Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Rob, and I'll be your operator today. [Operator Instructions]. Today's call is being recorded. And I will now turn the call over to Elizabeth Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel?

Thanks, Rob. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Fourth Quarter and Year-End 2017 Conference Call. This morning's call will be hosted by Joseph MarcAurele, Chairman and Chief Executive Officer; Ned Handy, President and Chief Operating Officer; and Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer. Please note that today's presentation may contain forward-looking statements and actual results could differ materially from the information presented. Our complete safe harbor statement appears in our earnings press release and in other documents the corporation files with the SEC. Please visit our Investor Relations website at washtrustbancorp.com to review these materials and the safe harbor statement in its entirety. Washington Trust trades on the NASDAQ stock market under the symbol WASH. And a reminder that today's call is being recorded. I'm now pleased to introduce Washington Trust's Chairman and Chief Executive Officer, Joseph MarcAurele.

Thank you, Beth. Good morning, and thank you all for joining us on today's call. Before we review our fourth quarter earnings, I'd like to make a few brief remarks. As you may recall, last September, we announced some executive changes as part of the corporation's succession plan. Ned Handy, who will lead today's call, will take over as Chairman and Chief Executive Officer when I retire next month. Mark Gim, who is not able to join us today, will assume Ned's position as President and Chief Operating Officer; and Ron Ohsberg will succeed David Devault as Chief Financial Officer. All three of these gentlemen bring a wealth of experience to their positions, and I and the board are very confident that they will lead Washington Trust to continued success in the years to come. Today actually happens to be David Devault's last official day with Washington Trust. David has been an integral part of Washington Trust's success over the past 31.5 years, helping us grow from a local Rhode Island bank with $296 million in assets to a regional financial institution with over $4.5 billion in assets that is recognized as one of the top-performing banks in the region. I'd like to thank David, he's not here on the call today, but I'd like to thank him on behalf of Washington Trust's board, management and our entire employee team. I really would like to thank you, David, for your tireless dedication and numerous contributions. David has been extraordinarily helpful, particularly to me personally, and he will be significantly missed. He's really provided great financial insight and guidance with the utmost integrity, and we will all miss him and wish him well in his retirement. And now I'll turn the call over to Ned Handy. Ned?

Thanks, Joe. I, too, would like to wish David well and to thank him for his great counsel, leadership and friendship over so many years. He's been a great part of this company, and we'll all miss him. Thank you all for joining us this morning. I'd now like to present a brief overview of the fourth quarter and full year 2017. Then I'll ask Ron to provide an in-depth financial review. At the end of our prepared remarks, Joe, Ron and I will answer any questions you may have about 2017 or the year ahead. Washington Trust had a solid fourth quarter, posting a record level of total deposits, total loans and wealth management assets under administration. We reported fourth quarter earnings of $8 million or $0.46 per diluted share, which contributed to full year 2017 earnings of $45.9 million or $2.64 per diluted share. Earnings per share were down $0.36, and profitability was lower due to a noncash charge associated with the Tax Cuts and Jobs Act enacted in late December. Ron will provide additional detail on the impact of the Tax Act in a few moments. At year-end, capital levels remained strong and continued to exceed regulatory requirements. We reached a record $3.2 billion in total deposits at year-end and had good growth along all deposit categories with significant increases in demand deposits. Deposit generation has been an industry-wide challenge, so we're pleased with our ability to attract low-cost deposits in this extremely competitive environment and hope the momentum will continue into 2018. In November, we had a very successful grand opening of our Coventry branch located in the central part of the state. Branch expansion has helped us attract and build customer relationships and has contributed to consistent deposit and loan growth. We believe we have…

