Washington Trust Bancorp Q3 2026 Earnings Call Transcript
Washington Trust Bancorp (NASDAQ:WASH) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Washington Trust Bancorp reported a decrease in total equity by $23 million from the previous quarter, with net income impacted by a decline in the fair value of available-for-sale debt securities and the quarterly dividend maintained at $0.56 per share.
Asset and credit quality metrics improved, with nonaccruing loans decreasing to 48 basis points and past-due loans reducing to 54 basis points, thanks to the resolution of a significant office loan.
Guidance for Q4 margin is set at 2.85% to 2.90%, with the company remaining modestly asset sensitive and expecting a slight benefit from future rate hikes.
Noninterest-bearing deposit growth was strong, largely driven by institutional banking team efforts, and the company is focused on maintaining this growth.
Expenses are expected to increase by $1.5 million in Q4 due to investments in new branches, marketing, technology, and personnel, not including a $750,000 annual charitable contribution.
Loan growth is expected to achieve a 10% annualized rate within the commercial book, despite strong payoffs earlier in the year.
The company plans no immediate stock buybacks, focusing instead on capital deployment for business growth and maintaining a strong deposit-to-loan ratio.
Full Transcript
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Total equity amounted to 531 million, down by 23 million from the end of the second quarter. In the third quarter, net income was offset by a decline in the fair value of available-for-sale debt securities as well as the quarterly dividend. The dividend remains at $0.56 per share. Turning to asset and credit quality, overall, our asset and credit quality metrics improved at September 30th. Nonaccruing loans were 48 basis points on total loans, decreasing from 78 basis points. And past due loans were 54 basis points on total loans, down from 81 basis points at the end of the second quarter. The improvement was largely driven by the resolution of an office loan of $22.3 million that was placed on nonaccrual in the first quarter.
During the third quarter, this loan was restructured, resulting in 18.5 million being returned to accrual and 3.8 million being charged off. In the third quarter we recognized $1.8 million provision for credit losses. And at this time I will turn the call back over to Ned.
Ned Handy (Chairman and Chief Executive Officer)
Thanks, Ron. And we’ll move to question and answers.
OPERATOR
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star-one. 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’re 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. Your line is open. Please go ahead. A reminder to unmute yourself locally. If you would like to ask the question on your device, I will move to the next question. Please rejoin the queue. If you are looking to ask a question, your next call comes from the line of Damon Del Monte from KBW. Your line is open. Please go ahead.
Damon Del Monte (Analyst at KBW)
Hey, good morning, guys. Hope everybody’s doing well today and thanks for taking my questions. Just wanted to start on the outlook for the margin. You’ve had a string of consecutive quarters of nice margin expansion and just kind of curious, Ron, to get your thoughts on how you see it kind of playing out over the back half of this year and as we go into ’27, especially with the rate hike that we had in September and the prospects of additional hikes over the coming quarters as well.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah. So Dan, it’s probably a little early to be talking about 2027, but we’ve revised our guidance for Q4, going to guide to a range of 2.85% to 2.90%.
Damon Del Monte (Analyst at KBW)
Okay, great.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
So yeah, I would say that we remain modestly asset sensitive, so that guidance includes just the September rate hike at this point, and we think that each 25 basis point hike probably gives us one to two basis points on the run rate.
Damon Del Monte (Analyst at KBW)
Okay, great. And then kind of along those lines, the noninterest-bearing deposit growth has been really strong the last couple quarters. Just any color on what’s driving that?
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, you know, I think a good part of it is the institutional banking team onboarding operating accounts related to the relationships that they’re bringing in is probably the biggest driver. But I think we have kind of an across-the-board approach to taking in deposits across both retail and commercial at this point. So yeah, we had pretty good growth in the quarter and we’ll see if we can maintain that.
Damon Del Monte (Analyst at KBW)
Got it. Okay. And then just one more for me on the expense outlook. Good quarter this quarter, pretty much flat. Just curious on your outlook for the fourth quarter and any puts and takes around that. Thanks.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, yeah. So listen, on the last call we guided to a million-dollar increase in the quarter and we came in below that. I would say a lot of that is timing related, so we’re going to see a shift to some of that previously expected expense growth shifting into the fourth quarter. So for the fourth quarter we’re looking at an increase of about 1.5 million. We are making some targeted investments in a few areas including some new branches that are coming online, some marketing spend, some technology spend, some personnel spend.
That 1.5 is kind of evenly distributed across that. None of that includes our annual $750,000 contribution to our charitable foundation. So that would be incremental to the 1.5.
Damon Del Monte (Analyst at KBW)
Got it. Okay, great. Okay, that’s all that I had for now.
OPERATOR
Thank you. Your next question comes from the line of Justin Crowley from Piper Sandler. Your line is open. Please go ahead.
Justin Crowley (Analyst at Piper Sandler)
Hey, good morning. Hopefully you can hear me now.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
We can. Justin, good morning.
Justin Crowley (Analyst at Piper Sandler)
Perfect. Thank you, Ron. Just going back to the margin, if I remember correctly, I believe you were going to benefit from the terminated swap this quarter, so I just want to confirm that that was the case.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yes, it is.
