Washington Trust Bancorp - Earnings Call - Q3 2025

Executive Summary

• EPS beat despite elevated credit costs: Diluted EPS of $0.56 vs $0.46* consensus, aided by net interest income growth, a 4 bps NIM expansion to 2.40%, and lower noninterest expense; offset by a $6.8M provision tied to two resolved credit exposures. EPS consensus from S&P Global*.
• Revenue broadly in-line: Company total revenue (NII + noninterest) was $56.5M; S&P consensus was $56.4M*, though S&P’s revenue methodology shows $49.7M* “actual” (bank revenue definitions vary). NII rose 4% q/q and 20% y/y; noninterest income grew 3% q/q. S&P Global*.
• Balance-sheet momentum and de-risking: In‑market deposits rose 4% q/q, loan-to-deposit fell to 98%, FHLB advances declined 21% q/q; nonaccrual loans fell to 27 bps of loans after charge-offs on two credits, with commercial nonaccruals at $1M.
• Outlook: Management guides to ~5 bps NIM expansion in Q4, Q4 noninterest expense ~ $37M, 2025 ETR ~22.5%; buybacks paused after completing a $7M internal allocation; ~$350M of FHLB maturities in Q4 provide additional funding tailwind.

What Went Well and What Went Wrong

• What Went Well

  • NIM and NII improved: NIM rose to 2.40% (+4 bps q/q; +55 bps y/y); NII grew to $38.8M (+4% q/q; +20% y/y). “We expanded our net interest income and margin” — CEO Ned Handy.
  • Fee engines up: Wealth management revenues rose 3% q/q (asset‑based +6%); AUA +7% q/q to $7.68B; mortgage banking revenues +15% q/q and +22% y/y; loans sold rose to $126.5M.
  • Funding mix/liquidity improved: In‑market deposits +4% q/q; loans/deposits down to 98%; FHLB advances cut to $791M (−21% q/q); contingent liquidity $1.84B (127% of uninsured deposits).

• What Went Wrong

  • Elevated provision/charge-offs: Provision rose to $6.8M (from $0.6M), driven by $11.4M in net charge-offs on two commercial exposures: an SNC to a telecom contractor (−$8.3M) and a Class B office note sale (−$3.0M).
  • EPS down q/q on credit cost: EPS fell to $0.56 from $0.68, primarily due to higher provision despite stronger pre‑provision results.
  • Office credit scrutiny persists: Questions on appraisal reliability and office marks; management cited market-specific challenges and moved quickly to dispose of a problem asset; Class A office special mention increased linked-quarter, though management expects stabilization with leasing progress.

Transcript

Speaker 1

Good morning and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Lydia, and I'll be your operator today. If participants need assistance during the call at any time, please press star zero. Participants interested in asking a question at the end of the call should press star one to get in the queue. Today's call is being recorded. Now I'll turn you over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications, to begin. Please go ahead.

Speaker 6

Thank you, Lydia. Good morning and welcome to Washington Trust Bancorp, Inc.'s conference call for the third quarter of 2025. Joining us this morning are members of Washington Trust's 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 the 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 Chairman and Chief Executive Officer, Ned Handy. Ned?

Speaker 4

Thank you, Sharon. Good morning and thank you for joining our third-quarter conference call. We respect and appreciate your time and your interest in Washington Trust. I'll briefly comment on our financial results, and then Ron will provide more details on the quarter. After our remarks, Mary and Bill will join us for the Q&A session. This quarter, we realized a net income of $10.8 million. We resolved two credit exposures that resulted in an elevated provision for credit losses this quarter, as we detailed in a Form 8-K filed earlier this month. That said, we are confident in our current portfolio quality and that we will continue our long track record of strong credit performance. This quarter, we saw strong performance across our core business lines, with increases in margin, wealth revenues, and mortgage revenue. We also saw in-market deposit levels increase and assets under management (AUM) growth.

