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

Thank you. Good morning and welcome to Washington Trust Bancorp Inc.'s conference call for the fourth quarter and year-end 2023. Joining us this morning are members of Washington Trust's executive team; Ned Handy, Chairman and Chief Executive Officer; Mary Noons, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President and Chief Financial Officer and Treasurer; and Bill Wray, 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 today's call. Our complete Safe Harbor statement is contained in our earnings release, which was issued yesterday as well as other documents that we filed with the SEC. All of these materials and public filings are available on our Investor Relations website at ir.washtrust.com. Washington Trust trades on the NASDAQ under the symbol WASH. I'm pleased now to introduce Washington Trust's host - Washington Trust's Chairman and Chief Executive Officer, Ned Handy.

Thank you, Beth. Good morning, everybody and thanks for joining us for our call. We definitely appreciate your time and interest. And I know we have a busy morning this morning, so I'm going to be fairly quick in my comments. Then Ron will dive into the fourth quarter performance and then Mary Noons and Bill Wray will join us for Q&A. We continue to be focused on ensuring a durable balance sheet that is positioned, to take advantage of opportunity, as external conditions improve. We're concentrating on capital credit deposits, and expense management all to prepare for what we believe will be a steadily improving external environment throughout 2024. In that way, we'll remain positioned to resume growth of our long-term focused profitable relationship-driven company. On the capital front, we've slowed asset growth and are managing our funding base, and expenses, to build earnings capacity. Our lenders are primarily focused on managing existing credit, raising deposits and attending, to the needs of our all-important customer base. We're emphasizing deposit growth and are looking particularly, at deposit-oriented segments of the economy. We've made some technology investments to supplement our deposit growth strategies, including the addition of an omni-channel automated deposit account opening tool. Our deposit franchise remains strong although understandably more expensive. We remain committed, to incremental branching and are pleased that our three newest branches opened within the past two years have almost $130 million in aggregate deposits. Our average branch size remains above $200 million. We held end market deposits steady in the fourth quarter in a very competitive landscape, and through our continued efforts and focus, we will drive growth in future periods. While there are signs of a stabilizing economy, it is difficult to gain short-term certainty about rates, inflation, the credit cycle and other aspects of the general economy. Our focus is on what we can control and on protecting and enhancing our customer base and the experience they have with us. Included in our expense focus is a detailed look at our real estate footprint, both leased and owned. We will right-size our footprint and look at appropriate ways, to unlock capital and reduce expenses, where able. Our employees always provide reason to be optimistic, both according to our customers and reflected in the recognition we've received from Newsweek, Forbes, American Banker and Blue Cross as a great and healthy place to work. In summary, we are positioned to ensure stability and to regain our customary strength in the quarters ahead. We have a strong and dedicated team, a known brand, very strong credit statistics, sufficient capital in an appropriate short-term strategy, to weather the current challenges and to - enhance franchise value. At this point, I'll turn it over to Ron for a more detailed review of the quarter. Ron?

Okay. Thank you, Ned. Good morning, everyone and thanks for joining us. As Ned mentioned, fourth quarter net income was $12.9 million or $0.76 per diluted share. This includes a tax item of $3.3 million that added $0.19 to EPS. Net interest income was $32.7 million, down by $1.1 million or 3%. The margin was $188, down by nine basis points. Average earning assets increased by $103 million and the yield on those assets was $481 up by 12 basis points. On the funding side, average wholesale funding rose by $105 million and average end market interest-bearing deposits increased by $21 million. The rate on interest-bearing liabilities increased by 23 basis points to $349. Prepayment fee income was $27,000 in the fourth quarter and $71,000 in Q3, neither having any impact to margin. Non-interest income was comprised 29% of total revenues and amounted to $13.3 million, down by $1.9 million, or 13%. Wealth management revenues were $8.9 million, down $67,000, or 1% reflecting a decrease of $58 million, or 1% in average AUA balances. End of period AUA totaled $6.6 billion, up by $457 million or 7% mainly reflecting market appreciation of $503 million. Mortgage banking revenues totaled $1.6 million, down by $554,000, or 26%. Of note, 64% of our originations in the quarter were saleable compared to 33% in the third quarter and we expect the improvement in that ratio to continue. Derivative income totaled $112,000 in the fourth quarter, down by $970,000. We do expect minimal derivative gains in 2024. Regarding expenses, these were down $1.8 million, or 5% from Q3. Salaries expense decreased by $3.2 million, or 15% and reflected a $3.4 million in reductions, to performance-based compensation accruals. For the year, these reductions totaled $5.4 million. Other non-interest expenses were up by $1.3 million, or 56%,…

Thank you, Ron. And we can go right to questions.

