Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call. My name is Sherry. I will be your operator today. [Operator Instructions] Today's call is being recorded. And now, I will turn the call over to Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel?

Thank you, Sherry. Good morning and welcome to Washington Trust Bancorp, Inc.'s first quarter 2019 conference call. Today's call will be hosted by Washington Trust executive team Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer. Please note today's presentation may contain forward-looking statements and actual results could differ materially from the statements made on today's call. Our complete Safe Harbor statement appears in our earnings press release and in other documents filed with the SEC. Please visit our Investor Relations website at ir.washtrust.com. to review the complete Safe Harbor statement and other documents. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce Washington Trust's Chairman and Chief Executive Officer, Ned Handy.

Thank you, Beth and good morning and thank you for joining us on today's conference call. Earlier today we released our first quarter 2019 earnings. I'll now take a few minutes to review some highlights from the quarter and then Ron will provide a more in-depth overview of our financial performance. And then Mark, Ron and I will answer any questions you might have about the quarter. Washington Trust posted solid first quarter earnings with net income of $17.5 million or $1.00 per diluted share. That's up from both the fourth quarter of 2018 and the year ago. Profitability metrics remained strong and we continue to rank highly among our peer groups for key performance ratios. We had good activity across all business lines resulting from favorable market conditions, recent branch expansion and continued marketing and business development efforts. Let me take a few moments to discuss these activities in more detail. Total deposits amounted to $3.5 billion at March 31, down from year end but up from a year ago. In January we opened a branch in North Providence, Rhode Island further expanding our presence in the Northern part of the state. We've had great success with de novo branching over time and have already seen evidence with this new branch as we've been warmly welcomed by the North Providence community and the branch has met our financial expectations. There continues to be aggressive competition for deposits in our market with banks and credit unions offering high rate CD and money market specials during the quarter. As we mentioned on previous calls back in mid 2017 we got ahead of the curve and ran some very successful CD campaigns. These promotions brought in both new money and new customers, especially in the markets where we've opened new branches in…

Yes, thank you, Ned. Good morning everyone and thank you for joining us on our call today. I'll review our first quarter operating results and financial position as described in our press release which was issued this morning. As Ned mentioned, net income was $17.5 million or $1.00 per diluted share. This compared to $17 million or $0.98 on the fourth quarter. We also reported return on equity of 15.52% and a return on assets of 1.39%. Net interest income for the first quarter rose by $706,000 or 2%. The net interest margin was $2.93% down 2 basis points. Income from loan payoffs and prepayment penalties totaled $49,000 compared to $144,000 in the fourth quarter. Excluding these amounts the margin was 2.93% down 1 basis point compared to the fourth quarter. The average balance of interest earnings assets rose by $227 million or 5% on a linked quarter basis. Average investment securities were up by $124 million and average commercial loans were up by $97 million. The yield on average earning assets increased by 11 basis points from the preceding quarter to finish at 4.24%. On the funding side, average in-market deposits were up $53 million and the average balance of wholesale funding sources was up $172 million from the fourth quarter largely to fund our securities purchases. The cost of in-market deposits was 82 basis points up 7 basis points on the quarter and the cost of wholesale funding was 248 rising by 17 basis points. Net interest income comprised 31% of total revenue in the first quarter and amounted to $15.4 million which was up by $204,000 or 1% from Q4. Wealth management revenues were $9.3 million up $240,000 or 3%. Transaction based wealth management revenues totaled $331,000 up by $249,000 on a linked quarter basis due to…

Thanks Ron. Washington Trust had another solid quarter as the earnings increased from fourth quarter, capital and asset quality remained strong and we increased the dividends for our shareholders. We're off to a good start in 2019 but know that we must be prepared to face any new challenges and opportunities that may arise. It's amazing to think that the global economy including trade conflicts and Brexit and other sad things happening around the globe could affect our little corner of the world but it does. Federal Reserve interest rate changes and financial market fluctuations can significantly impact financial service companies. Washington Trust has a solid foundation and as our results have shown has performed well through various economic cycles over the past 218 years. Tomorrow we will host our annual meeting and look forward to sharing these favorable results and presenting our 2019 outlook with our shareholders. We thank you for your time and your continued interest and support of Washington Trust. And now Mark, Ron and I are happy to answer any questions you may have about the quarter.

