Washington Trust Bancorp Inc (WASH) 2008 Q4 法說會逐字稿

Hello and welcome to the fourth-quarter 2008 Washington Trust Bancorp earnings conference call.

All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note this conference is being recorded.

Now, I would like to turn the conference over to Elizabeth Eckel. Ma'am, please begin.

Thank you. Good morning and welcome to the quarterly earnings conference call for Washington Trust Bancorp, NASDAQ global market symbol WASH.

This morning's conference call is being recorded and is being webcast live. A webcast replay of the conference call will be available shortly after the conclusion of today's call through the Corporation's Web site at www.washtrust.com in the Investor Relations section, under "Presentations".

However, the information we provide during today's call is accurate only as of this date, and you should not rely on these statements after the conclusion of today's call.

Hosting this morning's discussion is John C. Warren, Chairman and Chief Executive Officer, and David V. Devault, Executive Vice President, Chief Financial Officer, and Secretary. Now, I am pleased to introduce Washington Trust Chairman and Chief Executive Officer, John C. Warren. John?

Thank you, Beth. Good morning and thank you all for joining us here today.

Earlier this morning, we released our earnings for the fourth quarter and the year ended December 31, 2008. David and I will provide an overview of our results and then answer any questions you may have.

As we look back at 2008, it's clear that our success for the year can be attributed to our focus. We knew the challenges we faced in both the economic environment and the financial markets, but we stuck to our principles, remained focused on our core businesses and the core business that has driven our company for more than 208 years.

Over the past few years, we've exited the credit card business. We exited indirect automobile lending. We didn't get involved in subprime lending. We remain true to our disciplined credit standards.

We continue to invest in new talent and technologies that will help us to grow our key business lines. We raised approximately $47 million in new capital through a private issuance, a pipe transaction, all of which is publicly trading now, with select institutional investors in early October. We chose not to accept any TARP funds through the U.S. Treasury Department's capital purchase program. All of these decisions contributed to our success in 2008 and have made us an even stronger company.

Despite all of the turmoil in 2008, including a national recession, a federal banking crisis, a precipitous decline in the financial markets, Washington Trust had a very solid year. For the fourth quarter, net income totaled $4.6 million or $0.29 per diluted share, down from $5.8 million or $0.43 per diluted share for the fourth quarter of '07. In the year ended 2008, net income was $22.6 million or $1.59 per diluted share, compared to net income of $23.8 million or $1.75 per diluted share in the year 2007.

Our asset quality remains good, which is obviously critical in today's environment. More importantly, our asset quality has remained strong in light of exceptional double-digit growth in our Commercial loan portfolio.

In that area, our Commercial loan area was the highlight of 2008 as total Commercial loans were up almost 30% from 2007 levels. We had excellent growth in both C&I and commercial real estate lending. We had good demand in our small-business lending area as well, once again serving as one of the top SBA lenders in Rhode Island.

Where did the growth come from? While many financial institutions were tightening up on their credit and actually not making loans, Washington Trust continued to work closely with our accountants, developers, borrowers to assure them that we were ready and willing to lend. The result -- our Commercial portfolio is comprised of quality credits of all types and sizes throughout our market area. We've worked with existing clients, brought in multimillion dollar deals from new clients and financed loans for local small businesses. Washington Trust has earned the reputation as the bank to go to for business banking.

In the Wealth Management area, while the Commercial area benefited from the upheaval in the economy, our Wealth Management area did not fare as well as Wealth Management assets declined 22% in 2008. This was primarily due to the depreciation in financial markets. As a result, Wealth Management revenues were down 3% from the prior year.

One benefit of the market rest was new business development growth as investors who had lost confidence in much of Wall Street turned to our Wealth Management professionals for guidance. We recently launched new technology that will enable our Wealth Management division to implement an open-architecture overlay program that combines proprietary models, third-party managers, mutual funds, fixed income and exchange-traded funds. This technology is critical to growing the Wealth Management business.

