Good morning, and welcome to Washington Trust Bancorp, Inc. Conference Call. My name is Vaishnavi, and I will be your operator today. Call. 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?
Thank you. Good morning, and welcome to Washington Trust Bancorp, Inc. 2nd quarter 2021 conference call. Joining us on today's call are members of Washington Trust's executive team Ned Handy, Chairman and Chief Executive Officer Mark Gimme, 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 today.
Our complete Safe Harbor statement appears in our earnings press release as well as in other documents filed with the SEC. You may view these materials as well as our Safe Harbor statement in its entirety on our Investor Relations site at ir. Roshtrust.com. Washington Trust trades on NASDAQ under the symbol Rosh. I'm now pleased to introduce the host of today's call, Washington Trust Chairman and CEO, Ned Handy.
Thank you, Beth, and good morning, everybody. Thank you for joining our Q2 call. I hope everyone is doing well and has remained healthy since our last call. We appreciate your continued interest in Washington Trust. Today's agenda is similar to past calls.
I'll provide an overview of our 2nd quarter highlights and then Ron Osberg will review our financial performance. After our prepared remarks, Mark Kim 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 2nd quarter results with net income of $17,500,000 or $1 per diluted share. Meaningful quarter over quarter increases in net interest income, wealth management revenues and loan related derivative fees were offset by lower mortgage banking revenues. Non interest expenses were well managed in the quarter and our returns and capital levels reflect a successful quarter.
Ron will provide more detail in a moment. We are increasingly optimistic about where we, our customers and the economies in which we operate stand with regards to the pandemic. As we contemplate the new work environment, we think first about what is safest for everybody and then we turn to what is most effective and efficient for our customers. We will implement all of the best practices we've learned throughout the pandemic and we'll find the appropriate balance between technology assisted flexibility, outstanding customer service, culture enhancing practices and continued dedication to delivering consistent strong results. I continue to feel great pride in the way our employees adjusted and adapted without ever losing sight of what matters most to our customers and the communities we serve.
We were recently named by Forbes as one of America's Best in State Banks for 2021. This award based on a survey of our customers recognizes the strength of our franchise based on factors such as trust, products, branch services, digital services and financial advice. Additionally, we were also recognized by Providence Business News as one of the best places to work and one of the healthiest employers in Rhode Island. We're very proud of these acknowledgments and believe that when we take great care of our customers and our employees, it translates into growth and profit for our shareholders. We were pleased that Lisa Stanton joined our Board in April.
Lisa has deep experience in the payment space and in various aspects of data security. Lisa was most recently General Manager, Enterprise Strategy for American Express. We very much look forward to her contributions. It's a digital world and we recognize that the ever spreading technology ecosystem poses both opportunities and challenges. So we continue to invest in improving our customers' experience across delivery channels and in our evolving hybrid work environment.
At the same time, we are investing to protect our customers' data privacy, while educating them about the increasing risks of cyber fraud that accompany the shift to digital commerce. Our business model has consistently provided a diverse stream of earnings for us through various economic cycles and that has served us well during the crisis. Our commitment to strong credit practices has helped to minimize potential costs associated with the pandemic. We opened our new branch location in East Greenwich, Rhode Island, our first in that vibrant market. We're very pleased with the 1st few months of operations.
We continue to believe we have deposit market share opportunity in Rhode Island and believe that physical presence matters in tandem with enhanced digital connection and service points. In market deposits were up 12% from a year ago. We also saw continued reduction of cost in both our in market deposit base and our wholesale funding base, and Ron will comment on the margin impact. Turning to lending, total loans amounted to $4,300,000,000 at June 30, up 3% from the end of the Q1, with residential mortgage and commercial real estate growth outstripping reductions from PPP forgiveness. We processed forgiveness of about $85,000,000 in PPP loans in the 2nd quarter.
Commercial pipelines continue to improve and have returned to pre pandemic levels. We've seen a resurgence in CRE, in warehouse and multifamily in particular, and are seeing commercial lending activity pick up as the economy begins to recover. Mortgage sales volume in the quarter remained strong at $291,000,000 essentially even with Q1. Consistent with that, we've seen in the industry and our market area, market pricing has reduced our sales yields from very elevated levels realized over the past several quarters. Residential mortgage originations at $489,000,000 continued to be very strong in the Q2 with an increasing percentage of these originations heading for portfolio.
