Washington Trust Bancorp (WASH) Q3 2026 earnings review
Washington Trust's margin widens, but another office loan goes bad
Washington Trust earns more on each loan, but a second office loan went bad as it fixed the first. Net income rose 21% from the spring quarter: the gap between loan yields and deposit costs widened while expenses barely moved. Chief executive Ned Handy cited "continued margin expansion", which by our math holds without one-time help. Loans grew 1% from June, leaving most of the year's planned growth for the last quarter.
| Net interest margin | 2.84% 2.73% last quarter; July outlook was about 2.75% |
|---|---|
| Profit per share | $1.01 $0.95 excluding one-offs by our math; $0.56 a year ago |
| Total loans | $5.16 billion +1.2% from June; +0.6% since December |
| Full-year tax-rate outlook | Unchanged about 21.5% |
⚖️ Verdict: 🟢 Bullish
The story got better, because the margin kept widening after the hedge lift ended and deposits now fund the bank instead of borrowings. One caution: the business lending meant to carry earnings once the margin levels off reversed this quarter, and a new office loan stopped paying.
The question now is whether loan volume can take over from the margin as the source of growth. Institutional lending may resume after a seasonal lull, or real-estate payoffs and a shrinking business book may keep loans near flat. December's loan balance will tell.
🐂 Bull Case
Margin Widened Again, Beyond the Hedge Step
Net interest margin is the gap between what a bank earns on loans and what it pays for deposits and borrowings. "We delivered another strong quarter marked by growth in earnings and net interest income, continued margin expansion and improved operating efficiency," chief executive Ned Handy said.
The margin reached 2.84%, above the roughly 2.75% management had pointed to in July. Part of the rise came from a known step: a hedge Washington Trust had terminated stopped charging interest in May, worth about 4 basis points this quarter. Catch-up interest on the repaired office loan added 2 more.
- Loan yield: 5.28%, up 8 basis points from the spring quarter
- Interest paid on Federal Home Loan Bank borrowings: $4.4 million, from $10.5 million a year ago
- Net interest income: $44.7 million, up 15% from a year ago
By our math the underlying margin widened about 5 basis points once those two items come out, so Handy's "continued margin expansion" holds. The gain came from lending at higher rates and borrowing less, not from cheaper deposits, which still cost a little more than in the spring.
What to watch: the fourth-quarter margin against the 2.80% Washington Trust gave in July, on tomorrow's call and again in January. A figure above this quarter's 2.84% would mean the margin keeps widening without one-time help.
Deposits Now Fund the Bank Instead of Borrowings
A year ago Washington Trust owed $791 million to the Federal Home Loan Bank, a government-sponsored lender to banks. It now owes $376 million, because deposits came in, which the company said reflected "increases in deposits and timing of liquidity management activities".
- Deposits: $5.4 billion, a record, up 4% from a year ago
- Deposits that pay no interest: up 7% from June
- Loans as a share of deposits: 94.8%, from 98.0% a year ago
- Brokered deposits bought from outside: none, for a fifth straight quarter
This matters because the borrowings cost 4.03% while interest-bearing deposits cost 2.42%, so each dollar that moves from one to the other widens the margin. But the deposit price rose 1 basis point rather than falling, so competition for savings in southern New England has not eased.
What to watch: the cost of interest-bearing deposits next quarter. A reading below this quarter's 2.42% would mean the margin can keep widening even after the borrowings run out.
Spending Stayed Flat as Revenue Rose 7%
Revenue, meaning net interest income plus fees, rose 7% from the spring quarter to $65 million, while noninterest expense moved up only 0.5%. Salaries fell slightly, and the one line that cost more was outsourced services, which Washington Trust tied to volume. Fee income helped because commercial borrowers bought more interest-rate swaps, contracts that fix a loan's rate.
- Efficiency ratio, costs as a share of revenue: 59.7%, from 63.8%
- Salaries and benefits: 38.7% of revenue, down 3.2 percentage points from the spring quarter
- Loan-related swap income: $1.5 million, from $583,000
- Noninterest expense from a year ago: up 9%, with salaries up 11% on "annual merit and staffing increases"
By our math the efficiency ratio was 60.9% without the life-insurance gain and the catch-up interest, so most of the improvement is real. But one flat quarter follows a year of expense growth faster than revenue grew in 2025, and the branches Handy promised for late 2026 are still to open.
What to watch: fourth-quarter noninterest expense against this quarter's $38.8 million. A figure near $39 million with the new branches open would mean the cost base has stopped growing faster than revenue.
🐻 Bear Case
One Office Loan Fixed, Another Stopped Paying
The release says asset quality improved, and the headline figures agree. Nonaccrual loans, those no longer paying interest, fell to 0.48% of total loans from 0.78%. The reason is one $22.3 million office loan Washington Trust "restructured and bifurcated". It returned $18.5 million to paying status and charged off the rest.
The office table tells a second story. The resolved loan explains the whole of June's office nonaccrual balance apart from a lab-space loan that went bad in the spring, so by our math the Class A office loan now listed as nonaccrual is new to the list.
- Nonaccrual office loans: $12.6 million, of which $6.0 million is the new Class A loan
- Additions to nonaccrual loans in the quarter: $7.8 million, three times the spring figure
- Net charge-offs: $3.9 million, almost all from the resolved office loan
- Reserves as a share of nonaccrual loans: 165%, from 107%
This matters because 61% of the $208 million office book matures before September 2028, so each maturity tests whether the borrower can refinance. Reserve coverage of problem loans rose only because the problem loans shrank; the reserve itself fell $2.1 million, to 0.78% of loans.
