Washington Trust Bancorp Inc (WASH) 2020 Q2 法說會逐字稿

Good morning, and welcome to Washington Trust Bancorp Inc.'s conference call. My name is Chad, and I'll 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?

Thank you, Chad. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Second 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 today's 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 site at ir.washtrust.com to visit our 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, Chief Financial Officer and Treasurer, will review our second quarter performance. At the conclusion of their remarks, Mark Gim, President and Chief Operating Officer; and Bill Wray, our Senior Executive Vice President and Chief Risk Officer, will join Ned and Ron for question and answer session.

I'm now pleased to introduce Washington Trust Chairman and CEO, Ned Handy. Ned?

Mr. Handy, perhaps your line is muted on your end. We're unable to hear you.

Good morning, and thank you for joining us on today's call. I apologize I was on mute. We hope you and your families are doing well and have managed to remain healthy during this ongoing pandemic.

Yesterday, we released our second quarter earnings, and I'm pleased to report that Washington Trust posted very strong results, with net income of $21 million or $1.21 per diluted share. This is a significant increase from $11.9 million in net income or $0.68 per diluted share earned in the first quarter of 2020.

With solid business continuity and pandemic plans in place, we were as prepared as we could be for these unprecedented events, but our performance was a testament to our people and our unwavering care for our customers. On July 6, we reopened our branch lobbies to limited foot traffic and in-person meetings. Our frontline retail bankers have kept the branch operation running without pause and have been steadfast in their support of each other and our customers.

Our noncustomer-facing employees, who have been working remotely, are gradually beginning to transition back to their bank offices. We've done an outstanding job of keeping everyone healthy while maintaining service and production levels, so we will be cautious with our transition plans. We continue to enforce strict health and safety guidelines to ensure we are maintaining a safe workplace and to help mitigate the risk of any future spread of COVID-19.

As we continue to manage through this multifaceted period of health, social, economic and political unrest, the depth of which none of us have seen, we take comfort and careful planning, deliberate execution and common focus on being a part of an expedited resolution to the issues we all face. In addition to highlighting the dedication of our people, our second quarter performance also once again demonstrated how our diversified business model enables us to generate earnings in a challenging environment.

Let me review some of the quarter's highlights. Total loans amounted to $4.3 billion at June 30, 2020, an increase of 5% from March 31, 2020, and up 15% from a year ago. Loan growth in the second quarter was primarily due to the origination of the small business administration's Paycheck Protection Plan loans. Washington Trust accepted applications from both existing customers and noncustomers. Washington Trust was one of Rhode Island's top PPP lenders securing SPA authorizations for more than 1,700 borrowers, totaling more than $220 million. According to a recent article in the Providence Journal, the Rhode Island SPA estimates that PPP funding has supported approximately 200,000 jobs in the state, covering roughly 83% of the state's small business payroll expenses. We're now working with eligible PPP borrowers to prepare them for the SPA's forgiveness process, once rules are final and guidance is in place. We also continue to actively support our commercial borrower base with deferments and other payment relief. Details of our COVID-19 relief efforts are contained in our earnings press release, and we'll be happy to address this further in the Q&A session.

Once again, I must acknowledge the efforts of our employees. In addition to our commercial lending team and retail branch staff, we had 70 employees from different departments throughout the bank pitching to help with the PPP program. As you know, after the PPP program was introduced in April, the rules and guidance kept changing. Our team worked closely with both existing customers and new borrowers to answer questions and help them understand the program and guide them through the application process.

Aside from PPP lending, though, overall commercial loan demand and our commercial pipeline were down during the quarter, as there's still a great deal of economic uncertainty in the marketplace. Residential mortgage demand is a different story, and our mortgage banking area achieved record levels in the second quarter. Low interest rates spurred both refinance and purchase activity, resulting in an all-time high mortgage origination volume and sales gains. Mortgage revenues, which reached a quarterly record of $14.9 million, helped to offset margin pressure and proved to be a key source of revenue during the quarter.

I can't say enough about our retail lending team, the mortgage originators, the underwriters, the loan operations staff and the secondary market group, everyone worked long hours, some from their bank offices, others from remote locations, and still were able to originate a record level of mortgages safely and efficiently.

We've recruited employees from other areas of the bank to assist our retail lending team, and they'll be needed going forward as the demand is still strong. Our mortgage pipeline has increased from the prior quarter, so our team has its work cut out for them in the months ahead.

