Washington Trust Bancorp (NASDAQ:WASH) reported second-quarter financial results on Tuesday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

Washington Trust Bancorp reported strong second quarter results with a net income of $16 million, which is an increase of $3.4 million from the previous quarter.

The company saw significant loan and deposit growth, driven by its institutional banking initiative, which increased the commercial and industrial loan book.

Plans to open two new branches in Rhode Island later this year and roll out an enhanced digital banking solution for small businesses demonstrate strategic expansion and technological advancement.

The company introduced Jeff Wilhelm to its board, highlighting a focus on digital innovation and cybersecurity expertise.

Net interest income increased by 3% from Q1, with a margin expansion to 2.73%. The full benefit of a terminated hedge will be realized in Q3, boosting net interest margin further.

Noninterest income rose by 8% compared to Q1, driven by increases in wealth management and mortgage banking revenues.

The company anticipates continued mid-single-digit loan growth, led by the Institutional Banking Group, with a focus on the not-for-profit space and commercial real estate growth.

Asset quality remained stable, with a slight decrease in nonaccruing loans and an increase in past due loans due to a single account.

Management expressed confidence in maintaining margin expansion, controlling expenses, and achieving sustainable growth in the C&I loan segment.

Full Transcript

Ned Handy, Chairman and CEO

I'll begin with a brief overview of our second quarter results and then Ron will provide more detail on our financial performance for the quarter. Following our remarks, Mary and Bill will join us for the question and answer session. We delivered strong results in the second quarter as disciplined execution across the company drove higher profitability and solid loan and deposit growth. Our institutional banking initiative helped drive an increase in our commercial and industrial loan book and overall deposits.

Our capital levels remain strong and supportive of additional expected loan growth. We are planning to open our 30th branch later this year in Bristol, Rhode Island, providing greater access for consumers and businesses in the East Bay and southeastern Massachusetts. We're also finalizing the build of our new Pawtucket branch and are excited to have both locations open soon. We are on target to roll out an enhanced digital banking solution for our small business customers this fall and continue to look for ways to leverage technology to provide greater security, convenience and choice for our customers.

In April, we welcomed Jeff Wilhelm to our board. Jeff has more than 25 years of experience in digital innovation and we're excited to draw on his expertise in AI and cybersecurity as these areas continue to grow in importance across the financial services industry. Overall, we are pleased with our second quarter performance and the direction of our business. Strong earnings growth, margin expansion and balance sheet growth position us well as we continue to invest in our franchise, expand our presence in key markets and enhance the customer experience.

With that, I'll turn the call over to Ron to provide additional detail on our financial results.

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Thanks, Ned, and good morning everyone. In the second quarter we reported net income of $16 million or $0.83 per share, up by 3.4 million or $0.17 from the preceding quarter. Pre-provision, pre-tax net revenue, or PPNR, was up 9% from Q1 and up 23% year over year. Net interest income was 41.8 million, up by 3% from Q1 and up by 12% year over year. The margin was 2.73%, up by 10 basis points from Q1 and up by 37 basis points year over year. On May 1, the remaining deferred loss from a terminated hedge was fully amortized, eliminating this expense from the bank's ongoing run rate.

The second quarter captured only a two-month benefit from ending this amortization expense. As one month of amortization remained in April, the second quarter benefit to net interest income and NIM was 1.4 million and 9 basis points. In the third quarter we will realize the third month of benefit totaling approximately 700,000 or 4 basis points compared to Q2. Noninterest income was up by 1.4 million or 8% compared to Q1 and up by 9% year over year.

Wealth management revenues were up 554,000 or 5% compared to Q1 and increased by 1.1 million or 11% year over year. Q2 included an increase of 265,000 in transaction-based revenues, largely reflecting seasonal tax servicing fee income. Asset-based revenues were up by 289,000 from Q1. Mortgage banking revenues totaled 3.5 million, up 14% from the first quarter and also up 14% year over year. Our mortgage pipeline at June 30 was 121 million, up by 7 million or 6% from the end of March.

Noninterest expenses totaled 38.6 million in Q2, up by 2%. Salaries and benefits expense was up 972,000 or 4%, reflecting staffing additions in our commercial and retail banking business lines as well as volume and performance-related compensation changes. All other categories of noninterest expenses decreased by a net $140,000 in the second quarter. Our effective tax rate was 21.2% and we expect our full year 2026 rate to be approximately 21.5%.

