Good morning and welcome to Washington Trust Bancorp Inc.'s Conference Call. My name is Elliot and I’ll 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. Miss. Eckel?

Good morning, thank you, Elliot. Welcome to Washington Trust Bancorp's third quarter 2022 conference call. Joining us for today's call are members of Washington Trust's 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 Ray, Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward-looking statements and actual results could differ materially from what is discussed on the call. Our complete Safe Harbor statement is contained in our earnings press release, which was issued yesterday and other documents that are filed with the SEC. These materials and other public filings are available on our Investor Relations site at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth. Good morning and thank you for joining our third quarter call. We value your time and your interest in Washington Trust. I’ll provide some commentary on the quarter and our view of the current environment and then Ron Ohsberg will review our financial performance. After our remarks, Mark Gim and Bill Ray will join us and we will answer any questions you may have about the quarter. I'm pleased to report that Washington Trust posted solid third quarter results with a net income of $18.7 million or $1.08 per diluted share. We saw a very strong loan growth which has helped optimize our balance sheet in this rising rate environment. Commercial loans grew by 8% with strong credit formation, strong construction funding and a slowdown in pay-offs. Margin expanded and we delivered an all-time quarterly high in net interest income, loan and in-market deposit growth has positioned the balance sheet to continue to offset pressure and our two main fee drivers’ wealth management and mortgage banking. Our returns on average assets and average equity remains strong and asset quality did as well. The diversity of our revenue streams combined with credit discipline and strategic organic growth enabled a strong third quarter. Ron will provide details about our results in his comments. The markets we serve continue to provide us with quality growth opportunities. We opened our New Haven commercial lending office in July and now have five lenders in that market supported by a new cash management higher and complemented by our strong wealth management and residential mortgage teams in Connecticut. We've operated in Connecticut successfully for years. This commitment to the market will help establish our brand and leverage our diverse offerings. We announced our intention to add three new branch locations in Rhode Island in…

Thank you, Ned. Good morning, everyone. And thank you for joining us on our call today. As Ned mentioned, net income was $18.7 million or $1.08 per diluted share for the third quarter as compared to $20 million or $1.14 for the second quarter. Net interest income amounted to $42 million, up by $4.5 million or 12% from the preceding quarter. The net interest margin was 2.82% up by 11 basis points. There was essentially no benefit to the third quarter from PPP fees. In Q2, these fees amounted to 323,000 a two basis point benefit to margin. Pre-payment fee income was modest at 30,000 in the third quarter and 62,000 in the second quarter, both had no impact to the margin. Excluding the impact of both items for each period, the margin increased by 14 basis points from $2.68 to $2.82. Average earning assets increased by $365 million driven by loan growth. The yield on earning assets was 3.49% for the third quarter up by 46 basis points. On the funding side, average in-market deposits declined by $120 million and average wholesale funding sources rose by $438 million. The rate on interest bearing liabilities increased by 44 basis points to 0.86%. Non-interest income comprised 27% of total revenues in the third quarter and amounted to $15.8 million down modestly by 49,000 or point0.3% from Q2. Wealth Management revenues were $9.5 million down by 541,000 or 5%. This included a decrease in asset based revenues of 339,000 or 4%, as well as a decrease in transaction based revenues of 202,000 consisting mainly of tax servicing income which is concentrated in the first half of the year. The decrease in asset base revenues correlated with a decrease in average asset balances which were down by $337 million or 5%. September 30,…

Great. Thank Ron. We can now Elliot, we can go to questions.

Thank you. [Operator Instructions] Our first question comes from Mark Fitzgibbon from Piper Sandler. Your line is open. Please go ahead.

Hey, guys, good morning. A couple of questions on the wealth management business those four advisors that left. I guess first, did they end up going into the same place as the other team that had left a while back?

So we can say as they left to pursue other career opportunities, Mark...

