Sandy Spring Bancorp Inc (SASR) 2011 Q3 法說會逐字稿

Good day and welcome to the Sandy Spring Bancorp Inc. earnings conference call and webcast for the third quarter of 2011. All participants will be in listen-only mode. (Operator Instructions) After today's presentations, there will be an opportunity to ask questions. Please also note this event is being recorded. I would now like to turn the conference over to Daniel J. Schrider, President and CEO. Mr. Schrider, please go ahead, sir.

Thank you, Rocco, and good afternoon to everyone. Welcome to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2011. Now this is Dan Schrider speaking, and I'm joined here today by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. 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 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 Kuykendall will give the customary Safe Harbor statement.

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risks and future costs and benefits, assessments of probable loan and lease losses, assessments of market risks 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 operation do not necessarily indicate its future results.

Thank you, Ron. Well, we had another good, strong profitable quarter with net income ahead of both the linked second quarter of this year and also ahead of the third quarter of last year as you might expect. On a percentage basis for the third quarter versus the third quarter of last year, net income was up 76%, and for the nine months, it was up 149% over last year's first nine months. On a per share basis, fully diluted, net income was up 73% quarter-over-quarter, and up 127% for the nine-month period. It's also important to note that on an operating basis, our pre-tax pre-provision earnings increased by roughly 4% on a linked quarter basis. However, you cut it we think those advances are pretty decent in this business environment.

As noted on our press release, there was a credit to the provision which obviously had a positive impact on this quarter's improvement in profitability. The provision credit is indicative of what we've stated previously. We've aggressively addressed problem credits early in the cycle which drove significant provision expense and net charge-offs. The pace in which we addressed the problems early has resulted in a more rapid release of our allowance today, all in keeping with our allowance methodology that we've employed consistently throughout the cycle. Despite the provision credit, we have not cut back in the slightest on our intense focus on credit quality. In fact, you will note that NPAs crept up a bit this quarter.

This increase was due to one specific income producing commercial real-estate credit which is $13.6 million, now placed on non-accrual. We feel that this loan is adequately reserved and also at a satisfactory point in our understanding of how to best get it resolved. It is disappointing to be putting a fairly large loan on non-accrual, but as we've said all along as we've moved through the latter stages of this credit cycle, we expected that there would be some bumps in the road and this credit that we've placed on non-accrual was, by no means, a surprise to us. That said, we do continue to be very disciplined and attentive in our approach to managing risk and avoiding any temptation to stretch during what is likely to be a very prolonged and unpredictable recovery.

On the plus side, as we noted in our release today, even with weak demand for quality loans across the market, we were still able to generate new commercial loan commitments of $291 million, and of that, $167 million in new commercial loan funding during the first nine months of this year, actually resulting in net growth for the quarter. Additionally, we're pleased to see that the pace of loan run-off is beginning to slow. We believe we've managed to do this without stretching our underwriting criteria or caving on pricing in the face of competitive pricing that is often, in our view, irrational.

Core deposit levels, they continue to be strong, which reflects our financial stature as both a leading Maryland and a Northern Virginia-based community bank and also customer preferences to do business with a locally managed institution, particularly in this environment. On the deposit pricing side, we've managed to hold the line consistently. The net interest margin declined, as you might expect, to 3.53% from 3.58% at the end of the second quarter of this year, and 3.64% at the end of the third quarter a year ago. And our expectation is for net interest margin to stay in the low 3.50% range for the remainder of the year. Non-interest expenses increased by only 3% on a quarterly basis over a year ago and increased 4% for the nine months versus where we were this time last year.

The efficiency ratio on a non-GAAP basis came in just a hair over 62% for the third quarter, which was up from just over 59% a year ago and down slightly on a linked quarter basis. Third quarter ROA was 1.24% versus 0.7% a year ago, and ROE came in at 10.42% compared to 6.26% a year ago. Some of the other highlights of the quarter are as follows -- Non-interest income, not including service charges, was strong during the quarter as our assets under management increased nicely. The 3 elements driving this performance were -- first, steady growth in assets under management at our wealth management subsidiary, West Financial Services; secondly, a pick-up in the volume of internally generated business in our bank investment services lines, especially mutual fund offerings; and lastly, our bank trust department has been steadily expanding its asset base, improving its market penetration and seeing some meaningful growth stemming from internal referrals from other business lines.

