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spk01: Good morning and welcome to Washington Trust Bancorp, Inc.' 's conference call. My name is Sarah and I will be your operator today. If participants need assistance during the call at any time, please press star zero. Participants interested in asking a question at the end of the call should press star one to get in the queue. Today's call is being recorded. And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President Chief Marketing and Corporate Communications Officer. Ms. Echol, please begin.
spk05: Thank you. Good morning and welcome to Washington Trust Bancorp Bank's first quarter 2021 conference call. Joining us for today's call are members of Washington Trust Executive Team, Ned Handy, Chairman and Chief Executive Officer, Mark Gim, President and Chief Operating Officer, Ron Osberg, Senior Executive Vice President, Chief Financial Officer and Treasurer, and Bill Ray, Senior Executive Vice President and Chief Risk Officer. As a reminder, today's call may contain forward-looking statements and actual results could differ materially from what is discussed. Our complete Safe Harbor Statement appears in our earnings press release as well as other documents filed with the SEC. You may view these materials as well as the Safe Harbor Statement in its entirety on our investor relations site at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce the host of today's call, Washington Trust CEO and Chairman Ned Handy.
spk00: Thank you very much, Beth, and good morning, everyone. I hope you're all doing well and that you've all been able to stay healthy since our last call. We appreciate your continued interest in Washington Trust, and thank you very much for taking the time to join us this morning. Today's agenda is similar to past calls. I'll provide an overview of our first quarter highlights, and then Ron Osberg will review our financial performance. After our prepared remarks, Mark Gimm and Bill Ray will join us to answer any questions you may have about the quarter. I'm pleased to report that Washington Trust posted strong first quarter results with net income of $20.5 million or $1.17 per diluted share, up from $18.6 million or $1.07 per diluted share reported in the fourth quarter of 2020. Quarterly earnings increased substantially from the first quarter of 2020 when we first started feeling the impact of COVID-19. If you look back over the past year, it's incredible to think about what's transpired. When the pandemic hit, it abruptly forced us to change the way we work, the way we communicate, and the way we serve our customers. Our results reflect our success at adapting to change. They also show just how important consistency is during times of change and uncertainty. Throughout the pandemic, our employees worked hard to ensure they consistently delivered a high level of service and maintained a human connection with their clients, and it made all the difference. I can't say enough about how proud I am of our team and the work they do. Our business model has also consistently provided a diverse stream of earnings for us through various economic cycles, and that has served us well during this crisis and this period of extended low interest rates. Our returns on average equity and average assets improved from fourth quarter levels. We remained well capitalized, and our risk-based capital ratio was 13.85% at the end of the first quarter. We believe our capital position suits our business model supports our dividend, and provides us with opportunities for future growth. I'd now like to take a few moments to share some first quarter highlights. In-market deposits, which exclude wholesale brokered time deposits, reached an all-time high $4 billion in the first quarter, up 6% from the fourth quarter, and up 23% from a year ago. Deposit growth has continued and included temporary increases associated with PPP loan origination funds deposited to customer accounts. As a result of the increase in low-cost deposits, we saw improvement in both our loan-to-deposit ratio and our margin. Deposit growth has also allowed us to continue to reduce federal home loan bank borrowings. This influx of deposits is a nationwide trend as consumers buckled down, saving stimulus checks and putting aside funds to ensure they could meet day-to-day living expenses while riding out the COVID-19 pandemic. Industry research shows that Consumer saving tends to slow down and consumer spending picks up as soon as there are positive signs of economic growth. We're cautiously optimistic about consumer strength, but think it's too early to predict what will happen with consumer behavior in the short run. And we're seeing more and more businesses open up now that state governments and health officials have eased many of the COVID-19 restrictions. We reopened our branch lobbies on April 1st with safety measures still in place, and have seen a gradual uptick in branch traffic. And speaking of branches, next month we'll open a new branch in East Greenwich, Rhode Island. It's a great location that offers tremendous opportunities for retail, wealth management, and small business banking. We have a seasoned team of professionals in place and are looking forward to opening the doors in May. We still believe branches are an important part of our community banking model. Over the past year, we've seen more and more customers use digital and telephone banking services, as well as other types