Washington Trust Bancorp Inc Q1 FY2026 Earnings Call

Good morning, and welcome to Washington Trust Bancorp Incorporated Conference Call. My name is Elliot, and I'll be your operator today. As a reminder, today's call is being recorded. And now I'll turn the call over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications. Please go ahead.

Thank you, Elliot. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the First Quarter of 2026. 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 today's 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's Chairman and Chief Executive Officer, Ned Handy. Ned?

Thank you, Sharon. Good morning, and thank you for joining our first quarter conference call. We appreciate your time and your continued interest in Washington Trust. I'll begin with a brief overview of our first quarter results, and then Ron will provide more detail on our financial performance for the quarter. Following our remarks, Mary and Bill will join us for the question-and-answer session. Building on the momentum generated throughout 2025, quarterly performance was driven by continued net interest margin expansion reflecting the underlying strength of our core banking business and continued benefits from our December 2024 balance sheet repositioning transactions. The Q1 results do, however, include a higher provision related to reserve builds on two credits moved to nonaccrual in March, and we'll provide details on those in the Q&A session. Our capital ratios remain strong, providing the flexibility to support continued execution across the business. In the first quarter, we completed a digital banking conversion for personal accounts that provides enhanced security and technology and a better customer experience, reinforcing our focus on service and relationships. We will continue the conversion of our business accounts in the ensuing quarters. With recent industry shifts locally, these investments position us well to attract new customers by pairing modern capabilities with the personalized service that defines Washington Trust. We're also leveraging our strength as a community bank that prioritizes local decision-making to attract experienced bankers to our commercial team. We recently added new talent across C&I, CRE, and business banking, all of whom bring deep experience and strong client relationships in the region. The institutional banking team we added in January is showing strong momentum that positions us for loan and deposit growth as the year progresses. In addition, our planned branch opening later this year in Pataka, Rhode Island will further expand our presence in the northern part of the state. Overall, we're encouraged by the progress we are making to position the company for long-term success. With that, I'll turn the call over to Ron to provide additional detail on our financial results. Ron?

Okay. Thank you, Ned, and good morning, everyone. Net income in the first quarter was $12.6 million or $0.66 per share compared to $16 million or $0.83 per share last quarter. PPNR was down 6% from Q4 and up by 23% year-over-year on an adjusted basis. Net interest income was $40.5 million, down by 1% from Q4 and up by 11% year-over-year. The margin was 2.63%, up by 7 basis points from Q4 and up by 34 basis points year-over-year. Q1 included $116,000 of loan prepayment fee income, which benefited NIM by 1 basis point compared to $516,000 or 3 basis points last quarter. Noninterest income was down $1.2 million or 6% compared to Q4 and up by 11% year-over-year on an adjusted basis. Loan-related derivative income, which is transactional in nature, was down by $854,000 compared to Q4. Wealth Management revenues were down by $205,000 or 2%. Average AUA for Q1 decreased by 1% and increased by 10% year-over-year. Mortgage banking revenues were $3 million, seasonally down 6% and were up by 32% year-over-year. Our mortgage pipeline at March 31 was $114 million, up by $33 million or 41% from the end of December. Noninterest expense totaled $37.8 million in Q1, down by 1%, and other noninterest expenses were down by $1.2 million in Q1, largely due to a $1 million contribution made to our charitable foundation in Q4. In the first quarter, salary and employee benefits expense was up by $693,000 or 3%, reflecting merit increases and higher payroll taxes associated with the start of a new calendar year. Our Q1 effective tax rate was 21.6%, and we expect the full year 2026 effective tax rate to be approximately 21.5%. Balance sheet total loans were down 2% from December 31. Total commercial loans decreased by $95 million, reflecting mainly payoffs in the CRE portfolio. The commercial pipeline in total is approximately $156 million. Residential loans decreased by $21 million as we continue to amortize that portfolio. End market deposits were down 2% from the end of Q4 and up by 3% year-over-year, and wholesale funding was down by $50 million or 8% from the end of December. Our loan-to-deposit ratio decreased slightly to 96.9% at the end of March. Turning to asset and credit quality. At March 31, nonaccruing loans were 81 basis points on total loans and increased by $27.5 million from the prior quarter, largely due to two commercial real estate office loans. Past due loans were 33 basis points on total loans. In the first quarter, we recognized a $4 million provision for credit losses, largely reflecting an increase in specific reserves on the two commercial office loans. The allowance totaled $41.1 million or 82 basis points. And at this time, I will turn the call back to Ned.