Turning to the balance sheet, total loans were up 2% from March 31. Total commercial loans increased by 63 million, driven by growth in the commercial and industrial loan portfolio, mainly from our institutional banking team. Commercial real estate had solid production in Q2, but this was more than offset by payoffs. The commercial pipeline is approximately $143 million. Residential loans increased by 13 million and consumer loans were up by 12. Deposits were up 4% from the end of Q1 and up by 6% year over year.

Wholesale funding was down 120 million or 21% from the end of March and our loan-to-deposit ratio improved from 96.9% to 95.1% on June 30th. Total equity amounted to 554 million, up by 7 million from the end of Q1. The dividend remained at $0.56 per share. Turning to asset quality, overall our Q2 asset and credit quality metrics were stable at June 30th. Nonaccruing loans were 78 basis points against total loans, decreasing from 81 basis points at the end of Q1.

Past due loans were 81 basis points, up from 33 basis points at the end of Q1. The increase was attributable to a single commercial real estate office loan that had already been placed on nonaccruing status in the preceding quarter. It did not reflect further deterioration in portfolio credit quality during the quarter. In the second quarter, we recognized a $1.6 million provision for credit losses. The allowance totaled 42.6 million or 83 basis points against total loans.

And at this time I will turn the call back to Ned.

Ned Handy, Chairman and CEO

Ron, thanks very much. At this point, we'll open it up to questions. Hillary,

OPERATOR (Hillary)

Wonderful, thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality and if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Justin Crowley from Piper Sandler.

We're just staging you. Your line is open. Please go ahead.

Justin Crowley, Analyst at Piper Sandler

Hey, good morning, everyone.

Ned Handy, Chairman and CEO

Morning, Justin.

Justin Crowley, Analyst at Piper Sandler

Just wanted to start out on loan growth. You know, certainly a really nice result here that you called out and you talked about the contribution at C&I and the institutional team. So just curious if you could talk a bit more about that group, what the runway there looks like and just how sustainably you think the result we saw this quarter could end up being.

Ned Handy, Chairman and CEO

Yeah, thanks, Justin. The group had a great quarter and we expect, and commercial loans in general were up 2.4%. So we expect that kind of rate to continue in the coming quarters. You know, the Institutional Banking Group is growing its pipeline. I think from quarter to quarter there will be a balance between the Institutional Banking Group and CRE. Third quarter generally is a little slow in the not-for-profit space. So we may see a little bit more of that growth come out of the CRE group than out of institutional banking.

But I think there's a good balance there. And yeah, we're sticking with the mid single-digit overall loan growth for the year. And I think as we said in the prior quarter, that'll be led by the Institutional Banking Group and C&I in general.

Justin Crowley, Analyst at Piper Sandler

And so is it really, you know, when you look at that institutional banking group and, you know, specifically, I guess this quarter, is it really its contribution coming from the not-for-profit space or how diversified is that beyond that arena? Okay. And then I guess on commercial real estate, you know, you called it out as well, but payoffs again, sort of a headwind this quarter. Is there kind of a line of sight that that should slow? What kind of gives you confidence it will be able to kind of take the torch from maybe a softer quarter on the C&I side?

Ned Handy, Chairman and CEO

Yeah, it really is. And in the quarter it was largely educational in nature and we expect that to be kind of the leader in that group. Again, good loan growth, good deposit growth, average assets. Some of that loan growth happened towards the end of the quarter, so that obviously had an effect on net interest income, but nice to have those loans on the book. And we expect for the third quarter that nonprofit activity to be the driver for the institutional group.

But as I said, third quarter generally tends to be a little bit slower in that space, and so we'll see overall growth led in the quarter probably by commercial real estate. Yeah, the pipeline is good. The credit formation in the quarter was about, between construction and new loans, you know, about 100 million. Payoffs were a little bit above that and led by CRE at 112 million. We think with a little bit of upward pressure in rates, cap rates probably move, outright sales probably slow a little bit.

We expect that payoff rate to slow a little bit. But the pipeline is good, and so we expect that we'll have net growth in the third quarter, certainly in the real estate space. Overall formation was about 214 million in the quarter, so we're really happy with the level of activity, and payoffs and paydowns were at about 150. So, you know, it's a little bit of slowdown in the payoff and continued pace on the new originations. And our construction book is down a little bit, but we still see some construction advances in the quarter.

So, you know, I'm confident that we'll hit that same kind of, you know, two-and-a-half-ish percent commercial growth overall in the quarter. And then, you know, obviously the lead time on the not-for-profit space can be a little longer. So while there may not be fundings at the same level in Q3, the pipeline is certainly being built.

