$28.80
$56.70
bear $28.80
base $48.10
bull $56.70
margin of safety $24.00
market price* $37.06
Washington Trust is a 225-year-old Rhode Island community bank holding company (about $6.5 billion of assets, $5.4 billion of deposits) with branches in Rhode Island, Massachusetts and Connecticut and a sizeable wealth-management and trust arm. Its loans are roughly 40% residential mortgages, 41% commercial real estate (multi-family 31% of that, retail 20%, industrial 17%, office 11%) and the rest commercial, industrial and consumer. Because it is a lender, deposits and borrowings are the raw material of the business and interest is an operating cost, so we value its earnings after interest directly and subtract no debt. Owner earnings for a bank are measured as net income per diluted share; cash flow from operations is not used because it is swamped by the origination and sale of mortgages held for sale. What happened: earnings per share rose from $2.70 in 2016 to $4.39 in 2021, then fell to $4.11 (2022), $2.82 (2023) and a loss of $1.63 in 2024. The cause was this bank's own balance-sheet design: a large book of low-yielding fixed-rate residential mortgages and securities funded with wholesale borrowings whose cost rose faster than the assets repriced. In December 2024 management disposed of those assets at a roughly $94 million pre-tax loss, repaid wholesale funding and issued $70.5 million of new stock, lifting the share count about 12% to roughly 19.2 million. Since then net interest income (taxable-equivalent) rose from $129 million in 2024 to $154 million in 2025, the margin from 1.87% to 2.40%, FHLB advances fell from $1.1 billion to $626 million, and 2025 earnings were $2.71 per share (a $7.0 million sale-leaseback gain and a $6.4 million pension settlement charge roughly cancelled). The first half of 2026 earned $1.49 per share against $1.31 a year earlier, with net interest income of $82.3 million (Q2 $41.8 million vs Q1 $40.5 million). This is a duration mistake that cost the owners about two years of earnings, and we treat it as a recurring feature of how this franchise can go wrong rather than an accident. Earnings level and growth. The 2021-2023 years describe the old balance sheet and 2024 is distorted by the repositioning, so we do not take a median across the decade; the business is measured from 2025, the first full year after the transformation. Actual growth in the most recent full year, 2025 versus 2024 with the repositioning loss removed (about $2.38 by our own estimate), was roughly 14%; the first half of 2026 grew a similar 14%. The base case assumes $3.00 for the next twelve months, an increase of about 11% over 2025, which is below the trailing actual rate and half of which is already earned. Growth credited: the contractual run-off of the fixed-rate residential loans hedged in a closed pool ($733 million falling to $609 million during 2025) being replaced at current yields, which lifts the base to $3.09 and then $3.15 and stops. Growth left out: loan growth, market-driven wealth-management fee growth, share gains and any further margin expansion, because the bank has no multi-year record of growing earnings per share (2016 $2.70, 2025 $2.71) and these depend on things that have not yet happened. Base case, about $48 per share. Owner earnings of $3.00, $3.09, then $3.15 a year, with one ordinary credit downturn in year five (about $1.00 per share of extra loan-loss provisions, then partial recovery). After year ten we keep earnings going at $2.80 because the record supports it: net income has been at least $45 million in every year of the last ten except the repositioning year, and the deposit and wealth franchise is structural. The $2.80 deliberately carries the cost of an occasional credit or interest-rate squeeze like 2022-2024 (roughly one lost year of earnings per decade or so). The business is worth about $48 per share; there is no debt to subtract (deposits are operating funding; the only holding-company borrowing is $22.7 million of junior subordinated debentures and FHLB advances of $626 million are funding of the loan book). Bear case, about $29 per share. Owner earnings stall at $2.71, the 2025 level, and we then run a full credit cycle modelled on the 2008-2010 episode, in which industry loan losses ran about 2.5% of loans a year at the peak. For a $5.2 billion book that is 40% residential and 41% commercial real estate (office $238 million, of which 24% is special-mention and 3% classified; two office loans are already on the problem list) we assume cumulative losses of about 5%, provisions of $40 million, $90 million, $85 million and $35 million over four years against a $42.6 million existing reserve, with pre-provision income dipping about $6 million. Owner earnings go to $1.29, then losses of $0.74 and $0.54, then $1.49, the dividend is cut, and recovery is only to about $2.60. Beyond year ten, we carry $1.85 to reflect a second credit cycle and another rate squeeze of the 2022-2024 kind, each costing roughly two to three years of earnings every dozen years or so. Tangible equity is about $486 million (roughly $25 per share), and the cycle consumes it only at the margin because pre-provision earnings stay near $70 million a year, so no dilution is assumed. The bear value sits slightly above tangible book because the franchise still earns positive pre-provision income through the cycle and has produced a profit in every year of the last ten except the repositioning year. Bull case, about $57 per share. Margin repricing continues and owner earnings reach $3.60 by year three, equal in dollars to the $68-70 million the bank earned in 2018-2020, with one mild credit year, and $3.35 thereafter. We do not assume a better rate environment or market-driven fee growth. Margin-of-safety price, $24. We are fairly sure of an earnings level between $2.70 and $3.00 because net income has run between about $12 million and $16 million a quarter since the start of 2025 and provisions rose to $5.6 million in the first half of 2026 yet earnings still grew. We are less sure of what comes after: the same management lost nearly all of two years of earnings on a funding mistake, the dividend of $2.24 is a high share of earnings (about 75-83%) leaving little retained cushion, and the loan book is concentrated in southern New England property. Things most likely to be wrong are the margin plateauing at the current run-rate (which on its own still supports a value in the mid-$40s), credit costs running at the level of the first half of 2026 (about $11 million a year) rather than lower, and a second asset-liability misstep. The business structure would survive the worst outcome we can describe (with $1.4 billion of unused FHLB borrowing capacity, $5.4 billion of deposits and only $22.7 million of holding-company debentures). The price assumes a holding period of three to five years, with the dividend of $2.24 equal to about 9% of the margin-of-safety price annually. From $24 the bear case implies roughly 12% a year including dividends over three years, and the base case about 30%; at a higher price the bear outcome would imply too little return. That is why the margin-of-safety price is $24 rather than a price nearer the base value. Previous estimates were made on a different basis and are not comparable; what has changed in the business is that the earnings recovery is now confirmed by two more quarters, offset by higher credit provisions.