Sandy Spring Bancorp Inc (SASR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Sandy Spring Bancorp second quarter earnings call.

(Operator Instructions).

At this time I would now like to turn the conference over to your host, Daniel J. Schrider, President and CEO of Sandy Springs Bancorp. Sir, you may begin.

Thank you, and good afternoon, everyone. And welcome to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2010. This is Dan Schrider, and I'm joined here today by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always the call today is open to all investors, analysts, and the news media, and there will also be a live webcast of today's call, and a replay of the call available at our website beginning later today. We will take your questions after a brief review of some financial highlights, but before we get started, Ron will give the customary Safe Harbor statement.

Thank you, Dan. 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, 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 or 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 it's future results.

Thanks, Ron. During our conference call at the end of the first quarter, we noted that one of the main highlights was a very successful common stock offering of 7.5 million shares, which resulted in net proceeds of $95.6 million. Based on the approval from the US Treasury, we're thrilled to announce that yesterday we repaid half of the TARP proceeds of $41.5 million. And it continues to be a high priority to repay the remaining TARP funds, and we do anticipate doing so sooner rather than later.

As noted in our press release from earlier today, we're also very pleased to have reported a profit for the second quarter of $5.1 million or $0.21 per diluted share, compared to a net loss of $1.5 million or $0.09 per diluted share for the second quarter of last year, and a net loss of $700,000 or $0.04 per diluted share for the linked first quarter of 2010. Obviously the main driver of this quarter's results is continued improvement in our asset quality metrics, as non-performing assets declined for the third quarter in a row to $118 million, compared to $146.3 million at June 30, 2009 and $143.3 million at March 31, of this year.

Our lending and credit teams have done a great job in effectively managing down our problem assets. This decrease also resulted in a coverage ratio of the allowance for loan and lease losses compared to non-performing loans, which includes restructured loans and 90 days past due of 65%, compared to a ratio of 42% at June 30, 2009, and 51% at March 31, 2010. At quarter-end our allowance for loan lease losses stood at 3.22% of outstanding loans, compared to 2.44% at June 30 of 2009, and 3.08% at March 31 of 2010.

Loan charge-offs net of recoveries decreased to $4.3 million for the quarter, compared to $12.1 million for the second quarter of 2009, and $10 million for the first quarter of 2010. As a result of these improvements, we are encouraged with the second quarter provision which was lower and amounted to only $6.1 million, compared to $10.6 million for the second quarter of 2009, and about $15 million for the linked first quarter this year. We really like the way the provision and other credit metrics are trending at this time.

Shifting to a year-to-date view, for the first six months of 2010, we earned $4.4 million, compared to a net loss of $465,000 for the first half of last year. Of course, our 2010 year-to-date results included a very sizeable provision totaling $21.1 million, while the results for the first six months of 2009 included both the provision for loan and lease losses of $21.2 million, and an industry-wide FDIC special assessment charge of $1.7 million. And we've now posted three linked quarters where the provision expense declined, our level of net charge-offs in non-performing loans are also trending down. We feel confident that we have turned the corner, and we are also seeing a meaningful decrease in new problem credits as we move through the cycle.

Shifting gears a bit, it goes without saying that the companion story to the resolution of problem assets is the business of generating high quality new assets, an underlying driver of our revenue growth and profitability. Suffice it to say, the sluggish economy has resulted in weak loan demand. But one factor that we believe is differentiating us from many of the larger competitors right now, is that we are not so internally focused and consumed with our problems. We are making a concerted effort to be on the offensive with our existing customers, and in our efforts to take away relationships from some of the larger out of town banks.

An example of one recent initiative involved some new leadership and senior talent we brought into help ramp up our lending to government contractors, which we see as a great opportunity, given the dynamics of the local market. On a related note we are also pursuing and delivering on a number of initiatives on the deposit side, with focused efforts aimed at small business DDAs, non-profit organizations, and affluent retail prospects that value dealing with the local, high quality and high touch bank. While consumer funding sources remain virtually even, compared to the linked quarter and prior year, we have successfully attracted targeted small businesses and retail DDA relationships, while at the same time enhancing margin by driving down the costs, and in some cases the balances of higher cost accounts.