Justin Crowley, Analyst at Piper Sandler

Okay, got you. That's helpful. And then, Ron, maybe just one on the margin. You know, you'll get the full benefit of the swap termination for the third quarter. Just wondering if you could comment on expectations for the NIM trajectory through the balance of the year, just beyond that benefit.

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Yeah, we're looking at, say, 2.75% for Q3 and 2.80% for Q4.

Justin Crowley, Analyst at Piper Sandler

Okay, great. That is super helpful. And then maybe just one last one. Just on wealth, you saw the nice lift in AUM levels. And so I guess with the move of the market that we saw last quarter, provide a little detail on what net flows look like and just how you're thinking about the trajectory looking ahead there?

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Yeah, yeah. You know, we actually set a record in the quarter on wealth assets under management, and you can see that we do disclose our overall assets. We're not really breaking out the flows, but I would say that, you know, we're pretty pleased with the overall performance of the business.

OPERATOR (Hillary)

Okay, thank you for your question. Your next question comes from the line of Damon Del Monte from KBW. Your line is now open.

Damon Del Monte, Analyst at KBW

Hey, morning, guys. Hope everybody's doing well. Ron, just a quick follow-up on the margin. I appreciate the guidance for the next couple quarters, but I know part of the benefit here in the third quarter is from the interest rate swap component of it. But could you just give a little perspective on kind of how you're feeling about deposit pricing trends this quarter and kind of going forward? Are you seeing competition picking up? You had a little bit of a decline this quarter.

Is that sustainable? Just a little bit more color around some of the dynamics that give you the confidence for the margin expansion.

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

So on the liability side, you know, I would say most of our CDs and FHLB have kind of repriced down. You know, there's probably a little bit left to go. I think on the deposit side we're really focused on trying to improve our mix. I think that the Institutional Banking team is, you know, expecting to self-fund about 35% of their production. That should help our mix going forward and give us some help on that side. So that's kind of how we're thinking about it.

Damon, does that answer the question?

Damon Del Monte, Analyst at KBW

Got it. Yep, that's helpful. And then on the asset side, you know, was the increase this quarter attributable to some of the back book repricing, or what were some of the dynamics in the increase there, or is that all tied to the interest rate swap?

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

You know, most of it was the swap. There is an undercurrent of back book. You know, we have the big mortgage book that we're still trying to amortize down, so that is giving us some benefit going forward. I think if the yield curve continues to steepen up a little bit, that should help as our new production comes in. And, you know, the mortgage amortization is a little bit of a slow grind, but it's there and it's helping us as it goes off. You know, coming into the year, we were somewhat hopeful that maybe rates would come down and we'd see a pickup in refi activity and maybe some prepayments on that, but, you know, that hasn't happened yet.

But the amortization is real and that should give us, you know, a little bit of a tailwind.

Damon Del Monte, Analyst at KBW

Got it. Okay, great. And then on the expense side, you know, can you give a little perspective here on the back half of the year? You know, I think you called out that comp and benefits were up a little bit higher from some hiring and ongoing operational costs. So I guess can you keep it under the $39 million level in the back half of the year per quarter, or what's the outlook there?

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Yeah, you know, I would say we're expecting our third quarter expenses to be up about another million. Some of that is mortgage volume related. We've got the branches coming online that we talked about later this year, so that that'll add, you know, a couple hundred thousand in the third quarter and then another couple hundred thousand in the fourth quarter as those start to roll in. You know, some open positions we still have that we intend to fill and maybe some timing on the advertising expense.

So right now I would say we're looking at like a million-dollar increase in Q3, which would put us just under 39 million.

Damon Del Monte, Analyst at KBW

Got it. Okay, great. That's all I had.

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Thank you very much. Thanks, Damon.

OPERATOR (Hillary)

Thank you for your questions. Your next question comes from the line of Lori Hunsicker from Seaport Research. Your line is now open.

Lori Hunsicker, Analyst at Seaport Research

Hi. Thanks. Good morning, Ned and Mary, Ron and Bill.

Ned Handy, Chairman and CEO

Morning, Lori.

Lori Hunsicker, Analyst at Seaport Research

My question, I just wanted to go back to loans here. So the C&I growth, and I just want to make sure I understand this. I appreciate the breakdown you have on page 13, but it looks like education loans going from 54 million to 135 million. Can you just take us through exactly what those loans are to? Are they small private colleges? I mean, how should we be thinking about that?

