Sandy Spring Bancorp Inc (SASR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sandy Spring Bancorp third quarter earnings call. 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). As a reminder, today's call is being recorded.

At this time, I would now like to turn the conference over to your host, the President and Chief Executive Officer of Sandy Spring Bancorp, Mr. Dan J. Schrider. Sir, you may begin.

Thank you, and good afternoon, everyone. Welcome to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2010. This is Dan Schrider speaking, and I'm joined here today by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, our General Counsel. The call today is open to all investors, analysts and the news media, and as always, 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 key 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 risk 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 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 operations do not necessarily indicate its future results.

Thank you, Ron. We had a good, strong, profitable quarter, and I want to quickly make some observations concerning our performance highlights, and then cut right to your questions. I will keep my remarks brief today, and on point this time because our results are very straightforward. We believe we have advanced through this unprecedented economic cycle to a point where we can begin to focus on the future. It also means we have moved beyond the main agenda that we knew you wanted to hear in our previous conference calls.

As you know, in our calls over the past several quarters, we basically performed a drill down on loans, a detailed discussion quarter after quarter on credit quality metrics, and our problem assets, and rightfully so. But now we feel it makes sense to take a bit of a different turn. That said, we're in no way insinuating that our problem assets are out of the picture at all. There's no way they are totally behind us, and there is still plenty of work to do to move all of these assets through the pipeline and off the books. But we do believe we have pushed our way over the hump, and are well-positioned to go out and return to the business of community banking, making a profit and building market share as the largest and leading independent community banking company headquartered and operating in Maryland.

Here are the major performance drivers for the third quarter as I see them. A reduced provision expense, a key driver of earnings. Our overall credit metrics were good. Our NPA levels were better. We had a reduced charge-off level from the second quarter. There was a reduction in the overall level of reserves, but we did improve our coverage ratio on non-performing loans for the third quarter. There were a couple of significant loans that went back on accrual status during the quarter, thanks to the huge efforts of the team we assembled early on to handle the work-out process. Our margin has been holding up well, and it ended above 3.60% at quarter end. It's been trending in that range, and we feel we're holding our own with respect to margin.

Along those lines, we have done a good job pushing our cost of funds down, this done in a highly competitive area with every large and small bank obsessed with the greater Washington marketplace, and its great demographics. But we have deliberately managed the run-off of time deposits against growth we have achieved in demand deposits and other transaction-based funds. The run-offs of time deposits is focused primarily on single service non-relationship accounts.

On the flip side of the balance sheet, there has been further contraction in the loan portfolio, as production is very tough in this climate, and while we continue to move weaker credits out of the portfolio. We see the business of producing quality loans the primary function of just plain lack of demand from our most creditworthy borrowers, and to a lesser extent, the competitive environment. We are operating in one of the best markets in the country. And yet, plain and simple, the ongoing uncertainty about the economy is still a significant factor, as we work with our great commercial client base.

Non-interest income was off, as expected, as our service charges declined about 9% year-over-year, and were also down versus the linked quarter. Obviously, the new Reg E impact drove this, but we still had very satisfactory opt-in ratios in line with our expectations.

We have continued to hold expenses down, as the numbers will reflect for the quarter. One highlight you may not have picked up on is that we received recognition from Forbes as one of the most trustworthy companies included in their annual survey. We like this, and feel the recognition is important.

On the competitive front, we continue to benefit from ongoing consolidation in the market. We've already added some new high quality professionals as a result of the continuing consolidation and name changes that occurred during the third quarter, and we continue to have discussions ongoing with other quality folks who will likely choose to join Sandy Spring, supporting our belief that we're the local employer of choice.

Let me conclude my highlights with a comment about capital. Repaying the remainder of TARP continues as our highest priority, and we believe the results we released today will demonstrate the stability and performance metrics to enable the US Treasury to move forward, and approve our request for the repayment of the remaining balance of Treasury's investment. Our capital levels are currently healthy, as everyone can see.

Let me wrap up my comments by noting that this was our best quarter in over two years, in terms of net income. So we feel we have come a very long way. We think we have done this expeditiously compared to our peers, and that we have executed exactly as we had hoped to do on a respectable timeline. So above all, we want to be evaluated as a consistent, dependable performer. So obviously, we'll be continuing to dedicate all of our resources to delivering on this as we emerge from this tough banking cycle. We are well on our way out of this, and focusing on the business of dominating our community banking markets in this region, and we have the team at Sandy Spring to do just that.

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 to your questions. Operator, we can have the first question, and we would appreciate it, as you do, if you could state your name and company affiliation as you come on, so we know with whom we're speaking.

(Operator Instructions). Our first question comes from Matt Schultheis.

Good afternoon. This is Matt Schultheis at Boenning and Scattergood.

Good afternoon, Matt.