This performance underscores our continued commitment to long-term value creation. Additionally, this quarter, we made several key investments to drive growth. We completed an asset purchase from Lighthouse Financial Management, which added AUM of approximately $195 million. This transaction also added four advisory and tax planning team members to our wealth management division. We also hired Jim Brown as Senior Executive Vice President and Chief Commercial Banking Officer. Jim has more than 38 years of experience in the financial services industry, an extensive network, and a proven track record in leading high-performing commercial banking teams. He's focused on building and deepening our commercial relationships and will be working closely with our wealth division on continuing to integrate these services. We're pleased with the direction we are headed in and excited about our investments in future growth.

We look forward to continuing to build long-term relationships with our customers and support their financial service needs throughout their lives, whether they are buying a home, starting a business, or investing in their future. 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?

Speaker 2

Okay. Thanks, Ned, and good morning, everyone. For the third quarter, we reported a net income of $10.8 million or $0.56 per share compared to $13.2 million or $0.68 per share for the preceding quarter. Pre-provision pre-tax revenue, or PP&R, was up 17% from Q2 and 48% compared to the third quarter of last year. As previously disclosed, we resolved two significant credit exposures this quarter, which resulted in an elevated provision for credit losses. Net interest income in Q3 amounted to $38.8 million, up by $1.6 million or 4% on a linked quarter basis, and by $6.6 million or 20% year-over-year. The margin was 2.40%, up by four basis points and up by 55 basis points compared to last year. Non-interest income comprised 31% of revenue in Q3, up 3% compared to Q2, and up 8% year-over-year. Wealth management revenues were up 3%.

This includes a 6% increase in asset-based revenues in Q3, reflecting market appreciation and the purchase of $195 million of managed assets from Lighthouse Financial Management. End-of-period AUA totaled $7.7 billion, up $501 million or 7%. Mortgage banking revenues totaled $3.5 million, up 15% for the quarter and 22% year-over-year. Non-interest expense totaled $35.7 million in Q3, down by $804,000 or 2%. Salaries and employee benefits expense was down by $351,000 or 2%, reflecting lower levels of performance-based compensation. Outsourced services declined by $284,000 or 6% due to lower third-party software costs and volume-related changes. Our full-year effective tax rate is expected to be 22.5%. Turning to the balance sheet, total loans were down by $18 million. In-market deposits were up $179 million or 4% from the end of Q2 and up by $431 million or 9% year-over-year.

Wholesale funding was down 21% compared to June and 53% compared to last September. Our loan-to-deposit ratio decreased 3.8 percentage points to 98% as of September 30. Total equity amounted to $533 million, up by $6 million from the end of Q2. The dividend remained at $0.56 per share. In Q3, we repurchased 237,000 shares at an average price of $27.18 per share and a total cost of $6.4 million. We repurchased an additional 21,000 shares in October at $26.98 per share to complete our $7 million internal allocation to this program. The dividend yield on these repurchases was 8.26%, which will reduce dividend payouts by about $600,000 annually. As I mentioned earlier, we resolved two significant credit exposures this quarter. We recorded charge-offs of $11.3 million on these loans and provided additional details in a Form 8-K filed on October 8.

We have a well-established process to monitor credits and asset quality and do not believe that this quarter's results are indicative of any adverse credit trend. At September 30, non-accruing loans were 27 basis points on total loans and were concentrated in collateralized residential and consumer loans. Non-accruing commercial loan balances amounted to $1 million. Past due loans were at 16 basis points of total loans and were essentially all collateralized residential and consumer. Non-accruing loans and past due loans are down 55% and 60% compared to last September. The allowance totaled $36.6 million or 71 basis points of total loans and provided NPL coverage of 261%. At this time, I will turn the call back to Ned.

Speaker 4

Thank you, Ron. We'll now take any questions you might have about the quarter. Thanks, Lydia.

Speaker 1

Thank you, Ned. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question's already been answered, you can withdraw your question by pressing star followed by the number two. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Speaker 0

Hey, guys. Good morning.

