Washington Trust Bancorp Signals Strength in Earnings Call

Washington Trust Bancorp ((WASH)) has held its Q4 earnings call. Read on for the main highlights of the call.

Washington Trust Bancorp struck an upbeat tone on its latest earnings call, emphasizing broad-based improvement across earnings, margins, deposits, mortgage banking, wealth management and credit quality. While management acknowledged rising expenses, a softer quarter for loan growth, and some lingering exposure in office commercial real estate, the overarching message was one of momentum and confidence, with positive trends viewed as outweighing the challenges.

Robust Earnings Rebound Quarter-over-Quarter and Year-over-Year

Washington Trust delivered a strong finish to the year, with fourth-quarter net income rising to $16.0 million from $10.8 million in the prior quarter. Earnings per share climbed to $0.83 from $0.56, reflecting meaningful operating leverage. On an adjusted basis, EPS grew 41% year-over-year, underscoring how much the bank has recovered from margin pressure and funding headwinds that hit the sector over the past two years. Management framed this as a clear sign that its balance-sheet repositioning and business investments are starting to pay off.

Net Interest Income and Margin Move Higher With More Tailwinds Ahead

Net interest income rose to $40.7 million, up 5% from the third quarter and 24% from a year earlier, powered by an improving balance-sheet mix and lower reliance on wholesale funding. Net interest margin expanded to 2.56%, up 16 basis points sequentially and 61 basis points year-over-year. Importantly for investors, management sees this as the baseline rather than the peak, pointing to a terminated swap that is expected to add about 13 basis points to the margin by the third quarter, plus another 3–4 basis points per quarter of organic expansion assuming short-term rates stay steady.

Deposit Growth Strengthens Funding Mix as Wholesale Reliance Falls

Core deposit trends were a clear highlight. End-market deposits grew 1% from the prior quarter and 9% year-over-year, providing the bank with more stable, lower-cost funding. At the same time, wholesale funding was reduced by $165 million, a 21% drop since September, reflecting less need for higher-cost borrowings. This shift is a key driver of margin improvement and gives Washington Trust more flexibility in pricing both loans and deposits, an important differentiator in a still-competitive funding environment.

Wealth Management Builds Scale and Fee Momentum

Wealth management continued to deliver steady fee growth. Revenues from the business increased 5% sequentially, supported by a 4% quarter-over-quarter rise in average assets under administration and a 9% increase year-over-year. The bank closed a wealth asset acquisition (Lighthouse) and added business development and financial planning staff, signaling a strategic push to grow this capital-light, fee-based line. With average fees around 60 basis points on assets, incremental growth in this segment can flow meaningfully to the bottom line.

Mortgage Banking Benefits From a Strong Year, Despite Seasonal Cooling

Mortgage banking remains a bright spot on a full-year basis. Washington Trust originated $667 million of mortgages in 2024, up 31% from the prior year, with origination volumes up 21% and sales volumes up 25%. In the fourth quarter, mortgage banking revenue reached $3.3 million, a 14% increase from a year ago, although it dipped 7% from the third quarter due to normal seasonality. The mortgage pipeline ended the year at $81 million, down 37% from September, which management described as a typical seasonal slowdown rather than a structural issue.

Credit Quality Remains Strong With Normalized Provisioning

Asset quality metrics were notably solid. The provision for credit losses normalized in the quarter, and nonaccruing loans were just 0.25% of total loans, with nonaccruing commercial loans at zero. Past-due loans stood at 0.22% of total loans, and the bank recorded net recoveries of $160,000 in the quarter. Management also highlighted that one commercial real estate relationship that had been past due was brought current in January, reinforcing the narrative of benign credit conditions across the portfolio.

Capital Position Supports Dividend and Strategic Flexibility

Washington Trust’s capital levels remain comfortably above regulatory minimums, giving the bank room to both invest and return capital. Total equity rose to $544 million, up $11 million from the prior quarter. The common equity Tier 1 ratio is near 11.9%, with total risk-based capital around 13%. The quarterly dividend was maintained at $0.56 per share, underlining management’s commitment to a steady income stream for shareholders and signaling confidence in the sustainability of earnings.

Commercial Banking Expansion and New Branch to Drive Growth

Management is leaning into growth via targeted investments. The bank hired a four-person institutional and commercial banking team, sourced from Brookline, to focus on middle-market C&I and not-for-profit clients across the Northeast. This initiative is designed to accelerate C&I loan growth and deepen relationships in attractive segments. Additionally, Washington Trust plans to open a de novo branch in Pawtucket in 2026, extending its footprint in a market where it sees opportunities to win more core deposits and consumer relationships.

