Sandy Spring Bancorp Inc (SASR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Sandy Spring Bancorp fourth-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 Spring 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 final quarter 2010. This is Dan Strider speaking, and joining me here is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.We appreciate you joining the call. As always, today's call is open to all investors, analysts, and the news media. And there will be a live webcast of today's call and a replay available at our website later on today.

We will take your questions after a brief review of some key highlights. Before we get started, Ron will give the customary Safe Harbor statement.

Thank you, Dan. Good afternoon. 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 costs and benefits; estimates 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, 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 differ materially from those indicated. In addition, the company's past results of operation does not necessarily indicate its future results.

Thanks, Ron. We had a good, strong, profitable quarter, especially compared to where we were last year at this time, and performance that is consistent with the third quarter of this year. So this marks our third consecutive quarter of strong earnings, and we have an optimistic outlook that we can produce consistent and sustainable, favorable results as we move into 2011.

I want to quickly make some observations concerning our performance highlights and then cut right to your questions. We will keep our prepared remarks brief again this quarter, as our results are pretty straightforward. We believe we have advanced through this unprecedented cycle to a point where we can begin focusing on future.

As you know, we were very repetitive and granular in the main focus of our calls during both 2009 and 2010, where we performed a drill down on loans, especially those problem loans, with a detailed discussion quarter after quarter on credit quality. As I said last quarter, we believe that the very dominant and all-consuming focus on problem loans is now largely behind us, and we have successfully returned to our principal purpose, which is generating profitability and consistent returns for our shareholders.

Let me reiterate, however, that there is still plenty of work to do to move problem assets off of our books, and we continue to dedicate both the time and the experienced people, and other resources to finish that job properly. We do have plenty of work ahead of us to complete this process.

Let me say that it is well-quantified, manageable, and moving at what we believe is a very satisfactory pace. So touching on the major takeaways for the fourth quarter, here they are as I see them. Reduced provision expense was, again, a key driver of earnings; a $2.3 million in loan loss provision was down, versus the linked third quarter where we set aside $2.5 million. So over the course of the year, we feel we have a favorable downward provisioning trend underway and are returning to a much more normalized level as we move forward, but also keeping in mind that the current operating environment will still dictate that we provision conservatively.

Our overall credit metrics were good. Our NPA levels were much better, with non-performing assets declining to $89.3 million, compared to $141.2 million at December 31, 2009. This decrease that produced the coverage ratio of the allowance for losses compared to non-performing loans of 78% at December 31, 2010, compared to a ratio of 48% at December 3, 2009. This is obviously a vast improvement.

We had a reduced charge-off level from the third quarter. Loan charge-offs net of recoveries totaled $7.5 million for the fourth quarter of 2010, compared to $19.5 million for the fourth quarter of 2009. For the year, net charge-offs totaled $28.3 million, compared to $62.7 million in 2009.

Notably, our net interest margin was 3.61% for the fourth quarter of 2010, compared to 3.40% for the fourth quarter of 2009, and 3.64% for the third quarter of 2010. For the year, the net interest margin increased to $360 million, compared to $329 million for 2009. We think this is decent given the intense competition across our markets, our current excess liquidity position, combined with the obvious impact of credit costs.

We see continuing opportunities to improve the margin as we move forward, and we also understand that a good, solid net interest margin that is sustainable and can be approved upon as a key underlying driver that investors are analyzing in today's environment. So, our focus accordingly is on the margin, and we don't intend to be distracted during 2011 on this objective. Non-interest income increased 4% to $12 million for the fourth quarter of 2010, compared to $11.5 million for the fourth quarter 2009.

Gains on the sales of investment securities increased $300,000. Gains on the sale of mortgages increased $300,000, or 63%, due to largely higher refinancing volumes. Seize on the sale of investment products increased $200,000, or 28%, due to higher assets under management and higher sales of financial products, while trust and investment management fees increased $400,000, or 19%, due primarily to an increase in assets under management.

