Good morning and welcome to the Q4 2021 Washington Trust Bancorp Incorporated Conference Call. My name is Juan and 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 please go ahead.

Thank you. Good morning, and welcome to Washington Trust Bancorp Inc.'s 2021 fourth quarter and year-end conference call. Joining us for today's call are members of Washington Trust Executive team. Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Wray, Senior Executive Vice President and Chief Risk Officer. This presentation may contain forward-looking statements and actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in our earnings press release, which was issued yesterday and in other documents we filed with the SEC. These materials and all public filings are available on our Investor Relations website at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce the host of today's call, Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth. Good morning all and thank you for joining our fourth quarter call. We do appreciate your time and continued interest in Washington Trust. This morning I'll provide an overview of our fourth quarter highlights and then Ron Ohsberg will review our financial performance. After our prepared remarks, Mark Gim and Bill Wray will join us to answer any questions you may have about the quarter. I'm pleased to report that Washington Trust posted strong fourth quarter results with net income of $20.2 million or $1.15 per diluted share, compared with $18.8 million or $1.07 per diluted share in the prior quarter. In the quarter, we hit record highs in wealth management revenues, assets under management and total in-market deposits. Ron will provide more detail. For the full year, we generated net income of $76.9 million or $4.39 per diluted share. Once again this quarter we were well-served with diversity of our revenue sources and our commitment to strong credit practices, which have helped to minimize potential costs associated with the pandemic. Our strong brand positioning in the Rhode Island market supports moderate branch expansion along with investment in digital capabilities and access points. We have commenced construction of our new branch in Cumberland Rhode Island. Our team has done an exemplary job of managing through the pandemic, keeping the branches open and staffed and safe for our customers. In 2021, we grew in-market deposits by $678 million or 18%. Fourth quarter mortgage lending activity remained robust as we continued to take advantage of low rates in the strong markets in which we operate. Full year mortgage originations reached a record high of $1.69 billion. At year-end, our wealth management division's assets under administration stood at a record $7.8 billion and revenues reached a record high. In the…

Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $20.2 million or $1.15 per diluted share for the fourth quarter. This compared to $18.8 million and $1.07 for the third quarter. Full year net income for 2021 was $76.9 million or $4.39 per diluted share, up by 10% from $69.8 million or $4 per diluted share reported for the prior year. Net interest income amounted to $37.7 million, up by $1.7 million or 5% from the preceding quarter. The net interest margin was $2.71, up 13 basis points. Net interest income continued to benefit from PPP forgiveness fee income, which totaled $1.2 million and had a nine basis point benefit to the margin. This compared to $2 million and 13 basis points in the third quarter. Additionally, there was $2.2 million of commercial loan prepayment fee income in the fourth quarter, which had a 16 basis point benefit to the margin. There was no prepayment fee income in the preceding quarter. Excluding the impact of both items the margin increased one basis point from 2.45% to 2.46%. Average earning assets decreased by $8 million, largely reflecting a decline of $36 million in average loans, which also included a decline of $64 million in average PPP loans. This was partially offset by increases in average investment securities and cash and due from banks. The yield on earning assets was $2.97 for the fourth quarter, up by 12 basis points. On a core basis, it was $2.72 unchanged from Q3. On the funding side, average in-market deposits rose by $203 million while wholesale funding sources decreased by $257 million. The rate and interest-bearing liabilities declined by one basis point to 0.34%. Non-interest income comprised 35% of total revenues in…

Thank you, Ron. This was another strong quarter and year for Washington Trust and we feel very well positioned heading into 2022. And at this point, we're happy to take any questions.

Thank you. [Operator Instructions] And our first question comes from Mark Fitzgibbon from Piper Sandler. Please Mark. Your line is now open.

Thank for that. Nice instruction and happy New Year everybody.

Good morning, mark.

First question. I wonder if you could share with us the size and complexion of the pipelines both commercial and mortgage?