Our mortgage team continues to work diligently. The pipeline and application activity remains strong at a higher than pre pandemic levels. It appears, however, that we are beginning to see indications of normalizing in the industry, although it's too soon to forecast the pace and the impact. Our Wealth Management division's assets under Our Wealth Management division's assets under administration reached a record $7,400,000,000 at June 30, up 6% from March 31. This growth reflects financial market appreciation as well as strong business development and client retention efforts, net of routine asset client asset flows.
Wealth Management revenues were $10,400,000 for the 2nd quarter, up 5% from the preceding quarter, providing a key source of non interest income. We are very pleased with our Wealth Management division's 2nd quarter performance. I'll now turn the call over to Ron for a more detailed review of our financial performance. Ron?
Thank you, Ned, and good morning, everyone, and thank you for joining us on our call today. As Ned mentioned, net income was $17,500,000 or $1 per diluted share for the Q2. This compared to $20,500,000 and $1.17 in the Q1. Net interest income amounted to $34,800,000 up by $1,900,000 or 6% from the preceding quarter. Net interest margin was $2.55 up 4 basis points.
Net interest income continued to benefit from accelerated fee income recognition due to PPP forgiveness, which totaled $1,000,000 and had a 6 basis point benefit to the margin. This compared to $1,200,000 9 basis points for the Q1. Excluding PPP accelerated fees in both periods, the margin increased by 7 basis points from 2.42 to 2.49%. Also in the 2nd quarter, commercial loan prepayment fees totaled $717,000 compared to $217,000 in the 1st quarter. Excluding the PPP and prepayment fees, the margin increased from 2.40 percent to 2.42 percent.
Average earning assets increased by $140,000,000 with increases of 114 $1,000,000 in average investments and $42,000,000 in average loans. The yield on earning assets decreased by 5 basis points to 2.85%. On the funding side, average end market deposits rose by $113,000,000 dollars while wholesale funding sources decreased by $3,000,000 The rate on interest bearing liabilities declined by 12 basis points to 38 basis points. Non interest income comprised 37% of total revenues in the 2nd quarter and amounted to $20,600,000 down $5,400,000 or 21% from the preceding quarter. As previously disclosed, included in other non interest income in the first quarter was income of $1,000,000 associated with the settlement.
Excluding the impact of this item, non interest income was down by $4,400,000 or 18%. Wealth Management revenues were a record $10,400,000 in the 2nd quarter, up by $533,000 or 5%. This included an increase in asset based revenues, which were up by $408,000 or 4%, as well as an increase in transaction revenues of $125,000 dollars The increase in transaction revenues was largely due to tax reporting and preparation fees, which are concentrated in the first half of the year. The increase in asset based revenues correlated with an increase in the average balance of assets under administration, which were up by $359,000,000 or 5%. The June 30 end of period assets totaled an all time high of $7,400,000,000 up by $392,000,000 or 6% from March 31, reflecting market appreciation of assets and net positive new business.
Our mortgage banking revenues totaled $6,000,000 in the 2nd quarter, down by $5,900,000 or 50% from the 1st quarter. This included net realized gains of $8,600,000 which were down by $5,200,000 or 38%. Loan sales volume remained strong in the 2nd quarter. However, realized gains were impacted by a reduction in the sales yield compared with the very high levels recorded the past few quarters. The decline in sales yield is consistent with what we are seeing within our markets.
Note that the second quarter sales yield is still higher than it was at the pre pandemic level. Mortgage loans sold totaled $291,000,000 in the 2nd quarter, down modestly by $1,000,000 from the previous quarter. Realized gains in the 2nd quarter were offset by net unrealized losses of $2,500,000 reflecting a decrease in the fair value of mortgage loan commitments as of June 30. This compared to a net unrealized loss of $1,900,000 in the preceding quarter. Originations amounted to $489,000,000 up by $48,000,000 or 11% from the preceding quarter and were up by $63,000,000 or 15% from the Q2 in 2020.
