WASH (2020 - Q3)

Good morning. And welcome to Washington Trust Bancorp, Inc.’s Conference Call. My name is Rocco. 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 go ahead. Elizabet

Thank you, Rocco. Good morning, everyone. And welcome to Washington Trust Bancorp Inc.’s third quarter 2020 conference call. We would like to remind everyone that today’s presentation may contain forward-looking statements and our actual results could differ materially from what is discussed on the call. Our complete Safe Harbor statement is contained in Washington Trust’s earnings press release and other documents that we file with the SEC. We encourage you to visit our Investor Relations website at ir.washtrust.com to visit a complete Safe Harbor statement and other public filings. Washington Trust trades on NASDAQ under the symbol WASH. Today’s call will be hosted by Washington Trust executive team, Ned Handy, Chairman and Chief Executive Officer; and Ron Ohsberg, Senior Executive Vice President and Chief Financial Officer and Treasurer, and they will review our second quarter financial performance -- our third, excuse me, our third quarter financial performance. At the conclusion of their remarks, Mark Gim, President and Chief Operating Officer; and Bill Wray, Senior Executive Vice President and Chief Risk Officer will join Ned and Ron for our question-and-answer session. And I am now pleased to introduce Washington Trust’s Chairman and CEO, Ned Handy. Ned?

Thank you, Beth. Good morning, and thank you all for joining us on today’s call. Yesterday, we released our third quarter earnings. This morning, I will review the quarter’s highlights and Ron Ohsberg will discuss our financial performance. We will then answer any question you may have about the third quarter or our outlook for the remainder of 2020. I am pleased to report that Washington Trust posted net income of $18.3 million or $1.6 per diluted share for the quarter ended September 30, 2020. Our key performance measures remained strong, we are well capitalized and while our asset quality indicators improved in the quarter, we continue to be highly focused on our loan portfolios and very close to our borrowers as we work through the challenges of the pandemic. Our third quarter performance reflects our success at generating solid earnings during extremely challenging economic times. It’s amazing to think about what we have experienced so far this year, near record low interest rates, financial market volatility, social and political unrest, and a global pandemic. Fortunately, Washington Trust business continuity and pandemic planning, diverse business model and strong balance sheet have enabled us to manage our way through these difficult times. I couldn’t be more proud of our team and the work they have done, and continue to do to ensure the well-being of our Washington Trust family, our customers and our communities. Let me take a moment to review some of the highlights from our key business lines. Total deposits amounted to $4.3 billion at September 30th, up 4% from the previous quarter and nearly 20% from a year ago. We had strong end-market deposit growth and had seasonal inflows from institutional and municipal customers during the quarter. We had increases across all deposit categories checking now savings, money markets and CDs. The increase in low cost core deposits allowed us to reduce federal home loan bank borrowings which helped stabilize the margin. There’s been some indication that customers are saving more than usual, perhaps a result of reduced spending during COVID or need to set aside emergency funds. We are fortunate to be in a position to help our customers manage their funds in whatever way their condition mandates. During the pandemic, we temporarily closed our branch lobbies for health and safety reasons, and saw an increase in the use of drive-through digital and telephone banking services. Now there are lobbies are open, we have seen an uptick in branch traffic, but haven’t seen a corresponding decrease in other delivery channel usage. We believe a high tech -- high touch service model fits well with our community banking strategy. We found that our customers enjoy the convenience technology offers, but also want face-to-face conversations with our trusted advisers as needed, and during these turbulent times, our team has been there for them. Branch expansion has been a key part of our growth in recent years and I am pleased to announce that we recently broke ground for a new branch in East Greenwich, Rhode Island. This is one of a handful of remaining vibrant suburban communities in Rhode Island where Washington Trust does not currently have a presence. We anticipate the branch will open towards the end of the first quarter of 2021. Total loans amounted to $4.3 billion at quarter’s end, which was essentially unchanged from the previous quarter. Year-over-year we had double-digit growth as total loans were up 13% from September 30, 2019. Commercial loan activity is relatively flat during the quarter, which was not unexpected given market conditions. We continue to work one on one with borrowers to help with PPP forgiveness, applications and assist with loan deferrals modifications and extensions. Our team has been working around the clock and I have been pleased to speak with borrowers who are grateful for the support and attention that we have provided them. It’s been a difficult time for local businesses and as a community bank it is our responsibility to do whatever we can to help keep businesses open and the economy moving forward. Ron will provide more detail about our credit portfolio including an update on loan deferments. The residential mortgage story continues to be a good one as mortgage banking activity was outstanding during the quarter. Both mortgage originations and mortgage loans sold to the secondary market reached all-time quarterly high levels with mortgage originations surpassing the $1 billion mark. Mortgage revenues totaled $12.4 million for the third quarter, up a remarkable 155% over the same period last year. Year-to-date, mortgage revenue has tripled the amount earned in 2019. Housing demand is very strong but inventory is low in the areas where we originate. Rates are anticipated to be low for the coming months and we anticipate that there will be continued demand for refinancing, as well as purchases. We continue to be very active in the Greater Boston area where low inventory levels support a robust and fast paced sales market. We have also seen an increase in second home purchases in our market as borrowers look for green space properties. It’s been a busy year for our mortgage team and they work closely with borrowers to ensure they receive the right product and best pricing. We have introduced technology to make the process faster, easier and more efficient for employees and customers, but personal service plays a key role in retaining and building mortgage relationships. The unprecedented volume and pace has been exhausting, and I want to acknowledge the hard work and dedication of our mortgage team from the frontlines to the back offices, as they have worked tirelessly to ensure home buyer’s needs were met, while producing record results. Our mortgage pipeline remains strong going into the fourth quarter. So we believe volume should continue at a good pace through year end. Wealth management assets under administration amounted to $6.4 billion at September 30th, up 4% from the previous quarter. Wealth management revenues amounted to $9 million and were also up by 4%. As we found with other business lines, our wealth management clients continue to seek personal advice and attention during these uncertain economic times. Our wealth team has done an outstanding job of meeting client’s safely in person or through online conferencing to ensure their financial plans and investments are in order. I will now turn the discussion over to Ron for a more in-depth review of our financial performance. Ron?

