Categories Earnings Call Transcripts, Finance

Washington Trust Bancorp (WASH) Q3 2020 Earnings Call Transcript

WASH Earnings Call - Final Transcript

Washington Trust Bancorp  (NASDAQ: WASH) Q3 2020 earnings call dated Oct. 19, 2020

Corporate Participants:

Elizabeth B. EckelSenior Vice President, Chief Marketing & Corporate Communications Officer

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Mark K.W. GimPresident and Chief Operating Officer, The Washington Trust Company

William K. Wray Senior Executive Vice President and Chief Risk Officer

Analysts:

Mark FitzgibbonPiper Sandler — Analyst

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

Erik ZwickBoenning & Scattergood Inc. — Analyst

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

Presentation:

Operator

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.

Elizabeth B. EckelSenior Vice President, Chief Marketing & Corporate Communications Officer

Thank you, Rocco. Good morning, everyone, and welcome to Washington Trust, Inc.’s third quarter 2020 conference call. We’d 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 the complete safe harbor statement and other pubic 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; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer, and they will review our second quarter financial performance — 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’m now pleased to introduce Washington Trust’s Chairman and CEO, Ned Handy. Ned?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

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’ll review the quarter’s highlights, and Ron Ohsberg will discuss our financial performance. We will then answer any questions you may have about the third quarter or our outlook for the remainder of 2020. I’m pleased to report that Washington Trust posted net income of $18.3 million or $1.06 per diluted share for the quarter ended September 30, 2020.

Our key performance measures remain 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’ve experienced so far this year. Near record low interest rates, financial market volatility, social and political unrest and a global pandemic.

Fortunately, Washington Trust’s 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 30, 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 that our lobbies are open, we’ve 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’m 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 was 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’ve been pleased to speak with borrowers who are grateful for the support and attention that we’ve 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 was triple 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’ve 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’ve 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 front lines to the back offices as they’ve worked tirelessly to ensure homebuyers’ needs were met while producing record results.

Our mortgage pipeline remains strong going into the fourth quarter. So we believe volumes should continue at a good pace through year-end. Wealth management assets under administration amounted to $6.4 billion at September 30, 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 clients safely in person or through online conferencing to ensure their financial plans and investments are in order.

I’ll now turn the discussion over to Ron for a more in-depth review of our financial performance. Ron?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

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 $1.06 per diluted share for the third quarter. This compared to $21 million and $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, in total $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, while 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 loans sold to the secondary market.

Mortgage loans sold totaled 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 in net unrealized mortgage gains, reflecting a lower mortgage pipeline and a corresponding decline in the fair value of mortgage loan commitments as of September 30. Year-to-date, net mortgage banking revenues of $33.3 million are triple to 2019 levels.

Our mortgage origination pipeline at September 30 was about $372 million, down about 9% since June 30, 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 $281,000 decrease in transaction-based revenues. The increase in asset-based 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 30 end-of-period balance of assets under administration totaled $6.4 billion, up by $257 million or 4% from June 30, 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% from the second 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 costs, which is a contra 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 and professional fees were up $593,000, mainly due to various matters arising in the normal course of business. Also included here are the cost of obtaining a bond rating and refreshing our shelf registration. Outsourced services expense was up $376,000, mainly reflecting volume-related increases in 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 30, 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 by $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 30, 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 shareholders’ equity was $527 million at September 30, 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 30. Intangible 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 9. Finally, I’d like to update you on our COVID-19 lending impact. Loan deferments as of October 14, 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 30, we are reporting 1,770 PPP loans totaling $217 million. The average PPP loan size as of September 30 was approximately $122,000. Unamortized fees on PPP loans, net of underwriting costs, amounted to approximately $5.1 million at September 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. 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.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Thank you, Ron. We’re pleased with our third quarter performance in light of all the challenges we’ve faced, and we know we’re 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’ll continue to do what is in the best interest 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.

Questions and Answers:

Operator

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

Mark FitzgibbonPiper Sandler — Analyst

Hey, guys. Good morning.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Good morning Mark.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Hey, Mark.

Mark FitzgibbonPiper Sandler — Analyst

Yeah. A quick question on the deferrals. Do you have a sense for what percentage of the loans on deferral are in their first 90-day versus sort of second 90-day deferral?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

We do. If you wait one second, I’ll give you that. So in 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 the — that’s total CRE book. On the C&I side, 77% are in the first deferment and 23% are in the second, they’re not in a third deferment at this point.