In the residential mortgage area, the turmoil in the market has led many borrowers away from the larger, out-of-state banks and the mortgage brokers down to and coming to the local lenders like Washington Trust. When they come to us, they can actually count on the fact that we will be there when it is time to close the loan. Recently, the refinancing business has been robust as consumers are taking advantage of interest rates that are at the lowest levels in years.

In December of 2008, we relocated our existing Providence branch to a new high-tech, high-touch branch in the financial district of downtown Providence. It's a unique upscale branch; it's both comfortable and convenient for busy professionals in the area. We are also moving forward with our plans to open a second branch in Warwick later this year in 2009.

At this point, I would like to ask Dave Devault to provide more detail on our third-quarter financials. David?

Thank you, John. Good morning, everyone. Thank you for joining us on our call today. I will be reviewing the fourth-quarter operating results and financial position as described in our press release this morning.

Net income for the fourth quarter of 2008 was $4.6 million, or $0.29 per diluted share, compared to $5.8 million or $0.43 per diluted share reported for the fourth quarter of 2007. Return on average equity for the fourth quarter was 7.98% compared to 12.73% for the same period in 2007.

Full-year 2008 results included net income of $22.6 million, or $1.59 per diluted share, compared to $23.8 million or $1.75 per diluted share in 2007. The return on average equity for the year 2008 was 11.31%, compared to 13.48% for 2007.

There were a few items which were unusual for Washington Trust in the fourth quarter that I'd like to mention. We recognized losses on write-downs to fair value for certain investment securities deemed to be other-than-temporarily impaired totaling $2.4 million pretax. On an after-tax basis, this amounted to $1.7 million or $0.10 per diluted share.

Non-core income tax benefits totaling $1.2 million or $0.07 per diluted share were recognized in the fourth quarter. This was attributable to the resolution of certain tax positions and adjustments to our overall effective income tax rate based on full-year 2008 operating results.

Unrealized losses on interest-rate swap contracts of $663,000 were recognized in the fourth quarter, compared to unrealized losses of $24,000 in the third quarter of 2008 and unrealized gains of $27,000 in the fourth quarter of 2007. On an after-tax basis, the fourth-quarter 2008 charge amounted to $468,000 or $0.03 per diluted share. I will comment further on the nature of this matter in a few moments. The combined impact of these unusual items for us was a reduction in fourth-quarter 2008 net income of $973,000 or $0.06 per diluted share.

With that, I will now comment on the results of operations. Net interest income for the fourth quarter of 2008 was $17.6 million, up $942,000 or 6% from the third quarter and up $2.7 million or 19% from the fourth quarter in 2007. The increase from the third quarter reflects growth of $112 million or 4% in average interest-earning assets, including the reinvestment of the $46.7 million in net proceeds received from the issuance of common stock. The increase from the fourth quarter of 2007 reflects growth in interest-earning assets and lower deposit costs. On a year-to-date basis, net interest income was up $5.6 million or 9% over 2007.

The net interest margin for the fourth quarter of 2008 was 2.65%, up 3 basis points from the third quarter and unchanged from the fourth quarter of 2007. The increase on a linked-quarter basis reflects a 6 basis point beneficial impact of the reinvestment of the net proceeds from the common stock issuance, offset in part by lower yields on variable-rate commercial and consumer loans resulting from Federal Reserve action to reduce short-term interest rates with less commensurate reduction in deposit and other funding rates.

Moving onto our loan loss provision, it was $1.85 million in the fourth quarter, an increase of $850,000 from the fourth quarter of 2007 and up from $1.1 million in the third quarter. That increase is due to growth in the loan portfolio, as well as our ongoing evaluation of credit quality and general economic conditions. This brought the total provision for the year to $4.8 million, compared to $1.9 million for all of 2007. I will have additional comments on asset quality later in my remarks.