Speaker 4

Morning, Mark.

Speaker 0

I'm Ned. I wonder if you could share with us how much you have in remaining shared national credits, how big that book is.

Speaker 4

Yeah, I'm going to turn to Bill on that, but it's a pretty limited portfolio.

Speaker 0

It is. It's about $173 million, and it's split between CNI and commercial real estate. Okay. Secondly, Bill, while I've got you, I think last quarter, in response to another analyst's question, you said we have appropriate specific reserves on that one credit. I think you had $2.3 million against it. What changed from then till now that caused you to have to take another $6 million charge-off on that loan?

Speaker 8

A lot of the other bank groups were in the exact same situation. We were operating off the information we had from our Asian bank and the advisors in the context of a Chapter 11. There were two primary means of recovery in Chapter 11, both of which were significantly reduced following the end of the quarter in terms of the outcome. They came in at about maybe 20% or so of what the expectations had been. We had done our reserving at the end of the second quarter based on what at the time was a fairly conservative view of what the recovery might be. It turns out that was certainly erroneous, and we, along with all the other banks, ended up taking a very significant loss.

Speaker 0

Okay. I guess kind of a similar question. On the office building sale, it looked like the reduction in value versus the charge-off necessitated essentially a 70% reduction in the value of the property versus where you were carrying it last quarter. I guess I'm curious, how could you be off by that much if you had recent appraisals and valuations done on it when it went non-accrual?

Speaker 8

Right. As required by accounting, we had this marked to its most current appraised value, less selling costs. That happened to be about a third of what this property was originally estimated to be. We had it marked down to what the appraiser suggested was the appropriate time, even accounting for a difficult market. We ended up liquidating it because we weren't seeing any positive momentum. As you understand, it's very difficult for appraisals of office properties in this market, especially when there's not consistent demand to get the numbers right. Ultimately, we decided that instead of a series of descending appraisals based on limited information, we'd take an actual note sale offer and dispose of it that way. That's why that final mark was made.

Speaker 0

I guess I'm curious, how do you have any confidence in any of the appraisals that you have on those other office portfolios? What makes you feel comfortable that those are good numbers?

Speaker 8

I feel comfortable those are good numbers because they're different properties in different markets. When there's some leasing momentum underway, appraisal estimates tend to have more validity. The actual submarket in which the final charge-off occurred was a town in Connecticut where there had literally been no office deals done, no office leases in the last two years. That's when we decided, especially because opportunities for alternative redevelopments weren't happening, we decided to take the loss and move on. I do want to also point out that, for example, we had another property in Connecticut that was also non-accrual, happened to be related to the same borrower where we saw some momentum and we ended up recovering 90% of that with a short sale. That's why I'm saying it really comes down to the property and the market that it's in.

I feel very comfortable that we're taking a conservative approach with our other office properties as well.

Speaker 0

Okay.

Speaker 8

We have a very active watched asset process where we're going over this as a senior team intensively at least once every quarter. We feel comfortable with our numbers.

Speaker 0

Okay. In fairness, Bill, you felt comfortable last quarter with a $2.3 million reserve on that loan as well?

Speaker 8

We did, along with about $200 million worth of other bank lenders.

Speaker 4

He's talking about the size of a great deal.

Speaker 0

Gotcha. Okay. Just changing gears, Ron, I wondered if you could share with us what client flows were in the wealth management business this quarter?

Speaker 4

Yeah, no, we're not doing client flows anymore.

Speaker 0

Okay, you're just unwilling to share that anymore with us?

Speaker 4

Yeah, we brought our disclosures in line with our peers.

Speaker 0

Okay. Lastly, I wonder if you could share with us any thoughts on the margin?

Speaker 4

We're looking at margin expansion in the fourth quarter of, we'll call it, 5 basis points, plus or minus.

Speaker 0

Thank you.

Speaker 4

You're welcome.

Speaker 1

Thank you.