Mark FitzgibbonPiper Sandler — Analyst

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

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Yes. We will definitely see a decline. And I know, Bill, you’ve done some work on that and Ron. We expect to go from here to something in the 4% range around year-end, and we’ve got a pretty good handle on what’s going to need. The hospitality book market will need a little bit longer. There are a couple of retail deals that we know we’ll 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’ve got a good handle on what’s included and what will go beyond 12/31. But I think we’re going to be in really good shape, certainly by year-end.

Mark FitzgibbonPiper Sandler — Analyst

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 on those. I’m just curious kind of when it fall?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. 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 some additional lift on the margin as those liabilities reprice.

Mark FitzgibbonPiper Sandler — Analyst

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

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

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

Mark FitzgibbonPiper Sandler — Analyst

I’m sorry, $340 million. Got you.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

And the $340 million at 1.1%, 1.2%.

Mark FitzgibbonPiper Sandler — Analyst

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 you still see some continued market decline?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

No, I think we see some — yes, we’ll see some expansion, Mark. It will be somewhere between $235 million and $240 million. And that’s exclusive of any PPP forgiveness. At this point, we’re not even factoring that in because the timing of that has been so uncertain. So internally, we’re thinking that’s a Q1 event, but we’ll see what happens.

Mark FitzgibbonPiper Sandler — Analyst

Okay. And then lastly, on the wealth management business, maybe this is for Mark. There was look 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?

Mark K.W. GimPresident and Chief Operating Officer, The Washington Trust Company

Yes, Mark, this is Mark. That is really routine distributions, more than anything else. We’ve — the outflows from those employees at Weston 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.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

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

Mark FitzgibbonPiper Sandler — Analyst

Great. Thank you.

Operator

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

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

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

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Good morning, Damon.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Hi, Damon.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

My first question, I just wanted to circle back on the numbers you gave for the CRE deferrals. I think you said there’s 56% that are still on their first deferral period. And what were the other two?

Mark K.W. GimPresident and Chief Operating Officer, The Washington Trust Company

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

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

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

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

So I’m 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 — or three 90-day deferment periods. It could be a 180 and then 90. 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’re going for P&I to start with, we’ll try and modify that to principal only. So I don’t have the specifics in front of me, Damon, but I would guess that, that probably captures. Bill. I don’t know if you have other color on that.

William K. WraySenior Executive Vice President and Chief Risk Officer

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’s a lot less uncertainty than there used to be, and we’re very much focused on the ones that are going to need some help to get them through the winter. And that’s why there’s a concentration on the hospitality side. But we’re doing deferments to borrowers who are sound and to collateral that are 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.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

And Damon, I’ll just add, I’ve just looked it up. And that — the $21 million or that 33%, I think — no, excuse me, the — it’s $21 million in dollars, and it’s 9% of the CRE deferrals, they’re all hospitality deals. They’re just going to take a little longer to come back.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

Okay. 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. Are you guys still feeling comfortable with that based on the way you’ve interpreted CECL and whatnot?

William K. WraySenior Executive Vice President and Chief Risk Officer

Yes, yes, Damon. We’ve obviously have another quarter under our belt now. We’ve seen the deferments come down. We’ve 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.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

Okay. So the last few quarters, you’ve averaged — well, $2.2 million and $1.3 million. So do you think kind of somewhere in that range as you go forward? Is this reasonable?

William K. WraySenior Executive Vice President and Chief Risk Officer

Yes.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

Okay. 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 tick a little bit higher as you start to incur some costs with the new branch you’re putting on?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. We have $50,000 in the fourth quarter for the new branch. I think 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’ve seen all year.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

Got it. Okay. That’s — I guess my last question, regarding capital. I think you guys mentioned you had updated your shelf 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, three, four months. Just kind of wonder what your thoughts were on that.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. 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’re not exactly sure what we would do with that capital, to be honest. So we have the tools in place in 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.

Damon DelMonteKeefe Bruyette & Woods Inc. — Analyst

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

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Thanks, Damon.

Operator

Our next question today comes from Erik Zwick with Boenning and Scattergood. Please go ahead.

Erik ZwickBoenning & Scattergood Inc. — Analyst

Good morning, everyone.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Good morning Erik.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Hi, Erik.

