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

Thank you, Jamie. Good morning and welcome to Washington Trust Bancorp Inc.'s third quarter 2019 conference call. Today's call will be hosted by Washington Trust Executive team Ned Handy, Chairman and Chief Executive Officer; Mark Kim, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer. Before we begin, we'd like to take note of -- that today's presentation may contain forward-looking statements and actual results could differ materially from what is discussed on the call. Our complete Safe Harbor statement appears in our earnings press release and in other documents that we filed with the SEC. We encourage you to visit our Investor Relations' website at ir.washtrust.com to review all of our SEC filed documents and the complete Safe Harbor statement. 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. Good morning and thank you for joining us. Yesterday, we released our third quarter earnings. This morning, I'll review the quarter's highlights and then turn the call over to Ron Ohsberg, who will discuss our financial performance in more depth. Then Ron, Mark, and I will answer any questions you may have about the third quarter performance or our outlook for the remainder of 2019. I'm pleased to report that Washington Trust posted record third quarter earnings with net income of $18.8 million or $1.08 per diluted share. Our performance reflects the benefits of our diverse business model and generating consistent revenues from varied economic cycles and interest rate realities. Our key profitability measures remain strong, we are well-capitalized, and asset quality also continues to be strong. The Federal Reserve's rate decisions during the third quarter presented both opportunities and challenges for us. Let me take a moment now to review some of the highlights of the quarter. We had good deposit momentum in the third quarter as total deposits reached a record $3.6 billion at September 30th and end-market deposits were also at all-time high levels at quarter's end. We had solid growth in both demand deposits and money market accounts. As we mentioned last quarter's call, in the anticipation of the Fed's rate cuts, we began rationing down rates early in the quarter and ultimately saw modest runoff in time deposits. We had seasonal deposits inflows from municipal and institutional clients during the quarter. End market deposit growth enabled us to reduce FHLB wholesale borrowings. Changes to our deposit mix, careful management of deposit pricing, and continued end market deposit growth will help offset margin pressure. FDIC deposit market shares statistics were released during the third quarter and we're pleased to report that Washington Trust…

Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was a record $18.8 million or $1.08 per diluted share for the third quarter. This compared to $17.3 million and $0.99 for the second quarter. We also reported a return on equity of 15.2% and return on assets of 1.44%. Net interest income for the third quarter of $33 million declined by $880,000 or 3%. The net interest margin was 2.72%, down nine basis points. Income and margin were affected by the July reduction in the Fed funds rate with LIBOR in prime-based loans resetting downward and continuing prepayments in our mortgage backed securities and residential loan portfolios. The average balance of interest earning assets declined by $22 million or 0.5% on a linked quarter basis. Average investment securities were down $76 million while average loans were up $21 million. The yield on average earning assets decreased 11 basis points from the preceding quarter to 4.07%. On the funding side, the average balance of wholesale funding sources declined $103 million while average end-market deposits rose to $58 million from the second quarter. The cost of interest-bearing liabilities declined two basis points. Non-interest income comprised 36% of total revenues in the third quarter and amounted to $18.3 million, up $1.6 million or 9% from Q2. Wealth management revenues were $9.2 million, down $396,000 or 4% from the preceding quarter. Transaction-based revenues totaled $140,000, down by $268,000 on a linked quarter basis due to tax reporting and preparation fees, which are concentrated in the first half of the year. Asset-based revenues totaled $9 million, down $128,000 or 1% on a linked quarter basis. The September 30, end of period balance of assets under administration was $6.1 billion, down $353 million or…

Thank you, Ron. We're pleased with the third quarter performance and hopeful that the momentum will continue through year-end. We are well aware of the challenges presented by the current operating environment as well as the uncertainties that the mid-year may bring. We've weathered many economic storms during our 219-plus year history, and have a solid financial foundation. We are well capitalized. We have a proven business model and our sights are set on continued sensible growth. We thank you for your continued support of Washington Trust, and we'll continue to work hard to enhance shareholder value in America's oldest community bank. So, thank you for your time this morning. And now Mark, Ron and I are happy to answer your questions.

