Sandy Spring Bancorp Inc (SASR) 2009 Q3 法說會逐字稿

Good day. Welcome to the Sandy Spring Bancorp second quarter earnings conference call. For opening remarks and introductions, I'd like to turn the call over to Mr. Daniel Schrider, President and Chief Executive Officer of Sandy Spring Bancorp. Please go ahead.

Thank you. Good afternoon, everyone. This is Dan. Welcome, everyone, to Sandy Spring Bancorp conference call to discuss our performance for the third 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, our call is open to all investors, analysts and the news media. There will also be a live webcast of today's call and there will be a replay of the call at Sandy Spring's website later today. We will take your questions after a brief review of some key highlights. 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 risks 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 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 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 were a couple of main points I would like to focus on today and then we will be happy to move to your questions. Let's look at four credit quality components. First our reserve expense. As you all know from the pre-release information we issued earlier, we again booked at large loan loss provision expense that amounted to $34.5 million which was substantially more than the first two quarters combined and obviously was the main factor driving our overall financial performance for the third quarter which was a net loss of $13.8 million. We now have a total provision expense of $55.7 million for the first nine months.

Second, the reserve coverage. The allowance for loan and lease losses now stands at 2.7% of outstanding loans and leases and 44% of nonperforming loans at September 30, 2009. This compares to 2.44% of outstanding loans and leases and 42% of nonperforming loans at mid-year.

Third is the growth rate of nonperforming assets. MPAs totalled $150.2 million at September 30, 2009, compared to $146.3 million at June 30, 2009, and $68.4 million at the end of the third quarter one year ago.

And fourth, chargeoffs. Our chargeoffs net of recovery were $29.8 million for the third quarter compared to $12.1 million in the second quarter and just 1.3 million for the first. These trends in numbers support a point that I made in the press release we issued earlier today. The point is we are clearly moving from the earlier phase in prior quarters where we focused on identifying and reserving against problem credits to where we are now which is all about aggressively managing these credits toward their ultimate resolution and moving them out. We think we have moved to a point of slowing the growth rate of nonperforming assets and certainly the chargeoff numbers for this quarter indicate favorable activity more towards resolving the nonperforming loans.

One further point to be made is that the higher level of overall chargeoffs is primarily confined to our residential real estate portfolio which is evident that we are not seeing other classes of assets showing meaningful deterioration. As I have in past quarters, let me move to some detail in the composition of those nonperforming assets. 63% or $94.5 million are from our residential builder portfolio, again the most significant portion of MPAs and representing some of our largest relationships. 15% are from our retail mortgage portfolio or $22.6 million. 9.1% or $13.7 million of our MPAs are from our C&I portfolio. 5.3% or $8 million in our owner occupied commercial real estate portfolio and, again, less than 1% is from our home equity portfolio as well as less than 1% from our investor real estate portfolio.

I also want to take a moment and comment briefly on a few specific portfolios. Our home equity line portfolio continues to perform with excellent metrics and usage rates just above 40%. We continue to rescore these credits monthly and limit availability when appropriate. Our commercial mortgages secured by retail properties totals about $94 million representing approximately 16 relationships with the average loan of $1.6 million. We no big box exposure. These are mostly neighborhood centers with good diversification and strong guarantors standing behind these loans.

Our office portfolio is approximately $98 million with an average loan just under $1 million. We have no tenant concentration and, like retail, these projects tend to be small properties with diverse tenant mix. Our shared national credit portfolio consists of 10 relationships totaling approximately $64 million. One credit is a nonperforming loan and is deep in the process of workout. We have taken a chargeoff on this relationship during the third quarter and this loan represents the only nonperforming loan from our shared national credit portfolio.

To repeat even more affirmatively what I said at the end of the second quarter, there is now good evidence of a flow occurring from identification of a nonaccrual to chargeoff, or to workout, or to REO. I'm pleased with our progress to date and I'm confident that the steps we have taken are both prudent relating to the evaluation of asset values and aggressive in relation to risk recognition and resolution. Clearly, beyond the AD&C portfolio our loan portfolios are well diversified in terms of product type, industry focus and individual loan size. We can talk more about credit quality when we take questions, so I want to turn briefly to the deposit picture which I think is very encouraging.

We have done a great job of capitalizing on the ongoing market disruption coming from several recent local mergers. The primary evidence of this is we have retained a large majority of the deposit growth we experienced early in the year. This is definitely the result of our high touch strategy. It is something we have always been very good at and we are finding that fewer and fewer of the larger bank competitors can really match. Once we win a new relationship we do periodic follow-up calls to new customers within their first 90 days to retain and solidify the new relationship and then successfully cross sell other products to begin building depth and share of the wallet. This is a real team approach and we have employees from all levels, including our executives, engaged in this process.