Ned Handy, Chairman and CEO

They are schools. They are not colleges. They're more high school oriented. They're obviously not-for-profit, very well-heeled with strong deposit relationships included, and very strong operations from the schools.

Lori Hunsicker, Analyst at Seaport Research

Okay, and then of that 135 million. How much is college? Is it any amount of that or is that a focus?

Ned Handy, Chairman and CEO

I'm sorry, did you say college?

Lori Hunsicker, Analyst at Seaport Research

Right. Of the 135 million, so the growth was high school, but I'm just wondering, the 135 million, is there any colleges in that bucket and is that a focus?

Ned Handy, Chairman and CEO

No, it is a focus, but none of the existing volume is to colleges. It is a focus though. We have a few in the pipeline that we're exploring. But the group has looked at just order of magnitude something in the neighborhood of $700 million of opportunities. And we either compete on rate or, for other reasons, credit-related or otherwise, we pass. So they're seeing a lot of opportunities, as we expected, and we're being fairly careful. We have looked at a couple of colleges, Lori, and have not won a couple of them, have passed on a couple of them.

So it's in the mix. These guys have been at it for a long time. They have access to the opportunities, but they also have a really good sense of where the market is and where our best opportunities lie.

Lori Hunsicker, Analyst at Seaport Research

Okay. Okay, got it. And then just sort of extrapolating, most of the jump that you had in the noninterest-bearing demand deposit category was tied to that growth. Is that the right way to think about this?

Ned Handy, Chairman and CEO

Yeah, I think that's fair, Lori.

Lori Hunsicker, Analyst at Seaport Research

Okay. Okay. And then as we look further out, you know, the C&I is 13% of your loan book, up from 11% last quarter. Where does that percentage go if we look out a year, two years? How do you think about that?

Ned Handy, Chairman and CEO

Yeah, so Lori, we expect, you know, over the next, call it 18 months, that C&I is going to grow at a faster pace than everything else in our loan book. So I think CRE is going to return to kind of normal growth rates that we saw several years back. But C&I, I think, is the main growth engine. They're both going to grow, and I would say that C&I will grow at a somewhat faster pace than CRE.

Lori Hunsicker, Analyst at Seaport Research

Okay. I mean, just to quantify that, obviously just linked quarters, you were up 17%, almost 70% annualized. I mean, what should—and obviously you had an exceptional quarter here—but how should we think about that growth? I mean, can you help us think a little bit about what that looks like this year, next year, or however you want to quantify that?

Ned Handy, Chairman and CEO

Well, yeah, so I think the position we're trying to put ourselves in is to have sustainable growth comparable to what we just posted in Q2, and we believe that we are on that path to do that, Lori. And remember, on the C&I side, the existing C&I book is relatively small and the Institutional Banking Group has no risk of payoff. So that's pure net growth. So the percentage growth is a little misleading. It's going to be the leader, it's going to help on the deposit growth side.

But we expect both CRE and C&I overall, including the Institutional Banking Group, to kind of lead the charge.

Lori Hunsicker, Analyst at Seaport Research

Okay. Okay. And quick question on office. Obviously things are looking good there. I know you've got that Class B 3.8 million special mention coming due this next quarter. Do you have any kind of update on that, or has that been pushed out, that maturity? How should we think about that?

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

We're in discussion with the sponsor, well known to us, long-standing relationship with the bank. It's got some long-term state leases in it. So we feel comfortable about where this is and where it's going to go. We're obviously in active discussions right now.

Lori Hunsicker, Analyst at Seaport Research

Okay. Okay, great. Thanks. I'll leave it there.

Ron Ohsberg, Senior EVP, Chief Financial Officer and Treasurer

Thank you, Lori.

OPERATOR (Hillary)

Thank you for your questions. A reminder that if you would like to ask any additional questions, please press star one to raise your hand and to withdraw your question, press star one again. There are no further questions at this time. I will now hand the call back to Ned Handy, Chairman and CEO, for closing remarks.

Ned Handy, Chairman and CEO

Thank you, Hillary. And thank you all for your questions and for joining us this morning. As we look ahead, we remain focused on disciplined growth, prudent risk management, delivering exceptional service to our customers and communities, and creating long-term value for our shareholders. We appreciate your continued interest in Washington Trust and your support of our company. We look forward to speaking with you again next quarter. Have a great day, everyone.

OPERATOR (Hillary)

This concludes today's call. Thank you for attending. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.