of technology, to conduct their banking transactions. However, as I mentioned earlier, we also believe our customers enjoy the human connection and meeting face-to-face with our trusted advisors to discuss financial solutions. We're committed to meeting our customers where they want, whether it's on a technological platform, at a physical location, or both. We strive to deliver a safe, convenient, and high quality customer experience across all channels. Turning to credit and lending, asset quality is stable and the economic outlook has improved given the acceleration of the vaccine rollout and the continuation of government stimulus. Based on this, we released about 2 million in credit loss reserves in the quarter. Ron will provide more details on this shortly. Total loans amounted to 4.2 billion for the first quarter, down slightly from the end of the fourth quarter, but up by 104 million or 3% from a year ago. We originated over 1,000 PPP loans totaling 97 million in the first quarter, and we processed PPP forgiveness on about 700 loans totaling $66 million. Aside from PPP lending, commercial loan originations and construction advances were offset by payoffs and paydowns. On a positive note, commercial pipelines have been improving since February, and have returned almost to pre-pandemic levels. We've seen a resurgence across all business lines and are hopeful that commercial lending activity will pick up as economic recovery begins. Residential mortgage originations and sales were down from the record levels in the fourth quarter of 2020. Mortgage banking revenues total 11.9 million for the first quarter, down by 2.2 million or 15% from the fourth quarter of 2020. but up by 5.8 million or 96% from a year ago. Our mortgage team continues to work diligently. Although there was an uptick in mortgage rates in the first quarter, inventory levels continue to remain very low. We had robust application activity throughout the first quarter and into April, and the pipeline is currently very strong. At some point in 2021, mortgage banking activities may start to normalize, but timing is somewhat difficult to predict given the impact of very tight supply and continued low rates. Our Wealth Management Division's assets under administration, or AUA, reached a record $7 billion at March 31st, up 3% from the end of 2020 and up 32% from March 31st, 2020. This growth reflects financial market appreciation as well as strong business development and client retention efforts, net of routine client asset flows. Wealth management revenues were $9.9 million for the first quarter, up 7% from the preceding quarter, providing a key source of non-interest income to the bottom line. We're very pleased with our Wealth Management Division's first quarter performance. And now I'd like to turn the call over to Ron for a review of our financial performance. Ron?
spk02: Thank you, Ned. Good morning, everyone. Thank you for joining us on our call today. As Ned mentioned, net income was $20.5 million or $1.17 per diluted share for the first quarter. This compared to $18.6 million and $1.7 for the fourth quarter. Net interest income amounted to $32.9 million, up by $628,000 or 2% from the preceding quarter. The net interest margin was $251,000, up by 12 basis points. In the first quarter, net interest income benefited from accelerated fees due to PPP forgiveness, which totaled $1.2 million and had a nine basis point benefit to the margin. This compared to $423,000 and three basis points in the fourth quarter. Excluding PPP fees in both periods, the margin increased by six basis points from 236 to 242. Commercial loan prepayment fees were modest, in total 217,000 in the first quarter, compared to 123,000 in the fourth quarter. Average earning assets decreased by $47 million, mainly due to a decrease of $38 million in average loans. The yield on earning assets decreased by two basis points to 290. On the funding side, average in-market deposits rose by 88 million, while wholesale funding sources decreased by 183 million. The rate on interest-bearing liabilities declined by 17 basis points to 0.50%. Non-interest income comprised 44% of total revenues in the first quarter and amounted to $26 million, down by $1.8 million or 6% from the preceding quarter. Included in other non-interest income in the first quarter was $1 million associated with the litigation settlement, as previously disclosed, quarter was a gain of $1.4 million associated with the sale of our interest in a low-income housing tax credit investment. Excluding the impact of these items, non-interest income was down by $1.4 million, or 5%. Our mortgage banking revenues totaled $11.9 million in the first quarter, down $2.2 million. This included net realized gains of $13.7 million, which were up by $351,000, or 3% from the prior quarter, reflecting a lower volume of loans sold, but offset by a higher yield. Mortgage loans sold totaled $292 million, down by $26 million, or 8% from the preceding quarter. Sales were up by $130 million, or 80% from the first quarter of 2020. Realized gains in the first quarter were offset by net unrealized losses of 1.9 million, reflecting a decrease in the fair value of mortgage loan commitments as of March 31st. Originations amounted to 441 million, down by 5 million or 1% from the preceding quarter. And our origination pipeline at March 31st was 396 million, up 73 million or 23% since December. Wealth management revenues were $9.9 million in the