Sandy Spring Bancorp Inc (SASR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Sandy Spring Bancorp Incorporated first quarter 2010 conference.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to the President and CEO of Sandy Spring Bancorp Incorporated, Mr. Daniel J. Schrider. Sir, you may begin.

(Inaudible) Phil Mantua, Chief Financial Officer; and Ron Kuykendall, general counsel, for Sandy Spring Bancorp. As always, this call today is open to all investors, analysts, and the news media. There will be a life webcast of today's call and there will be a replay of the call available at our website beginning later today. We'll 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.

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 uncertainty. These forward-looking statements include statements of goals and 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 and 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 nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differently materially from those indicated. In addition, the Company's past results of operation do not necessarily indicate its future results.

Thank you, Ron.

In today's press release, we announced a net loss available to common stockholders for the first quarter of 2010 of $700,000 or $0.04 per diluted share, compared to net income available to common stockholders of $1 million or $0.06 per diluted share for the first quarter of 2009. And a net loss available to common stockholders of $4.4 million or $0.27 per diluted share for the fourth quarter of 2009. Certainly the main highlight of the quarter was our recent common stock offering of 7.5 million shares, which was very well received and resulted in net proceeds of $95.6 million.

As I stated in today's press release, repayment of TARP remains as one of our highest corporate priorities, and a successful offering was a key step toward achieving this goal. Stockholders equity totaled $471.9 million at March 31st and represented 12.9% of total assets, compared to 11.2% at March 31st a year ago. So at quarter end the Company had total risk based capital ratio 17.04%, a tier one risk based capital ration of 15.77% and tier one leverage ratio of 12.01%, which are all above amounts needed in order to be categorized as well capitalized for regulatory purposes. Obviously our regulatory capital ratios do include proceeds from the offering.

Last quarter, I talked about our net interest margin, which continues to be a main focus. And I'm pleased to report that the margin was 3.56% for the first quarter, compared to 3.39% for the first quarter of 2009, and 3.4% for the linked fourth quarter of '09. We think this is especially positive considering that total loans and leases decreased 8% to $2.3 billion compared to the prior year and 2% lower than they were a year end. This decrease in loans was attributable to declines in all major categories of the loan portfolio, primarily due to the lack of loan demand, which is being driven by ongoing soft regional economic conditions.

Additionally, our proactive credit risk management process has also resulted in runoff of undesirable loans in excess of newly originated lending relationships. On the deposit side, customer funding sources, which include deposits and other short-term borrowings from core customers were ahead 3% to $2.3 billion at quarter end compared to the prior, with the increase primarily attributable to consistent growth and balances in our premiere money market account and non-interest bearing deposits. I should also point out that total deposits were down slightly by 1% compared to the fourth quarter of 2009 due to seasonal fluctuations, some intentional runoff of both high cost time deposits, and higher priced public fund.

So as I've explained before, managing our cost of funds is key to sustain and grow the margin in this tough cycle. And keeping a tight reign on non-interest expenses remains critical in order to maximize our pre-tax, pre-provision earnings. To give you some perspective on the performance of the core company, pre-tax, pre-provision earnings for the first quarter of 2010 were the second highest ever at $14 million compared to $12.75 million at the first quarter 2009, and $13.9 million in the linked fourth quarter of '09.

Comparing the first quarter of 2010 and 2009, net interest income increased by $3.1 million or 13%. This increase was due to our continuing efforts to manage rates paid on deposits and borrowings, together with a higher level of interest earning assets. Clearly the margin is also affected by the current level of non-performing assets, which were about $143 million at March 31st, compared to $126 million a year ago and $141 million at year-end. The negative impact to our net interest margin from our non-performing assets is approximately 25 basis points at quarter end. We took a $15 million provision for loan losses in the first quarter, which was higher than the $11 million set aside for March a year ago. But notably lower than the $21 million provision at year-end and about $34 million for the third quarter of last year, which we are optimistic was the peak.

In terms of other credit trends, we continue to ensure the adequacy of our allowance for loan and lease losses, which now stands at 3.08% of total loans and 51% of non-performing loans, compared to an allowance of 2.81% and MPA coverage of 48% at December 31st. These coverage ratios include loans that are 90 days or more past due that continue to accrue interest. To drill down a bit, as has been the case throughout this cycle, solid credit risk management practices and specifically the resolution of problem loans remains a high priority, especially in our residential acquisition development and construction portfolios since 50.5% or $72 million are from this segment. That by far the most significant portion of non-performing assets involving some of our largest relationships.

Less than 1% of our MPAs are in our income producing, commercial real estate portfolio. Our commercial mortgages secured by retail properties totals $91 million, representing some 56 relationships. The largest relationship is around $10 million and the average loan is $1.6 million. There's no big box exposure. These are mostly neighborhood centers with good diversification and strong guarantor support.

Our office portfolio is approximately $79 million with an average loan size of $1.2 million. We have no tenant concentration and like retail, these projects are generally small properties with a diverse tenant mix. The C&I and owner occupied real estate portfolios represent traditional community bank small business relationships; and as you might expect, some of these business owners are struggling with the current economic environment. 15.1% or 21.5 million of our MPAs are from our C&I portfolio, and 6.54% or $9.3 million are in our owner occupied portfolio.

