Washington Trust (WASH) Q4 2025: Margin Expands 61bps as Deposit Mix and Commercial Banking Drive Upside
Washington Trust’s Q4 results marked a turning point with margin expansion and disciplined deposit growth fueling improved profitability. Strategic investments in commercial banking and wealth management are beginning to reshape the business mix, while asset quality remains a standout among peers. With new teams in place and a branch opening planned, WASH is positioning for measured, higher-quality growth in 2026.
Summary
- Commercial Banking Buildout: Newly hired institutional and C&I teams are expected to accelerate loan and deposit growth in 2026.
- Margin and Deposit Tailwind: Improved funding mix and in-market deposit gains are driving multi-quarter margin expansion.
- Asset Quality Outperformance: Zero non-performing commercial loans and net recoveries highlight conservative risk management.
Performance Analysis
Washington Trust delivered a quarter of broad-based improvement, with net interest margin (NIM) rising to 2.56 percent, up 16 basis points sequentially and 61 basis points year over year. This expansion was powered by a better funding mix—higher in-market deposits, lower wholesale funding, and disciplined deposit rate management—demonstrating the bank’s ability to optimize its balance sheet amid a competitive deposit environment. Net interest income grew 5 percent quarter over quarter and 24 percent year over year, while non-interest income, including wealth management and mortgage banking, advanced 5 percent sequentially and 15 percent on an adjusted annual basis.
Wealth management revenues grew 5 percent, with average assets under administration (AUA) up 4 percent quarter over quarter and 9 percent year over year, reflecting both organic growth and the integration of Lighthouse Financial Management. Mortgage banking revenues, though seasonally down 7 percent, were up 14 percent annually, with origination and sales volumes increasing 21 percent and 25 percent, respectively. Expenses rose 6 percent in the quarter, driven by performance-based compensation, increased staffing, and a one-time charitable contribution. Credit quality remained exceptional, with non-accruing commercial loans at zero, non-accruing loans at just 25 basis points of total loans, and net recoveries for the quarter.
- Deposit Mix Shift: In-market deposits rose 9 percent year over year, while wholesale funding declined 21 percent sequentially, reducing funding costs.
- Expense Discipline: Non-interest expense growth was contained, with most increases tied to strategic hires and compensation linked to performance.
- Balance Sheet Strength: Total equity increased by $11 million, and the dividend was maintained, reflecting a stable capital position.
The quarter’s results highlight a bank that is leveraging local deposit growth, margin management, and targeted business line investments to build sustainable earnings power.
Executive Commentary
"This quarter's results reflected continued earnings momentum and improving profitability. The quarter's performance was driven by margin expansion, continued in-market deposit growth, and increased revenues from wealth management."
Ned Handy, Chairman and Chief Executive Officer
"Net interest income was $40.7 million, up by 5% from Q3, and 24% year over year. The margin was $2.56, up by 16 basis points, and up by 61 basis points year over year. Better funding mix with higher in-market deposits and lower wholesale funding, as well as deposit rate management contributed to this improvement."
Ron, Senior Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Commercial Banking Expansion
WASH is investing heavily in its commercial and institutional banking franchise, bringing on a dedicated team to target education, healthcare, and nonprofit clients across the Northeast. This move is expected to generate high-quality C&I (commercial and industrial) loans, strong deposit growth, and new wealth management opportunities from institutional clients. The team’s deep regional experience and networks are seen as catalysts for accelerating growth in 2026 and beyond.
2. Wealth Management Scale and Integration
Wealth management continues as a growth lever, with the Lighthouse Financial Management acquisition adding scale and new capabilities. The business is also investing in financial planning talent to deepen client relationships, drive retention, and appeal to next-generation customers. Management remains open to further tuck-in M&A, but is disciplined on pricing and cultural fit, emphasizing organic growth and strategic fit over rapid expansion.
3. Margin Management and Deposit Focus
Margin expansion is being driven by a deliberate shift to in-market deposits and lower reliance on wholesale funding, supported by active deposit rate management. The upcoming swap termination is expected to further boost NIM by 13 basis points through Q3 2026, with organic margin expansion of 3 to 4 basis points per quarter projected if rates remain stable.