Yes. I'll start on commercial and then Ron I think you gave some stats on the mortgage, but we can go through that too. Actually the pipeline on the commercial side Mark is relatively strong. It's up almost $90 million over where it was last year at this time. It's a $175 million. And interestingly, it's weighted towards C&I. So, it's about $100-plus million in C&I and the balance in CRE. So, we've really sort of renewed and refreshed activity in the Connecticut marketplace on the C&I front. We're pretty active in the assisted living with the memory care element to it space and that has proved to be pretty fruitful for us and we see some good activity there. Now we have got couple of $100 million of yet to be funded construction proceeds out there. So we continue to expect kind of $7 million or $8 million a month in construction funding for the next year.

Yes, Mark. As far as residential, I mentioned our pipeline is $194 million. It has been declining now for three or four straight quarters. It is declining as I am sure you've seen across the national environment, but I don't know if there is more to it than that.

Okay. No, I think that's good. And then on -- I guess as it relates to Mortgage banking revenue, when you guys do your budgeting for that business, do you sort of utilize the MBA stats in terms of expected volumes for 2022 or do you think your business will perform a bit differently than the industry trend?

Yes. So we certainly look at the MBA data to inform how we think about things. So, I guess, I can give a little bit of guidance on that. So the MBA is projecting the industry origination volume will decline about 35% year over year and we are expecting a somewhat lesser decline than that maybe in the high 20% range. You know this is all speculative given potential movements and rates. Mortgage Bank revenue is dependent on the percentage of originations sold, which has been trending down a bit for us as well as sales yields, which are trending internationally. But we do expect revenues to be higher in 2022 than they were pre-pandemic.

This is Mark, I'll add some…

I'm sorry, Mark. Go ahead.

I was going to say that, while originations and pipeline volumes are down from previous quarters, as Ron said, we still feel that purchase activity is quite robust. And in the markets that we serve, given the size of mortgage loans, particularly in the Boston metropolitan area, the purchase market still should produce a fairly robust level of loan originations, which we tend to retain in portfolio. Today that pipeline is about 45% purchased. So the bigger decline on a relative basis will have been in refinance conforming sale activity.

Okay. Great. And then, I think, you have 1.2 million left in deferred PPP income. I'm wondering, do you expect most of that to come in, in the first quarter?

So I would say, about half of what we had remaining at the end of September came in, in the fourth quarter and it looks like the trend is about the same. So maybe it's got a half-life, Mark. About half will probably come in according to what we've seen in the brief period of the first quarter so far.

Okay. And then, Ron, I wonder if you could just kind of give us an update on what the impact on NII is for each 25 basis point hike in rates.

Yes. So we estimate that at about say $1 million.

That's on an annualized basis?

Yes.

Okay. And then, can you help us think about sort of other significant moving pieces as it relates to the margin. I know you had the prepayment penalty income this quarter and the PPP fees, but anything else that we should be thinking about as we model out margins for 2022?

Yes. I don't think so, Mark. So we had a core margin of 2.46% in the fourth quarter. All of our more expensive longer-term FHLB debt has been paid. So there's no more opportunity there. So excluding PPP and excluding any change in the Fed funds rate, we'd expect our margin to be pretty much in line with what we reported on a core basis in the fourth quarter at mid-240s.

Great. And then just one last question. What sort of growth rate are you budgeting in 2022 for technology-related spending? Thank you.

Yes. It's nothing unusual. I mean, we've been -- Mark, our overall expense growth rate we think is about 5-ish percent. We have no major technology initiatives planned. So it's kind of steady as she goes.

Thank you.

Yes.

Thank you. Our next question comes from Laurie Hunsicker from Compass Point. Please, Laurie, your line is now open.

Hi. Thanks. Good morning.

Good morning, Laurie.

Good morning, Laurie.

I wanted to check on expenses. So a couple of things, obviously, the debt prepay that was great, the $45 million. How much was that costing and when in the quarter did you guys prepay that?

Yes. So that was early in the fourth quarter that average cost of that was about -- was 2.59%. And so when we did that we expected to get about a basis point of benefit in 2022 off of that.

Okay. Okay. And that's somewhat fully baked then. The other expense line looks high at $2.38 million. Was there onetime items in that? I'm talking about the other non-interest expense line? Was there rebranding? I mean, when we look down and obviously your core expenses are holding really nicely. Was there anything nonrecurring that drove that number higher? How should we think about that?

Yes -- no. No, no, it's just kind of just normal activity.

Okay. Okay. And then can you help us think a little bit about your approach with any de novo that you're seeing out there any potential? And maybe that dealing with that how should we think about core expense growth in 2022 and 2023?

