WESTERLY – Washington Trust Bancorp Inc. says it is "repositioning" its balance sheet in a strategy that has the company selling off low-yielding assets and taking a $70 million loss in a bid for better future earnings.
That one-time hit to the bank's financial statement also likely means that it will finish the quarter and the entire year with a net loss, an extremely rare occurrence for Washington Trust, which posted profits even in the depths of the Great Recession of 2008-2009 when financial markets imploded following the subprime mortgage meltdown.
The amount of quarterly and yearly net loss is unclear at this point because the fourth quarter hasn't closed, but it will likely be far less than the loss recorded from "repositioning" the balance sheet.
In preparation for the repositioning, the publicly traded company – the parent of The Washington Trust Co. – raised about $70 million in a stock offering of 2.2 million shares on Dec. 16. (The bank had 17.1 million outstanding shares as of the end of the third quarter.)
The bank, the third largest in Rhode Island in terms of deposits, noted that the loss will be entirely funded by the capital raised in the stock offering.
Meanwhile, "the underlying core operations [at the bank] are great," Edward "Ned" O. Handy III, Washington Trust chairman and CEO, told Providence Business News on Monday.
In recent years, the strategy of clearing a balance sheet of low-yielding loans and securities and placing funds into higher-yielding assets has become more common among financial institutions in a high interest rate environment. The reinvestment into assets with higher yields boosts net interest margins and interest income.
Perhaps the biggest downside, however, is the one-time loss that most banks are hit with because of the lower resale value of the underwater assets.
"Like many banks, we have been carrying low-yielding assets on our balance sheet following rapid increases in interest rates over the past few years," Handy said in a statement announcing the sale of assets. "These assets have been earning interest below current market rates, which has impacted our earnings and ability to reinvest and expand our business."
The repositioning "will allow us to focus on growth and investment, which is good for shareholders, employees, customers and the communities we serve," he said. "This has also made us even stronger financially and will set us up for improved profitability in 2025 and beyond."
Washington Trust said it sold about $409 million of debt securities from its "available for sale" portfolio. Those assets had a weighted average yield of 2.65%, and the bank said it reinvested the funds into $378 million of securities with an average yield of 5.30%.
Also, Washington Trust has agreed to sell $345 million in low-yield residential mortgage loans – $145 million in adjustable-rate mortgages and another $200 million in fixed-rate home loans. The sale of those mortgages is expected to be completed in the first quarter of 2025.
The bank said it would use $282 million of those proceeds to reduce its wholesale borrowings on which it was paying an average interest rate of 4.5%
As a result of the repositioning of the balance sheet, Washington Trust said the after-tax loss of about $70 million will show up in the fourth-quarter earnings report.
William Hamilton is PBN managing editor. He can be reached at hamilton@pbn.com.
