Washington Trust Bancorp, Inc. (WASH) Q4 2018 Earnings Report, Transcript and Summary

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

Good morning and welcome to Washington Trust Bancorp, Inc.'s conference call and fourth quarter and full year 2018. 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. Before we begin, please note that today's presentation may contain forward-looking statements and that the actual results could differ materially from what is discussed on today's call. Our complete Safe Harbor statement appears in our earnings press release and in other documents that we file with the SEC. The complete Safe Harbor statement and all of our SEC filed documents can be found on our Investor Relations Web site at ir.washtrust.com. Washington Trust trades under the NASDAQ under the symbol WASH. I'm pleased now to introduce Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth. Good morning and thank you for joining us on today's call. This morning, I’ll review the highlights for the fourth quarter and the full year 2018 and Ron will provide a more in-depth analysis of our financial results. And then Ron, Mark and I will answer any questions you have about the quarter, the year and what lies ahead in 2019. Washington Trust had a solid fourth quarter as we posted net income of 17 million or $0.98 per diluted share. As a result of our consistent performance throughout 2018, as well as the lower federal corporate tax rate due to tax reform, we earned a record $68.4 million or $3.93 per diluted share for the full year 2018. In addition to these strong earnings, Washington Trust also reached 5 billion in total assets at year end and posted all-time high levels of total deposits and total loans. Our performance ratios are sound. We’re well capitalized and our asset quality remains strong. It was another good year for Washington Trust and these achievements are testaments to our continued success in growing our key business lines and expanding our presence throughout the region. We reached 3.5 billion in total deposits at year end. We were aggressive with CD promotions during the year which helped us attract new money and captured new customer relationships. Also, as you may recall, in June we transitioned approximately $70 million of wealth management client assets which had previously been held outside of Washington Trust onto our balance sheet and placed them into insured interest-bearing demand deposit accounts. At year end, those balances increased to more than 94 million. Deposit generation remains a priority and continues to be competitive. We carefully monitor deposit pricing and our cost of funds. We’ve had good success in generating deposits through our organic growth. In November, we celebrated the first anniversary of our Coventry office which is off to a good start with more than 13 million in deposits. And just two weeks ago, we opened the new branch in North Providence, Rhode Island. North Providence is a densely populated town with lots of small businesses and rooftops offering plenty of opportunities for a community bank like Washington Trust. We’re very excited about that new branch. On the lending side, we reached 3.7 billion in total loans at year end with double-digit percentage growth in both residential mortgage and commercial loans in the year. Total commercial loans topped the $2 billion mark at year end. We have a great commercial team and we’re proud of their efforts in generating commercial real estate and C&I loans. We continued to have payoffs in the fourth quarter as we’ve come to expect given today’s relatively high valuations. Commercial activity was very strong in the fourth quarter and the commercial pipeline is building well heading into 2019 after very strong fourth quarter closings. Residential mortgage loans totaled 1.4 billion at the end of 2018, up by almost 11% from a year earlier. However, similar to other mortgage lenders and banks nationwide, we saw a decline in residential mortgage activity in the fourth quarter. According to a recent Wall Street Journal article in December, home sales fell to their lowest levels since 2015. There were many factors that contributed to the December slowdown, including a lack of inventory, rising home prices, which impacted affordability for many homebuyers. Other factors impacting the fourth quarter included rising interest rates, volatility in the stock market and general seasonal slowdown during the holiday season. Our pipeline is lower at this point than it has been in a few years indicating that 2019 overall mortgage activity may be returning to more traditional purchase market levels. That said, we’ve implemented several new programs and processes to ensure that our mortgage banking model is sustainable and will continue to serve as a good source of revenues for the company. In 2018, we introduced the hedging program to efficiently facilitate the sale of loans into the secondary market. We continue to recruit top quality mortgage professionals to increase production in growth markets. We recently added a team of mortgage lenders to work out of our existing Glastonbury, Connecticut office and serve the Connecticut market. Wealth management assets were 5.9 billion at December 31, which was down from the previous quarter as these assets were adversely impacted by the financial market declines in the fourth quarter. Throughout 2018, the financial markets took everyone on a rollercoaster ride and that ride ended with a significant drop in December as the Dow and S&P 500 recorded their worst performance since 1931 and the biggest month we lost since February of 2009. And while the financial markets rebounded a bit in early January, the recent government shutdown and other factors indicate that market volatility may continue in 2019. Earlier this month, we introduced the new private clients group dedicated to generating new wealth management assets from business owners and high net worth individuals. As you know, Washington Trust has been around for 218 years and has had Trust powers for more than 100 years, so we’ve been providing private client services to generations of families and businesses. It is a more formalized program to ensure that we are doing all that we can to service the wealth management needs of our business and professionals, clients in the marketplace. I’ll now turn the call over to Ron for a review of our financial performance. Ron?

