Washington Trust Bancorp Inc (WASH) 2009 Q2 法說會逐字稿

Hello and welcome to the Q2 2009 Washington Trust Bancorp, Incorporated, conference call and webcast. All participants will be in 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. Ms. Eckel, the floor is yours, ma'am.

Thank you very much. Good morning and welcome to the quarterly earnings conference call for Washington Trust Bancorp Inc., NASDAQ Global Select market symbol WASH. This morning's conference call is being recorded. It is being webcast live, and a webcast replay of the conference call will be available shortly after the conclusion of today's call through the Corporation's website, www.washtrust.com in our Investor Relations section under the subhead Presentations. However, the information that 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's Chairman and CEO, John C. Warren. John?

Thank you, Beth, and good morning to everyone. Yesterday afternoon we released our earnings for the second quarter ended June 30, 2009. This morning we will discuss those results and answer any questions you might have about our performance.

The second quarter was a dichotomy of sorts. On the one hand, we continued to achieve good core business growth along all key business lines while, on the other hand, earnings were down as a result of the effects of continued weakness in the national and regional economies and the FDIC's special assessment. For the second quarter ended June 30, net income totaled $3.8 million or $0.23 per diluted share compared to $6.1 million or $0.45 per diluted share earned a year ago.

Comparing our June 30 earnings with those of a year ago, you'll see that this year's earnings were negatively impacted by several major items. We charged $3 million to the loan loss provision in the second quarter. This is after careful review of the weakened economy and the effect this may have on credit. It also reflects continued growth in our loan portfolio. FDIC premiums were up $1.9 million from the second quarter of last year, reflecting higher assessment rates and a special one-time assessment of $1.35 million.

It's important to note that our capital positions remain strong. Total risk-based capital exceeded 12%, and tangible equity to tangible assets stood at 6.12%, up from a 4.68% level a year ago. Liquidity levels also remained healthy as deposit growth has enabled us to reduce borrowings during the quarter.

While earnings aren't where we would like them to be, Washington Trust's performance was good and has continued to weather the storm better than most. We are staying focused and maintaining our discipline.

We continue to capitalize on the disruption in the marketplace. Not only have we hired outstanding talent away from the big banks, but we've also booked some quality commercial credits, attractive wealth management assets, and brought in new cash management relationships, much of it taken from our major competitors.

We also continue to build and invest in our franchise for future growth. Our new branch located in Warwick at Governor Francis is now under construction and will open later this year.

Finally, we continue to pay attention to what truly matters, those people who contribute to our success -- our employees, our customers, and our shareholders. By staying focused and maintaining discipline, we are able to capitalize on this disruption in the marketplace, and that will continue. But let me take a moment to discuss our operations for the quarter.

Commercial loans were up 4% or $39 million during the second quarter of 2009; we're up 19% from a year ago. We've had good growth in both C&I lending and commercial real estate. Much of the new business is coming to us at the expense of our large competitors.

The loans are primarily in the Providence and Greater Boston markets, and they are all good-quality credits. However, we are beginning to see a slowdown in activity in both C&I and CRE lending.

We are well aware that credit concerns are a key focus as the Northeast as well as the country has been hit hard by rising job losses and unemployment and decreases in housing valuations. We have maintained the same prudent credit standards and have not deviated from them for the sake of growth. We continually monitor our portfolio and have provided adequate reserves. This should put us in good stead going forward.

Let me turn now to wealth management. The wealth management revenues were down $1.7 million from the second quarter a year ago, primarily because of the condition of the financial markets. Assets under management were down $607 million from the second quarter a year ago; but we are, however, encouraged by the growth of $358 million from the first quarter of this year.

These results are primarily due to the fluctuations in the financial markets. Over the last quarter, we've seen more and more new business opportunities and have successfully lured assets in from our major competitors.

On the retail side, mortgage volume has been strong due to the heavy refinancing activity, and this contributed to healthy gains on loan sales during the quarter.

Now at this time I'll turn the speaker over to David Devault, who will provide more detail on the second-quarter financial performance. David?

