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

Thank you, Andrew and good morning everyone. Welcome to Washington Trust Bancorp Inc.’s fourth quarter 2019 conference call. Today’s call will be hosted by Washington Trust executive team Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer. Before we begin today’s call, we would like to remind everyone that the 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 section at ir.washtrust.com to review all the complete Safe Harbor statement and other documents filed with the SEC. Washington Trust trades on NASDAQ under the symbol WASH. And now, I am pleased 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 will review the highlights for the fourth quarter and full year 2019, Ron will provide an analysis of our financial results and at the conclusion of our remarks, Ron, Mark and I will answer questions about the fourth quarter 2019 and provide some thoughts on 2020. I am pleased to report that Washington Trust posted record full year 2019 earnings with net income of $69.1 million or $3.96 per diluted share. Our 2019 results reflect the strength and stability of our core business model, which through the year enabled us to generate growth in revenues from our key business lines. Total deposits amounted to $3.5 billion at year end. This included a record $3.2 billion of in-market deposits, which grew by 5% during the year. While the current low interest rate environment has made deposit generation a challenge for all banks, we have had consistent deposit growth over time. We have relied on our high service retail team, our effective cash management team supporting commercial, institutional and municipal clients and our customer-facing bankers to bring in deposits. We enjoy a highly efficient branch network with an average branch size of approximately $150 million. We believe that we have opportunity in Rhode Island to add branches given our strong brand and service reputation. As you may recall, we opened a branch in North Providence, Rhode Island a year ago. It was our fifth de novo branch in as many years and the branch is off to a good start. We continue to look for a few more attractive locations in Rhode Island. We have had recent success with attracting checking accounts from new out of state residential mortgage customers. As you know, we do…

Thank you, Ned. Good morning everyone. Thank you for joining us on our call today, our review of our fourth quarter 2019 results in some more detail. As Ned mentioned, net income was $15.5 million or $0.89 per diluted share for the fourth quarter as compared to $18.8 million and $1.08 for the third quarter. Net interest income for the fourth quarter was $32 million and declined by $984,000. Net interest margin was $2.61, down 11 basis points. Income from loan payoffs and prepayment penalties was modest and totaled $189,000 compared to $130,000 in the third quarter. Income in margin were affected by the July, September and October Federal Reserve rate reductions with LIBOR and prime-based loans resetting downward and continuing prepayments in our mortgage-backed securities and residential loan portfolios. The average balance of interest earning assets increased by $22 million on a linked quarter basis, average loan balances were up by $72 million, while average investment securities were down by $46 million. The yield on earning assets decreased by 21 basis points from the third quarter to 3.86% due to lower market interest rates. On the funding side, average in-market deposits rose by $90 million, while the average balance of wholesale funding sources which includes FHLB borrowings and wholesale brokered deposits declined by $57 million from the third quarter. The cost of interest bearing liabilities declined by 13 basis points to 1.53%. Net interest income comprised 34% of total revenues in the fourth quarter and amounted to $16.6 million, down $1.7 million or 9% from the third quarter. Wealth management revenues were $8.9 million, down $259,000 or 3%. This was in line with the average balance of assets under administration which decreased by $209 million or 3% during the quarter. The December 31 end-of-period balance of assets under administration…

Thank you, Ron. The 2019 was another good year for Washington Trust. And as we entered our 220th year of service, we remain committed to providing enhanced value to those who have contributed to our success over time, our employees, our customers, our communities and our shareholders. We know the year ahead will be challenging given the continued low interest rate environment and flat yield curve, but we have the right people, products and technology to continue to achieve positive growth in our markets. We have a dedicated team of employees who work closely with our customers to offer financial solutions backed by top notch personal service. As in past years, we will continue to make incremental investments in our people and technology to ensure we have all the tools necessary to deliver the best experience for our employees and our customers. Washington Trust will continue to follow the strategy that has contributed to our success over the past 219 years. We have the solid financial foundation, strong capital and asset quality and business model that has provided a consistent stream of revenues during all types of economic cycles. We recently paid a $0.51 per share divined and have continued to enhance the value of our company for our shareholders. We thank them for their continued support of management and their investment in Washington Trust. This concludes my prepared marks. And now Mark, Ron and I will be happy to answer any questions you may have.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Good morning, Mark.

Good morning, Mark.

I wonder if you could update us on the wealth management run-off, do you think we are getting to the end of that, I know you said there is some residual impact on revenues in the first quarter of $100,000, but are we pretty much through that unique customer run-off if you will?