Yes. Thank you, Ned. Good morning, everyone, and thank you for joining us on our call today. I'll review our fourth quarter 2017 operating results and financial position as described in our press release issued yesterday. Net income amounted to $8 million or $0.46 per diluted share for the fourth quarter compared to $13 million and $0.75 in the third quarter. We also reported return on equity for the quarter of 7.65% and return on assets of 0.71%. For the full year 2017, net income totaled $45.9 million or $3.64 per diluted share compared to $46.5 million, $2.70 in 2016. Also for the full year, return on equity was 11.26% and our ROE was 1.04% in 2017 compared to 11.96% and 1.16% in 2016. These reported results were affected by the enactment of tax reform in December. We wrote down the value of our net deferred tax asset by $6.2 million for the corresponding increased income tax expense. This write-down reduced EPS by $0.36. Net interest income for the fourth quarter rose by $830,000 or 3%. Net interest margin was 2.95%, up two basis points compared to the preceding quarter. Included in net interest income was prepayment fee income of $174,000 compared to $131,000 in the second quarter. Excluding these amounts, net interest income was up $786,000 or 3%, and the net interest margin was 2.93% in the latest quarter, also up two basis points compared to the third quarter. The yield on interest-earning assets increased three basis points from the preceding quarter to 3.70%. Excluding prepayment fee income in both quarters, the year-end interest-earning assets increased by two basis points to 3.58%. The average the balance of interest-earning assets rose by $79 million, virtually all in loans. On the funding side, average in-market deposits were up $149 million, while…

Thanks, Ron. So Washington Trust had another good year. Our strong financial foundation, diversified revenue stream and expanded market footprint were once again the keys to our success in 2017 and position us for continued growth in the year ahead. 2018 promises to be an interesting year as corporate and personal tax reductions, rising interest rates and continued economic growth will affect both consumer behavior and the competitive environment. We feel that Washington Trust is prepared to meet the challenges and capitalize on the opportunities that lie ahead of us. So thank you for taking your time this morning with us. And now Joe, Ron and I will answer any questions you have.

[Operator Instructions]. The first question comes from Mark Fitzgibbon with Sandler O'Neill.

This is Nick Pirsos filling in for Mark. So first off, loan growth really picked up in the back half of the year. It looks as if the elevated pay-downs from the beginning of the year are in the rearview mirror here. How should we be thinking about your loan growth targets for 2018?

Yes. I think mid-single-digits growth is kind of what we're marking. I agree with you, the pay-downs slowed a little bit, and we don't see the same level of pay-downs ahead of us at this moment. So we think we're well positioned. The pipelines are -- they're seasonally a little bit low as we rolled out a lot in the fourth quarter, but both on the commercial side and the resi side, the pipelines are healthy compared to the prior year, and so we feel good about that.

Okay, great. And then could you just share with us your outlook for the net interest margin?

Yes. So this is Ron. So I think at this point, we're expecting 2018 to look reasonably in line with where we were in the fourth quarter, and that's absent any additional Fed rate hikes at this point.

Okay. And then on the expense line, given the announcements you've made over the past few weeks, how should we be thinking about expenses in 1Q and then for the remainder of the year?

Yes. So for the full year, I would say our core expense growth is probably in the 3% range, and then the two compensation initiatives that we took will add about another 1%. 0.5% is a one-time related to the bonus, and another 0.5% for the salary increases that we implemented.

Okay. So just a little bit of a rise in 1Q and then kind of dropping back down in 2Q. Am I thinking about things correctly?

Yes. I think that's right. We also have FICA resets and other things happening in Q1. So Q1 will be a little higher, to begin with, but yes.

The next question comes from Damon DelMonte with KBW.

The first question. Just wanted to get a little bit more color on the residential loans that you guys purchased. I think you noted in there, they're predominantly Massachusetts-based mortgages. And also, just maybe some comments on this part of the growth strategy going forward. How big of a or how active could you be with future purchases like this?

Yes. So we bought a portfolio of about $19 million. As you said, all in our footprint and mostly in Massachusetts. You know we underwrite all those loans individually, so they met our standards. And I would say that was an opportunity that we took advantage of at the end of the year. It's not part of our stated strategy. We can grow the book organically and have done so and will continue to do so. And as I said, the pipeline's strong. But if those opportunities come around, we'll take a look at them.

Got you. Okay. And then when you look for that mid-single-digit growth into 2018, where do you feel the best opportunity is when you look at the commercial portfolio? Is it more CRE? Is it commercial construction? Is it C&I? Where do you see the best opportunity?

I would say it's mixed. I mean, we had pretty good C&I growth in the fourth quarter, and the pipeline looks pretty good for C&I growth. Certainly, real estate's a focus. And by market, we've seen a lot of growth in the greater Boston market and parts of the Connecticut market, New Haven and in Fairfield County. We've been active in Rhode Island, in particular in Providence. Pretty well spread out across the property types on the real estate side so I think it's a pretty diverse book, and I expect it to continue to grow that way.