Non-interest income in the fourth quarter of 2008 declined $3.3 million or 31% from the third quarter and declined $4 million or 35% from the fourth quarter of 2007. For the full year 2008, non-interest income was down by $4.4 million or 10%.

The most significant reason for the decline in non-interest income for the quarter were write-downs charged to earnings on investment securities deemed to be other-than-temporarily impaired in the amount of $2.4 million. These fourth-quarter impairment charges included $1.9 million on a pooled trust-preferred debt security and $494,000 on common and perpetual preferred stocks. Total impairment charges for the full year 2008 on securities deemed to be other-than-temporarily impaired were $5.3 million.

Also included in non-interest income in the fourth quarter were realized gains on securities of $315,000 related to the annual contribution of appreciated equity securities to our charitable foundation. For the year, net realized gains on securities were $2.2 million as compared to $455,000 in 2007.

Regarding the Wealth Management business, Wealth Management revenues are dependent to a large extent on the value of assets under administration. That's closely tied to the performance of the financial markets. Wealth Management revenues were down $1.3 million, or 17% compared to the fourth quarter of 2007, and down $1 million or 14% on a linked-quarter basis. Wealth Management assets were adversely affected by declining values in the financial markets, as evidenced by a 22% decline in the S&P 500 Index in the fourth quarter.

Assets under administration declined $477 million, or 13% in the fourth quarter, ending the year at $3.15 billion. They were down 22% from the end of '07.

Also included in non-interest income in the fourth quarter of 2008 were unrealized losses on interest rate swap contracts totaling $663,000. The majority of this, $638,000, is attributable to an interest-rate swap contract executed in April of 2008 to hedge the interest rate risk associated with variable-rate junior subordinated debentures. At inception, this hedging transaction was deemed to be highly effective. Therefore, changes in the value of the swap contract were recognized as a component of equity.

In September, however, due to a change in the credit worthiness of the swap counterparty, the hedging relationship was deemed to be no longer highly effective, with the result that subsequent changes in the value of the swap contract are recognized directly through earnings. The valuation decline in the fourth quarter was due to a decline in the swap yield curve, which reduced market fixed rates with terms similar to the swap contract.

Unrealized gains on other interest rate swap transactions not affected by this matter were $121,000 for the nine months ended September 30 and $27,000 in the year and quarter ended December 31, 2007.

Looking at noninterest expenses, they amounted to $18.1 million in the fourth quarter, down $396,000 or 2% from the third quarter. We made our annual charitable contributions in the fourth quarter in the amount of $397,000, while the 2007 contribution occurred in the second quarter of that year. The decline in non-interest expenses on a linked-quarter basis reflected a seasonal decline in merchant processing expenses and reductions to employee incentive accruals.

Fourth-quarter noninterest expenses were up $1.4 million, or 8%, from the same quarter in 2007. The year-over-year increase included an increase of $211,000 in FDIC deposit insurance costs, higher recruitment costs of $186,000, increased outsourced services costs of $152,000 associated with Wealth Management platform and product-support costs, and $145,000 related to foreclosed property costs, asset disposals, and one-time costs associated with the relocation of our branch office.

Earlier, I mentioned the $1.2 million noncore income tax benefit recognized in the fourth quarter, which resulted from the resolution of certain tax positions and adjustments to our overall effective income tax rate based on full-year results. Excluding the effect of these matters, our effective tax rate for the fourth quarter of 2008 was 29.4%, compared to 32.2% in the third quarter and 31.1% in the fourth quarter of 2007. We expect our effective tax rate for 2009 to be approximately 30.8%.

Looking now at the balance sheet, total loan growth amounted to $70 million or 4% in the fourth quarter and $266 million or 17% for the year. Commercial loan growth continued at a good pace for the ninth consecutive quarter, increasing $38 million or 5% in the fourth quarter and $200 million or 29% for the full year 2008. Residential mortgages rose by $24 million or 4% for the quarter, and consumer loans were up $8 million or 3% in the quarter.

