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Edited Transcript of WASH earnings conference call or presentation 23-Jul-19 12:30pm GMT

Q2 2019 Washington Trust Bancorp Inc Earnings Call

WESTERLY Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Washington Trust Bancorp Inc earnings conference call or presentation Tuesday, July 23, 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, everyone, and welcome to 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.

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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. Second Quarter 2019 Conference Call. This morning's call will be hosted by Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President and Chief Financial Officer and Treasurer.

Before we begin, I'd like to take note of today's presentation may contain forward-looking statements and actual results could differ materially from those statements. Our complete safe harbor statement appears in our earnings press release and in other documents we filed with the SEC. We encourage you to visit our Investor Relations website at ir.washtrust.com to review the materials and are complete safe harbor statement. Washington Trust trades on NASDAQ under the symbol WASH.

And now I'm pleased to introduce Washington Trust's Chairman and CEO, Ned Handy.

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

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Thank you, Beth, and good morning and thank you for joining us on today's conference call. Yesterday afternoon, we released our second quarter results. This morning, Ron and I will review the quarter's highlights and financial performance and after our prepared remarks, Mark will join us and we'll answer any questions you may have about the quarter and our outlook for the remainder of 2019.

Washington Trust reported second quarter earnings of $17.3 million or $0.99 per diluted share compared to $17.5 million or $1 per diluted share in the prior quarter. Our profitability measures, capital ratios and asset quality all remained strong at quarter's end. Washington Trust's second quarter earnings reflect the benefits from our diversified business model. We continue to see positive results from several of our key business lines, mostly offsetting declines due to the competitive and challenging rate and economic environment.

Let me take a moment to share some of the quarter's highlights. Total deposits were $3.5 billion, which was consistent with first quarter levels and up 6% from a year ago. Competition for deposits remained strong in the second quarter as we saw aggressive rate offers from both large and small banks as well as local credit unions. We successfully attracted and retained deposits through special CD promotions, which helped to offset seasonal run-off in our municipal deposits, but contributed to an increase in our cost of funds during the quarter.

In anticipation of the expected interest rate reduction to be announced by the Fed at the end of July, we reduced our CD rates and decreased promotional efforts. Many of our competitors continued to offer high-rate deposit specials, which might lengthen our deposit price recovery.

As we've mentioned on previous calls, our second quarter deposit numbers typically reflect seasonal outflows from large educational and government customers and that was the case again this quarter. We expect those deposits will return to the bank in the third quarter.

Our North Providence branch, which opened in the first quarter, is meeting our performance expectations. We continue to seek attractive branch locations within the -- within Rhode Island, which would offer opportunities for continued deposit and loan growth.

Total loans were down from the previous quarter, but were up by 7% from a year ago. Our residential mortgage area had another strong quarter as mortgage banking revenues reached their highest level since the fourth quarter of 2016. Residential mortgage activity was robust throughout our market area with particularly strong production from the Massachusetts lending offices. More than 60% of residential mortgage originations in the second quarter were from Massachusetts.

As we head into the third quarter, mortgage applications are very -- are at a year-to-date high, so the residential pipeline is healthy. The Federal Reserve rate reduction later this month could spur additional home purchase and refinance activities, so we're bullish on the mortgage business at the moment. On the commercial side, total commercial loans were down overall due to an increased level of pay-offs during the quarter. Our commercial real estate area had a good quarter and we had a solid level of credit originations with new business and construction advances.

Competition from both large and small banks has been extremely challenging, especially around pricing and structure. Business expansion seems to have moderated, while CRE still remains healthy. We recently hired 2 new lenders in the Connecticut market, a seasoned commercial real estate lender, who will focus on the greater New Haven market area and a commercial and industrial, C&I lender who has more than 30 years of experience in Connecticut. We're excited to have those lenders on board and believe they will help us further expand the Washington Trust brand and build our commercial portfolio in Connecticut.

