Good morning, and welcome to Washington Trust Bancorp Inc.'s Conference Call. My name is Val. 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, Marketing and Investor Relations. Ms. Eckel?

Thank you, Val. Good morning and welcome to the Fourth Quarter and 2011 Year End Earnings Conference Call for Washington Trust Bancorp Inc. We are listed on the NASDAQ Global Select Market under the symbol WASH. As Val said, this morning's conference call is being recorded, is being webcast live and a webcast replay of today's conference call will be available shortly after the conclusion of the call through our website at washtrust.com in the Investor Relations section under the subhead, Presentations. However, the information we provide during today's call is accurate only as of this date and you should not rely on these statements after the conclusion of this call. Hosting this morning's discussion is Joseph J. MarcAurele, Chairman, President and Chief Executive Officer; and David V. Devault, Senior Executive Vice President, Secretary and Chief Financial Officer. And now I'm pleased to introduce Washington Trust's Chairman, President and CEO, Joseph MarcAurele.

Thanks, Val. Good morning and thank you for joining us on today's call. Yesterday afternoon, we released fourth quarter and year end 2011 earnings. This morning, I'll review some of the highlights and then David will provide a more detailed overview of both the fourth quarter and the full year. We'll answer any questions you may have at the end of the call. By all measures, Washington Trust had an outstanding fourth quarter and an exceptional year. We reported net income of $7.7 million or $0.47 per fully diluted share in the fourth quarter of 2011 and these strong fourth quarter results contributed to a full year 2011 earnings of $29.7 million or $1.82 per fully diluted share, up $0.33 from the prior year. This is the highest level of earnings in Washington Trust's 211-year history. Key profitability measures were also strong as return on average assets was 10.61% and return on -- excuse me, return on average equity was 10.61% and return on average assets was 1.02%. Our performance is especially significant considering that we are operating in a slow growth economy. Because of this, our strategy was very clear. 2011 would be a year of discipline, hard work and capitalizing on opportunities, and that's what we did. Let me explain. On past calls, we've mentioned the continued disruptions at some of our larger competitors and over the years, we've built an experienced team of commercial lenders, many of whom we recruited from some of those banks and joined with our existing lending staff. Commercial loan demand was sluggish throughout the year. However, our commercial team made the calls and worked hard with potential clients and as a result, we not only had a strong fourth quarter, but total commercial loans were up 8% year-over-year. Our commercial portfolio is…

Thank you, Joe. Good morning, everyone. Thank you for joining us on our call today. I'll review our fourth quarter operating results and financial position as described in our press release yesterday afternoon. Net income for the fourth quarter of 2011 was $7.8 million or $0.47 per diluted share compared to $7.6 million or $0.46 per diluted share for the third quarter and up from $7.2 million or $0.44 per diluted share in the fourth quarter of 2010. The returns on average equity and average assets for the fourth quarter of 2011 were 10.89% and 1.04%. Fourth quarter 2011 net income included a net reduction of about $0.03 per diluted share, resulting from specific transactions. A contribution was made to our charitable foundation in the form of an appreciated equity security holding, resulting in $990,000 of expense included in other noninterest expenses and $331,000 in a realized gain on the security disposition. The combined effect was a net after-tax charge to earnings of $305,000 or about $0.02 per diluted share. We also conducted a modest balance sheet management transaction in December. $4 million in mortgage-backed securities were sold and $4 million in Federal Home Loan Bank advances were prepaid, resulting in net realized gains of $142,000 and $473,000 of debt prepayment expense. The net after-tax charge to earnings associated with this transaction was $213,000 or about $0.01 per share. For the full year, net income was $29.7 million or $1.82 per share compared to $24.1 million or $1.49 per share in 2010. Both the fourth quarter and full year 2011 net income levels were record amounts for us. Net interest income in the fourth quarter of 2011 was up 2% on a linked-quarter basis and up 9% from the fourth quarter of 2010 due to continued reduction in our funding…

Thank you, David. 2011 was a very successful year for the company. However, it did take a great deal of discipline, hard work and seizing opportunities and we did this, I believe, without taking unnecessary risk. I believe 2012 will be much of the same for several reasons. This continued uncertainty in both the economy and the financial markets. The Fed, obviously, is committed to keeping interest rates low through 2013 and we still believe that some of our competitors are a bit distracted and we're hoping to continue to be able to take advantage of that. Going forward, I can assure you that Washington Trust will continue to provide the best financial products and the highest level of service to our customers. This is really who we are and it's what we do. We believe it makes Washington Trust the leader in the communities we serve and what has earned us the reputation as Rhode Island's "Bank of Choice". We will continue to try to capitalize on that. I'd like to thank you for your time this morning, and now David and I would be happy to answer any questions.

