Washington Trust Bancorp (NASDAQ:WASH) reported higher third-quarter earnings, net interest income and net interest margin, while credit-quality measures improved following the restructuring of a commercial real estate office loan.
Third-quarter net income totaled $19.4 million, or $1.01 per share, up $3.4 million, or $0.18 per share, from the preceding quarter, according to Chief Financial Officer and Treasurer Ron Ohsberg. Pre-provision, pre-tax net revenue increased 20% from the second quarter and 26% from a year earlier.
Chairman and Chief Executive Officer Ned Handy said the company delivered “another strong quarter” marked by earnings and net interest income growth, margin expansion and improved operating efficiency. He also said Washington Trust plans to open two new Rhode Island branches in the coming months.
Margin expansion and balance-sheet growth
Net interest income rose 7% sequentially and 15% year over year to $44.7 million. Net interest margin was 2.84%, up 11 basis points from the second quarter and 44 basis points from a year earlier. The quarter included $283,000 in second-quarter interest income from a loan returned to accrual status, adding about 2 basis points to net interest margin.
For the fourth quarter, Ohsberg guided to a net interest margin range of 2.85% to 2.90%. He said Washington Trust remains modestly asset-sensitive and that each additional 25-basis-point interest-rate increase could add roughly 1 to 2 basis points to the run-rate margin. The outlook at the time incorporated the September rate hike.
Ohsberg said the company has about $2.1 billion of loans tied to SOFR and prime rates, with SOFR loans resetting monthly. He also said the company’s approximately $2 billion residential portfolio provides a margin tailwind as loans amortize and cash flows are reinvested, contributing an estimated 1 to 2 basis points per quarter.
Total loans increased 1% from June 30. Commercial loans rose $62 million, or 2.3%, led by growth in commercial real estate lending. Deposits increased $77 million, or 1%, during the quarter and were up $213 million, or 4%, from a year earlier. Wholesale funding declined $80 million, or 18%, from the end of the second quarter.
Ohsberg attributed growth in noninterest-bearing deposits partly to operating accounts being brought in by the institutional banking team. He said Washington Trust is pursuing deposit growth across retail and commercial channels and intends to keep deposit growth broadly aligned with loan growth.
Loan growth outlook and lending mix
Management said its mid-single-digit loan-growth outlook is based on run-rate growth rather than calendar-year growth, following strong loan payoffs in the first and second quarters. Ohsberg said total portfolio growth was running at an annualized rate of about 5%, while commercial lending was running at about 10% annualized.
The company’s commercial loan portfolio grew 2.3% in the third quarter, within management’s target range of 2% to 3% quarterly commercial growth. Handy said the pipeline totaled about $230 million as of Sept. 30 and was weighted toward commercial and industrial lending, including about $40 million in institutional banking opportunities.
Handy said the third-quarter loan mix was more heavily weighted toward real estate lending, in part because of seasonality in institutional banking, particularly education-related business. He said institutional activity is expected to pick up in the fourth quarter and first quarter.
On commercial real estate repricing, Handy said loans originated at lower rates may provide some lift as they mature or extend. However, he said competitive conditions for high-quality assets have caused lending spreads to tighten, partly offsetting the benefit of higher rates.
Noninterest income, expenses and branch investments
Noninterest income increased $1.6 million, or 9%, from the second quarter and 15% from a year earlier. Wealth management revenue declined 1% sequentially but rose 7% year over year, as higher asset-based revenue was offset by a seasonal decrease in tax servicing fee income.
Mortgage banking revenue totaled $3.2 million, down 9% from the prior quarter and 10% from a year earlier, reflecting a lower mortgage pipeline and higher market interest rates. Loan-related derivative income increased $924,000, while bank-owned life insurance income benefited from recognition of a $954,000 gain.
Noninterest expense totaled $38.8 million, rising $200,000, or 0.5%, from the prior quarter. For the fourth quarter, Ohsberg said the company expects expenses to increase by about $1.5 million, excluding an annual $750,000 contribution to its charitable foundation.
The projected expense increase includes targeted investments in new branches, marketing, technology and personnel. The two Rhode Island branches, in Bristol and Pawtucket, were expected to open around the end of the quarter. Ohsberg said a branch’s ongoing annual run rate is approximately $750,000 to $800,000, though some spending occurs before opening.
Credit quality improves after office-loan resolution
Asset-quality metrics improved during the quarter. Nonaccrual loans declined to 48 basis points of total loans at Sept. 30 from 78 basis points at the end of the second quarter, while past-due loans fell to 54 basis points from 81 basis points.
The improvement was driven largely by the resolution of a $22.3 million office loan placed on nonaccrual status in the first quarter. The loan was restructured during the third quarter, with $18.5 million returned to accrual status and $3.8 million charged off. Washington Trust recorded a $1.8 million provision for credit losses in the quarter.
Chief Risk Officer Bill Wray also discussed a $6 million Class A property loan that was moved to nonperforming status because of potential valuation risk. He said the property’s occupancy had remained level, its sponsors remained committed, and the borrower had not missed a payment. The loan does not mature until 2031.
Wray said a separate $28 million lab-space loan was 95% leased and could move out of special mention in the near term if tenants continue to perform after free-rent periods expire. He said Washington Trust was also working with sponsors on an exit scenario for a $6.6 million lab-space loan.
Total equity was $531 million at quarter-end, down $23 million from the prior quarter as net income was offset by lower fair values on available-for-sale debt securities and the quarterly dividend. The dividend remained $0.56 per share. Management said it has no current plan to repurchase shares, preferring to retain capital to support balance-sheet growth and investments in the business.
About Washington Trust Bancorp (NASDAQ:WASH)
Washington Trust Bancorp, Inc is the holding company for The Washington Trust Company, a community bank headquartered in Westerly, Rhode Island. Founded in 1800, Washington Trust is one of the oldest continuously operating banks in the United States and serves individuals, families, businesses and institutions.
The bank provides a range of financial services, including checking and savings accounts, certificates of deposit, residential and commercial real estate lending, consumer loans, business banking and cash-management services.