Thank you, Ned. Good morning, everyone. Thank you for joining us on our call today. As Ned mentioned, net income was $18.3 million or $1.6 per diluted share for the third quarter. This is compared to $21 million and a $1.21 for the second quarter. Net interest income of $31.7 million, increased by $709,000 or 2% from the preceding quarter. The net interest margin was 2.31% unchanged. Prepayment penalties were modest and totaled $33,000 in Q3, compared to $21,000 in the second quarter, average earning assets increased by $63 million, loans were up by $81 million and cash and short-term investments were down by $19 million, the yield on earning assets decreased by 20 basis points from the second quarter to 2.98%. On the funding side, average end-market deposits rose by $83 million, our wholesale funding sources decreased by $126 million from the second quarter. The rate of interest-bearing liabilities declined by 23 basis points to 0.85%. Non-interest income comprised 45% of total revenues in the third quarter and amounted to $25.5 million, down $852,000 or 3% from the second quarter. Our mortgage banking revenues totaled $12.4 million. These results included net realized gains of $14.3 million, which was up by $3.6 million or 34% from the prior quarter. This increase reflected both a higher volume and yield on loan sold to the secondary market. Mortgage loans sold total with an all-time quarterly high of $354 million, up by $49 million or 16% from the prior quarter’s record level. Compared to the third quarter of last year, mortgage loans sold were up $169 million or 91%. Net realized gains were offset by a decrease and net unrealized mortgage gains, reflecting a lower mortgage pipeline and a corresponding decline in the fair value of mortgage loan commitments as of September 30th. Year-to-date, net mortgage banking revenues of $33.3 million or tripled the 2019 levels. Our mortgage origination pipeline at September 30th was about $372 million, down about 9% since June 30th, but remains 43% higher than at this time a year ago. Wealth management revenues were $9 million, up by $349,000 or 4%. This was due to a $630,000 or 8% increase in asset based revenues, which was partially offset by a $281,000 decrease in transaction based revenues. The increase in asset base revenues correlated with an increase in the average balance of assets under administration, which were up $594 million or 10%. The decline in transaction based revenues was mainly due to tax preparation fees, which are concentrated in the first half of the year. The September 30th end of period balance of assets under administration totaled $6.4 billion, up by $257 million or 4% from June 30th, reflecting financial market appreciation of assets, which were partially offset by net client outflows. Loan related derivative income amounted to $1.3 million. This was up by $1.2 million from Q2, reflecting a higher volume of commercial borrower interest rate swap transactions. Income from bank owned life insurance totaled $567,000 in the third quarter, down by $224,000, included in the prior quarter was $229,000 of life insurance proceeds. Now let me turn to non-interest expenses. Total expenses were up by $3.9 million or 14% quarter. Salaries and employee benefits expense increased by $2.4 million or 12%. Recall that last quarter we deferred approximately $1 million of direct labor cost, which is a contrary expense to defer PPP -- to originate PPP loans. The increase also reflected volume-related increases in mortgage originator commission expense, as well as some performance based compensation expense increases. Legal audit professional fees were up $593,000, mainly due to various matters arising in the normal