Thank you, John. Good morning, everyone, and thanks for joining us on our call today. I'll review our second-quarter operating results and financial position as described in our press release yesterday afternoon.

Net income for the second quarter of 2009 was $3.8 million or $0.23 per diluted share compared to $6.1 million or $0.45 per diluted share reported for the second quarter of 2008. For the six months ended June 30, 2009, net income of $6.4 million or $0.40 per diluted share compared to $11.9 million or $0.88 per diluted share for the same period of last year.

The return on average equity for the second quarter of this year was 6.22%, and it is 5.36% for the first half of the year. This compares to 12.88% in the second quarter a year ago and 12.55% for the first six months a year ago.

Several factors significantly affected the comparison of the most recent quarter to the second quarter of last year. Included in this -- FDIC deposit insurance premiums were up by $1.9 million from the second quarter a year ago, and this increase included a special one-time FDIC assessment of $1.35 million, which is $869,000 after tax or $0.05 per diluted share. The loan loss provision charge to earnings amounted to $3 million in the second quarter of this year compared to $1.4 million in the second quarter last year.

And no dividend was received from the capital stock we hold in the Federal Home Loan Bank of Boston in the second quarter. Dividend income on that investment was $344,000 in the second quarter of last year.

Some further comments on the results of operations. Net interest income for the second quarter of this year was $16.3 million, up $300,000 or 2% from the first quarter and essentially flat compared to the second quarter a year ago.

The net interest margin for the second quarter of this year was 2.45%, an increase of 6 basis points from the first quarter, but down 26 basis points from the second quarter a year ago.

Compared to the first quarter of this year, the most significant factor for the increase in the margin on a linked-quarter basis was a 31 basis point decline in the effective rate paid on interest-bearing deposits. Compared to the second quarter a year ago, the 26 basis point decline is for the most part due to the elimination of the Federal Home Loan Bank of Boston dividend income, as well as margin compression in general between yields on interest-earning assets and rates paid on core deposits resulting from the Federal Reserve's actions to reduce short-term interest rates in late 2008 and early 2009.

Non-interest income for the second quarter was up by $4.4 million or 56% from the first quarter and up 1% from the second quarter a year ago. The increase from the first quarter is partially due to the fact that other-than-temporary impairment charges on investment securities of about $2 million were recognized in the first quarter of this year. There were no impairment charges in the second quarter of 2009.

Wealth management revenues for the second quarter of this year increased by $541,000 or 10% from the first quarter of this year, but are down $1.7 million or 22% from the second quarter of last year. Second-quarter amounts typically include tax-preparation fee revenues, which this year amounted to $339,000, about the same as last year.

Wealth management revenues are largely dependent on the value of assets under administration, which is closely tied to the performance of the financial markets. Assets under administration stand at $3.316 billion, up $358 million or 12% in the quarter, but down $600 million or 15% from a year ago. The increase in the assets under administration in the most recent quarter included net market appreciation and income of $314 million and net customer cash inflows of about $44 million.

Certainly a bright spot in the recent quarter's results was residential mortgage origination and related sales activity. Net gains on loan sales into the secondary market and commissions on loans originated for others totaled $1.6 million in the second quarter of this year, up $500,000 from the first quarter and up $1.1 million from the second quarter last year.

Non-interest expenses amounted to $20.3 million for the most recent quarter, up 11% from the first quarter, and up $2.3 million or 13% from the same quarter a year ago.

The increase in non-interest expenses on both a linked-quarter basis and year-over-year is largely due to higher FDIC deposit insurance costs, which were up by $1.5 million from the first quarter and $1.9 million from the second quarter last year. This again included the special assessment of $1.35 million in the second quarter, which was $0.05 per share after tax.

Turning to the balance sheet, total loan growth was $25.3 million, 1.4% in the most recent quarter, led by commercial loan growth of $39 million, an increase of 4.3% in that category. Residential mortgages declined by 3% in the second quarter, and consumer loans grew modestly by 1% in the quarter.