Thank you. [Operator Instructions] Our first question is from Mark Fitzgibbon from Sandler O'Neill. Please proceed with your question.

Hey guys, good morning.

Good morning Mark.

Good morning Mark.

A couple of quick questions on the Wealth Management business, I'm curious if of the sort of $6.35 billion of AUA, would it be possible to breakdown sort of what the mix looks like between equities and fixed income?

Yes, Mark this is Mark. In broad terms about 55% of the assets under management are related to equity securities – the S&P could use as a proxy for that, 35% or so would be fixed income and then 10% other, the majority of which would be cash, but there might be some other assets within that.

Okay. And then I'm curious if the roughly $80 million of client outflows this quarter, how much of that is attributable to those folks that left, are we getting to the end of that?

Yes, we think we are getting to the end of that Mark. It was a nominal amount but not outside the ordinary course of business and you're referring to the departure of several client base and counselors from Weston Financial Group in the first quarter of 2018. I think we gave some estimates as to the amount of assets and revenues that will be impacted and we think substantially all of that has taken place in the last 12 months or so.

Okay and then changing gears a little bit on the deposit front it sounds like Citizens Financial is really putting the pedal to the metal on in terms of competing for deposits up there. What kinds of things can you do to combat that and how high would you be willing to let the loan to deposit ratio go? Thank you.

Yes, Mark this is Ron. So I think there is a bunch of things that we're doing. We're doing the de novo branching. I think we were quite aggressive in our market as far as CD promotions beginning in the summer of 2017 and we brought in about $300 million in that time period of new money which I think added some market share to us. And we're also quite aggressive on the commercial money market side in terms of cities and towns and the colleges locally. So we're doing all of those things. You know as Citizens is more aggressive, they implemented their new access account, that's more of a national product. Can we see them locally? Yes, sure we're competing with them locally. So to be honest we've actually dialed back our CD promotion from 3% down to 2.5%. So we're seeing market rates sticking at that CD rate of about 3% which we think does not make economic sense to us. So we dialed that back and that might be a little bit why our deposit growth slowed a little bit, but even at that 2.5% we raised another $10 million. So we compete against Citizens and we compete against BofA and a number of smaller institutions locally, so really no change there.

Okay, and then Ron, I'm curious, given the competitive pressures on the liability front, should we expect the net interest margin to continue to squeeze down a little bit?

Yes, I think that's probably fair. I mean we're probably looking for the year, probably closer to 290 perhaps upper 280s at the moment, so I mean couple of things there we could grow our balance sheet, we're funding that with wholesale funding, so it has got a tighter spread. Again, we continue to see our older CD promotions mature and reprice upward as well as our FHLB funding. So we'll see probably another quarter or so of that phenomenon happening and there continues to be pressure on money markets, that's where we see the - I think the beta is probably good, most apparent on money market at the commercial end.

This is Mark, just some color on that too. As fed policy has changed prospectively we would think that pricing for deposits would begin to become more rational as the year unfolds and expectations for margin change at banks. How fast that lessening of deposit rate pressure occurs is unknown as yet. So we think it has some, it's got some time to ripple through that competitive pricing landscape as management teams adjust their expectations and move deposit rates accordingly.

And then lastly, is it too early to provide any guidance on CECL?

Yes.

Okay.

We're told that we're in line with everyone else and then we're may be a little ahead of the pack, in terms of planning, but too early to give you any math on it.

And Mark, just I don’t think I answered your loan to deposit ration question, so that's obviously a metric that we care about and we look at and we're trying to grow our deposits as quickly as we can. I would say that we won't turn down loans that make sense just to protect the loan to deposit ratio. So if we find competitive deals on the loan side we will continue to do those. We have plenty of liquidity to do that and we would continue to do that.

But given the other businesses we are not as margin dependent as perhaps others and can and should be careful about the loans we choose to do and the yields we earn and off themselves. So I think we're being a little bit more picky perhaps than we have been, even though we've always played in the safe end of that curve.

Thank you, Ned.

Yep.

Our next question is from Damon DelMonte with KBW. Please proceed.

