Sandy Spring Bancorp Inc (SASR) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to Sandy Spring Bancorp Inc. second quarter earnings conference call and webcast. 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 the 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. Please go ahead.

Thank you. And good afternoon, everyone. Welcome to Sandy Spring Bancorp conference call to discuss our performance for the second quarter of 2011.

This is Dan Schrider speaking and I am joined this afternoon by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Council for Bancorp. As always, the call is open today to al investors, analysts and the news media and there will be a live webcast of today's call and a replay of the call available at our website, beginning later today. We'll take your questions after I review some key highlights, but before we get started, Ron will give the customary Safe Harbor Statement.

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 risk and future costs and benefits, assessments of probable loan and lease losses, assessments in market risks, and statements of 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 nature are subject to significant uncertainties.

Because of these uncertainties, Bancorp 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.

Thanks, Ron. We had another good strong profitable quarter with net income ahead of both the second quarter of last year and also ahead of the linked first quarter of this year. Provision expense is becoming more normalized, as it too was way lower than a year ago and also lower than what we set aside in the first quarter 2011. This more normalized provision expense certainly does not mean we have cut back in the slightest in our intense focus on credit quality.

As I have said before, we continue to be very disciplined and attentive in our approach to managing risks and avoiding any temptation to stretch during what continues to be a very prolonged and unpredictable recovery. My observation is that the success or lack thereof for community banks is an accurate reflection or barometer of the strength and stability of the local economies where they operate.

We as community bankers can be the lifeblood of our local communities and we know need to support our customers through tough times, but we must be selective in doing so. So, in this economic recovery scenario, where we often see a couple of steps forward followed by steps backwards, the challenge for all banks is to stay vigilant and very close to each creditor relationship in order to prevent unexpected negative changes or any outright surprises. And we very much intend to continue to do just that.

Even with our solid return to profitability and an obvious need to focus on delivering future growth, we're still very much in a period of elevated credit workout costs, ongoing fragile demand for quality loans and as always, challenging competition everywhere around us. So, I would characterize this quarter as fairly similar to the first quarter. Measured growth, decent profitability, hitting singles and some doubles, keeping 1 eye on credit quality as it relates to our existing relationships, and 1 eye on building new relationships to try to grow the Company.

With over 4000 new prospect calls having been made cross functional sales teams in the first half of the year, I'm pleased with the credit pipelines that continues to build for the future and also much improved production of commercial lending, combined with significant growth of non-interest-bearing deposits.

Some takeaways for the quarter are as follows. Loan growth versus the first quarter was essentially flat, meaning we are keeping up with runoff and early repayments, were slightly ahead in some segments of the overall loan portfolio.

In the true commercial segment, the pipeline for the first 6 months is better than for the same period of last year having nearly doubled. So, our efforts to get our commercial bankers back out on the streets is working. The real estate loan pipeline is also about the same level, having double for the 6-month period, versus last year but it, too, is remaining essentially flat for the second quarter of '11 over the first quarter 2011.

With the soft economy, most of the new business we are acquiring consistent relationship transitioning away from other banks, headquartered out of our market. Said another way, the combination of our high-quality products and services, plus the fact that we deliver them with excellent bankers and all of this being done in a high-touch local approach is winning business.

On a related note, during the past few quarters, we brought in some very solid experienced talent from these competitors. Especially bankers who are located in the Frederick, Maryland, and/or Northern Virginia market where we expect to expand our share of the commercial market and have already begun making some good progress. We have also added some great producers in both our Insurance and Wealth Management Business Lines.

Another noteworthy development that dovetails with the addition of new talent on the line side of the organization, is the election on June 29, of Bob Henel to the Sandy Spring Bancorp Board of Directors. Bob is the former President of PNC for the Annapolis and Anne Arundel county region. This is geography that we like a lot and has great growth potential for us.

What is more important that Bob was the Chairman, President, and CEO of an Annapolis Banking and Trust Company for 16 years, an affiliate of Mercantile Bank Shares before PNC acquired Merck. With Bob's election, we acquired a great Board member with 39 years of banking experience, as well as a key figure in the greater Annapolis business community. This is a great combination for us. For anyone who is interested in more detail, we issued a news release on Bob's appointment on June 30.

Here are some other general takeaways without just reading back the numbers from our release. Revenues from Wealth Management services including fees from trust and investment management and the sale of investment products increased 15% for the second quarter 2011 compared to the second quarter last year.

