Sandy Spring Bancorp Inc (SASR) 2009 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. At the time I would like to welcome everyone to the 2009 fourth quarter and year-end earnings conference call and webcast.

(Operator Instructions).

And now I would like to turn the call over to Daniel J. Schrider, President and CEO of Sandy Spring Bancorp.

Thank you, and good afternoon. This is Dan Schrider and welcome everyone to Sandy Spring Bancorp conference call to discuss our performance for the final quarter of 2009. Joining me here this afternoon is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always this call is open to our investors, analysts and the news media. And there will be a live webcast and a replay of the call available at our website beginning later today. We'll take your questions after the 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, and good afternoon, ladies and gentlemen. 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 cost and benefits, assessment 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 regulation and a variety of other matters which by their very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp actual future results may differ materially from those indicated. In addition, the Company's past results of operations do not necessarily indicate it's future results.

Thank you Ron. Today we announced a net loss available to common stockholders for the fourth quarter of $4.4 million, or $0.27 per diluted share, compared to a net loss available to common stockholders of $3.8 million or $0.23 per diluted share for the fourth quarter of 2008, and a net loss available to common stockholders of $14.8 million, or $0.90 per diluted share for the third quarter of 2009. The fourth quarter of 2009 included a provision for loan and lease losses of $21.1 million. Our results this quarter were obviously driven by the provision expense. The loan loss provision did decline compared to the prior quarter, largely due to a reduce level of net charge offs, and a decrease in nonperforming loans. Most of these decreases were related to our acquisition and development portfolio, with a majority of nonperforming loans are concentrated.

This positive trend reflects our ongoing efforts in managing the resolution problem credits. As we have in past calls, I will spend sometime discussing our credit trends. But before in doing so I would like to comment on some highlights of our core banking operation, which we feel has remained very strong throughout this cycle, and specifically in the fourth quarter. We are pleased with the improvement in our net interest margin to 3.4% in the fourth quarter, compared to 3.27% in the linked third quarter. Despite soft loan demand and healthy deposit growth for most of the year, we successfully expanded margin in the fourth quarter by effectively managing deposit pricing. We did this while at the same time retaining a large majority of our deposit growth from new relationships produced earlier in 2009. As we have discussed previously, our margin is also negatively impacted by the current level of MPA, so we feel good about the upside potential in our margin, as we successfully work through this credit cycle.

Also related to margin, is the composition and quality of our investment portfolio. We've been both conservative and prudently focused on short duration positions, even though we have generated a significant deposit growth, and could have deployed these funds into higher risk, higher yield instruments. But we've opted to contain the risk, sacrifice a bit on yield, maintain good liquidity, and position our cash flow to take advantage of improved loan demand. This strategy has had an impact on the net interest margin, especially considering the absence of loan growth. However, we feel we are in a good position as the economy returns.

As you know deposit growth and retention throughout 2009 has been a real bright spot, and reflects our ability to utilize our high touch strategy to drive new clients to the Company. And take advantage of the market disruption in one of the best demographic regions in our country. Our strategy has rewarded us with 14% deposit growth year-over-year, and new multi-product relationships that will help loan growth and fuel earnings in the future. Our fourth quarter decisions to moderate deposit growth and reduce our dividend were both aimed at maintaining a stong capital position as we work through this credit cycle. As we said in the past, we continue to be thoughtful about capital, and do look forward to repaying TARP when conditions are favorable to do so.

Let's now turn to some concluding remarks regarding our credit trends. The results for the year include provision for loan and lease losses totaling $76.8 million, which is well more than double the $33.2 million we took a year ago. The encouraging news is that the provision expense for the fourth quarter of $21.1 million was lower than what we set aside for the third quarter of $34.5 million. Again, as the levels of both net charge offs and nonperforming loans trended downward toward the end of the year. We continued to ensure the adequacy of our allowance for loan and lease losses, which stands at 2.81% at December 31st, compared to 2.7% at the September 30, and 2.03% at December 31, 2008.