Great, okay. And then just lastly, Ron, could you just repeat what you said about the expense growth? Did you say the core was about 3% growth in '18 and then those two initiatives add another 1%? Or did you say 2% and 1%?

Yes, it's a total of 4%, of which 1% is post-compensation initiatives.

[Operator Instructions]. The next question comes from Laurie Hunsicker of Compass Point.

I just wanted to go back to Damon and ask a question on expenses because I just want to sort of frame it in terms of dollars. If we are looking -- and I saw your press release out on the 16th in terms of your bonuses and your increase, but just help us think about it in terms of total dollars. What was the total dollars of one-time bonuses in your expense number? And then what is the total dollars in terms of, I don't know, tax windfall expense reinvestment, whether are you putting the Charitable Foundation, giving back in place, layer in ongoing expense increase related to wage inflation? Just help us think about that in dollars.

Yes. So those compensation initiatives amounted to about $1 million, and it's about 50-50 between the bonus and the raises.

Okay. And then what about charitable giving?

We haven't made a determination on that front, Laurie. I think there are some technology items that we're going to take care of in, maybe, an expedited fashion. But that's going to be sort of a marginal increase in depreciation expense next year. So the big drivers are those two items.

Okay. And so just again, when we think about just dollar increase then, for 2018 because they don't include the one-time bonuses, that's basically a $500,000 increase. Am I thinking about that the right way?

Yes, yes. We have no plans at this time for any major level of reinvestment of that tax windfall in our operations yet. And we'll be assessing that going forward, but there's nothing at this time.

Okay, great. Okay. And then noninterest income, just two lines. Do you have the breakdown of what the equity in earnings of your unconsolidated sub is? It was a loss of $89,000 last quarter, and I guess, you're rolling it into your other, other line, and I just...

Yes, it will be right in that neighborhood.

Okay, okay. And then going forward, are you not breaking it out? Is that...

Yes, we don't really do it at that material, so we haven't been disclosing it.

Okay, perfect. And then the wealth management revenues being down, can you talk a little bit about that as directionally your assets under management went up and how we should be thinking about that?

Yes. So we saw a shift in some assets into lower fee-structured products towards the end of Q3, and we are taking some steps internally to address that. And we expect to have that turned around in the first quarter.

Okay, great. All right. And then last question on your dividend, and I appreciate that you said you are reassessing it. You have historically said that you would be at a 50% to 55% payout. Are you still in line with that thinking?

Yes. I think our payout ratio will go down, so as I mentioned, we don't have any big plans for reinvestment of the tax benefits at this point. So our earnings and our capital will increase, and I think it's probably a fair assumption that our dividends will be higher than the growth that they have normally experienced. We also have to balance that out against replenishing some of our capital related to the deferred tax asset write-offs. So I think it's fair to say you will see some increased dividends. We're not ready to give guidance on that yet, but we're working through that very carefully right now.

Great, okay. And then just one last question. Generally, can you just update us, Joe, in that in terms of how you're thinking about a whole bank acquisition?

Yes. I don't think our views have changed, Laurie. I think, obviously, we would be very careful. We're interested, but it comes down to cost and what we think we could do with it once we bought it. So we haven't out-ruled it or ruled it out, but we're very careful. And I think we'd want to replenish things very quickly if we did it, and it would need to solve a problem for us. As I've said before, if we could find a loan-to-deposit entity in our footprint that solved for deposit growth, that would be wonderful, but we don't see them out there as we look around. So again, careful approach. RIA, different story, we would certainly consider that. We've been very pleased with the Halsey acquisition and so we're a little bit more focused on that front than on the whole bank deal.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Ned Handy for any closing remarks.

Well, thank you all very much for taking the time. We appreciate it and we look forward to doing more of the same as the time goes forward. And I would like now to turn it back over to Joe MarcAurele for some closing comments.

Thanks, Ned. I appreciate that no one on the phone asked me any hard questions. That was actually helpful. But I would just like to end this by saying that I have, and so does the board, have the utmost confidence in our succession plan and the new executives that are taking over. We feel very, very good about this, and I'd also just finally close with thanking everyone on the phone for your support and have appreciated getting to know all of you. So thank you very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.