Sandy Spring Bancorp Inc (SASR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sandy Spring Bancorp second quarter 2009 earnings conference call. This call is being recorded. With us today from the company, 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. Schrider. Please go ahead, sir.

Thank you, Shannon. Good afternoon. This is Dan Schrider, and welcome, everyone to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2009. As always, this call today is open to all investors, analysts and the news media. There will be a live webcast of today's call and a replay of the call available at Sandy Spring's website beginning later on 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 risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk and future costs and benefits, assessments of probable loans and lease losses, assessments of market risks 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 affected 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 operation do not necessarily indicate its future results.

Thank you, Ron. There are a couple of main take aways I'd like to focus on today, and then we'll be happy to take your questions. First and foremost is that we again set aside a large loan loss provision expense that amounted to $10.6 million which was about even with what we set aside for the first quarter and substantially less than the $17.8 million provision that we booked in the fourth quarter.

Chargeoffs, net of recoveries were $12.4 million for the second quarter compared to $1.3 million for the first quarter. Of note is that half of the $12.1 million that we charged off is related to just one project. The large residential real estate project in southern Delaware that we've been talking about for some time now. So now with that project, having charged off about $6 million of it during the second quarter, we've reduced our remaining exposure there to approximately $6 million. In other words, about half of the quarter's total chargeoffs are associated with one of our largest problem projects. One which is also farthest away geographically from our home market.

So now we've cut our exposure on the Delaware loan by half. That is we think it's good progress after several quarters of essentially no movement on that particular loan. So the main take away on credit quality is that there is movement occurring and not just relating to the Delaware loan.

We're seeing more of a flow starting to get underway among problem assets. We've moved beyond just watching the level of MPAs rise rather into a phase where we are progressing towards eventual resolution. I think this is what's different about second quarter versus the first quarter and late last year. Nothing super dramatic, but there's now evidence of a flow occurring from non-accrual to chargeoff or workout or OREO. We're clearly not in a state of gridlock now.

So why is this happening? Partly because the extra people and resources that we've added are moving through our agenda and getting the results we're looking for. As we were ramping up the extra staff, we were aggressively recognizing problem credits, which in turn increased the level of MPAs. It's also important to understand that we were not simultaneously aggressively dumping these MPAs as chargeoffs, which is a strategy many banks are using.

So as we've gotten a very good handle on the scope of our MPA s, it's logical that the resources allocated to credit risk management are moving beyond simply trying to correctly identify problems and quantify the risk and exposure and now focusing more on creating movement towards a final outcome, which could be an increase in the reserve, a chargeoff, a workout program or taking a property into OREO.

There's also beginning to be a market for some of the inventory currently held by higher end local builder and developers. There are some sales occurring. This may be attributable to where mortgage rates are as well as due to the spring and summer selling season. Seasonal timing, in other words. It's also interesting to see some large national home builders moving into the local market and taking over the stalled projects from some of our better local developers who have not been able to move the product on their own.

As I have in past quarters, let me move to some more detail in the composition of the non-performing assets. 63.8% or $92 million are from our residential builder portfolio, the most significant portion of MPAs representing some of our largest relationships. 16.2% are from our retail mortgage portfolio or $23.8 million, 8.7% or $12.7 million of our MPAs are from our C&I portfolio, 4.7% or $6.8 million in our owner occupied commercial real estate portfolio, and less than 1% is from our home equity portfolio as well as less than 1% from our investor real estate or income producing 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. Our portfolio primarily consists of neighborhood centers located within our footprint with good tenant diversification.

So to wrap up on credit quality, as we said before, we are still concerned with the depth, breadth and duration of this current economic environment. But we are highly focused on recognizing problems early then tackling them proactively.

Let's shift to the other main take away I'd like to focus on. It's deposit growth, which is the tip of the iceberg evidence of the success of a much larger strategic effort that I want everyone to know about. Many of you have heard us talk about what we've internally called Operation Take Share, which is the major strategic initiative that we planned and began to implement in the latter part of 2008.