Mark K.W. GimPresident and Chief Operating Officer, The Washington Trust Company

Good morning Erik.

Erik ZwickBoenning & Scattergood Inc. — Analyst

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 the 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?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. Yes, I think so.

Erik ZwickBoenning & Scattergood Inc. — Analyst

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

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes, it was between $100,000 and $150,000.

Erik ZwickBoenning & Scattergood Inc. — Analyst

And then just thinking about kind of the loan loss provisioning as well. And you kind of gave me the comment that 4Q could be in line with the 2Q and 3Q levels. And I guess, it sounds like you’re pretty confident with — if 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’m 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 mark in the 3Q. So just kind of curious on those two fronts, organic loan growth and how that might impact provisioning as well.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. So Ned, maybe I’ll let you 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. And the organic growth piece, we definitely have seen our markets cooldown on the commercial side. We may be looking to add some residential, if that’s possible. But yes. And Ned, I don’t know if you have any commentary you want to add on that?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Yes. I would say on the loan growth side, the commercial pipelines are okay. They’re down a little bit from normal times, as one might expect. I would say we’ll see moderate growth in the fourth quarter. I think we’ll kind of hit our low mid-single-digit growth for the year. But last quarter, obviously, it was low. Next quarter, it will be, I think, low. The originations are okay. We’re going to have some payoffs 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 expense of taking gains. So we always consider that option. But I think — I would say that loan growth in general will be kind of like the third quarter of kind of be flat.

Erik ZwickBoenning & Scattergood Inc. — Analyst

Got it. Okay. And just switching gears to credit. You mentioned as you’re doing the second and third round deferrals, you’re doing full underwriting on those loans and those relationships. 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?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Bill, do you want to talk about the sort of the COVID watchlist process and kind of how we’re handling the incremental deferments?

William K. WraySenior Executive Vice President and Chief Risk Officer

Sure, Ned. So from the beginning, we obviously had a watchlist process already that dealt with our criticized and classified assets and certain lower grade pass rating assets. We started a COVID watchlist process where every month, we look at all loans that are in deferments that are above $500,000. We have 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, etc.

Once — we also follow loans on the watchlist, once they’re out of deferment until they’ve made three payments. So we don’t drop anything off the COVID watchlist until they’ve shown that they can operate successfully post-deferment. And so now that watchlist has become substantially narrowed down as deferments roll-off, which is why we feel comfortable with our thoughts on where we’re 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’re very closely tied to our borrowers and to the collateral as we make these next deferments when they’re needed.

And as we’ve 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’re very focused on the dozens of loans that are going to continue to be in deferment. We know why they’re in deferment. They’ve been underwritten.

There are committee-level decisions being made on these. And again, we feel — obviously, we’d rather have them fully paying current 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’re working with the right people. We know the sponsors and the borrowers are the right ones to be at the helm on these.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

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

William K. WraySenior Executive Vice President and Chief Risk Officer

Right. And I should have mentioned that we didn’t — we’ve had only nominal increases to special mention. And I would say we probably move 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’s been very little move into criticized assets.

Erik ZwickBoenning & Scattergood Inc. — Analyst

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 when those are forgiven has been pushed back. I know a couple of months ago, there were some initiatives from some of the lobbyists to push for automatic forgiveness. And I think the number was $150,000 in loan value or less. I guess, have you heard anything similar? Or is your expectation now that all loans will have to go through the formal forgiveness process?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Yes. Bill has the pleasure of managing our whole forgiveness process. So I’ll 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?

William K. WraySenior Executive Vice President and Chief Risk Officer

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 or 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 end up doing something at $150,000 because that would cover about 85% of our loan accounts. Meanwhile, we’ve invited over 60% of our total dollar volume into the forgiveness process. That represents less than 10% of the borrowers.

So we’re starting from the top. We process them through our review process. We’re making submissions to the SBA. So far, we have one tiny deal, a $15,000 deal that’s gone all the way through and been funded. So our pipeline is up. It’s active. We’re starting with the larger borrowers because they know that’s where the focus is going to have to be. And we’re hoping that, that $50,000 threshold that’s been laid out by the SBA may get extended to $150,000, but we’re certainly not counting on it at this point.

Erik ZwickBoenning & Scattergood Inc. — Analyst

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 full year 2021. And was there a 4Q number as well? I think that’s where I might have missed.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. The 4Q number is 21.9%.