[Operator Instructions] Our first question comes from Frank Schiraldi of Sandler O'Neill.

So I was wondering if you could -- David, if you could just talk a little bit about the small -- looked like you had a small restructuring in the quarter. How much yield did that help you pick up?

That's -- it's modest at $4 million, Frank. It's -- I don't think it's really going to stand out. It's the kind of thing you should do. It is beneficial to net interest income on a go-forward basis, but it's pretty modest. The margin itself at 3.22%, obviously unchanged in the third quarter is -- we're certainly facing some headwinds in terms of low market -- low rates of interest, a yield curve that's not all that friendly. So it's -- I think to maintain it at 3.22% was -- is something that is acceptable given the current environment and we've seen a number of banks reporting declines in the margin on a linked-quarter basis.

The growth in commercial, I mean, can you sort of just give us an estimate of where the loans are coming on -- at in terms of yield?

Well, I'm not sure what -- if you're talking about what's coming off. I mean they're coming on at rates that are competitive at spreads that are lighter than they were several years ago, maybe not as wide as a year ago, but these are excellent-quality assets. There was some good growth, certainly, as you noted in the commercial real estate portfolio and the quality that we're seeing in these credits is very good.

Yes, Frank, my comment on the loan growth particularly in the fourth quarter and why it was so much better in the fourth quarter than it had been previously, I think it is really a function of the fact that commercial banking and commercial real estate banking has a relatively long sales cycle. And we recognize even going back more than a year ago that we had to keep up a very robust calling effort and we could see in the third quarter in the beginning of a pipeline momentum build and we were able to bring a lot of that to close in the fourth quarter. But it really was more a result of a long-term effort to consistently call on borrowers that we felt we wanted to do business with in markets that we thought were more robust maybe than some of the other markets.

Okay. But the loans coming on today sort of in terms of -- compared to the loans that are coming off, it's just sort of net-net in terms of yield. You're not picking up much and not losing much. Is that sort of the idea?

That's a pretty fair statement.

Yes.

And then just wanted to -- just one other question, just switching gears to mortgage banking. I'm just wondering if you have any thoughts, Joe, of where you -- how much the ramp-up is just due to the refi boom and how much is you ramping up the business? And if we can get a sense of where this might end up, say, in a quarter or 2, where these revenues could end up?

I don't think, Frank, that I could predict exactly where they would end up. I will tell you a brief explanation of the strategy that we developed around mortgage banking. I think that what we really saw was an opportunity to recruit successful originators in markets that we would not typically be able to get them from. I think we were able to get because we deliver a better service quality proposition than the places that they had previously worked at. We also saw markets like Burlington and Glastonbury as being markets that are stronger-purchase markets than the markets that we are currently in, primarily Rhode Island. So our feeling for why we wanted to do that was that we felt we could get people who could produce; that ended up happening, and we do believe that the purchase market will come back faster in particularly the Boston market and in the Connecticut market. All that being said, we did more refinance this year than we did purchase. So that's -- that will be a challenge going forward and will be highly dependent on how the residential markets react as we go forward. But we do believe that the new markets we're in will be a better purchase market, going forward.

Okay. I'm just wondering looking at refi activity, if -- when refi activity loses steam, if it loses steam here, do you have to pull back in some way? I mean, are there going to be significant fixed costs that you're still basically stuck in? Or are you able to pull back? I'm just wondering what happens when activity starts to slow.

There's a modest amount of fixed cost associated with these loan production offices. The most significant expense component is the commissions and paid to originators and that is highly variable with volume. So if refinancing activity slows down, then you would see both a reduction in the revenues but also the expense side. I would point out that of the 2 Massachusetts loan production offices, one is only a year old; one is about 2 years old and I don't think -- particularly the one that is the more recent one is really up to speed and has reached its full potential by any means at this point. The most recent office in Connecticut only opened in the fourth quarter, so it really has not reached anywhere near its potential. So you'll have the offset of more coming from new market areas to any decline that you would see in -- or the decline that you would see from lower refinancing activity in general.