Okay. And Mark have you changed, like the pay structure or something at, the wealth management side that caused these people to leave or did their non-competes burn off or just curious on that.

So, Mark, they We have non-compete, non solicit agreements in place and we can't comment much further given where we are in the process.

Okay, so $400 million of client outflows have already announced they're leaving to follow them. But it sounds like you expect a big chunk of that billion dollar book of business, they have to go away. Is that correct?

Yes, Mark, this is Ron. I mean, we're still early in this. So I can't really give you any more guidance other than telling you what has happened today. So we're currently at $412 million.

Okay.

And to add a little bit on that, Mark. It's we don't think that it's necessarily valid to extrapolate or experience from prior departures with what's happening now. But as Ron said, it's early to tell.

But what's changed, Mark? I mean, last time, we had the team leave the book of business just kind of slowly blood out. And I thought we were under the impression that you guys have made changes to the non-compete non solicits to try to prevent this kind of, large chunks of business leaving. Well, I guess I'm curious, what's changed?

So, again, we have non-compete, non solicitation agreements in place. And as we've said, we're, we can't comment on where we are at this stage in the process.

Okay. Changing gears on, I wonder if you could share with us what the spot deposit rates are today.

Spot deposit rates? Yes, I mean, we have not really changed. Yes, Mark, we haven't changed our, our rack rates. We are competitive on some promotional pricing, particularly on CDs, that's been a traditional strategy for us, our current promo rates for new money with a checking account is 350.

Okay, and then Ron are all the expenses for the new branches and offices reflected in the third quarter number?

So the new we announced three new branches opening in 2023. So that none of that expense is really reflected in our in our numbers at this point. And we don't know the exact dates that those branches will open. Typically, we have some leading expenses prior to the branches opening, but we don't have those opening days yet, Mark. So there's not too much to say on that at this point.

Okay, and could you share any thoughts around the NIM outlook?

Yes. So, we had pretty good new expansion in the third quarter. We would expect some additional expansion in the fourth quarter. So we're looking at 285 to 290 for Q4.

Okay. Okay, great. And then lastly, I know you manage the company toward regulatory capital ratios, but does the TCE ratio play any role in your sort of capital planning? And if so, how comfortable are you taking that down? Thank you.

Yes. I mean, we obviously look at it, and it certainly is a metric that's important. I wouldn't say that the level that it's at is going to change the way we're running the business at this time. I mean, we were, we're quite comfortable with our regulatory capital ratios. And then so that's, that's kind of our position at this point.

Thank you.

Our next question comes from Damon DelMonte from KBW. Your line is open. Please go ahead.

Hey, good morning, guys. hope everybody's doing well today. Just a follow up question. Just to start off with a follow up question on the margin outlook. I noticed borrowings increase decent amount this quarter in light of the strong loan growth. So Ron when you think about the margin, I heard your comments to Mark's question 285, 290 for the fourth quarter. But do you feel like the margin kind of peaks at the end of the fourth quarter and kind of starts to maybe see a little headwind as we go into 2023?

Yes, I mean, listen so our, we're asset sensitive. As the Fed increases rates, our LIBOR portfolio will reprice immediately but what we understand that that some of our variable funding will change, including FHLB, brokered CDs and so forth. So I don't think we've peaked yet. I know that there is concern in the industry, whether banks are already peaking. I don't think we're quite there yet. Although I do think we'll see the expansion of our NIM start begin to moderate somewhat in the fourth quarter. And we just need to keep looking at what the Feds doing. We're not quite ready to put out any 2023 guidance on that yet. But I think we'll I think we'll see some benefit for another a little bit.

Okay. Thanks. And then with regards to the outlook for loan growth, can you talk a little kind of broad commentary? And what your pipelines are looking like now and kind of how you're feeling about the next couple of quarters? Obviously, two very strong quarters back-to-back from you guys. And kind of just wondering if the pipeline continues to build and the outlook remains relatively consistent, or how would you think about it?

