Good morning, and welcome to the Washington Trust Bank Conference Call. My name is Bruno and I'll be your operator today. Today's call is being recorded. And now, I would like to hand over to Elizabeth Eckel, Executive Vice President, Chief Marketing and Corporate Communications Officer. Ms. Eckel, please go ahead.

Thank you, Bruno. Good morning, and welcome to Washington Trust Bancorp, Inc.'s fourth quarter 2022 conference call. Joining us today are members of Washington Trust's executive team: Ned Handy, Chairman and Chief Executive Officer; Mark Gim, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; Mary Noons, Senior Executive Vice President and Chief Retail Lending Officer; 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 press release, which was issued earlier yesterday, as well as other documents that are filed with the SEC. All of these materials and other public filings are available on our Investor Relations website at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm pleased to introduce today's host, Washington Trust's Chairman and CEO, Ned Handy.

Thank you, Beth, and good morning, everybody. Thank you for joining our call. We appreciate your time and interest in Washington Trust. This morning I'll provide some comments about the fourth quarter as well as our thoughts on the current environment. Ron Ohsberg will then discuss our financial performance, and afterward, Mark Gim, Mary Noons, and Bill Wray will join us to answer any questions you may have about the quarter. Before I turn to our quarterly results, I'd like to make a few brief comments. In December, we announced that Mark Gim will retire as President and Chief Operating Officer this April and that he has immediately been elected to our Board of Directors. I want to personally thank Mark for all the contributions he's made to Washington Trust over the past three decades. During his tenure, he's provided great strategic vision and led key business line growth. We look forward to his continued guidance as a member of our Board. It's also my pleasure to introduce Mary Noons, who will become the first female President and Chief Operating Officer in Washington Trust's 222-year history upon Mark's retirement. Mary is another Washington Trust veteran and, over her 30-year career, has played a key role in the successful revenue growth and market expansion of our retail lending operations. She's a proven leader, a strategic thinker, and has a passion for service excellence and process improvement. I look forward to working alongside her. Now, I'll turn to our quarterly results. I'm pleased to report that Washington Trust posted sound fourth quarter net income of $16.6 million or $0.95 per diluted share. Total loans grew by 5% in the quarter and 20% for the full-year 2022, reaching a record high balance at year-end. While increasing wholesale funding balances and costs challenged net interest margin in the quarter, this robust loan growth helped deliver near record quarterly net interest income, attracted new customers, and positioned the balance sheet for long-term success. Our main non-interest income drivers, wealth management, and mortgage banking were both under pressure in the quarter. Rising interest rates had an expected impact on mortgage revenues in the quarter despite strong loan production. Wealth management revenues were affected by lower levels of assets under administration resulting from market pressures and from the departure of client-facing advisors from our Wellesley office, which we previously reported on our Q3 call. Ron will provide more details in his comments. We are pursuing legal remedies associated with this matter and remain committed to servicing our wealth management clients and growing this key line of business. Expenses were up slightly in the quarter but included a $600,000 contribution to our charitable foundation. This allows us to continue our tradition of assisting the organizations that provide health and human services, housing, and other support to those in need in our local communities. I'm proud to report that our Board approved a strategic diversity, equity, and inclusion plan and we launched our employee-driven DE&I Council in the quarter. I very much look forward to working with this team to ensure that ours is an accepting inclusive workplace built to reflect and benefit our employees, customers, and the communities we serve. We continue to take a long-term view and will be protective of credit and capital as we consider avenues for growth. The current period of continued, although moderating inflation and the result in unpredictable rate environment are challenging in the short run but they're temporary. We continue to invest in talent to support growth and are also focused on rational technology investments to improve the customer experience and to ensure a secure operating environment. At this point, I'll turn the call over to Ron for an in-depth review of our financial performance. Ron?