Thank you. [Operator Instructions] The first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead.

Good morning, Mark.

Good morning. You guys did a nice job on expenses in the fourth quarter. I guess, I was curious on your thoughts for expense growth in 2024?

Yes. So, if you take our fourth quarter total expenses and you back out the charitable contribution, and you back out the incentive reversal, that's a good run rate going into 2024. So annualize that fourth quarter normalized, and that's our expense estimate for the year, so far.

I'm sorry. So roughly about $30 million a quarter?

I think it's about $35 million a quarter.

I'm sorry, you're right. Yes. Okay. And then secondly - what is your net interest margin outlook over the next quarter or two, and what does that assume for Fed actions?

Yes. So, we're looking at NIM in the first quarter of $180 to $185. We continue to see a lot of competitive pressure on deposits, as there's a lot of exception pricing going on. We continue to see mixed shift from DDA into CDs, et cetera. So, we expect to see that continued pressure on the margin at least in the first quarter. We are budgeting three Fed rate reductions, and we think that should give us some lift in the second half of the year.

Okay. And then, can you share any color with us regarding?

And we have a lot of - Mark yes…

Sorry.

Yes, Mark. I was - just going to give a little bit more color on that. So, we do have a large $1.8 billion, $1.9 billion, one-month so for the portfolio. So when the Fed does begin to cut rates, if they do that will reprice immediately, we keep most of our wholesale funding pretty short. So it will catch up, it won't be instantaneous. So if they cut in March, we'll see a reset on that loan book on April 1, and then we'll just need to reprice our liabilities down.

Okay. And then I wondered if you could give us any color on that one commercial real estate loan that you put on non-accrual?

Yes. Bill, do you want to handle that.

Sure. Basically our exposure is $11 million. It's a recently renovated mixed use office retail building in Greater Boston. They had at least the first floor up line to a restaurant. They've had difficulty with the other three floors getting office tenants. So, the borrower, are very - he's got a lot of money in this deal more than we do at this point has gone through an orderly liquidation process. We have incredible bids. We expect it to close this quarter, a sale to close this quarter that will take us out with our principal loss. However, there's always, you never know when a deal is going to close, but at this point, it's on a path to resolution within the first quarter.

Okay. Great. And then last question I had, your dividend payout ratio on a core basis this quarter was 98% and with the margin likely to come under a little more pressure in coming quarters and expenses kind of in that $35 million level, it would imply that you'd go over 100% payout ratio in the first quarter. How do you feel about the sustainability of the payout ratio or the dividend level?

Yes. Sure. I mean our payout ratio was high, we realize that we believe that we are, we remain well capitalized and we believe that the dividend is sustainable. Even if we, I would say temporarily go over 100%. We're still prepared to maintain that, we are fully expecting to maintain the dividend.

Thank you.

Yes. Thanks, Mark.

Your next question comes from Laurie Hunsicker from Seaport Research Partners. Please go ahead.

Yes, hi. Thanks, good morning. Just going back to expenses here?

Good morning, Laurie.

So the charitable foundation charge-off $1 million. How should we think about that in your numbers going forward? Is that something we are going to see occurring in the fourth quarter every year, is it going to be flat, how do you think about that?

Yes. So, I would say, Laurie, we kind of guided to more in the 500 range. Last time we talked about this and with the tax benefit that we recorded, we topped that up to $1 million. So that should carry us through 2024 and into 2025. So at this point, we're not really expecting to add more to that in calendar year 2024 at this point. At some point, we'll have to put more in - as we disburse the funds, but yes, we intentionally top that million dollars - that contribution up to $1 million.

