Participants

Sharon Walsh; Senior Vice President, Marketing Strategy and Planning; Washington Trust Bancorp Inc

Edward Handy; Chairman of the Board, Chief Executive Officer of the Corporation and the Bank; Washington Trust Bancorp Inc

Ronald Ohsberg; Chief Financial Officer, Senior Executive Vice President, Treasurer of the Corporation and the Bank; Washington Trust Bancorp Inc

William Wray; Senior Executive Vice President, Chief Risk Officer of the Bank; Washington Trust Bancorp Inc

Laurie Hunsicker; Analyst; Seaport Research Partners

Damon DelMonte; Analyst; Keefe Bruyette & Woods Inc

Presentation

Operator

Good morning and welcome to Washington Trust Bancorp Inc's conference call. My name is Lydia and I'll be your operator today. (Operator Instructions) 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

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?

Edward Handy

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 the December capital raise of $70.5 million and subsequent balance. She'd be positioning which entailed selling lower yielding securities and loans and reinvesting into higher yielding securities and paying down expensive wholesale funding. The security 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 in maturing wholesale funding will occur over the next few months and Ron will provide some detail beyond that though, this initiative resulted in the 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 a further strengthen 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 Kyle, 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?

Ronald Ohsberg

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 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 [195%] 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 non-interest income amounted to $16 million and was modestly down by $229,000 or 1%. Wealth and management revenues were $10 million, up by $60,000 or 1% and spot AUA balance has 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 non-interest 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 approvals. Also advertising and promotion expense decreased by $297,000 in the fourth quarter due to timing. So adjusted income tax expense amounted to $3.2 million and the adjusted effective tax rate was $23.7 million 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 broker deposits were down $82 million and FHB borrowings were down by $175 million.
Our loan to deposit 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 total $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. This time, I'll turn the call back to Ned.

Edward Handy

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

Question and Answer Session

Operator

(Operator Instructions) Laurie Hunsicker, Seaport Research Partners.

Laurie Hunsicker

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 pay down 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 C DS, etcetera?
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 points pick up 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.

Ronald Ohsberg

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

Laurie Hunsicker

And is that May 1?

Ronald Ohsberg

Yeah.

Laurie Hunsicker

Okay and that's still 12 basis points?

Ronald Ohsberg

Yeah, yeah, what we published hasn't changed. So yeah, so the balance sheet repositioning will be very impactful to 2025. We're projecting in them of between [230 and 235] for the first quarter that will increase over the course of the year to about 245 to 250 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'll bring our earning asset balances down somewhat. And, and the expectation is that we will be paying down, primarily at HLB funding over the next couple of months. The spot margin for December was 207.

Laurie Hunsicker

Okay. And then just how are you thinking about deposits and CDs and repricing there?

Ronald Ohsberg

Yeah. So the Feds cut four times and we will continue to see I included, this is included in the numbers I just gave you. But we still have some short-term maturing wholesale funding, brokered CDs over the next few months. That will reprice on that and also our regular retail CDs will be repricing down. I know you've asked about brokered CDs in the past, we will use those when it makes sense too. Right now, brokered CDs are somewhat more expensive than FHLB. And when that reverses then we'll rely a little more heavily on that. But the trend on wholesale funding is to be paying it down anyway.

Laurie Hunsicker

Okay. And then on capital, I just want to clarify the $2.199 million, your issuance in December. Does that include the two?

Ronald Ohsberg

Say that again, Laurie?

Laurie Hunsicker

Two already numbers? (multiple speakers) --
So that's all perfect. Okay so that's all as of December 31. Okay. And then now just a question for you on dividend obviously it's looking substantially more safe. Can you just comment on that and target payout ratio? How you're thinking about that?

Edward Handy

Yeah, we're not -- it's an important part of this trend. Go ahead, Ron.

Ronald Ohsberg

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

Laurie Hunsicker

Perfect. The coverage?

Edward Handy

But the coverage ratio is obviously better.

Laurie Hunsicker

Right? Much better. Okay. Just wanted to hear it from you. Okay. 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 awesome. You stated that was coming it came how much in charge-off 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. Love your chart but just wanted a little color on those two things.

Ronald Ohsberg

Bill, do you want to take that?

