Sandy Spring Bancorp Inc (SASR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Sandy Spring Bancorp first quarter 2009 earnings conference call. This is being recorded. With us today from the Company is the President and Chief Executive Officer, Daniel J Schrider, Executive Vice President and Chief Financial Officer, Philip J Mantua, and Executive Vice President and General Counsel, Ronald E Kuykendall. At this time, I would like to turn the call over to Mr. Dan Schrider. Please go ahead, sir.

Thank you, and good afternoon. This is Dan Schrider and welcome, everyone, to the Sandy Spring Bancorp's conference call to discuss our performance for the first quarter of 2009. Joining me here today is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.

As always, today's call is open to all investors, analysts and the news media. There will be a live Webcast of today's call and there will be a replay of the call available at Sandy Spring's website beginning later today. We will take your questions after a brief review of some key highlights. But before we make our remarks and then take your questions, Ron will give the Safe Harbor statement.

Thank you, Dan. Good afternoon. Sandy Spring Bancorp will make forward-looking statements in this Webcast that are subject to risk and uncertainties. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk and future cost and benefits, assessments of probable loan and lease losses, assessments of market risk and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or projected by Management's estimates and projections of future interest rates, market behavior and other economic conditions, future laws and regulations and a variety of other matters which by their very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operations do not necessarily indicate its future results.

Thank you, Ron. The major factor determining results this quarter, and we know it's what everyone is still focusing on, was again a sizable loan loss provision expense that amounted to $10.6 million. That's substantially less than the $17.8 million provision that we booked for the fourth quarter. But, not surprisingly, the local economy across our markets has not shown meaningful improvement since year-end for the residential real estate builder and developers that we work with. I will get back to more comments on credit quality in a few minutes. To review a few of the significant highlights in the press release we issued earlier today, net income was a profitable $0.06 per share for the first quarter versus a net loss of $0.23 a share in the linked fourth quarter of 2008. Net income during the first three months tracked just exactly about where we expected to be according to our operating plan.

Total assets increased 11% to $3.5 billion, which was due mainly to growth in deposits. Deposit growth is a good story for us and I'll give a little more color later in my comments. Total loans and leases increased 4% to $2.5 billion compared to a year ago. There has been reasonably healthy loan production all along, but the growth in new originations has been heavily offset by runoff and repayments of existing loans. The Northern Virginia market grew loans quite well during the first quarter, as the organization we put into place there is hitting on all cylinders and our style of banking is selling well in that market. So loan activity overall is decent, not great, and we would like to be able to ramp it up through the rest of the year. Loan demand will need to improve to be able to accomplish this. Our loan pipelines across the various business lines are certainly active, although it's fair to say the pipelines are not as full as compared to historic levels.

I do want to emphasize that we are not among the banks that have curtailed lending or stopped making new loans all together. For instance, we closed about twice as many residential mortgages during the first quarter compared to the first quarter of 2008. Our year-over-year increase in loans was comprised mainly of a 6% increase in commercial loans and a 9% increase in consumer loans. We don't expect much action in the real estate sector for the time being. On a linked quarter basis, total loans decreased 1% compared to the fourth quarter of 2008. All that said, we think the real story is about our deposit growth. During the quarter we added approximately $190 million in new deposits and there was a good mix of both retail and commercial, albeit for different reasons. Total customer funding sources increased 8% compared to the fourth quarter of 2008. That is mostly as a result of new money coming in under our new Premier Money Market Account.

This product is a new money only product with a required link to the client's DDA account. Up until April 1st, the Premier account paid 2.5% with a three month guaranteed rate. We've since lowered the rate by 25 basis point with the same three month guarantee and the product continues to do very well. Just for comparison purposes, these terms are comparable with offers from SunTrust, M&T, PNC and others here in our local markets. So while we are being aggressive in deposit gathering, we are not out there all alone leading the market with irrational pricing. Deposits attributable to the Premier Money Market Account balances have grown by more than 50% since the end of the year. We've had a decline in overall timed deposits during the first quarter, primarily due to pricing decisions to assist us in managing our margin. We have structured the premier account to serve as what we internally call a lead or hook product.