We are seeing a shift in market demand away from saleable loans to portfolio. The percentage of originations to be added to excuse me, to be sold in the secondary market declined from 70% to 50% on a linked quarter basis. Our mortgage origination pipeline was smaller, but still very robust at June 30. The pipeline was approximately $298,000,000 down by $98,000,000 or 24% from $396,000,000 at the end of March. Loan related derivative income was $1,200,000 up by $708,000 from the preceding quarter.
Regarding non interest expenses, these were down by $1,700,000 or 5% from the Q1. In both the second and Q1 of 2021, debt prepayment penalties were incurred to pay off higher cost FHLB advances. This expense was $895,000 in the 2nd quarter compared to $3,300,000 in the first. Excluding the impact of these penalties from both periods, non interest expense was up by $739,000 or 2% from the Q1 of 2021. Salaries and employee benefits expense increased by $555,000 or 3% in the Q2, largely due to increases in performance based compensation accruals.
Advertising and promotion expense was up by $338,000 on a linked quarter basis, largely due to timing. Income tax expense totaled $4,900,000 for the 2nd quarter. The effective tax rate was 21.8% compared to 21.7% in the previous quarter. We currently expect our full year 2021 effective tax rate to be approximately 22%. Now turning to the balance sheet.
Total loans were up $105,000,000 or 3 percent from March 31st and by $12,000,000 essentially flat from a year ago. In the 2nd quarter, commercial loans decreased by $25,000,000 or 1%, which included a net reduction in PPP loans of $82,000,000 Excluding PPP, commercial loans increased by $57,000,000 or 3% from March 31, reflecting originations and advances totaling $162,000,000 partially offset by payoffs and paydowns of $103,000,000 Residential loans increased by $133,000,000 reflecting a higher proportion of loans originated for portfolio as well as $39,000,000 of residential loans with a weighted average rate of 2.74 percent that were purchased for portfolio. Investment securities were up by $104,000,000 or 11% from March 31. In the Q2, we purchased $194,000,000 of investments with a weighted average yield of 1.91% and securities represented 18% of total assets as of June 30. In market deposits were down $20,000,000 or 1% from March 31st and were up by $421,000,000 or 12% from a year ago.
The quarterly decline was modest considering the drawdown of PPP related deposits in the normal seasonal outflows of our municipal and higher ed deposits. Compared to last year, deposit inflows have allowed us to improve our funding mix by paying down higher cost wholesale advances. Wholesale brokered CDs were up by $197,000,000 in the 2nd quarter at an average marginal rate of 8 basis points. At Page LV, borrowings were down by $58,000,000 from March 31. Total shareholders' equity amounted to $548,000,000 at June 30, up by $14,000,000 from the end of Q1.
Washington Trust remains well capitalized. The total risk based capital ratio was 13.65 percent at June 30 and the tangible equity to tangible asset ratio was 8.27%. Our 2nd quarter dividend declaration of $0.52 per share was paid on July 9. Regarding asset quality, non performing assets declined by $2,500,000 in the 2nd quarter. Non accruing loans were 24 basis points on total assets and total loans and loans past due 30 days or more were 20 basis points of total loans, both of which were lower than the Q1.
TDRs decreased by $3,500,000 from March 31 reflecting payoffs. The allowance for credit losses on loans totaled 41,900,000 dollars or 97 basis points of total loans and provided NPL coverage of 400%. Excluding PPP loans, the allowance coverage was 100 basis points. There was no provision for credit losses in the 2nd quarter compared to a negative 2,000,000 dollars recognized in the preceding quarter. The provision for credit losses and the related ACL reflected our current estimate of forecasted economic conditions and continued stable asset quality metrics.