We've began to note some asset quality stabilization during the quarter. Overall, deterioration in our commercial loan portfolio began to slow, with the fourth quarter results supporting our perspective that asset quality trends may be stabilizing, at least in terms of frequency. Meaning we have seen the lowest number of risk rate in decline, since the first quarter of 2008. As we have been saying all along, the resolution of problem loans in our acquisition and development portfolio is obviously our highest priority, since 58% or $82.1 million are from this segment, the most significant portion of MPAs, and representing some of our largest relationships.

We are seeing positive signs that the values are stabilizing, and a return of the national home builder to our market, one that has been holding out far better than many other regions of the country. Less than 1% of our MPAs are in our income producing commercial real estate portfolio. Our commercial mortgage is secured by retail properties totals $92 million, representing approximately 58 relationships. The average loan is a $1.6 million. There is no big box exposure. Mostly in neighborhood centers with good diversification and strong guarantors. Our office space portfolio is approximately $76 million,with an average loan size of a $1.2 million. We have no tenant concentration, and like retail, projects tend to be small properties with a very diverse tenant mix.

The C&I and owner-occupied real estate portfolios represent traditional community bank small business relationships, and these business owners are not immune from the current economic environment, 12% or $17 million of our MPAs are from the C&I portfolio, while 5.5% or $7.7 million reside in our owner-occupied portfolio. All commercial relationships, regardless of risk rating are subject to regular portfolio reviews as part of an enhanced credit risk management process. Our residential mortgage business, that is loans that are to individuals, consist of three specific segments, lot loans, construction loans, and permanent adjustable rate mortgages.

Given the impact of unemployment and reduced property values, these portfolios have been a meaningful source of MPAs throughout the cycle, and we have dedicated the internal resources for necessary for ultimate resolution, 3.65% or $5.2 million of MPAs are from the lot portfolio, 5.4% or $7.6 million are construction loans, and 8.25% or $11.7 million are permanent ARMs. Our home equity line portfolio continues to perform with excellent metrics, and usage rates online is 44%. This portfolio is 100% organic, in that all credit has been generated through our 43 retail offices. We continue to rescore these credits monthly, and limit availability when appropriate.

Our home equity portfolio represents less than 1% of our nonperforming assets. As stated in our release today, resolution of problem assets requires expertise and patience. And we have both and we are seeing results. There's little question in my mind that we are working through the MPAs as efficiently and as rapidly as circumstances are permitting. And we have the best people available, driving our efforts to clear these assets from our balance sheet. We've covered most of the other key highlights in our press release today, so I will not read them over again. And at this point, we'll move to your questions. Operator, we can have the first question. We would appreciate it, if you state your name, and company affiliation when you come on, so we know with whom we are speaking.

Thank you.

(Operator Instructions).

We'll take our first question from Steve Moss with Janney.

Good morning guys. How are you doing?

Hi Steve,.

I want to ask where are the construction AD&C balances, and the resi mortgage construction balances, and the resi lot balances as of 12/31?

The AD&C balances, which would be the loans to builders and developers, Steve, are approximately $184 million at year-end. If you look at, I think the second part of your question, is are the lot loans to individuals?

Yes.

Okay. Let me -- We'll get that for you Steve, and I'll get back to you.

Okay. If I could also ask here, where are -- 30 days, 90 days as of period end?

The trend in 30 and 89s -- they are up from third quarter. We have some noise in the commercial portfolio with some mature credits that you'll see, that just clicked over year-end, which are performing loans, but hit maturity. But -- so you'll see some increase in the 30 to 89s, but at the same time as I mentioned in my comments, we have seen a significant slow in the migration within the risk rating categories.

Okay. Good. And then I guess lastly on the margin, big drop in the cost of funds. Obviously, pretty liquid, but what should we expect here going forward?

