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Edited Transcript of WASH earnings conference call or presentation 22-Oct-19 12:30pm GMT

Q3 2019 Washington Trust Bancorp Inc Earnings Call

WESTERLY Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Washington Trust Bancorp Inc earnings conference call or presentation Tuesday, October 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward O. Handy

Washington Trust Bancorp, Inc. - Chairman & CEO

* Elizabeth B. Eckel

Washington Trust Bancorp, Inc. - Senior VP and Chief Marketing & Corporate Communications Officer

* Mark K. W. Gim

Washington Trust Bancorp, Inc. - President & COO

* Ronald S. Ohsberg

Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer

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Conference Call Participants

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* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* Erik Edward Zwick

Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research

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Presentation

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Operator [1]

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Good morning and welcome to the Washington Trust Bancorp Inc.'s conference call. My name is Jamie, and I will be your operator today. (Operator Instructions) Today's conference call is being recorded. And now I would like to turn the conference call over to Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel, you may begin.

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Elizabeth B. Eckel, Washington Trust Bancorp, Inc. - Senior VP and Chief Marketing & Corporate Communications Officer [2]

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Thank you, Jamie. Good morning and welcome to Washington Trust Bancorp Inc.'s Third 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, we'd like to take note of -- 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 appears in our earnings press release and in other documents that we file with the SEC. We encourage you to visit our Investor Relations website at ir.washtrust.com to review all of our SEC filed documents and the complete safe harbor statement. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce Washington Trust's Chairman and Chief Executive Officer, Ned Handy.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [3]

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Thank you Beth. Good morning and thank you for joining us. Yesterday, we released our third quarter earnings. This morning, I'll review the quarter's highlights and then turn the call over to Ron Ohsberg, who will discuss our financial performance in more depth. Then Ron, Mark and I will answer any questions you may have about the third quarter performance or our outlook for the remainder of 2019.

I'm pleased to report that Washington Trust posted record third quarter earnings with net income of $18.8 million or $1.08 per diluted share. Our performance reflects the benefits of our diverse business model and generating consistent revenues from varied economic cycles and interest rate realities. Our key profitability measures remain strong, we are well capitalized and asset quality also continues to be strong. The Federal Reserve's rate decisions during the third quarter presented both opportunities and challenges for us.

Let me take a moment now to review some of the highlights of the quarter. We had good deposit momentum in the third quarter as total deposits reached a record $3.6 billion at September 30, and in-market deposits were also at all-time high levels at quarter's end. We had solid growth in both demand deposits and money market accounts.

As we mentioned on last quarter's call, in anticipation of the Fed's rate cuts, we began rationing down rates early in the quarter and ultimately, saw modest runoff in time deposits. We had seasonal deposit inflows from municipal and institutional clients during the quarter. In-market deposit growth enabled us to reduce FHLB wholesale borrowings. Changes to our deposit mix, careful management of deposit pricing and continued in-market deposit growth will help offset margin pressure.

FDIC deposit market share statistics were released during the third quarter, and we're pleased to report that Washington Trust continues to rank third in Rhode Island with an 11% market share. We've opened 8 branches in Rhode Island in the last 10 years and our FDIC market share ranking reflects our success at expanding our footprint in the state. We believe retail branches still play an important role in our customers' banking experience and continue to seek out new locations to expand our branch network in several Rhode Island communities.

Total loans reached a record $3.8 billion at quarter's end, with increases in commercial real estate, residential mortgage and consumer loans. Commercial origination activity in the quarter was concentrated in commercial real estate. Early pre-payoffs continued in the third quarter, moderating loan growth somewhat. But the commercial pipeline, including both commercial real estate and C&I remains healthy through year-end. Reduced interest rates helped our retail lending team deliver record-level mortgage volume and mortgage banking revenues in the third quarter. We had a record number of mortgage applications during the quarter and the mortgage pipeline is strong, so volume should continue at a good pace through year-end.

We are pleased with the mortgage team's third quarter results. We've remained steadfast in the mortgage business, buoyed at times by strength elsewhere in our business mix and have, therefore, been positioned to be opportunistic when conditions are supportive. We remain committed to growth, have invested in new technology and have made process improvements to streamline operations and improve our customers' experience.

Our strategy and those investments are paying off for us. Wealth management assets under administration were $6.1 billion at September 30, down from the previous quarter. Expected seasonal declines in tax preparation fee income as well as the impact of client outflows from our Weston division, which lost 2 senior counselors earlier this year, were partially offset by new client growth and favorable market conditions in the third quarter.