Total deposits amounted to $4.1 billion at June 30, 2020, up 11% from the first quarter. End market deposits increased by 9% from the previous quarter, mainly due to increased noninterest-bearing demand deposit balances and now account balances. A good portion of the new deposit growth was related to PPP loans, as we required customers and noncustomers to deposit PPP funds into the Washington Trust deposit account. We do expect some deposit outflow as the businesses begin to use the PPP funding. We've been pleased to be able to assist many noncustomers with PPP loans. They're grateful for the personal attention and service they received during the process. We now consider them new customers and hope to retain and build relationships with them over time.

Turning to wealth management. Wealth management assets under administration increased to $6.1 billion at June 30, 2020, up from the first quarter due to market appreciation and new business generation. Over the past several months, our wealth management team has been in close communications with clients, providing regular financial market updates and conducting online video conferences to advise and guide them through these uncertain times. As you may recall, in 2019, we introduced a Private Clients initiative to help uncover new wealth management opportunities. The Private Clients team has been working closely with our commercial and mortgage lending teams to introduce high net worth clients to our wealth management business. We're encouraged with their efforts to date, as they've been a meaningful contributor to net AUM growth.

Before I ask Ron to provide his financial review, I want to assure you all that we remain very focused on proactively managing credit across the company and I'm building and preserving capital as we navigate the uncertain road ahead.

I'll now turn to Ron and ask him to provide a financial review of our results. Ron?

Thank you, Ned. Good morning, everyone, and thank you for joining us on the call today. I'll review our second quarter 2020 results in more detail.

As Ned mentioned, net income was $21 million or $1.21 per diluted share for the second quarter as compared to $11.9 million and $0.68 for the first quarter. Net interest income of $30.9 million decreased by $1.7 million or 5% from the preceding quarter. The margin was 2.31% compared to $2.61 in the first quarter. Fee income from prepayment penalties was modest and totaled $21,000 compared to $125,000 in the first quarter. Net interest income and margin were negatively affected by the decline in LIBOR during the quarter as compared with Q1.

The average balance of interest-earning assets increased by $357 million on a linked quarter basis. Average loans were up by $261 million and average cash and short-term investments were up by $74 million. The yield on earning assets decreased by 58 basis points from the first quarter to 3.18%.

On the funding side, average in-market deposits rose by $94 million while the average balance of wholesale funding increased by $115 million. The cost of interest-bearing liabilities declined by 33 basis points to 1.08%. Noninterest income comprised 46% of total revenues in the quarter and amounted to $26.3 million, up by $6.4 million or 32% from the first quarter. Our mortgage banking revenues totaled $14.9 million, a record high. The linked quarter increase of $8.8 million or 144% included an increase in net realized gains, reflecting both a higher sales volume as well as a higher sales yield on loans sold to the secondary market. Mortgage loans sold totaled an all-time quarterly high of $305 million in the second quarter, up by $143 million or 88% from the first quarter. This was also up by $168 million or 122% from the second quarter of 2019.

Net unrealized mortgage gains also increased from the preceding quarter, reflecting growth in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments as of June 30. Our mortgage origination pipeline at June 30 was about $410 million and up about 25% from the end of March. Wealth management revenues were $8.6 million, down by $84,000 or 1%. This was due to a $199,000 or 2% decline in asset-based revenues, which were partially offset by an increase in transaction-based revenues of $115,000. The decline in asset-based revenues correlated with a decline in the average balance of assets under administration, which decreased by $157 million or 3%. The June 30 end of period balance of assets under administration totaled $6.1 million and was up by $801 million or 15% from March 31. This was due to a recovery in financial markets during the quarter as well as net client asset inflows.

Loan-related derivative income amounted to $99,000. This was down by $2.4 million from the first quarter, reflecting a lower volume of commercial borrower interest rate swap transactions as well as unusually high activity in the first quarter.

Income from bank-owned life insurance totaled $791,000, up by $227,000 or 40%. Included in the second quarter was a $229,000 nontaxable gain due to the receipt of life insurance proceeds. Now let me turn to noninterest expenses. Total expenses were down by $2 million or 6% from the first quarter. The linked quarter change was impacted by the following items. In the first quarter, we established a contingent loss reserve within other noninterest expenses of approximately $800,000. This matter was resolved in the second quarter and $170,000 of unnecessary reserves were reversed. Excluding the impact of this item, noninterest expenses for the second quarter decreased by $1 million or 3% on a linked quarter basis.

