Sandy Spring Bancorp Inc (SASR) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Sandy Spring Bancorp Inc. first quarter earnings conference call and webcast. At this time all participant lines 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 this conference is being recorded. I would now like to introduce your host Mr. Daniel Schrider, President and CEO of Sandy Spring Bancorp, Inc. Sir, you may begin.

Thank you and good afternoon everyone, and welcome to Sandy Spring Bancorp conference call to discuss our performance for the first quarter of 2011. This is Dan Schrider speaking, and I am 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. There will 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 risks and uncertainties. These forward-looking statements include statements of goals and intentions, earnings and other expectations, estimates of risks 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 managements 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 to differ materially from those indicated. In addition, the Company's past results of operation do not necessarily indicate its future results.

Thank you, Ron. When I look back at my remarks for the fourth quarter of 2010, I notice I led with the comment we had a good, strong, profitable quarter especially compared to where we were last year at this time. Well, I am pleased to be able to repeat the opening statement today. We did have a good, strong, profitable first quarter especially compared to where we were last year at this time. As I said previously we believe we have advanced this unprecedented cycle to a point where a focus is on the future, and I feel increasingly more comfortable saying that we have turned the corner, and are positioned to return to our historical reputation as one of the best performing banking companies in the mid-Atlantic region. The first quarter was good.

A profitable quarter, yet is still achieved during a transition period of elevated credit workout costs, week quality loan demand with pent up earnings in an appropriately structured investment portfolio, ready to be deployed. We continue to be disciplined in our approach to managing risk during a recovery cycle that will tempt many to stretch the limits of credit worthiness. As I consider our heritage, look at our team and review our capabilities, I know that we are unmatched in the mid-Atlantic market. So, our business model is simple. Hit the street and tell our story.

One of the top priorities over the past few months has been to get out and get our bankers out on the street after essentially two years of focusing on work out issues, and holding the hands of our clients during the uncertainty of the recession. We also had the shadow of TARP, which is now fully gone, and on more of an intangible note the morale of our bankers has clearly been lifted as TARP has been redeemed. Sandy Spring Bank has a proactive and can-do culture.

I say this confidently because I grew up in the bank on the lending side of the organization for two decades. And, I know firsthand how we treat our clients. Today under the leadership of Executive Vice Presidents Jay O'Brien and Lou Caceres, who lead our sales efforts, we have mobilized our entire front line sales teams, including commercial, retail, insurance, mortgage banking, wealth management and treasury management, in an unprecedented calling effort. They are out in the market calling on prospects, telling our story, and winning opportunities. We have made the emphasis fun and competitive, but make no mistake, it is about winning new business.

As I look just briefly from a high altitude perspective at the three primary markets that roll up this Company wide effort, I have seen new loans generated this quarter in the $52 million, $45 million, and $43 million range. And, I am seeing new core deposit balances by region in the $31 million, $15 million, and $52 million range. Remember, this is organic activity and a banking environment where there is still weak loan demand and tough competition for deposit dollars. I love this enthusiasm and activity, but most of all the execution we are seeing from our front line. Touching on the highlights for the first quarter, here they are as I see them. We experienced growth in commercial loans of 1% in the first quarter compared to year end, while also continuing a trend of strong, non-interest bearing deposit growth of 9%.

We concluded our participation in TARP with the repurchase of the warrant in February. Reduced provision expense was again a key driver of earnings. At $1.5 million, our loan loss provision was down compared to the linked fourth quarter, where we set aside $2.3 million, and significantly lead down from year ago when it was $15 million. Overall, credit metrics are good. Our trend in NPA's is stable and improving as resolutions of credits continue. Our reserve position is solid in relationship to total loans and NPA's.

Early-stage delinquencies and negative drift in commercial risk ratings continue to show improvement, and finally our credit risk management practices provide a solid foundation for quality loan growth. Notably, our net interest margin was 3.65% for the first quarter of 2011 compared to 3.61% a year ago. We think our margin is good, given the intense competition across our markets, our excess liquidity position, combined with the obvious impact of credit costs. We see continuing opportunities to improve the margin as we move forward. We understand that a sustainable net interest margin that can achieve improvement is a key driver that investors are analyzing in this environment.

So, we will focus on margin and we don't intend to be distracted during 2011 on this objective In the area of wealth management we are proud to have crossed an important milestone this quarter when total assets under management reached the $2 billion mark. We believe this is indicative of our strong capabilities in the business of wealth management. Let me now get some clarity around our reported non-interest income. There are two areas of comment.