I think, Frank, the explanation too for cost there is when we look strategically at things we could do to grow the company, one of the attractions to the mortgage business is the elastic cost associated with the business if the market goes away per deal [ph]. So as David said that, that certainly was one of the drivers and one of the considerations that we felt made the expense associated with that a little more low risk than other things you might invest in.

Your next question comes from Laurie Hunsicker of Stifel, Nicolaus.

Just wanted to follow up actually on Frank's question with the LPOs. I mean, where do you stand as far as potentially turning those into full-service branches? Or is that just not going to happen?

Laurie, I think there is a difference between a loan production office and a traditional branch. I think we are not at a place right now where our retail brand would play in a market like the Boston market or the Hartford market. I think it would be a very big investment spend on branding to make that work. So I would say that right now, the mortgage business does not appear to be highly dependent on our brand. We have been able to recruit people based on our service delivery. So I think that right now, that is where we would see the opportunity. Now it does give you insight into those markets and quite frankly, from my prior experience, the Connecticut market is one that I understand well, but I would say that we're a ways away from considering that.

Okay. I mean because, certainly, we were looking at a picture of your Glastonbury loan production office and it's huge.

It's a small office in a huge building, Laurie, with a little...

Is it? Okay. I mean, looked at it, it looked like a campus. I thought, oh my goodness.

Well, we did not invest in a campus -- as attractive as that might have been.

Okay. And I guess sort of a broader question to that point then is where do you stand on de novo branches? Maybe you could give us an update on -- and I realize it's brand new, but where you are in East Providence? And then where you would be in terms of doing de novo branching potentially in the North Boston area where you've got your LPOs or in the Connecticut marketplace. Maybe where you stand -- yes, go ahead.

I think we have to be very frank. I think we're a ways away from de novo branching in markets outside of Rhode Island. I would say it's safe to say that we are comfortably ahead of our projections in East Providence. We feel very good about the new Cranston branch. I think we have a ways to go and I think over time, we may be able to be slightly more aggressive in branching in Rhode Island and again, I think our brand plays very well statewide. There are other areas we would like to get into, but they will be natural extensions of the markets that we are already in.

Okay. And do you have a deposit figure on your Providence branch?

East Providence.

It's in the $14 million range currently.

And did anything transfer over there? Or that's $14 million?

No, that's all new.

It's all new. That's great. And that's through today or through December 31?

It's a current number.

Current number, okay, fantastic. Great. And then just to your charitable charge, obviously, you had the gain, but it was more this quarter than it's been in past years. I guess past years, it's run $300,000, $400,000. Do you have any guidance on what we could expect going forward? I mean is $1 million closer to where you would? Or would you potentially see yourself back at that $300,000, $400,000 mark?

That is larger than we've done in the past and we had the opportunity to do that without appreciated equity security. There's a tax advantage to donating that as well. I don't see us doing anything of that magnitude in 2012.

Okay. So maybe closer to $300,000, $400,000 or...

That's it, yes. If that, yes.

Okay. And then just one last thing: could you just touch on your thoughts on the trust preferred? Linked quarter, the unrealized loss went up sharply in that, the $30.5 million you have. Linked quarter, the unrealized loss went from $5 million to $8 million, just sort of what your plans are with it.

Give me a moment to look at some detail on that.

Sure. If you want to take someone else's question and come back to that at some point later.

Sure.

Okay. And then just one last thing; can -- obviously, you've got one of the stronger stock currencies here in New England. Can you just update us on your thoughts on potentially making a whole bank acquisition and how you're looking at that?

Laurie, I think it's the same as it's been in previous conversations. I think it's opportunistic at the right price and in my mind, it would have to be something that we could get synergies out of and also would have to be something that we thought we could grow if we bought it. So I would say that we are always open. We are constantly looking, but it would have to be the right thing. We would be very, very disciplined about the decision.

Okay. And then just one last thing. As it pertains to de novo branching in Rhode Island, just given that your Providence branch is going well, how many de novo branches would you potentially see yourself opening per year? Are we still sort of at maybe a 2 to 3 run rate? Or is that changed?

Actually, Laurie, we don't think we're at a 2 to 3 run rate a year yet. I think we're at a 1 and then as we get -- it's easy to open 2 or 3 when you have 25 or 26 versus the 19 that we have currently.

The next question comes from Damon DelMonte of KBW.

I guess my first question is probably for David. Could you talk a little bit -- and I apologize if you may have touched on this in your comments, but can you talk a little bit about maybe some of the additional leverage you have to pull for your margin in order to kind of preserve it at this level? Or maybe provide a little color around how you see that shaping up in the upcoming quarters?