Thank you, Ned. Good morning, everyone. Thank you for joining us on our call today. I’ll review our fourth quarter 2018 operating results and financial position as described in our press release which was issued on Monday. As Ned mentioned, net income was 17 million or $0.98 per diluted share for the fourth quarter. This compared to 17.5 million and $1.01 for the third quarter. We also reported return on equity of 15.61 and return on assets of 1.40. Net interest income for the fourth quarter rose by 429,000 or 1%. The margin was 2.95, down 4 basis points. Income from loan payoffs and prepayment penalties totaled 144,000 compared to 173,000 in the third quarter. And excluding these amounts, the margin was 2.94, also down 4 basis points. The average balance of interest-earning assets rose by 124 million or 3% on a linked quarter basis. The yield on average earnings assets increased 10 basis points from the preceding quarter to 4.13%. On the funding side, average end market deposits were up 66 million and the average balance of wholesale funding sources was up 37 million from the third quarter. The cost of end market deposits was 75 basis points, up 13 basis points in the quarter. The cost of wholesale funding was 2.31%, rising by 18 basis points. Non-interest income comprised 31% of total revenues in the fourth quarter and amounted to 15.2 million roughly equal to Q3. Wealth management revenues were 9 million, down 442,000 or 5%. The decrease was caused by a 552 million or 9% decline in assets under administration, virtually all of which resulted from fourth quarter volatility in the equity markets. Our mortgage banking revenues totaled 2 million in the fourth quarter, down by 646,000 or 25%. These results reflected a 34 million or 25% decline in loans sold to the secondary market, as well as lower a sales yield compared to Q3. Loan-related derivative income was 1.4 million, an increase of 1.1 million compared to last quarter and was commensurate with the strong commercial loan growth we recorded in Q4. Now let me turn to expenses. Total expenses increased by 620,000 or 2% from the previous quarter. Significant items include an OREO write-down of $833,000 in the quarter which compared with $197,000 write-down in Q3. In Q4, we also recorded 187,000 nontaxable contract [ph] expense to reimburse the contingent consideration liability related to a prior acquisition. And in the third quarter, a one-time third-party vendor credit of 300,000 was recognized as a reduction to outsourced services expense. Excluding these items, non-interest expenses were actually down $129,000. Included in this was a reduction in mortgage commissions of approximately 400,000 which was commensurate with the reduction in mortgage origination volumes during the quarter. Income tax expense totaled 4.5 million in Q4 and our effective income tax rate was 21% which compared to 21.3% last quarter. And the effective tax rate for the full year was 21.1%. Turning to the balance sheet, we had a strong growth in both earning assets and deposits. Total loans were up by 124 million or 3.5% from the end of the third quarter and by 306 million or 9.1% from a year ago. Commercial loans were up 116 million or 6.1% with the CRE portfolio increasing by 152 million while the C&I portfolio declined by 36 million. Residential loans rose by 11 million and consumer loans were down 3 million. Investment securities increased by $115 million reflecting purchases of debt securities of $124 million in December. Total deposits rose by $110 million or 3.2% in the quarter and were up 281 million or 8.7% from a year ago. In-market deposits were up 76 million and wholesale brokered CDs were up 33 million, while FHLB borrowings increased by 122 million. Asset quality remains very strong. Non-accruing loans were 0.32% of total loans compared to 0.30% at the end of September and delinquent loans as a percentage of loans outstanding decreased by 1 basis point to 0.37%. Net charge-offs were 237,000 versus 15,000 last quarter and were just 3% of average loans for both the quarter and the year. The allowance for loan losses was 0.74% of total loans, down 1 basis point and provided NPL coverage of 231%. The loan loss provision was 800,000 compared to 350,000 in Q3 and reflected growth in the loan portfolio. Total shareholders' equity was 448 million, up 20 million compared to Q3. The company remains well capitalized with the risk-based capital ratio of 12.56%. The tangible equity to tangible assets ratio was 7.62 compared to 7.57 last quarter. And finally, our fourth quarter dividend declaration of $0.47 per share, an increase of $0.04, was paid on January 11. And at this time, I will turn the call back to Ned.