Salaries and employee benefits expense was essentially flat as increased mortgage commission expense was offset by approximately $1.1 million of deferred labor costs, including $1 million associated with the PPP loan originations. The PPP deferred labor costs, our contra expense and are nonrecurring. Outsourced services expense was down $216,000, mainly reflecting volume-related decreases in third-party processing costs related to customer swap transactions.

FDIC insurance costs were up by $252,000 from the preceding quarter, largely due to growth in average assets, mainly related to the PPP loans. We expect quarterly expenses to approximate $550,000 in both the third and fourth quarter of 2020.

Income tax expense totaled $5.5 million. The effective tax rate for the second quarter was 20.9%, unchanged from the prior quarter, and we currently expect our full year effective tax rate to be approximately 21% for 2020.

Turning to the balance sheet. Total loans were up by $197 million or 5% compared to March 31 and up by $557 million or 15% from a year ago. Total commercial loans were up by $210 million or 9% in the second quarter. The increase mainly reflected $220 million of PPP originations. Also a single $25 million line advance that was made at the end of the first quarter was repaid during the second quarter. Residential loans decreased by $2 million and consumer loans were down by $11 million.

End market deposits were up by $299 million or 9% and by $551 million or 18% from a year ago. We estimate approximately $175 million of the increases associated with PPP loans, which are expected to be temporary.

Wholesale brokered CDs were up by $97 million and FHLB borrowings were down by $193 million. We also elected to participate in the PPP liquidity facility with the Fed. At June 30, advances under this program totaled $39 million. Nonperforming assets declined by $1.9 million from the end of Q1. Nonaccruing loans were 0.37% of total loans compared to 0.44% at the end of the first quarter. Loans past due 30 days or more were 0.34% of total loans compared to 0.4% in Q1. Net charge-offs of $308,000 were recognized in Q2 compared to $623,000 in Q1. The allowance for credit losses on loans totaled $41.4 million or 97 basis points of total loans and provided NPL coverage of 259%.

Excluding PPP loans, the allowance coverage was 101 basis points. The provision for credit losses was $2.2 million compared to $7 million recorded in Q1. We use the baseline national unemployment rate forecast from FactSet, the econometric data provider used by our wealth management division for our CECL modeling. Continued uncertainty regarding the severity and duration of the pandemic and related economic effects remains, and it is unclear what -- to what extent various government initiatives will be able to mitigate future credit losses.

Total shareholders' equity was $520 million at June 30, up by $11.6 million from the end of the first quarter. Washington Trust remains well capitalized. The total risk-based capital ratio was 12.78% compared to 12.42% at March 31. The tangible equity to tangible assets ratio was 7.74% compared to 7.89%. This reflected the increase in total assets associated with PPP lending, which is government guaranteed and anticipated to be relatively short term.

Finally, I'd like -- sorry, our second quarter dividend declaration of $0.51 per share was paid on July 10. And finally, I'd like to update you on our COVID-19 lending. Loan deferments as of June 30 totaled $652 million or 15% of outstandings. This includes $447 million of CRE, $74 million of C&I, $122 million of residential and $9 million of consumer. A breakdown of commercial deferments by industry category is presented in a table in our earnings release. We will be happy to get into the details during Q&A.

Also as of June 30, we have underwritten 1,741 PPP loans totaling $220 million at an average size of 127,000. Gross fees related to PPP loans total about $7.4 million or 3.4% of originations, and these are expected to be -- which will be offset by projected underwriting costs, which include $1 million of the internal deferred labor costs that I mentioned previously. The timing of the recognition of net fees into the margin will depend upon the pace of loan forgiveness as approved by the SPA.

And at this time, I will turn the call back to Ned.

Thank you, Ron. Washington Trust response to the COVID-19 pandemic and its extended implications has been thorough, and I'm tremendously proud of the commitment, spirit of teamwork and genuine sense of caring that our team has displayed. As we move forward, there is still a great deal of uncertainty regarding the severity and duration of the COVID-19 pandemic and its related economic effects. The impact on consumers and many businesses will likely take time to fully manifest due to the powerful effect of various government stimulus programs.

While we are cautiously optimistic about what lies ahead, there are many hurdles, challenges and unknowns. We believe Washington Trust is well positioned with a strong capital position and ample sources of liquidity to handle the challenges that lie ahead during these unprecedented times. We thank you for your continued support of Washington Trust and hope you'll stay with us as we ride out this storm together. This concludes our prepared remarks. And now, Chad, please open the phone lines to begin our Q&A session.