Got it. Got it. Okay, so just back to the expense guide that you gave Mark here, I'm just trying to understand sort of sort through that. So just looking at $32.6 million backing out a million, and down to $31.6 million, how am I going from $31.6 million and I realize you've got some new branches coming online. So maybe you can comment on that, but how do you go from $31.6 million for quarter up to $35 million per quarter? Can you help us think about that, what am I missing?

Yes. So yes, so Laurie. We had a credit go through the expense line of $3.4 million in the fourth quarter. So strip that out and fourth quarter is more like $35 million.

Got it. Okay.

We had the incentive reversal of $3.4 million.

Okay. And then your….

Yes.

Okay. Great. And then the other, other income line of $83,000 looked like, was there - any one-time charges that ran through that?

Yes, there was a - we did set up a $300,000 valuation reserve. Yes we set up a $300,000 valuation reserve on an asset in there.

Okay. Great. Okay. And then back over to NIM, do you have a December spot margin?

Yes, it was 182.

182. Okay. And then just last sort of maybe a general question. We've seen some banks take some restructuring within the securities, but how do you guys think about that as we look forward?

Yes, I mean we've kicked that around a lot. We have not decided to do that. I don't think we're planning to do that. We had a nice recovery in our investment portfolio in the fourth quarter. I understand some of the merits of why banks are doing this, but it - I doubt that we're going to do it.

Got you. Okay. Great. Thanks for taking my questions.

Yes, thanks Laurie.

The next question comes from Damon DelMonte from KBW. Please go ahead.

Hi everybody. This is Matt Rank filling in for Damon DelMonte. I hope everybody is doing well. You guys mentioned you're slowing asset growth…

Hi Matt.

That came out on loan growth this quarter. So I was just hoping. Hi, I was just hoping we could get your thoughts on full year loan growth for 2024?

Yes, I would say, on a net basis it's going to be about 0%. So, we're looking at commercial growth, we had - we're not doing a lot of originations right now. We did have a fairly sizable construction - previously committed construction pipeline, that's going to add about $240 million of advances during the year. That'll be partially offset by amortization and paydowns, but that'll give us commercial growth of about 3%, but then we'll have about a 3% decline in resi and consumer. So on a net basis about zero.

Okay. Got it. And then just a follow-up on credit with the slower loan growth. How should we think about provision expense, should we think of it as reserves holding steady, or maybe a slight build as credit starts to normalize?

I think we're thinking a slight build. And if you wanted to put in $1 million a quarter. We're not seeing any particular trouble, just feels like it needs to be a little higher than say, like the $0.5 million run rate that, we've had. Of course, this quarter was a little higher. But we're thinking about $1 million a quarter.

Okay. Got it. Thank you.

Thanks Matt.

Yes, Matt, you said. Okay. I just wanted to give a little bit more - color on expenses. So yes. So that 0% expense growth also includes about a $1.5 million additional expense related to the de novo branches, so that's covered.

Okay.

We have a follow-up question from Laurie at Seaport Research. Please go ahead.

Yes. Thanks, Ron. Yes, I was actually just hitting you guys back on the expense related to branches. So what is - the timing on de novo branches opening in 2024. How you're thinking about that?

Yes, Ned...

Yes, hi, Laurie, it's Ned and one - in the first quarter - actually one end of January and one end of first quarter, essentially April. And as Ron just pointed out in his expense comments, we have covered the cost - of those new branches. So, they are built into that expense base.

Perfect. Great, thank you.

Thank you.

Also have a follow-up from Mark Fitzgibbon of Piper Sandler. Please go ahead.

Hi, guys, I was wondering if you could comment on your capital position and whether you were thinking about raising additional capital?

Yes, we're not, we are curtailing our loan originations pretty significantly. So, we're expecting capital ratios to stabilize pretty close to where they are, and begin to improve over the second half of the year.

Thank you.

[Operator Instructions] Okay. We have no further questions on the call.

Thank you all. I know you've got a busy morning. We appreciate you taking the time to be with us, and look forward to talking to you again soon. Have a great day everybody.

This concludes the conference call. Thank you all very much for joining and you may now disconnect.