Thanks, Ron. So another solid quarter and strong year in the books. It’s hard to believe that it was just a year ago that Mark, Ron and I were introduced to the new leadership team for Washington Trust. Joe MarcAurele and David Devault, like their predecessors, left us with a company that has a long proud history, solid financial foundation and an outstanding team of dedicated employees that care about their communities and their customers. I’m pleased that we were able to generate record records in 2018 and build upon the legacy of Washington Trust. As we look ahead to 2019, we once again face many challenges but we’re strategically positioned to take advantage of the opportunities that come our way. We’re off to a good start as we kicked off the year with several new initiatives, including the opening of our new North Providence branch, the introduction of the private clients group and the expansion of our Connecticut mortgage banking team. We’re committed to enhancing the value of the company for our shareholders and appreciate their continued support and confidence in us. Thank you all for your time. And now Mark, Ron and I will answer questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Mark Fitzgibbon with Sandler O’Neill. Please proceed with your questions.

Hi, guys. Good morning.

Hi, Mark.

Good morning, Mark.

Wondering if you can help us think about sort of the outlook for expenses and the net interest margin?

Mark, this is Ron. I’ll take that. So I’ll start with the margin. So we’ve seen in recent quarters that funding costs are re-pricing faster than our own portfolio and that’s putting downward pressure on the margin. This is even as we do maintain an asset sensitive balance sheet whereas increases in interest rates have been accretive to income. But as you know we’re relatively dependent on wholesale funding. Those costs are responsive to changes in interest rates. We put on a number of promo CDs which are relatively more expensive. Those will continue to re-price as they mature going forward. So in light of all that, it’s the fact that deposit betas and cost of funds betas in general are increasing faster than asset betas leading us to think that we’re going to see some NIM compression. I would say the outlook for the full year 2019 is probably in the mid 2.90s.

Okay.

And then as far as expenses, nothing really to talk about here. We’d expect non-interest expense growth for 2019 to be in the 3% to 4% range. We’re making some modest investments in private clients, as Ned mentioned, some technology infrastructure enhancements. Nothing unusual, as well as we have the new North Providence branch coming on line. So we’ve got some modest expenses baked into that 3% to 4% increase.

Okay. And then I noticed the securities portfolio growth this quarter and I assume it was a function of just an opportunity to put some additional leverage on. I suspect that you’re probably not going to continue to grow the portfolio at an outsized rate, like we saw this quarter?

We will look at it opportunistically, Mark. Adding some leverage brings us some income, so there is actually a negative impact and it’s a little dilutive to NIM. We think the earnings are more important.

Mark, this is Mark. Just to give some clarity on that. When you look at where our financial markets went in the last quarter, it was kind of a wild ride both in terms of forward outlook for fed policy in 2019 and I think sentiment’s changed on that and just the absolute level and shape of the yield curve was changed pretty dramatically from the middle of the fourth quarter to the end of the fourth quarter. And when we added securities to the portfolio in mid to late fourth quarter, our feeling was that it was an opportune time given the absolute level of rates. And we throw off anywhere between 80 million and 100 million on cash flow from the securities portfolio on an annualized basis. So this gives us some flexibility to decide whether or not we wish to maintain those levels based on current shape going forward. And as Ron said, we’re going to take opportunity of income positive, EPS positive, ROE positive opportunities to grow the balance sheet.

What kind of duration or average life did you put them on at?

We were adding longer duration I think. Ron’s primarily looking forward to the end of the fed cycle sometime over the next couple of years.