Our residential mortgage business, that is loans to individual, is comprised of the three expected specific segments. That's lot loans, construction loans, and permanent adjustable rate mortgages. With continued elevated unemployment levels and depressed property values, these portfolios have been a substantial source of MPA throughout this cycle. 4.2% or $6 million of MPAs are from the lot portfolio, 5.45% or $7.8 million from the construction loan portfolio, and 10.5% or $15 million are from our permanent adjustable rate mortgage portfolio. And as I noted last quarter, our home equity line portfolio continues to perform with healthy metrics and consistent usage rates on lines of about 44%. And our home equity portfolio represents less than 1% of our non-performing assets.

We've covered most of the other key financial highlights in our press release today so I'll not read them over again, and now we'll move to your questions. Operator., we can have the first question please. We would appreciate it if would state your name and company affiliation as you come on so we know with whom we are speaking.

Thank you, sir. (Operator Instructions) Thank you.

Our first question comes from Steve Moss of Jenny Montgomery.

Hi, guys. Steve Moss, how you doing?

Hi Steve.

Just want to start off on the--where do the AD&C balances appear? I might have missed that in your discussion there?

We'll pull that up for you here, Steve, as I flip through some pages. Total of $179 million approximately.

Okay.

And with regard to commercial business loans and CRE loans were down a bit quarter-over-quarter, how's loan demand looking for those two segments?

Yes. Both--both commercial and home equity demand has been several--has been soft for several quarters. Fortunately in March, we finally saw a turn to where we're hitting--hitting our loan growth or loan production expectations in the commercial portfolio. But Steve, it will--it will be tempered by our on-going efforts to move problem credits off of our balance sheet. Including some success we're having in moving balances out of some watch credit categories that aren't necessarily MPAs. So while demand is picking up, net growth will be challenging as we work through the MPA portfolio.

Right. Okay.

And then onto TARP, where are discussions with the regulators at this point?

Well, as I mentioned, repayment of TARP continues to be one of our highest priorities, and the offering was a key step toward that end. Repayment as you know, Steve, is not as simple as writing a check, and the process includes dialog with the US Treasury and our Federal regulator, and we've begun that dialog, and beyond that I'm not in a position to comment further.

Okay. Thank you very much guys.

Thank you. (Operator Instructions)

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

Hello.

Hey, Avi.

Hi, guys. Two quick questions for you.

Number one, noticed continued building of the reserves through over providing relative to net charge offs. I was wondering when you anticipate, or do you anticipate an eventual reserve release? Is that something we could maybe see at the end of this year or, is that maybe something out in 2011?

Yes. We see--definitely see provision expense moving in the right direction. The specific timing and extent of further decreases in expense would really depend upon specific timing and resolution of some--some larger credits. I think the key, as we've seen MPA stabilize and the trend of the pipeline of potential problems improve. So our provision expense and our reserve methodology is based upon, I think this is important to note, a very realistic view of values in the market. And so we're going to continue to view things that way, but we definitely see the provision expense moving in the right direction.

Okay. Thanks.

And then separately on an unrelated issue. I know first quarter is usually seasonally a little slower for deposit service charges, overdraft, etc., compared to the fourth quarter, but how should we be thinking about that more--more broadly in light of the upcoming rule changes to overdraft and what systems or what ideas do you guys have in place to recapture some of what will be lost?

Avi, this is Phil.

I think that--I think you're correct in terms of the seasonality effect in general terms on service charges, as much so as the seasonality that really occurs during the fourth quarter of the year, and then the trail off of that during the first quarter. But as we look ahead here, I would think you should expect that that service charge level of income is not going to come back up to prior levels; and in fact, with some of the impending regulatory pressures going forward, I think we would expect that that--that level would initially go down before it comes back up, and come back up primarily related to any growth that we might get in transaction oriented accounts as opposed to the types of fees per account that we've been able to enjoy in the past.

Okay. Thanks a lot guys.

Sure, Avi.

Thank you. (Operator Instructions)

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

Thanks. Good afternoon guys.

Hi Bryce.

Hi Bryce.

Can you guys speak to the--I guess the source or the mix of the loans 90 days past due and still accruing? And then secondly, if you could talk about any kind of movement into and out of the OREO? And then thirdly, if you had the 30 to 89-day past due balances?

Yes. Bryce, this is Dan.

First on the 90-day quarterly trend. The major changes we're seeing in that trend, or at least an uptick in this first quarter, which is really the driver behind the slight increase in an overall mPAs is in the residential permanent portfolio solely. So from a trend, that's one that saw an uptick in the first quarter in terms of 90s and over. And that's really simply due to what we're seeing in the regional economy, as well as the depressed values.

When you look at the 30 to 89 trend, however, quarter-over-quarter, we're actually down substantially in the first quarter relative to fourth quarter '09. Almost cut in half. So the pipeline coming in is--we feel better good about that from the 30 to 89.