We've made a concerted effort this year to properly educate and incent our bankers to refer new business into our trust group, and we've seen the results working. Our growth is also the result of an effort to add more concentrated sales resources on the trust side, especially to bring in new talent. And we have added a new trust relationship manager this year with great results. We also elected a new Director in late September; Gary Nakamoto was the founder of a business consulting firm in McLean, Virginia that bears his name. He's also the former Chairman of Base Technologies, a government contractor that was acquired earlier this year. Gary brings us, really, two-fold group of skill sets that we really like. He's been focused throughout his career geographically in northern Virginia where we're expanding our presence, and secondly, he also has expertise in the government contracting and small business sectors which is a big plus for us as well.

On a related note, in northern Virginia, we mentioned briefly during the last quarter call that we had just opened a new branch in Arlington, Virginia. This branch actually opened for business on July 13, which was during the third quarter but just prior to when we conducted the call to discuss our second quarter results. And then lastly, because there will likely be a question on this, we issued a news release on August 19, announcing the Board had approved a stock buyback authorization under which we could repurchase up to 3% of the Company's outstanding stock or approximately 730,000 shares.

To date, there has been nominal activity, and we will, of course, be reporting in the upcoming 10-Q the exact number of shares that we did repurchase. That wraps up my prepared comments as we covered most of the other key financial highlights and statistics in our press release today and we will now move to your questions. So Rocco, we can now take the first question and if you would please state your name and company affiliation as you come on so we know with whom we're speaking.

We will now begin the question-and-answer session.

(Operator Instructions)

Casey Orr, Sandler O'Neill.

I just had a few questions, mainly about that large commercial credit that went onto non-accrual. You just commented that it wasn't much of a surprise so can I assume it was previously classified as substandard or doubtful, or where was that --

Casey, I don't have the exact timing of how it migrated through our risk rating system, but clearly, it did. And so it's been in the works throughout the process, but I don't have exact timing of how it moved through.

I'm going off that just to try to get a sense for the drag on the margin from it, so did it move over to non-accrual early in the quarter or later?

Casey, this is Phil. We actually moved it over at the very tail end of the quarter. But we had to reverse the interest accrual on it at that point, which was basically 90 days' worth of interest on that particular credit, which had approximately about a $300,000 non-annualized impact to the interest income in the quarter.

Okay. And, overall, how much are non-accruals dragging the margin now? All non-accruals, not just this one, would you say?

Yes, I don't know that I've looked at that at late, but I would probably say it's still somewhere in the probably 15 basis point, 16 basis point range, just knowing the nature and the size of what's left in the non-accrual portfolio.

Okay, great, thanks. And then, back to that commercial credit, how much do you have specifically reserved for it?

That credit actually meets all the tests to require no specific reserve by virtue of its collateral value.

Okay, that's all I had for now. Thanks for taking my questions.

Mike Shafir, Sterne Agee.

I was just wondering, it certainly seems like we're going to probably stay in this lower rate environment for a little bit, and your cost of funds has now gotten down extremely low, which it doesn't seem like there's a lot of room left on that side. So, as we think about the margin moving forward, are we going to continue to see pressure in that 3-basis-point- to 4-basis-point-a-quarter range as you guys reinvest the cash flows of the securities portfolio and there's minimal growth?

Mike, this is Phil again. I think that, that's probably a fairly accurate way to view it. The caveat, as we've said all along, is how much of loan growth we get within each and every quarter as we move forward, which allows us to redeploy and offset some of that [compression] that's happening naturally, so to speak, as you move into 2012. You're right, we really don't have much room left on the liability side. Looking back, we were able to shave 25 basis points here or there on different product pricings, either in the CD portfolio or even in some of our money market products, but we're getting pretty far down there, obviously. And I think we believe that this low rate environment is not short-term, either, based on, obviously, comments from the Fed and others about what the plan is for short-term rates. So, again, the migration into loans is really the offset that we would be hoping for to keep the margin from compressing any further. But, absent of that, I would say it will.

And then, just how much, in terms of dollar amount, the cash flows that are coming off the securities portfolio a quarter?

Just in normal amortizing cash flows, it's somewhere around $10 million to $12 million a month, and then depending on the timing of either bullet maturities or calls within the agency portfolio, I think you could probably add to that anywhere from -- could be $10 million to $20 million to $30 million, depending on the blocks, on a month-to-month basis. And we have a fairly significant amount of the portfolio maturing between now and the end of next year, could be as high as 40% to 50% of the overall portfolio.