(Operator Instructions) And the first question will come from Mark Fitzgibbon with Piper Sandler.

A couple of questions related to modeling. First, Ron, cash balances have been up a lot year-over-year. When do you think you'll see cash balances coming back down? Will we see a much impact in 3Q?

Probably not, Mark. The cash balance is largely a function of our swap book. So with our dealer counter parties, we're kind of out of the money. So that's -- a lot of that is just posted cash collateral.

Okay. And then secondly, and I heard what you said about the PPP impact of loan forgiveness, but excluding the impact of PPP, does the core margin sort of hang around at the current level, or does -- do we see an improvement in the coming quarter?

Yes. So LIBOR ratcheted down during the quarter, so I would say our asset yields bottomed out in the month of June. We're still seeing some investment payoffs and resi payoffs, which as we replenish those, they kind of come back on at a lower yield. So those 2 things will drag down asset yields a little bit. But we do think that we have quite a bit -- we know we have quite a bit of variable liabilities that we'll reprice in the second half of the year. So I would expect kind of the core margin for the third quarter to be comparable to the second quarter, and then we should see some margin expansion in the fourth quarter.

Okay. And then your mortgage pipelines, could you share with us the size today?

Yes. I mean, it's over $400 million right now, Mark, which is higher than it was at the end of March.

Okay. And then we saw some pretty positive signs in the wealth management business there with client inflows, I think it was $130 million. What's driving that? Is it new or existing clients? And do you anticipate we'll continue to see good flows in 3Q and beyond?

Yes. Mark, this is Mark here, I'll take that question. The net inflows were driven by a combination of high net worth individuals and by one larger institutional account at the end of the quarter, which came in from the Private Clients Group. These are, by and large, from new clients, although there are always additions from existing clients. And we're optimistic that, that momentum will continue into Q3. Although, as you can imagine, business development in the COVID era has been a little bit more challenging. So pipelines were strong going into the end of the second quarter. We're working to refill those going into the third, but I think we can safely say that the majority of net asset inflows were due to new customers.

Okay. And then given the strong mortgage banking income that you guys had this quarter, I guess I'm curious, why not push some of that into the provision, given the uncertainties around the current environment?

Yes. So Mark, I mean, we -- first and foremost, we follow GAAP, and we're following our allowance methodology that we've installed under CECL. We've -- we're using the same kind of unemployment data that everyone is using. I would say, Mark, our provision is a function of the underwriting that we're doing and the nature of the composition of the portfolio that we have. So we don't have credit card, we don't have car loans, we don't have student loans. There is definitely uncertainty with regard to where the economy is going. But -- and Ned and Bill, I'll let you jump in on this, too, in terms of just what we're doing in terms of customer outreach and understanding our portfolio, but at this point in time, we feel comfortable with the level of reserves that we're at, which are approximately 4x the worst loss experience we had at the depths of the financial crisis. So time will tell what happens when we come out of the deferral process. But for the moment, we feel comfortable with the reserves where they are. And Ned and Bill, again, you guys can kind of talk about how we're monitoring the portfolios.

Yes. Mark, I'll go first, Bill. But look, we're -- we get the question. We have a clean portfolio that has performed well in the quarter. We have a lot of loans on deferment. I'd say from a process standpoint, we are all over those, and we are talking to those customers weekly and we have now set up a system of kind of color coding them to predict whether additional deferments will be requested and staying on top of how -- either on a retail deal, how underlying tenants are doing or we've got a hospitality portfolio that we're watching weekly for signs of progress. And so some of those will require additional deferments and will be accommodative, but we're spending all of our credit time watching the deferments, watching -- managing through the forgiveness process on the PPP program. The pipelines on the commercial side are down, I think, at least part because we're focused on internal things and staying on top of the credit book. And we think we have enough capital and earnings generation power to face whatever comes our way as the facts suggest we need to do something more. Right now, the facts as we see them, and I'll let Bill speak in more specifics, the facts as we see them suggest that the reserve we've got in place is the right one. Bill, I don't know if you want to add to that.

Sure. Two things. First, on the reserve methodology, we have -- we do our quantitative estimates as we're supposed to following GAAP. They have a bias towards conservatism in them. But then we have, Mark, as you suggested, overlaying a lot of sort of uncertainty in our qualitative factors to boost those -- the results of the quantitative side. So we believe what we're doing is in accordance with GAAP and is appropriately conservative and adequate. And on the deferment side, I mean we literally talk to our customers. We drive by our customers. We're sort of the essence of community banks. So we're staying very, very close to what's going on during this period so that these deferments aren't masking any underlying concerns. And obviously, we'll respond to those as they arise.