first quarter, up by $689,000 or 7%. This included an increase in asset base revenues, which were up by $517,000 or 6%, as well as an increase in transaction revenues of $172,000. The increase in transaction revenues was largely due to tax compliance fees, which are concentrated in the first half of the year. The increase in asset-based revenues correlated to an increase in the average balance of assets under administration, which were up by $298 million or 5%. The March 31st end-of-period balance of assets under administration totaled a record $7 billion, up by $182 million or 3% from December 31st, reflecting market appreciation of assets. Regarding non-interest expenses, these were up by $604,000 or 2% from the fourth quarter, In both the first quarter of 2021 and the fourth quarter of 2020, debt prepayment penalties were incurred from paying off higher cost FHLB advances. This expense was $3.3 million in the first quarter compared to $1.4 million in the preceding quarter. Excluding the impact of these penalties from both periods, non-interest expense was down $1.3 million or 4%. Salaries and employee benefits decreased by $548,000 or 2% in the first quarter. The decline reflected lower incentive compensation expense as well as higher deferred labor, which is a contract expense, which were partially offset by higher payroll taxes associated with the start of a new calendar year. The linked quarter increase in deferred labor was approximately $560,000 and was largely attributable to first quarter origination of PPP loans. The remaining decrease in non-interest expense reflected relatively modest declines, including lower marketing expense due to timing and a decrease in legal expenses. Income tax expense totaled $5.7 million for the first quarter. The effective tax rate was 21.7% compared to 22.9% in the prior quarter. We currently expect our full year 2021 effective tax rate to be approximately 22.3%. Now turning to the balance sheet. Total loans were down by $1 million from December 31st and up by $104 million or 3% from a year ago. In the first quarter, commercial loans increased by $9 million or 0.4%. In the first quarter, commercial loan originations and construction advances totaled $160 million and included $97 million of PPP loans. This was largely offset by payoffs totaling $153 million, which included $66 million of PPP loans that were forgiven. Residential loans decreased by $10 million and consumer loans were essentially unchanged. Investment securities were up by $54 million or 6% from December 31st and securities represented 17% of total assets as of March 31st. In-market deposits were up by $227 million or 6% from December 31st and up by $739 million or 23% from a year ago. All of the increase has been in checking and savings products. The deposit inflows have allowed us to improve our funding mix by paying down higher-cost wholesale advances. Wholesale brokered CDs were down by $56 million in the first quarter, and FHLV borrowings were down by $127 million. Total shareholders' equity amounted to $534 million at March 31st, down by $596,000 from the end of Q4. Washington Trust remains well-capitalized. The total risk-based capital ratio was 13.85% at March 31st compared to 13.51 at December 31st, and our tangible equity to tangible assets ratio was 8.21% at March 31st compared to 8.22 at December 31st. Our first quarter dividend declaration of 52 cents per share was paid on April 9th. Regarding asset quality, non-performing loans declined by 214,000 in the first quarter, Non-accrual loans were 0.31% of total loans unchanged from the end of the year. Loans past due 30 days or more were 0.26% of total loans compared to 0.30 at the end of Q4. The allowance for credit losses on loans totaled 42.1 million or 1% of total loans and provided NPL coverage of 325%. Excluding PPP loans, the allowance coverage was 105 basis points. The provision for credit losses was a negative $2 million in the first quarter compared to a positive $1.8 million recognized in the preceding quarter. The reduction in the provision and the ACL reflected our current estimate of forecasted economic conditions and continued stable asset quality metrics. Net charge-offs were $18,000 in Q1 compared to $118,000 in Q4. And finally, I'd like to provide an update on our COVID-19 lending impact. Loan deferments as of April 16th totaled $150 million, or 4% of total loans outstanding, excluding PPP loans, down from $245 million, or 6% of total loans as of December 31st. This includes $120 million of commercial real estate, $13 million of CNI, $16 million of residential, and $1 million of consumer loans. A breakdown of commercial deferments by industry category is presented in a table in our earnings release. We will be happy to get into the details during Q&A. As of March 31st, we are reporting 2,065 PPP loans with a carrying value totaling $229 million. In the first quarter, we originated 1,058 PPP loans with principal balances totaling $97 million. PPP loans totaling $66 million were forgiven by the SBA during the first quarter. As I mentioned earlier, approximately $1.2 million of net deferred fees were accelerated into income as a result of these loans being forgiven. Net unamortized fees on PPP loans amounted to approximately $5.7 million at March 31st. The timing and recognition of these net fees into the margin will depend upon the pace of loan forgiveness as approved by the SBA. And at this time, I will turn the call back to Ned.
