Good morning and welcome to Washington Trust Bancorp, Inc.’s Conference Call. My name is Vaishnavi and I will be your operator today. 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. Second Quarter 2021 Conference Call.

Thank you, Beth, and good morning, everybody. Thank you for joining our second quarter 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 second quarter highlights, and then Ron Ohsberg will review our financial performance. After our prepared remarks, Mark Gim and Bill Wray will join us to answer any questions you may have about the quarter. I’m pleased to report that Washington Trust posted strong second quarter results with net income of $17.5 million or $1 per diluted share. Meaningful quarter-over-quarter increases in 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 the 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 site 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, recognized as the strength of our franchise based on factors such as trust, products, branch services, digital services and financial advice.

Thank you, Ned, and good morning, everyone. And thank you for joining us on our call today. As Ned mentioned, net income was $17.5 million or $1 per diluted share for the second quarter. As compared to $20.5 million and $1.17 in the first quarter. Net interest income amounted to $34.8 million, up by $1.9 million or 6% from the preceding quarter. Net interest margin was 2.55%, up 4 basis points. Net interest income continue to benefit from accelerated fee income recognition due to PPP forgiveness, which totaled $1 million and had a 6-basis-point benefit to the margin. This compared to $1.2 million and 9 basis points for the first quarter. Excluding PPP, accelerated fees in both periods, the margin increased by 7 basis points from 2.42% to 2.49%. Also in the second quarter, commercial loan prepayment fees totaled $717,000 compared to $217,000 in the first quarter. Excluding the PPP and prepayment fees, the margin increased from 2.40% to 2.42%. Average earning assets increased by $140 million with increases of $114 million in average investments and $42 million in average loans. The yield on earning assets decreased by 5 basis points to 2.85%. On the funding side, average in-market deposits rose by $113 million, while wholesale funding sources decreased by $3 million. The rate on interest-bearing liabilities declined by 12 basis points to 38 basis points. Noninterest income comprised 37% of total revenues in the second quarter and amounted to $20.6 million, down by $5.4 million or 21% from the preceding quarter. As previously disclosed included in other noninterest income in the first quarter was income of $1 million associated with a settlement. Excluding the impact of this item, noninterest income was down by $4.4 million or 18%.

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.

We will now begin the question-and-answer session. 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 last of the run-off from those past employee departures?

Yeah, Mark, this is Mark Gim. 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 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 slowed asset outflows from Western Financial really contributes to that. And we’re feeling very positive about business development momentum going into the second half of 2021.

Okay, great.

Yeah, Mark. And just to add on to that, the Western outflows really were finished by the first quarter 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 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, 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 for the last 4 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 on 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 saleable mortgages. As the 10-year trended up early in the second quarter, 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 into that.

Mark, what is the – I’m sorry.

Go ahead.

I was going to say, what’s the rough split fixed versus variable cost this quarter in the mortgage business?

Ron, do you have that?

Mark, I’d have to get back to you on that one.

Yeah.

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 third quarter 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 2 areas in the second quarter. 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 2.40% range. As far as operating expenses, I would say that our Q2 operating expenses represent a good run rate going forward.

Thank you.

Yeah.

The next question comes from Damon DelMonte 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?

Yeah. So, Damon, I’ll take that. This is Ned. Yeah, 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 it, and the pipeline today is $158 million, which is decent for us and we’re seeing renewed activity, and mostly industrial and multifamily, and on the CRE side. Most of the activity is in CRE. We haven’t seen a lot of renewed investment on the C&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-digit is still a good place to that growth for the year.

Okay, good. And then, this kind of tie-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 origination. Is that fair?

Yeah, 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.

Yeah, Damon, this is Mark. I’ll just reinforce that the purchase activity in the Boston suburban areas, where many loans are not saleable by reason – into the conforming agency market by reason of size remains really strong. So, although refi, a conventional refi activity may have dropped off a little bit. The New England housing markets were represent remained 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 saleable 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 first quarter, nothing this quarter, as you continue to book loans, do we ask about, do we think about, maybe no provision again in the back half of the year?

Yeah. 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 if I could just sneak in one more, just a 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?

Yeah. So we constantly look at our capital levels, obviously, from a safety and soundness standpoint, but also from a shareholder return. We review that 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 it’s something that we look at every quarter.

Okay. Fair enough. Thanks a lot, guys. Appreciate it.

Thanks, Damon.

The next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead.

Good morning, everyone.

Good morning, Erik.

First question, I know that loan-related derivative income can be lumpy from quarter-to-quarter, 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?

Yeah, I mean, Erik, it’s based on new volume, and we talked about it with every new customer. And if the rate environment is right, we generally fixed 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 risks. So we happen to have a good quarter and new originations and swaps followed. So yes, and you’re absolutely correct in your first comments, lumpy and it’s hard to predict quarter-to-quarter. 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&A, certainly activity in the industry and kind of your region has picked up this year, and Washington Trust, I mean, as you know, very strong currency. Could you just remind us, how you think about that possibility of an acquisition today and what might be attractive from an asset size or geographies or business mix?

Yeah, I don’t think it’s changed a lot, Erik. This is Ned. I mean, our gating factors are what they’ve always been price as convincing ourselves, we can do something once we own it. And then 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 the 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’d 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&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 to?

Yeah. Thanks, Ned. We’re always looking, Erik, for wealth M&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 million to $1.5 billion 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, Erik.

Thank you.

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Yeah, good morning.

Good morning, Laurie.

Hi, Laurie.

I’m hoping that we can just go back to extensive maybe just starting with your debt prepay, you’ve done that for the last 3 quarters. Is that something that we likely to see continue? Or, I mean, how are you thinking about that? You’ve got another $5 million of PPP unamortized fees come in. Will you not let that drop to the bottom line? Or how do we think about that?

Yeah. So we’re pretty close to the end of the barrel on those prepayments, so I wouldn’t really expect us to be doing anymore.

Okay. Okay, fair. And then just looking at your overall expenses are stripping out the prepays are $32 million a quarter, the last time your mortgage banking revenues are running at $6 million, you were close to the $30 million a quarter on noninterest expenses. But are there other tightening measures that you’re looking at? Or are we kind of looking at a $32 million run-rate for the back half of 2021?

Yeah, 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?

Yeah, 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, is 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 branch – our average branch size is still in the $150 million 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, Ned, last question, going back to what Damon was asking me on capital management. Can you discuss buybacks? You all haven’t been active in many banks that there are. Can you talk a little bit about your thoughts behind that? Thanks.

Yeah, 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 our question-and-answer session. I would like to turn the conference back over to Mr. Ned Handy 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.