Yes, Damon this is Ned. Thanks for the question. So the pipeline is still remains pretty strong commercials in the mid to hundreds, resi is still it's down. But it's still pretty, pretty strong enough in the 160 to 170 range. So deals keep coming in. We're seeing a lot activity, a lot of requests and all of the markets we serve Connecticut's particularly strong. Right at the moment, the greater Boston marketplace is still very supportive, both on both sides. So we feel we feel good about the certainly the quarter ahead.

That's great. Are you seeing what's the reaction from like your some of your commercial development customers with just the rapid rise in rates? And has that caused them to pause on projects at all, and kind of revisit their personal balance sheets for the project?

That's a good question. We haven't seen it yet. Maybe an individual deals, we're having more discussions, I think, I think we're seeing a little slowdown and swaps, which tells us that the borrowers think that over the next, I don't know, 6 months to 12 months that we may see a see a reversal in rates. So they're not they're not. They're not fixing through swaps, we see a little bit of a lift, run and fixed rate requests. So people are, interestingly, locking in at current rates, and yet not doing swaps. So it's I think there's a sort of across the board. But we aren't seeing people pull deals off the table, because of current rates.

Got it. And then this last question.

I've seen a lot higher rates in their careers.

Fair point, this last, last question on credit. Reserve is not 76 basis points in part, because of the strong growth this quarter. How are you guys thinking about the reserves? If we look at it, like on a year-over-year basis, it's down, 25 basis points. I think there's some growing concern, we could be going into an economic slowdown, loan growth outlook seems positive. So I mean, should we start to see a little bit of a reserve build in the next couple of quarters?

Yes, I'll take that. And Bill, if you want to jump in at some point. But so in the in the third quarter, we had strong loan growth. And we provided for that. The provision has several components to it. And so the loan growth provision was kind of commensurate with the amount of growth that we had. We also look at various qualitative factors that that we've been providing for over the past couple of years, one being COVID. And so we actually dial back some of our kind of COVID related reserves. So the net of that was an $800,000 provision for the quarter. I think, going forward I think the reserve that will you'll see printed will be more in line with just with loan growth, and then any changes in economic and asset quality concerns that we might have with from the economy, Bill I don't know if you want to.

Sure. I mean, the CECL model is fundamentally based on loan losses over a period of time and then looking forward against econometric outlook. And so we're very confident that we have good coverage based on our loss history. We have priced in the growing concerns about recession and unemployment and other things. So I think we're very comfortable with where we are and so it'd be wrong to say there's a magic number or that loan growth itself will change things. But again, I think we're in good shape now. And certainly as loans continue to grow, there'll be roughly commensurate provision.

Got it? Okay. Appreciate all the collar guys. Thanks a lot.

Thanks, Damon. Thank you.

[Operator Instructions] Our next question comes from Laurie Hunsicker from Compass Point. Your line is open. Please go ahead.

Great. Hi. Thanks. Good morning. I just I just wanted to go back to Damon's question around reserve build, I just want to make sure I understand it. So when you're talking about sort of commensurate loan loss provisioning, pre pandemic, you were sitting at 69 basis points, reserves to them. Now you're at 76. I mean, is it, is it fair to say and it certainly I understand, CECL, but I also understand a lot of management teams all the way up, or they're also factoring in an overlay on top right. So is it fair to assume that we're not going to see you get below that 69 basis point level? Or how do you think about that? Or when you say, commensurate? Are you, are you thinking sort of 75, 76 basis points of reserves to loans? It's not going to go below that. Maybe just help us think a little bit more about that as we model provision? Thanks.