spk00: Thanks very much, Ron. Washington Trust had a very good first quarter, which has provided us with some momentum going forward. Now that the government has eased some COVID restrictions and the vaccine appears to be successfully rolling out, we're beginning to see more business activity and consumer confidence. We're also hearing that summer rentals and reservations are picking up, so that's a good sign for the region's tourism industry and economy. I don't think we're out of the woods yet. But we're cautiously optimistic about the remainder of 2021. I think it's a bit too early to claim victory over the pandemic or predict when the economy will recover or to fully define the new normal. But I believe we've successfully navigated through significant change in the past year and that we're well prepared for the challenges and opportunities that lie ahead. As I mentioned earlier, Washington trusts success to date and over time. has been our ability to change and to provide consistent returns to our shareholders. Washington Trust has weathered many storms during our 220 plus year history and we believe in our team and in our business model and that we are well positioned to continue to navigate forward. We thank you for your continued support of Washington Trust and now Ron, Mark and Bill will join me for a brief question and answer session.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk07: Hey, guys. Good morning. Morning, Mark. Hey, Ron, I was curious if you could share with us your core NIM outlook for the next quarter or two. I know the PPP fees will bias that upward, but I was curious of your view on the core NIM.
spk02: Sure. So excluding PPP, we would expect modest expansion of the margin from the 242 that we reported in the first quarter to somewhere in the 245 to 250 range in Q2. In the second half of the year, we'll probably see that starting to trend back down towards 240. There'll be continuing headwinds on asset yields for a while, and most of our liability repricing is really behind us. So we'll get a little bit of pickup in the second quarter, and then that will taper down in the second half.
spk07: Okay. And then I wondered if you could maybe at a high level share some perspectives on the mortgage business. you know it's been trending down and i know gain on sale margins even this quarter under a bit of pressure do you feel like a lot of your customers at this point have refinanced do you expect the mortgage pipeline to be under a little pressure in this this line to kind of work down and and in that same vein i'm curious you know what kinds of things are and can you do to get the cost uh structure under control if that occurs
spk02: Sure. I'll start with that and Mark and maybe you can jump in too. But the pipeline remains really strong at the end of March. But that said, we recognize that these elevated levels aren't going to last forever. So, you know, rates have trended up recently, although the pipeline is still strong. I think our expectation is that Q2 will be a good quarter, but maybe not quite as strong as Q1, maybe with some lower volume and lower sales yield. It's too early to tell beyond that. But, Mark, I don't know if you want to add anything to that. Sure, I would be happy to.
spk03: Good question, Mark. We think that just from a point of view of housing activity in New England, while some of the refinance activity may have been sort of boiled out by the strength of refis over the last year and a half, there are still quite a few people who have a refinancing incentive with a 10-year where it is today. And really in New England, the story is one of lack of housing inventory. And our pipeline and application activity still remains very strong. Purchase is over 40% of activity, which is healthy, and we would anticipate that to improve further as we go into the spring and summer months. The real story, we think, is lack of inventory in the Rhode Island and greater Boston markets. It's the lowest it's ever been and about 25% lower than the previous low in 1992. By our estimates, if you say a healthy housing market has about six months of available inventory, just for illustrative purposes, we maybe have 1.3 and 1.4 months of inventory available in Rhode Island and in greater Boston, respectively. If purchase activity is a bellwether of mortgage activity in general, that should be strong. As Ron said, refi looks pretty good for the second quarter. The second half of the year is a little harder for us to foresee. As far as costs are concerned, the majority of our expenses on the mortgage side are variable related to mortgage commissions based on loan closings. And we took great pains not to build the cost structure up significantly during the last year and a half or two years. That's been really good from a profitability perspective. At times, it taxed our mortgage group's ability to turn around $450 million pipelines, but we don't perceive being stuck with an inflated cost base to support a level of activity as and if it begins to wane during the second half of 2021. And the flip side of slower refinancing may mean also slower prepayments. which would be a net positive for mortgage loan growth, all things being equal. Our origination activity, both for sale and for retention and portfolio has been robust, but it's been muted somewhat by the amounts of prepayments. So I think Ron's guidance is pretty good. The last half of the year is a little hard to foresee, but we don't feel like we have overbuilt an expense engine to support a declining level of mortgage activity. Hope that helps in terms of color.