Speaker 4

Thanks, Mark.

Speaker 1

Our next question comes from Damon DelMonte with KBW. Please go ahead.

Speaker 3

Hey, good morning, everyone. Hope you're all doing well. First question, just wanted to talk a little bit about.

Speaker 4

Morning.

Speaker 3

Morning. I just want to talk a little bit about loan growth and how you're looking at your pipelines going into year-end and where you think that would be tracking after a flattish third quarter here.

Speaker 4

Yeah. You know, I think, Damon, we'll stick with the sort of the low single-digit growth for the year. We did have a couple of paydowns right at the end of the quarter. The pipeline is still kind of in the $180 million range, so pretty healthy from where it started at the beginning of the year. Really excited that we brought Jim Brown on board. He's got a brand new Rolodex of opportunities, COIs, and the like to the bank. He's already busy, you know, sort of strengthening the existing team and building bridges across our various businesses. I'm really excited about the prospects that he brings. Pipeline's healthy. Other than the formation in the quarter, actually, we had $115 million of new formation. We just had $103 million of payoffs, some of them rather large right at the end of the quarter.

You know, I'm going to stick with that sort of low single-digit growth and we'll keep the pedal to the metal in the fourth quarter.

Speaker 3

Got it. Okay. That's helpful. Thanks. Maybe one for Ron on the expense side here. With the addition of Lighthouse and then some hires that you guys have made, and you kind of look at where expenses are here in this last quarter, do you expect things to go back up towards around $36 million, maybe a little bit higher per quarter level once you readjust for accruals and whatnot?

Speaker 4

Yeah. So, Damon, I would say that, you know, the guidance that we provided in January was about $37 million per quarter. We've been running below that pretty consistently for the first three quarters. We do have some timing issues. We're going to have higher levels of marketing in the fourth quarter. We're going to have a $500,000 contribution to our foundation in the fourth quarter. I would say $37 million, which is kind of what we originally guided in January, is close to where we'll be in the fourth quarter.

Speaker 3

Gotcha. Okay. That's helpful. I guess just lastly, did I hear the commentary on the buyback that you basically what you bought during the quarter plus what you bought in October got you to your $7 million internal limit? Should we not expect any more buybacks for the remainder of the year? Is that fair?

Speaker 4

Yeah. You know, Damon, we'll always look at it. I can tell you that we did what we said we were going to do internally. We're going to take a pause right now and continue to reevaluate whether it makes sense to do more, balancing that off against redeploying our capital back into growth. At this point in time, we have no plans to do additional share repurchases.

Speaker 3

Got it. Okay, that's all that I had for now. Thank you very much.

Speaker 4

Thanks, Damon.

Speaker 7

Thanks, Damon.

Speaker 1

Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. We'll move to our next question from Laurie Hunsicker with Seaport Research Partners. Please go ahead.

Speaker 5

Great. Hi, thanks. Good morning.

Speaker 4

Good morning, Laurie.

Speaker 5

I'm sticking where Damon was on the buyback, and pausing the buy. It was so great to see you all repurchasing shares. You're still so far below your spot. Obviously, with your commercial non-performers down to $1 million, and outside of the lumps this quarter, help us think about why not buy back. It's so accretive to earnings on a per-share basis. What am I missing here?

Speaker 4

Yeah. Laurie, we are on the lower end of the range on capital ratios. We're aware of that, and we do have, you know, hiring Jim Brown coming in. It's too early to give guidance on 2026. However, we are expecting, you know, to ramp up our commercial lending. We want to make sure that we've got appropriate capital levels to support growth. I will say I'm not ruling out whether or not we do some more. I'm just saying at this point in time, we're going to take a pause and see what's happening. Yeah, from a credit standpoint, we actually feel pretty good having dealt with these two problems this quarter. Laurie, that's the best I can tell you. I mean, there's arguments either way to do more or to sit tight. For the time being, we're going to sit tight.