The investment securities portfolio decreased by about $58 million in the second quarter of this year, primarily due to maturities and paydowns on mortgage-backed securities.

At June 30, the net unrealized gain position on the investment portfolio was $4.2 million, including gross unrealized losses of $20 million. About 90% of the gross unrealized losses on investment securities were concentrated in variable rate trust preferred securities issued by various financial services companies.

Total deposits were essentially unchanged in the second quarter. However, backing out a decline in out-of-market brokerage certificates of deposit, in-market deposits grew by $11 million during the quarter, reflecting a good 7% increase in demand and NOW balances, offset by some outflow in money market deposit balances. And in-market deposits are up 16% in the last 12 months.

Let me now discuss asset quality. Nonperforming assets, which include non-accrual loans, non-accrual investment securities, and property acquired through foreclosure, amounted to just under $25 million or 0.85% of total assets at the end of the most recent quarter. That compares to $17.5 million at the end of the first quarter and $6.2 million a year earlier.

The largest category of nonperforming assets is non-accrual loans, which amounted to $22.7 million at the end of the quarter, with an increase of $7.2 million in the second quarter. Most of that increase was in non-accrual commercial loans, which rose by $6.1 million in the quarter. That includes one commercial real estate relationship representing $3.2 million of the increase, and two C&I loan relationships totaling $3.7 million.

Non-accrual residential mortgages increased by $1.1 million in the most recent quarter. At the end of the second quarter we have one property acquired through foreclosure on our books, with a carrying value of only $236,000.

At June 30, total 30-day or more delinquencies amounted to $25.6 million. That is 1.35% of total loans. Delinquencies were up $3.5 million in the second quarter. The largest component is in commercial loan delinquencies, which amounted to $17.6 million, which is 1.85% of total commercial loans.

In the residential mortgage and consumer loan categories, delinquencies totaled $8.1 million or 0.85% of those total loan categories at the end of the quarter. That increased about $900,000 from the end of the first quarter.

In the second quarter we recognized net charge-offs of $1.4 million. That is up from $927,000 in the first quarter of this year and up from $161,000 in the second quarter last year. The largest component of the chargeoffs in the second quarter of this year, $1.3 million, was in commercial and commercial real estate loans.

For the first six months of the year, net charge-offs totaled $2.4 million, up from $164,000 in the same period last year. The ratio of net charge-offs to average loans on an annualized basis for the first half of this year is 25 basis points compared to 2 basis points for the same period last year.

We recognized a loan loss provision charge to earnings of $3 million in the second quarter of this year based on our analysis of the changes in the credit quality, indicated by the increase in the non-accrual loans and other factors as well as the impact of the chargeoffs in the quarter. This compares to quarterly provisions of $1.7 million in the first quarter of this year and $1.4 million in the second quarter last year.

We believe the decline in credit quality trends is primarily related to weakness in national and regional economic conditions. This trend may continue for the next few quarters.

The allowance for loan losses stood at $26.1 million, 1.38% of total loans at the end of the second quarter, up from $22 million or 1.29% of total loans a year ago.

Total shareholders equity stands at $242.3 million at June 30, 2009. The Corporation and its subsidiary Bank are well capitalized. The Corporation's estimated total risk-based capital ratio was 12.23% at June 30, 2009.

In the second quarter of this year, we declared a dividend of $0.21 per share, which was paid on July 10. At this time I'll turn the call back to John Warren.

Thank you, David. I would like to thank everyone for joining us here on today's call and for your interest in Washington Trust. These are indeed challenging times, and the economic outlook is somewhat like this summer's weather forecast, which has been turning out to be mostly unpredictable.

Over the past few months, we have heard other economists and others speak of green shoots or possible signs of recovery. We are getting closer to that, and maybe we are seeing a couple of green shoots; but most of the numbers say the economy is still declining perhaps, but just at a slower pace.

We believe that it will be several more quarters before we begin to see the improvement in the economy. We are not out of the storm by any means, but we are hopeful.