Erik ZwickBoenning & Scattergood Inc. — Analyst

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

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Thanks, Erik.

William K. WraySenior Executive Vice President and Chief Risk Officer

Thanks, Erik.

Operator

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

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

Yeah. Hi. Thanks. Good morning.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Good morning, Laurie.

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Laurie.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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?

William K. WraySenior Executive Vice President and Chief Risk Officer

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

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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

William K. WraySenior Executive Vice President and Chief Risk Officer

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’ve 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.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. That’s as of September 30.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

As of September 30. Okay. Perfect. Okay. And then just on two loan books, I was hoping for a little more color. On the hotel book, 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 similar? Any additional color you can give us around the hotel book?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

So Bill, do you want to kick off on the LTV side, and then I’ll give some details?

William K. WraySenior Executive Vice President and Chief Risk Officer

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’re necessary as part of underwriting because at this point, appraisal estimates are like the rest of this. 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 49% is the number on that.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

So I have a few here. I’ll run through a few of the large ones. So in that hotel book, 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. That’s the $22 million we talked about earlier. Almost all of them remain on 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’m 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, a residence in 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’ve got another Hampton, that’s got a 65% loan-to-value that most of the drivers are corporate — it’s 40% corporate, it’s 60% leisure. So that’s some color. We have details on, obviously, on all 11, we’re 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 hit their kind of, we think, 40% — somewhere between 40% and 50% to breakeven on the occupancy side, and they’re just not there yet.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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 CRE piece of $336 million is affected by movie theater chains or just how you’re thinking about that?

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Yes. So Bill, you jump in if I’m wrong on this, but I know of three properties total that have movie theaters on them. And the 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’re 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’re 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 anchors, look like they’re going to come off to deferment, and we’ve got a number of deferments that are rolling in November. Some of these retail deals will roll in November and have told us they don’t need additional deferments. Let’s see, Bill, on the LTV side?

William K. WraySenior Executive Vice President and Chief Risk Officer

Yes. That was — the weighted average for retail is 57%.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

Okay. Great. And then just do you have the dollar amount of the three properties that you flagged with the movie theaters? Your dollar amount of exposure on that?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

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

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. Yes, right.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

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’ve got them in place. But can you talk a little bit about how you think about buybacks here? And what you’re 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 a — I mean just how you’re thinking about that?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. So Laurie, we think of it maybe as a, I guess, as a function of our stock price. And as you know, we did dabble into this in the first quarter and kind of 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’d 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.

Laurie H. HunsickerCompass Pt Rch & Trading LLC — Analyst

Okay. And then last question. Since you mentioned acquisitions or the possibility of acquisitions, can you just talk a little bit about how you’re thinking about acquisitions? And do you mean AUA-type acquisitions? Or do you mean bank acquisitions?

Ronald S. OhsbergSenior Executive Vice President, Chief Financial Officer and Treasurer

Yes. Ned, I’ll 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 if one were to present itself. And Ned, I don’t know if you want to elaborate on that.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

No, I think that’s right. We’re always looking for wealth opportunities, Laurie. And if a bank deal became available and made sense, I think we’re putting ourselves in a position with all that we’ve done to take advantage of that if it happen to become available. I think it’s a — our outlook hasn’t changed much. The price has to be right. We’ve 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 1 strategic challenge and finding ways to grow deposits includes bank M&A, if it becomes available under the right terms.

Mark K.W. GimPresident and Chief Operating Officer, The Washington Trust Company

And Laurie, this is Mark. I’ll 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’re probably aware, there is a lot of interest in alternative to margin-based revenues. And so price and value, which is an important gating factor for us, is something that we are — you have to make sure that you are not paying above what’s useful from an internal rate of return perspective, even if market is leading you there. So definitely more competitive pressures, more buyers compared to just 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.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

Laurie, I think Bill has some information on the theater question that you asked. We can give you that now.

William K. WraySenior Executive Vice President and Chief Risk Officer

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 0.1 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 that are going to have a bigger impact given structurally, no one’s quite sure where the industry is going. Does that get at what you wanted, Laurie?

Operator

Apologies. Laurie has left the queue. At this time, I’m showing no further questions, I’d like to turn the call back over to Mr. Handy for any final remarks.

Edward O. HandyChairman of the Board of Directors and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

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