Rising Noninterest Expenses and 2026 Cost Creep

On the expense side, the story is more mixed. Noninterest expense rose to $38 million in the fourth quarter, up 6% versus the prior quarter. For the full year, adjusted noninterest expense increased 7%. Salaries and benefits were up $973,000, or 4%, driven by headcount additions and standard wage inflation, while other noninterest expenses increased $1.3 million, including a $1.0 million charitable contribution. Looking ahead, management expects Q1 2026 salary and benefits to be about 6% higher year-over-year and other noninterest expenses up around 5%, with the new branch expected to add roughly $600,000 of annual cost once it opens.

Mortgage Pipeline Feels Seasonal Chill

Despite strong full-year production, the mortgage business is entering the new year with a smaller backlog. The pipeline ended the fourth quarter at $81 million, a 37% decline from September. Management attributed this to typical seasonal patterns rather than weakening demand, but investors should expect some near-term moderation in mortgage banking revenue as that lower pipeline works through. The bank’s emphasis on purchase activity and its broader footprint may help offset some of this seasonal softness over time.

Loan Growth Trails Internal Targets in the Near Term

Loan balances were essentially flat in the quarter, increasing just $12 million from September, and management conceded that net loan growth was “not where we wanted it to be.” Residential mortgage runoff and competitive lending markets contributed to the slower growth. Nevertheless, Washington Trust continues to target about 5% annual net loan growth, with commercial real estate expected to grow 4–5% and commercial & industrial loans outpacing that as newly hired bankers ramp up production. The ability to convert the new commercial hires and stronger funding profile into sustained loan growth will be an important watch item.

Reserve Levels and Office Exposure Draw Investor Scrutiny

While credit metrics are strong, management acknowledged that its CECL reserve coverage ratio sits on the lower end compared with peers, roughly in the “mid-70” basis-point range. They stressed that reserves may move around as the portfolio and macro outlook evolve, and that the current stance is appropriate given performance. The bank still has about $6 million in an office-classified commercial real estate loan with occupancy in the mid-40% range and a maturity in 2031. Management described a slow but constructive workout process, noting that the sponsors remain engaged, but this pocket of exposure remains a modest risk factor in an otherwise clean book.

Capital Returns: No Rush on Buybacks

Despite a strong capital position and an existing authorization to repurchase shares, Washington Trust is not rushing into aggressive buybacks. With CET1 near 12%, management is evaluating options but has not committed to accelerating repurchases; about 582,000 shares remain under the current authorization. For now, the emphasis appears to be on funding organic growth, expanding the franchise, and maintaining the dividend, leaving open the possibility of more active buybacks later if conditions warrant.

Forward-Looking Guidance Points to Steady Margin and Modest Growth

Looking ahead, management expects the net interest margin to remain in the mid-2.50% range near term, with a clear path to gradual expansion. The termination of a swap is projected to add about 9 basis points to NIM in the second quarter and another 4 basis points in the third, while organic spread improvements could contribute an additional 3–4 basis points per quarter, implying a potential margin in the 2.78%–2.82% range by the fourth quarter of 2026 if interest rates stay stable. The bank is targeting roughly 5% annual net loan growth, with commercial real estate advancing 4–5% and faster C&I growth boosted by the new institutional banking team. Deposit trends are expected to remain constructive following 9% year-over-year growth, and management plans to keep the quarterly dividend at $0.56 per share. For 2026 planning, they are modeling a tax rate around 22%, salary and benefits up about 6% year-over-year, other noninterest expenses up roughly 5%, and incremental costs from the Pawtucket branch and a charitable foundation item. Overall, guidance reflects a measured growth trajectory with a focus on margin improvement and disciplined expense management.

In sum, Washington Trust Bancorp’s earnings call painted a picture of a bank emerging from the industry’s rate shock with growing earnings power, stronger funding, and resilient credit quality. While expense pressures, slower recent loan growth, and a small office exposure remain watch points, management’s confident tone on margins, loan growth potential, and wealth and mortgage strength suggests a constructive outlook. For investors, the story now centers on whether the bank can deliver on its planned NIM expansion and translate strategic hires and branch investments into sustainable, profitable growth.