Earnings Call Transcript - WASH Q2 2025

Operator, Operator

Good morning, and welcome to Washington Trust Bancorp Inc.'s conference call. My name is Lydia, and I will be your operator today. Today's call is being recorded. I'd like to turn the call over to Sharon Walsh, Senior Vice President and Director of Marketing and Corporate Communications. Ms. Walsh, over to you.

Sharon M. Walsh, Senior Vice President and Director of Marketing and Corporate Communications

Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call for the second quarter of 2025. 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; 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 you to today's host, Washington Trust's Chairman and Chief Executive Officer, Ned Handy. Ned?

Edward Otis Handy, Chairman and Chief Executive Officer

Thank you, Sharon. And good morning, and thank you for joining our second quarter conference call. We respect and appreciate your time and your 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. Washington Trust's second quarter results reflect our diversified business model performing positively. We realized growth in net interest income, wealth management revenue, and mortgage banking revenue, and we continue to build capital. This was a solid quarter with loan and deposit growth on target. This quarter, while we continue to focus on deposit generation, we enhanced our wealth management team with the addition of a new client services manager and business development additions to our wealth advisory and private clients teams. This added expertise will be instrumental as we continue to grow and evolve to meet the needs of our clients and communities and continue to provide the highly personalized consultative experience that has defined our firm for generations. Also in the quarter, we finalized the conversion of our core wealth management system, which will ensure enhanced customer experience. The company remains committed to providing exceptional full-service banking, mortgage, and wealth services to our customers and is focused on continuing to be a financial partner that provides solutions and resources that customers need for all life stages and the unique opportunities and challenges that come with those milestones. 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 Stephen Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Ned, and good morning, everyone. For the second quarter, we reported net income of $13.2 million or $0.68 per share compared to $12.2 million and $0.63 per share last quarter. As previously disclosed, there were two infrequent items included in first quarter results, a pension termination charge and a sale leaseback net gain. Excluding these items, adjusted net income increased by $1.5 million or $0.07 per share. Net interest income was $37.2 million, up by $763,000 or 2% on a linked quarter basis. The margin was $2.36, up by 7 basis points. Noninterest income totaled $17.1 million in Q2. Excluding Q1 sale leaseback net gain of $7 million, adjusted noninterest income was up by $1.4 million or 9%. Wealth management revenues were $10.1 million, up by $229,000 or 2%, reflecting an increase in transaction-based and seasonal tax servicing fee income. Asset-based revenues were down modestly, reflecting a decline in average AUA balances. However, at the end of period AUA balances totaled $7.2 billion, up by $363 million, or 5%. Mortgage banking revenues totaled $3 million, up by $730,000, or 32%. Our mortgage pipeline at June 30 was $102 million, up $6 million or 7% from the end of March. Loan-related derivative income, which is transactional in nature, totaled $676,000 in the second quarter compared to $101,000 in Q1. Noninterest expense totaled $36.5 million in Q2, excluding Q1's pension plan settlement charge of $6.4 million, adjusted noninterest expense was up by $770,000 or 2% on a quarter basis. Salaries and benefits expense was up by $603,000 or 3%, largely due to volume-related increases in mortgage originator compensation. Income tax expense in the second quarter totaled $3.9 million and the effective tax rate was 22.7%. Our full year effective tax rate is expected to be 22.4%. Turning to the balance sheet. Total loans were up by $44 million or 1%. Total commercial loans increased by $57 million or 2%, while residential loans decreased by 1%. In-market deposits were up by $30 million or 1% from the end of the first quarter and by $407 million or 9% on a year-over-year basis. Brokered deposits were down by $25 million and FHLB borrowings were up by $151 million. Our asset and credit quality metrics remained solid. Nonaccruing loans were 51 basis points and past due loans were 27 basis points compared with total loans. The allowance totaled $41.1 million or 80 basis points on total loans and provided NPL coverage of 157% and the second quarter provision for credit losses was $600,000. We had net charge-offs of $647,000 in the second quarter. And at this time, I will turn the call back to Ned.

Edward Otis Handy, Chairman and Chief Executive Officer

Thanks, Ron. And Lydia, we can open it up to questions.

Operator, Operator

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

Mark Thomas Fitzgibbon, Analyst

First question, Ron, I had for you was sort of how you're thinking about the net interest margin and what you're assuming for Fed rate cuts in the back half of the year?

Ronald Stephen Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

Yes. So for the third quarter, I would say you can see our margins starting to level out. So I think we're expecting a pretty modest expansion in the margin, maybe only a couple of basis points in the third quarter. What we are seeing is higher than previously anticipated deposit costs. So that's kind of reaching the top on that. As far as the Fed, we're a lot less liability sensitive than we were last fall when the Fed was cutting. And I think we did a good job last fall of repricing our deposits down. We will aggressively reprice our deposits down as much as we feel we can without causing attrition if the Fed indeed does start to cut, but I don't think that we'll necessarily see as much impact as we did in the third and fourth quarter of last year.

Mark Thomas Fitzgibbon, Analyst

Okay. Great. And then it looked like you had pretty good mortgage origination this quarter, I think $181 million. I guess I was curious, how much of that was purchase versus refinance? And also, what was the mix between sort of hybrid ARMs and 30-year fixed?

Mary E. Noons, President and Chief Operating Officer

Mark, this is Mary. We have about 75% of our origination related to the purchase market. It goes as high as 80% depending on the timeframe. As far as the mix, predominantly the salable is 30-year fixed. But we do some origination into the portfolio that is hybrid ARMs, mostly 7/1.