Hey good morning everyone, how is it going today?

Good morning, Damon.

So, the first question, just talk a little bit about loan growth, you know kind of started off the year pretty good, I think you're up 6% on a linked quarter annualized basis for end of period balances. Can you guys just give a little update on your outlook for the remainder of the year and do you feel comfortable with your previous guidance?

Thanks Damon. So yes, we feel comfortable with previous guidance. One thing to note in the first quarter is we really didn’t have the kinds of payoffs that we've seen in prior quarters. We do expect that to pick up a little bit in the second quarter, so I don’t think we'll see the same kind of growth certainly in the next quarter based on what we know. So I don’t think there's any reason to change sort of mid single digit growth outlook at this point although the first quarter was healthy and the fourth quarter was very strong. Pipelines are rebuilding, it's kind of about $100 million which is not the highest it has been by any stretch. So we're in a little bit of a rebuild mode. I think second quarter should be fine, but I think the same guidance for the balance of the year.

And I think as a fact that Damon that changed growth rates more we had anticipated it was a slower pace of anticipated payoffs and pay downs that we had expected to go through in the first quarter for have been deferred to the second.

Got you, okay. And then driving that growth again continues to be commercial real estate opportunities throughout your footprint is that fair?

Yes, I think balanced between our main three states and across product type fair amount of construction. So we're seeing, first quarter we saw kind of $15 million a month on average construction funding which is helpful. Our construction book is about 50% funded right now, so that should keep going for a while and then will be a nice offset to payoffs. But I think CRE has certainly been the focus. We had a couple of nice C&I approvals in the first quarter probably won't close for another couple of weeks, but I think we're - we continue to try and balance out C&I and CRE growth but CRE has certainly been downwards.

And those are those payoffs Ned would come from CRE related credits correct.

Got it, okay, great. And then with respect to expenses, do you feel comfortable with this quarter's level as a go forward rate, I know you kind of reiterated the 3% to 4% growth but I mean is there anything unique to this quarter that we should maybe not include in the run rate going forward?

Oh yes, I think just the payroll tax items that I talked about, so I would say the rest of our expenses are on track.

Okay, great and then I guess just lastly on the bit of leverage you put on this quarter with securities and funding them with wholesale borrowings, is that something we should expect more of in the coming quarters or is this something you just felt was appropriate this quarter and probably not going to increase from this level?

Yes, we don’t have any plans to do more. We did $100 million at the end of December and another $16 million end of January and we thought that that was a good time for us to get in with that, and so we’re not expecting more at this time.

Okay, great. That’s all that I had. Thank you.

Thanks Damon.

Our next question is from Laurie Hunsicker with Compass Point. Please proceed.

Yes, hi thanks, good morning.

Good morning Laurie.

Good morning.

Just wondered if we could go back to commercial real estate because it was so strong this quarter, I mean annualized growth of 20%. Can you tell us how much of that book is construction currently and then so again factoring in...

Yes, so, so...

Oh, yes go ahead. Thanks.

Sorry Laurie, so the whole construction book is around about $400 million of which about $200 million and change has funded, and so, we have projects in process that will generate sort of and they have generated $15 million a month in the last quarter. So we expect that to continue for a while. Obviously as that construction is completed those roll into CRE in the past couple of years and we expect to continue. We will see some of those playoff upon completion and so we expect the payoffs with rates staying down we expect values to stay fairly constant and payoffs to continue as our developers take advantage of people looking for investment returns and buying real estate, still fairly low cap rates and high values. Spread out among the three states a little bit of growth in Connecticut in the last couple of quarters versus the other two, but pretty much spread out among the states and among property type.

And then again, if we just think about what overall CRE is going to look like relative to the 20% annualized currently, we layer in payoffs, I mean could that still be a double-digit grower?

I don’t have reason to change our view from sort of mid single-digit growth for the whole commercial book, real estate had a very strong first quarter, but again we had $15 million in payoffs in the quarter which is very low for our history on a quarterly basis and we expect that to pick up. So, and also Laurie, you know, I think where we are in the cycle we’re being particularly careful about new originations and so, I think, I don’t expect growth to stay at that rate that we saw in the first quarter.