Before I turn the call over to Ron, I'd like to mention some very important recognition Washington Trust received. In August, Washington Trust was named one of the nation's Best Banks to Work For by American Banker magazine as part of its annual review by the Best Companies Group. We're the largest Northeast bank and the only Rhode Island-based institution named for the honor. The program identifies, recognizes and honors U.S. banks for outstanding employee satisfaction and is based on workplace policies and practices as well as a survey of employees regarding life at Washington Trust, our work environment, morale, benefits and growth opportunities. As an employer, we strive to be an employer of choice, a place where people aspire to work, are proud to work and stay to build their lives and careers with us. We're extremely proud to be recognized as one of the nation's best banks to work for as it reconfirms our commitment to our employees and the outstanding service they provide to our customers and our communities. I'll now turn the discussion over to Ron, for a more in-depth review of our financial performance.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [4]

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Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was a record $18.8 million or $1.08 per diluted share for the third quarter. This compares to $17.3 million and $0.99 for the second quarter. We also reported return on equity of 15.2% and return on assets of 1.44%. Net interest income for the third quarter of $33 million declined by $880,000 or 3%. The net interest margin was 2.72%, down 9 basis points.

Income and margin were affected by that July reduction in the Fed funds rate, with LIBOR and prime-based loans resetting downward and continuing prepayments on our mortgage-backed securities and residential loan portfolios.

The average balance of interest-earning assets declined by $22 million or 0.5% on a linked quarter basis. Average investment securities were down $76 million, while average loans were up $21 million. The yield on average earning assets decreased 11 basis points from the preceding quarter to 4.07%.

On the funding side, the average balance of wholesale funding sources declined $103 million, while average in-market deposits rose $58 million from the second quarter. The cost of interest-bearing liabilities declined 2 basis points. Noninterest income comprised 36% of total revenues in the third quarter and amounted to $18.3 million, up $1.6 million or 9% from Q2.

Wealth management revenues were $9.2 million, down $396,000 or 4% from the preceding quarter. Transaction-based revenues totaled $140,000, down by $268,000 on a linked quarter basis due to tax reporting and preparation fees, which are concentrated in the first half of the year. Asset-based revenues totaled $9 million, down $128,000 or 1% on a linked quarter basis.

The September 30 end-of-period balance of assets under administration was $6.1 billion, down $353 million or 5% from the balance at the end of Q2. The average balance of assets under administration decreased $13 million or 0.2% from Q2. The decline in assets under administration reflected approximately $450 million of client outflows associated with lost client accounts due to the departure of 2 senior counselors at the end of Q2. The impact of these lost accounts through September 30 was a reduction of asset-based revenues of approximately $290,000 during the third quarter and is estimated to be a reduction of about $620,000 in the fourth quarter.

Our mortgage banking revenues totaled a record $4.8 million in the third quarter, up by $1.2 million or 33%. These results reflected a substantially higher volume of mortgage loans sold in the secondary market. Our origination pipeline at September 30 was very helpful -- healthy at about $250 million, an increase of $26 million or 12% since June 30.

We expect fourth quarter revenues to comparable to the third quarter.

Loan-related derivative income was at an above-average level in the third quarter and amounted to $1.4 million. This was an increase of $661,000 from Q2.

Now I'll turn to noninterest expenses. Total expenses decreased by $1.3 million or 5% from the previous quarter. Included in this change was a $1 million linked quarter reduction in FDIC deposit insurance costs, which included approximately $900,000 of FDIC assessment credits, which were recognized in Q3. We have an additional $200,000 in credits available to offset future quarterly assessments. Excluding the impact of the FDIC costs, noninterest expenses were down $281,000 or 1% compared to Q2. This change included a net decrease of $104,000 in salaries and benefits, which reflected lower wealth management compensation costs associated with the departure of the 2 senior counselors, which was partially offset by volume-related commission expense due to an increase in mortgage banking activities.

We also had a decrease of $157,000 in advertising and promotion costs, largely due to timing and an increase of $204,000 in outsourced servicing expense, reflecting volume-related increases and third-party processing costs, largely to support higher mortgage and derivatives volumes.

Income tax expense totaled $5.2 million for Q3. The effective income tax rate was 21.8% compared to 21.3% in Q2. We currently expect the full year 2019 effective tax rate to be approximately 21.5%.

Turning to the balance sheet, total loans were up $48 million or 1% compared to June 30, and up $222 million or 6% from a year ago. Total commercial loans were up $17 million. Originations were approximately $93 million and were concentrated in commercial real estate. Payoffs and paydowns were $76 million. As a result, the commercial real estate portfolio increased by a net $34 million, while the C&I portfolio declined by $17 million. Residential loans were up $26 million and consumer was up $4 million.