And then, just as that stuff is rolling off, how are you guys thinking about when you reinvest in terms of just the duration and the rates that you're getting?

Yes, Mike, the -- just to give you a perspective on that, just in terms of some of the things that we've bought just in recent times here in the month of September, which was a fairly active rollover month in the portfolio. Our average duration overall is a little over 3 years. I think we'd like to keep that average about where it is. We certainly don't want to extend any further than we believe we have to. I think that we try to be value buyers in terms of what we buy when we buy it. But, the spectrum of things that were bought during the month of September -- we bought some municipals, for example, that probably start with a high 3% handle and maybe get as high as 5%, but obviously those are in smaller pieces, just by their nature. We've also bought some additional mortgage-backed and some home loan bank type callable agencies. Those, on the other hand, are probably in the low 2% range, maybe 2.5%. So you start blending all that together, and you're in that 2% to 2.5%, maybe up, on average, to 3% depending on the mix bought at any given time.

Okay, thanks a lot for all that detail on the NIM. And then, just one other one, a pretty significant reserve release this quarter. I know that your loan loss reserves to loans ratio is still relatively high at over [2.30%], but as we think about the provision moving forward, and if we stay in a relatively minimal growth environment, is it going to be a scenario where you're matching charge-offs, or you're thinking about a slower reserve bleed?

I think it's probably -- Mike, this is back to Dan. As we mentioned in the press release, most of this release is driven by the historical loss factor within the methodology, and given the pace in which we've built reserves and experienced charge-offs, it's -- the reverse is true in the release. But I would think it would slow as we move forward and again, driven by also our ability to grow the portfolio.

Thanks a lot, guys. I appreciate it --

Mike, let me clarify one other thing real quick, going back to your question about the investment portfolio. That's roughly 50% of what's scheduled to either be called or matured is really spreads out even into 2013 over about a 27-month period from where we sit today. Again, given the current interest rate environment, we would project approximately about half the portfolio coming due in that period.

Okay. And then, just one quick one on the margin again then. On the borrowing side, is there -- do you guys have any of that maturing in the next 6 months or so?

Not within the next 6 months. We're continuing to look at what we have in that home loan bank advance piece, which is roughly about $400 million. I think as you know, just by their nature, the penalties for early extinguishment are pretty severe, and none of that is really scheduled to mature until probably at its earliest, 2015. So we're going to continue to look at that. We're going look to see if there's ways to restructure it at some point without having to take the hit, but at this point we're going to hold the course on that.

All right, thanks a lot, guys.

You're welcome, Mike.

Matt Schultheis, Boenning & Scattergood.

As far as the historical loss rates used in calculating your provision, how far back does that -- how many quarters does that entail?

It's 8 quarters, Matt.

So, you basically dropped off the -- I guess the 5% that you guys did 2 years ago, and so you've got 3%, so it -- I understand. All right, thinking out loud there. I apologize. As far as the large loan that you put into non-accrual, most of my questions have been answered there, and I don't expect you to answer it, but I'm going to ask it anyway. It didn't happen to be a ski resort in western Maryland, did it?

No, no, it didn't.

Just checking. (laughter) All right. Well, that's it for me. Thanks a lot.

Steve Moss, Janney Montgomery Scott.

Just -- not to go back on the non-performing asset, but is it an apartment loan, or is it an office, commercial real estate loan?

No, it's not. It's a retail center.

Okay. And is it located in the inner part of the Beltway or out towards the periphery?

It's right in the heartbeat of our market area.

Okay, okay. That's helpful. And then, just one more thing with regard to just looking at the provision going forward, I think you touched on it a little bit, but normalizing credit costs, I guess 2 parts. One is, just trying to balance out normalizing credit costs going forward with non-performers slowly moving down outside of this uptick here.

Sure.

Where do you expect credit costs to be roughly going forward?

That's not an easy question to answer because so much of it is driven by growth within the portfolio, and an assumption that things remain stable, which all indications are that they should, with an occasional blip like we experienced this quarter. So, I certainly would not expect to see the type of releases that we saw in the third quarter, although a credit in the future is not impossible, by any stretch, but I would think that provision expense is going to be very minimal until we start seeing growth in the portfolio.

Okay. Thank you very much.

Bryce Rowe, Robert W. Baird.