That means we are using it to attract new households to our Company and then sell ourselves into an increased share of the customer's overall wallet. Since introducing the premier product, we have secured over 1100 new households to our Company. This hook strategy works because we have combined the attractive rate with the guarantee for three months. That gives us a window of opportunity to work a selling process that we've always been good at and we call it on-boarding. The basis explanation is that if you touch a customer several times over a short period after they open a new account, you have a much better chance of cross-selling other products and making a client for life. Very few banks do this effectively and it really does work. To shift over to the commercial deposit side, approximately 40% of our deposit growth can be attributed to relationships with small and mid-sized businesses, an area of strategic focus for our Company.

We think most of the overall new deposit business is coming from Chevy Case and Provident. Both of which, as you know, were recently acquired and are in the process of being integrated into larger out-of-state banking institutions. This is happening on two different timetables and involves a huge number of local branches, as well as hundreds of effected employees. So there is market disruption working in our favor, along with the fact that we will soon be the largest local community bank operating in the zone between Baltimore and Washington. Clearly, the customer feedback we've been getting is that there is a preference for local quality. Because of all this, we think we can generate some good momentum in growing new relationships over the coming months in all of our business lines and we launched a program in April that we internally call operation take share to capitalize on what's going on among our competitors.

We have also seen opportunities to hire some very good people out of the competitors that are consolidating. Shifting the focus to a related topic, the dynamics of our loan and deposit growth are producing growth in our securities portfolio, which is now up to about $700 million, the highest level in several years. I just want to point out that the current growth in the securities portfolio is being invested into high quality, agency type mortgage-backed securities, mostly seasoned Fannie and Freddie ARMs, with short durations in the two to three year range. This is amortizing paper so we should be positioned very favorably to have good liquidity available when higher loan growth eventually resumes. Let me go back to some additional comments on credit quality and the resolution of problem loans and then we can take your questions. We are not surprised by the jump in our non-performing assets.

As we have said previously, we have several long-standing relationships with large local real estate developers. But these builders are also seeing the worst economic cycle they have ever had to weather and many of them are being tested as never before. We have added four new relationships just this past quarter to our non-performing list that belong to established local builders who have never had trouble in the past. The increase in MPAs over the linked fourth quarter of 2008 was due primarily to one commercial loan and these four residential real estate development relationships, all together totaling $46.2 million. The components of our non-performing assets are as follows. 70.8% or $89 million are from our residential builder portfolio. Clearly, the most significant portion of MPAs and representing some of our largest relationships.

9.84% are from our retail mortgage portfolio or $12.3 million. 9.5% or $12 million of our MPA's are from our C&I portfolio. 3.22% or $4 million in our owner occupied commercial real estate portfolio. Less than 1% is from our home equity portfolio, as well as less than 1% from our investor real estate portfolio. In the retail and office portfolio segments we have very good diversification with no tenant concentrations. We have no exposure to big box tenants within the portfolio and our portfolio primarily consists of neighborhood centers located within our footprint with good tenant diversification. It's important to note that MPAs do not catch us by surprise. Our risk identification system is robust. We recognize weaknesses early and begin the process of assigning appropriate risk ratings, updating collateral values and establishing appropriate reserve levels well in advance of a loan reaching non-performing status.

With that said, the initial financial impact on our allowance for loan lease losses is often well in advance of a loan reaching non-performing status. Additionally, I realize that we are all waiting for any sign that MPAs will begin to turn in the other direction. While we do expect MPAs to continue to build over the short run, a financially successful loss mitigation and recovery program is more important to us and our shareholders than simply the velocity by which MPAs decrease. We're very sensitive to the resource needs in the credit risk management area and will continue to add resources and expertise when and where needed. Aggressively identifying and dealing with potential trouble spots is a key to successfully working through this cycle. So to conclude the credit quality discussion, we continue to be concerned with the depth, breadth and duration of the current economic environment, but we continue to be highly focused on recognizing problems early, then tackling them proactively.