Mark Thomas Fitzgibbon, Analyst

Okay. Great. And then I guess, Ned, I'm curious with all the consolidation that we've seen up in Massachusetts recently, it would seem like kind of an opportune time to maybe open some branches up there or even consider a merger with a bank up in the mass market since you have so much of your portfolio up there, and you have the mortgage business, the wealth business. I guess I'm curious, is that in the cards for you all, or how are you thinking about sort of strategic expansion into Massachusetts?

Edward Otis Handy, Chairman and Chief Executive Officer

Yes, always on the list of possibilities. We think there's probably some talent opportunity. We've added a few people in wealth that have spent prior periods in their life in the Boston marketplace. We think, Mark, we've got locations in Rhode Island that we can build out where our brand is stronger before we jump into the Massachusetts market on the de novo branching side. We'll see what comes out of the various transactions that are ongoing in terms of obviously, one of those transactions has Rhode Island presence. That's going to be interesting to see kind of what opportunities come out of that. M&A, our history, nobody would accuse us of being overly acquisitive. But if the right transaction were to come up at the right price point and enabled us to grow reasonably, we'd have to think about it. So I think we've got work to do...

Mark Thomas Fitzgibbon, Analyst

What about the other, I'm sorry.

Edward Otis Handy, Chairman and Chief Executive Officer

Go ahead. No, no, go ahead.

Mark Thomas Fitzgibbon, Analyst

I was going to say, what about the other way, there are some much bigger banks up in Massachusetts now that seem to be looking south. Could Washington Trust be a target for one of those banks at some point?

Edward Otis Handy, Chairman and Chief Executive Officer

I suppose we could consider it, but it hasn't been brought to our attention yet. We believe it's important to maintain our independence, and we recognize that we need to earn that status. We have work to do on the organic front to ensure our independence, and that's where our focus lies. We value our independence and prefer to be the acquirer rather than the acquired. However, we have a fiduciary duty to address any activities that may arise, but we haven't seen anything so far.

Mark Thomas Fitzgibbon, Analyst

Okay. And then lastly, and I hate to beat a dead horse here because I've asked about this in the past, but we've had, I think, 13 consecutive quarters of net outflows in the wealth management unit. Could you talk about maybe some of the things you're doing to try to stem that or change the direction?

Edward Otis Handy, Chairman and Chief Executive Officer

Yes. As I mentioned, we've brought on some new talent, not a large number, but a few individuals who will enhance our client service and sales capabilities within the Private Clients Group. We have just completed the transition to our new wealth core system, which I believe will improve the customer experience moving forward. This is currently being implemented. We have discussed some small mergers and acquisitions primarily in the Rhode Island market, where our brand is strongest, and that remains part of our strategic plan. Additionally, we're initiating some marketing efforts. However, combining all these elements, there isn't a quick fix. Growing this business organically is challenging, and we understand that. You've highlighted the need for market support alongside net growth, which is true. All I can say is that we're dedicated to making incremental progress on multiple fronts.

Operator, Operator

Our next question comes from Damon DelMonte with KBW.

Damon Paul DelMonte, Analyst

I guess first question on loan growth. Good to see some positive movement here with, I think you had about 3% linked quarter annualized for the whole portfolio. But you really got the majority of the growth on the commercial side, about 9%. Could you just talk a little bit about kind of how your pipelines are looking today and kind of what your expectations are here for the back half of the year?

Edward Otis Handy, Chairman and Chief Executive Officer

Yes. Thanks, Damon. Yes, we were happy with the growth and the pipeline continues to grow. At quarter end, it was close to $145 million, which is not the highest it's been over the last 5 to 10 years, but it's up substantially from the end of the first quarter with a pretty equal balance between C&I and CRE. We're happy with the activity levels and continue to support kind of the low single-digit growth for the year. The second quarter was obviously strong. Payoffs were down a little bit. We do have some projected payoffs still in the second half of the year. So I think we stay with the guidance that we've given, but we're happy with the growth in the quarter.

Damon Paul DelMonte, Analyst

How would you characterize the sentiment of your borrowers today versus, call it, 90 days ago, when there was a lot more uncertainty coming out of D.C. Do you feel like people are believing in the economy and believing in their businesses and looking to take the next step forward with investing, or do you think there's still some skepticism out there?

Edward Otis Handy, Chairman and Chief Executive Officer

It's interesting. I've been reviewing some reports from larger regional banks, and I’ve noticed comments about increased usage of lines of credit. We haven't really observed that ourselves, and we don’t have many lines of credit. However, there's still a level of uncertainty. In real estate, project costs are rising, and people are exercising more caution. Investments in machinery and equipment haven't returned to what they used to be. People seem optimistic but careful. We are in the same boat; we see opportunities and some increased construction, although that has slowed down significantly in our area. It's slightly better than lukewarm, but not quite warm yet. How does that sound?

Damon Paul DelMonte, Analyst

That sounds good. That's good characterization. And then I guess on the fee income, the swap gains were up or the derivative income was very strong this quarter. Do you think that, based on what you're seeing today, like you could kind of repeat a level of this quarter? Or do you think it kind of goes back to a more normalized level after this quarter's results?

Ronald Stephen Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer

I would lean towards more normal. I mean, they're hard to predict, right? They're chunky in nature. And we're working with our customers and making sure that they understand that the product is available to them ultimately, it's whatever works best for the customers. But I think we're pushing that a little harder than we were, say, last year. So hard to know, Damon, exactly what we'll comment on that.

Operator, Operator

We have a question from Laurie Hunsicker with Seaport Research Partners.