Okay, great, thanks and then and just going over to the funding side, so the biggest piece we did see was the money markets, and you touched on that a little bit, but I just wonderif you could help us think about the overall cost of where that’s going, so December quarter, the MMAs [ph] were 89 basis points and now they are 101 how should we be thinking about that?

Yes, I mean I don’t know if I could give you, you know an exact cost to funds on that, but I’ll tell you that you know our rep rates really haven’t moved that much, but we’re negotiating our larger accounts on a one by one basis. You know we're reactive because you know we do have good conversations with our customers and they’ll call us. If they are contemplating doing something different they’ll call us and they’ll give us a chance to retain the business. So that's getting more and more competitive. I mean people are looking at us say, you know why can’t I get 2%, why can’t I get 2.20. So we’re providing the rates that we need to do to retain the accounts. I mean generally we can keep these customers with a little bit lower then maybe they were being offered somewhere else. It tends to be our history because they like banking with us, but yes, I mean I would expect to see some continued pressure there.

And Laurie, this is Mark. I think a lot of our effort from margin in 2019 is dependent on what the change in outlook for fed policy will mean to competitive deposit pricing, and Q1 I think people hadn’t really caught up to that reality of no rate increases and maybe declines as the next move. So that could change the competitive landscape and consumer expectations, but a lot remains to be seen. So market competition is probably going to be the biggest driver of cost of funds increase for the remainder of the year.

Right, that makes sense. And then in your North Providence branch, the new branch, how are deposits coming in there? Are you running any specials and maybe can you help guide in terms of us thinking how many basis points over your overall costs that, that new money is running?

Yes, so, we opened the branch in January. We brought in about $10 million in deposits. Yes, we’re running some specials there, but we’re getting a lot of foot traffic and people are excited about that branch. Average cost of funds are probably a little higher just because we are getting lift off and offering the CD promo. I don’t know if Mark you could probably add to that.

Yes, now, I think that’s - I mean, the traffic has been great. The City of North Providence has been very supportive and yes, it came online while we were doing CD promotions especially in the newer markets in the greater Providence area. So it definitely benefited from those promos and now and most of those promos were in the kind of the 2-year range, so that gives our branch a couple of years to introduce us to those new customers and deepen those relationships and that was sort of the strategy. I feel very comfortable about it. Mineral Spring Avenue is a very busy thoroughfare in North Providence and I think our brand and service quality will play very well in that market.

Yes, we’ve done a lot of direct marketing around there to generate a twist in the branch.

Okay, and what percentage of that $10 million is CD?

It’s really early to read much into the numbers because of the small deposit size I think Laurie.

Okay.

Well, I think it’s fair to say a lot of it.

Okay, okay. That’s helpful.

Yes, I mean those promos were out there, so people were certainly taking them in the branches was told to use the promos to bring customers in the door and I think about half of it is municipal, so that wouldn’t be, but you know, your guess is probably right. The other half would be highly CD oriented.

Okay, great. And then just two more questions here.

Yes.

The noninterest income obviously you've got the tax prepped in March, and the tax prepped run rate typically historically has peaked in the June quarter, is that still the case? So June probably runs 300,000 and then September we'll see that fall out?

Yes.

Okay, great. And then your outsourced services that under noninterest expense, I know it was outsized in the fourth quarter so it looks like it’s still elevated, is there anything nonrecurring in that 2.606?

No.

Well, swap [ph] fees would go through, yes so the higher levels in Q4 largely swap [ph] related, so we outsourced some of our swap execution costs, so that runs through our site services, so we did have higher volume in Q4 than we did in Q1 related to that.

So the swap income is higher than the shared cost goes up too Laurie, so a larger volume of swap transactions and swap related revenue will have a corresponding increase in the fee back up.

Okay, and then I mean to the extent obviously we saw it cut in half this quarter relative to last quarter, I mean there is nothing non-recurring in that 2.6?

No.

No.

Okay, great thank you.

Thanks Laurie.

This concludes our question-and-answer session. I would like to turn the conference back over to Ned Handy for closing comments.

Well, thank you all for joining us, we certainly appreciate your interest in Washington Trust and your support and we certainly look forward to reporting next quarter and we will talk to you all I’m sure between now and then, so have a great day and thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.