We are thrilled with the contribution of our Wealth Management teams. Overall service charges, mortgage gains, insurance business revenue, all were modestly advanced over the first quarter. Expenses, they were in the same range as the first quarter as well.

As a final comment on credit quality, we continue to echo what we've said over the past 2 to 3 quarters. Stable and improving are the operative words. We remain focused and realistic that the underlying trends will continue to move in the right direction.

Let me also reiterate that we are very pleased with our success at driving growth in a non-interest-bearing deposit book, which grew 5% from the end of the first quarter. This is a testimony to the great work of our front line. Our people are doing a great job in the current environment and they clearly understand the value of building our deposit franchise and are delivering great results.

Now, on a final note, let me just touch briefly on our current views about capital deployment and our 4 main priorities in this area. First and foremost, we are focused on funding organic growth. Because we believe both in the inherent strength of our organization, it's people, and the strength of the geographic sub markets that make up the footprint we operate in. On this note, we've just opened a branch in Arlington, Virginia which we see as a great commercial opportunity, especially in the light of the new senior lending talent we recently brought in to help us grow business in that market.

Second, as we have stated previously, we continue to review opportunities on the M&A front, both bank and non-bank situations. These are only situations that would be good strategic and geographic fits for us and as we have said before we have no interest in troubled banks. Our view towards M&A is consistent with past practice and we will continue to take a very disciplined approach as we evaluate possible opportunities.

Third, as for dividends, we intend to keep the payout ratio conservative and yet also reasonable for the foreseeable future which everyone should agree is prudent given the industry's and the regulatory emphasis on capital adequacy these days. And last, to address 1 inevitable question we always get when we go out on the road to meet with investors, we don't see the Company buying back stock at this time.

We have covered most of the other key financial highlights and statistics in our press release today so I will not read them over again and we will now move to your questions. We can take the first question now, Operator? 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)

Our first question is from Mike Shafir of Sterne, Agee Your question please?

Hi, good afternoon guys. Mike Shafir from Sterne, Agee.

Good afternoon, Mike.

I just have a question about, as we start to think about your low loss reserve to loan ratio, and the last several quarters now, the charge-offs have well out paced the provision. And certainly that speaks to the improved credit quality there, but we are still at 2.58% on that low loss reserve to loans. Are we going to have a consistent reduction in that as we've seen over the last several quarters? How do you guys feel about that?

You know Mike, I think it's not unreasonable to expect what you see in the first and second quarter would be a likely trend going forward. I think the absolute ratio to loans will also be driven by our ability to grow the loan portfolio. But all else being equal, we would see that level. You should expect a similar trend as it relates to the provision expense and its relationship to charge-offs.

Also, on the loan growth front, it certainly seems like activity has picked up from your commentary and your dealing with some of the natural runoff. Should we begin to see an uptick in absolute loan growth, kind of the back half of the year?

If we -- You are right in terms of your observation about production and pipelines, I think. But our success there continues to be tempered by the fact that we are successfully working out credits. So, any uptick in balances would be modest, at best.

Okay. Just finally on the margin. You came in a little bit, this last quarter, and I believe, your commentary last quarter really spoke to the CD side or the funding side starting to run out of steam and how future NIM expansion would really come from the addition of solid loan growth.

So, as we think about it in the near term and on the back of what you just said, in terms of the moderate potential growth in the second half of the year, should we see that margin continue to slightly come in as a function asset compression? (multiple speakers)

Mike, this is Phil, and I think that, in addition to what you stated, we had commented on last time, as far as what we could do on the deposit side, I think we also believe that the general level of margin is going to be fairly consistent even though it came back about 7 basis points quarter-over-quarter here. I think we talked in terms of low 360 range and I don't think what we just saw changes that a whole lot. We really have done most of what we can do, if not everything on the liability side.

So, I think your other comment is valid as it relates to meeting the loan yields moving forward in order to move the margin beyond that kind of 360 range. We did have, at the end of the quarter, a couple of non-accruals -- or a couple of loans that went to non-accrual status that forced us to reverse some earlier in the quarter accruals that really probably cost us on a more normalized basis about 3 basis points on that margin. So really, on that basis, it would have been more like 361 and that, again, would be consistent with what I think is our general range here.

All right. Thanks a lot guys. I appreciate all of that commentary.

Thank you, Mike.

Thank you. Our next question is from Steve Moss of Janney Montgomery Scott.

Good afternoon, guys.

Hello, Steve.

Hi, Steve.