The bottom line is depositors want to really know their bank and their banker. It gives them the confidence they need particularly in time of economic uncertainty. We are of a size to lend and manage real money in one of the country's best markets yet do it in a high touch community bank style. We are now the largest locally managed and independent banking company headquartered in Maryland, including the affluent suburbs surrounding Baltimore, Washington, and Northern Virginia. I'm excited about the opportunity we have and the momentum we are seeing in relationship growth. We are looking to continue our strategy by expanding our presence in Northern Virginia and are excited about a new office we are preparing to open soon in Leesburg, Virginia. We think one of the benefits of this deposit growth and retention strategy is that we should have elevated levels of core deposits to rely upon to fund future loan growth as the economy recovers.

Just to recap some of the deposit numbers to support these points our total customer funding sources which are deposits and other short term borrowing from core customers have increased 19% compared to the balance a year ago. These increases are primarily attributable to growth product and also substantial growth in noninterest bearing deposits. Just a brief final note related to the deposit growth picture before we take questions. Our investment portfolio has grown to nearly $1 billion. As we have been very prudently and conservatively been investing the proceeds of our acquired deposit growth mainly into US government agency instruments, our treasury folks have done a great job managing this process and positioning the portfolio to take advantage of loan growth as the economy turns. We think it is worth noting that unlike many banking companies we have experienced no realized losses in the investment portfolio. We covered most of the key financial highlights in our press release today so I will not read them over again. This wraps up my formal comments for today which we can expand on as Phil and I take your questions. Operator, we can now have the first question and we would appreciate it if you would state your name and company affiliation as you come on so we know with whom we are speaking.

Thank you. (Operator Instructions) And we will go first to Steve Moss of Janney Montgomery Scott.

Good afternoon, guys.

Good afternoon, Steve.

Just want to start off on the -- with regard to the loan loss reserve. How much of that has been allocated to the AD&C portfolio?

Steve, we don't typically drill down into the components of the reserve in terms of dollar amount. What I can tell you is that our reserve that is allocated to the AD&C portfolio right now is in excess of our historical loss experience within that portfolio year-to-date. So what we have experienced in chargeoffs year-to-date as a percentage of that portfolio our reserve exceeds that amount today as we close out the third quarter.

Okay. Then what percentage of the chargeoffs were related to that portfolio during this quarter?

Bear with me just one moment, Steve.

Sure.

Almost there, Steve. We have got a year-to-date number. I'm just breaking it down for the quarter.

Okay.

Just north of 70% of the chargeoffs are related to the AD&C portfolio.

The other was C&I or CRE related?

It would have been a blend from some of the mortgage residential portfolio as well as the C&I portfolio.

In terms of the loans 90 days past due what's the mix in there? Or what type of loans are in there?

It really is -- it cuts across all portfolios with the exception of my comments on the home equity portfolio, that consumer base, our 90 days past due really are across all portfolio sets. Mortgages is heavier in there with C&I. You're not seeing it as I commented from the commercial real estate portfolio either in terms of the investor business. Predominantly C&I, some AD&C and mortgage portfolio.

Okay. On 30 to 90 days were they stable or how are they this quarter?

They are down slightly over second quarter.

Did you guys disclose that previously?

We don't disclose that number previously, no.

Okay.

But they are down.

And I guess lastly, in terms of changing away from credit quality for a moment here. With regard to the margin, what are your expectations here going forward?

Steve, this is Phil. I think as we have said before I anticipate the margin will continue to expand as we go through the last quarter here of the year for a variety of reasons, some of which we stated before in terms of repricing that is occurring on the liability side primarily between the combination of the turnover in our time deposit portfolio as well as our management now of the premier money market rate as some of the immediate initial guarantee periods have run off and we have got that priced more closely to the top of the market but certainly somewhere close or more to 200 basis points from where we started a year ago.

Thank you very much, guys.

Sure, Steve.

Next we will go to Avi Barak of Sandler O'Neill.

Good afternoon, buys. How are you?

Hi, Avi.

Regarding your commentary in the press release and you want to manage credit toward their ultimate resolution. Obviously there are only two or three ways to do that, charge them off, sell them off, restructure them as you mentioned in your comments. What do you see in general most of the problems credit playing out and cannot give us a handle on the provision run rate or provision going forward?