The investment securities portfolio stood at $866 million at the end of 2008, up $113 million in the fourth quarter, largely due to an increase of $118 million in mortgage-backed securities. The total fare value of all mortgage-backed securities holdings was $684 million at the end of the year. All of our mortgage-backed securities are issued by US government agencies or US government-sponsored enterprises.

Net unrealized losses -- this is unrealized -- on the investment securities portfolio at December 31 amounted to $3.8 million. This included gross unrealized losses of $23.7 million. Approximately 73% of the gross unrealized losses are concentrated in variable-rate, trust-preferred securities issued by financial services companies. These trust-preferred securities consist of holdings issued by the seven individual-name financial industry institutions and two pooled trust-preferred securities in the form of collateralized debt obligations. All of these trust-preferred securities holdings have investment-grade credit ratings.

For both of the pooled trust-preferred holdings, our investment is senior to one or more subordinated tranches that have first-loss exposure. One of our pooled trust securities holdings continues to accrue and make payments as expected. The other pooled trust security is currently deferring interest payments for our tranche until future periods and, based on the financial condition and operating outlook of the underlying issuers, was deemed to be other-than-temporarily impaired in the fourth quarter with a resulting charge to earnings of $1.9 million.

Total deposits increased by $53.6 million, or 3% in the fourth quarter, and were up $144.7 million for the full year 2008. Excluding out-of-market brokerage CDs, in-market deposits grew by $86.5 million, or 6%, for all of 2008. The largest component of fourth-quarter growth was time deposits, which grew by $52.7 million or 7.3% in the quarter.

In the fourth quarter, we recognized a liability of $2 million, which is classified in other borrowings, with a corresponding increase to goodwill. This represents the final amount earned under the terms of the 2005 acquisition of Western Financial Group, which provided for contingent annual earnout payments during the three-year period ended December 31, 2008.

I will now comment on asset quality. Nonperforming assets include non-accrual loans, nonperforming investment securities, and assets acquired through foreclosure or repossession.

Nonperforming assets were $8.8 million or 0.3% of total assets at the end of 2008, compared to $6.8 million or 0.25% of total assets at the end of the third quarter and $4.3 million at December 31, 2007. The increase in the fourth quarter included non-accrual investment securities of $633,000 classified as nonperforming assets for the first time. Assets acquired through foreclosure or repossession stood at $392,000 at the end of the year, compared to $113,000 at the end of the third quarter, and there were none in 2007.

While these reflect increases in the quarter and year-to-date periods, our ratio of nonperforming loans plus accrued troubled debt restructured loans as a percentage of total loans was 0.47% at the end of 2008, which was favorable in comparison to the median level of 0.72% of total loans reported by RBC Capital Markets for all New England bank and thrifts as of September 30, which is the most recently available information.

Total 30 day plus delinquencies stood at $17.6 million, 0.96% of total loans at the end of the year. That was an increase of $6.4 million in the quarter and an increase of $10.6 million for the full year. Included in that were commercial loan delinquencies of $11.5 million, representing 1.3% of total commercial loans.

In the residential mortgage and consumer loan categories, delinquencies were $6.1 million or 0.64% of those loan categories at the end of 2008, up $3.9 million in the quarter. There were five residential mortgage loans totaling $973,000 in the 90-day category and two loans totaling $77,000 in the consumer loan category at the end of 2008.

As I indicated earlier, our loan-loss provision charge to earnings in the fourth quarter was $1.85 million and for the full year $4.8 million. This compares to net charge offs which were $756,000 in the fourth quarter, compared to $432,000 of net charge offs in the third quarter and $195,000 in the fourth quarter of 2007. Fourth-quarter 2008 charge-offs included -- net charge offs included $682,000 in the Commercial loan portfolio.

For the full year of 2008, net charge-offs were $1.4 million compared to $517,000 for 2007. Again, the majority of that was commercial loans with net charge offs in that category of $1.1 million for the full year. The ratio of net charge-offs to average loans for 2008 was 0.08%.