4. Prudent Credit and Portfolio Mix
Credit quality remains a hallmark, with zero non-performing C&I and CRE (commercial real estate) loans and net recoveries in the quarter. Management acknowledges reserve coverage is on the lower side versus peers, but attributes this to a higher weighting in lower-risk residential loans and ongoing conservative portfolio management. The only classified office exposure is being actively managed and remains current.
5. Retail Footprint and Channel Strategy
The bank is selectively expanding its retail presence, with a new branch slated for Pawtucket in 2026 and ongoing exploration of alternative delivery models such as ATMs. The approach reflects a blend of growth and cost discipline, with the potential for 1-2 new locations per year, tailored to evolving customer needs and market opportunities.
Key Considerations
This quarter marked a pivot toward a more diversified, higher-quality growth model, with management prioritizing commercial banking and wealth management while maintaining a conservative risk posture.
Key Considerations:
- Commercial Team Ramp-Up: The newly hired C&I team, with deep Northeast market experience, is expected to drive above-peer loan and deposit growth, though pipeline impact will materialize over coming quarters.
- Margin Upside: NIM is guided to expand further through 2026, supported by funding mix improvements and swap roll-off, providing a rare tailwind in a volatile rate environment.
- Expense Management: Strategic hiring and a new branch will increase costs, but management projects a contained 5-6 percent annual expense growth, with performance-based compensation tied to revenue gains.
- Wealth Management Leverage: Ongoing integration of Lighthouse and targeted hiring in financial planning should support steady fee income growth and deepen client relationships.
- Buyback Flexibility: With capital ratios near 12 percent CET1, buybacks remain an option, but management is prioritizing organic and strategic growth investments.
Risks
Loan growth execution risk looms as new commercial teams ramp and residential portfolios are expected to run off. A single classified office CRE exposure, while manageable, highlights sector-wide vigilance. Expense growth from new hires and branch expansion could pressure efficiency if revenue lift lags. Peer reserve comparisons may draw scrutiny if credit quality normalizes or economic conditions deteriorate, though management expresses confidence in its portfolio risk profile.
Forward Outlook
For Q1 2026, Washington Trust expects:
- Expense growth of approximately 6 percent, reflecting annual merit increases and new hires
- Continued NIM expansion, with a 9 basis point benefit from swap termination in Q2 and a further 4 basis points in Q3
For full-year 2026, management guided:
- Net loan growth of approximately 5 percent, with C&I expected to outpace CRE and residential running off
- Effective tax rate around 22 percent
- Branch expansion limited to Pawtucket, with further retail investment under review
Management cited the following drivers for its outlook:
- Ramp-up of new commercial and institutional banking teams
- Margin tailwind from deposit mix and swap roll-off, assuming stable Fed funds rate
Takeaways
Washington Trust is leveraging margin expansion and a disciplined funding strategy to reinvest in higher-growth business lines, notably commercial banking and wealth management. Asset quality remains a differentiator, and capital levels provide flexibility for continued organic investment and selective buybacks.
- Margin and Deposit Gains: Multi-quarter NIM expansion and in-market deposit growth are providing durable earnings leverage and funding stability.
- Strategic Hires Set Up Growth: New commercial and institutional teams, with proven track records, are positioned to accelerate loan and deposit growth in 2026, though execution will be closely watched.
- Wealth Management Opportunity: Integration of Lighthouse and new financial planning talent should drive recurring fee income and deepen client relationships, with tuck-in M&A as a secondary lever.
Conclusion
Washington Trust is entering 2026 with positive momentum, underpinned by margin expansion, disciplined deposit growth, and strategic investments in commercial and wealth management. With asset quality outperformance and a prudent approach to capital, the bank is well positioned to deliver steady, higher-quality growth in the coming year.
Industry Read-Through
WASH’s results highlight the growing importance of deposit mix and local funding in driving margin resilience for regional banks. The rapid pivot to commercial banking and institutional client segments is a clear response to margin compression and legacy residential runoff seen industry-wide. The bank’s asset quality outperformance and conservative reserve approach underscore the value of disciplined risk management amid sector credit normalization. For peers, the message is clear: margin tailwinds, business mix diversification, and targeted growth investments will be key differentiators in 2026 and beyond.