Wealth management revenues were $9.5 million for the second quarter of 2019, up 3% from the previous quarter. Wealth management assets under administration were $6.5 billion at June 30, 2019, up 2% from March 31, 2019. Both the increase in asset-based revenues and wealth management assets under administration were attributable to financial market appreciation.

In late June, just before the end of the second quarter, 2 senior counselors in our Weston Financial group subsidiary left the firm to join a large wirehouse. We have noncompete and nonsolicitation agreements in place, which could help reduce the outflow of client assets, but does not necessarily ensure that the clients will remain with Weston.

While we are disappointed with this development, we are committed to Weston and the clients. We have an experienced team of Weston counselors and employees who are working hard to continue the excellent service to which our Weston clients have long been accustomed.

From the financial standpoint, our wealth management division has been and continues to be a key contributor to corporate revenues. While it's too early to determine the potential financial impact of this event, the counselors who left managed or were associated with assets totaling approximately $1 billion.

We realize some clients may choose to follow the counselor with whom they've had a long-term relationship and therefore, anticipate there will be some future client asset outflows. Our clients come first, and we will always ensure they receive the best possible service and attention. Washington Trust is highly committed to Weston, our clients and the entire wealth management division. We've been offering wealth services since 1902, so it's an important part of who we are and that differentiates us from other banks, both big and small.

I'll now turn the discussion over to Ron Ohsberg, who'll provide more detail on the second quarter's financial performance. Ron?

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

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Yes. Thank you, Ned. Good morning, everyone. Thank you for joining us on the call today. I'll review our second quarter 2019 operating results and financial position as described in our press release issued yesterday.

As Ned mentioned, net income was $17.3 million, or $0.99 per diluted share for the second quarter. This compared to $17.5 million and $1 per share for the first quarter. We also reported return on equity of 14.58% and return on assets of 1.34%. Net interest income for the second quarter declined by $726,000 or 2%. The net interest margin was 2.81%, down 12 basis points.

Income and margin were affected by the reversal in market interest rates during Q2 as mortgage prepayments resulted in accelerated amortization of mortgage-backed securities premiums as well as in deferred costs on residential mortgages. There was a slight impact from lower LIBOR rates in Q2 as well. Liability rates increased to quarter-over-quarter as CDs and wholesale funding matured and repriced upward in the quarter and money market rates continue to rise. The average balance of interest-earning assets rose by $56 million or 1% on a linked quarter basis. Average commercial loans were up by $32 million and average investment securities were down by 4%. The yield on average interest-earning assets decreased by 6 basis points from the preceding quarter to 4.18% due to lower market interest rates.

On the funding side, average in-market deposits declined $12 million and the average balance of wholesale funding sources was up $57 million from the first quarter. The cost of in-market deposits was 88 basis points, up 6 basis points in the quarter and the cost of wholesale funding was 2.54%, up 6 basis points.

Net interest income comprised 33% of total revenues in the second quarter and amounted to $16.8 million, up $1.4 million or 9% from Q1. Wealth management revenues were $9.5 million, up $297,000 or 3%. Asset-based wealth management revenues totaled $9.1 million, up $220,000 or 2% on a linked quarter basis. This increase reflected an increase in the average balance of wealth management assets under administration.

Transaction-based wealth management revenues totaled $408,000, up by $77,000 on a linked quarter basis and was due to tax reporting and preparation fees, which are generally concentrated in the first half of the year. The June 30 end-of-period balance of wealth management assets under administration stood at $6.5 billion, an increase of $129 million or 2%. The average balance increased 3%. The increase in spot and average balances reflects financial market appreciation.

As Ned mentioned, 2 of our investment counselors left the company in June. They managed or co-managed just over $1 billion in assets, which have estimated annual revenues of approximately $5.5 million. It is too early to estimate how much of this business will be lost. As of yesterday, we had been informed by clients that they are withdrawing approximately $75 million in assets, which have estimated annual revenues of $435,000.