How are you guys?

Good, thanks for calling.

Quick question for you. You repaid $40 million in TARP, and I'm assuming you had some discount accretion or issuance cost that you had to accrete into earnings this quarter. I'm estimating that at about $1.3 million. Does that sound about right?

That's almost exactly correct, Matt.

Okay.

And therefore, it leaves about roughly $1.2 million, $1.25 million for the remaining piece that obviously would be written off upon the approval of the second half of the preferred.

And your preferred dividend will be about $600,000 a quarter going forward?

Yes, somewhere in that range is a reasonable estimate, that's correct.

Okay. Do you have any expectation as to when you would expect to hear back from regulators regarding repaying TARP, the remaining portion?

Matt, we don't have an expected time frame at this point. We just hope it's soon.

Okay. Sort of a big picture question, where do you feel that this leaves you with regard to the ability to be involved in M&A activity, and what would you be looking for? And would you be -- there aren't a whole lot of deals for FDIC-assisted deals in your market, so outside of FDIC-assisted deals, what do you think you'd be looking for geographically, as far as mix of business of anybody you'd be looking to buy?

I think in a very general way, Matt, we continue to be very committed to the Maryland and northern Virginia markets. We really think that these are markets we know well. And we'll continue to look at opportunities for healthy franchises, both bank and non-bank in that general region. Hopefully that gives you an idea of where we're focused geographically.

Okay. And one last question, with regard to net interest margin, obviously as rates stay low, and if they stay low for an extended period of time, I have some concern that you'll have asset pricing pressure just as cash rolls in on the balance sheet, and it has to get redeployed into a low rate environment, that your net interest margin will start to slip some. Do you see that as likely, or do you think your margin's going to be stable through 2011? And if it does start to slip, when would you expect to see that?

Matt, this is Phil again. As it relates to the margin, first of all, the 3.64% in the current quarter was elevated slightly towards the end of the quarter because of some -- as Dan mentioned, a handful of loans that came back on accrual status. And therefore, we had to reinstate some interest income there. So, on a run rate basis, there's probably 3 basis points, 4 basis points, 5 basis points in that margin that kind of get you back to normalized. And yet having said that, I think that we -- and I've said this for some period of time, and that anticipates not a lot of movement in the broader market rates, that margin is fairly well sustainable in, and through the next few quarters at least.

So, I don't know that we see a whole lot more asset compression other than what can occur by cash flows in and out of the investment portfolio. We do have a fair amount of that given the mortgage backs that are in there. But we also do believe we still have a bit of room on the liability side, again through what we continue to do on the time deposits. So, we actually have a 40% of our CDs, again, maturing within the next six months, and it appears that we can price the majority of those down a little bit more first.

Okay. Thank you very much.

You bet.

Joe, if I could before we take the next question, just dawned on me that in my comments, with regard to asset quality metrics, that I misspoke. The reduction from second to third quarter was in our provision expense, not in our charge-off level, and I said charge-offs. Just wanted to clarify.

Our next question comes from Mike Shafir.

Hello. Good afternoon, gentlemen.

How are you doing, Mike?

So, this is Mike Shafir from Sterne, Agee. And maybe we can just follow up on some of the questions that were asked previously on the NIMs, specifically on the borrowings.

Yes.

We were looking at that -- it looks like around $400 million or so, $409 million?

Correct.

How -- that rate, that 3.56% rate, how long are those fixed for, and is that a combination of some stuff that's laddered? What's the duration on that borrowing piece?

Yes, Mike, this is Phil. It is a fair amount laddered. It's primarily federal home loan bank callable advances. And so, as the rate environment continues as it does, obviously there's not going to be a lot of movement in that element of the balance sheet.

In terms of the average duration, let me find that for you in a second here. It is about 56 months at this point. And that has certainly lengthened out a little bit here, given what's been going on on the longer end of the curve in the last quarter or so. And then there's also the one trust preferred issue that we have for $35 million that is in a variable state today to LIBOR-based credit, and is obviously, in this environment, extremely cheap, somewhere in the 2% to 2.30% range. So that certainly helps for the time being.

So on the [flow] piece, we're borrowing a significant, like you said, change in the rate environment. We're going to stay, in terms of that funding cost, on that piece of the funding.

Yes, I would clearly view that that's fairly fixed at this point. I don't believe there's a lot of maturing by term in there at this stage either. So, yes, I would consider that to be about what it should remain for the foreseeable future.

And then, on the time deposits, having significant reductions over the last three quarters, and another 21 basis points this quarter, and you said you had another 40% of your CDs repricing?

In the next six months. And that would include this month of October. We have scheduled about 40% of that portfolio, which is around $265 million of the $660 million that is scheduled to mature again. That's correct.