Yes. Thank you, Ned, and good morning, everyone. Thank you for joining us on our call today. As Ned mentioned, fourth quarter net income was $16.6 million or $0.95 per diluted share. Net interest income was $41.3 million, down $700,000 or 2% from the preceding quarter. The net interest margin was 2.65%, down 17 basis points. Strong loan growth was funded mainly from increasingly expensive wholesale sources. Deposit betas were also higher than expected. Average earning assets increased by $294 million. The yield on earning assets was 3.94%, up by 45 basis points. On the funding side, average in-market deposits increased by $84 million, and average wholesale funding sources rose by $220 million. The rate on interest-bearing liabilities increased by 78 basis points to 1.64%. Repayment fee income was modest at $15,000, and PPP fees in the quarter were $59,000, collectively adding 1 basis point to the margin. Turning to non-interest income, this comprised 25% of total revenues in the fourth quarter and amounted to $13.8 million, down $2 million or 13% from Q3. Wealth management revenues were $8.6 million, down by $901,000 or 9%. The decrease in revenues corresponded with a decrease in average AUA balances, which were down $527 million or 8%. December 31 end of period AUA totaled $6 billion, down $361 million or 6% from September 30, reflecting net client asset outflows of $673 million, partially offset by net investment appreciation of $312 million. AUA declined by $604 million due to client asset withdrawals related to the advisors that left the company at the end of Q3. This resulted in a prorated reduction of revenues of approximately $525,000 in the fourth quarter. The full run rate quarterly revenue loss related to these withdrawals is estimated to be $876,000 or an incremental $351,000 over Q4. Since the end of 2022, we have been notified of additional client withdrawals totaling approximately $55 million with an estimated Q1 prorated revenue loss of $40,000. Mortgage banking revenues totaled $1.1 million, down by $944,000 or 46%. Realized gains were $1 million, down $726,000 or 42%. Mortgage loans sold totaled $55 million in the fourth quarter, down by $21 million or 28%. Market competition has continued to compress the sales yield. Total mortgage originations were $268 million, down by 11%, and we placed 85% of mortgage originations into portfolio compared to 74% in the preceding quarter. Our mortgage origination pipeline at December 31 was $102 million, which was down $62 million or 38% from the end of September. Regarding non-interest expenses during the fourth quarter, we contributed $600,000 to our charitable foundation. Excluding this item, non-interest expenses were down $308,000 or 1%. Salaries expense decreased by $797,000 or 4%, reflecting adjustments to performance-based compensation accruals, lower wealth management compensation, and volume-related decreases in mortgage compensation. Legal, audit, and professional fees increased by $294,000 or 42%, reflecting higher legal expenses. Now turning to the balance sheet. Loan growth was strong. Total loans were up $261 million or 5% from September 30, and by $837 million or 20% from a year ago. In the fourth quarter, total commercial loans increased by $70 million or 3%. Within this category, commercial real estate loans increased by $66 million with additions of $146 million, partially offset by payments of about $80 million; and C&I increased by $4 million as new volume of $48 million was offset by payments of $44 million. Residential loans increased by $179 million or 8% from September 30, and by $596 million or 35% from the end of 2021. In-market deposits were up by $34 million or 1% compared to September 30 and by $196 million or 4% from a year ago. Broker deposits were down by $85 million in the fourth quarter, while FHLB borrowings were up by $280 million. Regarding asset quality, it remained strong. Non-accruing loans were 0.25% and past due loans were 0.23% of total loans. The allowance totaled $38 million or 74 basis points of total loans and provided NPL coverage of 296%. The fourth quarter provision for credit losses was a charge of $800,000 consistent with Q3 and reflects loan growth continued negative trends in forecast of macroeconomic conditions, and strong asset and credit quality metrics. We had net recoveries of $264,000 in the fourth quarter and year-to-date net recoveries of $368,000. And at this time, I will turn the call back to Ned.

Okay. Thank you, Ron. We will now take questions.

Our first question today is from Laurie Hunsicker from Compass Point. Laurie, your line is now open. Please go ahead.

And Mark, I just want to say it's been absolutely lovely working with you and wishing you all the best. Glad you're staying on the Board, and welcome Mary. So funding, maybe we can start there. Can you take us through your thoughts on using brokered CDs and how that will continue, what the trajectory there is going to look like? And maybe a spot margin for the month of December? Any forward guidance you can give us on spot margin would be super helpful.

Sure. We view brokered CDs and FHLB as fungible funding sources. Brokered CDs have lately trended lower cost than FHLB, but there's less inventory out there. I would say we would take full advantage of all the brokered CDs that we can collect. FHLB is a little more instantaneous. You call; you get the funding the same day. It's a little harder to get those brokered CDs in, and there's more competition out in the market to get them. I would say we would rely on those as much as we can. We're looking in the first quarter for guidance at a range of about $250 million to $255 million.

Great. And then can you just remind me your brokered CD balances? I know at September it was $422 million. What did it come in at December?

Yes, $358 million at the end of December.

Okay. Great. Thank you. Lastly, can you comment on how we should think about expenses for full-year 2023, obviously a lot of moving parts? With the pressure on expenses has that slid your branch plans at all or how we should think about that? Thanks.

I think our guidance on expense will mainly focus on the first quarter. We're looking at a 2%-2.5% increase in Q1, largely due to merit increases and payroll tax resets. For the full-year, the new branch impact will be about $1 million. Additionally, we have new FDIC insurance expense coming in at $1.4 million that was not on the 2022 run rate.