That’s right. I don’t have the actual duration on that, Mark, but I could get that if you want it.

Longer-term MBS and longer data agency calls, so no credit risk. Really all agency – sponsored agency product.

And then the $833,000 OREO write-down, was that related to a commercial credit or a couple of commercial credits or what drove that?

Yes. Right now we have a single commercial real estate commercial property in our OREO book and we foreclosed on that earlier in the year. We received a new appraisal in the fourth quarter which really downgraded the assumed highest and best use of property from a medical office building to straight office. So really just a function of the change and the expected use of the property resulted in a downgrade to the valuation.

Mark, it’s Ned. I can give you a little more color on that. So this is an asset that’s been around as a loan asset for a while and you’ve heard of it before. It’s been one of our – it’s causing charge-offs in prior quarters. We took it into OREO. When we did that we had to get a new appraisal. And about the same time a big hospital group decided to build a medical office building nearby. So it kind of transitioned this – the highest and best use of this property from medical office which by the way was pretty dated and needed a lot of repairs to just straight office because obviously the market need for medical offices have been taken up by a new office building about two blocks away. So we got a new appraisal that reflected that. It came in lower and so we took the OREO expense while it was in OREO. So, frankly, I don’t see that as a core expense. It’s not like we have a lot of OREO assets and we’ll always have this expense. We’ve got one. So I think this – we’ve got it positioned well now for sale and we’re in the process of marketing it.

Okay. And then loan related derivative income was really strong this quarter. I assume that it’s seized some seasonality and maybe some unusual things in there. Should we assume in the first quarter that comes back down to maybe a couple hundred thousand bucks?

I think it’s very chunky. Obviously, it follows volume, mostly the real estate volume. We had a great fourth quarter. That definitely is reflected in the swap income in the fourth quarter. And I think if you look at last year’s total that’s probably a pretty good indication of what might happen in the year ahead. So definitely it travels over quarter end and can be big one quarter and lower the next.

Thank you.

Thanks a lot, Mark.

Thank you. Our next question comes from the line of Damon DelMonte with KBW. Please proceed with your questions.

Hi. Good morning, everyone. How’s it going today?

Good morning, Damon, and it’s going well.

Great. So first question just want to talk a little bit about outlook for loan growth. It finished the year pretty strong. Just kind of wondering what the pipelines look like right now and kind of how you’re feeling about 2019?

So on the commercial side, Damon, obviously we had a big fourth quarter. So we’re in rebuild mode, but the commercial pipeline looks strong. It’s at about 120 million right now and growing. There’s a lot in the earlier stages of the pipeline. So I feel very good about where the commercial pipeline is. The resi pipeline is down a little bit relative to prior years at this time just given a little bit of a slowdown in the marketplace. Mark?

Yes, I would say – it is Mark. As we look at 2019, we would guess that origination volumes might be slightly down in total from 2018. However, the step back in the 10-year to the 2.75 range may change that. Recall that some of our origination is for sale but a lot is for portfolio, particularly in the Boston market area where many loans are non-salable for reasons of size. So portfolio growth similar too or slightly lower than last year at a percentage basis we think would be a reasonable indictor, but a lot has to do with the level of interest rates going forward.

Got you, okay. So would you suggest then that the growth will be equally split between commercial and consumer or do you think that the commercial side will kind of grow at a faster pace?

I think the commercial side will grow kind of in the mid-single digits level similar to this year. The pipeline suggests that’s the case. And on the resi side I’m guessing we’ll come in a little bit below what we did last year just based on the overall marketplace and the pipeline suggest we’re a little behind where we were last year. So I think a little slower growth in the resi side.

Okay. And then by doing this last quarter, could you just talk a little bit about what drove the CRE growth and what drove the pullback in C&I?