Until then we will continue to stay the course, focusing on our core business and maintaining our discipline. Once again we thank you for your time, and David and I will be very happy to answer any questions you might have at this moment. Thank you all.

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

Morning. I wanted to -- just a couple questions on credit. Is there any more detail you can give on the increases in the non-accruals quarter-over-quarter in terms of the commercial real estate relationship, then the C&I relationship?

Well, the commercial real estate relationship is a credit that has some office and retail properties associated with it. The borrower is experiencing some cash flow issues, and we are monitoring that closely.

We actually put this on non-accrual based on our analysis of the credit. It had not gone into 90-day status at the time that we had made that assessment of it. So we are trying to stay proactively ahead of any developments in the portfolio.

And in the C&I category, there are a couple of credits there, one of which is an auto dealer that has been notified that it will be losing its franchise. It had originally been told that wasn't the case, and then subsequently received some different information.

The second piece of that is a -- or the second C&I credit in the non-accrual increase is a small manufacturer which is simply experiencing some difficulties.

Frank, I think the interesting thing about credit, our overall weighted average risk rating is actually improving and continues to improve. So that even with the analysis that we do internally, and the reserves we establish, and the chargeoffs and so forth, the risk rating continues to get better over the entire portfolio.

So we are trying to be aggressive and address the credits as we see them. But once again it's a lousy economy, not just here in Rhode Island or in New England but elsewhere around the country.

I remember speaking at a conference a year and a half ago, and a couple people were saying this was a one-quarter event and this was just a little hiccup we were going to have in the economy, and that the banks were just going to experience that one-quarter hiccup. When it came my turn I said that you don't have economic problems in the world of banking and the economy that last for one quarter.

We expect that even after the economy has bottomed -- and let's say the economy has bottomed now, typically after that you see two to three quarters that the unemployment rate continues to climb. That doesn't do any good for the consumer; it doesn't do any good for a whole bunch of other categories. And businesses may start to see things get a little bit better, and that certainly helps and that is the beginning of what we need to see. But you know, the turn is not here yet.

Right. No, understood. Were there any specific reserves put against those in the quarter? Are they credits that you feel that you are not at risk of losing anything basically, because of the loan-to-value or the debt ratio or whatever?

Certainly with the change in our assessment of them, we have various methods of allocating increased reserves, whether it's based on analysis of the valuation of collateral or other factors that we use. So yes, part of the increase in the provision is driven by those kind of assessments of credit.

Also, Frank, what we do obviously when we move one of the credits, we obviously have downgraded it from a rating point of view, and the reserve that we have earmarked for these credits is now substantially higher, just on a normalized basis, just because of the rating, than it would have been in the prior quarter.

Right, okay. Then the C&I stuff, is that -- the collateral on that is real estate as well?

On the auto dealer it is primarily real estate. On the manufacturing credit, it is I believe a combination of real estate and business assets.

So for example, on that manufacturing company, which is about a $1.1 million carrying value, we've got a 40% reserve allocation on that, which is no doubt up from what we would have had at the end of the first quarter.

So what John referred to, either based on collateral assessment or ratings-driven valuations, we are increasing our reserves.

Okay. Just one final question on the commercial real estate. Is that, the one relationship there with offices and retail properties, is that several retail properties? Is it non-owner occupied?

It's definitely non-owner occupied. It's, I believe, one office and one retail property.

Right. When we say office, it's an office building.

Right. Okay. Then I just wanted to ask something I saw in the release as well in terms of the restructured loans quarter-over-quarter. Can you just talk a little bit about the growth there and what drove that, or what the specifics are there?

Primarily, we have been working with residential mortgage borrowers on a case-by-case basis who may be experiencing cash flow problems but have appropriate equity in their property, but are unable to really get a market refinancing. So we are trying to work with them, to accommodate them, so that they don't go into a totally nonperforming status.

So about half of that increase would be in residential mortgages, and we're trying to be responsible in working with our borrowers on that. I think there is some amount of commercial borrowers again also there, where we are working with them to try to achieve a successful workout with them.

