Earnings Call
Washington Trust Bancorp Inc (WASH)
Earnings Call Transcript - WASH Q2 2020
Operator, Operator
Hello, and good morning, and welcome to Washington Trust Bancorp Inc.'s Conference Call. My name is Chad, and 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. Please, go ahead.
Elizabeth B. Eckel, Senior Vice President, Chief Marketing and Corporate Communications Officer
Thank you, Chad. Good morning, and welcome to Washington Trust Bancorp Inc.'s second quarter 2020 conference call. We would like to remind everyone that this 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 we file with the SEC. We encourage you to visit our Investor Relations website at ir.washtrust.com to review our Safe Harbor statement and other public filings. Washington Trust trades on NASDAQ under the symbol WASH. Today's call will be hosted by the Washington Trust executive team: Ned Handy, Chairman and Chief Executive Officer; and Ron Ohsberg, Senior Executive Vice President and Chief Financial Officer and Treasurer, who 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 the question-and-answer session. I'm now pleased to introduce Washington Trust's Chairman and CEO, Ned Handy. Ned?
Ned Handy, Chairman and Chief Executive Officer (CEO)
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 non-customer-facing employees who have been working remotely are gradually beginning to transition back to their bank offices. We have done an outstanding job of keeping everyone healthy while maintaining service and production levels. 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 in careful planning, deliberate execution, and a 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 Paycheck Protection Program loans. Washington Trust accepted applications from both existing customers and non-customers. Washington Trust was one of Rhode Island's top PPP lenders, securing SBA authorizations from more than 1,700 borrowers, totaling more than $220 million. According to a recent article in the Providence Journal, the Rhode Island SBA estimates the PPP funding has supported approximately 200,000 jobs in the state, covering roughly 83% of the state's small business payroll expenses. We are now working with eligible PPP borrowers to prepare them for the SBA'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 will 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 pitch in 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, overall commercial loan demand and our commercial pipeline were down during the quarter as there is 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 for both refinance and purchase activity resulted 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 have recruited employees from other areas of the bank to assist our retail lending team, and they will 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. In-market deposits increased by 9% from the previous quarter, mainly due to increases in non-interest bearing demand deposit balances and NOW account balances. A good proportion of the new deposit growth is related to PPP loans as we required customers and non-customers to deposit PPP funds into a Washington Trust deposit account. We do expect some deposit outflow as the businesses begin to use the PPP funding. We have been pleased to be able to assist many non-customers with PPP loans. They are 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 on 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?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
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. 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%. Non-interest 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 $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 billion 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 non-taxable gain due to the receipt of life insurance proceeds. Now, let me turn to non-interest 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 non-interest 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, non-interest 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 are a contra expense and are non-recurring. 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 FDIC expense 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. In-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 increase is associated with PPP loans, which are expected to be temporary. Wholesale brokered CDs were up $97 million, and FHLB borrowings were down by $193 million. We were also elected to participate in the PPP liquidity facility with the Federal Reserve. At June 30, advances under this program totaled $39 million. Non-performing assets declined by $1.9 million from the end of Q1. Non-accruing 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 baseline national unemployment rate forecasts from a national economic data provider—the econometric data 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 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, our second quarter dividend declaration of $0.51 per share was paid on July 10. I'd like to update you on our COVID-19 lending/loan deferments: as of June 30, deferments totaled $652 million or 15% of outstanding loans. 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, with an average size of $127,000. Gross fees related to PPP loans totaled about $7.4 million or 3.4% of originations, and these 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 SBA. At this time, I will turn the call back to Ned.
Ned Handy, Chairman and Chief Executive Officer (CEO)
Thank you, Ron. Washington Trust's 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's 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're 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. Chad, please open the phone lines to begin our Q&A session.
Operator, Operator
Thank you, sir. We will now begin the Q&A session. (Operator Instructions) And the first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon, Analyst, Piper Sandler
Guys, good morning.
Ned Handy, Chairman and Chief Executive Officer (CEO)
Good morning, Mark.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Hey, Mark.
Mark Fitzgibbon, Analyst, 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 much impact in 3Q?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Probably not, Mark. The cash balances are largely a function of our swap book. With our dealer counterparties, we're kind of out of the money, so a lot of that is just posted cash collateral.
Mark Fitzgibbon, Analyst, Piper Sandler
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 do we see an improvement in the coming quarter?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
LIBOR ratcheted down during the quarter. I would say our asset yields bottomed out in the month of June. We're still seeing some investment payoffs and residential payoffs, which as we replenish those, they come back on at a lower yield. Those two things will drag down asset yields a little bit, but we do have quite a bit of variable liabilities that will re-price in the second half of the year. I would expect 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.
Mark Fitzgibbon, Analyst, Piper Sandler
Okay. And then, your mortgage pipeline—could you share with us the size today?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Yes, it's over $400 million right now, Mark, which is higher than it was at the end of March.