Ladies and gentlemen, we'll begin the question-and-answer session [Operator Instructions] And our first question today comes from Mark Fitzgibbon from Sandler O'Neill. Please go ahead with your question.

Hey, guys. Good morning.

Hey, Mark.

Hey, guys, good morning. Ron, just to clarify, on the mortgage side did I hear correctly that you expect mortgage revenues to be pretty comparable in 4Q, which you had in 3Q?

Yes, yes. Our pipeline is real strong at the end of the quarter, actually a little higher than it was at the end of second quarter. So, yes. We think mortgage sales activity will be pretty strong. A component of our mortgage revenues was the fair value of the hedge pipeline. So at some point we're going to see some tapering off of our mortgage volumes. We don't know exactly when that will be. We don't think it will be before the end of the fourth quarter, though.

And the gain on sale margins look pretty similar to what you saw in Q3 as well?

Yes. They've been strong. I mean they've been trending up through the year.

Okay. Secondly, how much more do you think it's likely we'll see in outflows from those folks that left at Weston? Are we sort of through most of that? Or do you think there's a little bit still to come?

Well. So we've had another $94,000 -- $94 million lease since the end of September. So I would say, we're not at the end of it yet. We probably won't know where we are in its entirety for another quarter or two. Mark, I don't know, if you have anything you want to add on that? Mark Gim.

No. Mark, we continue to do -- recently we have talked about on prior calls, we're reaching out to clients very proactively. The effort is really to do the right thing for the customer and client, but as Ron said, we'll keep you as current as we can as we receive information.

Okay. And then lastly, I wondered if you could help us think about the margin in the 4Q. My suspicion is that you'll continue to see some pressure until you get some of those CDs to reprice next year, is that fair?

It is. So, obviously, we had a cut at the end of September. We're expecting another cut at the end of this month. That's 50 basis points of pressure. We're not really taking into consideration at this time any cut at the end of the year. But considering all that, we would expect the fourth quarter margin to be in the low to mid-260s. I can kind of break that down for you a bit. So we have $1.8 billion in LIBOR and prime-based loans, so those we expect will reset downward on November 1. But offsetting that, we have $1.6 billion of interest-sensitive liabilities that consists of home loan borrowings, brokered CDs, retail CDs. And those will -- that $1.6 billion will reprice out by the end of June and of that about half of it actually resets in the fourth quarter. So each rate cut causes us some immediate pain, but we will be able to offset that on a relatively short-term basis. In terms of things that we're doing internally, we've been actively managing down the rates that we pay on our institutional money market accounts, as well as lowering and shortening our promotional offerings. And on the wholesale side, we did restructure some advances, which will lower our interest expense by $170,000 in the fourth quarter and by about $610,000 next year and $410,000 in 2021. So we're not sitting still. We do have some ability to manage our expenses down.

Thank you.

Our next question comes from Erik Zwick from Boenning and Scattergood. Please go ahead with your question.

Good morning. Just a couple questions on the expense side. I think I recall from last quarter you mentioned there could potentially be some legal expenses related to your issue -- your kind of efforts to pursue the clients or enforce any kind of non-competes from the two wealth management managers that left. Looks like legal expensive were kind of in-line this quarter. I guess, is this a good run rate going forward? Or kind of any updated thoughts on that front?

Yes. It's pretty good. I mean you take the FDIC out, obviously. We're going to see some kind of variable expense reduction on the wealth side at about 24% of revenue loss. So that's – you're starting to see some of that in there. So we've had some compensation saves on the wealth management side, which kind of offset in the short-term some of those legal expenses. We issued guidance at the beginning of the year at like 3.5% to 4% revenue and expense increase year-over-year, we're more or less on track with that. I guess I would just also like to reemphasize that we do have some variable cost in the mortgage and derivative side of things, which are pushing up expenses a little bit. That's kind of a good trade-off on the increased revenue that we have.

Okay. That's helpful. And then you kind of mentioned the FDIC piece. Do you expect to record any additional credits in the fourth quarter or into the first quarter of 2020?