Justin Crowley (Analyst at Piper Sandler)
Okay. And then I guess just looking out a little further, do you have detail on what loan repricings look like if we go out to the end of 2027, what that looks like from a volume and then just rate pickup standpoint?
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah. So we’ve got, call it about 2.1 billion of SOFR- and prime-based loans. Those SOFR loans are resetting monthly, so that’s kind of the repricing that we see immediately every time the Fed makes a change.
Justin Crowley (Analyst at Piper Sandler)
Okay. And then for the fixed-to-floating or any of the five-year CRE paper, do you get any benefit there, just given some of the growth you put on back in 2022?
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
I’m sorry, say that again, Justin.
Justin Crowley (Analyst at Piper Sandler)
Just for the five-year fixed-to-floating type commercial real estate paper. If I look back to growth you put on five years ago, I would think there’s some benefit there as we get into next year, although perhaps not.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, I would say, Justin, in the sense, I would say that CRE loans that are maturing that were underwritten at much lower rates are, obviously to the extent that they do extend and don’t pay off—we still see a fair amount of those paying off even before maturity—but I’d say we get a little bit of a lift, obviously, from the lows. I will tell you, though, that what we’re seeing in the market in general is spreads are tightening as rates rise, especially in high-quality assets.
So we’re seeing spreads in the, I don’t know, 170s, 180s for high-quality assets. So that bites into that benefit a little bit. And obviously there’s a lot of competition for quality assets. So it’s a mix. I mean, I think we’re getting a little bit of a lift off of the lows, but I think in general the market’s very competitive and spreads are getting a little thinner.
Ned Handy (Chairman and Chief Executive Officer)
Yeah. So Justin, I can add to that. Really there’s more of a tangible benefit, I think, on the residential side. We’ve got a $2 billion residential book, so as that’s amortizing and we’re reinvesting those cash flows, that’s giving us the tailwind of about one to two basis points a quarter.
Justin Crowley (Analyst at Piper Sandler)
Okay, got it. That’s helpful. And then just on loan growth, I think you guys have talked about mid-single digits previously. Seems like that might be tough to get to, just barring a really strong fourth quarter. So just kind of curious how you’re thinking about that trend line from here.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, yeah. So listen, I would say when we think about mid-single digits, we’re really talking about run rate versus calendar year. We had strong payoffs in the first and second quarter, so we’re not going to make that up inside of 2026. But I think our loan growth in the second quarter and in the third quarter was pretty strong. And we’re looking at annualized total portfolio growth of 5%. And we’re looking at within the commercial book, about 10%.
So this quarter the commercial book delivered 2.3%. That’s kind of within our target range of 2% to 3% quarterly commercial growth, which over the year we’re looking at that averaging out to about 10% annualized growth.
Justin Crowley (Analyst at Piper Sandler)
Okay, got it. And then maybe just one last one to follow up to that a little. Just any thoughts on the mix as we go forward? You saw CRE come back after the slower first half with some of the payoffs you alluded to and then the softer period on the C&I or institutional group. So just kind of curious how you’re thinking about both of those areas.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, that’s a good question. And I think as we guided, the growth in Q3 would be sort of real-estate heavy given the seasonality of the institutional, especially in the education space, the institutional business. But the pipeline going forward—we’ve got about a $230 million pipeline as of 9/30—which is weighted towards C&I with about 40 million of that today in the institutional group. We did do a $10 million New England school deal in the third quarter, so there was a little bit of institutional, but I think it kind of followed as we predicted that it would slow down a little bit in Q3 and pick up Q4 and into Q1.
But pipeline is pretty strong and again weighted towards commercial.
Justin Crowley (Analyst at Piper Sandler)
Perfect. I will leave it there. Thanks so much.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Thanks very much, Justin.
OPERATOR
Your next question comes from the line of Laurie Hunsicker from Seaport. Your line is open. Please go ahead.
Laurie Hunsicker (Analyst at Seaport)
Yeah. Hi, Matt and Ron. Good morning. Laurie Hunsicker from Seaport. Hi. I just wanted to circle back here on expenses. I just want to make sure that I’m getting this right. So, round numbers, you’re going to be about 41 million or so for the fourth quarter, including the charitable foundation of 750. Okay. And then obviously that is including the branch spend, the Bristol and the Pawtucket. Can you update us on exactly when those are opening and then just help us think about is that fourth quarter then a fully baked run rate perhaps you would be thinking about?
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
No, no, they’re coming on. Laurie, I don’t have the exact timing, but right around the end of the quarter. There is some ramp-up spending that occurs. We have to hire the people; we’ve got some real estate costs. So some of that expense is—you will see it in our run rate even before the branch is opened. But the ongoing run rate for a branch is around $750,000 to $800,000 a year.
Laurie Hunsicker (Analyst at Seaport)
Okay. So just in terms of one-quarter expense modeling, just thinking about maybe another 400,000 add for those branches to be fully phased. Or maybe it’s a little less, maybe it’s 150 a branch, maybe 300,000 additional expense into 1Q27.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
I think that’s fair. Yeah.