Yes, frankly just closing out what was in the pipeline, we had additions in the real estate side of 139 million new loans. We have a pretty big construction book, so we’re kind of averaging the average in the quarter, about 10 million a month in construction funding on the real estate side. And then also for this particular quarter we had about $47 million in payoffs and paydowns. So that continues. It was I guess a little slower pace of the paydowns in the fourth quarter than prior quarters. So net-net growth in commercial real estate of 152 million in the quarter. On the C&I side we didn’t have very big originations in the quarter. We also had an asset transfer back over to the real estate side as a senior housing deal that really belongs in the commercial real estate book. So that 29 million came out of the commercial book just for that transfer. And then we had $21 million of paydowns on the C&I side of things. So the C&I book with that transfer and with the paydowns and with relatively low originations reduced by 36 million in the quarter. For the year, we had $75 million in new originations in C&I and we had $32 million in average increase in line utilization. Line utilization at year end was down a little bit. So I think we had decent growth, but we had $98 million in paydowns in C&I alone in 2018. So we stayed flat a little bit by $8 million in the year. Real estate, we had $182 million in paydowns but between construction and new homes, good originations and so we grew the book by $182 million in the year on the real estate side. So again that volume is 94% centered in Rhode Island, Massachusetts and Connecticut. So we didn’t travel far and wide for it. We have a bit of construction, although I’d say the pace of new construction loans has slowed a little bit in the fourth quarter. Most of what we’re funding is stuff that’s been on the books for a while. Our construction book is about 50% funded at this point, the existing book. So we’ll continue to have decent construction funding in the quarters ahead which is great to offset some of the payoffs. We do expect – and valuations are still high. So we expect that the paydowns in the real estate side will still happen. I hope that as rates come up that will slow a bit in the quarters ahead.

Okay, great. That’s really good color. Thank you. And then I guess just lastly on the fee income side, so you talked about mortgage being down from last year, a more normalized swap level kind of give us something similar to this past year as well. Can you talk a little bit about your expectations for overall growth given those two dynamics? Do you expect wealth management and maybe interchange income to grow at a faster pace to give you a net growth in fee income for '19?

Damon, it’s Ron. So on the wealth side, given the market contraction that we had, given the lost business that we had earlier in 2018, if you think about it year-over-year, we’re probably down – looking to be down maybe 2%-ish to be honest. So equity markets were down, our assets under management were down 9% in the fourth quarter. Some of that’s come back. The S&P and the Dow have rebounded in January. It’s up about 5%. What happens from here is really anyone’s guess. So I would say if you’re thinking about it year-over-year, we’re probably down.

Yes. Damon, it’s Mark. One way of thinking about it is we entered the low point of market impact of AUA in late fourth quarter 2018. So looking at the fourth quarter’s fee income as a run rate, we would actually begin – we actually began 2018 given market pullback at a lower point than we began the fourth quarter. So Q4 is all things being equal probably a little higher than run rate for Q1 would be ex-impact of market movements which we are also hopeful will be positive, but there’s no guessing what the timing of that would be. Just for context a little – between 50% and 55% of our AUA is equity base. So you can look at the S&P as a proxy for that. 30%-ish, 35% is bond based, so you could look at the 5 or 10-year treasury and its price movement as a proxy for that. So a lot really depends on that combination of market movement in 2019 and net new business generation to drive the run rate going forward.

Got it, okay. That’s all I had. Thank you very much, guys.

Thanks, Damon.

Thank you. [Operator Instructions]. Our next question comes from the line of Laurie Hunsicker with Compass Point. Please proceed with your questions.

Hi. Good morning.

Good morning, Laurie.

Just staying with wealth management, can you help us think about the new private client group and how much you expect them to add in full year '19?

Sure. Laurie, this is Mark. First of all, we’re hopeful that this will add more opportunity to expand wealth relationships with existing commercial clients and higher net worth residential mortgage clients in the areas that we don’t already have a bank presence. That said, the business development curve for wealth management typically tend to be a longer sales cycle than for commercial residential mortgage. So I think we would be looking towards the second half of the year for meaningful contributions from that begin to kick in. This is kind of an extension of the wealth management business development sales force. The initiative I think should allow us more opportunity to gather net new business from existing clients as well as external markets. And I think as we look at its fraction, we’ll determine how much we want to expand that in the second half 2019 and 2020.