spk07: It does. I guess I'd be curious, what kind of margin, like in this quarter, did you see on the mortgage business or, or alternatively ask, you know, what was the rough cost structure in the mortgage business on the 11.9 million of revenue shift?
spk02: Yeah, Mark. So our mortgage commissions run about 85 bps on, on volume. So it's a largely variable cost. So we have not added a lot of fixed costs during this cycle.
spk03: And Mark, this is Mark. Just in terms of margin compression, we continue to try to find ways to improve turn times and to automate. Basically, in the mortgage business, speed equates to margin. And so while margins are under compression to some extent because competition for loans is starting to get more intense, Any ways that we can work with, for example, FinTechs to help shorten the title and closing side of the process and shave three or four days may help mitigate some of that margin compression risk. Open question as to whether the Fed remains as aggressive in the mortgage market in the second half of the year, again, from a quantitative easing support perspective, but that's certainly been contributing to it, too. Anyway, there are things that we think we can do on the operational and processing side to help mute the effect of that.
spk07: Okay. And then the last question I had, Ned, I'm curious, we've seen a bunch of deals in New England recently, and we've heard some CEOs suggest that scale and tech spending have become dramatically more important recently, which has prompted some of this consolidation. I guess sort of a two-part question, you know, number one, do you agree with that? And number two, do you think... Washington Cross needs more scale?
spk00: So, great question and two parts to it, obviously. I think you recognized us as somebody who spent some money recently on tech. I would tell you, and I'll let Bill comment on this further as tech reports to him, but we've invested fairly heavily in our sort of technology platform. We think we're well positioned to add on to that as we need to. improve technology at this sort of consumer-facing or customer-facing level, and we've done some of that, but I think that's kind of where our incremental spend would be. We don't have any big plans for technology spend today, but I think we've done that in the last couple of years and are ready to consider additional investment on that front. I think scale matters. I think, you know, we've talked over the various quarters about organic growth and M&A as important elements of our growth prospects. So we wouldn't take either of those off the table, certainly not take organic growth off the table. M&A, our guideposts haven't changed much. It's price, it's what can we do with it once we own it, can we find partnerships. A lot of the bigger deals at the higher levels that we've seen in recent quarters feel like they've been sort of MOE type deals and more partnership deals. I think we're open to that. We've certainly considered that over past quarters and thrown our hat in the ring and haven't been successful, but we'll continue to consider that. We've got the capital to do it. We think our currency is fine. But having said that, we've got a great operation and we won't do anything to jeopardize it. But I think we're a community bank, want to stay a community bank, and we'll find ways to grow and remain as such. Thank you.
spk01: Our next question comes from Laurie Hunsinger with Compass Point. Please go ahead.
spk06: Yeah, hi, thanks. Good morning. Good morning, Laurie. I was hoping, Ron, if you could just give me just a couple numbers. When in the quarter was the debt extinguishment completed?
spk02: We did a couple of rounds of that. So I can just give you some numbers on the debt extinguishment. So in the fourth quarter and in the first quarter, we expect the run rate benefit for 2021 to be about a million bucks and two basis points.
spk06: Okay. Perfect. Okay. And if you were to say that, you know, that was the debt extinguishment was weighted more toward the beginning versus the end or the middle of the quarter, just of this quarter, how do you think about that?
spk02: Yeah, we did some in February and some in March.