Net charge offs were $258,000 in Q2 compared to $18,000 in Q1. And finally, I'd like to provide an update on our COVID-nineteen lending impact. As of June 30, we had loan deferments on 22 loans totaling $93,000,000 or 2 percent of total loans outstanding, excluding PPP, which was down from 88 loans totaling $191,000,000 or 5% of total loans as of March 31. The deferments as of June 30 consist of 14 commercial real estate loans totaling $87,000,000 and 8 residential real estate loans totaling $6,000,000 As of June 30, we are reporting 15 13 PPP loans with a carrying value totaling $147,000,000 In the second quarter, we originated $4,000,000 of PPP loans, down from the $97,000,000 that we originated in Q1. Also in the Q2, approximately $85,000,000 were forgiven by the SBA.
As I mentioned earlier, approximately $1,000,000 of net deferred fees were accelerated into income. Net unamortized fees amounted to $4,900,000 as of June 30. The timing of the recognition of these net fees into the margin will depend upon the pace of loan forgiveness as approved by the SBA. And that concludes my remarks. And at this time, I will turn the call back over to Ned.
Thank you, Ron. This was another strong quarter for Washington Trust and we feel well positioned heading into Q3 and at this point, we're happy to take any questions.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys. Good morning.
Good morning, Mark. Good morning, Mark.
I saw that the flows turned positive in the Wealth Management business. I guess, I'm curious, have you hired some new producers there? And have we also seen sort of the last of the runoff from those past employee departures?
Mark, this is Mark Gimm. I'll start with that. We have not added new business developers recently, but as you know, we've both increased our outbound marketing from our inside business development officers and also had launched a private clients group initiative a couple of years ago, which is starting to bear fruit on both sides. And as far as the outflows from Western Financial, we do believe that the substantial majority of that is really behind us. So a combination of good business development outreach and slow to asset outflows from Western Financial really contributed to that.
And we're feeling very positive about business development momentum going into the second half of twenty twenty one.
Okay. Great. And Mark, and just to add on to that, the Weston outflows really were finished by the Q1 of last year.
Okay. Thank you. And then on the mortgage front, if gain on sale margins kind of remain under pressure and it sounds like you're going to be portfolioing a little bit more volume versus selling it, I guess I'm curious how you're thinking about the expense structure at the mortgage company. Is there an opportunity to maybe scale back some of the costs there if volumes are coming down a bit?
Mark, I'll take the first part of that question as far as expense base is concerned and then turn it to Ned and Ron for further comments. We really did not add to the expense base in the mortgage banking business at all during the really strong origination volumes of the last four quarters. We think we have a very flexible and process oriented infrastructure in place. So there was very limited incremental cost. The majority of the costs in that business when volumes increase is variable based on commissions and the as sales go up, the commission expense goes up as well.
As sales come down, the commission expense goes down as well. So we really did not build up our mortgage banking cost infrastructure at all at anything more than the very marginal levels during 2020. So there is we're not concerned about cost reductions. As Ron said, the mortgage banking business well, the mortgage business remains strong, but more skewed towards purchase in this environment than salable mortgages. As the 10 year trended up early in the Q2, we saw refi drop off as a percentage.
So cost reduction is not really on our radar screen simply because we didn't have non variable cost increases running up.
Mark,
I'm sorry.
Go ahead.
I was just going to say, what's the rough split fixed versus variable costs this quarter in the mortgage business?
Ron, do you have that?
It's Mark. I'd have to get back to you on that one.
Yes. Okay.
And then lastly, Ron, I wondered if you could kind of share with us your outlook for the margin and operating expenses? Thank you.
Sure. So for the margin, I think we'd expect to see a slight decline in kind of the core margin in the Q3 to perhaps 2.4% plus or minus. And mainly that's because we're still seeing some asset yield pressure as the residential mortgages and investment securities rollover. And you'll note that we had some asset yield compression in those two areas in the Q2. So that should likely continue.
Most of the liability repricing opportunity is behind us. There's a little bit more left to go, but I think we'll be roughly in the $240,000,000 range. As far as operating expenses, I would say that our Q2 operating expenses represent a good run rate going forward. Thank you. Yes.
The next question comes from Damon Darmonte with KBW. Please go ahead.
Hey, good morning, everyone. Hope everybody is doing well today.
Good morning, Damon. Thanks. Good morning, Damon.