Our allowance for loan losses was $23.7 million or 1.29%, of total loans at the end of 2008, up from $22.6 million or 1.28% of total loans at the end of the third quarter and $20.3 million or 1.29% of total loans at the end of 2007.

Total shareholders equity was $235.1 million at December 31, up from $186.5 million at the end of 2007. In the fourth quarter, a charge of $7.6 million to the accumulated other comprehensive income component of shareholders equity was recorded, which represents the periodic recognition of the change in the value of qualified pension assets -- qualified pension plan assets -- in comparison to the change in pension liabilities. This amount was larger than recorded at the end of 2007, primarily due to a decline in the value of the marketable securities held in the pension plan.

The Corporation and the subsidiary bank are well capitalized. The Corporation's estimated total risk-based capital ratio was approximately 12.5% at the end of 2008.

In December, we declared a dividend of $0.21 per share, paid on January 12.

At this time, I will turn the call back to John Warren.

Thank you, David.

On our conference call one year ego, I concluded by stating, "There are many words I could use to describe the banking industry in 2007 -- Challenging, difficult, or extraordinary." Little did I know. All I can say now is that, if 2007 was challenging, then 2008 took it to a whole new level for the financial services industry.

As we look ahead, candidly for everyone, 2009 is a total unknown. No one really knows. It will likely be the end of 2009 or possibly even 2010 before the economy can really get moving again. President Obama does represent change, and we're certainly hopeful that the new stimulus package will create a little confidence and begin to move the economy forward.

As we enter 2009, what you'll see from us -- we will continue to focus on commercial lending as the larger institutions continue to remain distracted. Our residential lending, largely refis, has shown some substantial growth for the recent rate declines. We expect this will continue.

Also in our press release, as we indicated, Jack Treanor, our President and Chief Operating Officer, has indicated his intent to take early retirement in October of this year. Jack will remain on the Board and we will continue to have the benefit of both his wisdom and strategic thinking. We are very thankful for that.

Washington Trust has been a pillar of strength for more than two centuries, and we remain one of the premier financial institutions in our region. We are ready, willing and able to meet the lending, deposit and investment needs of our community. That message is getting across. We are strong, focused, and poised for future growth.

Thank you for your time this morning. Now, at this point, David and I would be happy to answer any questions you might have. Thank you.

(Operator Instructions). Frank Schiraldi, Sandler O'Neill.

Good morning. Just a couple of questions -- I'm wondering if you can give us any specifics or further color on the commercial loan growth in the quarter as far as geography and the size and any specifics you can give, really.

It's really been New England, largely Rhode Island, with a little bit over into Massachusetts and with our branches in Connecticut, a little bit in Connecticut as well.

Okay. I am assuming, John, from the comments you made just a second ago, what are your thoughts on commercial loan growth next year? I mean, based on the pipeline, do you expect sort of next -- for instance, in 1Q '09, do you expect sort of similar growth that we saw quarter-over-quarter here?

I was going to reference quarter-over-quarter. I mean, I think the key is and continues to be the distraction of the largest institutions in our competitive area. That's been the source of a huge hunk of our lending.

You know, there's organic activity going on, but obviously the economy has slowed significantly and not just in Rhode Island and New England, but throughout the country. So what we really had is -- and thankful for it -- all of the major institutions are so distracted that we've had business coming to us. So we expect to see it continue growing. It won't be the 29% growth we saw year-over-year, and we will just see how the business environment in Rhode Island and the larger customers come to us.

Okay. Just finally on the Wealth Management business, obviously it's difficult to control what the market does. As far as flows, what have you seen so far? It's still early, obviously, but so far this year?

You know, the customer base we have has been, you know, I guess positive, responsive. I think, in the information we included in the press release -- and you probably didn't have time -- you know, Dave put in a stack of numbers and multiple pages to say the least. We did include the new business origination for the four quarters quarter-by-quarter last year.

