Washington Trust Bancorp Inc (WASH) 2021 Q1 法說會逐字稿

Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference Call. My name is Sarah, and I will be your operator today. (Operator Instructions) 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. Eckel, please begin.

Thank you. Good morning, and welcome to Washington Trust Bancorp, Inc.'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 Ohsberg, 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's CEO and Chairman, Ned Handy.

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 Ohsberg will review our financial performance. After our prepared remarks, Mark Gim 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 in this period of extended low interest rates. Our returns on average equity and average assets improved from fourth quarter levels. We remain 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 is 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 1 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 buckle 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 used many of the COVID-19 restrictions. We reopened our branch lobbies on April 1 with safety measures still in place and have seen a gradual uptick in branch traffic.

In 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, a meeting face-to-face with our trusted advisers 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. And 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 1 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 totaled $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 1 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. The 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 31, up 3% from the end of 2020 and up 32% from March 31, 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 noninterest 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?

Yes. 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 as compared to $18.6 million and $1.07 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 2.51%, 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 9 basis point benefit to the margin. This compared to $423,000 and 3 basis points in the fourth quarter. Excluding PPP fees in both periods, the margin increased by 6 basis points from 2.36% to 2.42% .

Commercial loan prepayment fees were modest and totaled $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 2 basis points to 2.90%.

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%. Noninterest 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 noninterest income in the first quarter was $1 million associated with the litigation settlement. As previously disclosed, included in other noninterest income in the fourth 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, noninterest 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 31. Originations amounted to $441 million, down by $5 million or 1% from the preceding quarter. And our origination pipeline at March 31 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-based 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 31 end-of-period balance of assets under administration totaled a record $7 billion, up by $182 million or 3% from December 31, reflecting market appreciation of assets.

Regarding noninterest 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, noninterest 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 contra expense, which will partially offset by higher payroll taxes associated with the start of the 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 noninterest 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 31 and up by $104 million or 3% from 1 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 31 and securities represented 17% of total assets as of March 31.

In-market deposits were up by $227 million or 6% from December 31, and up by $739 million or 23% from 1 year ago. All 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 FHLB borrowings were down by $127 million.

Total shareholders' equity amounted to $534 million at March 31, 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 31 compared to 13.51% at December 31 and our tangible equity to tangible assets ratio was 8.21% at March 31 compared to 8.22% at December 31.

Our first quarter dividend declaration of $0.52 per share was paid on April 9. Regarding asset quality, non-performing loans declined by $214,000 in the first quarter. Nonaccrual 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 in 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 16 totaled $150 million or 4% of total loans outstanding, excluding PPP loans, down from $245 million or 6% of total loans as of December 31. This includes $120 million of commercial real estate, $13 million of C&I, $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 31, 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 31. 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.

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 Trust's 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.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mark Fitzgibbon with Piper Sandler.

Ron, I was curious if you could share with us your core NIM outlook for the next quarter or two? I know the prepayment -- the PPP fees will bias that upward, but I was curious of your view on the

core NIM?

Sure. So excluding PPP, we would expect modest expansion of the margin from the 2.42% that we reported in the first quarter to somewhere in the 2.45% to 2.50% range in Q2. In the second half of the year, we would probably see that starting to trend back down towards 2.40%. That 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.

Okay. And then I wondered if you could, maybe at a high level, share some perspectives on the mortgage business. 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 line to kind of work down and in that same vein? I'm curious, what kind of things are, and can you do to get the cost structure under control if that occurs?

Sure. I'll start with that, and Mark Gim, 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 rates have trended up recently, although the pipeline is still strong. I think our expectation is that Q2 will be a good quarter, but be 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. 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 1.5 years, there are still quite a few people who have a refinancing incentive with the 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. And it's the lowest it's ever been. And about 1/4 -- 25% lower than the previous low in 1992. And by our estimates, if you say healthy housing market has about 6 months of available inventory, just for illustrative purposes, we maybe have 1.3 months and 1.4 months of inventory available in Rhode Island and in Greater Boston, respectively. So 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 1.5 years or 2 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 foresee being stuck with an inflated cost base to support the 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 loan -- 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. I hope that helps in terms of color.

It does. I guess I'd be curious, what kind of margin like in this quarter did you see on the mortgage business? Or alternatively ask, what was the rough cost structure in the mortgage business on the $11.9 million of revenue share?

Yes, Mark. So our mortgage commissions run about 85 bps on volume. So it's a largely variable cost. So we have not added a lot of fixed cost during the cycle.

Okay. 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 are 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 3 or 4 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 to that.

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 CEO suggest that scale and tech spending have become dramatically more important recently, which has prompted some of this consolidation, I guess sort of a 2-part question. #1, do you agree with that? And #2, do you think Washington Trust needs more scale?

So great question and 2 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. And we think we're well positioned to add on to that as we need to. Improve technology at this 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 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 that -- take either of those off the table, certainly not take organic growth off the table. M&A., our sort of 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 throwing 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. And -- but having said that, we've got a great operation, and we won't do anything to jeopardize it. So -- but I think we're a community bank, want to stay community bank, and we'll find ways to grow and remain as such.

Next question comes from Laurie Hunsicker with Compass Point.

Hoping, Ron, if you could just give me just a couple of numbers. When in the quarter was the debt extinguishment completed?

It was -- 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 $1 million and 2 basis points.