William Wray

This is Bill. Yeah, I can jump in the charge off was about of the non-AOR resolution was about half of the total. And so the other one you talked about that came in is actually under agreement to be resolved. Probably, I would guess late this quarter, but more likely next quarter. So again, with all of these, we're paying a lot of attention, we're looking for expeditious resolution. So we're hoping to continue to keep these numbers at these low levels.

Laurie Hunsicker

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

William Wray

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

Laurie Hunsicker

That's under agreement. Okay. Okay, great. And then just two more office questions, the what is your overall office reserve now? And then also, do you have a -- any kind of a refresh on the leasing that [$20.5 million] lab which had gone sort of from zero to I had in my notes 52% as of last quarter. Do you have a refresh on that on that number?

William Wray

Sure. The first one, we don't carry a specific reserve against office. We don't manage it as a segment because it doesn't work under c so we don't have the data to drive it, but our CRE segment which includes office, I think 'm just guessing here about 125 basis points of reserve. And then we use the way we manage office within that is we use call factors to reflect the fact that appraisals and other things are definitely under stress. So that's again, no specific office reserve, but our CRE segment is very adequately reserved.
And then your other question was on the large lab space which is now 50-50, more than 50% occupied. Leasing activity has been slow this quarter. They're starting to see it pick up already for 2025, though. So we feel there especially with the significant investment.

Laurie Hunsicker

Great. Thank you.

Operator

Damon DelMonte, KBW.

Damon DelMonte

Hey, good morning, everyone. I hope you're all doing well. Sorry, I thought I had queued in wondering why I wasn't being wondering why I wasn't being called on, but apparently, I didn't queue in. So in any event, Thanks for all the color on the outlook for the margin and the expected impact from the restructuring. That that was very helpful.
Just kind of wondering what your thoughts are, not a desk 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 you kind of go back to what we've seen in years past or you think it's still more of a kind of a conservative approach for a few more quarters?

Edward Handy

Yeah, it's a great question, Damon. So we're building back the pipeline in 2024 we purposely kind of slowed down the loan growth side of things. And so the pipeline's coming back, we're seeing opportunity. We're kind of thinking about low-ish 3% loan growth over the period on the commercial side. We'd like to lean that towards C&I the pipeline right now is lean towards C&I. We've got the CRE concentration limit that we're aware of.
There's no issue there. But it's over 350 so we need to be careful on that front. We are still out looking at real estate deals. We're seeing opportunity, the pricing is decent, the structure is good. So we're calibrating the growth there, wanting to make loans, wanting to again focus on C&I because it tends to bring more deposits with it. Our priority is on the funding side of things and making sure we fund loan growth appropriately.
It's an interesting interest rate environment to figure out. We're seeing more fixed rate requests. As people are wondering about, the longer-term picture of rates. And so, it, it's an interesting environment but there is opportunity and we think there might be upside opportunity to our current site line, but the current site line is kind of 3% on the commercial side.
I should let Mary talk about but resi, we've been sort of running off the existing portfolio and then tilting the tilting the resi operation towards sales. So we're still thinking kind of 75% of the volume will be sold. So that side of the port of the balance sheet won't grow. And Ron, I think we're actually should -- we're thinking that we'd have mild reduction in the portfolio over the next couple of quarters. Correct?

Ronald Ohsberg

Yeah, that's right. On the resi portfolio.

Damon DelMonte

Got it.

Edward Handy

Hope that helps.

Damon DelMonte

It does, yeah. Okay, perfect. And then with regards to expenses, Ron, I mean, how are you kind of thinking about it from like the 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?

Ronald Ohsberg

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 and what origination volume could be. But we are protecting, 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 head count by about 40 people over the past two years. So we're going to do some reinvestment back there.
Mortgage commissions, we 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 about $13.5 million per quarter. So increase in increased fee revenue, but we are also seeing an expense increase.

Damon DelMonte

Got it. Okay. So add those two, it's like, 37. Okay. All right. So that makes sense. So, I mean, you're getting the relief on the top side. So you can reinvest it into the rest of the franchise after taking a more conservative approach the last couple of years. Okay. Makes sense.
I guess that that probably covers it because I was going to ask about the fee income as well and you kind of trump me on that and, and, and gave me, gave us some insight on that. So, yeah, I think that's it. Everything else has been asked and answered. So thank you very much for the color and insight today.

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.

Edward Handy

Thanks, Lydia. And thank you for joining us today. I hope we 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

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