Mark Fitzgibbon, Analyst, Piper Sandler
Okay. And then, we saw pretty positive signs in the wealth management business with client inflows, I think it was $130 million. What's driving that? Is it new or existing clients, and do you anticipate we will continue to see good flows in 3Q and beyond?
Mark Gim, President and Chief Operating Officer (COO)
Mark, 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 more challenging. 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.
Mark Fitzgibbon, Analyst, Piper Sandler
Okay. And then, given the strong mortgage banking income that you had this quarter, I'm curious why not push some of that into the provision, given the uncertainties around the current environment?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
We follow GAAP and our allowance methodology installed under CECL. We're using the same unemployment data that everyone is using. Our provision is a function of the underwriting that we're doing and the nature of the composition of the portfolio. We don't have credit cards, car loans, or student loans. There's definitely uncertainty regarding where the economy is going, but Ned and Bill, I'll let you jump in on this in terms of what we're doing in customer outreach and understanding our portfolio. For the moment, we feel comfortable with the level of reserves that we're at, which are approximately four times the worst loss experience we had at the depths of the financial crisis. Time will tell what happens when we come out of the deferral process, but right now we feel comfortable with reserves where they are.
Ned Handy, Chairman and Chief Executive Officer (CEO)
We have a clean portfolio that performed well in the quarter. We have a lot of loans on deferment. From a process standpoint, we are all over those and are talking to those customers weekly. We have set up a system of color-coding them to predict whether additional deferments will be requested and are staying on top of tenant performance in retail deals. We have a hospitality portfolio that we're monitoring weekly for signs of progress. Some of those will require additional deferments and we will be accommodative, but we are spending all of our credit time watching the deferments, managing through the forgiveness process on the PPP program. The pipelines on the commercial side are down; part of that is because we're focused on internal matters and staying on top of the credit book and portfolio with customers. We think we have enough capital and earnings generation power to face whatever comes our way as the facts suggest more is needed. Right now, the facts, as we see them, suggest that the reserve we've put in place is appropriate. Bill, would you like to add specifics on monitoring the portfolio?
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
Two things: first on the reserve methodology, we do our quantitative estimates as required under GAAP, which tend to have a bias toward conservatism, and then we overlay qualitative factors that boost the quantitative results. We believe what we're doing is in accordance with GAAP and is appropriately conservative and adequate. On the deferment side, we talk to our customers frequently and stay very close to what's going on. We're staying on top of this period so that deferments aren't masking underlying concerns, and obviously we will respond to those as they arise.
Ned Handy, Chairman and Chief Executive Officer (CEO)
Most of the deferments we've put in place have not expired yet; July 31 is a big date for us. We're closely monitoring and expect to be making decisions in the July 31 to August 31 timeframe as these things roll.
Mark Fitzgibbon, Analyst, Piper Sandler
One last question on the deferments. Given the information you have, do you have any sense of what percentage of the $652 million of deferments are likely to go delinquent when, say, we get to the end of the year and the deferral periods run out?
Ned Handy, Chairman and Chief Executive Officer (CEO)
We have information on what has happened with deferments that have rolled so far, but we haven't put together a definitive estimate about what might happen at the end of the 90- or 180-day periods for the entire portfolio.
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
It's impossible to know at this point. There's a lot of uncertainty out there. If you look at other reports, you'll see the same caveat. So no, we don't know how many of these will be delinquent at the end of the deferral period.
Mark Fitzgibbon, Analyst, Piper Sandler
But given all that uncertainty, doesn't that make an argument for having a bigger reserve, or bigger allowance?
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
As I noted, our methodology already reflects a large allowance for uncertainty because we believe a lot of uncertainty exists.
Mark Fitzgibbon, Analyst, Piper Sandler
Okay, thank you.
Operator, Operator
The next question comes from Damon Delmonte with KBW. Please go ahead.
Damon Delmonte, Analyst, KBW
Hey, good morning, guys. How's it going today?
Ned Handy, Chairman and Chief Executive Officer (CEO)
Good morning, Damon. Doing well, thanks.
Damon Delmonte, Analyst, KBW
Great. Just to quickly follow up on the deferral commentary, of those that have reached 90 days—and understanding that you said a lot of these are going to be on July 31—I'm assuming some have already reached 90 days. Of those, how many have requested additional extensions?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
This is in flux, but on the commercial side about 17% as of last week had reached the end of the deferral period and between 60% and 70% of those had not extended. On the residential side, 50% have reached the end of the initial three-month deferral, and mid-70% of those have not requested additional deferrals. We are very willing to work with our customers to give them maximum flexibility to restore their businesses to pre-COVID levels. Qualitatively, our conversations with customers have been encouraging in terms of their recovery of business operations.