Take Share is a relationship based strategy that's broadly integrated across all of our product lines. The main objective behind this effort is to drive household growth and ultimately, long-term market share growth. In the short run, we are capitalizing on the huge amount of market disruption coming from several major recent mergers and acquisitions. These are acquisitions of well-established, dominant local players by large out-of-market companies. It's been a significant change to the landscape across our entire footprint. In the long run, our Take Share strategy goes beyond deposit and household growth by introducing our style of banking in a more focused way to both individuals and businesses in our market.

We are now the largest locally managed and independent banking company headquartered in Maryland, including the affluent suburbs surrounding Baltimore and Washington and northern Virginia. We are the best alternative for a client looking for a relationship with a local bank.

Let me describe Take Share in a bit more detail. First, we recognize that the growth and quality of core deposits do drive franchise value, so gathering core deposits is as integral a part of, but by no means not all of what Take Share is doing for us. Take Share began, as many of you know, with an original deposit program last September that featured a nine-month guaranteed rate premiere money market product. That was the hook. It launched the beginning of the initial phase of Take Share. We saw very strong growth with these primarily retail accounts almost immediately. Once we bring the business in the door, we have a very effective process of what we call onboarding, which involves touching the customer on a repeated schedule to expose them to a variety of other products.

It's fairly simple, but it is a disciplined process that really works. The evidence is pretty compelling. Total deposits are up 15% over where they were a year ago and were up 4% over where they were at the end of the first quarter. This growth is primarily attributable to the retail segment of the premier money market product that has been the cornerstone of Take Share so far. I do want to point out that the premier money market is aimed at both retail and commercial customers with about 75% or $340 million of the balanced growth from retail clients and 25% or $120 million going into commercial accounts.

At the same time, non-interest bearing deposits are up 20% since the beginning of the year, which reflects the consistent growth we've achieved in small business and commercial accounts, which is also an important component of Take Share. It's not just a retail deposit strategy and it's not just a rate play. We believe there will be good retention as the earliest premiere accounts are beginning to reprice out of the original nine-month guarantee and into a lower non-guaranteed rate. The continuing deposit growth trends would support this.

We tracked the measures of cross-selling success to get these new customers into other products in order to build our share of wallet and household. So far, the numbers look very good. So what Take Share has produced internally is enthusiasm because of the results. Everyone on the sales side of our organization is focused right now on building internal teams in order to effectively sell client relationships. This has always been an element of the Sandy Spring culture, but it's stronger than ever now because our people are seeing sales goals broken and we really think we're on a roll.

So the key take away I wanted to emphasize concerning Operation Take Share, it's more than just a deposit promotion and it's really driving household growth. We've seen over 3,500 new households acquired since the first of the year with average deposit balances over $125,000 and relationships made up of multiple products, and that number's growing.

We've covered most of the key financial highlights in our press release today, so I will not read them over again. This wraps up my comments for today, but we certainly can expand on these as we take your questions. Operator, we can now take the first question. We'd appreciate it if you would state your name and company affiliation as you come on so that we know with whom we are speaking. Shannon, we'll take the first question.

Thank you. (Operator Instruction) And we'll pause for just a moment. And we'll take our first question from Avi Barak with Sandler O'Neill.

Good morning, guys. It's Avi of at Sandler. How are you?

Hi, Avi.

Good Avi, how are you?

I'm well. A couple of quick questions. First, saw a material increase in net chargeoffs during the quarter. Obviously, you mentioned part of it was that Delaware project but we didn't see quite a jump in the provision. I was hoping you could give us a better feel for either of those or one, what's a better run rate?

The chargeoffs in the quarter, Avi, were against credits that had specific reserves already assigned to them, so that the way our allowance methodology works, there's not necessarily a dollar per dollar replenishment of the reserves so to speak when there's a chargeoff. It's all driven, obviously, by the general reserve and the specifics reserves on credits based on their collateral values. So there really isn't a necessarily a link to the current level of chargeoffs relative to the current level or necessarily the future level of provision expense.

Okay. Thanks. Secondly, it in light of today's earnings and what's been going on in the market the last month or so, I was wondering if your thoughts on repayment of TARP have changed in either a loan or in conjunction with a dividend [on] capital raise, et cetera?