Sure. This is Bill Ray, I used I think I said, roughly commensurate to allow for a little bit of wiggle room there, because there's multiple factors in the model, which I'm sure you understand. But again, there's no magic number, the key to CECL is looking at loss history. And if you look at our loss history, especially recently, it's extremely low. And we have to factor those in as we look at our quantitative model. That said, I think we're generally in a range that looks like a reasonably stable range. And if you start growing loans in that, which we've been able to do, it's likely that provisions will be roughly commensurate with that. So I think we're comfortable with the range we're in. We were comfortable with the 69 basis points. I don't see material change, frankly, in either direction at this point, assuming that there is no market change and economic outlook. We've already as the model requires, we factored in the forecasted economic changes that are out there. And that's what got us to the number where we are now. And so I think we're probably at a reasonably stable, steady state number. But that's subject to all the potential changes that could come down the road in terms of economic forecasts.

Got it. Okay, that’s helpful. Thanks. And then, and then just to go back to the Wealth Advisors that departed. I just want to make sure that I heard this right. Think you said 412 million have already left with the four advisors. Did I hear that right?

So we've been notified, Laurie, that 412 million, our clients have told us that they are leaving. So that doesn't mean that they're 100% out the door yet. So the impact of that on Q4 earnings would be prorated to whatever point in time, the assets were de-platformed.

Got it? Okay. Yes. So when we're looking at the $6.3 billion $6.3, 23 [ph] billion that you had as of September 30, nothing has left at that point in time. Right. There was only 8 million of outflows this quarter, none, none are actually related to okay, okay. And then can you just remind us how many AUA wealth managers do you currently have senior AUA wealth managers?

So we have Laurie, this is Mark about 60 client facing or client service team members out of approximately 100 employees across wealth management.

Okay, and then are you going to be pursuing legal action against them, as you've done in the past? For the -- week, or how do you think about that?

We really can't comment at this time any further Laurie so just given where we are in the process.

Okay, so maybe, maybe then sort of a more macro question. Because I mean, you have gone after them in the past. And I understand you don't want to comment, but I guess it's worth thinking about that legal audit professional fee expense line. And then also with the new branches. Can you help us think about what non-interest expenses are going to look like in 2023?

Yes Laurie, it's Ryan. So the annual run rate cost of a branches for us is about six to 700,000. So I can't tell you what month those costs will come online for the branches. And there will be some expense saves associated with the Wellesley situation, particularly on comp. There may be some other costs in there as well, either savings or otherwise. It's just it's too early for us to give you any guidance on that particular piece.

Okay, and then….

Yes, and Laurie, this is Mark. With regarding the branch applications that we've put in for 2023. Those are subject to a long line of regulatory and federal and state approvals plus outfitting construction. So we've announced our intention to open those but not necessarily, we don't necessarily have hard date. So it's tough to give you specific guidance.

Okay, and then just one last one last thing is, as we model out those expenses coming online, can you just help us roughly think about, even which quarter we might see the expense builds start for each of those three branches? Thanks.

Yes, Laurie, I, it's really too early to tell. I don't know, second, third, fourth quarter, if you wanted to stretch a limb.

I think they'll be spread throughout the year in 2023. They're, they're the ones that we are looking at are all existing structures. So it's not as much of a construction process. But again, we're subject to federal state local approval. So to give you an exact timeline is a little tough, but it is certainly as we stated, it's our intention to do all three, but we'll stagger them over the course of the year.

Okay, great. Thanks for taking my questions.

Thank you, Laurie.

This concludes our Q&A. I'll now hand over to Ned Handy for final remarks.

Thank you, Elliot. We certainly appreciate your time with us this morning. We had a very solid quarter. Our balance sheet, capital position and credit quality remains strong. And our diversified business model continues to be -- to be supportive. Strong loan growth and in-market deposit growth set the balance sheet to continue contributing with strength. The addition of the Cumberland branch in Q3 will help build our deposit base in Northern Rhode Island. We have strong momentum heading into Q4 which will help to offset any wealth management revenue loss. Once again, I want to thank our employees for their strength of character and their consistent care and concern for each other and our customers. And we thank you all very much. Have a great day everybody.

Today's call is now concluded. We'd like to thank for your participation. You may now disconnect your lines.