Yes. Realistically, we think we'll get the 200 in the fourth quarter assuming that the FDIC reserve levels maintain at the level that they are at which the FDIC has kind of signaled to the banks that that's -- that they're going to ensure that that happens. But that would be the only caveat, which is the timing, but we think we'll get it into Q4.

Okay. Great. Thank you. That's helpful. Thanks for taking my questions.

You’re welcome.

Thank you, Erik.

Our next question comes from Damon DelMonte from KBW. Please go ahead with your question.

Hey, good morning guys.

Good morning, Damon.

Just to start off -- how’s everybody doing today?

We’re good.

Great. Thank you.

Great. Just to start off real quick on the expenses, just to kind of follow up on Eric's question on the FDIC costs. So if you get additional $200,000 of credit that's coming off the normal quarterly amount, correct? So if you're somewhere in that $400,000 range, you take the $200,000 credit you're kind of looking at something around $200,000 in the fourth quarter?

Yes. That's about right. I would say our run rate is 400 to 450 in a normal quarter. So yeah, it would be $200,000 less than that.

Got it. Okay. Thanks for clarifying that. So I guess my next question kind of talking a little about loan growth. As you noted in your prepared remarks, good commercial real estate activity kind of softness in the C&I, how do we kind of think about those two buckets as we progress through the end of 2019 and into 2020?

Yeah. I think we'll stick with our sort of mid single-digit guidance. I mean, we're kind of 3.5% year-to-date. That would require another $30 million in net growth in the fourth quarter. We generally have pretty strong fourth quarters. The pipeline is sound. Some of the C&I reduction was utilization probably half of it in the quarter, so it's not that we had loss of customers. I would say that the pipeline has tilted a little towards its creep, but there are some C&I opportunities in the pipeline. So I feel comfortable with kind of the mid single-digit growth levels and we'll see about 2020. Who knows what's going to happen in the economy, but for now we're -- I think we're fine through year-end.

Got it. Okay. And then with regards to CECL, have you guys come to the point where you are able to disclose the expectations on the impact to your loan loss reserve level come 2020?

Yeah. So I would say, we're not going to provide any specific guidance just now. I'd said, it would be fair to say that we expect a modest impact on capital, no impact on our ability to implement our strategic initiatives. We’re on track with the implementation where at this point we're really just fine tuning methodology have some ongoing control implementation and testing to do, but we're completely on track with our implementation just not quite ready to give any specific numbers yet.

Okay. Fair enough. And then kind of in regards to your overall credit quality of the portfolio anything -- any areas throughout the loan book that you're seeing some weakness? Any impact in manufacturing clients, because of the trade war that's been going on?

Yeah. We don't really see any softening in the portfolio at all. We had a slight uptick in NPA. That was just a handful of residential mortgages. We did foreclose on one property in this quarter. We kind of aggressively foreclosed on it. We think it's a marketable property. It was past due at the end of June and kind of our best route was to just take it into a foreclosure and we think we'll be able to turn that one around pretty quickly.

Actually, it's sold. Okay.

It's sold? Okay. Here you go.

Perfect. Okay. That's all that I really had. Thank you very much. Thanks to everybody out there.

[Operator Instructions] Our next question comes from Laurie Hunsicker from Compass Point. Please go ahead with your question.

Yeah. Hi. Thanks. Good morning.

Good morning Laurie.

Good morning Laurie.

Just wondered if we could go back to the AUA. I just want to make sure, I've got this right. So, we obviously saw that $290,000 deduction this quarter $620,000 is your estimated reduction for next quarter. So that's a $3.6 million or so annualized run rate of reduction related to the run off. Is that correct?

Yeah. I mean, we're looking more like $3 million on that.

Okay. And these two folks had run about $1 billion. And so you saw $450 million come out? Is your $620,000 in revenue reduction for fourth quarter that's assuming what on the total outflows, so we have $450 million come out. You just updated us on $94 million. I mean are your assuming that, that's sticks at around $550 million in terms of our flows? Or how should we think about that?