course of business, also included here are the costs of obtaining, the bond rating and refreshing our shelf registration. Outsource services expense was up $376,000, mainly reflecting volume-related increases and third-party processing costs related to the customer interest rate swap transactions. FDIC deposit insurance costs were down $282,000, reflecting a decline in our assessment rate and other expenses were up by $413,000 from the prior quarter, of this increase, $170,000 resulted from the second quarter reversal of a contingency reserve. Income tax expense totaled $5.1 million for the quarter. The effective tax rate was 21.9%, compared to 20.9% in the prior quarter. We currently expect our fourth quarter effective tax rate to be 21.9% and our full year 2020 effective tax rate to be 21.5%. Turning to the balance sheet. Total loans were down by $6 million, essentially flat compared to June 30th and up by $504 million or 13% from a year ago. Total commercial loans were up by $5 million in the third quarter. The increase in the commercial portfolio included a net increase in CRE of $35 million, which was partially offset by a net decrease of $30 million in C&I. Residential loans decreased by $1 million and consumer loans decreased by $9 million. Investment securities were down by $25 million or 3%. In-market deposits were up by $129 million or 4% from the end of the prior quarter and $546 million or 17% from a year ago. Wholesale brokered CDs were up by $56 million and FHLB borrowings were down by $291 million. Last quarter, we elected to participate in the PPP Liquidity Facility with the Fed. At September 30th, advances under this program totaled $106 million. Turning to asset quality, non-performing assets declined by $1.3 million from the end of Q2. Non-accruing loans were 0.34% of total loans and compared to 0.37% at the end of Q2, and loans past due by 30 days or more were 0.24% of total loans, compared to 0.34% in Q2. Net charge-offs were $96,000, compared to $308,000 in Q2. The allowance for credit losses on loans totaled $42.6 million or 1% of total loans and provided NPL coverage of 289%. Excluding PPP loans the allowance coverage was 105 basis points. And finally the provision for credit losses was $1.3 million, which compared to $2.2 million recorded in Q2. Total shareholder’s equity was $527 million at September 30th, up by $7.5 million from the end of Q2. Washington Trust remains well capitalized. The total risk based capital ratio was 13.09%, compared to 12.78% at June 30th and tangible equity to tangible assets was 7.91%, compared to 7.74%. Our third quarter dividend declaration of $0.51 per share was paid on October 9th. Finally, I’d like to update you on our COVID-19 lending impacts, loan deferments as of October 14th totaled $336 million or 8% of total loans outstanding, excluding PPP loans. This was down from 16% in June and this includes $253 million of CRE, $42 million of C&I, $41 million of residential and $1 million of consumer. A breakdown of commercial deferments by industry category is presented in a table in our earnings release and we will be happy to get into the details during Q&A. As of September 30th we are reporting 1,770 PPP loans totaling $217 million. The average PPP loan size as of September 30th was approximately $122,000. On amortized fees and PPP loans net up underwriting costs amounted to approximately $5.1 million at September 30th. 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. Approximately $300,000 of net fees are amortizing into the margin monthly and absent any forgiveness in 2020 approximately $4 million would be recognized at some point in 2021. And at this time, I will turn the call back over to Ned.