Avi, let me talk a little bit about the provision because -- and as I alluded to in my comments, we have been very aggressive in taking our provision against collateral value when a loan moves to nonaccrual status and then as periodic examinations of value continue over the course of time, which is standard fare, we will adjust those values and corresponding reserve to those values. So a lot of the charges you see in this third quarter did not result in necessarily a move to higher OREO balances, we actually took charges on loans that we are in some process of work-out with that remain in the portfolio. So we are taking our charges on those loans based on realistic collateral values as soon as possible. The disposition of those loans will come in all of those different ways that you describe. In some cases, we will work out a solution with a borrower. In other cases we will take properties back and sell them and in some cases we will be able to move those assets out of the bank and the borrower can find a different solution. So all of those are up for grabs including potential sale of notes if that is in our best interests and we will move the assets off the books. That's clearly what we are motivated to do. And I think the charges that we have taken in the third quarter are an indication of just dealing with reality, not waiting for disposition but taking the charge when we see that the values clearly aren't going to return for us.

Fair enough. Thank you. Second question. There was some recent press coverage of a -- I guess they build retirement communities. I believe it is called [Erickson] Retirement. And Sandy Spring was listed as having some exposure there. Can you quantify for us -- do you have exposure and can you quantity for us what it is?

In my comments I spoke to our shared national credit portfolio. We have made it and so hopefully that information helped you. We have made it a practice as you probably understand not to comment on specific borrowers for their own protection and confidences. So really can't get a lot further on that.

Fair enough. Thank you very much, guys.

Sure, Avi.

(Operator Instructions) We will go next to Jennifer Demba of SunTrust Robinson Humphrey.

I wonder how you're feeling about your capital position right now, your comfort level and how you're feeling in interest and acquisitions.

As we look at our third quarter ratios we are comfortable with the current risk base ratios but, as you mentioned, they do include TARP and our desire is really stated from the beginning, Jennifer, is to position ourselves to repay TARP as soon as reasonable and to your second point position our company to take advantage of those growth opportunities in the market. So clearly at some point raising traditional capital appears very likely.

And one other question. Can you just talk about how your income producing CRE portfolio is performing and if you could talk about the maturity schedule on that portfolio and what the average LTV is, if you have that available?

I don't have the maturity schedule and LTV information to share. What I can say is I made some comments about the nonperforming asset composition. Less than 1% of that is from that income producing CRE portfolio and the pipeline isn't any different than what we described in terms of the NPA. So we are not seeing, although we are looking hard for significant deterioration or weakness in that portfolio. I think that is largely because of the nature of it. They tend to be small properties and very well diversified with guarantor strength. We were not big players in big box or big office that had tenant concentration in it. So more of a function of our portfolio makeup. So we are not seeing a significant negative trend in that portfolio as we speak today.

Okay. Thank you.

We will go next to Mark Hughes of Lafayette Investments.

Hi, guys.

Hi, Mark.

It is a Board decision but any comment on the dividend? Is it likely to be cut or eliminated?

This is standard approach for us with a dividend. That is we deal with it every quarter based on the circumstances we are facing at the time of that decision. And so management and the Board collectively work together on and it is really a function of past earnings which this quarter speaks for itself but also what we see on the horizon. And neither one of those necessarily weighs heavier than the other. So to the prior conversation in terms of our capital position and our belief that it is adequate and what we plan to do there will also weigh in to the decision on the dividend. No decision has been made. We will continue to wrestle with it here over the next few weeks.

Okay. Changing gears a little bit here. Maybe this is a little premature and maybe this is something you look forward to the day when you can talk about this. But assuming you're going to get through this period and you've dealt with your problem loans, strikes me in recent years that loan growth is somewhat sluggish and now you have a lot more deposits on your books. Where are you looking for growth in your loan portfolio down the road? I assume you will cut down on residential construction loans to the builders and those sort of things. Where is the growth going to come from?

That's a good question. We are starting -- have started to see here into the third quarter a buildup of our pipeline in the C&I which for us is the bread and butter. It is the traditional small business that really feeds our portfolio. Over the last five years our loan growth has actually been very strong really in every category. The mortgage portfolio tends to have peaks and valleys simply because of the nature of the product that's available and desired in the market so whether that is a salable loan that we generate for note sale or whether it is portfolio growth. So it is really 2009, latter part of 2008 into 2009, third quarter of 2008 we made a decision to slow loan growth from a liquidity standpoint and anticipate what we may face from an asset quality standpoint but 2009 is really the off year an we are starting to see the pipelines begin to build. For the future, our focus is growing consumer and small business relationships in our market and we think that's where our growth is going to come. So continuing a diversified approach in residential mortgages, consumer lending and small business lending.