Ned Handy, Chairman and Chief Executive Officer (CEO)
It's early, but businesses are starting to come back. We're seeing some uptick in reservations in the hospitality book, especially at drive-to locations in Newport and the surrounding area, and some retail inline stores are starting to reopen. It's early, and we'll be well served to wait for effects to manifest before making too many judgments.
Damon Delmonte, Analyst, KBW
Understood. Regarding PPP, could you talk a little about your expectations for the pattern for forgiveness and how that might play out over the coming months and quarters? I'm assuming you didn't have much, if any, forgiveness during the quarter.
Mark Gim, President and Chief Operating Officer (COO)
Bill Wray is running the forgiveness operation for us and will address that.
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
So far, because of the uncertainty around the criteria and because the SBA is not accepting formal submissions yet, it's a bit of a waiting game. We are set up to go, we have the ability to accept online submissions, and we've done a few pilots with customers. But with changes in Congress around the 24-week period and potential expedited approval for loans under $150,000, this looks like it will move more slowly than originally anticipated.
Damon Delmonte, Analyst, KBW
Right. And you said there's a total of 1,741 loans—what was the dollar amount for that?
Ned Handy, Chairman and Chief Executive Officer (CEO)
$220 million.
Damon Delmonte, Analyst, KBW
Okay, great. And then on the margins, you're saying the core margin is probably going to be stable from here and then you'll start to see benefit from liability repricing in the back half. What exactly was the core margin—if the reported was 2.31%, where would you put that core margin?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
We calculated the margin on our PPP loans standalone at about 2.30%.
Damon Delmonte, Analyst, KBW
Okay, all right, perfect. That's all I had. Thanks a lot. Appreciate it.
Operator, Operator
Our next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Good morning, Erik.
Erik Zwick, Analyst, Boenning & Scattergood
Good morning, everyone.
Ned Handy, Chairman and Chief Executive Officer (CEO)
Good morning.
Erik Zwick, Analyst, Boenning & Scattergood
Curious on the deferrals: some that reached initial expirations had pretty good percentages that have not extended. Do you have a sense of borrowers that requested deferral as insurance versus those that truly needed it? Also, how many of those borrowers actually made one or more payments even while having the deferral?
Ned Handy, Chairman and Chief Executive Officer (CEO)
It's an interesting question. Those that rolled early may have enrolled out of caution or for convenience; some may have had less need than others. We would have to look at individual borrowers to know for sure. Whether universal borrowers made payments during their deferral period, I don't think we have that detail readily available.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
I don't have that specific payment detail here.
Ned Handy, Chairman and Chief Executive Officer (CEO)
We can certainly find that information, Erik, but it's early. The universe that has expired so far may be different in composition than the larger set that will expire later.
Erik Zwick, Analyst, Boenning & Scattergood
Understood. You mentioned the loan pipeline is down quarter-over-quarter due to economic uncertainty and other reasons. What would you expect in terms of organic growth in the back half of the year at this point?
Ned Handy, Chairman and Chief Executive Officer (CEO)
I'd stick with low to mid-single-digit growth on the commercial side. Pipelines are below $100 million right now, which is low for us, but that reflects both demand and the fact our commercial lenders have been focused on PPP loans, deferments, and managing existing customer relationships.
Erik Zwick, Analyst, Boenning & Scattergood
You did a nice job on non-interest expense in Q2. Looking forward, can you continue to hold the line and remain somewhere near the $29 million per quarter run rate?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Yes, that seems reasonable. We do have some variable costs such as mortgage commissions, which may remain high through Q3. FDIC expense is higher because of PPP's impact on the balance sheet, so as those pay down we might see relief. There is nothing else in our expense base that's changing dramatically.
Erik Zwick, Analyst, Boenning & Scattergood
Great, thanks for taking my questions today.
Operator, Operator
(Operator instructions) The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Laurie Hunsicker, Analyst, Compass Point
Hi, good morning.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Good morning, Laurie.
Laurie Hunsicker, Analyst, Compass Point
Staying with expense: you mentioned stripping out the PPP-inflated FDIC number would probably be around $550,000 per quarter versus $674,000 this quarter. Is that correct?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Yes.
Laurie Hunsicker, Analyst, Compass Point
Expenses seem better than expected given the very high mortgage banking revenue. Should we think there was any timing lag where salary and benefits tied to mortgage commissions will show up next quarter?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Keep in mind we had $1 million of contra expense go through in Q2, so that's non-recurring. Otherwise our run rate is pretty stable, and working-from-home saved on occupancy. There can be timing items with advertising and marketing, but nothing dramatic.
Laurie Hunsicker, Analyst, Compass Point
Got it. On wealth management revenues, there was a drop linked quarter despite AUM appreciation and inflows. How should we think about that line in Q3?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Much depends on market performance, but we saw a big increase in end-of-period spot balances that isn't reflected in Q2 revenues. We would expect strong revenue momentum coming into Q3 as averages catch up to spot balances.