Yes. I would add that I think there was a bit of a seasonal reduction in the fourth quarter in customer flows, but it's my understanding that the pipeline for business development is in good shape.

Yes. Once again, needless to say, some of the competitors, both banking and -- I mean banking as in like "real bank" competitors and some of the brokerage firms are genetically different than they used to be. That's shuffling the deck, shall we say?

Okay, thank you.

Lee Howard, the Day Publishing Company.

I've got a couple of questions here. I'm curious as to what it's like to be running a bank these days. Obviously, you have a lot of pressure, a lot of questions that you never had to answer before. What kind of pressures are on you to do things that you might not want to do?

Well, you know, it's actually kind of a -- I should probably start by saying that if I didn't already have a full head of grey hair, it would be greater than it was before. But part of that came from the last cycle that we went through in 1989 to '91/'92 when New England really had a rocky period. A lot of the talent that we have here at Washington Trust went through that, experienced it, lived it. Both Jack Treanor and myself were running a bank in Massachusetts at that point, and we saw what happened up there. We handled it, and we handled it very well up there. To the extent we could, that team that we have down here at Washington Trust -- everything that we're going through now is -- and the quality of the loan portfolio that you see today is reflective of decisions that were made four, five, six, seven years ago.

We've put in a structure, we put in a discipline, and we are pleased with it. We still knock on wood every day but we are certainly pleased with where we are. As Dave said, our net charge-offs were 8 basis points, which is statistically about as low as it could go, and a slight increase from the last couple of years, but incredibly low compared to just about anybody out there in the banking world.

It's a challenge, what's going on in the economy. You know, when the President won the election, there was one shot just after the inaugural ceremony that the helicopter was on the lawn of the White House waiting to take President Bush and Laura away, and the two presidents and their spouses were saying goodbye. Bush looked five years younger and had a big smile on his face and Laura looked happy and great. There was a close-up of Michelle Obama, who said -- I mean, you could just see, I mean, you could write the quote underneath there, so like "Oh my goodness!, I can't believe they are leaving and we own it now!"

You know, it's obvious that '09 is going to be a difficult year and a challenging year. As I said, nobody really knows what's going to go on. You know, I think this is when all of the discipline of prior years and the discipline that we are maintaining today, the focus of being very selective in the kind of business you do, very selective in the kind of lending you do, paying attention to your customers, all of those things reflect well on what we currently have on the balance sheet and will be part of the decision-making that we make as we go through '09.

You know, there's a lot of pressure out there, I know, to lend, lend, lend. I hear of things like a lot of people can't get small business administration loans anymore supposedly because the banks aren't lending. What's the situation at Washington Trust? Obviously, it sounds, from your statistics, like you are bucking the trend here.

For sure. You know, our commercial lending area grew over $200 million just in '08. That was 29% growth. Our retail and our consumer lending grew about 7%.

You know, we are doing business. We've been doing business. As I had mentioned in the presentation, that some of the large banks being distracted and really in position, We've had customers tell us they have been told that the large banks aren't making loans. So, we are more than happy to invite them into our front door and help them out. That's the kind of business that's going on.

You know, we consciously did not take government money. We had a phone call inviting us to take government money. We raised the $50 million ourselves, net $47 million. In the subsequent events and the people that had basically been told how to run their company, we are exceptionally glad that we didn't take the government TARP money.

What kind of strings were attached?

Well, they've been making -- well, trying to force people to make loans. You should only make a loan if it's a good loan. Some of the politicians' comments are really pretty ridiculous, but that's part of what you get when two of the largest banks in the country now have the US government as their largest shareholder. You know, I chuckled when I saw the article in the paper today that one of the largest banks in the country today had to send back a $50 million jet.

Do you know what that was?

That was the Citigroup article that was in the paper today. You just sort of have to chuckle. I mean, much of it is appearances, but the government tells you what you can do for a dividend. I think it's not by coincidence that a number of banks have dropped their dividend to $0.01. The number of banks doing that is too large and if you went down the list, every one of them has TARP money.