Our mortgage banking revenues totaled $3.6 million in the second quarter, up by $994,000 or 38%. These results reflect a higher volume of mortgages sold in the secondary market. Our origination pipeline at June 30 was $223 million, an increase of $83 million or 60% since March 31. This reflected the sharp -- the recent sharp decline in 30-year mortgage rates.

Now let me turn to noninterest expenses. Total expenses increased by $1.2 million or 4% from the previous quarter. Significant items include an increase of $817,000 in salaries and benefits expense, which reflected the increased commissions expense due to an increase in mortgage banking activities. An increase of $286,000 in advertising and promotion costs was largely due to timing of our marketing activities.

Income tax expenses totaled $4.7 million. The effective tax rate was 21.3% compared to 21.7% in the first quarter. We expect the full year 2019 effective tax rate to be approximately 21.6%.

Turning to the balance sheet. Total loans were down by $8 million compared to March 31, but up $240 million or 7% from a year ago. Commercial real estate portfolio increased by $19 million, with new loans and advances of $85 million, offset by pay-downs of $64 million. Recall that our Q1 balances were elevated by delayed payoffs, which occurred in the second quarter. The C&I portfolio declined by $27 million, with new loans of $11 million, offset by paydowns of $39 million. Included in the $39 million were $8 million of TDR and watched loan payoffs.

Investment securities decreased by $26 million primarily due to repeat principal pay-downs and mortgage-backed securities, partially offset by an increase in the fair value of available-for-sale securities. We are not seeing attractive reinvestment opportunities at this time.

Total deposits were $3.5 billion, up $362,000 from the end of Q1 and up $183 million or 6% from a year ago. In-market deposits were up $1 million and wholesale brokered CDs were down by $1 million.

We have had our typical seasonal outflows in municipal and higher education customers, but these have been offset by some new larger depositor transactions. FHLB borrowings increased by $5 million.

Asset quality remains very strong. Nonaccruing loans were 0.34% of total loans compared to 0.33% at the end of the first quarter. Loans past due by 30 days or more were 0.48% of total loans compared to 0.39% at the end of Q1. There was one commercial real estate loan with a carrying value of $2.7 million that was past due at June 30, but returned to current status in early July.

Net charge-offs were up $771,000 versus $78,000 in the previous quarter. This increase was largely due to charge-offs on one residential real estate relationship. The allowance for loan losses was 0.73% of total loans and provided MPL coverage of 213% and a loan loss provision of $525,000 compared to $650,000 in the first quarter.

Total shareholders' equity was $484 million, up $14.4 million from the end of the first quarter. We remain well capitalized. The total risk-based capital ratio was 12.8% at June 30 compared to 12.59% at the end of March.

Tangible equity to tangible asset ratio improved to 8.06% compared to 7.83% at the end of Q1. And finally, our second quarter dividend declaration of $0.51 per share, an increase of $0.04 or 9%, was paid on July 12.

And at this time, I will 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. In my opening comments, I mentioned the important role our diversified business model plays in generating a consistent stream of earnings to the company, especially during challenging economic times. I'd like to close by noting another key contributor to Washington Trust's success, our people.

In today's technology-driven world of automated systems and artificial intelligence taking over customer service, Washington Trust believes that human interaction and expert guidance are more important than ever. While we embrace and employ technology, we also recognize that technology can only take us so far and that the most important connections are often the personal ones.

We believe that we're both an employer and the bank of choice because but what we offer is genuine. And in the second quarter, this was validated with third-party endorsements. In May, we were recognized by Providence Business News for the ninth consecutive year as one of Rhode Island's Best Places to Work.

In June, we were named the Best Bank in Rhode Island by 2 separate research studies. The first, a nationwide study conducted by Forbes selected the top bank in each state and Washington Trust received exclusive top honors. The second, the survey of New England Banks conducted by American Business Media and customer experience solutions ranked Washington Trust first in Rhode Island for both overall quality and community contributions. We're honored to receive this recognition as it reinforces our commitment to our core values.