Mark, I would just say this, too, most of the deferments that we've -- and Ron's got some details on what has come -- what has expired, what deferments have expired and what's happened. But the large share of them have not expired yet. 7/31 is a big date for us. So we're all over it, and I expect that we'll be making decisions in 7/31-8/31 time frame as these things all kind of roll.

And then one last question, if I could, on the deferments. The information that you have that's all to date, any sense for what percentage the of $652 million of the permits you have today are likely to go delinquent when, let's say, we get to the end of the year and the deferral periods run out.

So Ron, we have information on what has happened with deferments that have rolled so far. But I don't believe, Bill or Ron, that we've put together any kind of speculation about what might happen at the end of 90 or 180 days with the entire portfolio.

Yes. Mark, I think that's impossible to know. And I think if you look at any of the other banks that are reporting, they'll tell you the same thing. I mean there is certainly a lot of uncertainty out there. So no, we don't know how many of these are going to be delinquent at the end of the deferral period.

But given all that uncertainty, doesn't that make an argument for having a bigger provision or a bigger reserve, I should say?

Well, this is Bill. As I noted, we believe our methodology reflects a large allowance for uncertainty because we think a lot of that uncertainty exists.

Next question comes from Damon DelMonte with KBW.

Just to quickly follow-up on the deferral commentary. So of those that have reached 90 days and understanding that you said a lot of these are going to be on 7/31, I'm assuming some have already reached 90 days. So of those, how many have requested additional extensions?

Yes. So Damon, so it's -- this is all in a little bit of flux. But I'll tell you, on the commercial side, about 17% as of last week had kind of reached the end of the deferral period. And between 60% and 70% have not extended. On the resi side, 50% have reached the end of the kind of the initial 3-month deferral, and 70 -- mid-70s of those have not requested additional deferrals. So as Ned said, we are very willing to work with our customers to give them the maximum amount of flexibility that they have -- can have to kind of restore their businesses to pre-COVID levels. But Ned -- and qualitatively, I mean, our conversations with customers have been very encouraging in terms of the recovery of business operations. And then Bill, I don't know if you want to add any color to that.

Yes. I mean, I would agree with that, although it's very early. Businesses are starting to come back in. We're seeing a little bit of uptick in reservations in the hospitality book, especially the drive to locations in Newport and Watch Hill, and a little bit of business booking increase but out in the fall. So we're seeing positive signs in some of the retail projects as things reopen, some of the smaller in-line stores are starting to reopen. But Damon, I'd tell you, it's early. And I think we'd all be well served to wait and have the signs that we're seeing turn to fact before we make too many judgments.

Damon, this is Mark. That said, one thing that we might comment on is that the New England States and Rhode Island and Connecticut, in particular, are, in some ways ahead of the COVID curve compared to other parts of the country. We are going into the summer months, which are typically travel and tourism in Rhode Island. And because the state has been able to move to a phase 3 and maybe a soft phase 4 of reopening, we may compare a little bit more favorably with business dynamics and perhaps consumer and job dynamics compared to other parts of the country. So combined with the strong handle we have on customer communication on the commercial and even on the retail side, although it is early days yet to judge from whether deferral requests will roll or be renewed, the early data, we're, I think, cautiously optimistic about. And so that may give a little more insight on why we feel about our book compared perhaps to the Southeast or the Mountain West or the West Coast.

Got you. Okay. If you're seeing your video from Misquamicut, you can get the sense that things are almost back to normal. There's -- a lot of people are on vacation down there. So I guess on the -- regards to the PPP, could you talk a little bit about your expectation for the pattern for forgiveness and kind of how that might play out over the coming months and couple of quarters here? I'm assuming you didn't have much, if any, forgiveness during the quarter?

Right, right. And Bill Wray is running that operation for us. So I think, Bill, why don't you take that one?

Sure. So far, because of the uncertainty around the criteria and because the SPA is not accepting the formal submissions yet, it's a bit of a waiting game right now. We are set up to go. We have the ability to accept online submissions. We've done a few pilots with a few customers. But this thing has -- especially with some of the changes in Congress moving out to the 24 weeks and with some of the consideration for expedited approval below the 150 threshold, this looks like it's going to move more slowly than we all thought when it first came along.