We make a case-by-case determination as to whether or not, based on the underlying factors, the loan should be put on non-accrual status or not. Some of the increase in debt restructurings were not put into non-accrual status because we have confidence that we will collect principal and interest appropriately.

Do those that are in the accrual bucket, do those usually just stay in there very briefly over the quarter or over a part of the quarter, and then they're restructured, and then they come back out? Or they will just stay in there?

I guess, will they just stay in there after they are restructured? And then stay as long as you're comfortable in getting the cash flows? It will stay in accruing status there, in the restructured loan category?

I believe the convention is that they stay in there for at least one year, at which time they are reevaluated to determining whether or not the borrower is performing in accordance with the restructured terms. At that point, if it is and there is no reason to put it on non-accrual -- in other words, no assessment that there is doubt about the collectibility -- then it would be returned to or taken out of the restructured category.

Okay. All right. Thank you.

Laurie Hunsicker, Stifel Nicolaus.

Good morning. I just wanted to follow up on some of the things that Frank was asking about. Just going back to your increase in non-accruals, and I realize in the press release you talk December to June. But just looking March to June, so that $1.6 million increase in the commercial real estate non-accruals, that is all the office and retail property? That is the one property?

Well, that would be a net amount that would include the increase of the $3.2 million relationship; and then there were some chargeoffs that would have reduced the nonperforming, non-accrual balance (multiple speakers).

Okay, got it. Right, okay. So it was a $3.2 million relationship. What year was that put on, approximately?

I'm going to say four or five years ago.

Four or five years ago? Okay. Any idea what the LTV was approximately when you put it on?

I don't have that with me here.

Okay. Then same question to you on the C&I. Obviously it was a net increase of $4.5 million just in the one quarter. How much was the auto dealer and how much was the smaller manufacturer?

As I indicated, the smaller manufacturer was -- it's about $1.1 million. The dealer relationship is about $2.6 million.

$2.6 million; okay. The commercial real estate 60 to 89 days, the jump there, what it does that relate to?

Much of that is the CRE relationship that we have been discussing.

Okay, that $3.2 million?

Right.

Okay, that makes sense. Okay. I guess just generally as you look at loan-loss provision and generally with respect to your comments, the economy, the outlook -- tough for the next six, eight, who knows, 12 quarters, something like that. I mean loan loss provisions will likely continue to trend up from this quarter's levels; is that a fair statement?

I wouldn't necessarily say that, Laurie. Part of it is reflective of the loan growth. So to the extent that there is continued loan growth on a quarter-by-quarter basis you will see a normalized reserve that we would put in for that.

Then in addition, it will -- any chargeoffs that we experience in the course of the quarter will be reflected in that.

As David mentioned, the chargeoffs are running on an annualized basis of 25 basis points. So if you use that as at least an indicator, add to that the loan growth, you've got at least an inkling of what the direction is.

Then on any individual loan, really your loan portfolio is substantial in size; and as we look at it, any individual loan, if it has a problem, then the determination will be made both as far as an appropriate downgrade and an appropriate reserve to be established against it.

Okay, and just -- your reserves to loans target has been going up steadily for the last four quarters. Do you have a target area you would like to see it?

No, we actually -- I should let and in fact I will let Dave sort of finish the comment. But because we basically do the analysis from the bottom up, as well as looking at it often from the top down, and go through category by category. And the increases that you are seeing are in part reflecting the continued significant growth in the commercial portfolio, both commercial and commercial real estate. As we indicated, year-over-year we are still having 19% growth reflected in there.

Then also for the first time in a number of years you are beginning to see what even might be called a normalized level of chargeoffs. I think 25 basis points on an annualized basis is still probably for many people very much on the low side.

Yes, I would just echo what John said, which is that we build up the determination of how much allowance is necessary in the individual portfolios, and in the case of commercial loans almost at the individual loan basis.

That said, the increase in the allowance is reflective of the fact that we assessed some decline in credit quality. There were some downgrades in credit ratings, some increase in non-accruals. When you get done with all that, we concluded that the allowance that we had was appropriate based on the circumstances that we're looking at.