That concludes my prepared remarks and now Mark, Ron and I will be happy to answer any questions you might have.

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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 + Partners.

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

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Couple of quick questions around Weston. First, could you remind us what the total AUM at Weston is today, with the $1 billion in there?

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

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Yes. It's $1.9 billion.

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

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Okay. And so the 2 relationship people that are leaving had relationships with about $1 billion of that $1.9 billion?

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

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That is correct. Yes.

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

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So how many people are left at Weston?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [7]

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So there are currently 18 employees at Weston Financial. Mark, this is Mark Gim.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [8]

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And could you talk a little bit about sort of the noncompete, nonsolicits they have? How long are those and what sort of the action plan is to retain as much of that $1 billion that…

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [9]

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Sure. Yes, 2 things. We're pursuing all legal remedies associated with those agreements that were in place. In terms of outreach, the Weston team has been proactively reaching out to clients and has been reporting that those conversations have been open and honest.

Our job is to try to find, of course, the best fit for the client and we are in the process of continuing to execute those retention efforts. Ned, I don't know if you have anything to add.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [10]

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Yes. And Mark, you asked specifically the duration; they're 1-year noncompetes.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [11]

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Okay. And does this change kind of your thinking on the retention agreements you have with other folks in either Halsey or at Wash Trust or Weston?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [12]

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We've structured the nonsolicit, noncompete agreements that we have in place with other client-facing professionals, and what we think is the best optimal way and if that is also in accordance with current law and have looked at and have been looking at those for the last year or so.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [13]

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Okay. And then Ron, I wondered if you could help us think about the net interest margin. Given some of those CD promotions and the competitive environment, are we likely to see the margin continue to be under a little bit of pressure?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [14]

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Yes. Absolutely. We're, as you know, pretty asset sensitive. I can kind of give you just a little rundown of what we're thinking and just give you the composition of our balance sheet. So listen, I would expect that the NIM for the rest of the year will likely be in the low 2.7s. This factors in the expected 25 basis point cut in the Fed funds rate and it assumes that the residential prepayments that we saw in Q2 continue at the same pace going into Q3.

So we have a LIBOR book of $1.4 billion and that reprices at the first of each month. But half of the expected 25 basis point reset is already reflected in our July month-to-date numbers, so some of it's already been leaking in. We also have a prime book of $270 million that will reset on August 1. So in total, that's $1.7 billion of variable rate loans, 25 basis points annually on that book is $4.3 million per year.

We do not expect much deposit rate relief before the end of the year, but we do have $950 million of wholesale funding that will mature between July and December 31 that has a weighted average rate of 2.41%. So if we got a 25 basis points pickup on that, that would be worth $1.9 million annually. But as I said, that will phase in on kind of a monthly basis between now and the end of the year.

We will not see any material maturities of our promotional CDs until sometime in 2020.

So all of this is going to put pressure on the margin, as we saw in the second quarter. I think that there are limited opportunities for us to reduce our -- kind of in-market deposit costs at this time.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [15]

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Okay. And so you're only assuming one cut in July?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [16]

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Well, we're only assuming the one cut at this point. Yes.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [17]

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Okay. And then secondly, given some of the margin headwinds and perhaps, some headwinds on the wealth management side, is there an opportunity to take some costs out, reduce your overhead a bit?

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

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Yes. I mean our efficiency ratio is pretty low, to begin with, so no. So some of our expense base is variable. So on the Weston side, our -- kind of our variable costs against that revenue probably runs 20%, 25% of assets, so that they're being offset there. You're kind of seeing our -- on the mortgage side, we've got a lot of variable costs and commissions.

Overall, I think our expense outlook for the year -- the guidance we gave you at the beginning of the year was 3% to 4% increase year-over-year and it's probably trending more towards the 4% on the kind of the core fixed rate -- core fixed expense side of things, little bit higher legal, little bit higher FDIC.