Laurie Hunsicker (Analyst at Seaport)
Okay. Okay. And do you have any branches planned now for 2027?
Ned Handy (Chairman and Chief Executive Officer)
We have nothing planned, although I would say that we are still interested in expanding the branch footprint. So nothing to talk about yet, but in coming quarters we probably have something to talk about there.
Laurie Hunsicker (Analyst at Seaport)
Okay. Okay, great. Love seeing your deposit growth and you just held the line, I mean across the board on raising rates there. So your loan-to-deposit ratio now sitting below 95% which is great. Can you help us think about what that target looks like into next year and then maybe, Ned, very high level, can you talk about the competitive pressures you’re seeing on deposit costs in order to grow those buckets?
Ned Handy (Chairman and Chief Executive Officer)
Yeah, so we’re very pleased with our loan-to-deposit ratio, which is at a low level that we’ve rarely been at in the past. And as you know, Laurie, we’ve been quite a bit higher than that previously. We’re committed to maintaining our deposit growth in the neighborhood of where our loan growth is. Our loan growth will be higher in the coming couple of years than it has been in the previous couple of years. So we will have our work cut out for us to keep that deposit growth going and making sure that we can fund those loans.
We don’t have—you know, we’ve got internal policy limits and things of that nature—but I don’t have a target loan-to-deposit ratio to share with you. I will say that we would rely on wholesale funding to some degree to fund appropriate loan growth when we get to that point. I don’t know. That’s about the best I can tell you.
Laurie Hunsicker (Analyst at Seaport)
Okay. Okay. And do you have a spot margin?
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
Yeah, I mean call it 2.85 for September.
Laurie Hunsicker (Analyst at Seaport)
Great. And then I just had a couple questions on credit. Loved seeing the 22 million resolution. The 6 million Class A that was new into nonperformers—what is that loan? What’s the occupancy? What’s maybe your thoughts on timing of resolution there?
Bill Ray
Hey, Lori, this is Bill Ray. That’s been there for a while. Committed sponsors, never missed a payment, but we just felt it was the appropriate time to look at potential valuation risk. But the property doesn’t mature until 2031. So occupancy has been level, but it’s not at stabilized level. So we felt that was just the right step to take at this point.
Laurie Hunsicker (Analyst at Seaport)
Okay, but so last quarter it was performing and then you moved it to nonperformer. I’m just wondering what triggered that.
Bill Ray
Just thinking about valuation risk, I think, and we felt it was the right time. Again, there’s been no change in commitment from the sponsors, no change in occupancy up or down. And as I said, they’ve never missed a payment.
Laurie Hunsicker (Analyst at Seaport)
Okay. Okay, great. And then just wondered on the 6.6 million lab space, any update on that? I know that was in sort of initial lease-up phase I think last time we were chatting. Any color to add there?
Bill Ray
We are working with the sponsors on that and moving towards an exit scenario. And so we’re in the middle of those discussions.
Laurie Hunsicker (Analyst at Seaport)
Okay. Okay. And then last one for me, the 28 million lab space, that’s unclassified. I think there was a thought that that potentially could be returning here to—it could certainly be migrating out of Special Mention here in the next couple quarters. I have in my notes that property was fully leased. Just update us on when we might see movement in that.
Bill Ray
It’s fully leased, 95%. We’ve been waiting for the tenants to burn off free rent and show performance. All trends have been positive, and so we’re feeling reasonably good about a near-term move out of Special Mention. But until we have all the quarter-end information in terms of rent payments, we can’t commit to that yet. But that’s where it’s headed, we think.
Laurie Hunsicker (Analyst at Seaport)
Okay, great. And then one very last question, Ned, for you. Obviously your capital ratios are very, very strong here. Can you just refresh us on revisiting the buyback and how you’re thinking about that? Thanks.
Ned Handy (Chairman and Chief Executive Officer)
Yeah. I mean, we don’t have any plans to buy stock back at this point. The price is high. I mean, we’ve got the capital. We’ve got other things to invest in, and we want to make sure we have ample capital to support the growth we’re looking forward to on the loan side. So I think we’ll kind of keep our position of holding off on repurchases at the moment. Ron, I don’t know if you have other.
Ron Ohsberg (Senior EVP Chief Financial Officer and Treasurer)
No, that’s it. I mean, we’ve got plans to grow the balance sheet, so we’re going to hold on to that capital right now. Lori, I mean, listen, our regulatory capital ratios look fine. Our GAAP capital ratios remain on the lighter side of the peer group—we recognize that, we’ve recognized that for a while—so I think the prudent thing for us to do right now is to deploy that capital into the growth of the business.
Laurie Hunsicker (Analyst at Seaport)
Great. Thanks for taking my question.
Ned Handy (Chairman and Chief Executive Officer)
Thanks, Lori.
OPERATOR
There are no further questions at this time. I will now turn the call back to Ned Handy, Chairman and CEO, for closing remarks.
Ned Handy (Chairman and Chief Executive Officer)
Well, thank you, everybody, again. We appreciate your time and your interest in Washington Trust, and very much look forward to speaking with you again next quarter. Have a great day, everybody.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
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