Yes. Laurie, I would say that it’s in its early stages. It is an effort to try and maximize our opportunities with some of our commercial executives. The gentleman that’s running it has a commercial lending background and a credit background and is one of our sort of top sales guys. And we think we can grow both the interplay between commercial and wealth and wealth and mortgage. And so this is the start of an effort to really fill in the gaps between business lines and use financial planning as a tool to sit with some of our existing and prospective commercial customers and real estate customers and have a more meaningful discussion with them about wealth opportunities and deposits and mortgage and all the rest of our product capabilities. So I would tell you it’s early and we hope for great things. But I think in the quarters to come we’ll have more to tell you about that.

Okay. And just along those lines, as we said looking forward a year from now, could that be a $50 million or $100 million or $150 million book? How do you think where that target is?

Yes, we’re hesitant to give numbers. I can tell you that individual business development, a contribution per business development officer in the $50 million range of net new assets per year would be a good aspirational target.

Perfect. Okay. And then same question as we think about mortgage banking in your expanded banking team in Connecticut, how should we be thinking about that revenue line in 2019?

So the origination costs are largely flexible because commissions paid are based on volume generated. A percentage of each originator’s production can be salable versus portfolio gains. You pay commissions on them whether or not they go into portfolio whether they’re gain related. Again that team is in the early stages of its build-out. Probably if you were to look at individual producers, something between 15 million and 20 million per originator is a reasonable first year estimate.

Laurie, these are lenders that have been in that marketplace for a while. They’re coming from another institution. So they know the market, they’ve got to learn our processes and our way of doing things. And so it might take a little bit of time to get up and running. But we expect them, as Mark said, kind of the $15 million to $20 million mortgage production I think is reasonable to assume. That’s what we would expect.

Okay. And then just looking at your overall mortgage banking revenue line as we’re thinking about this again for 2019, given the pressure we’ve seen on the business, directionally we should be expecting that to fall into 2019 despite the add or how should we be thinking about that?

Despite the adds, we would – all things being equal on a baseline, same-to-same we would expect it. I think Fannie and Freddie would say the same thing to fall slightly. The more we can find additional teams to add to it, the more we can help offset that slight decline. I think we would say that in the markets we serve, Massachusetts, particularly in the greater Boston area, remains quite robust. So while there has been a lot of talk about a national slowdown in housing, we think that the markets that we are in are less affected than some of the hot ones that would have had more rapid growth, and therefore maybe more rapid cooling where it might change. The most sensitive to interest rates really is the conforming salable agency products. We have been very vigilant about credit quality on portfolio loan originations and maintain very high FICA standards in that area. So I guess what I want to say is depending on rates, the mix of what salable and portfolio may change. But as we add the teams, we should lessen the impact of a drop off in volume compared to just baseline. Does that help?

Yes, that helps. Okay. And so just thinking about that, thinking about wealth management revs, mortgage banking and obviously your loan derivative income being a bit lumpy, if we’re thinking about non-interest income year-over-year comparison is a 5% drop, does that seem in the range or can you help us think about that in a little bit of a tighter range?

Laurie, it’s Ron. I’d say all-in we’re kind of modeling like a 2% decline.

2% decline, okay. Perfect. That’s helpful. A quick question on net interest expenses. Your outsourced services, it looked like that jumped linked quarter. Was there something nonrecurring or is that the run rate?

Yes, we had a $300,000 nonrecurring credit in the third quarter.

Okay, great.

The third quarter was low.

Got it.

A one-time true-up in Q3.

Got it, okay. And then quick question on the deposit side. Can you help us think about your cost of deposits going forward? We saw a pretty big jump obviously in your overall cost of deposits, up 15 basis points linked quarter and even your core. And I realize some of that is obviously a focus on promotions and so forth, as you said. But can you help us think about how your promotions are going to be running and directionally where we’re seeing that?