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Operator [19]

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And 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 [20]

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Just a quick follow-up on the margin. Ron, can you -- I think you said low 2.70s. Are you saying for the full year of 2019? Or are you saying by the end of the fourth quarter, the low 2.70s?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [21]

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I'm saying for the second half of the year.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [22]

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For the second half of the year, okay. All right. Great. And then with regards to loan growth, I think for the first 2 quarters here, you're somewhere around 6% in the first quarter, kind of flattish or so here in the second quarter. Could you give a little perspective on what you're thinking for the back half of the year?

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [23]

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Yes. I think we'll -- it's Ned. I think we'll stick with the, sort of the low single-digit or mid-single-digit growth that we've talked about before.

We had a lot of payoffs in the second quarter, though some of those were delayed from the first quarter. So if you smooth those out, I think we've had about that kind of growth. We sold a lot on the resi mortgage side. So there hasn't been the kind of portfolio growth in resi in the first half that we might expect.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [24]

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Right. And Damon, this is Mark. Just to give a little more color on what Ned said with regards to the residential mortgage portfolio. The downwards shift in long-term interest rates has changed the mix of loans versus let's -- more is salable refinance than is -- in percentage terms than is portfolio. So we would expect to see less net loan growth going into the second half of 2019 than we thought at the beginning of the year since refinancing does effect some loans within our own portfolio as well as being a robust source of game generation for loans that are not held with us.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [25]

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Got it. Okay. Okay. And then in light of what's happened at Weston, I think this is the second time in the last couple of years that a couple key investment managers have left. Has this kind of changed your perspective on maybe trying to be more acquisitive in this space to just try to keep this a key component of your overall fee income?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [26]

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Damon, that's a good question. Yes. We are committed to the wealth business. It is a core competency at the company. We are committed to the differentiation that gives the revenue stream. We continue to look at wealth M&A opportunities. This has not changed that and we would expect to continue to be active in considering prospects in that space.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [27]

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Okay. Great. And then just the last question on expenses. Ron, can you give a little color on kind of how you see the trajectory in the back half of the year?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [28]

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Yes. As I mentioned, the -- we're probably at the higher end of that 3% to 4% range that I gave at the last call. So 4% year-over-year is kind of how we're thinking about it.

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Operator [29]

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(Operator Instructions) Our 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 [30]

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One more question on I guess the 2 individuals that left from Weston. I'm curious did you have any prior indication that they were thinking about leaving and any discussions to work with them? Or did it kind of come as a surprise to you?

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [31]

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Yes. We would much have preferred for them to stay, Erik. They've been with us for a long time. They're very good counselors. We're sorry to see them go. Yes, we would have preferred to keep them. And I think I'll leave at that, given the circumstances. But yes, they'd been with the company for a long time, served customers very well, as we do at Weston. I would say, look, we're still very committed to the business. We're very committed to Weston itself and we have great counselors remaining there who will do all they can to take care of the entire customer base. And we will help our customers make the best decisions for themselves and their families. And yes, that's the way we operate. But we are dedicated to that market and to that particular business unit and we'd certainly prefer that all the counselors stay in place and continue to help us manage great customer relationships. So I'll just leave it at that.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [32]

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And then next, just thinking about loan growth and outlook for growth, specifically on the commercial side. I know Connecticut is a focus, you've added some new lenders there. Can just talk a little bit about the competition in that market today? Are you able to be successful gaining wins, just competing on price or how much is structure? Is that getting soft in the market at all?

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [33]

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Yes. Great question. We've been active in the Connecticut marketplace for years and had a lot of success in the Greater New Haven, down into Fairfield County, somewhat up in Hartford County. So we've got a good track record there and again, have a great customer base.