What about mortgage loans, because people are concerned about obviously their ability to get loans in this environment? With prices going down, a lot of folks are saying this is an opportunity to kind of throw out a safety net and get the real estate market going again, and then maybe get the economy rolling. Obviously, you know, you have a very small slice of the economic pie in the United States, but what kind of thoughts are in your head about how you are approaching residential loans at this point?

We have seen some great activity in the residential lending area, especially in the month of January. With rates having dropped as much as they did, there were people out there. You know, it's challenging. Freddie and Fannie have changed the rules a little bit; that doesn't get mentioned too much. But the rates are lower, and there are opportunities, and there's a fair amount of refinancing that's going on in the market. In fact, the vast majority is refinancing, but that, on an overall basis, will help the cash flow of the economy.

Can you talk about some of those securities that went bad on you, the trust-secured securities? What kind of companies are we talking about as far as the ones that weren't able to pay you back?

Well, on the trust-preferred pool, you know, it's actually a pool with a large number of individual -- primarily banks but financial entities in the pool. So it's diversified. What's happened is, with some of the bank failures around the country and some of the banks, other banks, having trouble, we're seeing, in that one particular security situation, we're seeing several deferrals and at least one default as far as an individual underneath the umbrella or the pool, so that we don't necessarily agree with the pricing, but the way the world operates today and the accounting operates, we made the decision to do the evaluation and decided to write the security down.

We can come back to you. We've got a couple other people, I believe, that are looking to ask a question as well.

Laurie Hunsicker, Stifel Nicolaus.

Good morning, gentlemen. A couple of questions -- I just wondered if maybe we could talk specifically about credit. You know, maybe specifically within the Commercial and Residential categories, you've seen some erosion, especially in the C&I. Then I guess conversely, your consumer and your commercial construction seem to be performing brilliantly. You know, if you could just maybe comment on sort of both sides of that?

Well, in the Commercial category, I mean, there were a number of loans that moved into the non-accrual category during the quarter. I don't think there's any common characteristic there other than that they tend to be small business loans for the most part, midsized, small business loans. The economy is affecting those kind of businesses. That is manifesting itself in what you saw in the increase in delinquencies. I mean, comparatively, the absolute amount of both delinquencies and non-accrual loans we consider to be manageable, and we are watching it very closely.

Yes, in fact, Laurie, I think the stats that Dave gave in his presentation -- our percentage, which was very low, was reflective of December 31, 2008. The comparative was the best number we could get, which actually was September 30 for the peer group.

Now, I think it's safe to say that, when we see the December 31 number from the peer group, that our favorable variance on that will be even higher.

Yes, sure. Well, your credit numbers are still holding nicely.

On the Commercial charge-offs, the $682 million of the $756 million charge-offs for the quarter, was that all or primarily all in C&I small business?

Most of it was, yes.

Most of it was, okay. I mean, does the trend there make you sort of rethink that portfolio?

Well, not really, I mean that's a core part of our business because so many small businesses keep their checking accounts. Just from a liquidity point of view, they keep a substantial amount of money in DD&A on a relative basis, compared to the loans.

You know, I think, with an economy with a downturn like we are seeing right now and the magnitude of the layoffs right now, I mean, the small business guy or woman can't help but be struggling a little bit. I mean, there aren't too many people out there that are boasting about how good business is. The little guy is just taking a hit. This is a handful of small businesses in diverse areas that just couldn't make it.

Can you just generally talk to us about general economic conditions and I guess sort of unemployment as a backdrop. The preliminary numbers out yesterday say Rhode Island is at 10%.

Right.

That actually puts you guys a 30-plus year high on unemployment.

Yes. I think, in Rhode Island, we only have 1 million people, or a smidge over 1 million people, so that it's pretty easy to drive the numbers. But there is no question there are challenges out there economically, and there's a lot of work being done by the Governor and a lot of work being done actually by the business community, trying to pull together and find ways to bring in some additional jobs and get the employment levels back on the right road here in the States.