Laurie, this is Mark. I'll just comment on the branch timing. We have to balance the expense of opening branches in the short term against the long-term value of increasing our deposit gathering radius and scope. So I think we are mindful of trying to balance near-term cost in a challenging economic environment against the long-term value of improving our funding base, which remains a strategic priority for us. Branches are part of that. So is commercial deposit gathering and cash management, and we have a substantial focus on that from a strategic point of view. Branch opening timing might vary a little, but it would really be more based on when it's feasible rather than a desire to minimize near-term cost.

Great. Thanks Mark.

Thank you, Laurie.

Thank you, Laurie. Our next question is from Mark Fitzgibbon from Piper Sandler. Mark, your line is now open. Please go ahead.

Thank you. Good morning, everybody. Let me echo Laurie's comments. Congratulations to Mark, and also congratulations to Mary on your new role.

Thank you.

Thank you.

Thanks, Mark.

Ned, I wonder if you can help us think about your loan deposit ratio. I think it's 1.02 right now. Is that likely to serve as sort of a governor on balance sheet and loan growth in coming quarters?

I don't think so. I mean we have a strong commercial pipeline and not as strong as historical residential pipeline. We think we need to continue to serve our customers and prospects in the marketplace. We need to focus on deposit gathering, Mark, and fund that loan growth in a better fashion than we have been able to recently. Obviously, in the fourth quarter, we had huge loan growth at a time when the funding source available to us was borrowed funds and/or an increasingly expensive deposit base, so not the perfect scenario. I think more focus should be on growing the deposit side rather than reducing the loan side in the short run. Positioning the balance sheet for the long-term is important. Serving the customers continues to be important. We can't choose when to service them; we need to stay in the marketplace and remain active. But at the end of the day, we do have to be focused on loan-to-deposit ratio, and at some point, it could become a governor. I don’t see that in the near term.

Okay. I guess I was just thinking about like your capital ratios are not as high as they've been historically sort of a 580 TCE ratio. I know the regulatory ratios look good. But I just wondered if it may make sense to slow growth a little bit on the loan side to let deposits catch up and let capital ratios build, particularly if we're going into a more difficult economic period.

So Mark, this is Mark Gim. I'll take just a shot at the question about loan growth and how we try to think of it in terms of long-term opportunities. Our credit quality standards have not changed at all, and we're very mindful of the economic environment in 2023 and 2024 might worsen if the U.S. and global economies slip into recession. That said, we're seeing opportunities particularly on the commercial side from customers who we have not seen before who have very high credit quality. We think the ability to establish some of those relationships for the long-term might be something we need to follow up on. I'll turn it to Ron for comments on capital and the difference between TCE and our regulatory capital ratios. But again, with a comment that we're very focused on credit quality and very proactive about trying to identify potential risks long before they happen. So we don't go into this lightly.

A lot of the asset growth in the fourth quarter was residential, strong high-quality residential. We're hopeful that at some point down the road we'll be back at a point where we're selling the large majority of those loans and not growing the balance sheet as much as we have in the prior two quarters. When that will happen is anybody's guess; it's obviously rate-related. It's a good question, and we have to be thoughtful about all those angles. Ron, on the capital front?

Yes, Mark, I know we share your concern about GAAP capital as it is. We agree that regulatory capital is still fine. I believe we have enough capital to support the growth we've been booking. In terms of residential, those have favorable regulatory capital implications. I don't see any reason on the funding side or on the capital side for us to curtail our lending activities.

Last question is on the wealth side. It looked like you had $600 million leave with those full relationship people, and there's another $55 million coming this quarter, it sounds like. How much realistically beyond that is at risk in your view of leaving?

It's difficult to predict how much will leave. As you know, having non-compete and non-solicited agreements doesn't ensure clients will remain with us. We've been very active in reaching out to clients to affirm that we're continuing to service them. They're remaining with us for the time being. It's hard to predict. I think we would say we're much closer to the end of that runoff than the beginning, but we don't have specific guidance.

But did that group of four people have a book of $1 billion? We know that it's not going to go past that? Can you give us a sense of what's the total of the relationships?

As disclosed, collectively, they managed approximately $1 billion in assets as of September 30, 2022. We continually refresh our outreach to existing clients, those who have affirmed that they will stay with us for the time being. While we're confident in our outreach efforts, we're reluctant to give a guidance number as to how much is at risk out of what remains.

Thank you, Mark. Our next question is from Damon DelMonte from KBW. Damon, your line is now open. Please go ahead.

Hey, good morning, everyone and echoing everybody’s thoughts here. Congrats, Mark, and welcome Mary, I look forward to getting to meet you and work with you in the future.

Thank you.