I think the commercial real estate lender that we've added who has long history in the Greater New Haven marketplace will be very helpful. And the competition is strong. People's, Webster, KeyBank, there are a lot of providers in that marketplace, and I think you know from our history, we're pretty careful on the credit side. And so we probably won't be the most competitive fund when structure comes into play -- price where we -- the market deals us price and we have to decide whether we want to play at that -- at those rates or not. And so some cases, based on overall relationship, the deposits and cash management, we decided to go ahead.

The C&I lender that we added, who is someone that I've personally known for 25 years, has been in that marketplace for 30 years. He is -- he has a long track record of success in the Connecticut marketplace and he's our first on the ground C&I lender in Connecticut. So I have great hopes for us to grow around him. It'll be a -- there'll be a ramp-up period. There's always -- takes time to win C&I relationships, but he is well known in the marketplace and I'm particularly excited about having them both on the guidance. It's also our first pre-lender who is permanently on the ground in Connecticut. So to have someone sort of in the fabric of the marketplace on both the C&I and CRE side is exciting and I think a good development for us.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [34]

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I appreciate the color there Ned. And just one last one from me. With regard to M&A, how would you describe the pace of market chatter in the second quarter relative to say, 6 months ago? And then can you remind us of your preferred target size and kind of characteristics of any potential acquisitions you'd consider?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [35]

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Erik, this is Mark. You mean with regard to bank M&A?

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [36]

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Yes. Specifically, bank M&A.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [37]

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So generally, I think we would be thinking in the $0.5 billion to $1.5 billion range. It seems like the pace of M&A interest has picked up to some extent in the last 6 months in terms of institutions looking for partners, it -- we're not necessarily any more or less aggressive in this environment. We think relative currency differentiation matters, even though all bank stocks have declined in value since the beginning of the year.

I think our objectives would primarily be to seek market expansion reach and deposit funding. So in addition to size, mix has a lot to do with our level of interest.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [38]

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Yes. Erik, it's Ned. I mean times change a little bit and pricing is impacted but our rationale around M&A hasn't really changed. It's got to -- we've got to be able to buy things right. We have to convince ourselves that we can grow it once we own it. And to the extent that it can solve for a problem that we can't otherwise solve for, organically, that's a factor as well. So our gating factors haven't changed and nor has our interest in M&A as a possible way to increase our deposit gathering base changed.

So we're interested. I don't think our rationale has changed a lot. We've seen a lot of trades happen in our footprint over the last couple of years and we've followed them. And so I think we have a sense for pricing and a sense for what's going on in the market. So yes, we're tied in, we're interested. I don't think our -- again, our gating factors haven't changed.

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Operator [39]

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And 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 [40]

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Appreciate all of the color around the AUA and the departure and appreciate the transparency. I just wonder if you can help us think about just rewinding to the first quarter of '18 when you had 3 senior client-facing people leave, and you had client assets outflows just in that first quarter of $371 million. What were the AUA tied to those people? Or even cumulative, I guess. Cumulative first and second quarter was $628 million. What was the total AUA tied to those people? And I think if I remember correctly, at that point, there were no noncompetes on them. So just sort of a two-part question. Yes.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [41]

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The answer to the second part of the question, Laurie, is correct. There were no non-solicit, non-compete agreements in place with 2 out of those 3 individuals in the first quarter of 2018.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [42]

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Okay. And then specifically, what were the AUA that those 3 people were responsible? Now we're just -- we're sitting here trying to extrapolate, trying to figure out what noninterest income is going to look like. If you could just provide...

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [43]

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Yes. This is Ron. So I don't recall exactly the level of AUA that they had, but they took with them $565 million, which was pretty close to their full book of business. They did not have noncompete, nonsolicit agreements. And yes, I mean that was -- in that respect, it was a different solution than what we're seeing now. So I don't think that it is necessarily valid to extrapolate our experience from a year ago with what's happening now. We are pursuing all legal remedies available to us at the moment. And you can see that the pace of client exodus is slower this time around than it was last time, and we've lost 8% in the first month. It's way too early to know exactly where that's going to land.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [44]

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And Laurie, I appreciate your question and I also appreciate your comments about transparency and I will tell you that we will be as transparent as we can, given the circumstances and update as facts become available. We're obviously very involved in this and watching it closely and doing everything we can to protect ourselves, but also care for the customers and the mix here. And the one thing we do know for certain is that we will do the best thing by the customers that we can do and if that's help them transition, we'll do that to.