As mentioned in our release, we did see some improvement in the margin which was at 3.58% for the second quarter, compared to 3.11% for the second quarter of 2009, and 3.56% for the first quarter of 2010. Another further point worth noting, is that the growth in our Wealth Management Business was well ahead of where we were last year for the first six months, up over 11%. And for the second quarter of 2010 versus the second quarter a year ago, we saw 16% surge in fee income related to all Wealth Management activity. Assets under management were $1.7 billion at quarter end. Essentially all three major components of our Wealth Management Business did well, including our subsidiary, West Financial Services, as well as our bank trust division. And we were especially pleased with the performance of our financial advisors, that delivered through our branches, where revenue was up 50% on a quarter two versus quarter two basis, and 27% on a year-to-date basis.

Mutual funds are currently selling quite well, and as expected the annuity business has leveled off compared to prior quarters. Stockholders equity totaled $483.7 million at June 30, 2010, and represented 13.1% of total assets, compared to 10.8% at June 30 of 2009. At June 30, 2010, the Company had total risk-based capital ratio of 17.6%, Tier 1 risk-based capital ratio of 16.33%, and a Tier 1 leverage ratio of 12%, all which were above amounts needed to be considered well capitalized for regulatory purposes. I believe we've covered most of the other key financial highlights in our press release today, so I will not read them over again. And we will now move on to your questions. Operator? We will now take the first question and we would appreciate it if you would state your name & company affiliation as you come on, so we know with whom we're speaking.

Thank you, sir. (Operator Instructions).

Our first question comes from Michael Shafir.

Hi, this is Michael Shafir from Sterne Agee.

Hi, Mike.

I was wondering, the non-performing asset drop was pretty substantial, about $25 million. So I was wondering if maybe you guys could go over kind of the how some of those loans either got cured or charged off, or what was the resolution process in terms of maybe some of the larger credits?

The lion's share of what we experienced in the second quarter were the result of pay-offs. And that in some cases was successfully moving the credit out of the bank, either by the initiation or initiative of the borrower, or by actions that we have taken. And they really, the resolution process varies on a credit by credit relationship basis, but the result of predominantly pay-offs.

And then also, the $118 million left in non-performing assets, is that still predominantly, like construction and development?

Right now, approximately 40% of our non-performing assets, which would include the 90 days, are from that AD& C portfolio, which is substantially down over prior periods. So a lot of the resolution has been coming out of that portfolio.

And then you guys did mention that you saw kind of a slowdown in new non-performers, come in the door. The charge off number was actually pretty small, so it seems like there was a lot of pay-offs, and very little in terms of the way of new problem credits for the quarter.

Yes, a couple different points. One is the migration, the risk rating migration that we're seeing in the commercial portfolios has clearly slowed over the last few quarters. And so we're really pleased with the slowdown of new problem loans from that portfolio. We're also seeing a reduction in 30 day delinquency volume, in both in terms of dollars and number of loans from our residential portfolio. And one of the observations we have, in digging deeper into that is the vast majority of the defaults or the delinquency are repeat offenders, meaning that we're not seeing many first time or new defaulters come into that portfolio as well. So the signs are all pointing in positive directions, for both of those portfolios. And we do not have any meaningful asset quality issues coming out of our consumer portfolio.

Would you guys be able to quantify the 30 to 89 day this quarter versus last quarter?

What I can talk about is, within the press release we talked about our 90 day past due numbers which are relatively flat with the prior quarter at about $24 million. I think there's a notable difference though, in what that's comprised of. In that $24 million, approximately $22 million is from the residential portfolio. And the balance is really split pretty evenly between the consumer and commercial portfolio, which isn't much. But within that but within that $22 million residential portfolio 90 day number, a little over $6 million of that, are loans that have already received a charge off against them, that are awaiting movement into OREO, and just awaiting ratification on some foreclosures. So it's important to note, that the composition of that 90 day number, which is different than it has been in the past. We actually see the core coming down, as a matter of timing of how we move -- of when we move credits into OREO, which we'll see obviously uptick as we resolve issues.

And then just kind of, as we start to think about the provisioning line moving forward, clearly, a substantial drop this quarter. Do you guys feel like it will be more of a smoother kind of downward progression, or is it still going to remain lumpy depending on resolution of certain problem credits?