You also have to then stand back and say, does the allowance as a percentage of total loans make sense? Does the allowance coverage ratio to nonperforming loans make sense? And we concluded that it did at the level that we are at today.

The future path of credit losses will be dictated by the severity and the duration of the economic downturn. We are encouraged by the fact that our nonperforming loans have traditionally tracked lower than certainly national statistics, but even Northeast statistics. And most recently, at the end of the first quarter, our nonperforming assets were about 0.6%; the Northeast banks and thrift universe had 1.61.16%; and nationally it was 2.63%.

So while they are higher, we are somewhat encouraged by that and we believe that relatively conservative underwriting that we've employed over a long period of time is going to help us in the future with respect to credit. We cannot insulate ourselves from the downturn in the economy, but that's how we are looking at it.

Okay, okay. Just two more quick questions. The Warwick branch that you said will open later this year, do you have a target month on that?

October.

October? What is your projected breakeven in this rate environment?

Breakeven time horizon?

Time horizon and maybe deposits.

Well, it's going to take a while. It's going to be probably a two- to three- to four-year process.

We are encouraged by the fact that it's a great location. There's a lot of households and businesses within convenient access to this location. Time will tell. We've had a reasonably good track record with opening branches in the past.

You know, the first branch that came into Warwick, Laurie, was a $100 million branch within four years. The branch that we opened in Cranston, which I believe is just about two years old now, is over $40 million in deposits.

So the combination of the deposits and the new business access that convenience provides and the businesses in the area provide -- we are very pleased with that kind of growth.

Okay, okay, good. Then just lastly, John, can you comment a little bit on succession plans and where you all are?

Sure. As I think we've mentioned -- well, of course, we've publicly put out the 8-K and so forth. Jack will be retiring at the end of September or early October, depending on schedule and transition and so forth. The independent nominating committee of the Board has been thoroughly going through the process; and you could expect to see in the not-too-distant future an announcement coming out.

Okay, great. Thanks.

Damon DelMonte, KBW.

I was wondering if you could try to give us a little color regarding the margin. Do you think there is any additional opportunities to lower your deposit costs from here?

Yes, but there will also be some yields on loans and securities trending downwards. So I think margin is probably going to be fairly stable over the next quarter or two, and that is what I would say about that.

Okay. With respect to the branches opening, is there an estimated cost associated that you could quantify for us?

It would be a modest cost certainly in the fourth quarter, a low six-figure number. Kind of annualize that to a mid-six-figure number in next year's numbers. And again depending on the deposit mix and the pace of deposit growth, that will become mitigated.

Sure, sure. Okay, great. Then lastly, with the summer months upon us here, could you just give us a little update as to what the shore area looks like? Are you seeing a drop-off in tourism? Are people not vacationing as much? Just trying to get a read on the local economy there.

Well, the spring of April, May, and June, when we set records as far as the amount of rainfall, made it somewhat difficult to, I think, differentiate between people that looked at the forecast and didn't do some traveling with the slowdown in the economy.

It is slower than last year. But I can tell you last weekend which was gorgeous, they closed the beach in Misquamicut down on the water -- on the shores of Westerly, if you know Misquamicut Beach, because there were too many people here. So there are people getting out. They have all got cabin fever and they are looking to come down. So it's not a great economy but people are trying to get out.

Okay, great. That's all I had. Everything else has been answered. Thank you.

Eric George, Wells Fargo.

Morning, gentlemen. This is nearly in the asked and answered category, but to pyramid on a prior question, you guys are in a state with 12% unemployment. You're sort of in the eye of the storm.

Do you have any feeling if -- do you feel like you are bumping along the bottom maybe? Or are you seeing any sort of a moderation in this dramatic increase in unemployment in Rhode Island and in your commercial real estate stuff? Nonperformings. Is it seeming to let up at all? Can you put some color on that?