It remains our strategy and desire to move out of the TARP program when it's most advantageous for Sandy Spring. That's -- obviously the considerations for other capital considerations, and so we'll continue down a track of investigating when the time is right for us to do that. At the same time, second quarter, I guess your comment is related to our dividend, and it is clearly our process and intent to revisit the dividend decision each and every quarter, which we certainly will in light of our current earnings as well as our internal forecast of where we think earnings are going.

Okay, great. Thanks. And then lastly, an unrelated issue, looks like the margin came in pretty significantly this quarter. It's a little inconsistent with what we've been seeing at some of the other banks that have reported so far this earnings season. I was wondering if there was anything unusual there or if we should expect somewhat of a snap back in the third quarter.

Avi, this is Phil on that question. I'd clearly recognize that ours is a little counter cyclical to what seems to be going on the rest of the market. I think a part of that is just, as Dan was discussing earlier, embedded in what we've been doing in the Take Share program with the offering of an at least at market rate on this premier money market product. And that in conjunction with the lack of any loan growth to speak of, the lack of spread, therefore for what we're doing in the investment portfolio with those funds, trying to keep that as short as possible, generate cash flows for the eventuality of some loan growth coming back to the balance sheet. So I think that that's part of why our margin did what it did during the quarter.

I do, though, anticipate that our margin will snap back as we go through the latter part of the year, because we are seeing, as Dan also mentioned, the significant amount of those guaranteed premier accounts moving down from the highest levels which were 3.5% originally offered last year to the current rates that we're offering somewhere in the 175 range and maybe even lower, depending where the market goes. We also have about half of our time deposits that are going to mature during the next six months. And I foresee that we would probably have a pickup on average of maybe 130 basis points on the maturing amount that should help bring the margin back over the course of the next couple quarters.

Great. Thank you.

You're welcome.

Thanks, Avi.

(Operator Instructions) And we'll go next to Steve Moss with Janney Montgomery Scott.

Good afternoon, guys. Steve Moss from Janney.

Hi, Steve.

With regard to the Delaware project that was partially charged off this quarter, what was driving the chargeoffs? Is there actual contract for the property or is it going into OREO?

That property did not move into OREO during the quarter, Steve. Our chargeoff is more a reflection of updated collateral values.

Okay. And then, Dan, you mentioned you were sensing increased activity for distressed projects. What do you see in terms of nonperformers going forward, and do you figure you have a bit more of a build over the next couple quarters, or do you think there will be more workouts here over the next three to six months?

I think they're both -- let me separate both those questions and hit the last one -- second one first. We certainly will begin or continue to see some flow within the NPA categories in terms of workouts. At the same time, while we believe we have a good fence around our understanding of risk within the portfolio, there are some credits within AD& C portfolio. They're still close to the margin, so we could see some continued movement into the NPA category in the coming quarters. Nothing will catch us by surprise. It's just a question of whether events will trigger those moves. So we will see a combination of things. Flow within the categories, some credits coming out, but also the potential of some continued growth.

As I've mentioned previously, the AD&C portfolio for us is by far the lumpiest portfolio by virtue of credit size or relationship size. So as we move out of that portfolio, which does have a limit to it, the diversification is much more widespread in terms of credit size.

Okay. And how big was the AD&C portfolio at quarter end?

I think it was approximately $215 million to $220 million.

Okay. Thank you very much, guys.

Sure, Steve.

Thank you.

And we'll go next to Mark Hughes with Lafayette Investments.

Good afternoon.

Hi, Mark.

Hey, Mark.

Hi. Could you just talk a little bit broadly about what you're seeing in the landscape right now? Like, are you feeling better today than you were three months ago, six months ago, or do you feel like there's still more pain to come, that things haven't leveled off yet?

Mark, just for a little clarity's sake, are you still speaking with regard to the credit portfolios?

Yes.

Okay, the -- and obviously, the last several quarters, we've been talking builder related credit AD&C portfolio and while there's beginning to see some movements, particularly in the close-in markets, there's a lot of work to be done in our industry and our bank as we move through this time. Absorption's going to get some time to get these projects moving. As you move out of that portfolio, the areas that have us very focused is what is the impact of unemployment -- continued rise in unemployment going to mean for us? That causes us to focus in on our residential mortgage portfolio and specifically in the lot and construction segments of those portfolios. Again, much more diversified than that AD&C portfolio in terms of credit size and spread among many, many borrowers. But clearly, that's the area that's getting a lot of our focus.