Thank you, Ron. We are pleased with our third quarter performance in light of all the challenges we faced and we know we are not out of the woods yet, as we know there will be challenges with the ongoing pandemic, as well as implications resulting from the upcoming Presidential Election. We believe in our business model and our team, and we will continue to do what is in the best interests of our shareholders our communities our customers and our employees. We thank you for your time this morning, and now, Mark, Ron, Bill and I are happy to answer your questions.

Thank you. [Operator Instructions] Today’s first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Good morning Mark.

Hey, Mark.

Good morning Mark

Yeah. Quick question on the deferrals, do you have a sense for what percentage of the loans deferral or in their first 90-day versus sort of second 90-day deferral?

We do. If you wait one sec I will give you that.

And I guess…

So on the CRE space 83%, excuse me, 56% are in their first deferment, 35% or $88 million are in their second, $21.5 million are in their third deferment, that’s 9% of, like, that’s total CRE book. On the C&I side, 77% are in the first deferment and 23% are in the second. There are not enough third deferment at this point.

Okay. Great. And then, I mean, I know this is hard to say, but I am curious whether you think that we are kind of plateauing a little bit with deferral levels or do you anticipate we will see kind of a steady decline in those in coming months or quarters?

Yeah. We will definitely see a decline and I know Bill you have done some work on that and Ron. We expect to go from here to something in the 4% range around year end and we have got a pretty good handle on what’s going to need, the hospitality book, Mark, we will need little bit longer. There are a couple retail deals that we know will need a little bit more time to come back, a couple have movie theaters are going to take a while to come back. So I think we have got a good handle on what’s included in what will go beyond 12/31, but I think we are going to be in really good shape certainly by year end.

Okay. Great. And then, I wonder if you could give us a rough breakdown of the maturities of the roughly $750 million of time deposits that you have. It looks like the rates obviously are pretty high in those. I am just curious kind to when to enroll?

Yeah. So, Mark, it’s Ron. So we have between various wholesale funding, as well as CD maturities about $728 million coming due in the fourth quarter at an average rate of 1.2% and another $340 million in the first quarter at 1.1%. So we expect to get a some additional lift on the margin as those liabilities reprice.

I am sorry, Ron, you said that $728 million at 1.2% and $1.1 billion in the first quarter at what rate?

So, $728 million in the fourth quarter and another $340 million in the first quarter.

I am sorry, $340 million. Got you.

Yeah. And…

And the $340 million is…

At 1.1%, 1.2%.

Okay. Great. And so -- and obviously, probably, carrying a little bit of excess liquidity. How are you thinking about the outlook for the margin maybe in 4Q? Do we still see some continued March decline?

No. I -- we will see some…

I know…

Yeah. We will see some expansion, Mark, it will be somewhere between $235 million and $240 million.

Okay. Great. And then…

And that’s exclusive of any PPP forgiveness. At this point we are not even factoring that in because the timing of that has been so uncertain. So internally we are thinking that’s a Q1 event but we will see what happens.

Okay. And then, lastly, on the wealth management business, maybe this is for Mark. There was looked like about $78 million of outflows this quarter, was that a function of those employees that left or is it just sort of normal flow?

Yeah. Mark, this is Mark. That is really routine distributions more than anything else. We have -- the outflows from those employees of Western Financial, you mentioned is very limited and not really a factor now. So, Ron, I don’t know if you have any additional color to add on that, but primarily the decline in non-market driven AUM was routine distributions.

Okay.

Yes. So, we really haven’t seen any material outflow related to the two counselors since the beginning of the second quarter.

Great. Thank you.

Thanks, Mark.

And our next question today comes from Damon Delmonte with KBW. Please go ahead.

Hey. Good morning, guys. How’s going today?

Good morning, Damon.

Hi, Damon.

My first question, just want to circle back -- good morning. Just want to circle back on the numbers you gave for the CRE deferrals. I think you said there is 56% that are still on their first deferral period...

Yeah.

…and what were the other two?

35% in their second deferment and 9% in their third deferment.

Now the third deferment period is that basically just 90-90-90 or they -- sort of they have a 270-day deferral or I mean, I guess, how comfortable do you feel with that portion of the portfolio that they are requesting a third deferral? Have you done additional due diligence and underwriting on those, do you feel like there is limited loss content or is it still too early?

So, I am going to speak in general terms. We did a lot of six months deferrals in -- say in the hospitality space, but there may have been a few that we did 90-day, thinking that things were going to turn sooner and so these could be just three 90 days that there are three 90-day deferment periods. It could be a 180 days and then 90s days. So typically we try and shorten deferments as we go from first to second to third. Typically, we try and change the payment structure under that deferment. So if we are going for P&I to start with we will try and modify that to principal only. So I don’t have the specifics in front of me Damon. But I would guess that probably captures. Bill, I don’t know if you have other color on that.