What to watch: additions to nonaccrual loans in the fourth quarter, and whether the $18.5 million restructured piece keeps paying. Another office addition would mean the problem is the portfolio, not one loan.
Real Estate, Not Business Loans, Drove Growth
Washington Trust's growth plan rests on a team hired in January to lend to institutions such as schools and nonprofits, which shows up as commercial and industrial (C&I) loans. Those balances rose $102 million in the first half. This quarter they slipped $4 million while commercial real estate grew $66 million.
Chief executive Ned Handy said in July that he expected commercial loans to grow about 2.5% in the quarter and that institutional lending slows in the summer. Commercial loans grew 2.3%, so he was close. But real estate delivered it, and that is the book that shrank in the first half as borrowers paid off loans.
- Total loans: $5.16 billion, up 1.2% from June and 0.6% since December
- Full-year outlook: growth of 4–6%, which by our math needs 3.4–5.4% in the fourth quarter alone
- Last year: a low-single-digit target, and loans ended 2025 down 0.1%
This is a concern rather than a verdict, because one slow quarter in a line Handy had flagged as seasonal settles nothing. But the full-year plan now depends on a single quarter of faster growth than any since the plan began, and the bank missed last year's target.
What to watch: December's loan balance against $5.34–5.44 billion, the range the outlook implies. A figure below $5.34 billion would be the second missed loan target in two years, and the plan would be hard to trust.
Rising Rates Took 4% Off Shareholders' Equity
Banks hold bonds whose market value falls when interest rates rise, and the loss sits in equity even when the bank never sells them. Washington Trust's bond portfolio lost $44 million of value in the quarter, which the company blamed on "changes in market interest rates".
- Shareholders' equity: $531 million, down 4% from June despite $19 million of profit
- Book value per share: $27.82, from $29.02
- Unrealized losses parked in equity: $110 million, from $77 million
- Common equity tier 1 ratio: 11.93%, unaffected, because regulators exclude these losses
The losses do not touch regulatory capital or earnings, so the dividend and lending capacity are not at risk. But they shrink the bank's room to sell low-yielding bonds and reinvest at today's rates, and the same rate rise cut the mortgage pipeline, Washington Trust said.
What to watch: the unrealized-loss figure at year-end. A smaller number would restore book value without any action by management and reopen the option of reshaping the bond book.
Risks this quarter didn't answer
Four standing concerns got no decisive reading in the press release, and two of them will need the quarterly filing or tomorrow's call before anyone can judge them.
- Wealth management client flows: assets under administration were flat from June, but the bank stopped disclosing net inflows and outflows a year ago, so whether clients are leaving stays unreadable.
- Rate sensitivity: the bank's own estimate of net interest income under lower rates sits in the quarterly filing, not the release; a rate cut would test a margin built on asset yields.
- Deposit competition: deposit costs did not fall this quarter; a lower cost of interest-bearing deposits next quarter would ease it.
- Buybacks: the release reports no repurchases under the program authorized in May; the filing will show whether the bank bought any shares.
👓 Other Themes
One-Time Items Added 6 Cents to Earnings
Two items lifted the quarter and will not repeat. A non-taxable gain of $954,000 on bank-owned life insurance, policies banks hold on employees, added $0.05 a share. Catch-up interest on the restructured office loan added another cent. By our math earnings were $0.95 a share without them, still up 14% from the spring quarter.
💲 Other KPIs
Asset-based fees rose 7% from a year ago but only 1.5% from the spring quarter. Assets under administration, the client money the bank manages or oversees, stood still at $7.9 billion, 3% above a year ago. The Lighthouse purchase of July 2025 sits in both figures, so that growth is underlying. Fees run at about 56 basis points of assets by our math.
Down 9% from the spring quarter and 10% from a year ago, which Washington Trust attributed to "a decrease in the mortgage pipeline and rising market interest rates". Originations still rose 11% from a year ago to $193 million, and the bank sold three-quarters of them. A $414,000 negative swing in the value of loans awaiting sale did the damage.
Up from 0.99% in the spring and 0.64% a year ago. Return on equity reached 13.89%. The ratio has risen every quarter this year, from 0.78% in the winter, helped this quarter by about 6 cents of one-time items. The dividend took 55% of earnings per share, the lowest of the past six quarters.
🔮 Guidance
Unchanged. The plan keeps the full-year tax rate at about 21.5%. The figure has stood since January, down from about 22%. The rate through nine months is 21.0% by our math. This quarter's 20.4% was the lowest of the year, because tax does not apply to the life-insurance gain. If fourth-quarter pre-tax profit matches this quarter's, by our math the fourth quarter needs a rate near 22.8%.
❓ Key Questions
Which office loan went on nonaccrual this quarter?
The office table shows a $6.0 million Class A loan on nonaccrual that was not there in June, and additions to nonaccrual tripled. Investors need the property, the maturity date and the appraisal, plus the terms of the $18.5 million restructured piece.
What were wealth management net client flows this quarter?
Assets under administration were flat from June while fees grew. Without the inflow and outflow figures the bank stopped publishing a year ago, nobody can tell whether the largest fee line is winning or losing clients.
How do loans grow 4–6% with one quarter left?
Loans are up 0.6% this year, so the full-year plan needs 3.4–5.4% in the fourth quarter by our math. Management should say what is in the pipeline and whether business loans resume growing after the summer dip.
Did the small-business digital platform and new branches launch?
Handy said in July that an enhanced digital banking tool for small businesses would arrive this fall and that two Rhode Island branches would open later in 2026. The release does not mention either.
Does the fourth-quarter margin outlook move above 2.80%?
The margin already reached 2.84%, above the 2.80% given in July for year-end. Management should say whether deposit costs can fall or whether the margin now flattens without the hedge step.