Insurance agency commissions increased $200,000, or 21%, due to higher commissions on physicians' liability insurance. Visa check fees increased $100,000, or 14%, due to increased volume of electronic transactions. These gains are somewhat offset by a decrease of $600,000, or 19%, and service charges on deposits due to lower overdraft fees. Other non-interest income, it also decreased $400,000, or 17%, due mainly to lower market-to-market adjustments on commercial loan swaps. By the way, non-interest expenses, they were higher in the fourth quarter due to salary and benefit costs, but on a year-over-year basis, we held expenses flat.

Let me conclude my highlights with the comment about capital. Repaying the remainder of TARP has been our highest priority, and we have now done that. If our regulatory authorities had not been comfortable with our progress, we would have not been able to complete the TARP payback. Yet let me give you a synopsis of where we stand in terms of capitol strength, which is solid. Stockholders equity totaled $407.6 million at December 31, 2010, and represented a 11.6% of total assets, compared to 10.3% at December 31, 2009.

At December 31, 2010, the company had total risk-based capitol ratio of 15.37%, a Tier 1 risk-based capitol of 14.11%, and a Tier 1 leverage ratio of 10.3%. We believe these numbers will compare quite favorably with our mid-Atlantic area community bank peers, as well as other better performing community banks and other strong markets across the country. We are also very pleased to have declared an $0.08 per share dividend earlier today. We have been eager to increase our dividend, and our results certainly justify our action and are indicative of our view of the future.

Let me wrap up my comments by noting that both the third and fourth quarter were our best quarters in over three years in terms of net income. So we feel we have come a very long way and done this exactly as we said -- very methodically and consistently, and on a realistic timeline. We have covered most of the other key financial highlights in our press release today, so I will not read them over again.

We will now move to your questions. Joe, we can now take the first question. We would appreciate if you would state your name and company affiliation as you, so we know with whom we are speaking.

Thank you, sir.

(Operator Instructions)

Our first question comes from Casey Orr with Sandler O'Neill.

Good afternoon, guys.

Hi, Casey.

First, I was wondering if you could possibly give the dollar amount of the dividend accretion cost to the TARP repayment. I think before you had said it would be around $1.2 million. I was wondering what it actually came out to be.

Yes, Casey, this is Phil. The accelerated discount was approximately $1.2 million.

Okay, great. And then do you have the ADC balance for this quarter?

We do, we do. Let me get this for you. Total ADC outstanding at the end of the quarter were just north of $80 million.

Great. That's all the questions I have right now. Thanks.

Thanks, Casey.

Our next question comes from Brett Scheiner with FBR Capital Markets.

Hi, guys. Congrats on that credit improvement. Just a quick question on M&A opportunities. There are some struggling institutions as we get further north into the Baltimore area. Can you talk about any interest in growing your footprint?

Brett, this is Dan. Our approach to M&A over the past several years-- and I would say continues as we look forward-- is looking for good, strategic fits for us that will complement our existing geography and also give us opportunities for adjacent ones.

So, I think, I guess if I understand your question correctly, we have not been focused on looking at troubled institutions, simply because those that we think are in that category don't make that strategic fit very well for us. But we do continue to pay attention to what's happening around us, and our interest in growing the company that way if the opportunity arises.

Great. I appreciate it. And then just any anecdotal color around how the super regional banks are treating small commercial and C&I customers?

Our take on that-- and it would be anecdotal-- is that I think while many of us in the industry have been internally focused here the last couple of years a bit to work through credit issues, it has probably not been too dissimilar for the regional players that are not headquartered here.

So, that has opened up opportunities for us and helped us grow our pipelines of those who were interested in dealing with local banks. We do see a little bit of neglect there.

Okay, great. Thanks so much.

(Operator Instructions)

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

Good afternoon, guys.

Hey, Bryce.

Hey, Bryce.

I just wanted to touch on the margin and maybe a little bit on competition in the market. We've heard from some other companies up in the DC-- greater DC area, Baltimore area-- that competition has intensified from the larger banks. Could you guys speak to that, and then maybe speak to that from a deposit pricing and loan pricing perspective?

Yes, Bryce, this is Dan. I'll tackle both of those. I think on the deposit side, as you'll see as our K rolls out, we've been very successful in changing the shift, and we're shifting the composition of our deposit base. So we've been focused on driving new relationships that are in the transaction count area while being very selective in the time deposits.