spk06: Okay. Perfect. That's helpful. And then on the expenses, the legal expenses, obviously we saw a drop. which leads me to wonder the settlement that flowed through, was that related to the departure of the AUA people? And I guess more importantly, in terms of the legal expenses, is this now a good run rate or was this unusually small? How should we think about that?
spk02: Yeah. So I guess, you know, we're not going to really comment on the, you know, on the litigation matters. So I won't answer that directly. I will just say that we've It was something that we've been working on for a while, and it's resolved. So I think from a legal expense run rate, you would expect to see that to be lower than what it has been.
spk06: Okay. Okay. So this quarter is probably a good run rate then, or even tracking lower?
spk02: Yeah, I think so.
spk06: Okay. Okay. And then I just wanted to verify, you currently have seven mortgage banking offices right now? Or is that a dated number? And I guess your mortgage loan production offices, not your commercial ones, just your mortgage.
spk00: We have four in Massachusetts, one in Connecticut, and then in Rhode Island we generally work out of the branches. Ron, correct me if I'm missing anything.
spk02: Well, we technically have a mortgage office in Rhode Island as well. An underwriting office, yeah. Yeah, that's right.
spk06: Got it. So how are you thinking about those? Are you thinking perhaps you would shutter some of those, or can you just talk a little bit about how you're thinking about those and maybe cost saves around that given where rates are?
spk03: Yeah, let me take that, Laurie. This is Mark, if I can. really does represent locations that we work out of, but I think you're maybe asking in terms of lease commitments or physical facilities or so forth. Is that the nature of the question? Correct. Because, yeah, well, let's put it this way. I think in the COVID era, One might think, well, gee, office spaces is not as necessary as it used to be anymore. I'm not sure that that's true because our mortgage offices tend to work out of those locations because those are where their centers of influence might be and their referral sources, whether they're attorneys or accountants, are realtors. And so the critical mass in those locations has been there for quite some time, really well predating the COVID era. I think a lot of questions about the mortgage banking business that people are asking now, and we got this question just a few minutes ago, are whether banks have over-indexed in it during the run-up to outstandingly high refinance and origination levels. And really all of those offices for us were open long before this period of time. So we will continue as a company to be careful when we think about brick and mortar and lease commitments, but The strength of this mortgage banking business was built on an environment that was a factor of half what we see today. And so while I think we want to be careful about things like occupancy expense going forward, I would not look at all at our mortgage banking business as someplace where we would be looking to take out cost. We're in the mortgage business, both from a portfolio perspective and from a refinance perspective, unlike a mortgage company or a more retail-oriented bank that drives its originations through physical retail locations. Ours are really driven by originators working in a number of different areas. And again, more than, I think, 60 or so percent of our volume today comes from the Massachusetts market. So I would say we'll certainly be careful around the edges, but to reiterate, we really don't feel like we have any either incentive or need to to contemplate a cost reduction program on the mortgage infrastructure side at this point. Those markets remain robust. Again, if we were relying on refi only and no portfolio, it might be a different story as it might be for mortgage companies, but I don't think for us.
spk06: Right. Thanks, Mark. And then just, Ned, last question. If we can go back to your comments maybe around Mark's question. Can you help us think about your very, very strong stock currency? If you were to embark on a whole bank M&A, can you help us think about the framework for assets? In other words, would you be open to an MOE or just how you're thinking about an asset level in terms of how small you would go, how large you would go? Just how you're thinking about this.
spk00: I would say we'd be open to partnership. MOE feels big to me. It's bigger than anything we've contemplated. if you're talking about just equal asset size. So I would say probably not, that we'd probably be looking at something that we could partner with and add into our mix more efficiently than that. Culture would be important to us. Price would be important to us. We've looked around our local geography. Laurie, we may need to stretch our horizons a little bit in terms of how far away from home base we'd we'd go to find the right kind of partnership. But we're open to figuring out whether there's a company like ours culturally that could be a good fit, that could expand the geography in which we do what we do well. But it would be important to us to find someone like us that had also an interest in combining and adding scale. And perhaps we could bring something like wealth or mortgage to the table that Target doesn't have. And so we're happy to have those discussions and explore the opportunities. And again, I said, we've got the currency and the capital to do it. And I think a partner would be well-served frankly, own our stock.