Great. So my first question just regarding the loan growth, nice to see commercial loans, ex PPP come back this quarter. Can you just talk a little bit about your outlook here in the back half of the year and how the pipelines look and some of the sectors or areas of the economy that are driving this growth?
Yes. So, David, I'll take that. It's Ned. The pipeline is healthy. It's back towards pre pandemic levels.
It has been sort of at pre pandemic levels. We've had a lot of fundings in the last few weeks. So it's kind of at the pipeline today is $158,000,000 which is decent for us. And we're seeing renewed activity in mostly industrial and multifamily on the CRE side. Most of the activity is in CRE.
We haven't seen a lot of renewed investment on the C and I side. We've got some senior housing and memory care unit developments that we're getting involved in. We've always been in that space, but that slowed down a little bit during the pandemic, but with vaccinations occurring that's picked up a little bit. So we're seeing opportunities there. So we feel good about the second half.
I think sort of mid single digits is still a good place to peg growth for the year.
Okay, great. And then just kind of tying in loan growth with the mortgage banking discussion. So we should expect to see a continued growth in the residential real estate portfolio as you look to retain more of the originations, is that fair?
Yes, it is. And we saw some of that in Q2. And that's just kind of market driven. It's not a conscious decision on our part. It's just the nature of the applications that we're getting more oriented towards jumbo, for instance.
So I think that's a fair statement, Damon.
Okay.
Yes. Damon, this is Mark. I'll just reinforce that the purchase activity in the Boston suburban areas where many loans are not salable by reason into the conforming agency market by reason of size remains really strong. So although refi, conventional refi activity may have dropped off a little bit, the New England housing markets where we're present remain very robust and purchase demand is extremely high and market values are strong. So, as Ron said, it's not that we're redirecting loans from salable into portfolio.
It's just that the jumbo mortgage activity is still very, very robust.
Got it. That makes a lot of sense. And then I guess my last question on credit. I mean, obviously, credit trends are phenomenal and very consistent for you guys. How do we think about the provision going forward?
Took a credit in the Q1, nothing this quarter. As you continue to book loans, do we ask about or do we think about maybe no provision again in the back half of the year?
Yes. I mean, we're pretty comfortable with where we are on reserves. I think generally speaking, the level of provisioning would somewhat correlate to loan growth. But we're also factoring in economic outlook, Damon. So I guess I just leave it as saying, we feel pretty comfortably reserved at the moment.
Okay. All right. Fair enough. And then if I could sneak in one more, just any quick updated thoughts on the dividend and just given the strength of the earnings and capital generation, kind of what you would view for the next potential assessment of the dividend?
Yes. So we constantly look at our capital levels, obviously, from a safety and sound standpoint, but also from a shareholder return. We review the dividend every quarter. We're comfortable with it right now. It's we consider it to be very sustainable.
So I can't give you any guidance as to when the next dividend increase would be, but that's something that we look at every quarter.
Okay, fair enough. Thanks a lot guys. Appreciate it.
Thanks, David.
The next question comes from Eric Zwick with Boenning and Scattergood. Please go ahead.
Good morning, everyone.
Good morning, Eric. Good morning, Eric.
First question, I know the loan related derivative income can be lumpy from quarter to quarter and it's interesting just to look across a couple of different banks that reported this morning. You had a strong quarter and I had another bank that was weaker and pointed to just the shape of the yield curve making it not as attractive. But just curious from your perspective what led to some stronger income this quarter and how you think about that line item going forward?
Yes, I mean Eric it's based on new volume and we talk about it with every new customer and if the rate environment is right, we generally fix rates through swaps rather than doing fixed rate lending and we're I think we're dealing with a relatively sophisticated base of customers, especially in our larger ticket loans and they're accustomed to using swaps to manage interest rate risk. So we happen to have a good quarter and new originations and swaps followed. So yes, and you're absolutely correct in your first comment. It's lumpy and it's hard to predict quarter to quarter and I can't tell you today what the next quarter is going to look like, but we feel pretty good about kind of staying in line with prior years in terms of the total year.