Investment securities decreased $82 million primarily due to paydowns on mortgage-backed securities. Investment securities represented 17% of total assets at the end of the third quarter. Total deposits were $3.6 billion, up $82 million or 2% from the end of Q2 and up $172 million or 5% from a year ago. In-market deposits were up $134 million or 4%, representing -- reflecting seasonal inflows of various institutional and governmental depositors. Wholesale brokered CDs were down by $52 million, and federal home loan borrowings were down $104 million.

Our asset quality remains very strong. Nonaccrual loans were 0.39% of total loans compared to 0.34% at the end of Q2. Loans past due 30 days or more were 0.38% of total loans compared to 0.48% at the end of the second quarter. And net charge-offs were $801,000 versus $771,000 in the previous quarter. The allowance for loan losses was 0.71% of total loans and provided MPL coverage of 181%. The loan loss provision was $400,000 compared to $525,000 in Q2. And finally, total shareholder's equity was $498 million, up $13.6 million from the end of Q2.

And at this time, I'll turn the call back over to Ned.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [5]

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Thank you, Ron. We're pleased with the third quarter performance and hopeful that the momentum will continue through year-end. We are well aware of the challenges presented by the current operating environment as well as the uncertainties that the mid-year may bring. We've weathered many economic storms during our 219-plus-year history and have a solid financial foundation. We are well capitalized, we have a proven business model, and our sights are set on continued sensible growth. We thank you for your continued support of Washington Trust, and we'll continue to work hard to enhance shareholder value in America's oldest community bank.

So thank you for your time this morning, and now Mark, Ron and I are happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Mark Fitzgibbon from Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [2]

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Ron, just to clarify, on the mortgage side, did I hear correctly that you expect mortgage revenues to be pretty comparable in 4Q to what you had in 3Q?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [3]

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Yes, yes. Our pipeline is real strong at the end of the quarter, actually a little higher than it was at the end of second quarter. So yes. We think mortgage sales activity will be pretty strong. A component of our mortgage revenue was the fair value of the hedge pipeline. So at some point, we're going to see some tapering off of our mortgage volumes. We don't know exactly when that will be. We don't think it will be before the end of the fourth quarter though.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [4]

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And the gain on sale margins look pretty similar to what you saw in Q3 as well?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [5]

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Yes. They have been strong. I mean they've been trending up through the year.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [6]

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Okay. Secondly, how much more do you think it's likely we'll see an outflows from those folks that left at Weston? Are we sort of through most of that? Or do you think there's a little bit still to come?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [7]

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Well, so we've had another $94,000 -- $94 million lease since the end of September. So I would say we're not at the end of it yet. We probably won't know where we are in its entirety for another quarter or 2. Mark, I don't know if you have any -- anything you want to add on that, Mark Gim?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [8]

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No. Mark, we continue to do everything that we have talked about on prior calls. We are reaching out to clients very proactively. The effort is really to do the right thing for the customer and client, but as Ron said, we'll keep you as current as we can as we receive information.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [9]

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Okay. And then lastly, I wondered if you could help us think about the margin in the 4Q. It -- I -- my suspicion is that you'll continue to see some pressure until you get some of those CDs to reprice next year, is that fair?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [10]

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It is. So obviously, we had a cut at the end of September. We are expecting another cut at the end of this month. That's 50 basis points of pressure. We're not really taking into consideration, at this time, any cut at the end of the year. But considering all of that, we would expect the fourth quarter margin to be in the low to mid-260s.

I can kind of break that down for you a bit. So we have $1.8 billion in LIBOR and prime-based loans, so those, we expect, will reset downward on November 1. But offsetting that, we have $1.6 billion of interest-sensitive liabilities that consists of home loan borrowings, brokered CDs, retail CDs. And those will -- that $1.6 billion will reprice out by the end of June, and of that, about half of it actually resets in the fourth quarter. So each rate cut causes us some immediate pain, but we will be able to offset that on a relatively short-term basis.

In terms of things that we're doing internally, we've been actively managing down the rates that we pay on our institutional money market accounts as well as lowering and shortening our promotional offerings. And on the wholesale side, we did restructure some advances, which will lower our interest expense by $170,000 in the fourth quarter and by about $610,000 next year and $410,000 in 2021. So we're not sitting still. We do have some ability to manage our expenses down.