spk06: Great. Thanks for taking my question.
spk00: Yep, not at all. Thank you.
spk01: Our next question comes from Damon DeMonte with KBW. Please go ahead.
spk09: Hey, good morning, guys. Hope everybody's doing well today. Good morning, Damon. Hey, Damon. Morning. So my first question, just wanted to touch a little bit on loan growth. You know, I think you guys said that the pipelines were rebuilding going through the first quarter here. And Ned, I think you may have even said they were close to pre-pandemic levels. Obviously, a slower start off to the year, XPPP with balances down a little bit. How are you guys thinking about the upcoming three quarters and what you think you could get for net growth in the portfolio?
spk00: Yeah, so we've definitely seen growth in the pipeline in the last 30 to 60 days. Obviously, at the start of the year, things were looking pretty low. We were kind of at half of our sort of what had become our normal levels. We're building back towards where we were. We're not there yet, but we see a lot of activity in the early stages of the pipeline, a lot more requests. I think people are feeling a little bit better about the outlook ahead. So, you know, I think we've sort of suggested low single-digit growth for the year. I think we will grow for the year. It won't be like historic levels, but I think we're still committed to seeing growth in the commercial side in the low single-digit levels.
spk09: Okay. And again, primarily... Oh, sorry.
spk00: Sorry, go ahead. As I said, formation was pretty good in the first quarter. We're still struggling with payoffs and paydowns as our customers complete projects and stabilize them and frankly take advantage of either long-term finance, fixed rate finance, or low cap rates.
spk09: Yeah, I was just going to say, or just ask, you know, is this commercial growth focus in any particular area of the footprint? Is it Rhode Island based? Is it more greater Boston area or maybe, you know, Southern Connecticut? Like where are you seeing the best opportunities?
spk00: Yeah, I'd say it's all of the above. I mean, at Rhode Island, we have a great, great brand, and we know a lot of the top-tier developers that are going to be the ones that start first, and so we're in the mix there. We've got a lot of good momentum in the Connecticut marketplace, and again, I think we've got a core of developers that will be the first ones back into the mix, and similar in Boston. So I'd say we're in all three. Multifamily... Industrial properties are strong. I would say we're probably a little more reluctant on retail and office space at the time being. But we've got some customers that are CVS Walgreens type developers. We'll help them out. We've seen a couple of those deals come through in the last month or so. You know, I think we're open to consider whatever our, you know, strong field of developers bring our way. Things are competitive. Pricing is competitive. A little bit of structural competitiveness, which we'll stick to our kind of safe methods and won't go out on a limb on the structure side. We'll be competitive on pricing. And, Bill, I don't know if you have any other comments.
spk04: No, Ned, I think you explained it. you know, more of what we've done, steady growth. I think we're actually seeing some opportunities because we've been steady, didn't overreact when things got tough and, you know, have been taking good care of our borrower base and that creates loyalty and brings back loyalty. So while there is a lot of competition, we think there's going to be some opportunities out there, again, because we stuck to our knitting throughout this process.
spk09: Okay, great. That's an excellent call. Thank you. And then it's my second question. You know, credit trends have been extremely strong with you guys and see that in the way of low, you know, NPA formation, low net charge-offs, no provision this quarter, or sorry, negative provision this quarter. You know, Ron, how do we think about the provision going forward, you know, with the five basis point reserve release? Do you think reserves are going to come down further in the upcoming quarters? Any perspective you can give on that?
spk02: Yeah, so, Damian, we expect credit to remain stable in the absence of any, you know, COVID relapse or someone forcing an economic shock. So, I think generally we would say that, you know, provision should generally track to loan growth. And, you know, we'll take it as it goes. We recognize our, you know, deferments are still, I think, a little higher than others. I think that we've made a decision early on to be, you know, relatively, you know, liberal with deferments. with granting of deferrals. And, you know, we think that was in our customers' interests as well as ours. But we've seen a, you know, nice steady decline in those. And we would expect that to continue over the next, you know, three quarters to see the deferments roll off. So, yeah, I mean, provision, yeah, I mean, it's, we think things are pretty stabilized. Okay, great.
spk09: That's all that I had. Thank you very much. Thanks, Damon.