Before we go to questions let me point out that expenses were under our plan by 5% to 6%, which is evidence that we're continuing to emphasis very tight control of our discretionary spending. The trend over several quarters now has been showing essentially zero growth on our overall operating expenses and we will be working to continue that. Non-interest income was a bit better than we expected by a few percentage points, mostly due to gains on mortgages sold, as refinancings have been giving the mortgage business a recent surge. Just a point of comparison, we closed over $120 million this quarter compared to $60 million that we booked in the first quarter of last year. We should see mortgage revenue stream continuing to track very nicely as long as rates stay where they are, especially as we're moving into the spring and summer sales seasons.

So this concludes my comments for today, which we can expand on as we take your questions. Kelly, we can have the first question, please, and we would appreciate it if you would state your name and Company affiliation as you come on so we know whom we are speaking with.

(Operator Instructions).

Kelly, we're ready for the first question when you are.

Okay. Our first question comes from Jennifer Demba with SunTrust Robinson Humphrey.

Thank you. Dan, I was wondering if you could give us a little more color on your operation take share and what that's going to involve in terms of advertising, branches, hiring, et cetera?

Sure. I'll hit quickly six areas that operation take share will cover. One is very specific household growth expectations that we will drive down to each business line. So operation take share is about not only deposit growth, but also winning new households and so those are being driven down to the lowest level. Secondly, deposit growth goals. We think that it's a great opportunity for us to take advantage of the market disruption and have significant deposit growth. Third is the implementation of a new cross-functional sales teams within the organization to really lever the different business lines that we offer and bring our sales force together. Fourth is establishing cross-sell ratio goals through all of our business lines, which is traditionally a retail or branch banking type of strategy. We think it's important to begin to hold folks accountable for cross-sell ratios at every level.

Fifth is the marketing support, which you commented on, which is product development, it's advertising, it's merchandising, it's leave behind collateral, which has all been developed in an effort to differentiate us in the market while others are internally focused. And lastly, pretty excited about this, on our website we have an online switch kit which will take a client through an electronic, an automated fashion to move their accounts to Sandy Spring Bank through our website. So those are really the six components to operation take share.

To date have you been getting more share from Provident or Chevy Chase.

I think we're seeing activity from both. Really two different markets --

Yes.

-- within our markets, so we're seeing opportunities from both. As well as, as I mentioned in my comments, the opportunity to bring some new talent into our Company from those organizations. We're also seeing some activity in deposit growth from some of the larger institutions that tend to be a little bit more inwardly focused right now and so we see that as a real good sign that our belief in the value of a local institution is really being borne out by the activity we're seeing in the market right now.

One last question. What were your FDIC premiums for the quarter?

Jennifer, this is Phil. About $950,000.

And that run rate is in the first quarter?

That's correct. We clearly see that being at that level or more obviously based on just what other additional growth we get in the deposit area and also not knowing where things might go with this one-time assessment that still seems to be up in the air.

Okay. Thank you.

Thank you, Jennifer.

And our next question comes from Avi Barak with Sandler O'Neill.

Good morning, guys, or good afternoon, I should say.

Hi, Avi.

Two questions for you. First, just curious, looking at the margin which was -- it got hit a little bit linked quarter. Was wondering if you could quantify for us how much of the margin compression was a result of interest accrual reversals from the increase in non-performers and how much was a result of changes in short-term rates.

Avi, this is Phil. Not really much of anything from an interest reversal perspective, so it really leaves the majority of the impact to the second part of your question, which is really impact of short-term interest rates, where they are and also our Management on the liability side in terms of growing the premier Money Market Account in particular here at a fairly competitive rate and having that have the impact it does to the margin right now. Also, considering the investment patterns that we have in the investment portfolio, as Dan mentioned, there's not a whole lot of spread there for the time being.