Thanks, Ron. And now we'll take questions.

Good morning, everybody. Could you provide more detail on the two office loans? Specifically, can you share information about their geographic locations? Additionally, I would like to know more about what led to the downgrades in specific reserves, such as occupancy levels and how close they were to maturity, which might have required new appraisals.

Sure. Both loans have remained current so far. However, in March, certain events prompted us to decide to place them on nonaccrual at the quarter-end. Each has strong sponsors, and we are in discussions with both. One loan is maturing soon while the other has a maturity date next year. We are working on the appropriate next steps for both. I won't go into too much detail about what that entails, but historically, many of our assets in similar situations emerge without issues. In this instance, we decided to set aside reserves that we believe are suitable to account for any potential future loss. We still consider both properties to be solid with capable sponsors, and we anticipate continuing progress towards resolution. Ideally, within the next few quarters, these loans will either be resolved or return to performing status.

Okay. Got it. And then were there any general reserves allocated to office? Or was it all specific with regard to these two loans? I guess trying to get a sense of how you think about the risk and the rest of the office book at this point and if the cycle for this asset class has changed at all?

Well, I think our office exposure peaked at $300 million a couple of years ago. It's now down to $230 million. And we think we've done that with a fairly small amount of charge-offs along the way relatively. So we expect to continue to reduce our office exposure over time. Within the CECL methodology we make sure that we use qualitative factors especially to address issues in office. And so we have taken some of those steps. And we believe going forward that there's always going to be a handful of properties that are sort of on the bubble that need some attention and focus. But as you can see, all of our other office properties are performing. There aren't delinquencies there that we're concerned about. So we just expect that assets will move into lower ratings and then we'll emerge from those. And we certainly spend a lot of time thinking about maturity wall analysis and refinance risk. And so we're constantly juggling those handful of properties that look like they might raise some issues down the road and try to stay ahead of them. So I guess the best way of saying we're cautious on office, and we'll continue to be cautious on office, but we also think the scale of the problems are well within our capabilities to handle from an earnings standpoint and a reserving standpoint.

Okay. And then I guess, somewhat larger-sized loans here. It sounds like they were self-originated. Was that the case or were either participation? Just want to confirm that.

I'm not sure which ones you're referring to, but there's only five loans.

The two office loans that migrated and...

Participations, we're the lead on the Class A. The Class A office space one, we're two-thirds participants in the lead, and then we are the minority participant on the lab space.

Did you call it maybe 5% growth previously? I know a lot has changed since then. Just curious for an update there?

Yes, I appreciate the question. During the quarter, we experienced significant pay downs and payoffs, primarily in the commercial real estate sector, without the usual amount of new loans being originated. However, we remain optimistic about the future. We are maintaining our projection of mid-single-digit growth for the year. Currently, we believe that commercial real estate will likely see low single-digit growth for the year, as it has some ground to recover from the payoffs in the first quarter. We expect growth in that segment to be flat to around 1%. The majority of our growth will be driven by our core commercial and industrial (C&I) business and our institutional banking division. We anticipate high single-digit growth from our core C&I business, which currently has an outstanding amount of approximately $560 million. Most of the growth in C&I is expected to come from our relatively new institutional banking group, where we expect to see over $50 million in funding this quarter, and the pipeline is expanding. Importantly, this growth will also bring strategic growth in deposits from our C&I business, with expectations to self-fund at a 30% to 40% level, significantly higher than what we see in commercial real estate and our core C&I business. This team joined us in late January, so it’s natural for them to take some time to ramp up, but we are pleased with the growing pipeline. Overall, we are sticking to our mid-single-digit growth outlook, potentially slightly higher, and we are very encouraged by the quality of credit we are seeing as the pipeline builds. We will provide further updates by the end of next quarter.

Okay. Great. And then just one last one on the margin. I think I might have missed this in the prepared remarks. I know there were some elevated prepayment fees last quarter. Was there any of that in the $263 million for the first quarter?