I just wanted to start off by circling back on the margin guidance and outlook. Ron, I think you said you're expecting $250 million to $255 million here in the first quarter. Can you give a little bit more forward guidance assuming the Fed stops raising rates here in the first quarter, maybe two more 25 basis point hikes? Does the margin stabilize at this point? Or does it actually reverse course and start to trend up? How should we think about that?

Yes. I think best case, it kind of stabilizes over the next couple of quarters. We still have quite a bit of liability re-pricing to come, much of that in the first quarter, which explains the dip between Q4 and Q1. We are a little guarded about this. A number of different ways interest rates could play out over the course of the year. That's why we prefer to stick to one quarter at a time right now.

Can you give a little color on the rate of new loan production? What yields are you getting on those?

Yes. In the fourth quarter, total commercial loans came in at a weighted average of about 5.66%, and mortgages came in at about 4.84%.

That reflects the average for the quarter, Damon. Short-term rates have trended up, meaning LIBOR-related commercial loans coming on the balance sheet will be at a higher rate in December than they were in October. From a mortgage production perspective, it's important to note that the lead time to book a mortgage typically means the loans hitting the balance sheet are based on prior pricing decisions.

The rates for the fourth quarter certainly will be higher in the first quarter of this year because we implemented rate increases across the board as funding costs went up. Even though we've seen a dip in the conforming rates, we have not adjusted our portfolio rates. So those will continue to be attractive for the first quarter.

Got it. Okay. That's helpful. Thank you. As you think about your deposit betas, this past quarter, I think your total sold deposit linked quarter beta was around 31% and cumulatively around 20%. With the big ramp-up expected here in funding costs in the first quarter, what does your overall beta look like during this cycle?

I don't have a calculated beta number to share with you on this call, Damon. Clearly, there is a lot of market competition out there. Customers are coming in asking for rate exceptions depending on the relationships. We will grant those to retain the deposits; it's competitive. Betas will go up from here. Let's just say that.

Our stance on the retail side has not been to be at the front edge of rate retention but to keep an eye on providing fair rates to customers while maintaining lower deposit costs. The highest betas are for institutional and perhaps municipal or public fund type deposits. As ARPA type funds are released to states, there's been an opportunity to bring those in. They're certainly at a higher cost in the short term but also bring the opportunity to secure non-interest-bearing relationships. So while the betas on those might be high, we see value in maintaining those in the long run.

We have relationships with about a third of the cities and towns in the State of Rhode Island. We'd like to increase that number, and we're seeing success on that front. Those deposits may be relatively expensive in the short run. On the interest-bearing side, they come with deposit accounts or DDA accounts. So that's one of several strategies that we hope will be helpful long-term. But again, in the short run, those may drive betas up.

I don't mean to belabor the discussion on the margin here. But going back to my notes from last quarter, I think the guidance was around $285 million to $290 million for the fourth quarter, and you came in at $265 million. That's a sizeable turn of events. I'm just trying to connect the dots here. Is it fair to say that the loan growth was really strong, and you were forced to tap outside sources and higher cost funding, which had immediate impact on the margin? Is it that simple?

That's exactly what happened.

Great. Thank you for that. Lastly, on loan growth outlook. You seem pretty optimistic here going into 2023. Any guidance on full-year expectations for the overall portfolio?

The pipeline is strong. It was strong at year-end, kind of in the $250 million level, and it's grown since then. So we are seeing opportunity. We think we'll be in the mid-single-digit growth range again. We have seen a tapering off somewhat on the payoff side. So that could be helpful. Yes, I think we'll see strong growth. We're going into the year with a strong pipeline, and I think we'll see better growth in the early part of the year than we did last year. We ramped up towards the end of the year, but we have some momentum. I think it will be a little more spread out over the course of the year and continue to be strong. Mary, do you want to comment on residential?

I believe we have a 13% increase in our volume for what will hit portfolio. What I'm hoping is that this number is lower so that more loans can be sold. We're working on certain fronts to increase our salable avenues. We already have a very diverse salable outlet; we're structured to have multiple channels for our production. We've just hit a little kink in the yield curve on those. I think we'll have very strong production. We're very oriented to the purchase market, and the purchase market in our region is very strong and anticipated to stay that way.

Got it. Great. Thank you for the color and for taking all my questions.

Thanks, Damon.

Thank you, Damon. We currently have no further questions. I will now hand back to our speaker for final comments. Elizabeth, please go ahead.

Ned?

Well, thank you all for joining us. We appreciate your interest and your time, and we look forward to talking again to you in the coming quarters. Meanwhile, we'll be heads down and focused on serving our customers well, as always. So have a great day, everybody.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.