Okay, and one other question. The Virginia bank that you bought in recent quarters have been doing, I think, better in terms of NDAs than the Maryland portfolio. Is that still true?

That's a function of their size, and so their capital as an independent bank provided a lending limit that didn't really allow them to play in the builder related business as we have. And so the answer to that question is yes, it continues to perform well.

Great. Thank you.

Thank you.

And we'll go next to Bryce Rowe with Robert W Baird.

Thanks, good afternoon.

Hi Bryce.

Hey, Bryce.

We're talking about the individual construction and lot loans and how that's getting a little bit more attention. I assume that's why we saw that particular uptick in nonperforming assets within that category. Can you talk a little bit about kind of the marks you're seeing against those loans? And what kind of reserve you've got built against that portfolio at this point?

It's a little early to have a great deal of hindsight intelligence on the marks against that portfolio, because it's really -- we're dealing with individuals and individual lots and/or construction projects. So there's -- I can't say that there's a consistent or standard level of exposure in that portfolio. But obviously, as you know, once a credit moves into a nonperforming category, the rules are pretty clear. And that is we appraise the property and reserve against the value of that property compared to the loan balance. We don't have a good deal of history there to be able to look back and say what those loss rates on that portfolio will be going forward.

Okay. Just another unrelated question as far as the balance sheet goes, Phil. Obviously, deploying on a lot of the cash from the deposit program into securities.

Right.

I guess we should expect that to continue as loan demand is kind of soft?

Yes, as long as loan demand is what it is and we're as successful as we have been on the deposit side, that's pretty much the answer, yes.

Do you see a stabilization in the securities yield, or do you expect it to come down some more?

I would think we'll probably see some stability there as opposed to having it come down from this point going forward. Some of that downturn was related to some things that were scheduled to mature out that had been on the books for some period of time, especially in our remaining state municipal portfolio. I don't foresee a lot more of that going forward. Now we've just got a more kind of streamed cash flow basis by virtue of what we've been investing in, which are primarily agency based mortgage backs and agencies.

Okay. Thank you. Appreciate it.

Sure.

Thanks, Bryce.

And we'll go next to Carter Bundy with Stifel Nicolaus.

Good morning, everyone, or afternoon.

Hi, Carter.

Could you all talk a little bit about -- with loan demand being soft, your loan yields have continued to come in pretty meaningfully. Could you talk a little bit about what you're doing on that, and do you think you see those stabilize? Are you starting to get better pricing power for what is maturing and speak a little bit about that? Thanks.

The lending, as you know, demand is soft. But I think that we clearly have more pricing power today than we have the last few years because we're in the market, we're open for business, we're looking for opportunities. And that's not the case across our market with other financial institutions. So I think as things mature and reprice, we certainly have an opportunity, on floating rates for instance, to implement floors on prime based or LIBOR based transactions where we haven't in the past, so we could pick up a little bit of spread there. But I think overall we'll have an opportunity to price for risk maybe a little better than we've been able to the last few years competitively.

Are you putting in floors right now in the portfolio for pretty much everything that's renewing?

All commercial variable rates, yes.

You are? Phil, if you could remind me how much of that portfolio was tied to prime versus LIBOR?

I believe in terms of the -- this is going to be not quite the answer, Carter, but I think in terms of our overall loan portfolio, about 25% of it is tied to prime and maybe another 10% at the most is in any way tied to LIBOR. So the total loan portfolio, I didn't look at it from just the commercial basis, but I would imagine the majority of those are in that commercial portfolio.

Thank you very much, Phil, that's very helpful. Thank you.

You're welcome. Okay.

And with no further questions in the queue, I would like to turn the conference back over to Mr. Schrider for any additional or closing remarks.

Thank you, Shannon. Thank you all for your questions. I appreciate you taking your time this afternoon to spend with us, and would like to remind you that we would very much appreciate receiving your feedback to help us evaluate how we did. You can e-mail your comments to IR@sandyspringbank.com and we'd be happy to take those in contribution. Thank you again for joining us, and have a wonderful afternoon.

Once again, that does conclude today's conference. We thank you for your participation.