Sure. I mean, I would add that, we do underwrite every deal. So these aren’t borrower calls up and we grant them something. We take them through our loan approval process. We take them to the finance committee. They get a lot of discussion. There’s a lot of care put into it and we want to make sure our borrowers and sponsors are equally engaged as we are. So the good news is that numbers are coming down into the dozens now and so there is a lot less uncertainty than there used to be and we are very much focused on the ones that are going to need some help to get them to the winter and that’s why there is a concentration on the hospitality side. But we are doing deferments to borrowers who are sound into collateral that sound and now it’s a matter of structure in patients and working with them helping them conserve their cash until they get back to stabilized operations.

Got it. Okay. That’s helpful.

Damon, I will just add..

Yeah.

I have just looked it up and that -- the $21 million or that 33%, I think, no, excuse me, the -- its $21 million in dollars and its 9% of the CRE deferrals. They are all hospitality deals.

Okay. All right.

They would -- this does going to take a little longer to come back.

Yeah. Okay. Thank you. And then kind of on the credit front, provision -- kind of the outlook for provision, do you feel that your reserve level kind of was up ex-PPP, was up 3 basis points, so I think 105 this quarter. Do you guys still feel uncomfortable with that based on the way you have interpreted CECL on [ph] that.

Yeah. That -- Damon, we obviously have another quarter under our belt now. We have seen the deferments come down. We have had a chance to learn some things that we maybe didn’t know three months ago. I think we feel very comfortable with our reserve levels where they are. They increased modestly the coverage ratio this quarter. That could happen again in the fourth quarter. But we don’t see any -- we haven’t seen anything that we didn’t expect to see.

Okay. So the few quarters you have averaged about 2.2% and 1.3%. So you think kind of somewhere in that range as you go forward…

Yeah.

Is this reasonable?

Yeah.

Okay.

Yeah.

And then, I guess, just lastly on expenses, I mean, I think, it’s understandable why expenses were up this quarter and just kind of from a run rate, excuse me, run rate perspective, you think $32 million to $33 million per quarter is reasonable or could it tickle a little bit higher as you start to incur some cost with the new branch you are putting on?

Yeah. We have $50,000 in the fourth quarter for the new branch. I think the expenses could tick down a little bit, because we would expect mortgage originations to come down somewhat in the fourth quarter and that’s a variable cost. Our core expenses the non-variable piece is on track with what we have seen all year.

Got it. Okay. That’s or I guess, my last question regarding capital. I think you guys mentioned you hit up the edge yourself [ph] during the quarter. What are your thoughts on tapping the debt markets and maybe adding some Tier 2 capital? It’s been a pretty common trend I think throughout the industry in the last two months, three months, four months. Just kind of wondered what your thoughts were on that?

Yeah. So we went out and we got a debt rating this summer, which we thought was a good thing to do, but really that was just to have another option. We don’t see the need at this point in time to be raising additional capital through sub-debt. We are not exactly sure what we would do with that capital to be honest. So we have the tools in place and the event that it’s needed. If M&A were to happen we would reconsider that. But at this point, we really have no intention to go out and raise sub-debt.

Got it. Okay. That’s all that I had. Thank you very much.

Thanks, Damon.

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

Good morning, everyone.

Good morning Erik.

Hi, Erik.

Good morning Erik.

First just a follow-up on Damon’s question in terms of expenses and kind of keying in on that legal and consulting line, you mentioned there was other cost of obtaining the bond rating and then refreshing the shelf registration. So my guess is, those drop out a little bit. So is that another area where kind of the run rate expenses could tick down a little bit in 4Q?

Yeah. Yes. I think so.

Are you able to quantify what those costs were either individually or combined for the bond rating and shelf?

Yeah. It was between $100,000 and $150,000.

Thanks. And then just thinking kind of the loan loss provisioning as well and kind of gain with the comment that 4Q could be in line with the 2Q and 3Q levels. And I guess, it sounds like you are pretty confident with -- there’s no changes in the economic outlook or the deferral trends that any provisioning going forward should be potentially tied to just organic growth in the loan portfolio. I am just kind of curious if one if that’s true what are your expectations for potential organic growth and how does that pipeline look today. I think when we talked three months ago you thought maybe potentially low-mid single digits could be possible in the back half of the year and maybe didn’t hit that market in the 3Q. So just kind of curious on those two fronts organic loan growth and how that might impact provisioning as well?

Yeah. So, Ned, let me just take the loan growth piece. But as far as the provisioning, yes. I would say, unless something unexpected happens, yes, our provisioning would be more along the lines of organic growth at this point.

Yeah.

And the organic growth piece, we definitely have seen our markets cool down on the commercial side. We may be looking to add some residential if that’s possible. But yeah, and Ned, I don’t know if you have any commentary you want to add on?