Mark, this is Mark Gim. It feels like we are through the majority of that, yes. We obviously one can’t handicap the amounts of probabilities, but I think that’s substantially behind us. And Ron, I don’t know if you have anything to add?

Yes. No, the last couple of months, things have slowed down quite a bit. So, I don’t think we can say that there will be no more attrition, but it feels pretty good at the moment.

Okay. And then Ron, I wondered if you could sort of update us on your thoughts on the expected impact from CECL?

Yes. So like other banks we will kind of stick to a range, but we think it’s an increase on a non-tax effective basis of 6.9 – $6 to $9 million of our range.

That’s the adjustment to equity?

Yes, adjustment to equity, Mark.

Okay, great. And then I was just curious that $53 million of resi mortgages you bought this quarter at a yield of 3.36%, when you factor in funding cost, it strikes me that, that’s going to be degradative to the margin. Can you help us think about sort of the strategy there?

Well, so we care about the margin obviously, but we also care about net income. And certainly it’s accretive to income.

Secondly, Mark, this is Mark Gim, we also view it as an opportunity to replace lower yielding MBS with high-quality in-market resi loan purchases that fit our risk profile. So, when we see opportunities in terms low cost high credit quality attractive markets, we will sometimes make recourse to the purchase resi market as an alternative to reinvesting MBS cash flows.

Okay, but considering that, we probably should expect the margin to be down a little bit more in coming quarters would you say?

Actually, no. For the past couple of quarters, we have said that our loans tend to re-price downward faster than our borrowing cost. We expect to get 4 to 5 basis point NIM expansion in the first quarter and another 4 to 5 basis points in the second quarter. So that would put us for – with the second quarter NIM approximately 2.70% and things would kind of level out from there for the rest of the year.

And Mark, that assumes no further action by the Federal Reserve which is of course unknown to us.

That’s right.

Okay. And then lastly, I am curious on the expense front, is there any – you mentioned, I think Ned in your earlier comments about you have capacity to open some branches in Rhode Island, should we look for any unique increases in expenses during the course of this year?

Yes, I mean, I think we are looking at other branch locations. So that’s a possibility. The lenders that we hired in Connecticut are revenue generators, customer facing. If we came across opportunities like that, we might invest in those for revenue growth. On the technology, Ron, you might…

Yes. So, Mark, on a core basis, we see 2020 expenses going up at about at about a 4% to 5% range. We are seeing some wage pressure. We are also warping up the final stages of 3-year technology infrastructure upgrade. We started with desktops and windows. We moved on to servers and this year, we will migrate things out to the cloud. So some little bit higher level of core operating expense increase than what we have seen in the past couple of years in the 4% to 5% range. And as Ned said, as always, we will make appropriate strategic investments in the business such as additional branches if we find the right opportunities along the way, but there is nothing unusual on the horizon at this point.

Thank you.

Thanks Mark.

The next question comes from Erik Zwick of Boenning & Scattergood. Please go ahead.

Hey, good morning everyone.

Good morning. Erik.

Hey, Erik.

Maybe just a follow-up on the loan growth a little bit, just curious you have given the strong finish to the year from the organic growth perspective, a little bit of kind of purchase activity in there as well, what should we be thinking about or kind of how are you targeting loan growth in 2020 and what would you expect the mix to be from an organic versus kind of purchase perspective?

Yes. So, Erik, it’s Ron. So, our pipelines for both commercial and residential are pretty good right now heading into 2020. As such, we kind of expect a strong mid single-digit growth heading into 2020. On the resi side that could be supplemented with some additional purchase activity as Mark mentioned and as we did in the third – the fourth quarter, but that’s kind of how we see it.

Okay, that’s helpful. And then given that strong loan growth as well as letting some of the kind of wholesale deposits run off, the loan deposit ratio ended the year at 111% just kind of curious that your thinking around that current level and how that might trend going forward you have a target?

Yes, right. So, we track loan-to-deposits on both a total deposit as well as an in-market deposit basis. So, the increase that you are seeing in the loan-to-deposit ratio to 111% really reflects the run-off of the wholesale brokered CDs which we consider kind of interchangeable with FHLB advances and FHLB was just cheaper in the fourth quarter. So, we allowed some of that CD run-off to be replaced by FHLB.

Okay. So, you expect to if I think about it in terms of loans to the in-market deposits try kind of that level should be more constant and then kind of total ratio may just fluctuate based on kind of the cost of the funding – alternative funding?

Yes, as we have talked about many times, deposits are a priority for us. That’s why we are doing the de novo branching. It’s difficult deposit environment out there. We recognized that and we are doing everything we can to increase our deposit growth rate.