But again, we've got a great team left on the ground there. We are not giving up by any stretch on Weston. We have great people there and we have a great customer base there and we will -- we'll come through this. But I think it's too early to be -- to give direction on asset run-off and given the circumstances, I think we just want to leave it at that.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [45]

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Okay. And then can you just remind us, what are the total number of counselors, senior counselors that you have supporting the $6.5 billion?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [46]

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Well, the business models are somewhat different, Laurie. There are probably across the division between 30 -- 35 and 40 client-facing profession between counselors, investment portfolio managers, trust officers. That would include Washington Trust Wealth Management in Rhode Island, the bank trust company, Halsey and Weston Financial Group. There are about 110 wealth management employees in total, but between 30 and 40 I think is a good estimate for client facing.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [47]

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Okay. Great. And then just wonder, Ron, if you could give a little bit more color, just specifically, in 2 categories on the jump on noninterest expense, looking at the salary and benefits. I know that first quarter is typically elevated because of the payroll tax and removal and so the jump up this quarter.

And I thought that you had the North Providence, Rhode Island branch expenses fully baked in last quarter, maybe I got that wrong. But just wondered was there anything somewhat nonrecurring in that $18.4 million?

And then also within expenses, if you could just comment the advertising and promotion really jumped. Is that because of the new branch and we see that come back down or how should we think about that line item?

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [48]

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Yes. So our guidance earlier this year was 3% to 4% increase and so we're on budget for the year for marketing and advertising. So really, it's just kind of the timing of when it gets in the quarter. So there's nothing new within the marketing line. There's no nonrecurring expense items, our FDIC expense is going to run higher because our asset size is larger than what we had budgeted. So that's going to push things up a bit. And we're going to incur some legal bills related to Weston.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [49]

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Okay. That makes sense. And so -- yes so that line item, that already upticked a little bit this quarter, that keeps going higher. To where does that run, $800 to $1 million a quarter or…

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [50]

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The legal?

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [51]

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Yes.

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Ronald S. Ohsberg, Washington Trust Bancorp, Inc. - Senior EVP, CFO & Treasurer [52]

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We're probably thinking onetime expense of another $400,000 or $500,000 before this is all done.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [53]

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Okay. That's helpful. Okay. And then just last question here obviously we saw the North Providence, Rhode Island branch open, how are you thinking about de novos going forward at this point?

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [54]

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So we still think there's a market opportunity for us in Rhode Island. So we are always looking for new locations. We don't have anything specifically right at the moment, but we are -- yes, we are looking to expand further into primarily Northern Rhode Island, Greater Providence. So we're always looking and we think increasing our presence in the Rhode Island marketplace is an important part of our strategy. Mark, I don't know if you wanted to add to that?

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [55]

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No. We're pleased with our pace of de novo -- with the progress of de novo growth and would continue to look for opportunities in this market to expand.

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Operator [56]

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And ladies and gentlemen, I'm showing no additional questions. I'd like to conclude today's question-and-answer session and turn the conference call back over to Ned Handy for any closing remarks.

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Edward O. Handy, Washington Trust Bancorp, Inc. - Chairman & CEO [57]

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Well, thank you very much and thanks for joining us, everybody. We appreciate your time and your effort and your energy around our company and we look forward to talking to you again soon. So thanks, everyone.

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Mark K. W. Gim, Washington Trust Bancorp, Inc. - President & COO [58]

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Thank you.

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Operator [59]

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Ladies and gentlemen, the conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.