Yeah. I would say, on the loan growth side, the commercial pipelines are okay. They are down a little bit from normal times as one might expect. I would say, we will see moderate growth in the fourth quarter. I think we will kind of hit our low-mid single-digit growth for the year, but last quarter obviously was low. Next quarter will be, I think, low -- the originations are okay. We are going to have some pay offs in the fourth quarter. So -- and we may layer in some mortgage growth. We can always -- it’s a balancing act on the mortgage side, we can put more in portfolio at the expensive of taking gains. So we always consider that option. But I think, I would say, that long growth in general will be kind of like the third quarter kind of be flat.

Got it. Okay. Thanks. And just switching gears to credit, you mentioned, as you are doing the second and third round deferrals, you are doing full underwriting on those loans and those relationships. I am just curious how that’s impacting kind of your internal risk ratings and have there been any material changes to the special mention and the classified buckets?

Bill, do you want to talk about the sort of the COVID watch list process and kind of how we are handling the incremental deferments?

Sure, Ned. So from the beginning we always, obviously, had a watch list process already that dealt with our criticizing classified assets and certain lower grade pass rating assets. We started a COVID watch list process where every month we look at all loans that are in deferments that are above 500,000. We had a separate one for small business. We also look at any other loans we are concerned about and we grade those on what our thoughts are about whether they might need a second deferment, et cetera. Once we have -- we also follow loans on the watch list, once they are out of deferment until they have made prepayments. So we don’t drop anything off the COVID’s watch list until they have shown that they can operate successfully post deferment. And so now that watch list has become substantially narrowed down as deferments roll off and which is why we feel comfortable with our thoughts on where we are going to be at year end. We can pretty much name the deals that are going to be in there. Those deals are being underwritten with cash flow forecasts and -- so we are very closely tied to our borrowers into the collateral as we make these next deferments when they are needed. And as we have mentioned earlier, the composition of the deferments is changing from what was almost entirely principal and interest to include a lot more interest-only payments where we might only be deferring principal. So we feel that again the fog of uncertainty is still out there on kind of a macro basis for where things are going to go. But in terms of our commercial credit portfolio, we are very focused on the dozens of loans that are going to continue to be in deferment. We know why they are in deferment. They have been underwritten. There are committee level decisions being made on these. Again, we feel, obviously, we would rather have them fully paying for it all the time, but we feel very comfortable about effectively the handful that are left to deal with. And we understand why they need a deferment and we support it, and we also know that we are working with the right people. We know the sponsors and the borrowers are the right ones to be at the helm on these.

And Erik, it’s Ned. I will just add that we consider the loan rating on each of those loans at each of those monthly meetings. So we are adjusting ratings at least monthly on those deals if needed.

Right. And I should have mentioned that, we did -- we have had any -- only nominal increases to special mention. And I would say, we probably moved some of these loans to the lower grade of pass rating, making them if they were a four, making them a five, if they were five, making them a six, that’s been more common. But there has been very little move into the criticized assets.

That’s great color. I appreciate that commentary from both of you guys. And then on the PPP loans, it seems like across the industry the expectations for windows of forgiven has been pushed back. I know a couple of months ago there was some initiatives from some of the lobbyist to push for a automatic forgiveness and I think the number was $150,000 in loan value or less. I guess, have you heard anything similar as your expectation now that that all loans will have to go through the formal forgiveness process?

Yeah. Bill has the pleasure of managing our whole forgiveness process. So I will let Bill comment on that. It’s been an interesting ball to follow and our team has done a great job. But Bill any specific comments on forgiveness?

Sure. So far the only formal threshold for forgiveness that’s been set out has been $50,000 or below, which is about 60% of our loans by accounts far less in terms of dollars. So we are gearing up with an expedited process for those borrowers. We would love it as would our borrowers if they ended up doing something $150,000, because that would cover about 85% of our loan accounts. Meanwhile we have invited over 60% of our total dollar volume into the forgiveness process. That represents less than 10% of the borrowers. So we are starting from the top. We process them through our review process. We are making submissions to the SBA. So far we have one tiny deal of $15,000 deal that’s gone all the way through and been funded. So there -- our pipeline is up. It’s active. We are starting with the larger borrowers, because we know that’s where the focus is going to have to be and we are hoping that that $50,000 threshold that’s been laid up at the SBA may get extended to $150,000, but we are certainly not counting on it at this point.