I think there's always the possibility that could be a little bit lumpy. But at the same time, we think that the overall trend of what we're seeing in credit metrics is sustainable. But the provision, just given the nature of when a specific deal may get resolved, could still create a little bit of lumpiness.

Thanks a lot. I really appreciate all that clarity.

Thank you.

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

Thanks, good afternoon.

Good afternoon, Bryce.

My follow-up on some of Mike's questions there, but just wanted to get a feel for how the, I guess the conversation or the discussions with regulators went as far as we paying the TARP, and how you all agreed on paying half now and then half at some point here in the future?

You obviously alluded to the key point and that is any repayment is subject to the regulatory approval, and working through our primary regulator, which is the Fed. They have been very good to work with through this process, and we're obviously comfortable with approving repayment of half. It's my belief, my sense that it's continued asset quality trends in the right direction, and sustainable profitability, or sustained profitability that they would be looking for. And we think that's something that can happen sooner, rather than later. That's the best intelligence I have.

That's great. That's helpful. And then just again, follow up on Mike's question, if we think about where it's most problematic loan portfolios are, the AD&C portfolio, and then the consumer residential construction portfolios, vertical construction and lot loans, can you give us a feel for how much they paid down over the quarter? I think the AD&C portfolio is close to $180 million in the first quarter. And the residential construction piece through the consumers was, let's call it almost $200 million combined at the end of the first quarter.

Yes, let me flip through some data here, Bryce to get you, the AD&C portfolio at the end of the quarter, as you said, was about 180 at the end of the first quarter, and ended up at about 158. The res mortgage piece actually grew by $2 million or $3 million during the quarter period end.

Is that, Dan, does that include the lot loans to consumers as well?

No, it includes the lot loans to consumers. On the table in our release, the residential construction loans were broken out. There was a little bit of growth in that category. And the lot loan portfolio just continues to decrease, but not meaningful, a $1 million or so.

And the pay downs that you got there on the AD&C portfolio, is that more kind of in the category of you pushing those loans out of the bank? Or is it just normal course of those deals maturing or those projects maturing?

The former versus the latter, continued pushing assets out of the bank.

Okay.

And problem categories.

That's great. And one last question, kind of logistics question for Phil. Phil, the other non-interest income was a little over $2 million for the second quarter. Anything going on there that we need to know about?

Bryce, not other than the quarter end adjustments made for gains on the customer level derivatives, where things that are related to the mortgage banking world, per the mark-to-market accounting requirements. Otherwise, nothing of significance from a true operational standpoint.

Thank you guys. I appreciate it.

Thanks, Bryce.

Our next question comes from Steve Moss.

Good afternoon guys.

Good afternoon, Steve.

Nice quarter of progress here. I was wondering if you can give a little color if there are any non-performers under contract, perhaps from the AD&C side that you'd expect to move out this quarter?

I think it's tough to, Steve, we have quite a few that are in the works of solving for, exactly what quarter that falls into is probably a little difficult to predict right now.

Okay, and then I guess with regard to the, with regard to Reg E, in terms of charges here, do you guys have any feel for what your opt in rates are, and what the potential impact is to service charges?

We fortunately as a community player, Steve, we have an ability to have a little bit more robust process, and targeted approach on the opt ins. And what I mean by that is given the size of our institution, the direct mail, the internet banking e-mails, and then the phone calls most importantly from branch staff, as well as our client service center have been very effective, really focusing on those that are the heavy revenue producers. We're still finishing up that work, but at last count we were approaching the 40% positive response rate on some of those targeted segments, which far exceeds our expectation at this point. But we're still working on it, and trying to drive that number up.

Okay, and then lastly, with regards to the margin here, I guess a little color to what you expect going forward.

I'm sorry, Steve, you kind of broke up there . What was the question?

Sorry. Just wondering a little color on regard to the net interest margin here going forward.

Oh, okay, sure. I think that we would clearly like the progress that we've made to date, in terms of the quarter-over-quarter improvement. We think that that 355 to 360 range is certainly very solid as we move ahead. Given what's going on in the Markets around us and especially in terms of what's happening across-the-board with interest rates, it would be our desire to try to continue to expand that margin through what we're doing on the deposit side of the balance sheet. So we could see a little bit more expansion between now and the end of the year, as opposed to any significant contraction. The other element of that is also just, continuing to put more assets back into the performing category, which would certainly help.

Alright. Well, thank you very much guys.