Okay. Thanks. And then separately, I was hoping you could maybe give a comment or two on what you're seeing in stuff you've already moved into the OREO portfolio, what kind of properties are in there, what you have it written down to, maybe if you're seeing any interest from private real estate investors, if it's real estate, and maybe kind of the gap between where you're holding and what kind of bottom fishers are looking for that.

Avi, this is Dan. The -- and as you can see from our numbers, there hasn't been significant movement from our non-accrual status into OREO. That's a function of timing.

Sure.

And for the most part, as I mentioned in my comments, a large portion of our non-accrual or non-performers are from that residential development type of business. What we are seeing is significant interest by virtue of the location of our projects in the Baltimore, Washington corridor. Long-term outlook for new home sales continues to be strong, given job growth in this market, and some of the controlled growth of many of the jurisdictions we do business in. So the resolution is not obviously happening immediately, because we're working to maximize the value with those that are interested. The other part of your question has to do with the level of reserve against individual credits and really that is rather widespread. I can't really comment on a standard percentage write-down or reserve against those particular loans. It's really on a loan by loan basis. Obviously, the majority of our investments in loans are right in our footprint in that Montgomery, Howard, Frederick, Anne Arundel County market and those values, while down, are holding up much better than projects out in the edges of the suburbs. What I can say is that we are routinely and regularly updating appraised values and we are reserving appropriately on a very aggressive approach.

Okay. Thank you very much.

We'll take our next question from Mark Hughes with Lafayette Investment.

Good afternoon.

Hello, Mark.

Hi, Mark.

Hi. The $89 million in residential non-performers, the builder non-performers, is it a relatively small number of relationships. What's your maximum loan limit to any individual or entity?

There's a legal lending limit which is essentially, Mark, 15% of capital, which is much further than we typically go. Our largest relationships, which may include multiple projects, are in the $20 million to $25 million total borrower exposure or total commitments. But that would make up several projects in most cases.

Got you. Then the -- what is your, outside of the individual properties themselves, what do you typically do in terms of further collateral from these types of builders? I mean, what else can you do or did you do when these loans were made?

Well, in most cases, and I'm speaking generally but it certainly applies to our portfolio, is not only the value of the underlying collateral that they're developing, but also the personal guarantees of the individuals that own those companies or standing behind and in many cases it's multiple parties with significant financial wherewithal. Also a comment, Mark, that the large majority of the projects we're involved with with residential AD&C are not speculative in nature, not raw ground being held for land banking purposes there. It's developed land. Maybe not with the infrastructure built, but with all the necessary approvals to go ahead and build. And so as this thing begins to turn, we think that some of our projects will generate significant interest. But it's the underlying collateral and it's the wherewithal of the individuals to stand behind the credits.

Okay. And then you said you added I think 1100 household relationships in the quarter. Any way to sense whether this is kind of hot money just moving in because T bills and the like are essentially at zero versus how sticky these relationships might be?

It's a great question and it is a little bit early in the process to fully understand the stickiness or using our approach of on-boarding these clients. I mean, clearly there will be some of our existing clients that have moved out of the market and brought their funds into this product or other products, but what we do, Mark, is we track the utilization of that DDA account. So are they using the account? Are they using their debit card. Do they have direct deposit into their account. And when we see activity in that linked DDA account, then we know at that point that there's a pretty high probability that we keep a client because they've begun to use our bank. And so over time there certainly we would expect some of the money of our clients to move back into the market or other alternative investments, but we are hoping we keep the lion's share of those households. Which is why household growth is so important rather than just raw deposit growth.

So the -- with the yield you're offering on the new product and if you take that money and invest it in some kind of short-term government security, probably not much spread there at all between the two, so you're hoping to make the money on just establishing a more long-term relationship and selling other products to these people? Is that a -- ?

That's correct. That is correct.

Okay. Great. Thanks, good luck.

Thank you, Mark.

And our next question comes from Steve Moss with Janney Montgomery Scott.

Good morning, guys, or good afternoon.

Hi, Steve.