Yes. So -- I mean, I think it's too early to tell what the total outflows are going to be. So it's running $544 million through Friday. And it's too early to know.

Got it. Okay. And I certainly appreciate the color around this, but if you could update us one more thought as it pertains to this. These two folks that departed had one-year non-competes. How are you thinking about that? Where are you at pursuing legal remedies or recapture?

So Laurie, this is Mark. Really what guidance we gave you in the second quarter earnings call is in place. We believe, we had non-solicit and non-compete agreements in place. We can't provide much more comment on the ongoing matter to add more than we have said. We continue to pursue legal remedies. We believe that that's most appropriate action at this time. And then on the core business front, we continue to be very active outreaching retention efforts. We're very proud of the people we have in place at Weston. We're doing the right thing to best serve our client needs and we'll provide updates both on retention and on any updates to litigations as they become available. So that's still happening.

And then just one last question around the expense side of that, how much was the expense side of that in the third quarter? And how should we think about that going forward?

Yes. So I think the best way of thinking about it is kind of a run-rate basis at 24% of the lost revenue.

Okay. Fair enough. Okay. And then just one other question that I have and that's regarding your wholesale brokered deposits saw the drop that was great. How should we be thinking about that going forward? How are you approaching wholesale as we head into next year?

Yes. So we look at the brokered CDs and the FHLB borrowings as pretty interchangeable which is why we break end-market deposits out separately because we think that - that's really our core deposit base. So we just play off the FHLB versus the brokered to come up with whatever we think is the cheapest source of funds at the moment. We keep it all relatively short -- mostly shorten the 3 to 6 month range. We're looking at the rate curves and trying to be able to be strategic about how we roll that over, do we roll it at three or six months. We run the investment portfolio down. We will probably start to be thinking about reinvestment opportunities in the coming months. And generally, we would fund that increase with some type of wholesale funding.

Laurie, this is Mark. I'll expand on what Ron has added just a little bit. We do consider both FHLB and wholesale brokered CDs as an alternative sources of funding. Obviously, brokered has some advantages in that there is no collateral requirement but -- and we tend to regard those as kind of fungible. And I think the regulatory treatment has changed to be a little bit less-owned risk for brokered CDs. But as Ron also said, it's important to consider curve shape. One of the reasons that we have run down the wholesale book is because we're -- in a flat yield curve environment, it’s tough to find ways to manage to reinvestment money effectively within the securities portfolios. So those -- the decline in both those balances is related.

Great. Thank you so much.

Thanks Laurie.

Even our next question is a follow-up from Erik Zwick from Boenning and Scattergood. Please go ahead with the follow-up.

Just a quick follow-up on Laurie's question regarding the lost revenue, so that -- the third quarter impact you mentioned in this term the lost revenue associated with the two managers that left was $290,000 in the third quarter and then a projection for $620,000 in the fourth quarter. Is that an additional $620,000 off the run rate or of it? So really the delta is $330,000 may be from third to fourth. Am I understanding that, right?

Yes. So the $291,000 is on a -- that's kind of the impact in Q3 because we didn't lose everything on July 1, right? And so the $291,000 would equate into $619,000 going forward on a run-rate basis.

The $619000 is the new annualized...

Got you…

It's in the quarterly rate.

Quarterly, right?

That $620,000 is about $2.5 million annually. And I think you mentioned originally they were running at about $5.5 million annually so we are about 45% of that at this point.

Yes.

Okay. Great. That's helpful.

And just to clarify, so in the fourth quarter we've -- so far we've lost another $94 million in assets under management. That on a run-rate basis would equal about $517,000 per year $129,000 per quarter.

Got it.

So our rate on a quarterly -- $619,000 for the Q3 tranche and $129,000 on the Q4 tranche would give us an run rate at 748.

Perfect. That's great. Thank you so much.

Okay.

And ladies and gentlemen at this time I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you all for your interest in Washington Trust. We appreciate it and we look forward to updating you next quarter. And have a great day. Thanks very much.

Ladies and gentlemen, that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.