Sure.

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

Good afternoon guys.

Hi, Avi.

If I could just follow-up briefly on the earlier question about TARP. I was just hoping to understand a little better, the rationale behind paying back the TARP in pieces, as opposed to maybe waiting another quarter or two to get that definitive sign that credit is stabilizing, and I'm just paying back the whole TARP all at once.

Yes, obviously something, Avi, that we wrestled with, and obviously the economic decision, and an opportunity to get out from under that dividend, and put some of that cash to work. And so that's really the bottom line as to why doing it in pieces.

Okay, and then just a follow-up to that. Would -- as far as you're thinking about it right now, would the repayment of the remaining piece potentially involve an additional capital raise of any form?

That's certainly not what we're expecting.

Okay, and then totally separate issue. Do you have your TDR balances off hand? And just hoping to get an idea of what kind of re-default rates you're seeing there.

Be right with you here, Avi.

Thank you.

Right now at the end of the quarter, Avi, we're at about $1.2 million in total of TDRs, so not a significant balance for us.

Okay, thanks very much.

(Operator Instructions).

Our next question comes from Matt Schultheis with Boenning & Scattergood.

Hi, how are you guys?

Welcome back to the call, Matt.

Hi, Matt.

Thanks. Quick question for you, a follow-up on the Reg E. And I'm going to try to get you to quantify this a little bit more if you can. As it stands today, assuming nothing changes from today, what do you think the dollar figure impact is per quarter on you guys?

Matt, this is Phil. When we originally evaluated this, while we were doing our planning for the year, I think we estimated that the outside impact on an annual basis was about a $1.5 million. So you can divide that up quarterly to get the quarter to quarter impact. Again, given what's happened so far, and reaction, we're hopeful it will be less than that. But that's kind of what we put out there as the outside boundary on what we might expect.

Okay, and one last question with regard to repayment of TARP. I'm assuming that there is a cost to that, a charge, accretion of the issuance cost. Do you know what that's going to be?

I don't believe that that is, at least through the P&L, I don't know that that is truly the case, Matt, so I don't believe that there is any. And we hadn't really anticipated that that would be the case.

Okay, and do you think you'll negotiate to repurchase the warrants when it's all said and done? Or do you think you'll just let the Treasury deal with those how they are going to deal with them?

I think we'll wrestle with that when we make this repayment.

Okay, thank you very much.

Our next question comes from Jennifer Demba with SunTrust.

Good afternoon, Dan and Phil. This is David Grayson filling in for Jenny.

Hi, David.

Most of my questions have been answered but I guess I want to touch back on credit a little bit. Your body language on early stage indicators, favorable, things aren't filling up the pipeline. You're resolving your credit issues that have been a pretty healthy clip. Charge-offs were down. So all of the numbers look really good but I'm just wondering the thought process behind why the reserve build, and what we should be thinking about going forward?

That's a fair question. I think a good portion of our reserve methodology is reflective of historical loss methodology, David. And so that will, if our trends continue which we think they will, that will be tempered over type as a part of that allowance calculation. And then be a driver for how it backs off, in and when.

Okay, and then I guess sort of an open ended question if you will, maybe just some key thoughts on what you're seeing in the competitive landscape there around Baltimore, Washington corridor. And now that a lot of the market disruption is kind of in the rear view mirror from an M&A perspective for a while, and how is the dust sort of settling there and what are you seeing?

Well, I think it still needs to settle a bit more, in terms of what the competitive landscape will ultimately look like, because there's still some weakened players in the market. And but the bottom line, we think the opportunity that we have in front of u,s as the largest bank headquartered here in the state, doing business in probably one of the premier demographic areas in the country is tremendous. We have longevity in the market, we have a name that's recognized, and we have the people and products to win business. And so we think that combination is perfect for us to drive growth in the future. We look forward to taking advantage of it.

Okay, thanks. That's all I had guys. Thank you. Good quarter.

Thank you.

I'm showing no further questions on the phones. I'll now turn the conference back over to Mr. Dan Schrider.

Thank you very much, and for taking the time this afternoon to participate with us. We want to remind you that it would be great to receive your feedback to help us evaluate how we did, and how to make our call more effective in the future. You can e-mail your comments to ir@sandyspringbank.com. Thanks again, and have a wonderful afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.