Hey, Steve.

Get a little more color with regard to the non-performers on the construction side. Were they generally in Maryland and in what counties.

Yes, they're generally in Maryland. The good portion of those, the largest portion of those are in Howard County, Maryland, but we have projects that are in Frederick County, Montgomery County. We've commented previously that we had the one project in the southern shore of Delaware, which is our only Delaware project, so the bulk of those are Montgomery, Howard, Frederick, and Anne Arundel County.

Okay. And for I guess to reconcile with the disclosures within your previous presentations, where you've broken out the acquisition, development and construction loans, balance was about $163 million as of December 31st. What's the balance of that portfolio? I know you're categorizing it within commercial construction in the press release here.

Let me get that for you, Steve.

Okay.

We've got -- we've had some reclasses done in the past quarter. We have not grown that portfolio and right now the total AD&C portfolio is at $243 million.

Okay. And then with regard to the C&I non-performer, what type of business was it?

The C&I, the one that was added?

Yes.

Last quarter? Yes, that was slightly north of $1 million local real estate project.

Okay. All right. Thank you very much.

Our next question comes from Philip Richmond with Smith Barney.

Good afternoon, Dan.

Hi, Phil.

I noticed in the press release this morning the statement that you had $121 million in residential mortgage loans in the first quarter and I was wondering if you could clarify how much of that were in essence re-fis of existing loans that already existed and how much of that was, shall we say, non-organic in growth? Thank you.

Sure. Of that $120 million, $121 million of new originations, approximately 89% of that were refinances with the balance being loans for new property acquisitions. Now, that's not to say that there were refinances of loans necessarily in our portfolio, but from an origination classification standpoint they were refinanced loans.

On the re-fis, did that compress your spreads much?

On the re-fis that was all generated gain on sale as opposed to putting product in portfolio. So there was not a -- it was spread neutral.

Thank you.

Thank you.

(Operator Instructions). And we'll take our next question from Bryce Rowe with Robert W. Baird. Thank you. Good afternoon, everybody. Hi, Bryce.

Wondering if you guys could tell us what the 30 to 89 days past due were and then on the Premier Money Market Account, I assume that, I guess, that campaign is ongoing. How long do you expect to market it?

The Premier Money Market is something that we look at really on a weekly basis, Bryce, in terms of the appropriate rate and how long we want to continue with the guarantee. So we're going to continue to test some different things, not only with rate but with the guarantee period. So we don't believe this is a product that's a long-term type of product for us, but an opportunity in the short run to take advantage of the consolidation. So we're evaluating that on an ongoing basis as to how long we want to continue with it as structured the way it is today.

Can you remind us, I don't know if you said, what's the balance, the deposit balance associated with that product now?

The balance associated with that product at the end of the quarter, Bryce, was -- hang on one second. I'll give you a good number. It's about 300 -- about $350 million.

Okay.

The other thing, going back to some of your questions about the terms or whatever, you may remember that when we initially ran the product back in the fall, the initial guarantee period was for nine months, so we have a fair amount of that portfolio that's going to be guaranteed sometime through the latter part of the summer. So we know we've got some of those funds that are going to be in that situation for a while and that's part of the time element of evaluating what we do as we go forward here.

Okay.

Bryce, your -- we lost Bryce? Okay. We'll follow back up with him.

We do have another question from Carter Bundy with Stifel Nicolaus.

Good afternoon, everyone.

Hi, Carter.

Hi, Carter.

Hi, Dan, could you repeat again your commercial real estate non-performers?

Total dollars?

Total dollars.

Sure.

And then also perhaps just provide some commentary on how the overall portfolio is holding up right now and what your thoughts are here in the near-term.