Right. Okay. And you said there is a total of 1,741 loans. And what was the dollar amount for that?

$220 million.

Okay. Great. And then I guess just lastly, quickly on the margin. So you're saying like the core margin is probably going to be stable from here, and then you'll start to see some benefit from liability repricing as you go through the back half of the year. What exactly was the core margin, if the reported was 2.31%, where would you kind of put that core margin?

That's it. So we calculated the margin on our PPP loans, stand-alone, at like 2.30%.

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

Curious, maybe I'll just start with a quick question on the deferrals as well, and I realize it's early and only had a few as you kind of gave the numbers, a few that have kind of reached their initial expiration at this point, but some pretty good percentages of those that have not extended at this point. I'm curious if you have a sense of where some of those particularly -- are potentially borrowers, either businesses or individuals that requested maybe the deferral just as an insurance policy and didn't necessarily need it? And how many of those borrowers were actually made one or more payments, even having the deferral? Just kind of curious if now maybe we're getting those that didn't extend are those that are -- the businesses or individuals that are more stressed? Just trying to get a sense of how you view that population and what we're likely to see extend going forward?

Yes. It's an interesting question, Erik. I was thinking about that this morning. I mean, obviously, those that have enrolled were the ones that got the early deferrals. So they may have jumped into the mix early, not wanting to miss out or -- with less need than some of the ones that got in later. So I don't know that we know that for a fact. We'd have to look at the individual borrowers, but I would suspect that there are some in there that either didn't need it or didn't need it as much as others. Whether there were payments made by that universe of borrowers during their deferral period, Ron, I don't think we have that detail?

Yes. I don't have it here.

Yes. We can certainly find it, Erik, but yes, I'm not sure about that. But I think your hunch that this universe this early before the sort of the bulk of them expire might be different in ways than others is a possibility. But it's a little speculative to say that, but I understand your question.

No, that's great color. And I realize it's hard to have a good sense this early in the game. And then I think you mentioned kind of the loan pipeline down quarter-over-quarter. And I think, Ned, maybe you mentioned just due to the economic uncertainty, which makes a lot of sense. What would you expect in terms of kind of organic growth in the back half of the year at this point?

Yes. I think I'd stick with sort of the low, mid-single-digit growth on the commercial side. It's -- the pipeline's below $100 million right now, which is low for us. But I think that has -- so it's -- something to do with demand in the marketplace, but it also has something to do with the fact that our commercial lenders have been focused on PPP loans and deferrals within their existing books and frankly, spending a lot of time on the existing book and portfolio and with customers. So it's hard to say. But I would say, just based on where we are today, it's probably at the low end of what we've given for guidance thus far.

And then last one for me. Looking at the noninterest expense run rate in 2Q. You guys did a nice job. Some very good discipline, holding the line on salaries and net occupancy. As I look forward to the back half of the year, can you continue to hold the line and remain kind of below that $30 million mark somewhere in the $29 million per quarter run rate, does that seem reasonable?

It does. I mean we would expect -- we've got some variable costs such as the commissions on the mortgage. So those will probably remain high, at least through the third quarter. FDIC expense is a little higher than what we've been trending just because of the PPP kind of inflated the balance sheet. So as those pay down, we might see a little bit of relief on that. But there's nothing else in our expense base that's changing.

(Operator Instructions) Next question comes from Laurie Hunsicker with Compass Point.

Just one on expenses. I just want to just clarify the expense line. One of the comments you made very, very small, but on the FDIC insurance cost, you said that would be stripping out the PPP inflated number, that would probably be running around 550 a quarter from 674 this quarter. Is that correct?

Yes.

Okay. Okay. And then also just to follow-up, generally, on the expense line, expenses seem to be better than I had expected, especially given the very high mortgage banking revenue. The -- I mean, I guess, how should we be thinking specifically about that? Was there any kind of timing lag that expenses in the salary and benefits will be going up next quarter based on the strong mortgage banking revenue?

Yes. I mean -- keep in mind that we had $1 million of contra expense go through in Q2. So that's nonrecurring…

Got it. Okay. So that otherwise would have been…

Yes. Otherwise, it's been -- it's holding pretty steady. I mean, since we're working from home, I think we're seeing some savings in occupancy and things like that. And there can be some timing things with regard to advertising and marketing and those kinds of things. But yes, our run rate is pretty stable.