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Operator [11]

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Your next question comes from Erik Zwick from Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [12]

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Just a couple questions on the expense side. I think I recall from last quarter, you mentioned there could potentially be some legal expenses related to your issue -- your kind of efforts to pursue the clients or enforce any kind of non-competes from the 2 wealth management -- managers that left. Looks like legal expenses were kind of in line this quarter. I guess is this a good run rate going forward? Or kind of any updated thoughts on that front?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [13]

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Yes. It's pretty good. I mean you take the FDIC out, obviously. We're going to see some kind of variable expense reduction on the wealth side at about 24% of revenue loss. So that's -- you are starting to see some of that in there. So we've had some compensation saves on the wealth management side, which kind of offset, in the short term, some of those legal expenses. We issued guidance at the beginning of the year at like 3.5% to 4% revenue -- expense increase year-over-year, we're more or less on track with that. I guess I would just also like to reemphasize that we do have some variable cost in the mortgage and derivative side of things, which are pushing up expenses a little bit. That's kind of a good trade-off on the increased revenue that we have.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [14]

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Okay. That's helpful. And then you kind of mentioned the FDIC piece. Do you expect to record any additional credits in the fourth quarter or into the first quarter of 2020?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [15]

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Yes. Realistically, we think we'll get the $200,000 in the fourth quarter assuming that the FDIC reserve levels maintain at the level that they are at, which the FDIC has kind of signaled to the banks that, that's -- that they're going to ensure that, that happens. But that would be the only caveat, it would just be the timing, but we think we'll get it in Q4.

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Operator [16]

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Our next question comes from Damon DelMonte from KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [17]

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Just to start off real quick on the expenses, just to kind of follow up on Erik's question on the FDIC costs. So if you get additional $200,000 of credit, that's coming off the normal quarterly amount, correct? So if you're somewhere in that $400,000 range, you take the $200,000 credit, you're kind of looking at something around $200,000 in the fourth quarter?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [18]

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Yes. That's about right. I would say our run rate is $400,000 to $450,000 in a normal quarter. So yes, it would be $200,000 less than that.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [19]

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Got it. Okay. All right. Thanks for clarifying that. So I guess my next question kind of talking a little about loan growth. As you noted in your prepared remarks, good commercial real estate activity, kind of softness in the C&I. How do we kind of think about those 2 buckets as we progress through the end of '19 and into '20?

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [20]

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Yes. I think we'll stick with our sort of mid-single-digit guidance. I mean we're kind of at 3.5% year-to-date. That would require another $30 million in net growth in the fourth quarter. We generally have pretty strong fourth quarters. The pipeline is sound. Some of the C&I reduction was utilization, probably half of it in the quarter, so it's not that we had loss of customers. I would say that the pipeline has tilted a little towards CRE, but there are some C&I opportunities in the pipeline. So I feel comfortable with kind of the mid-single-digit growth levels, and we'll see about 2020. Who knows what's going to happen in the economy, but for now, we're -- I think we're fine through year-end.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [21]

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Got it. Okay. And then with regards to CECL, have you guys come to the point where you are able to disclose expectations on the impact to your loan loss reserve level come 2020?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [22]

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Yes. So I would say we're not going to provide any specific guidance just now. I said it would be fair to say that we expect a modest impact on capital, no impact on our ability to implement our strategic initiatives. We are on track with the implementation, where, at this point, we're really just fine-tuning methodology, have some ongoing control implementation and testing to do, but we're completely on track with our implementation, just not quite ready to give any specific numbers yet.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [23]

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Okay. Fair enough. And then kind of in regards to the overall credit quality of the portfolio, anything -- any areas throughout the loan book that you're seeing some weakness? Any impact in manufacturing clients because of the trade war that's been going on?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [24]

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Yes. We don't really see any softening in the portfolio at all. We had a slight uptick in NPA. That was just a handful of residential mortgages. We did foreclose on one property this quarter. We kind of aggressively foreclosed on it. We think it's a marketable property. It was past due at the end of June and kind of our best route was to just take it into a foreclosure, and we think we'll be able to turn that one around pretty quickly.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [25]

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Actually, it's sold. Okay.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [26]

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It's sold? Okay. Here you go.