Okay, so, clearly it looks like there is a couple of quarters where you guys can continue to fight the potential NIM compression.

Yes, I would say that's a fair statement, yes.

But as we think about moving forward, and then obviously, the best resolution to that is to see some growth on the loan side of things. And as we're looking at the portfolio over the last many quarters now start to come in, where do you guys potentially see some organic loan growth coming from in the next several quarters?

This is, back to Dan, Mike. I think our focus and resources are clearly being put towards the activity in the small business arena, small to mid-size businesses. Obviously, there's still hesitancy because of what's going on in the economy, but there's also plenty of opportunity for us to bring relationships into our Company from other banks.

So, what's transitioning right now is a move from, as you might imagine, a reactive portfolio management effort as we work through this cycle, to a more proactive relationship, expansion seeking opportunities from our front line. And we're not at a point where we're able to do that. So, we have several things underway that we think can bring loan production up, and get some portfolio growth in the coming quarters.

And then, just looking at the portfolio this quarter, looks like residential construction over the last quarters has now gone back up. Also with commercial construction this quarter showing an increase after you guys had a concerted effort in terms of reducing some of those portfolios. What kind of projects are those that are coming on, and also what kind of yields are those coming on at?

The residential construction portfolio, that growth you're seeing somewhat seasonal, but also somewhat the result of fewer players in the market that focus on that niche. So, that growth you see in that portfolio represents loans to individuals for the construction of their home. And that's a real relationship product for us. So oftentimes, these are well-heeled borrowers building their dream home, and also affords us the opportunity to oftentimes develop a commercial banking relationship because they may own their own businesses, and do wealth management for them. So, this is the season of time where a lot of funding occurs and demand, as well as the fact that we're one of three players in the market right now that do this business, down from dozens of players in the past that were doing this business. So, not a concern for us that that segment would be growing.

And likewise, in the commercial construction piece, we do have some healthy projects in the portfolio that are beginning to sell, which means that there's going to be fundings in those projects to construct either improvements on projects or going vertical on home construction. Not a lot of new production in that book, as much as it is projects that are beginning to fund, and progress positively.

Yields on the commercial construction piece obviously range by virtue of individual borrower. Typically prime plus floating, anywhere from 0.5 over to 1.5 over, plus decent fee income opportunities, and we have typically implemented floors on those relationships, as well.

Then also, as we just kind of think about the provision line moving forward, about $4 million worth of reserve lead this quarter. As we start to move into -- it certainly seems like things are more upbeat, and you guys have worked through an abundance of the credit issues, and while some of these numbers remain higher, it doesn't seem like we are going to see continued reserve build. Should we expect to see a reserve bleed over the next several quarters, then?

As you can see in this quarter, our charge-offs, I think for probably the first time, exceeded our provision expense. And so, there was a little bit of releasing done. That's probably not an uncommon thing to expect, as we work through this. All that to say that we're very optimistic, but we're cautiously optimistic as we move through this cycle. And the reserve right now gives us probably a little more flexibility as to how we deal with the remaining NPAs, in terms of the pace in which we move those off the portfolio, and how we do that. And so I think that needs to be considered in the equation as to what actually happens with the reserve levels. But clearly, the trend you see right now in terms of provision expense, is not unexpected.

Okay. Thanks a lot, guys. I appreciate all that detail.

Our next question comes from Steve Moss.

Good afternoon, guys.

Hi, Steve.

Sorry if you already spoke about this, but I did miss the entire beginning of the call here. Just -- I guess to start off one housekeeping, or two housekeeping numbers. What's the AD&C balance here as of September 30, and the resi mortgage lot loan balance?

We'll get that for you momentarily, Steve.

Okay.

The AD&C balance at the end of the quarter was just a little north of $150 million, $155 million.

Okay. And I guess the other thing, the residential mortgage number, just in general, what are you guys seeing for real estate activity in the region, whether it's development project or commercial real estate as well? How are those things holding up?

What we're seeing in the core markets for us are the ones that border the Washington area where we're predominantly located, is we're starting to see an uptick in activity on the home building side, on the new construction side. So, clearly not back to what we would think of as being historic levels. But we're seeing absorption in these projects, and builders actually turning dirt and going vertical. We're taking obviously a very conservative approach in terms of what we allow, if anything, ahead of any type of sale. So, most of this is all being done on a presale basis.

As you know, Steve, our commercial real estate exposure, in terms of income producing exposure on office or retail is quite limited, and it's very diverse, and so our experience there continues to be very strong with no meaningful deterioration in that portfolio, or any impact on NPAs. In terms of the broader market in commercial, I don't think that there's been any meaningful shift from earlier quarters this year to where we are right now.

Okay, and then one more thing. In terms of pricing on commercial loans these days, is it getting more competitive or is it holding reasonably constant?