Steve, this is Phil. I would think that overall trends on the margin will be for it to continue to improve. The quarter was reported at 340. We actually ended the year higher than that, in the low 350 range. And we expect that level to continue throughout the first half of this year. And then some potentially pick up as we move ahead as well. And it will be primarily driven as you've recognized, by virtue of the cost of funds being controlled and contained here, primarily through the pricing of our time deposit portfolio. And just choosing where we want to be competitive, depending on our funding needs.

Okay. And last question, and I'll hop off. What are your expectations for effective tax rate, Phil?

Oh boy, that is a little tough, Steve, considering how that gets affected by the overall level of net income pre-tax. And I think as you know in the last couple of quarters here, with the loss position, we've been hovering right around the point, where the permanent differences almost overcome the situation where you have any tax liability. So let me think about that here for a minute or two, but I don't know that I have an answer for you, right off the top of my head.

Okay. Thank you.

Steve, I do have a number for you on the residential lot portfolio, its just about $112 million at period end.

Okay, great. And by the way, the resi mortgage construction which I know was about 130 or so last quarter, as a separate line item.

It's just north of $93 million, at period end.

Great. Thank you very much.

Our next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

Thank you. Just wondering, now that you are seeing better credit trends, do you have a sense of when you might stop building reserve, and maybe just match chargeoffs, or kind of what are your thoughts there?

One of the aspects, every reserve methodology is a bit different, Jennifer. Ours have a pretty substantial component that deals with historical loss experience. And so we see that continuing to influence our provision needs, and obviously as things turn and chargeoffs moderate, then the need from that factor alone will be decreasing. That's a substantial driver, given what we've experienced in 2009. Outside of that methodology impact, we continue to take what we think is a realistic view of values, and we'll continue to provision based on that.

And can you talk about when your OREO sales, and how close the prices on those sales have come to your marks, maybe in fourth quarter versus second and third quarter?

You'll notice that our REO balances really aren't dramatically increasing, and that's due to the fact that we are strategically doing our best to move a lot of this product, without ever taking it into OREO. So from that standpoint the marks that we are taking in the credit portfolios, are -- seem to be very relevant related to what we've moved out. Obviously, we'll gain more experience as we work the MPAs down here in future quarters.

And one last question. Can you give us an update about your two or three largest nonperformers at this point?

Yes. We've got -- customarily, obviously we don't speak about specific credits. As I mentioned, the largest credits in the MPA categories are builder-related relationships. And, Jennifer, the status of each one of those credits really varies quite a bit, as do the values and underlying provisions or reserves against them. So I don't have comments to make about specific credits, other than we are aggressively working them out.

Thanks.

(Operator Instructions).

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

Good afternoon, guys. How are you?

Hi, Avi.

Good. How are you?

A couple of quick questions for you. First, I was hoping if you could touch some of the expense line items. There were some unusual swings there. Notably, it looks like salaries and comps were down pretty significantly linked quarter. And also, there was kind of a ramp in the marketing spend. Maybe that was along the line of the branch opening you did in over in Northern Virginia. And why the decision to open a branch there, what are you seeing there that was attractive to you?

Avi, this is Phil. As it relates to the overall level of expenses in the fourth quarter. And more specifically to your question within the salary and benefits area, as you might imagine at year-end some true ups, and some accrual adjustments, that were necessary especially in the benefits arena, that probably all told, and this is probably even more globally to our total expense level. There was probably about $500,000 of adjustments and things, in there that certainly won't reoccur. It would go to more normalized levels, starting with the first quarter. And so there were just a couple of things there more so than anything more of a run rate basis is the way I would view it in, terms of personnel costs, et cetera.

In terms of marketing, there may have been a few dollars that were related to some promotional grand opening type aspect of things related to the Leesburg branch. But I don't think that we would view any additional marketing expenses in the quarter, to be outside the norm, just based on timing of running different types of advertising campaigns, et cetera. Last question, I guess is related to the placement of the branch in Northern Virginia, and in particular in Leesburg. I think as everybody knows, we entered the Virginia market about three years ago with the acquisition of Potomac Bank. And I think we continue to look to fill out that part of our franchise footprint. And Leesburg is without a doubt in the middle of Loudoun county, which has one of the best demographic profiles in the country. And we just think we needed more presence there to go with the existing Lansdowne branch that was opened just right after the point where we acquired Potomac.

