10-Q: Washington Trust Bancorp Q3: Net Interest Income Rises Amid Loan Charge-Offs

Washington Trust Bancorp reported increased net interest income for Q3 and YTD 2025, driven by balance sheet repositioning, despite significant commercial loan charge-offs.

Summary

• Net income for the three months ended September 30, 2025, was $10.8 million, a 1% decrease from $11.0 million in the same period of 2024.
• Net income for the nine months ended September 30, 2025, was $36.3 million, an 11% increase from $32.7 million in the same period of 2024.
• Adjusted net income (non-GAAP) for the three months ended September 30, 2025, was $10.8 million, a 1% decrease, while for the nine months, it was $35.9 million, an 18% increase.
• Net interest income (FTE basis) increased by $6.6 million (20%) to $39.1 million for the three months and by $16.9 million (18%) to $113.1 million for the nine months ended September 30, 2025, compared to 2024.
• Net interest margin (NIM) improved to 2.40% for the three months and 2.35% for the nine months ended September 30, 2025, up from 1.85% and 1.84% respectively in 2024.
• Provision for credit losses significantly increased to $6.8 million for the three months and $8.6 million for the nine months ended September 30, 2025, primarily due to $11.3 million in charge-offs on two commercial loan relationships.
• Total loans decreased by $15.3 million (0.3%) to $5.12 billion at September 30, 2025, from $5.14 billion at December 31, 2024.
• Total deposits increased by $107.0 million (2%) to $5.22 billion at September 30, 2025, from $5.12 billion at December 31, 2024, driven by in-market deposit growth.
• Federal Home Loan Bank (FHLB) advances decreased by $334.0 million (30%) to $791.0 million at September 30, 2025.
• Total shareholders' equity increased by $33.3 million (7%) to $533.0 million at September 30, 2025.
• Nonperforming assets decreased to $14.0 million (0.21% of total assets) at September 30, 2025, from $23.3 million (0.34%) at December 31, 2024.
• Wealth management revenues increased by $384 thousand (4%) for the three months and $1.4 million (5%) for the nine months ended September 30, 2025.
• Mortgage banking revenues increased by $635 thousand (22%) for the three months and $706 thousand (9%) for the nine months ended September 30, 2025.

Sentiment

Score: 4

Explanation: While net interest income and margin improved due to strategic balance sheet actions, the significant increase in credit loss provision and charge-offs, coupled with a slight decline in Q3 net income and EPS, indicates underlying asset quality concerns that temper overall positive financial trends.

Positives

• Net interest income and net interest margin saw significant increases for both the three and nine months ended September 30, 2025, reflecting successful balance sheet repositioning and lower funding costs.
• Total deposits grew by $107.0 million, with in-market deposits increasing by $404.6 million, demonstrating strong core deposit gathering.
• FHLB advances and wholesale brokered time deposits decreased substantially, reducing reliance on higher-cost wholesale funding.
• Nonperforming assets and nonaccrual loans declined significantly, indicating an improvement in overall asset quality metrics.
• Wealth management revenues and mortgage banking revenues both increased, contributing positively to noninterest income.
• Total shareholders' equity increased by $33.3 million, and capital ratios remain strong, exceeding regulatory 'well capitalized' minimums.

Negatives

• Net income for the three months ended September 30, 2025, slightly decreased by 1% compared to the same period in 2024.
• The provision for credit losses increased dramatically to $6.8 million for the three months and $8.6 million for the nine months ended September 30, 2025, primarily due to significant commercial loan charge-offs.
• Charge-offs of $11.3 million were recognized on two nonaccrual commercial loan relationships in the third quarter of 2025.
• Diluted earnings per common share decreased for both the three-month ($0.56 vs $0.64) and nine-month ($1.88 vs $1.91) periods ended September 30, 2025, compared to 2024.
• A pre-tax non-cash pension plan settlement charge of $6.4 million was recognized in the first quarter of 2025 due to the termination of the qualified pension plan.
• Total average loan balances decreased by $414.2 million for the three months and $505.6 million for the nine months ended September 30, 2025, compared to the same periods in 2024.