spk01: Our next question comes from Eric Zwick with Boeing and Scattergood. Please go ahead.
spk08: Hi. Good morning, everyone.
spk00: Good morning, Eric. Good morning, Eric.
spk08: First, if I could start with a question, a bit of a kind of follow-up on Lori's question about the FHLB advances, but maybe just a little bit more bigger picture. Curious for, you know, your updated thoughts on your funding strategy, and I guess, you know, a little bit of a setup to this question as I just kind of look at how the funding has changed over the last year. You know, the in-market deposits are up. call it $740 million or so. FHLB advances down $734 million, so close to one-to-one there, and you incurred some prepayment fees to retire some of those advances. So my guess is to some degree you think the new deposits will be sticky, and I guess there's potentially some questions about those, some just excess liquidity with people not spending for travel. You've got the PPP funds that will be used by customers as I look at it at the same time, and you continue to kind of keep wholesale broker time deposits at about the same percentage of total deposits. So just kind of curious how you're thinking about funding today, you know, given some of those factors.
spk02: Yeah. So I think we think that, you know, those deposits are going to be relatively sticky. And, you know, the new deposits that came in with the new PPP lending, you know, those will bleed off, you know, over the next, you know, couple of quarters. But, you know, we've still finished That PPP-1, those deposits had already bled off by the end of the year, and we still had pretty elevated deposit levels even after that occurred. And so even putting PPP aside, I think we continue to enjoy some high organic deposit growth. I think that's going to stick around for at least a while. In terms of wholesale funding, the brokered CDs have been really much – measurably cheaper than FHLB. So just in terms of arbitrage, we've been favoring brokered CDs over FHLB as those scheduled maturities occur. And we had some higher cost, call it plus 3% FHLB debt on our books, and we've chosen to pay it down. I think there's probably a little bit more opportunity to do some of that going forward. But most of our repricing is behind us, and there's a little bit left to do, perhaps.
spk03: Eric, this is Mark. I'll just add to that from kind of a big-picture perspective. Ron has talked about some of the tactical moves that we've made during this period of low rates and flush deposit growth. We think that structurally one of the keys to our improved performance over time is really addressing the cost of funds on the balance sheet and to favor low-cost core deposit gathering wherever we can. And this feels like an environment right now where banks are so flush with liquidity and in the near term no place to use it that there may be less interest in growing deposit bases, particularly as we look at some of the M&A in our area with larger banks, the focus may be more on cost reduction and efficiencies through either closing branches as a result of transactions or closing lower performing branches. So in the long run, we remain very focused on deposit growth as a structural way of changing our cost of funds. Right now in this super low interest rate environment with the Fed being very accommodative, it may appear to some that the value of deposits in the near term isn't that great, but it is of substantial value to us. And so whether it's remixing of the wholesale funding book between FHLB and broker depending on cost, or just a focus on funding growth in general, core deposits remain a real key strategic priority for us, and we'll continue to pursue deposit growth even in a rate environment where others might not be as interested in it. Hope that helps give some color.
spk08: That's great. I appreciate the thorough answer from both of you guys. Ron, this next one's probably for you as well. Just curious, of the $5.7 million in remaining unamortized PPP fees, curious if you could break that out between which portion is related to the 2020 originations versus the 2021 originations, just trying to kind of maybe key on into what amount might be recognized this year as those 2020 continue to get forgiven.
spk02: Yep, yep. So The 2020 pool is about $2 million, and the 2021 pool is like $3.7 million.
spk08: Excellent. That's great. And then looking at the wealth management revenue line, I know the first quarter included some tax prep fees, and I'm guessing maybe that trickles a little bit into 2Q, given the extended filing date. But I'm curious if you could quantify what the amount of the tax prep fees were in 1Q21.
spk02: So in one queue, they were, well, I mean, our total transaction fees, which is mostly all tax, was $172,000. And we'd expect Q2 to look similar to Q1 in terms of transaction fees.
spk08: Okay, great. That's helpful. That's all I had right now. Thanks so much for the answers.
spk02: Thanks, Eric.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Ned Handy for any closing remarks.
spk00: Thank you, and we thank all of you very much for your time and interest, and certainly look forward to catching up with all of you as soon as possible. So thanks a lot, and have a great day.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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