Okay, thanks. And jumping to another issue, last we spoke seems like FDIC deals were kind of on hold, you were going to focus internally and work through your asset quality problems. Since then it's three months down the road, and there's some potentially more troubled institutions out there. Have your thinking on that changed at all at this point?

Avi, I would say it has not changed. We continue to obviously pay attention to the opportunities around us. Still a little uncertain as to exactly how some of those might unfold in market. There may be pieces of organizations, or certain geographic locations that would be of interest, so we will pay attention. But I don't think our overall view towards FDI-assisted transactions has changed.

Thanks. And then lastly, and I know there's always potential a lot of moving parts with this, but hypothetically if you were to repay the $80 million in TARP proceeds, would it be rational for us to assume that you would do a dollar for dollar common raise, or would you raise half of what you needed to repay in TARP. Maybe give us a general feel for how you would think about repaying TARP, whenever you decide to do it.

Our thoughts as it relates to capital just will depend, just clear visibility as to the economic climate, and conditions in the market as a whole. So I can't give you any more color on that.

Fair enough. Thank you.

(Operator Instructions.

Our next question comes from Bryce Rowe with Robert W. Baird.

Thanks. Good afternoon.

Good afternoon, Bryce.

Can you guys talk a little bit about, I guess, the decline in the builder portfolio? And then also in some of the -- I guess the consumer construction portfolio? Are you achieving that through some normal pay downs, as well as chargeoffs? Or is it more geared towards one versus the other?

Clearly chargeoffs within the portfolio has had the most significant impact on the decline in that portfolio. Within the residential construction business, that has been more of a flow of ordinary run off and conversion to permanents.

Okay.

We have had more traditional paydowns in the A B &C portfolio, but as you can see from our numbers, chargeoffs have had an impact here.

But it does seems like it's working it's way down at the very least.

It is. Absolutely.

Can you talk about, the other pieces along the portfolio look to be up quarter-over-quarter. Can you just talk about your competitive position there, and then maybe talk about the types of deals you are seeing, and how structure may be different now versus two or three years ago?

Sure. The -- while we are working through this cycle and plan a lot of defense on the aggressive workouts, we do have folks on the ground really focused in the traditional areas that we've been focusing. And that is in the residential area of significant production, both for portfolio and for sale in 2009. A lot on the residential mortgage side, a lot of disappearing acts from other small mortgage companies. So we feel really good about that. And a focus commercially on traditional small business. Demand is clearly soft, and I think most of our small business client and prospects are kind of hunkered down, waiting for some more clear visibility economically as well. We are focusing on taking business away from disrupted banking franchises. And so, that's where our focus is, and will continue to be going forward.

Okay. Thank you.

At this time it appears we have no further questions in the queue. I would like to turn the conference back to Mr. Schrider for any additional closing remarks.

We -- did you have something you wanted to follow up on?

Yes. This is Phil. Steve, as a follow-up to your earlier question related to your effective tax rate, the way I would give you guidance, so to speak on that, is that when we are in a situation where we have normalized earnings pre-tax, I would use something in the range, in the 28% to 29% as an effective tax rate. But again, I think there is some caution there, to understand that when we are in lower levels of pre-tax earnings, that average rate is not really going to completely hold up.

Thank you, Phil. That does wrap up our questions it appears. We appreciate you taking your time to participate with us this afternoon. We would love to receive feedback from you to help us evaluate how our call went, and how we did. You can email your comments to IR at sandyspringbank.com. And again, we thank you, and we hope you have a wonderful afternoon.

That does conclude today's conference. Thank you for your participation.