I don't think from quarter to quarter I would say that it is getting more competitive. I think there's clearly an appetite in the market to lend money, despite what you might hear or read, all of us looking for quality opportunities. But still tends to be some decent pricing power within that book of business today.

Okay. Sounds good. Good quarter, guys.

Thank you.

Thank you.

Our next question comes from Brent Scheiner.

Hello, guys, good quarter. I was actually going to ask about the reserve release. You guys gave some good color there. Just one question, I know this is done on a much more granular level, but as we're looking at this as outsiders, is there a reserve to loan balance that you're going to try to hold as you think about bleeding off reserves from a more holistic level?

Brett, this is Dan. There really isn't any target like that. We're very disciplined about using our allowance methodology, and allowing the risk rating profile within the portfolios to derive the reserve levels. That being said, I think the expectation of where reserves in the future will be relative to reserve levels in the past in community banking is that they'll be more elevated than maybe what we were accustomed to. But our methodology is king on this one.

Okay. Thanks, again.

Thanks, Brent.

Our next question comes from Jennifer Demba.

Thank you. Jennifer Demba, SunTrust Robinson Humphrey. Good afternoon. Just curious about what you saw in terms of Reg E impact this quarter, and if you have any expectations in future periods?

Yes, Reg E impacts, we projected, and I think we've commented in prior calls that this was probably about a $1.5 million annual impact. And so, what we've seen from implementation of the Reg is really on track with that level, Jennifer. And so, we would expect that to continue on a going-forward basis, absent any behavioral changes outside of specific Reg E impact.

Thanks so much.

Thank you.

Our next question comes from Bryce Rowe.

Hi, good afternoon. Bryce Rowe with Robert W Baird.

Good afternoon, Bryce.

Dan and Phil, just wanted to touch base real quickly on the expense level, maybe specifically on the salary line, Phil. Is this a good run rate to expect going into the fourth quarter and into 2011?

It's probably a pretty reasonable level, Bryce. A lot of times when you come off the summer period where you have some temporaries and some other types of things that go on, because I think we had a little bit of a decline here from the prior quarter, you get a little bit of noise in there related to that. But generally speaking, I think that it's a reasonable level to work with as you move forward, yes.

Okay. Thank you, guys. Appreciate it.

Sure.

Thanks, Bryce.

(Operator Instructions). Our next question comes from Carter Bundy.

Afternoon, everyone.

Hi, Carter.

Hi, Carter.

Carter Bundy with Stifel Nicolaus. Dan, could you talk a little bit more about the large relationships that went back to accruing in the quarter? If you could, provide some color on that?

They actually were a couple of larger, residential mortgage relationships. They were not out of the commercial portfolio. Just a matter of some credits and borrowers recovering after going through a difficult time.

Okay. Is there any sort of outlook in the near term that you have some large relationships that might move back to accrual in the next few quarters?

I think -- probably lumpy. I think probably a greater opportunity, at least as we're working through this, to exit some as opposed to having them move back into an accrual status. And again, that's just subject to timing, and exactly when, I can't predict. But we're working diligently on it.

And do you feel you have those specific loans marked to where the losses would be relatively small?

Yes, we feel really good about the reserve levels we have, and the values that we've marked against these. And that's been validated as we've moved through this cycle. So, yes, feel very good about that.

Okay. So, from a charge-off perspective, this might be a reasonable run rate with some lumpiness maybe along the way?

Laying that out right now, I think is difficult. Just knowing that we have $100 million or so of NPAs that we still need to work through.

Okay.

So, run rate on that is kind of tough to predict at this point.

And finally, could you talk maybe just a little bit about some of the inflows you had in the quarter, and how that compared over the last few quarters?

Two different comments I'll make there, Carter. One is, outside of the non-performing bucket inflows, is that we continue to see the negative drift, very stable and low, and that's into lower risk rating categories. Give me a second here on moving into the NPA bucket. I do know from quarter to quarter, that from every category of consumer residential mortgage and commercial loans of NPAs, with the exception of OREO where you'll notice we saw some increase, every one of those categories was either level or a net decline. So, there was not growth in any one category.

Okay. And did you -- is it right to assume that you had some upgrades in the quarter?

We did have upgrades in the quarter.

Okay.

The major change within the NPA category, apart from those reductions that we were able to achieve is, we did have nine loans totaling about $2.5 million moved into the OREO category that will resolve. And then we had about $0.5 million that was sold out of that category.

Okay. Thank you for all of the color. Appreciate it.

Thanks, Carter.

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

Thank you, Joe. Thanks for your questions, and taking the time today to participate with us. We would like to remind you that we would love to have your feedback to help us evaluate the effectiveness of our call, and how we've done. And you can e-mail your comments to IR@sandyspringbank.com. Thank you all again, and have a wonderful afternoon.

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