintain that got it okay great um that's all that i had for now thank you great thanks thanks dan our next question comes from laurie on sticker with the company seaport research partners laurie your line is not open great hi thanks good morning um just going back from

Going back to expenses, so when in the quarter did the sale lease back happen?

Well, it happened in February and March.

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, if we're looking at the core number here, the $35.8 million, that probably still jumps to about $37 million, even though things like snow removal, et cetera, come out?

Yeah, so I think my guidance at year end was for, you know, for all other expense, which that would be in there, about $13.5 million a quarter. You know, we were 13.3 in the first quarter, but the 13.5, I think, is a good estimate for the non salary expense line.

OK, 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?

You know, the other other, you know, at year end we had some, you know, accrual adjustments and, you know, 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?

Yes.

Is that right? Yes. Okay. Just making sure I got that right. Okay. 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. Yeah, for March, it was 231.

231, OK, great. And then going to credit, and I appreciate all the details you give, but can you just refresh us You know, specifically on some of these office properties. And then just help us think about the class B that dropped from, you know, $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, you know, around the loans that I would love a refresh. I know you had an easier number from last quarter, $7.8 million class B that was 50% vacant. It was still performing. Is it, you know, how do you think about that? You had a new non-performer that come up. Is that still planned to resolve in 2Q? 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. And then that last one, that big one, that $20.5 million, Laura Monje- lab, you know any new news on that any new appraisal think that's due in the fourth quarter unless there's been some restructuring movement just just anything on those those four properties would be super helpful.

William Boschelli, M.D.: : yeah i'll turn it over to bill, I mean we did see a reduction lori and and you know within within non accrual you know it's it's one is 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 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?

Sure, Ron. So as Ron said, of that non-accrual, 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-up 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 lease now, just over half lease. 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. 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 part that you had a question on?

Yeah, well, just on that 20 and a half million lab, is that still due in the fourth quarter or is there any movement on extending that?

Let's see, we did... 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 reading 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. Yeah, I'm sorry.

I was reading that wrong. Sorry. 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 off on, which loan was that? Was that the Class B office that was due this quarter? Okay, gotcha. 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?

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, Ned, just last question for you. You know, with sort of earnings clarity, dividend coverage clarity, etc., you know, 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?

Thanks. Yeah, 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, Enron, you should talk about the current state of approvals.

I mean, I know we let the approval So we don't have a plan currently in place, Lori, but it is something that we're really looking at.

Okay, great. That's helpful. Thanks for taking my questions.

Thanks, Lori.

If there are no more questions, question queue. Again, if you would like to ask a question, please start followed by one. If there are no more questions, question queue, I'd like to pass the conference. over to our hosting team for closing remarks.

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.

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