Speaker 5

Gotcha. Okay. Just going back to credit, the $173 million in shared national credits, what is the breakdown, I guess, Ron or Bill, between what's CRE and what's C&I?

Speaker 8

There's $90 million of CRE and $84 million of C&I.

Speaker 5

Okay, just double-checking here, NDFI exposure, close to zero?

Speaker 4

No.

Speaker 5

What is your NDFI exposure?

Speaker 4

We don't have it. We don't have any NDFI exposure.

Speaker 5

Perfect. Okay. And then, office, just switching back over. Just comparing linked quarter within that Class A bucket, and by the way, your disclosures are great. Really, really appreciate it. It looks like you had, within Class A, $22 million pop into special mention. Obviously, I understand what you cured, etc. You gave a lot of detail earlier in the month and obviously here. It's just the $22 million is not part of anything. Can you help us think about, I guess, what that is and how to think about it? What's the maturity?

Speaker 8

Sure. That's an office building, a Class A office building, actually, two of them, in a strong suburb of Hartford. Occupancy has been at 60%. However, this was downgraded to special mention because two tenants are vacating. They've actually replaced those tenants, and they will be getting back up to occupancy of 60%. They also have an LOI out, for which the lease is imminent, that should get them to a point at which it's got positive debt service coverage. Very strong sponsor. In addition to the discussion we had earlier about appraised values in office, it's important to understand that the sponsorship support for any given property also gives us a lot of confidence in terms of where we're valuing things. We think this is one that, like many office properties, is kind of on the simmer.

We don't think this is going to boil over because where it is, they're seeing a fair amount of leasing volume. We did take the downgrade as a precaution given that we knew there were some upcoming vacancies coming up.

Speaker 5

Gotcha. When does this loan mature? You know.

Speaker 8

I'm looking at my write-up, and I can't tell you. I'll have to let you know that offline.

Speaker 5

Okay, that's perfect. Okay.

Speaker 8

Not near term.

Speaker 5

Okay. That's helpful. Okay. Just switching gears, I'm just going back to the income statement, just two questions here. The first is, are there other income within the non-interest income bucket, the $619,000? It seems like there might have been some one-time gains in that number. Am I thinking about that right? If so, can you?

Speaker 4

Yeah, Laurie, there was a miscellaneous item of about $250,000 in there. That's correct.

Speaker 5

Okay. Perfect. Okay. Obviously, you've worked down the wholesale, which is great. Your advances came down also. It looks like, just based on the averages, your FHLB advances came down really kind of at the end of the quarter, if I'm backing into that right. Maybe just help us think about where that's going.

Speaker 4

Yeah. We've had strong deposit growth in the quarter. Of course, the FHLB gets paid off at maturity. We've got staggered maturities. Most of that's pretty short-term. I think we've got another $350 million maturing in the fourth quarter. We've got kind of elevated levels of cash and deposit related to those deposit inflows. We will just pay down the FHLB as it comes to.

Speaker 5

Okay. Great. Thank you. Oh, one more thing. Sorry.

Speaker 4

The maturity on that deal we discussed, the 7-rated, is October of 2027. We've got a couple of years to run on that.

Speaker 5

October 2027 maturity. Perfect. Okay. Sorry, one more, just a margin. Do you have the spot margin, Ron, for September?

Speaker 8

Yeah. We'll call it $243.

Speaker 5

Great. Thanks so much.

Speaker 4

You're welcome.

Speaker 7

Thanks, Laurie.

Speaker 1

Thank you. We have no further questions, so I'll pass you back over to Ned Handy for any closing comments.

Speaker 4

Thanks, Lydia. This quarter, we celebrated Washington Trust's 225th birthday, which really is a milestone that reflects our enduring commitment to customers and communities. We appreciate your continued support and thank you for your time today, and look forward to speaking to you all again soon. Thanks, everybody. Have a great day.

Speaker 1

This concludes today's call. Thank you for joining. You may now disconnect your line.