Yes, so over the last 18 months we’ve brought in about $309 million of promotional CD product. About 90% of that was new money. Recently that rate has been about 3%. I think the weighted average rate of all of those deposits was about 2.55. Some of those were underwritten earlier in this cycle and so they will be maturing at some point in 2019 and they will re-price hopefully not up to the 3%. But 3% is kind of the going rate for CDs. In Rhode Island right now we’re seeing that kind of across the industry for promotional CDs, not for the rack rate. Yes, not the rack rate but really the volume is all flowing through promotions at this point I think would be fair to say. So would be re-pricing – continuing to re-price up as they mature in 2019. In addition, we have got a fairly sizable book of FHLB advances and wholesale brokered CDs. Those are very sensitive to rates. We keep those maturities relatively short. There will still be some re-pricing upward in the first half of 2019 related to those as well. So some considerable upward pressure on the margin as a result of rising cost of funds.

That makes sense. Okay. And then just on the subject of CDs because we’ve seen that percentage grow. Is there a thought that 35% CD mix, this is where you keep it or is there a plan to bring it down or how are you thinking about that? And I guess the same question on the wholesale money as well, how are you thinking about that?

Listen, so we have our alliance on wholesale funding. The brokered CDs are cheaper than FHLB. So we will keep those kind of maxed out at 9.5% of total assets. There’s kind of an FDIC insurance penalty if you go higher than that. So I would expect that as the balance sheet grows, we’ll continue to grow those brokered CDs as long as they’re cheaper than FHLB. As far as retail CDs, it’s been kind of competitive product for us to bring in money from new customers, from existing customers. Most of it is new money to the bank. It also gives the opportunity to start cross-selling DDA and other products with our own products. We do a pretty good job with our relationship building with our customers. So we like the CDs. It’s certainly a much better alternative for us than funding it wholesale. It’s cheaper than FHLB. So we’ll likely to continue on that path.

Laurie, it’s Ned. We took an aggressive stance on that early on. We went out to I think the 3% level right out of the gate kind of a year ago. I think we got ahead of the pack. And we made the decision that it’s better off that rates would rise and would catch up with those promotional rates. And then we slowed a bit and we moved it – we went from 18 months out to 27 months on a 3% CD. So we’ve been pretty strategic about it. It’s brought with it obviously a lot of new customers, some checking accounts with those CDs and generally two-year tenant [ph] rates. So we’re giving our branches the opportunity to work with these new customers for a couple of years. And I would put our branch focus up against anybody to have good conversations with those customers and convert them to more efficient products sets for us and solutions for those customers. And that’s part of this strategy is just to bring more people into the branches and give ourselves an opportunity to tell the Washington Trust story and provide solutions.

Laurie, this is Mark. As you look at the long run for the next couple of years as we shift from the peak of an economic cycle perhaps to a slower economy and to a more challenging financial market environment, those revenue sources that are market sensitive; wealth management, mortgage banking can be affected adversely more positively by movement of markets. And growth in balance sheet footings can certainly help offset that. It was a very strong year in 2018 for both loan growth and deposit growth and the company’s capital ratios are strong enough to continue supporting that kind of growth. So as long as we can deploy our resources effectively to grow funding sources and balance sheet footing and we have capital to do it and the credit quality and discipline to be able to continue to deliver strong results, that’s a helpful trajectory we think in terms of sustainability of earnings over the next couple of years. So that’s how we think of it in the big picture.

Great. Thanks. That’s helpful. One last question. Obviously, your North Providence, Rhode Island branch opened on the last call. You said following that you had no more de novos in the works and I just wanted to get a refresh on that. Were there any de novos on the drawing board for this year or how are you thinking about that? Thanks.

We had no specific de novos sites identified. We do think that a measured pace of expansion in our market area will continue to garner results. One of the ways that you can diversify the positive mix beyond just promotional CDs is opening branches that have a better reach to give full access to business DDA, personal DDA, savings cap and so on and so forth. The economics of the branches have changed for us over time, but we’ll look for those opportunities and we recognize that that’s a sustainable way to grow deposits over a long period of time. And I think if we looked at the last seven or eight we’ve opened there close to 300 million in total deposits, it’s a very meaningful long-term investment in growth.

Thank you.

Thanks, Laurie.

Thank you. This concludes our question-and-answer session. I would like to turn the conference over to Ned Handy for any closing remarks.

Thank you all for your time and interest. We really do appreciate it. We’re going to get back to work now, as you would expect, and we look forward to talking to you and seeing you all in the near term. So thanks very much. Have a great day.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.