Sure. My comments were centered around two different segments. Obviously we spent some time on the AD&C business, which is $89 million or nearly 71% of our non-performers. We have a small portion, $4 million or 3.22%, in our owner occupied commercial real estate portfolio and then that's it. We have less than 1% coming from our investor real estate portfolio, under $1 million. So it's really it's from a real estate portfolio standpoint, it's being driven by the AD&C business. To give you some color overall, what we're seeing in the real estate portfolio is the fact that we're well-diversified in retail and in office, relatively small average credit size, no real large credits or no dependence on big box anchor type tenants. Small community centers and so a performance we're seeing in that is -- right now is pretty decent relative to what we see in the industry as a whole and obviously we can continue to monitor that. The C&I side, which is $12 million or 9.5%, is made up predominantly of smaller credits that were start-up in nature when we originated them or small credits that are some fashion related to the building business or the residential building trades. So looking forward, clearly our focus and energy is on the AD&C portfolio, while at the same time making sure we turn over every rock in the other portfolios as well.

Okay. Switching to the growth in the non-interest bearing deposits in the quarter, which was very remarkable, could you speak a little bit to that, if that was retail generated or if that was commercial generated?

I think that, Carter, this is Phil. I think Dan mentioned during his original comments that about 40% of that growth was in the commercial area and the rest was in the retail segment.

Okay. And then finally, do you all have the FTE count at quarter end?

I do. FTEs at the end of the quarter we're 668 and that compares to about 680 at the end of December.

All right. Thank you all very much.

You're welcome.

And we will go back to Bryce Rowe with Robert W. Baird.

Thanks. Yes, I guess that other question was the 30 to 89 day past due number.

Yes. Bryce, within the commercial portfolio the 30 to 89 is 104, 1.04% at quarter end.

All right. Thank you.

And we'll take our next question from Steve Moss with Janney Montgomery Scott.

Just a follow-up with regard to the loan loss reserve. How much is allocated to specific credits?

Give me a moment here, Steve, I'll pull that up for us.

Sure.

Of our total allowance at March 31, just north of $34 million in total reserves were allocated to specific credits.

Okay. And also with regard to the non-performing AD&C loans, what were the origination -- what were the LTVs at origination?

Yes, Steve, those were -- they maxed out at 65% by policy, but there's many of those at origination were far less than 65%, just depending upon the structure of the deal or how it was structured or the time in which the underlying ground was purchased. In many cases the developer had owned it for several years or the land owner may have contributed to the development project, so maxed out at 65%.

Okay. Thank you very much.

And we'll take our next question from Mark Hughes with Lafayette Investment.

Hi again. Could you just comment kind of generically on how the loan portfolios from Potomac and County National have held up versus, I guess, you would call the old Sandy Spring.

Sure. By virtue of the size of those institutions, Mark, and their capacity or loan limits based on their capital, they were typically small business lenders, so there was not any significant exposure in some of the areas where we're seeing weakness. So there was not significant exposure to builders or developers. And so the portfolios are performing very well and I would say from a C&I side comparable to what core Sandy Spring portfolios are performing.

Are you seeing growth as you might have expected out of those two acquisitions during this somewhat troubled time?

We have -- in my comments I alluded to Northern Virginia, which has seen significant growth after going through its initial adjustment to being acquired. Our acquisition in Anne Arundel County also continues to grow, but not quite at the pace that we're seeing in Northern Virginia. Both of them met our expectations in terms of being accretive to earnings in the time frames we set forth upon acquisition.

Great. Thanks. And one last question. How is west faring in this type of environment?

Our wealth management business as a whole, as you might imagine, just by virtue of that being a fee based business on asset balances, has -- they've seen some adjustment but we're finding that our ability to hold on to clients, this is actually a good time for us, we believe, to be in this business as some of the larger firms have gone through their struggles. So we believe we're faring very well.

Thank you very much.

Thank you.

And at this time we do not have any further questions in queue. I'll go ahead and turn the call back over to Mr. Schrider for any closing comments.

Thank you, Kelly, and thank you for your questions and taking the time to participate with us this afternoon. We would love to receive your feedback and help us evaluate how we did. You can e-mail us your comments at IR@sandyspringbank.com. That would be very helpful for us. Thank you, again, for joining us and have a wonderful afternoon.