Yes, like one basis point.

Okay. And then I guess just thoughts on the margins in there. I think you'll get that left from the swap termination, but could you just remind us the benefit there? And then just also how you're thinking about organic expansion through the year?

Yes. So the swap termination will add 9 basis points in the second quarter and another 4 basis points in the third quarter.

Okay. And then I guess just go ahead. Go ahead.

Go ahead, Justin.

I was just going to ask outside of that, just the margin lift from here as we get through the year?

Yes. There's modest expansion by quarter. First quarter was probably a little higher helped by the prepayment helped actually helped a little bit by the shorter day count in the quarter actually added about 2 basis points to the NIM. But when we look ahead to the fourth quarter, we're thinking $275 million to $280 million in the quarter.

Ron, could you just repeat the last comment you made on the margin, the $275 million to $280 million? Was that for the second quarter? Or is that for where you expect it to be at year-end? I missed that, sorry.

Sorry, Damon, yes, just to be clear, fourth quarter.

Fourth quarter.

So we're looking at $265 million to $270 million in the second quarter.

Got it. Okay. Yes, that aligns with what you were describing about the benefit. Great. Now, could you provide a bit more insight on expenses and your outlook in that area? You've made some hires, which I assume are reflected in the numbers. The expenses were around $37.8 million, so are you expecting just modest growth from here, or do you think you could keep it flat?

We are seeing about a $1 million increase in Q2, and there are three areas contributing to this: advertising, mortgage commissions, and some project implementation expenses that will be reflected in the quarter.

Got it. Okay.

Additionally, we are planning to open a new branch, likely by the end of the third quarter or the beginning of the fourth quarter. The associated expenses will begin to be reflected in the third quarter, and we anticipate approximately $500,000 in costs related to the branches for 2026.

Got it. Okay. Great. On Wealth Management, assets under management were down a little bit this quarter. Is that just a market fluctuation, or was there some client outflow?

Yes, it was primarily due to market conditions, though there were some net outflows as well.

Got it.

You can see markets have rebounded so far in April. So no one knows what the future holds, but it could see a lot of the declines that we saw in the quarter have reversed so far in the second quarter.

Got it. Okay. And then just lastly, given the outlook for the loan growth going forward, how do we think about the provision and kind of the reserve level? I mean, obviously, you built the reserve this quarter for those loans that went to nonaccrual status. But if we assume that there's no other credit deterioration, do you kind of have the provision such that it keeps the reserve flat given the loan growth?

Yes. We're kind of thinking somewhere in the range of $1 million to $2 million per quarter. And that covers loan growth and maybe that gives us a little bit depending on what we book and when we book it, it could give us a little bit of a reserve build going forward.

Ron, Maryville. Just to stay with where Damon was, on loan loss provision, so the $4 million loan loss provision I know you said, obviously, that was heavy with the office. What exactly was the dollar amount there associated with office of the $4 million build?

Laurie, it was essentially all of it.

Got it. Okay. Perfect. And then I just wanted to dive a little bit deeper here in office. So just I have a series of questions here. So you've got 59% maturing in the next two years, $136 million. Is any of that currently in special mention cost side, nonaccrual? And if so, when is that actually maturing?

Out of the five deals in the office space that are under special mention or classified, one has matured and was moved to nonaccrual. There's another Class B deal that is maturing in the third quarter of this year. We moved it to special mention as a precaution while we collaborate with a well-known and committed sponsor on a refinancing strategy. The other deal that went to nonaccrual will not mature until the third quarter of next year. As we stated, we examine all our maturing office loans very carefully, and when we have sufficient information, we prioritize caution and take the necessary steps to mark them as special mention. The two deals we referenced were designated as special mention, one in the fourth quarter of 2024 and the other in the third quarter of last year. Additionally, we've observed some positive movement out of special mention and classified statuses, such as the large lab loan which is currently in special mention, but we believe it will come out soon as free rent periods conclude and if contractual rates are met. Overall, we think our track record of migration is strong, and we feel similarly about the current deals. There are five deals that make up the information we disclosed.

Yes, great. Okay. So just for my clarification, you had two moved into nonaccrual. Was it the $22 million that matured that triggered that? Or was it that one that matured?