Okay. And then same question here on the wealth management revenues. Just in terms of timing, obviously, we saw revenues drop linked quarter despite a very nice uptick from both client inflows and investment appreciation. How should we be thinking about that line item next quarter?

Yes. So listen, so much of that depends on what markets do. But we saw a big increase in our end-of-period spot balances. And that's not really reflected in the second quarter revenue. So we would expect pretty strong revenue growth momentum coming into the third quarter just on the basis of the averages catching up to the spot balance. So yes, we would expect to see some revenue pickup in the third quarter.

Laurie, this is Mark. Just to amplify on Ron's comments. We have several different billing conventions. Some are based on asset under management spot balance at the end of given month. Some are based on average daily balance and some are based on billing in arrears. So wealth management AUM-related fees tend to lag on the way up in a rising market and tend to lag about a quarter on the way down in a falling market. But I think Ron's comments at the beginning of call were spot on. If you look at the average monthly balance during the quarter of wealth AUM, the fee decline roughly followed that.

Okay. Okay. I mean, so that's -- it's conceivable we could see -- obviously, all else being equal in terms of what's going on in the market, but we could see that $8.6 million track up to low $9 million?

Yes. Again, Laurie, depending on markets. And I also want to point out that the transaction-based fees will really run out at the end of the second quarter, so that won't carry over into Q3. That's the tax prep.

Right. Oh right, right, the tax prep. Okay. And just remind me the tax prep piece of that, how much is that typically?

So I will say that we had an insurance commission in the second quarter, which is, again, transaction-based about $100,000. So yes, so our total transaction-based fees in the second quarter a little higher than normal. But again, it's -- that's all seasonal. So there'll be nothing in Q3, virtually nothing in Q3.

Okay. Okay, great. And then just to go back over to NIM, and this is sort of just more general question. As we think about forgiveness rolling through and the PPP impact into NIM, are you all letting that drop to the bottom line? Are you all going to take -- withstand that some of the biggest banks have in terms of you're not collecting the PPP fees in terms of keeping them? How are you thinking about that?

Well, we are going to run the proportionate amount of deferred revenues associated with the program that will roll through the margin in proportion to the amount of forgiveness that occurs.

Right. Okay. So you're keeping it. Okay. That's great. Just wanted to make sure I got that piece. And then really appreciate your detail around your portfolio segmentation. Just wondered if you could, Ron or even Bill, just update us on a couple of things here regarding your commercial real estate segmentation. And just looking at sort of some of the higher categories in terms of deferment. For example, just starting with retail, the $327 million, I guess, $124 million is on deferment. Just can you help us think about within the service retail component, is that or what does your retail look like? By service piece, I mean, is it a grocery, drug store, liquor store type anchor or is it clothing? Can you just help us think overall more broadly about your $327 million? And also, if you've got LTVs on any of the retail, the office, the hospitality and the health care, just those segments. Any other color you can give us would be appreciated.

So Laurie, it's Ned. I'll start. And Bill, you can fill in on the LTV side as appropriate. But -- so on the retail book, $327 million, about $130 million of that is now as of July 17 in deferment, about 42% of that book, 133 loans, of which 45 have deferrals in place. So food anchored largely and the food anchors are paying, but the in-line tenants might not be -- there might be -- I can think of one deal with a food anchor that's paying that has got a movie theater and that shut down. And asked our borrower for deferral, we gave a commensurate deferral to what he gave to the tenants. We've got no large box to speak of. We've got very little. We've got no urban malls. So it's -- we've got some sort of in line, I'd say, not regional shopping centers, but kind of local shopping centers where you might have Dollar General as a sort of lead tenant that are paying.

But the in lines in those centers are not. So it's mostly -- and by the way, the news of late is that those in line tenants are starting to come back restaurants are -- at half capacity, but starting to come back. So I think it's neighborhood mostly. It's not regional. It's not large urban. It's not big box. For the most part, it's largely food anchored. But even the food anchor centers with the in-line stores not able to pay their rent or needed some support. So obviously, the next couple of months are going to be critical in terms of how those in lines come back and how the deferrals whether they get extended or not, and we'll try and keep you all as informed as we possibly can on progress on that front. The hospitality book…

A quick question. When you say food anchored, is that grocery store or that's restaurant?

No, grocery stores. Grocery stores.

Grocery Stores. Okay, great.

