KBRA Affirms Ratings for Washington Trust Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Westerly, Rhode Island-based Washington Trust Bancorp, Inc. (NASDAQ: WASH) (“the company”). KBRA also affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the subsidiary, The Washington Trust Company, of Westerly. The Outlook for all long-term ratings was revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook stems from core capital ratios that have contracted meaningfully below the average of the rating category, due to a combination of elevated loan growth, weaker earnings, and relatively high total shareholder distributions (including a higher dividend yield). In that regard, the CET1 ratio (10.7% at 2Q23), has declined by 160 bps compared to 2Q22 and tracked 110 bps below the KBRA rated peer average. Moreover, the TCE ratio (5.6% at 2Q23) is considerably lower than most peers, many of which hold a similar or higher AFS securities mix or investor CRE concentration. The earnings profile has historically been reinforced by diverse revenue streams, which have produced risk weighted earnings above or in line with similarly-rated peers despite a lower NIM. While noninterest income relative to total revenues of 28% in 1H23 is solid, when measured to average assets (0.79% in 1H23), it has tracked below peers in recent quarters. Overall, earnings performance and capacity has diminished in 2023, driven by a higher mix of lower-yielding mortgage loans, elevated reliance on more price sensitive funding sources, muted mortgage banking income (particularly gain on sale), and to a certain degree, variability in wealth management revenues, the latter partly attributed to notable client outflows in recent quarters. That said, AUM (~$6.4 billion at 2Q23) remains above pre-pandemic levels. The ongoing effects of the high interest rate environment are expected to continue to pressure margins, especially given a funding profile historically characterized by higher non-core funding utilization and limited deposit scale outside its legacy footprint. Additionally, subdued secondary mortgage market originations remain a constraining factor to earnings growth. The ratings are supported by solid long term asset quality performance, underpinned by disciplined underwriting standards, solid credit governance, a fairly granular loan portfolio, and a credit environment that has been benign for some time. The NPA ratio (0.21% at 2Q23) and the net charge-off ratio (averaging 0.03% since 2017) have tracked better than many peers historically. CRE loans are mainly located outside of city centers and largely comprised of class A and B structures in suburban locales, with the largest loans within each segment exhibiting solid WA LTV and DSCR attributes. Exposure to office is manageable at only 5% of loans, with seemingly moderate concentration to tenants within the medical sector. Additionally, office lease rollover risks appear adequately contained.

Rating Sensitivities

Given the Negative Outlook, a rating upgrade is unlikely in the intermediate term. The Outlook could revert to Stable if risk weighted earnings and capital ratios return to levels more in line with the rated peer group within the coming 12 to 18 months. Conversely, material asset quality deterioration or further funding pressures resulting in comparatively weak or uneven earnings, especially on a risk weighted basis, or sustaining the meaningful gap in capital measures relative to the average of the rating category could adversely impact ratings.

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