I just want to touch base here on -- with regard to (inaudible) the trust division. Was that just a pickup in assets or were there any one-time items? It was a pretty good move on that. I kind of missed your comments on that, Dan.

Steve, good question. The growth we're seeing in our Wealth businesses is a result of an increase in assets under management, new relationships being brought into the bank.

Okay. In terms of, what are you seeing these days in terms of loan pricing, besides just the general uptick in the pipeline. Are things getting tighter?

I think, given the lack of economic driven loan demand out there, and the need for most community banks to be driving loan production, I think pricing has been competitive going back the last few quarters and continues to be. So, no real change there this quarter compared to the last couple of quarters of commentary. It's just sticking with being disciplined with underwriting standards and pricing for the risk of the deal.

Got you. And then, lastly, touching back on capital here, you guys are really poised to increase capital quite a bit here over the next couple of quarters. At what point -- it looks like you will be breaking 10% TC pretty soon, at what point, do you think, you could perhaps increase the dividend?

We're clearly operating on the lower end of our payout ratio range, Steve, and as I mentioned in my comments, being cautious about moving up given some of the regulatory views toward capital. But, I think we probably already approached a time when it would be easy to justify increase in the dividend. We're just taking a conservative approach. You know, if you look at what we are paying out relative to our earnings, we are on the low side of the range so there's clearly room to move.

Okay. Great. Good quarter, thanks guys.

Thank you.

Thank you.

(Operator Instructions)

Our next question is from Carter Bundy of Stifel Nicolaus. Your question please?

Good afternoon, everyone.

Hello, Carter.

Good afternoon.

Could you talk a little bit about how you think about the investment portfolio here and maybe talk a little bit about the investments you're making? Obviously we need loan demand to start deploying some of that, but is there any opportunity to pay down borrowings over the near term?

Carter, this is Phil. I think as it relates first to the earlier part of your question in the investment portfolio, and I think we have talked about this before, you know, we think it's a fairly conservatively positioned portfolio, average duration in the 3 to 3.5 year range. Nice blend between amortizing agency-based mortgage-backed and CMO paper, with a little bit of augmentation earlier in the year for yield, out in the muni portion. That -- there was value there at a time, we took advantage of that and now we are really pulled back in that regard.

So, I think, we are very comfortable with the way the portfolio is built and positioned and the cash flows that comes off of it on a regular basis. If it relates to the ability to pay off borrowings, just on the surface, if you look at the nature of the advances that we have with the home loan bank, it's probably still fairly cost prohibitive. Given that the prepayment penalties to be able to do that in a normal course of business, we continue to look at it and -- but I think, unless there's a way to swap that out without incurring those fees, those penalty fees, I think that is a difficult thing for us to swallow at this point.

Okay. That's really helpful. Could you just talk a little bit about the deposit gathering environment? Obviously, other than the CD portfolio, it looks like you bottomed out here. Just talk a little bit about the competition out there?

You're talking about the deposit pricing?

Yes.

Obviously, given the liquidity we sit with -- and a lot of other banks, we haven't seen a lot on the deposit side. Mainly because of our strategy to drive the non-interest bearing side, less interested on the CD front right now. Not as clearly as stiff as what you're seeing on the credit side.

Okay. And is it just pricing on the credit side, Dan, or is it also structure?

We see structure getting a little bit -- becoming part of the game in addition to price, at least outside of the box that we are comfortable with. Everybody has got their own appetite and so we're seeing others with a little greater appetite than us right now.

Okay. Thank you all, very much.

Thank you.

(Operator Instructions)

Our next question is from Bryce Rowe of Robert W. Baird. Your question please?

Thanks. Good afternoon.

Hello, Bryce.

Hi, Bryce.

Phil, you talked about the interest reversal here at the end of the quarter. I assume that was tied to that residential construction bucket? I noticed the yield --

That's exactly correct, Bryce. Yes, it was.

Okay. Was that a handful of loans?

Yes. I think it was, I would say less than a half a dozen loans, but they were sizable in terms of individual loans in that particular portfolio, so, had a much more obviously dramatic impact to that portfolio's overall yield.

Are those loans or credits related at all? Are they in the same development?

Not to my knowledge, no.

Okay. Okay. And then second question, more general, if you could talk about what kind of payoff volume you are seeing from the loan portfolio? I know you touched on it a bit in your opening comments, but I just want to get a feel for what real gross loan fundings have been in the first half of the year, versus, what kind of paydowns you're getting and if you are getting paydowns, what part of the portfolio are you seeing that?