Laurie Hunsicker, Analyst, Compass Point
Is it conceivable that the $8.6 million could track up to the low $9 millions?
Mark Gim, President and Chief Operating Officer (COO)
We have several billing conventions: some fees are based on asset-under-management spot balance at month-end, some on average daily balance, and some are billed in arrears. AUM-related fees tend to lag about a quarter on the way up in a rising market and about a quarter on the way down in a falling market. Transaction-based fees, like tax prep, are seasonal and won't carry into Q3.
Laurie Hunsicker, Analyst, Compass Point
Regarding PPP fee recognition and NIM: are you recognizing the fees and letting them flow through NIM, or following a different stance?
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
We will run the proportionate amount of deferred revenues associated with the PPP program that will roll through the margin in proportion to the amount of forgiveness that occurs.
Laurie Hunsicker, Analyst, Compass Point
Okay, great. I appreciate the detail around the portfolio segmentation. Could you give more color on commercial real estate segmentation—retail, office, hospitality, healthcare—and provide LTVs if possible? For example, retail $327 million with $124 million in deferral—what does that retail look like in terms of anchors and tenants?
Ned Handy, Chairman and Chief Executive Officer (CEO)
On the retail book of $327 million, about $130 million is in deferment as of July 17—about 42% of that book, across 133 loans, of which 45 have deferrals in place. These are largely grocery-anchored centers. Grocery anchors are paying, but inline tenants may not be. We do not have large-box exposure or urban mall exposure; our retail is neighborhood shopping centers with food anchors and inline stores. Some inline tenants have been unable to pay rent or needed support. Recently, inline tenants and restaurants are beginning to reopen, so we're seeing signs of recovery. On hospitality, the $145 million book has $117 million, or 81%, in deferral. The hotel book was virtually closed and is starting to see bookings. These are generally smaller properties—motels, bed-and-breakfasts, and similar—and are likely to take longer to recover. We extended many of those for 180 days. On healthcare within CRE—assisted living and senior housing—it's a $120 million book with $64 million in deferral; five of 16 loans in that space are under deferral. These are non-government-reliant assisted living and senior housing facilities with memory care units. They were closed to new residents during COVID and couldn't replace exiting residents; however they are beginning to open for new customers and we expect demand to come back quickly when they can take new residents. We'll continue to monitor all of these portfolios closely and will provide updates where appropriate.
Laurie Hunsicker, Analyst, Compass Point
When you say 'food-anchored,' is that grocery store-anchored rather than restaurants?
Ned Handy, Chairman and Chief Executive Officer (CEO)
Yes, grocery-anchored. We have some restaurants as inline tenants, but the anchor is typically a grocery store.
Laurie Hunsicker, Analyst, Compass Point
Do you have weighted average LTVs on those CRE categories?
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
We analyzed weighted average LTVs as of May 31. The weighted average for all CRE was 58%. Retail was 57%, lodging was 49%, and healthcare was 56%. This reflects a seasoned portfolio and conservative underwriting. Borrowers generally have significant equity in the deals. We believe we're well-positioned going into this period with lower leverage in the portfolio.
Laurie Hunsicker, Analyst, Compass Point
What's the LTV on office?
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
Office is 56%.
Laurie Hunsicker, Analyst, Compass Point
Regarding the hotel book, can you indicate what percentage is corporate business travel versus vacation leisure?
Bill Wray, Senior Executive Vice President and Chief Risk Officer (CRO)
Our hotel portfolio is largely leisure travel. The business travel in our portfolio is more independent travelers, not group or conference business. We could look at revenue breakouts for specific properties and provide that detail offline.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
We can determine occupancy and other operating metrics—there are not that many properties and we can provide occupancy data for each if you'd like. Some properties were recently at zero occupancy and a few are now running around 20% or higher.
Laurie Hunsicker, Analyst, Compass Point
Thanks. One last question on C&I: looking at accommodation and food services at $45 million and a $25 million gaming loan payoff, the balance didn't seem to drop relative to last quarter. Is that $25 million related to the gaming loan included in that category? I can follow up offline if that's easier.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Let's follow up on that offline. I believe you are right that the gaming payoff affected the numbers, but there may be other exposures or lines that explain the difference. We'll provide detail.
Laurie Hunsicker, Analyst, Compass Point
Okay, thanks. I appreciate the time.
Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer (CFO)
Thanks very much, Laurie.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference back over to Ned Handy for any closing remarks.
Ned Handy, Chairman and Chief Executive Officer (CEO)
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. These are difficult and challenging times, and we are appropriately focused on credit and capital and less so on growth. While we are happy with the results and the performance of our team, we will stay focused on the right things and look forward to catching up with you soon. Thank you all.
Operator, Operator
And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.