Risks

• Changes in general business and economic conditions (including tariffs, inflation, and liquidity concerns) on a national basis and in local markets.
• Interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits.
• Changes in customer behavior due to political, business, and economic conditions.
• Changes in loan demand and collectability, with the possibility that future credit losses are higher than currently expected.
• Ongoing volatility in national and international financial markets.
• Reductions in the market value or outflows of wealth management assets under administration (AUA).
• Decreases in the value of securities and other assets.
• Increases in defaults and charge-off rates.
• Changes in the size and nature of competition.
• Changes in, and evolving interpretations of, existing and future laws, rules, and regulations.
• Changes in accounting principles, policies, and guidelines.
• Operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and future pandemics.
• Regulatory, litigation, and reputational risks.

Future Outlook

The company aims to leverage its strong regional brand to build market share and remains committed to providing superior service. Future growth is expected to be driven by offering convenient in-person service and digital banking solutions to customers. The company assumes no obligation to update any forward-looking statements.

Management Comments

• "We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions."
• "Management considers the ACL on loans to be a material estimate that is particularly susceptible to change."
• "Management assesses the decline in fair value of investment securities on a regular basis."
• "Management does not believe that any of the securities are impaired due to reasons of credit quality."
• "Management considers the CRE portfolio to be well-diversified with loans across several property types."
• "Management considers the C&I portfolio to be well-diversified with loans across several industries."
• "Management has identified $32.1 million in potential problem loans at September 30, 2025."
• "Management believes the Corporation's sources of funding meet anticipated funding needs."
• "Management believes deferred tax assets, net of the valuation allowance, are more-likely-than-not to be realized."

Industry Context

The banking industry is experiencing a heightened focus on the Commercial Real Estate (CRE) office sector due to the continuation of remote work and elevated vacancies. The company's market area also faces intense competition for deposit growth, particularly for higher-cost deposit products. Washington Trust Bancorp's strategic balance sheet repositioning, including the sale of lower-yielding assets and reduction of wholesale funding, aligns with broader industry efforts to manage interest rate risk and optimize funding costs in a dynamic economic environment.

Corporate Governance

Legal Proceedings

• The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management believes the ultimate disposition of these matters will not materially affect the consolidated financial position or results of operations.

Stakeholder Impact

• Shareholders are impacted by the slight decrease in Q3 net income and diluted EPS, but also by the increase in total shareholders' equity and the ongoing stock repurchase program.
• Employees were affected by the termination of the qualified pension plan in Q1 2025, which resulted in a settlement charge and the transfer of surplus assets to the 401(k) Plan.
• Customers benefit from the company's continued focus on providing convenient in-person and digital banking solutions, as well as wealth management services.
• Borrowers, particularly commercial loan customers, are impacted by the company's credit quality assessments and loan modification policies (TLMs).
• Regulators continue to monitor the company's compliance with capital requirements and the adoption of new accounting pronouncements.

Next Steps

• Continue to leverage the strong regional brand to build market share.
• Remain steadfast in the commitment to provide superior service.
• Focus on providing customers with convenient in-person service and digital banking solutions.
• Evaluate the impact of Accounting Standards Update (ASU) 2025-06 on financial statements.
• Management will closely monitor the performance of Troubled Loan Modifications (TLMs) to understand the effectiveness of the modifications.
• The Asset/Liability Committee (ALCO) will regularly review income simulation results to ensure exposure to a decline in net interest income remains within established tolerance levels and to develop appropriate strategies.

Key Dates

Recommendation

The company demonstrated strong improvements in net interest income and margin, reflecting effective balance sheet repositioning and deposit growth. However, the substantial increase in the provision for credit losses and specific commercial loan charge-offs in Q3 2025 signals potential asset quality deterioration, particularly in the commercial loan portfolio. While capital ratios remain strong, the credit quality concerns warrant a cautious "hold" stance until there is clearer evidence of stabilization in asset quality and a sustained reduction in credit loss provisions.

Keywords

Washington Trust Bancorp, WASH, SEC filing, 10-Q, financial results, banking, wealth management, net interest income, credit losses, commercial real estate, mortgage banking, deposits, FHLB advances, capital ratios, stock repurchase, Rhode Island, Massachusetts, Connecticut