Any runoff or paydowns, Bryce, this is Dan, is really widespread among all portfolios. That's really not one dominant sub-portfolio that's driving that. If I look at the first 6 months in terms of total production, our payoffs, which would also include normal principle curtailments, are running probably about 75% or so of new production. If that gives you a relationship there.

Okay. Yes. That's helpful.

But it is widespread among the portfolios.

And, beyond just the normal principal paydowns, have you seen anything that surprised you as far as total payoffs go?

No. Everything we are seeing leave have been strategic on our part, whether it's moving out of a credit that we prefer to move out of or decreasing exposure to a certain client or groups of clients. So, it has all been based upon our moves, but we are not losing business we want to keep.

Okay. Dan, do you expect that trend to continue as far as seeing some elevated level of payoffs, relative to production?

Well, I would say, this is probably broader than your question, but the -- from a credit quality standpoint, the inflows to criticize or classify categories, dramatically slowed over the last few quarters. So, the population of credits that we would look to move out, apart from those that are already in nonperforming status, is decreasing over time. They clearly come from resolutions of MPAs.

Those resolutions, as they have come down, have been bumpy at times. It's likely to be that way going forward.

And so is it fair to think about prospects for net loan growth being better over the next 12 to 18 months?

I think so. More of a function of a more robust demand. Backdoor.

Thank you.

Thank you. Our next question is from Jennifer Demba with SunTrust Robinson Humphrey. Your question please?

Thank you everyone, this is David Grayson in for Jennifer. Good afternoon, Dan and Phil. Good quarter. Wanted to touch on the capital a little bit more.

I know Dan, you had said, pretty much, categorically that share buybacks are off the table at this point. But, you know, loan growth expectations don't really materialize if sellers expectations on the M&A front aren't there. At what point do you, maybe, thaw on that topic and decide share buybacks are back on the table?

That's a good question. I think the -- to reiterate my quote was that share buybacks were not something that were in the cards at this time. I think as I walk through the 4 priorities from capital deployment, from organic growth to selectively looking at M&A opportunities, or dividends, there is no secret, that's kind of the priority order that we are evaluating how we deploy capital.

So, I think any one of those 4 need to remain on the list, but we are going to work through them in that order. Time will tell, depending upon what happens in terms of organic growth and loan production, or any M&A opportunities that may come our way.

Okay. And then, just a housekeeping question on the same topic, Dan, can you remind us, or if you haven't actually mentioned it with any specificity in the past, can you tell what you are thinking on that payout ratio range -- you said you're operating now at the lower end for conservatism, but how high are you willing to go?

Well, historically, if you look back over, our payout ratio has been anywhere in the 25 to 45 range on average, at times, as we are kind of coming down at the beginning of the cycle our payout ratio exceeded the high end of that range I described. But, that's generally where we've played.

Okay. All right. That's all I had think so much.

Thanks Dave.

Thank you. Our next question is from Joe Plevelich of Schneider Capital. Your question please?

Yes. Good afternoon. Your TC right now is sitting at 9.5%, as someone already said, on the way to 10%. Has anything changed with the regulatory environment where, say if you were targeting a 7% TC before and now you want to be 8%. And, to the previous person who asked about the buyback, not to beat a dead horse, if the loan demand is sluggish, acquisition opportunities are risky values, and you do have such a big excess capital cushion, isn't it a lot better to be out there buying back your stock versus trying to grow the securities portfolio or other -- just kind of sitting there?

Yes, Joe, Dan. I think that -- I guess in our mind it is a tool in the shed, but it would be premature where we are right now to go there. And, I'm not suggesting that we never would. I wouldn't have mentioned it as one of our options, but, just coming out of the cycle we are seeing our pipelines grow.

We are seeing production improve. I think, to your point, we have to keep our finger on that pulse and evaluate all the opportunities that we might have. And, a lot of that is going to depend upon both the loan engines as well as any opportunities, or lack thereof, on the M&A front and we will circle back to dealing with that question at that time.

Okay. Thanks.

Thank you.

Thank you. I'm showing no further questions in queue at this time. I would now like to turn the conference back over to Mr. Schrider for any closing remarks.

All right. Thank you. Thanks for your questions. I appreciate you taking the time to participate on our call this afternoon. And we love to receive your feedback. We'd appreciate it to help us evaluate how we have done and you can e-mail your comments to IR@sandyspringbank.com. Thanks again for joining the call and have a wonderful afternoon.

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