That makes sense. Thanks. And just on switching gears to M and A, certainly activity in the industry and then kind of your region has picked up this year and Washington Trust certainly has very strong currency. Could you just remind us how you think about the possibility of an acquisition today and what might be attractive from an asset size or geographies or business mix?
Yes, I don't think it's changed a lot. Eric, this is Ned. I mean, our gating factors are what they've always been price, convincing ourselves we can do something with it once we own it and it's got to solve for something that we don't think we can solve for as easily organically. I don't think our GEO outlook on a whole bank deal has changed. It's in footprint.
It's got to be relatively proximate. There aren't a whole lot of opportunities. We be very careful on the credit front. We're not going to inherit credit issues. So I don't think any of that's different than it has been.
We still consider M and A one of the avenues for growth. So we're looking, we're talking, we're not certainly unwilling to consider that as an important part of our growth strategy. And then Mark, you can talk about it on the wealth side, if you want.
Yes. Thanks, Ned. We're always looking, Eric, for wealth M and A. And in addition to being on the other end of the line for any outgoing incoming calls from sellers looking for a partner, we are doing our best to start to proactively try to identify opportunities in our area. Probably in that size range, we'd be talking about $800,000,000 to $1,500,000,000 in AUM with, as Ned said, business mix and capabilities that help complement what we have or address areas that we might like to build up in.
So the geography there could extend a little bit further than in footprint as it might for a bank, really New England in general and maybe a little bit further south of Connecticut.
That's great color. Thanks for taking my questions today.
Thanks, Eric. Thank you.
The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Yes. Hi, good morning.
Good morning, Laurie.
I'm hoping that we can just go back to expenses. Maybe just starting with your debt prepays, you've done that for the last three quarters. Is that something that we likely see continue or I mean how are you thinking about that? You've got another $5,000,000 of PPP and amortized fees come in. Do you not let that drop to the bottom line or how do we think about that?
Yes. So we are pretty close to the end of the barrel on those prepayments. I wouldn't really expect us to be doing anymore.
Okay. Okay, fair. And then just looking at your overall expenses, so stripping out the prepays, you are $32,000,000 a quarter. The last time your mortgage banking revenues were running at $6,000,000 you were closer to $30,000,000 a quarter on non interest expenses. But are there other tightening measures that you're looking at?
Or are we kind of looking at a $32,000,000 run rate for the back half of twenty twenty one?
Yes. I think that's right, Laurie. We don't have any we run things pretty lean to begin with. So there isn't a lot of expense that we could take out necessarily. So, no, I think that's a pretty fair run rate.
Okay. Okay. And then just any comments on future branch openings? How are you thinking about that?
Yes, Laurie, it's Ned. I'll start with that and Mark you can chime in. I think we still have some market opportunity on the deposit front. We think there are a couple of markets, handful of markets in the Rhode Island footprint that where we're not physically present, where it would be helpful to be physically present. We don't have anything planned for this year that would be put in place this year.
So East Greenwich is it. East Greenwich is doing well already. It's beating our expectations, which is nice to see. But I think, Laurie, over the next couple of years, there might be a handful of branches. And at the same time, we think it's really important for us to be thinking about sort of the digital approach and what we need to do to simplify things for our customers and find growth through non brick and mortar approaches.
So we've got both on the radar, but I think our average branch size is still in the $150,000,000 kind of range. So we've got some we can leverage that a little bit, but we're not every new branch is a little daunting, right, in this day and age. So we're very careful about it.
Okay, perfect. That's helpful. And then just last question, going back to what Damon was asking on capital management, can you discuss buybacks? You all haven't been active in many banks out there are. Can you talk a little bit about your thoughts behind that?
Thanks.
Yes. So Laurie, it's Ron. Again, we monitor our capital position all the time. We refresh our buyback program, which we will continue to do on an annual basis. No plans at this point in time to be doing any share buybacks at our current stock price level.
But it is something that is definitely something that we're thinking about on a quarter by quarter basis.
Great. Thanks so much.
Thanks, Laurie.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Ned Shandy for any closing remarks.
Well, thank you all very much. We appreciate your time and interest and certainly look forward to speaking with all of you again soon. So that concludes it. Have a great day. We'll speak soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.