OREO as you can tell, is it not materially growing out of that portfolio, we're selling predominantly residential lots that we've taken in early in the cycle, those tend to be a number of relationships but smaller dollar balances. We continue our strategy, Bryce, of trying to move the larger commercial AD&C projects out of the portfolio if at all possible, without having it flow through OREO, and that's a--and that's simply a strategy not to take title and ownership of the projects.

Okay. And Dan, I would assume that the residential lots are tied to that consumer lot loan portfolio, or is it, or is it different?

Absolutely. Thanks for that clarification. It is tied to that consumer lot portfolio.

Okay.

And kind of following up on Steve's question there, do you have the loan balances for the consumer lot portfolio, and then the consumer residential construction portfolio as well?

Yes. The lot portfolio is just shy of $110 million, quarter end; and the construction portfolio about $83 million.

Okay. Thank you, guys. Appreciate it.

Sure.

And there appear to be, actually I'm sorry. Our next question comes from Michael Shafir of Sterne, Agee.

Good afternoon guys.

Hi, Mike.

Hi Mike.

I was just wondering if you can just maybe go over the MPA balances by loan bucket again? I'm sorry, I didn't have a chance to catch all those at the beginning of your presentation.

Sure. We've got, let's see, I'll just run through the three primary categories.

Great.

Of, of consumer loans, mortgage loans, and maybe give you a little detail on the commercial in the first quarter. Overall consumer loans, that's every bucket is right around 1% of our MPAs. But that's only about a $1.5 million. Our total mortgage loan, non-performing assets at quarter end was just shy of $29 million, or 20% of MPAs. Our commercial loan bucket, which includes AD&C overall represents 74% of our MPAs, with 50.5% of overall MPAs coming from that AD&C portfolio.

Okay. Thank you.

And then on--in the commercial side, that's residential construction, commercial construction, land, and all the different lots?

The residential, which is a consumer portfolio, residential mortgage portfolio; and in my comments, I really spoke about three different components that are all loans to individuals, and that's construction loans, lot loans, and permanent adjustable rate mortgages. And that's, that's the bucket that represents the 20% of our non-performing assets, those are all loans to individuals. Some are construction, some are lot loans. Within the commercial category, and that would be loans to builders or developers. Within that non-performing loan balances, approximately $72 million are in that builder related business, which represents about half of our non-performing assets.

Out of the total non-performing number?

Correct.

And then, as far as the 30, 89-day, do you actually have those balances, or percent ages by any chance from the fourth quarter and the first quarter?

Yes. I can--I think those numbers will be published in the call report, I believe, when it's filed. But I can tell you that the overall 30 to 89 from fourth quarter to first quarter was, was cut in half.

Okay. Thanks a lot. I appreciate that detail.

Thank you.

Thank you. Our next question comes from Avi Barak of Sandler O'Neill & Partners.

Two quick follow-ups for you.

Talking about more broadly the market that you operate in. Obviously, there's been a lot of disruption over the last few years as far as bank M&A and larger players coming in, and that's been part of your strategy. I'm wondering if that's changed of late, have the larger banks finally maybe gotten their act together a little bit, or are you still seeing significant opportunities for market share?

Avi, Dan.

We still believe there's significant opportunity for market share. And that's, that's a little bit challenged, simply by the current economic conditions. And that is small business relationships tend to be a little hunkered down and waiting for a little more visibility in terms of their own businesses economically. But in terms of our position in the market, we still feel very fortunate to be in a market that we're the largest independent publicly traded bank in the state of Maryland. And when we look at the landscape across our market, we think we've got a great opportunity to take share over time. Particularly as the economy starts emerging from its current cycle.

Okay. Thanks.

And then separately unrelated issue, FDIC assisted transactions that's obviously all the rave right now. And we also know there's not too many "sick banks" in your market. Could you maybe give us an idea of how you're evaluating potential acquisitions at this point, either FDIC or traditional M&A or anything outside of the bank's base, maybe some--?

Sure. I think we'll continue to be very thoughtful now and in the future about opportunities for us to grow our business through acquisition, that would be bank and non-bank. As far as--and that's a strategy that's unchanged from what you've heard us speak of in the past and actually I think we spoke to the FDIC possibilities last quarter. And much like you said, Avi, we don't see there being a great opportunities for Sandy Spring in that space. Just by virtue of who you might anticipate and where they may be located and strategic fit, we just don't see ourselves--that being a great opportunity for us.

Okay. Thank you.

Thank you.

Thank you. And there appear to be no further questions in queue at this time.

Sir, did you have any closing remarks?

Well, obviously that wraps up our questions, and we just want to thank you. We appreciate the time you're spending with us this afternoon. We would like to receive your feedback to help us evaluate how we did and you can e-mail us your comments at IR@SandySpringBank.com. That's IR@SandySpringBank.com

Thank you, again, and have a wonderful afternoon.

Thank you, sir.

And thank you, ladies and gentlemen, for your participation. This does conclude your program. You may disconnect your lines at this time. Have a great day.