Yes, yes. Sorry. Thank you for clearing that up. I appreciate that. Yes. No, we don't have a lot of -- other than, again, in-line space and a neighborhood shopping center, there are likely some restaurants, but not -- we don't have a focus on big sort of big-box chain restaurants. Hospitality book, $145 million, $117 million of it or 81% in deferral. Obviously, the hotel book virtually closed down. They're starting to come back. We're starting to see bookings. As I said earlier, it's 25 distinct borrowers. A number of those are very small motel, bed and breakfast kind of things in the Rhode Island Marketplace, Newport, Watch Hill. The larger hotels are starting to reopen, starting to see a little bit of a surge and a surge is probably a strong word, a return to some occupancy but that book is going to take a while. I expect that we will be extending. We did 180 days on those. It will be interesting to see what happens at the end of those 180-day periods, whether -- I know there's a lot of push, ABA and others to try and get even more time for the hospitality sector. We'll see how that goes. I think it will need it. Let's see.

On the health care side, within the real estate book, which would be assisted living, senior housing, nongovernment reliant for the most part, $120 million book, of which $64 million is in deferral, 5 of the 16 loans in that space under deferral. So -- and again, those are assisted living, senior housing facilities with a memory care unit perhaps that all but shut down to new customers during COVID couldn't replace exiting customers. They're starting to -- they were doing virtual tours. Now they're starting to actually open up for new customers. So we expect that to -- I mean the demographics for that space are still very supportive. As soon as they can take new residents, they will, and residents are lined up to move in. So I think that space will be pretty strong in terms of how fast it comes back. That cover us. That's the main.

And then do you have LTVs on each of those books? Or if not, I can follow-up with you offline.

Yes. Ned, I can answer that if you want. This is Bill.

Yes, go ahead, Bill.

Yes. So we did an analysis of weighted average LTVs, and we also look at the distribution of LTVs on these. Weighted average for all of CRE as of 5/31 was 58%, retail, 57%, lodging was 49% and then health care was 56%. So reflects the seasoned portfolio and reflects our underwriting. We -- our borrowers have a lot of cash in the game that they want to protect. So we think, again, we're well positioned going into this, certainly expect some concerns as we come out the other side of it, but we went into it with a seasoned and low leverage portfolio.

Got it. That's really helpful. And do you have LTV on the asset?

Yes. It's 56%.

56%. Okay. And then just going back to the hotel book. Do you know what percentage of sort of more corporate business travel versus what percentage of vacations, hotels or BnB? I mean, BnB is obviously would be vacation, but just wondered if you had any other color there.

I would tell you that we are largely a leisure travel book and that the business travel that's involved is sort of the free independent traveler, it's not group business. I couldn't give you a breakout in terms of total revenues for the whole book. That is something we could look at.

Yes, we could -- we don't have that many, Laurie, so we could determine that. There's a lot of sort of tourism base. And even the ones that are here in Providence, for example, that might have a business orientation, they also have an education orientation. So one of them is right next to the Brown Medical School, for example, and serves the resi Brown Providence College downtown URI population as much as it serves the business community.

Right. Great. And then just last question on the hotels. Do you have any idea what your occupancy is running now at these?

We would know occupancy on each one individually. I don't have that information in front of me, Laurie, but I'm happy to get it to you. It's low. I mean, some of them until very recently were 0. In fact, I'm surprised at the 1 or 2 that kind of ran at 20% occupancy. I haven't figured out yet who was going to them. But yes…

Got it. That's all I need there. Okay. Yes, that's helpful. Okay. And then just wondered on the C&I category, just looking at the accommodation and food services, the $45 million. I know you said that the $25 million, I think it's the gaming loan paid off. But the balance there didn't seem to drop relative to where it was last quarter or maybe I misheard something there. I just wanted to double check that. Because I thought of the $45 million that included the $25 million student loan? Or I can follow-up with you offline.

Yes, let's follow-up on that. I still do -- let's see, show that same combination of foodservice. Yes. Laurie, if we could -- let's follow-up on that, I'm happy to give you the details on that. I do believe you're right, but that gaming -- there was a -- we have additional debt with that. There was a line of credit and maybe some term debt. And so maybe that's the difference. But let me get you the detail on that.

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

Thanks very much, Chad, and thank you all. We really appreciate your interest and the time you invest in us. And we look forward to keeping you informed. Obviously, these are difficult, challenging times, and we're focused, I think, appropriately on credit and capital as we should be and less so on growth. And while we're happy with the -- certainly happy with the earnings and unapologetic about how strong our team has been through this, we'll stay focused on the right things and look forward to catching up with you soon. So thank you all.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.