Great. And then, just one last one for me, I missed some of the tax rate guidance. Ron, I think, you said, 21.5% for a full year 2021 and was there for 4Q number as well, I think, that’s where I might have missed.

Yeah. That 4Q number is 21.9%.

Great. Well, thanks guys for taking all my questions today.

Thanks Erik.

Thanks, Erik.

Thanks, Erik.

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

Yeah. Hi. Thanks. Good morning.

Good morning, Laurie.

Good morning, Laurie.

Bill, I just wondered, if we could go back on the PPP loans, I mean, what is your expectation assuming there isn’t a fast track in terms of how quickly it will roll through the process of forgiveness. How many months potentially, how are you thinking about that?

Well, remember the SBA has 90 days to turn all these around. You have to factor that in. This is going to be a 2021 event and I think it’s hard to say within that timeframe when it will happen, but certainly it won’t happen until 2021 and I wouldn’t be surprised if it doesn’t start -- move into the second quarter potentially even the third quarter depending on how quickly the SBA decides to move. But I will defer to Ron in terms of what that will mean for our numbers. But this -- it’s an effectively a non-event for 2020.

Perfect. Okay. That’s what I was looking for. And then just one question, so you said you had a $15,000 loan moved all the way through. How quickly start to finish did that go through?

From the time we submitted it to the SBA, it was literally about a week. But that’s the only one that’s gone through of, I think, we have probably submitted on the order of $30 million or so to them. So I think, at this point it’s kind of a random process and we haven’t gotten any real sense of flow. We just know that between the time we have to review these and the 90 days the SBA has to turn them around that fourth quarter is going to be again a non-event in terms of forgiveness.

Okay. Thanks. And then Ron just to confirm the net of amortized costs, the potential fee recapture is $5.1 million.

Yeah. That’s as of September 30.

As of September 30. Okay. Perfect. Okay.

Yeah.

And then just on Q1 book, I was hoping for a little more color on the hotel book.

Yeah.

If you could give us a refreshed LTV and then potentially if you also have a refreshed LTV on that $89 million that’s modified or maybe that’s similar, any additional color you can give us around the hotel book? Thanks.

So, Bill, do you want to kick off on the LTV side and then I will give some details.

Sure. I mean, our weighted average LTV on the commercial hospitality book is 49%, hasn’t moved from last quarter. We haven’t been doing updated appraisals unless they are necessary as part of underwriting, because at this point appraisal estimates are like the rest of us. No one’s quite sure when things will turn around. So what we do is we make appraisal reduction estimates when we go through underwriting just based on picking a factor for the timing of stabilization. So it’s 49% is the number on that.

So...

Okay. And then do you have an LTV too on the $89 million piece that’s modified?

So I have I have a few here. I will run through a few of the large ones. So in that hotel book in the $89 million, there are 21 loans on 11 properties, Laurie. There are $32 million in the first deferment, $35 million in the second deferment and $22 million in the third deferment, the $22 million we talked about earlier.

Perfect.

Almost all of them remain on P&I, excuse me, P&I deferment, a couple of them are on interest-only or principal-only, but $87.5 million of the $89.4 million is on P&I deferment. Obviously, this is a book that’s going to take a while. Some of the larger deals, I am just looking at four or five of them, one in Connecticut, 54% loan-to-value, another one in Connecticut, that’s kind of the driver is the casinos, that’s 61% loan-to-value, one Residence Inn, that is a 62% loan-to-value, that one actually had 81% occupancy in the month of August, but it was -- we think it was due to some environmental issues that caused people to have to leave their homes. We have got another Hampton Inn that’s got a 65% loan-to-value that most of the drivers are corporate -- it’s 40% corporate 60% leisure. So that’s some color. I -- we have details on obviously on the whole 11 or very close to these customers. But I think, it’s just plain going to take a while for these things to get back to the point where they are. They hit their kind of we think 40% -- somewhere between 40% and 50% to breakeven on the occupancy side and they are just not there yet.

Okay. Okay. Same question on the retail side, do you have a refreshed LTV on the retail book? And then can you just comment a little bit, I guess, your total retail is $404 million, but I guess, how much of that $404 million or even how much of the creep is of $336 million is affected by movie theater chains or just how you are thinking about that?