Well, I think given that new assets are certainly coming on at rates that are not outstanding and there's really no play in the securities portfolio that would be truly margin enhancing without a great deal of risk. Now that we're going to have to be very disciplined in pricing both on the loan side as well as on the deposit side. So far, we have been very thorough and committed to doing that. The other thing that I think is serving us well, and this will be something that is going to have to pay off over a long term, is continuing to improve the mix of deposits. And you can see both on a year and quarterly basis, the progress that we've made in building demand deposits in particular, which is really the result in large part of some very successful business development efforts to cultivate business banking relationships, cash management relationships.

Okay. Do you have -- I mean, do you have some CDs maybe that are repricing in the upcoming quarters that will help to mitigate the pressure?

There is some of that certainly, but the volume of that has certainly -- I mean the amount of potential, say, from that is declining as we continue to go through this low interest rate environment.

Okay. So then, it's reasonable to expect a modest amount of pressure, at least for the upcoming couple quarters?

Yes. I think where it is right now, we'd be happy keeping it around this level and certainly in the near term.

Okay. Fair enough. I guess, Joe, kind of touching on questions that have already been asked about your expansion plans for outside of Rhode Island, I've seen through press releases, you guys have made some loans here in Connecticut. It seems like you're getting some good traction here. So what would be a reason for not moving forward with putting branches in Connecticut and lenders on the ground here if you're already getting traction so far and you don't really have a meaningful presence yet?

Well, I would say, Damon, that the reason for not opening branches in Connecticut is everything about the brand maybe not having the kind of traction that I would be happy with if we just put a stake in the ground, for example, in the Greater Hartford area. I would not rule out hiring additional commercial lenders who would be totally directed at markets other than Rhode Island, but those would be markets that we would know very well or I personally would know well, and Connecticut would be one of them. Right now, we are very effectively penetrating the Connecticut market with Connecticut lenders who happen to be housed in our Westerly headquarters. I mean, we're right on the Connecticut border. So we did hire a couple of people during the last couple of years who are essentially Connecticut commercial real estate lenders and they have been effective in penetrating that market even though they actually physically reside in Westerly.

Okay. Well, that's good to know then.

But that doesn't mean we wouldn't consider doing that and putting a -- an LPO somewhere, but that's not directly in the plan today.

Okay. That's helpful. And then I guess my last question, when we were on the call last quarter and now we're on the call this quarter, how's your outlook for 2012 changed? Would you say that today, it is incrementally better, worse or kind of the same?

I think it is very slightly better. I think we are -- most of the economic indicators, Damon, are not significantly different than they were last quarter. So for us, to continue to be successful and hold our own, I think we have to do exactly what we have been doing during this year. I think it's going to be a lot of hard work. We have to take an opportunity to take market share from others in an economy that quite frankly is expanding very, very little.

[Operator Instructions] Our next question is a follow-up from Laurie Hunsicker of Stifel, Nicolaus.

Just to follow up on Damon's question, if you guys were going to go into Connecticut in a meaningful way, which areas would be your top preference?

Well, if you think about where the deposits are in Connecticut, Laurie, they're really in the Greater Hartford area. But I would say that I am most familiar with a lot of the markets, and obviously, Fairfield County is attractive. I think other markets are more rural and would be a harder pull. So I think if you were to get into those markets, the Greater Hartford area, Fairfield County represent the most growth areas.

They're also a highly banked and...

Right. And very expensive from a real estate perspective, particularly, Fairfield County.

Right, but certainly, you know the Connecticut market.

I do.

Okay. Great. Any other color on the trust preferred? Or should I just follow up with you offline?

You can certainly follow up with me off-line. We're not seeing that big a change in the fair value on a linked-quarter basis, so there's maybe a couple million dollar at most change in the unrealized loss from the end of the third quarter. Again, we've taken OTTI charges certainly on the pool trust preferred securities, but there was none in the fourth quarter, which we were pleased to see, which represents, I think, a stabilization of the components of those pools. And the individual issuer holdings in that portfolio are stable and we're not seeing any sort of impairment charges coming out of that portfolio. They're in much better condition than they were in years past.

And at this time, I'm showing no further questions. And I would like to turn the conference back over to Joe MarcAurele for any closing remarks.

Well, once again, I'd like to thank everyone for participating on today's call and your continued interest in Washington Trust. We do look forward to updating you on our company's progress during the year. So I close out by thanking you and we will see you again next quarter.

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