First, we reclassified all commercial loan derivative activities, that is customer level swaps, into a net position in the other income line. In the past, we reported the newer positions on each side. In other income and other expense. We also renamed our gain on sale of mortgage loans to mortgage banking activities. Which includes not only the gain on the sale of these loans to third-party investors, but also now includes the respective gains and losses related to the interest rate lot commitments on these lots. We feel both of these changes represent a better presentation of this information.

The second comment related to non-interest income is concerning the linked quarter trends. We have a tremendous fourth quarter in 2010, and all elements of our wealth management business, and in our mortgage gain activities. Our insurance agency commissions reflect some seasonality . For instance, physicians liability insurance is traditionally high in the fourth quarter of the year, and although we received contingency income in the first quarter, the soft insurance market does not yield the levels of income in this regard that it did in the past.

Finally, our other non-interest income is down primarily due to letter of credit fees and other periodic one-time fees such as loan prepayment fees, that did not occur or re-occur in the first quarter of the year. On a capital front, stockholder's equity totaled $409 million at March 31, which is 12% of total assets. Our regulatory capital ratios remain solid. At March 31, the Company had total risk based capital ratio of 15.48%, a tier one risk based capital ratio of 14.2%, and a tier one leverage ratio of 10.63%, so we are in a strong position from a capital standpoint.

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

Thank you. (Operator Instructions) Casey Orr with Sandler O'Neill. Your question please?

Good afternoon, guys.

Hi, Casey.

Hi. My first question was the decline in 90 days past due this quarter, did most of those go into non-accrual or are they back performing?

Most of that reduction which was, as you can see, was significant did move back into a performing category.

Okay. And then what about the increase in the restructured loans? Are those, are most of those term or rate changes or can you give us more color on the --?

Yes. The increase, really 2 different buckets. In the commercial area, it was mostly a move to interest-only in terms of structure changes, and on the residential mortgage piece it was mostly rate reduction.

Okay. So how much was the residential piece versus the commercial piece?

Let me -- we will get that for you, Casey.

Okay.

Give me a sec.

I will ask another question why you're getting that.

Okay.

In your prepared remarks you see continued opportunities to [present] margin, is that mostly going to come on the deposit side or can you give us more color on that?

I think most of our opportunity on the margin front is our ability to get the loan engine cranking. We are doing a great job of driving chief deposits into the bank on the non-interest-bearing side, but it's really going to be shifting that excess liquidity out of the investment portfolio into higher-yielding loans.

Okay. Thanks. That's all I had for now, but if you guys just want to --.

Of the move in the restructureds, about $2 million of that was in the residential mortgage.

About half. All right. Thanks, guys.

Thanks, Casey.

Thank you. Mike Shafir with Sterne Agee. Your question, please.

Hello, this is Mike Shafir with Sterne Agee.

Hello, Mike.

As we start to think about the insurance line, and going back the previous 2 years, there was always significant seasonality in terms of that first quarter, and I know you addressed some of this, but 70%- and 80%-type gains, but then kind of a chunk of that getting reduced in the second quarter, from both 2009 and 2010, so as we start to think about that particular line item because it does add a decent amount in terms of percentage of fee income? How should we start thinking about that? I understand that obviously the insurance environment potentially is subject to change, but maybe you can just kind of speak to how we should look at modeling that moving forward?

Yes, Mike, this is Phil. One other thing that we didn't really clarify in Dan's comments earlier that were related to the first quarter of last year in the insurance area, was that we'd made a one-time move from a more cash to accrual basis, which impacted the timing of some of the commission-related revenues, and so the first quarter of last year had another $560,000 of income in that area that will not re-occur. It's kind of a catch-up type of thing when you make that kind of an accounting change. So, just one other piece of clarity as it relates to the quarter-to-quarter type comparisons other than the linked quarters.

Beyond that, just again for clarity, I think that we've made a lot of significant strides in what we are trying to do within the insurance business here. And as it relates to the revenue element of it, I would think that from here going forward, we are clearly looking for that revenue to start to rebound back up as opposed to what we've seen here in the last couple of quarters. There's been a significant amount of movement in terms of hiring new producers and putting qualified individuals in place to move those revenues forward. I don't know that you could arc back to levels where we were 2 or 3 years ago at this point, but we clearly want to start to move back in that direction starting in the second quarter.

So then thinking about it, we should be able to see some type of seasonality in terms of a bump in the out years in the first quarter?