Well, I will give you one green shoot that we have seen, although I hate that term, green shoots. We were talking and just looking at the stats at the pipeline on our residential mortgage activity. And compared to just a couple months ago, the pipeline probably has -- the number of homes that are not refis but are actually purchases is probably 3 times as much as what we were seeing two or three months ago. So people are actually going out and starting to buy homes again.

That's good to hear.

We thought so too. On the commercial side, I'm not sure we're any different than any other place. I read the Boston Globe every day as well as the New York Times. You sort of do Boston to Providence through Connecticut into New York. The stories are all similar.

The 12% in Rhode Island, because we are a smaller state the numbers and the percentages I think move faster. I pay as much attention to what's going on in Boston and the Greater Boston area as I do the Providence area as well.

Thank you.

John Stewart, Sandler O'Neill.

Good morning, guys. Actually just to kind of follow-up maybe a little bit on what you just commented on with the resi mortgage pipeline. Can you just give us a bit of a sense as to what we can expect for the loan sale gain fee income line looking ahead?

You know, it's very rate-sensitive. If you could tell me where the 30-year rate was going to be for the next three months, I could give you a number or David could give you a number.

I'm not saying that facetiously. The difference between a 5% 30-year and a 5.5% 30-year is noticeable; and if you push the 30-year up to 5.75%, it is enough to really stop things, even though for most of us a 5% handle is an incredibly low rate. But I think people are a little bit fragile right now.

We've seen that sort of accordion-type effect from going to 5%, up to 5.5%, up to 5.75% or 7/8ths, back down to 5.25%, and it picks up again. I mean the rates were lower, closer to the 5% level for a good part of the second quarter. We'll have to see if they come down.

It depends on all the business numbers and whether it's Bernanke's testimony or somebody else's testimony, you get a full point movement in the 10-year and I think the rates go down a little bit.

Okay. Then could you just give us a bit of detail on where you are seeing the construction loan growth you talked about, $15 million linked-quarter? Just where that's coming from.

Well, if you mean geographically, it's certainly within our local area of primarily Rhode Island and a little bit in Massachusetts and Connecticut. These are advances on credits that are performing well, and that would be that increase that you saw in the second quarter.

Yes, much of it is reflective of credits that were already booked but the project is getting closer to completion and they are completing the drawdown.

Okay. Okay, good. Thank you.

Yes, we are definitely not emphasizing construction lending, if that's part of the question.

Yes, it was. All right, great. Thank you.

Matthew Kelley, Sterne, Agee.

Yes, I was wondering what the loans sold dollar amount was during the quarter that generated the $1.5 million gain. Just trying to get a sense of the gain on sale margin, and then a little guidance on where you see that going.

It was about around $100 million of either sales or originations on behalf of other parties where we act in that capacity.

The pipeline is good right now. We are seeing applications coming in, in the last several weeks. We try to turn those around and about a 40-day, 30- to 45-day time frame, so it is sensitive to application volume.

Okay. So that would be call it a 1.5 to 135 basis point gain on sale margin? Do you see that sustained?

That's generally going to hold up pretty well, yes, the margin.

Okay.

Matt, part of it is we sell most of our fixed-rate servicing released, so a good chunk of that spread is the servicing rights that are being sold as well.

All right, okay. Then a question on your trust preferreds. The ones that you have downgraded, you are carrying them at $0.20 to $0.40 on the dollar on an amortized cost or original cost and are rated speculative.

I imagine there is a pretty high capital charge associated with those two securities, the Tropic and the PreTSL. Just wondering what your thought process is in terms of keeping those around or selling them after you've written them off, considering the capital charges that you have to keep on those.

At this sense, we've concluded that it is appropriate for us to retain those. That capital charge is a bit of a complicated calculation embedded in the call report instructions, and it's something that we've concluded is not a reason for us to dispose of those.

Got you. So it has to do with the collateral above you?

Yes.

All right, thank you.

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

We just want to thank you all very much and encourage you to take a long weekend and come up to see the beaches of Rhode Island. They are pretty lovely and we would love to have you come. Some great restaurants up here, and come on up. Thank you all very much, appreciate it.

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