Yeah. So, Bill, you jump in if I am wrong on this, but I know of three properties total that have movie theaters on them and there -- two of them are I think solely movie theaters and one of them is a movie theater as part of a larger retail development. That retail development is food anchored. It also happens to have a gym in it, which is another type of tenant that’s not doing so well. So we are -- well, obviously, those are going to be on longer deferments. It’s going to take a while for movie theaters to be rationalized and figured out whether they are going to come back as they were or in some different shape, Laurie, I just -- I don’t know, it’s hard to tell. A lot of our retail is food anchored, some of our larger ones are our food anchors and those -- the ones that are mostly relying on their food anchor is look like they are going to come off the deferment and we have got a number of deferments that are rolling in November. Some of these retail deals will roll in in November and have told us they don’t need additional deferments. Let’s see, Bill, on the LTV side.

Yeah. That was -- the weighted average for retail is 57%.

Okay. Great. And then, just -- do you have the dollar amount of the three properties that you flag with the movie theaters -- your dollar amount of exposure on that?

Bill, do you have that? I don’t have it in front of me Laurie. We can get back to you on that.

Okay. I can follow up with you offline. And then also just to clarify when you say food anchored, that’s the grocery store, right?

Yes.

Yeah. Right.

Okay. Okay. Okay. That’s helpful. And then just going back a little bit to the capital question, I mean, your capital certainly looks very healthy and to your point that you don’t need additional tools, obviously, you have got some in place. But can you talk a little bit about how you think about buybacks here and what you are thinking in terms of where you would feel comfortable revisiting that or is it a question of following your modifications. Is it a question of credit? Is it, I mean, just how you are thinking about that?

Yeah. Sorry, we think of it mainly as, I guess, as a function of our stock price, and as you know, we did dabble into this in the first quarter and --but stopped once COVID hit. I don’t think -- I wouldn’t say, we have a big appetite at our current price to be buying stock at this point. Like I said, we have done it. I think we would like to see just a little bit more clarity on the economy before we were to start thinking about it seriously again. So I wouldn’t expect to see anything on that front.

Okay. Okay. And then last question since you mentioned acquisitions or the possibility of acquisitions. Can you just talk a little bit about how you are thinking about acquisitions and do you mean AUA-type acquisitions or do you mean Bank acquisitions?

Yeah. Ned, I will turn it to you. I guess, I would just say, Laurie, it could be both and we would be looking to make an opportunistic deal with it if one were to present itself. And Ned, I don’t know if you want to elaborate on that.

No. I think that’s right. We are always looking for wealth opportunities, Laurie. And if a Bank deal became available and made sense, I think, we are putting ourselves in a position with all that we have done to take advantage of that, if it happened to become available. I think it’s a -- our outlook hasn’t changed much. Price has to be right. We have got to -- we got to convince ourselves that we can do something with it once we own it and it’s got to solve for a problem. Obviously, our -- I shouldn’t say, obviously. We still think deposit growth is our number one strategic challenge and finding ways to grow deposits includes Bank M&A, if it becomes available to right -- under the right terms.

Okay. Thanks.

And Laurie, this is Mark.

Please go ahead.

I will comment a little bit on the wealth M&A side of the house. We are always very active in seeking opportunities and monitoring the market. As you are probably aware, there is a lot of interest in alternative to margin based revenues and so price and value, which is a interest an important gating factor for us is something that we are -- you have to you have to make sure that you are not paying above what’s useful from an internal rate of current perspective even if market is leading you there. So definitely more competitive pressures, more buyers compared to just non -- non-Bank buyers pushing up prices in that area, but we are actively monitoring and would be ready to pull a trigger on those if we found one that made sense.

Great. Thank you very much.

Hey, Laurie. I think Bill has some information on that theater question that you had. We can give you that now. Bill?

We have a total of five loans three relationships that have theaters in them, totaling about $22 million in outstanding value. Of that, most of it, probably about 75% of it, the theater is just one-ten among others, so it might be 8% to 10% of the total rent. There is one relationship where theaters are the only tenant and so that’s again a much smaller part of the $22 million. But those are obviously the ones are going to have a bigger impact, given structurally no one’s quite sure where their industry is going. So that get at what you wanted, Laurie?

Apologies. Laurie has left the queue. And at this time …

Okay.

…I am showing no further questions.

Okay.

I’d like to turn the call back over to Mr. Handy for any final remarks.

Well, yeah, thank you everyone for participating on today’s call and for your continued interest and support of the Bank. We surely appreciate it and I hope everyone is well and stays well, and we will certainly talk to you soon. So thank you everybody.

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.