Yes. I mean, the 2 quarters where we have traditional seasonality is the first quarter, where you have this contingency income, which, by the way, is about $200,000 in the first-quarter result. And then also, the physicians liability insurance, we had a significant amount of premium that -- and commission revenue that off that, that comes through in the fourth quarter, and I think from the fourth quarter to the first quarter here is about a $200,000 differential between the level of the physicians liability in the fourth quarter versus this first quarter.

Okay. Thanks for all that clarity. And then, just as we start to think about, clearly your credit trends are stabilizing, and we've seen a lot of improvement in that moving forward. Growth, especially on the average earning asset side, has been very difficult and you're not the only ones in that camp, but how are you guys thinking about that in terms of trying to pursue both organic and then also potentially from an M&A standpoint?

Yes. As I commented, Mike, back to Dan here, we feel pretty good about our ability to continue to generate, particularly in the commercial areas, strong opportunities, probably not due to economic growth, but those that value dealing with a community bank that can deliver large bank complex services. So, the trend that we have seen in the first quarter, which was an uptick in loan originations and then finally starting to see some growth, we feel good about that being something we can continue with. But at the same -- if the economy does impede that becoming a more robust -- getting out there to the level that we would like to see.

From an M&A standpoint, our strategy going back several years, as we have answered this question, continues today. Obviously, we think there's going to be more activity in the market as smaller institutions look for larger partners, and we continue to consider those and will consider those. But for us, it's not buying someone else's problem in terms of a troubled institution, and we look for opportunities to either expand our market or fill in a market with a partner that would be a good, strategic partner. And so, we are very disciplined about our approach there. So, M&A is something we are interested in, but certainly nothing imminent.

Thanks a lot, guys. I appreciate all of the detail.

Sure, Mike.

Thank you. Matthew Schultheis with Boenning & Scattergood. Your question, please.

Good afternoon.

Hello, Matt.

A couple of quick questions for you. With regard to the increase in restructured loans, how much of that in your opinion was driven by regulators sort of, for a lack of a better term, forcing their world view onto you?

Matt, this is Phil. I don't know that at this stage, classified per se as to the regulators, I think it is more of an issue as it relates to the current accounting guidance and direction around what gets classified as a TDR. So, as we went through the year-end and evaluated what needed to be disclosed there and going forward -- and I think you probably and others know, there is a lot of maybe confusion or a lot of uncertainty as to whether or not all of that is being done on a consistent basis. So, I think it was more along those lines than it was from any regulatory pressure.

Okay. And lastly, just a housekeeping question, there was no incomes -- is it correct there was no income statement impact to your warrant repurchase?

You're talking about the warrant repurchase?

Yes.

That's correct. That was all done through the capital portion of the balance sheet. That's correct.

Okay. Thank you very much.

Sure. Thank you, Matt.

Thank you. Jennifer Demba with SunTrust Robinson Humphrey. Your question, please?

Thank you. Good afternoon.

Hello, Jennifer.

Hello. You've had great improvement in provisioning in the last 2 or 3 quarters. Do you think there is room for further improvement as we go through the rest of 2011? And you will continue to release reserves? What is your expectation there at this point?

Yes. Jennifer, this is Dan. I don't think that would be an unreasonable expectation. Obviously, we feel pretty good about our trends, and we expect those to continue from an asset-quality front, so if that were to hold true then you would expect a similar trend with regard to provision expense.

Okay. And a follow-up question on the acquisition topic. You said you're kind of looking for healthier partners, rather than a more distressed partner. Is your interest level higher in Virginia than it would be in Maryland at this point? Or what is your preference?

No, I wouldn't say that there is a geography that carries with it more weight than another. I think we are a central Maryland, northern Virginia institution, and so we kind of look around that geography and see where we could use a partner or use some fill-in. So, I would say that the broad geography is where we keep our eyes open.

Thanks a lot.

Thank you. Steve Moss with Janney Montgomery Scott. Your question, please.

Hello, guys. How are you doing?

Hello, Steve.

Most of my questions here have been answered. Just wondering, unless I missed this, any incremental color with regard to the resolution of the non-performing assets you have remaining in the second or third quarter? What do you expect there?

Tough to predict. I'd be cautious about predicting the pace of resolutions. I can tell you that -- much like we have been throughout the cycle, resolutions tend to be a bit lumpy, and so we would expect that to be the case, but that the overall trend of stable to improving to be the case as well. So, don't have a good forecast for you there.

Okay. And I guess in terms of -- you alluded to lending opportunities earlier, Dan. What are you seeing, what do you think your sweet spot is right now, where are you seeing the most opportunities? And the other thing, what are your thoughts on the commercial real estate market?