And, so, I wouldn't say that the deposit pricing competition has been at least impactful to us in terms of where our focus has been. We are seeing a bit more of an aggressive approach on the lending side, both in terms of pricing, and in some cases, believe it or not, in terms of structure. And, so, that would be -- that would be true in the market around us. But not as much on the deposit front.

Dan, on the lending side, is that kind of across all categories of -- category of loan? Or is it just specific to one category?

Given the nature of our business and the most active areas of commercial and mortgage, we're seeing some take what appears to be more long-term interest rate risks on the mortgage side, and on the commercial -- on the commercial lending front. So I don't know whether that's -- you know, have to ask them whether they're hedging that position, or whether that's a balance sheet build type of motive.

Okay. And then maybe, Phil, if you could talk a little bit about margin drivers here. Obviously, you saw some pressure on earning asset yields, and were able to offset that somewhat with reduced funding costs. Any more opportunity to bring this average cost of deposits that looks like it is 128 basis points, bring that lower? Also the also just comment on the earning asset points.

Sure, Bryce. On the liability side, first of all, I would anticipate that the level of the margin, generally, throughout the year is going to be mainly impacted by the ability for us to shift next on the asset side.

Just generally speaking, I think that is the nature of any improvement from where we are today. And that really is solely predicated on our ability to grow loan portfolio back and shift, as we stated before, a good portion of what we built in the investment portfolio over the course of the last year or so. So, I think that is the real means there.

We certainly have reduced the NPA impact on the earning asset yield. I think for a long time we had about a 25 basis point impact. That's down now to about 16 basis points. So, that's clearly going in the right direction and will continue to contribute in that regard.

On the deposit side, I don't see a lot more ability to really push that cost of funds down. We have about 35% or 40% of our time deposits in the next six months that are going to mature and be available to reprice, but I just don't see a whole lot of opportunity there, maybe a couple basis points here and there . Again, as Dan reiterated, we are not trying to be competitive there to a large degree, so that certainly helps in that regard, just because we don't need the funding.

Okay. And you touched on the earning asset mix. Do you feel like there is an opportunity to show some long growth here in the next couple quarters?

Yes. Back to Dan, Bryce. We certainly do, particularly -- the evidence we've got, for instance, our fourth-quarter loan production activity where we are focused greatly in the small business commercial area was up about 35, 37% quarter-over-quarter, which is meaningful. I think it's indicative of the fact that we get some of this credit piece behind us, and I've got folks out on the street.

We renewed our effort of prospect calling, just to give you another data point, early in November. Since that time, our front-line folks have been out in front of nearly a thousand prospects and are building pipelines and building production as a result. We do think we can move the needle on the let loan portfolio side of things.

Great. Thanks for all the help.

Thank you.

Our next question comes from David West with Davenport & Company.

Good afternoon. It seems like you are downsizing the problem loans is getting nearer in the end. I'm just curious, do you think you are near an inflection point regarding overall loan growth that could turn positive in 2011?

That's the way we would view 2011, absolutely.

Any particular areas of the loan portfolio where you are seeing attractive opportunities in your mind?

We think the kind of bread-and-butter commercial small business portfolios are where we are focusing a lot of our attention. Obviously, what comes with that is some owner-occupied real estate opportunity, and then, I guess, moving out of the commercial realm, we have long been a niche lender in the construction area.

This is not for homebuilders, but for individuals who have built their own home and use our financing alternatives to do that. That's actually been a pretty robust business for us as we head out of 2010 into 2011.

Very good. Lastly, you mentioned in your press release that you are in negotiations with the treasury on the warrants. Is there any time expectation? Do you think you could possibly come to some agreement with them this quarter?

As you said, we have continued to be a negotiation. We are going to move down that road as quickly as we can. Don't have a good timeframe to report today.

Thanks so much.

Thank you.

I am showing no further questions on the phones. I would now like to turn the conference back to Mr. Schrider for closing remarks.

Thank you, Joe. Thanks for your questions and participation. We do appreciate you spending your time with us this afternoon, and we would love to receive your feedback and to help us evaluate how we did.

So if you would, you could email us your comments at IR@sandyspringbank.com, and thank you for your participation.

This concludes the program. You may now disconnect. Everyone have a great day.