Yes. So we've been -- okay. Mark, go ahead.

I was going to say de novo just to clarify you meant de novo branching activity?

Yes, de novo branching, yes.

Okay. Go ahead Ron.

Yes. Yes. So Laurie, we've announced that we've got one branch coming online in Cumberland Rhode Island probably kind of in the middle of the year. Our annual run rate on that is about $650,000. And some of those expenses are being incurred in advance of the actual opening. So if you're looking for a run rate impact, I'd say, about $650 million.

Okay. And any other de novo plans in the works…?

Laurie, this is Mark. We do think that there still are opportunities for us to be placing branch locations and some of the demographically attractive Providence area suburbs. Just to give some context the East Greenwich location that we opened in May of this year just past the $30 million mark, which is a very attractive number to get in less than nine months of being fully opened. So we believe the opportunities are there. Core expense [ph], the balance growth for us has been very strong during the pandemic and we have a lot of reason to believe that it is not simply temporary park in place for liquidity. So while we're aware of changes in technology and delivery alternatives for customers, the recent experience has shown this is a very robust way of us for us to build low-cost core deposit balances to help us replace some of the more expensive wholesale funding on the balance sheet.

Great. Okay. And can you all just comment on how we should think about core expense growth both for this year and then for next year? Thanks.

Well, I mean, next year being 2023, I mean, I don't think we're thinking quite that far ahead yet, Laurie. But on just a core expense basis, we're looking at -- this is excluding the prepayment expense that's done. Everything else probably a 5% increase excluding that branch cost that I mentioned.

Got it. Okay. Great. And then I just wanted to clarify one thing. The PPP income that you booked this quarter $1.2 million, there's $1.2 million remaining on the $38 million of loans. Is that correct…?

1.3 -- yes, we have 1.3 remaining at the end of the year. Yes.

Okay. Great. And then last question for you. Can you just refresh us with your strong stock currency your thoughts on M&A?

Yes. Thanks, Laurie. It's always part of the thought process. Pricing has been high on the bank side. There's not a whole lot of opportunity left. We're always sort of eyes and ears open. There's nothing in the hopper right now on that front. Mark, do you want to comment on the wealth side?

Sure. Although, you asked specifically about bank M&A Laurie, we're interested in wealth M&A and are trying to take a more proactive approach to identifying partner firms in the areas that we serve that we think would fit well with our business model not just within wealth management but the commercial retail and higher-end residential mortgage services we could offer to our customers. So we remain active on that front although we try to be prudent about valuations and their effect on GAAP earnings.

Thank you very much for taking my questions.

Thanks, Laurie.

Thank you, Laurie.

Thank you. The next question comes from Damon DelMonte from KBW. Please Damon, your line is now open

Hi. This is actually Matt Rank filling in for Damon. I hope everybody is doing well today.

Good morning, Matt

I was hoping to get your – Good morning. I was hoping to get your thoughts on the loan derivative income and if you're still seeing higher levels of commercial swaps heading into the year? And do you think it will remain elevated throughout 2022?

Yes. I think credit formation given where the pipeline is today we'll continue. All signs are that will we'll do as much as or more than we did last year and derivative income comes along with new volume with rates positioned where they are I think it's an attractive opportunity for our customer base and many of them choose to go that route to fix a rate. So we expect that that will continue.

Okay. And was there any seasonality in Q4? Do you expect like it's a run based on that number or maybe a lower level?

Yes. We funded nearly $100 million in the month of December alone. So the fourth quarter was a pretty big quarter for volume and derivatives. I think it's probably safe to say that it will spread out throughout the course of the year depending on when the volume comes on board. It's hard to nail it to a quarter but I would suggest spreading it out over the course of the year.

Okay. Great. Thank you. I’ll step back.

Great. Thanks, Matt.

Thank you. [Operator Instructions] We currently have no further questions. I will hand over back to Ned Handy for any final remarks.

Well, thank you all for joining us. We really appreciate your time and your interest in Washington Trust. And we look forward to seeing you soon hopefully and certainly talking to you soon. So have a great day, everybody.

This concludes today’s call. Thank you so much for joining. You may now disconnect your lines.