Yes. We are an interesting size where we have the ability to handle a client that many would consider to be a middle market client, but we also are great in the small-business market and kind of everything in between. So, we have the products and the backroom to support a variety of different client segments on the commercial side.

I think one of the areas where we see some opportunity is in the government-contracting arena, and we've built some teams to target that and we are seeing production in that area. We've also done some lift-outs of some small groups of lenders from competitor banks that have been long in the market and which are more of a non-specialist, commercial bankers that can cover a variety of different segments. So, we think we can become that community bank of choice for the commercial area.

You had a second question, I want to make sure I touch that?

Just what you are seeing with regard to the commercial real estate market, in the DC Metro area.

Yes, Matt, we're not very active in town, either in DC or Baltimore, so we tend to play where our footprint is in the suburban markets. And depending upon where you are in those markets, it's either stable to improving, and we think there is going to be opportunities for us in that world as well.

Okay, thank you very much, guys.

Thank you. Bryce Rowe with Robert W Baird. Your question, please.

Thanks, hello.

Hello, Bryce.

Maybe Phil, you could help us out with your run rate on the expense side of the house. There's obviously a little bit of a tick-up in salary and benefit expense. I assume that has something to do with higher incentive costs?

That would be accurate, Bryce, first quarter of a new year where we are actually making some real money, and have expectations that there will be incentives that will be earned throughout the course of the year. So yes, that's the key element of that, by far.

Okay. And then, if you guys could just touch on just looking at the one piece of the loan book that gave you some troubles here in the last few years, the construction builder book, if you could talk about some of the trends you're seeing from a volume perspective there? It looks to me like that portfolio has been relatively flat at $150 million. I'm wondering if there have been some pay-downs offset by some new fundings there?

That's accurate, Bryce. There has been opportunity that has come just by the absence of bankers willing to enter into that business. So, we have a handful of relatively new clients that profile much differently than our existing book in terms of their liquidity positions, staying power, and even our loan to value is going in. So, there has been some production that has offset the declines. And in some cases, some of the resolutions have come through, new relationships and so, a non-performing loan for instance may be purchased by another developer that we might provide financing for.

Okay, so Dan, I guess I'm seeing non-performing loans in that bucket over $30 million in the fourth quarter of 2010. What is that level now?

Right at the end of the first quarter, we were just a little bit north of $32 million.

Okay. So we've seen an uptick in non-performing loans there?

A slight uptick.

Okay. Thank you.

Thank you. Mark Hughes with Lafayette Investments. Your question, please.

Good afternoon.

Hello, Mark.

Hello. The good news is your net income at about $7.3 million isn't that far below kind of the $8 million, a little bit over $8 million you all used to earn, pre-crisis. The bad news is you now have 7 million or so more shares than you did back then. So on a per-share basis, it's a much tougher comparison. Could you just talk a little bit about -- when the smoke clears a little bit here, and the stock, if it trades in the same range, you're not that far above tangible book value. Would you be more inclined perhaps than you have been in the past to visit the issue of a share repurchase?

Yes, good question, Mark. This is Dan. I think that's something that is always a consideration, and the question is how much of the smoke needs to clear before you would consider that, from the standpoint of regulatory pressures on capital levels, opportunities for growth organically, and M&A, and really answer those 3 questions. And making sure that there's clear skies from an economic standpoint, which we certainly think that is in the forefront. But that's not out of the question as a consideration, in light of those other areas as well. If that makes sense. We clearly have to put that capital to work.

Right. And a little different question, project lift, which is I think what you used to call it, had a goal of -- just checking my notes from a year or so ago, of getting the efficiency ratio down to the mid-50%s, the trend is kind of going counter to that. Are there some kind of temporary things that are working against you there or is that still a reasonable goal?

Mark, this is Phil. You are exactly accurate in terms of your recollection there. As it relates to not only just through the lift process of a number of years ago, but also from just a strategic standpoint, our having a goal of moving that efficiency ratio down into that mid-50% range. And clearly, in this quarter that is not the case, and we are honestly not necessarily happy about where it is.

So, I think that there are a couple of things though that are going on somewhat from, let's call it somewhat temporary basis in terms of -- we are kind of at a crossroads here with still having some drag in terms of expense levels related to the things we are still working on in terms of credit quality. The cost of dealing with outside attorneys and work-out type efforts. Still have somewhere potentially between $2 million and $3 million in our run rate of expenses today. And we would certainly anticipate that those costs would, over time, dissipate or if not completely go away.