Last question. All of the money you've taken in, assuming you're getting very little return on the investments that you've purchased is it safe to say it is probably kind of a break even situation right now between what you're paying and money that you've just tucked into the investment portfolio?

Mark, this is Phil. I think it is certainly better than break even at this stage of the game because of the way we have been repricing down the originally acquired funds on the premier account and others on the liability side. And I think we have tried to position the investment portfolio for some yield enhancement here of late given that the loan activity hasn't been there, but at the same time also made sure that we are going to have the cash flows available to us as we go through the next 12 to 18 to 24 months when that loan growth reappears. So I think that just in general our investment yields probably the things that have been bought in recent times are probably in the 3.75% to 4% yield range. And with the push down some of the costs on the liability side here, we actually produced cost of funds this quarter by 36 basis points over the prior quarter. So I think that's where my comment to Steve earlier as it related to some margin expansion is the combination of those two things.

Thanks. Good luck, guys.

Thank you.

We will go to our final question with Steve Moss from Janney Montgomery Scott.

Just one follow-up back on the AD&C stuff. I was just wondering of the AD&C loans charged off this quarter, what was the average severity?

We won't make you wait this long again, Steve, for the answer. The average severity. Want to look at the chargeoff rate on those particular loans? Want to look at the chargeoff rate on those particular

Yes.

That is a -- we certainly have that average. What I will tell you is that that can move quite a bit depending upon the nature of the project. So from applying it to the total portfolio, I'm not sure how that would be but our average on a year-to-date basis on that ranges anywhere from 10% to 15% on that portfolio. And as I mentioned earlier our reserves today against that portfolio exceed that level.

Okay. Thank you very much.

At this time I would like to turn it back over to you, Mr. Schrider, for any closing comments or remarks.

I believe we have one other question in cue if we could take it.

Sure absolutely. We will go to Carter Bundy from Stifel Nicolaus.

Hi, Carter.

Sorry to jump in here right at the end. Couple quick questions kind of smaller in detail versus the other macro questions on the credit front. The salary line item spiked pretty meaningfully this quarter and if you could sort of talk about that unless I missed something in the press release which I might have. And, secondarily, with the lift initiatives, are there other opportunities here to cut out some of the expenses in the expense base?

Carter, this is Phil. I'll address those for you. There is no question that the salary number did move north here in the third quarter over the second quarter on a run rate basis and some of that is related to the current environment as you might imagine with some increases in employees and credit management and workout areas. So there is an element of that that is included there. And then the other element is really related to us looking forward and beyond what's going on today in terms of making some investments and some opportunity hires is what I will call them for us to beef up and improve other in various elements of the company both on the front lines as well as in the support areas. So all of what took place there by and large is either by necessity today or opportunity looking forward.

We did have a small amount of some severance-related costs that won't reoccur during the period in a given area. We made a decision to outsource the internal audit function within the company and so there was some severance-related costs related to that, but you're on point in terms of your overall evaluation or observation. In terms of broader expense levels, we also did have some one-time type things in this quarter that if you go through the math where you do the comparison of second to third quarter and you exclude, as we did in the press release the $1.7 million assessment last quarter gives you about a $1.4 million increase and about half of that was due to one-time things in the quarter that won't reoccur. So when you do that come through you've got about a 2.5% increase many expenses that even includes the before mentioned salary increases. So we are not uncomfortable with where we are with that and so to your point about lift initiatives and other cuts I don't think we really envision anything along those lines as we look ahead.

Okay. Phil, do you have the FTE count there?

I do. FTEs actually went down. FTEs from 6/30 to 9/30 it was 673 on June 30 went down to 654 on 9/30. One of the things I think we talked about this before too, in this particular point in the year we have a lot of crossover and back between summer intern-type help and temporary-type folks that kind of move that number forward and then bring it back down as we go through the latter part of the third quarter. So that's all in the mix there in terms of just looking at that particular metric.

Thank you very much.

Thank you, Carter. You're welcome.

At this time we have no further questions in the queue. I'll turn it over to Mr. Daniel Schrider for any closing comments or remarks.

Thank you all. I would like to remind you that we would appreciate receiving your feedback to help evaluate the effectiveness of our call. You can e-mail us your comments at ir@sandyspringbank.com. Thank you, everybody, for participating, and hope you have a wonderful afternoon.

That concludes today's conference. We thank you for your participation.