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Operator [27]

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(Operator Instructions) Our next question comes from Laurie Hunsicker from Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [28]

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Just wondered if we could go back to the AUA. I just want to make sure I've got this right. So we obviously saw that $290,000 reduction this quarter, $620,000 is your estimated reduction for next quarter. So that's a $3.6 million or so annualized run rate of reduction related to the runoff. Is that correct?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [29]

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Yes. I mean we're looking at more like $3 million on that.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [30]

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Okay. And these 2 folks had run about $1 billion. And so you saw $450 million come out. Is your $620,000 in revenue reduction for fourth quarter, that's assuming what on the total outflows? So we have $450 million come out. You just updated us on $94 million. I mean are you assuming that, that sticks at around $550 million in terms of outflows? Or how should we think about that?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [31]

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Yes. So I mean I think it's too early to tell what the total outflows are going to be. So it's running $544 million through Friday. And it's too early to know.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [32]

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Got it. Okay. And I certainly appreciate the color around this, but if you could just update us, one more thought as it pertains to this. These 2 folks that departed had 1-year non-competes. How are you thinking about that? Where are you at pursuing legal remedies or recapture?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [33]

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So Laurie, this is Mark. Really what guidance we gave you in the second quarter earnings call is in place. We believe we had non-solicit and non-compete agreements in place. We can't provide much more comment on the ongoing matter to add more than we have said. We continue to pursue legal remedies. We believe that that's the most appropriate action at this time. And then on the core business front, we continue to be very active on outreach and retention efforts. We're very proud of the people we have in place at Weston who are doing the right thing to best serve our client needs, and we'll provide updates both on retention and on any updates to litigation as they become available. So that's still active.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [34]

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And then just one last question around the expense side of that. How much was the expense side of that in the third quarter? And how should we think about that going forward?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [35]

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Yes. So I think the best way to think about it is just on a run-rate basis at 24% of the lost revenue.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [36]

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Okay. Fair enough. Okay. And then just one other question that I have, and that's regarding your wholesale brokered deposits saw the drop, that was great. How should we be thinking about that going forward? How are you approaching wholesale as we head into next year?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [37]

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Yes. So we look at the brokered CDs and the FHLB borrowings as pretty interchangeable, which is why we break in-market deposits out separately because we think that that's really our core deposit base. So we just play off the FHLB versus the brokered to come up with whatever we think is the cheapest source of funds at the moment. We keep it all relatively short -- mostly short in the 3- to 6-month range. We're looking at the rate curves and trying to be a little strategic about how we roll that over, do we roll it at 3 or 6 months. We run the investment portfolio down. We will probably start to be thinking about reinvestment opportunities in the coming months. And generally, we would fund that increase with some type of wholesale funding.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [38]

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Laurie, this is Mark. I'll expand on what Ron has said, just a little bit. We do consider both FHLB and wholesale brokered CDs as alternative sources of funding. Obviously, brokered has some advantages in that there is no collateral requirement but -- and we tend to regard those as kind of fungible. And I think the regulatory treatment has changed to be a little bit less onerous for brokered CDs. But as Ron also said, it's important to consider curve shape. One of the reasons that we have run down the wholesale book is because we're -- in a flat yield curve environment, it is tough to find ways to manage -- to reinvestment money effectively within the securities portfolio. So those -- the decline in both those balances is related.

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Operator [39]

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And have a next question is a follow-up from Erik Zwick from Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [40]

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Just a quick follow-up on Laurie's question regarding the lost revenue. So that -- the third quarter impact you mentioned, and this is from the lost revenue associated with the 2 managers that left, was $290,000 in the third quarter and then a projection for $620,000 in the fourth quarter. Is that an additional $620,000 off of the run rate or of it? So really the delta is $330,000, maybe, from third to fourth. Am I understanding that right?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [41]

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Yes. So the $291,000 is on a -- that's kind of the impact in Q3 because we didn't lose everything on July 1, right? And so the $291,000 would equate into $619,000 going forward on a run-rate basis.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [42]

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The $619,000 is the new annualized...

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [43]

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Got you.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [44]

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It's in the quarterly rate.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [45]

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Quarterly, right? So you annualize the $620,000.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [46]

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That $620,000 is about $2.5 million annually. And I think you mentioned originally they were running at about $5.5 million annually, so we are about 45% of that at this point.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [47]

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Yes.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [48]

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Okay. Great. That's helpful.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [49]

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And just to clarify, so in the fourth quarter, we've -- so far, we've lost another $94 million in assets under management. That, on a run-rate basis, would equal about $517,000 per year, $129,000 per quarter.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [50]

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Got it.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [51]

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So our run rate, on a quarterly -- $619,000 for the Q3 tranche and $129,000 on the Q4 tranche would give us a run rate at $748,000.

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Operator [52]

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And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [53]

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Thank you all for your interest in Washington Trust. We appreciate it, and we look forward to updating you next quarter. And have a great day. Thanks very much.

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Operator [54]

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Ladies and gentlemen, that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.