And at the same time, as Dan alluded to and has really talked about in his comments, we are looking to move ahead and to really invest in the future. So, we have a little bit of a crossroads as it relates to some of that. And then you also factor in that we are still at a margin in the mid-360 range with a $1 billion investment portfolio, and wanting to have at least the 0.5 or more of that go back into the loan portfolio and generate higher yields. So, that's the way I am viewing where we are today and how we look at it going forward.

And the objective hasn't changed.

Right. Correct.

Good luck. Thank you.

Thank you, Mark. I want to circle back if I could before we take the next question, in case, I think Bryce asked the question with regard to the movement of non-performers from that AD&C portfolio. One of the things I did not comment on, Bryce, was that there was actually about a $2 million reduction in non-performing loans in that AD&C book from year-end to the end of the first quarter, while at the same time there was a $4 million or so increase in the TDR's in that book, which went into the NPA's which are performing. So that gives you a little bit more color around that move.

Thank you. (Operator Instructions) Carter Bundy of Stifel Nicolaus. Your question, please.

Good afternoon, everyone.

Hello, Carter.

Could you talk a little bit about how the competitive front is on both the lending and deposit side?

Yes. I'll hit the lending side first. Obviously, everyone is out trying to grow their portfolios; we all have probably pretty strong liquidity positions, so it is very stiff competition. No question about it. The good news side of that is we compete very well against some of the larger players in our market that tend to make some portfolio management decisions, backing out of certain business lines, so we typically are net recipients there.

But very competitive and that's where in my comments, I talked about remaining really disciplined to our approach to credit risk management. We are seeing some stretch on credit quality or underwriting standards as well as throwing out the deal curve on pricing quite a bit. So that's what we come up against most of all.

Deposit side continues to be competitive, but as you can see in our numbers, we have chosen strategically to not play as heavily in the rate game market, and really focus on driving new, non-interest-bearing relationships to the bank, and have been successful in doing so. So, probably less of an issue for us today as perhaps it has been in the past.

Okay. That's really helpful. And then, I guess a question for you, Phil, on the margin side, this is the first quarter we saw securities yields not fall, and in fact expand, I think they are up about 13 basis points sequentially. Can you talk a little bit about your expectations for what that book may look like from a yield perspective, and then I guess also on the loan book, given the commentary from Dan?

Yes, Carter, as it relates to the investment portfolio, I think that in light of what is or isn't really happening in terms of a significant amount of loan growth, as a means for trying to maintain, if not as we have, expand margin. We've gone a little bit further out the curve to some degree because that is where we find that the best value is today. We bought a handful more of municipal-type securities that obviously bring on a tax-free basis, tax-affected basis, a little bit greater yield. So, we have done a bit more activity in that regard to bolster the investment portfolio yield, and I think that, that should be sustainable there. And by the way, most -- all of the municipals that have been bought are certainly bank qualified and general-obligation-type of bonds and are very diversified from a geographic standpoint as well.

As it relates to then on the loan front, in terms of -- I guess your question is about the potential for that yield to expand, is that what you're looking at?

Or just to bottom out and firm up here.

Yes, I think that it probably has, probably generally has bottomed out. I mean, we certainly have slowed the non-performing and non-accruing element of the impact there, although there is probably still somewhere between 10 and 15 basis points of impact of the existing, non-performing position. So, I would think that's probably more on the bottomed-out side and should, as we get some greater production, see that starting to come back. And in fact, I think if I'm not mistaken, I think we picked up maybe 3 basis points in the overall earning asset yield through the period, and I do believe that over the fourth quarter, the loan yield may have expanded slightly.

Okay. And then I guess the final question, if you could, you're running a lot of capital now, you're generating a lot of capital. In terms of potential M&A activity, if you could, would you consider using cash as a way to more effectively sort of -- or as a way to effectively lever this capital base? Or would you prefer to do all stock? Or would it just depend on I guess the seller?

I think it depends on the objectives of the seller, but as an example, our last 2 transactions that were done in 2007 were both I believe 50/50 or darn near close, 50/50 cash and stock.

Okay.

A lot of it does depend on who we are talking with.

Okay.

Make it clear, there is nothing imminent in the wheel house on that front. We're just going to keep our eyes open as we always have.

Okay. Thank you very much.

Thank you. I am showing no further questions in queue at this time. I would now like to turn the conference back over to Mr. Schrider.

Thank you. And thank you all for your questions, and taking the time to participate with us this afternoon. We remind you that we would love to receive your feedback, and help us evaluate the effectiveness of our call, and how we did. You can e-mail us your comments at ir@sandyspringbank.com. Thank you again, and have a wonderful afternoon.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may now disconnect, and have a wonderful day.