Okay. Then just to go back over to credit for a second, your commercial construction, your nonperformers -- I mean, how are you all doing that?

(LAUGHTER) By paying attention. A lot of that commercial construction is really owner-occupied businesses that have been expanding projects that they've been working on or expanding their business. So you've got a building going on or moving to a slightly different location, so a lot of that has done well.

What percentage of that is land, just roughly?

Well, pure undeveloped land, it wouldn't be in that category. I mean, there's a modest amount of land development loan in there, but it's not significant.

It's not significant, okay.

No, not at all.

Okay. Then just one more general question I guess I would throw out there -- and congratulations to Jack. (LAUGHTER). You know, he's done amazing. So Jack, if you are on the call, congratulations.

But I mean generally, if you could comment -- so Jack is on the call, okay, great. I remember you from your [ICS] days. It's amazing. So Jack, you are retiring in October. John, you are scheduled to transition next April.

Can you all generally talk -- you know, we are in harder economic times. If you were to sort of weigh it on a scale of 1 to 10, where would you put your consideration in maybe becoming part of a larger bank, given the succession and so forth and the challenges facing you all generally?

Well, I think the humor in it -- and you can understand this very well -- is if you look back over the last couple of years when our price of the stock was trading higher and needless to say everybody else's price was trading higher, that if you look over the range of what's left on the battlefield of larger institutions and where they are price-wise, it's a pretty devastated battlefield. It was a real good thing that nothing ever happened and we didn't end up owning stock that's now trading at $3 a share or $4 a share.

So as a further answer to your question, I guess, when I look around on the residual, it seems to me like we are one of the last guys standing. You know, there's not too many people in good shape right now, and they would have to call the US government, since most of them have taken TARP. They would have to call the US government to ask permission to do anything.

So we are staying focused and paying attention to what's going on, Laurie. I think the best thing we could do for this institution is to maintain that focus and keep doing a great job on the business that we are doing.

Okay, great. Thanks a lot.

Damon DelMonte, KBW.

Just a question on the home equity growth that we saw this quarter -- was that more of a function of line utilization, or are you adding new loans?

It's both. There has been some new loan growth there. Line utilization is up a little bit, but it's still very, very modest, I would say.

Do you have a percentage of the utilization rate?

Well, yes. Utilization, just as a comparison, was 45% at the end of 2007. It's 48.9% at the end of '08. So, it's up somewhat but still on the low and conservative side.

Could you just remind us a little bit about the characteristics of that portfolio, like what's the average LTV, FICO of the borrowers, things like that?

It's all local and self-originated.

Right. With LTV at time of origination in the 50s in that category and our FICO scores when we have looked at that have been averaging well over 700 for that portfolio.

Okay. Then just kind of kind of getting back to credit, the reserve level this quarter was $129 million. As you just kind of go through '09, I would imagine we've seen this trend with a lot of other banks. But are you comfortable at this level, or are you kind of bearish enough with the outlook that you feel you need to increase that some level?

No, we are comfortable with the level. I mean, we do a regular analysis. I mean, obviously, we look at it every month, but we thoroughly look at it every quarter. It's really -- you know, if you look at the loan growth that we had in 2008, the biggest chunk of why you saw the kind of provisioning that we did in '08, the $4.8 million, was really the loan growth that we had. You know, in order to keep a $129 million reserve every time you put a new loan on, you have to put $129 million against it. So that's a chunk of money when you grow well over $200 million.

Right, okay. That's all I had. Thank you.

We show no further questions at this time. I would like to turn the conference back over to John Warren for any closing remarks.

Once again, we thank you all for attending, and to Jack Treanor, who is on the line as well, we thank him for attending the call. It was good to talk to you all. Any questions, as always, feel free to give David or myself a call, or Beth a call. Have a great day. Thank you very much.

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