Sure. And then on the fee income side, obviously a great year in 2019 for mortgage revenue, $14.8 million, your expectations you mentioned that the pipeline is strong kind of heading into the beginning of the year, would you expect to be able to approach that number again in 2020 or too early to tell at this point?

Erik, this is Mark Gim. So, I think what you have said is pretty accurate. We believe that the first and second quarters of 2020 will be strong based both on current pipeline volume and on the strength of the resi housing market in our lending areas where there really aren’t any signs of decreased demand and pressure on supply. And given the level and trend of the long end of the yield curve, we don’t have any major expectation that rates would trend up from here. The crystal ball is a little less clear on the second half of the year just because it’s further out and we are late in the growth cycle, but at least for the first half of the year from a color standpoint it seems strong. Ron, I don’t know if you have anything to add?

Yes. No, I mean, we had a record year. We don’t necessarily think that mortgage revenue is going to go up 40% again, but we have much stronger volumes and pipeline levels than we normally do at this time of the year. So it’s – things are pretty good on mortgage.

I appreciate the color there. And maybe just one last one for me as I think about kind of the bigger picture, it’s obviously a tough operating environment given the shape of the curve, that the loan interest rate environment certainly putting pressure a little bit on earnings as well as profitability I guess? In terms of how you think about success in 2020 in terms of either earnings growth or ROA or some other profitability measurement kind of how are you shaping your expectations for 2020?

Yes, let me start with that. It’s Ned and thanks for the question. And I think we feel well positioned. Certainly, credit quality is great. We don’t have anything to worry about in that front. I think the growth rates that Ron has talked about are achievable. We do know that deposits is our – it continues to be our number one priority. And so we are thinking about that strategically. As we talked about earlier, if a great branch location comes up, we think we are prepared to pull the trigger on that. M&A, our view in M&A hasn’t changed. We are going to be very cautious and thoughtful about it, both on the bank and wealth side. So, we are obviously generating capital and we have got the capital to do some things, how we deploy it, we think about all the time and look for ways to continue growth off of what we think is just a great foundation.

And Eric, this is Mark. Our goal as always is to remain on the top quartile of community banks are – in our peer group. And this challenging rate environment certainly for all of them, we think that’s some of the differentiators we have, the wealth management business, the mortgage banking business are worth emphasizing in environments like this. And lastly, we as Ned said have enough routes to deploy capital whether through dividend or through M&A or through the opportunistic use of repurchase to manage those profitability levers.

Great. Thank you so much for taking my questions.

Thanks, Eric.

The next question comes from Laurie Hunsicker of Compass Point. Please go ahead.

Yes, hi, thanks. Good morning.

Good morning, Laurie.

Hi, Laurie.

Just wanted to go back to expenses, when you said a 4% to 5% increase in core expenses, I just wondered what you are using as your core base for 2019, because certainly, there was some noise whether it was the outside vehicle fees or the OREO or if you are just looking at this on a more reported level?

It’s basically on a reported level that the OREO write-down – the OREO write-down that we took in December kind of offsets the benefit that we had on the FDIC. So on a full year basis, I think our reported expense base is pretty representative of the things that we have going forward.

Okay. And then for your full year ‘20 guide, does that assume any de novo branches are opened or more than likely if you would identify?

No.

Okay, so it would be 2021, okay. And then just jumping back to the comments around – about selective buyback, can you help us think about as you rank use of capital where you would stand in terms of buyback versus dividend versus M&A and how we should think about that with your stock sitting here at 51?

Yes. So I mean where we trade relative to tangible book value seems like buyback doesn’t necessarily make a lot of sense at these levels. I mean, we would be looking closely at our share price when making that decision. And just considering what we think is important overall to investors in terms of whether a dividend would be preferable or not.

Okay. And so what is the….

Sorry. Laurie, it’s Ned. I was just going to say that the value of the dividend which we paid historically is we think a big part of investing in our stock and that’s obviously to us is a priority, but it doesn’t mean that we don’t think about other alternatives from capital deployment.

Okay, great. And then…

And lastly, Laurie, M&A is as you know opportunistic. We are – we have historically been a disciplined acquirer and would put money to work as appropriate on the bank or wealth side when those funds opportunities are a good fit for us.

Okay, great. And just last question around the buyback, what price point you become more constructive?

Yes. I don’t know that we would get into that.

Okay, fair enough. I will leave it there. Thanks.

Okay, thank you.

Thanks, Laurie.

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

Well, thank you all for your time and your interest in Washington Trust. We appreciate it and we know you have a lot on your plate. So with that, I will say thank you and we will talk to you again soon. Thanks very much.

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