No, the $22 million was not the one that matured. The one that matured was the $6.5 million.

Okay, I understand that the $22 million matured in the third quarter of $27 million, correct?

Yes.

Okay. And then what is the occupancy running on that one, that Class A?

Well, it's solid. I mean, it's north of 50%. And there's actually been a fair amount of leasing momentum. The move made here was more triggered by a notification of a potential lease termination for next year, but that tenant is renegotiating. So this generates a pretty material NOI. And we feel it's a solid property with a solid sponsor in a solid market. But like most sponsors, they're looking ahead and thinking about what their capital requirements are going to be. And so we're having discussions at this point on that topic.

Okay. Okay. And then just the cross fee that you mentioned, just that $3.8 million that's on special mention that was new to special mention. What is the occupancy on that? And how are you thinking about a resolution there?

It's in the high 60s. It's got some solid tenants. It's a well-known sponsor to us. By the way, all of these are in our core markets in the Tri-State area. And so our expectation is that we'll work something out with the sponsor and keep it on special mention as long as we need to, to make sure it's payment season and then potentially do an upgrade. So again, special mention here is sort of more just a prudential judgment to put a marker on something and watch it through its refinance process.

Okay. And then obviously, with the...

It's a fully performing loan at this point, and we expect it to continue that way. But we are being cautious as we face the maturity issue in the third quarter.

Got you. Okay. And then the lab space. So I had thought there were the $33 million, $34 million, I thought that was all related. And then it looks like just one you moved over. Are those two completely separate loans?

Two completely separate loans.

Got you. Okay. So the $6.6 million that was triggered by the miscerity indicates that coverage here is zero, meaning occupancy is zero. Am I thinking about that correctly?

Yes, occupancy for that building is still in its initial lease-up phase, so it is currently at zero. The other building is effectively fully leased, and as you know, that's a very competitive market. As the free rent period concludes, we expect it to return to fully performing and at pass-rated levels. We are closely monitoring the tenants as they transition out of free rent and begin making their payments, and there is strong positive momentum on that one. For the other building, we are in discussions with the sponsors about the next steps since it has matured.

Got it. So the $27.5 million property is fully leased. Positive momentum is occurring this year and will continue into next year. When is that? Go ahead.

I'm sorry, you cut out a little bit. But if you're asking when that comes back out, again, we think it's probably within the next few quarters. We want to make sure the tenants are making their payments as agreed and that we're going to let it season a little bit and judge that. But we are feeling very solid about the leasing status and the performance status to date.

Yes. Okay. And then one last question on this lab loan. When does this $27.5 million mature?

That is 2029.

Okay, great. I believe that addresses all my questions on that. I really appreciate the details provided on Page 11. I apologize, but I have one more question. Last quarter, you had $2.2 million of Class C that was under special mention, and now it’s no longer there, which is great. How was that resolved? Was it sold, or what occurred?

No, it ended up being fully leased and was performing well throughout the process. They were paying as expected. Now that it's fully leased and we have completed that process, we have moved it back into pass-rated.

Perfect. Perfect. Okay. Great. Okay. So just two more questions. Now for you, Bill, I guess, this goes back to you, Ron. Do you have the spot margin for March?

Yes, $259 million.

$259 million. Great. Okay. And then Ned, for you. This is my last question. Your capital levels are very strong, and your credit, obviously, excluding office, is also very strong. You're one of the few banks in New England that is not repurchasing shares. Can you help us think a little bit about your approach to buybacks and your perspective on it?

Yes. Yes. Laurie, I'll take it. I mean we consider that all the time, and I think we've talked about it on previous calls. So I can make some arguments in favor of doing the buybacks. Our dividend is still relatively high. The payout ratio is still relatively high. And so at this point, we maintain a buyback program, but we really are not at this point intending to be buying back shares at this moment.

Thanks, Laurie.

We have no further questions. I'll hand back to Ned Handy for any final comments.

Well, thank you all for joining. As we move through 2026, we remain focused on what has defined us for 26 years, paring personalized service and local decision-making with a comprehensive suite of financial products and services. We very much look forward to quarters ahead and sharing the news about those quarters with you as we progress. So thank you for your time today. We certainly appreciate your interest and support, and we look forward to speaking with you again soon. Have a great day, everybody.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.