Okay. Perfect. Okay. And if you were to say that, that was the -- the debt extinguishment was weighted more towards the beginning versus the end or the middle of the quarter, just of this quarter, how do you think about that?

Yes. We did some in February and some in March.

Okay. Perfect. That's helpful. And then on the expenses, the legal expenses, obviously, we saw a drop which leaves me to wonder the settlement that flow 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?

Yes. So I guess put me in -- we're not going to really comment on the litigation matters. So I won't answer that directly. I will just say that we -- 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.

Okay. Okay. So this quarter is probably a good run rate then or even tracking lower?

Yes. Yes, I think so.

Okay. Okay. And then I just wanted to verify, you currently have 7 mortgage banking offices right now? Or is that a dated number? And I guess your mortgage loan production offices, not your commercial ones. Just for mortgage...

Yes. We have 4 in Massachusetts, 1 in Connecticut. And then in Rhode Island, we generally work out of the branches. Ron, correct me if there's -- if I'm missing anything?

Well, we technically have a mortgage office in Rhode Island as well.

An underwriting office. Yes.

Yes. That's right.

Okay. Got it. So how are you thinking about those with -- are you thinking perhaps you would shudder 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?

Yes. 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 like lease commitments or physical facilities or so forth? Is that the nature of the question?

Correct.

Because -- Yes. Well, let's put it this way. I think in the COVID era, one might think, well, office space is not as necessary as it used to be anymore. I'm not sure if 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 or 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've 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 in some place 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 contemplate a cost reduction program in 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 a mortgage companies, but I don't think for us.

Great. 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 full 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 go? Just how you're thinking about this (inaudible)?

Yes. 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 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 dp 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, that target doesn't have. But -- and so we're 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 in -- well served to, frankly, own our stock.

Our next question comes from Damon DelMonte with KBW.

So my first question, just wanted to touch a little bit on loan growth. 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're close to pre-pandemic levels. Obviously, a slower start off to the year ex PPP, with balances down a little bit. How are you guys thinking about the upcoming 3 quarters? And then what you think you could get for net growth in the portfolio?

Yes. 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 well. We were kind of 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 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 and on the low single-digit levels.

Okay. And again...

Sorry, go ahead -- formation was pretty good in the first quarter. We're still struggling with payoffs and pay downs as our customers complete projects and stabilize them and frankly, take advantage of either long term finance, fixed rate finance or low cap rates.

Yes. I was just going to say -- or I'd just ask, is this commercial growth focused in any particular area of the footprint? Is it Rhode Island based? Is it more Greater Boston area or maybe Southern Connecticut? Like where are you seeing the best opportunities?

Yes. I'd say it's all of the above. I mean, in Rhode Island, we have a 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 are -- we'll be the first ones back into the mix and similar in Boston. So I'd say we're in all 3 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 do -- that are CVS, Walgreens type developers. We'll help them out. We've seen a couple of those deals come through them in the last month or so.

So I think we're open to consider whatever our 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 we'll go out on the limb on the structure side. We'll be competitive on price. And Bill, I don't know if you have any other comments?

No. Ned, I think you explained it. It's 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 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.

Okay. Great. That's excellent color. And then just my second question, credit trends have been extremely strong with you guys and see that in the way of low NPA formation, low net charge-offs, no provision this quarter -- or sorry, a negative provision this quarter. Ron, how do we think about the provision going forward with the 5 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?

Yes. So Damon, we expect credit to remain stable in the absence of any COVID relapse or some unforeseen economic shocks. So I think generally, we would say that provision should generally track to loan growth. And we'll take it as it goes. We recognize our deferments. Our (inaudible) can go higher than others. I think that we've made a decision early on to be relatively liberal with granting of deferrals. And we think that was in our customers' interest as well as ours. But we've seen a nice, steady decline in those, and we would expect that to continue over the next 3 quarters to see the deferments roll off. So yes, I mean, provision -- yes. I mean, it's -- we think things are pretty stabilized.

Our next question comes from Eric Zwick with Boenning and Scattergood.

First, if I could start with a question, a bit of a kind of follow-up on Laurie's question about the FHLB advances, but maybe just a little bit more bigger picture. Curious for your updated thoughts on your funding strategy. And I guess a little bit of a set up to this question as I just kind of look at how the funding has changed over the last year. The in-market deposits are up, call it, $740 million or so. FHLB advances down $734 million, so close to 1:1 there and you incurred some prepayment fees to retire some of those advances. So my guess, to some degree, you think the new deposits will be sticky.

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 a whole -- 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 given some of those factors?

Yes. So I think we think that, that those deposits are going to be relatively sticky. And the new deposits that came in with the new PPP lending, those will bleed off over the next couple of quarters. But we've still finished -- that PPP one, 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. So I think there's probably a little bit of more opportunity to do some of that going forward. But most of our repricing is behind us, and there's little bit left to do perhaps.

Eric, this is Mark. I'll just add to that from a 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 flushed 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, on 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, both between FHLB and brokered 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 rate environment where others might not be as interested in that. I hope that helps give some color.

That's great. I appreciate the thorough answers from both of you guys. And Ron this next one is 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?

Yes. Yes. So the 2020 pool is about $2 million and the 2021 pool is like $3.7 million.

Okay. 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 trickless a little bit into 2Q given the extended filing date. But curious if you could quantify what the amount of the tax prep fees were in 1Q '21?

So in 1Q, 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.

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

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.

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