Thanks. Just wanted to follow up on the questions about the margin. Phil, you talked about essentially being locked out of being able to prepay the SHLB without a big penalty. How do you guys think about managing the balance sheet growth assuming that loan demand stays fairly weak here? Do you let the deposit portfolio shrink at all and not add to the securities portfolio? And, along that line of questioning, what kind of opportunity are you seeing with the debit card fees that we've seen from Bank of America?

Bryce, this is Phil to talk a bit more on the margin question and the balance sheet structure element of that. I think to your specific question about the deposit side, I don't think it's any different than where we've been over recent periods, which is, we'll continue to allow the hotter money, higher priced even in this environment, CD portfolio to continue to decline, just because of the fact that, one, it's more expensive, and two, we don't need the funding, if, in fact, we don't have a lot of expansion on the other side of the balance sheet. Now, having said that, the true core deposit element of the liability side, commercial retail, DDA balances, traditional transaction accounts, I don't know why we wouldn't continue to attract those to add to the relationship aspects of those customers.

And we've had good success there from last year this time to now, and I think we would continue to promote that type of growth even in the face of deployment into the investment portfolio, looking beyond the immediate. So, other than that, just being as diligent as we can on other parts of pricing, maybe a little bit more stringent in the premier money market product that we still have about $600 million in, to just try to minimize costs, which we've done, and we still have not seen a lot of run-off there. So, I think that's how we view that element of it.

Phil, is there a way to quantify roughly what the hot money composition, or how much in, quote-unquote, hot money you have within the CD book?

I don't know that I could tell you, quote-unquote, what the hot money part of it is. Probably if I looked to see that the moneys that were sitting in the various specials that we're running today, that would probably give us that answer, because that's normally where those flow in and out of, vis-a-vis just your standard maturity buckets. So, I don't know that I've got it quantified that way for you off the top of my head, but that would be the way that I would view that. And, obviously, we don't really buy the funds like others, so it's not easy to identify the brokerage situation or whatever that would get you closer to that answer.

Okay. On the earning asset side, just looking at the individual components or yields within the loan book, you had quite a jump in the residential construction bucket and the commercial AD&C bucket. What's driving that? Is that non-accruals coming back in or going off?

I would think that in the AD&C portfolio, it's probably a little bit of the non-accruals working their way out of our system and probably some production activity in there. I think we've probably booked a couple of deals in that portfolio. In the construction portfolio, we've certainly seen some growth there, more so than I would say it's any type of non-accrual rundown, so I would hope that, and we believe that the pickup in the yield there would be related to the new business.

Okay. That's all I had. Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good afternoon. You have a fair amount of capital. You've got a share repurchase authorization now. What are your goals in terms of a total dividend payout, and total payout ratio with regards to share repurchases and dividends?

Sure. Jenny, this is Dan. Good afternoon. Our framework we operate on from a dividend perspective, obviously, looking backwards from a -- on actual earnings and ahead on forecasted, is a payout ratio in the 25% to 45% range and looking at a yield in the 2.5% to 4.5% range, which guides us. So, if you look at the core earnings this quarter, clearly doing the math, you can see where there's an opportunity for us in the future to consider the dividend. As it relates to share repurchase, really put that in place, our former share repurchase agreement expired while we were in the midst of TARP early in the credit cycle, so it didn't make a whole lot of sense to put something back into place at that point. So we wanted to make sure that we could at least be opportunistic, given the volatility in the market, to be active if we saw an opportunity to be active.

Okay. Thank you.

Mark Hughes, Lafayette Investments.

Just to follow up on that last question, your share repurchase, it sounds like will be, maybe if there's a drop in the stock, for whatever reason, rather than a systemic trying to buy a set amount per quarter, per month, or whatever, would that be a correct assessment?

It would be. I think it fits in the context of, Mark, prior comments we've made with regard to capital deployment and with the priority being on organic growth, examining M&A activity, clearly, the dividend and share repurchases and all four of those potentially working together.

In the past couple of years, you all have had to put on hold some of the incentive programs that were laid out in the proxy for Management, and as we're working our way through the problems, now we're seeing some sunlight out there, what are you all thinking about doing about putting either new plans or reinstalling some of the old incentive plans that you had? Obviously, people have been working very hard through these troubled times. I'm sure it's time to start rewarding people for some of these efforts. So, are you thinking about doing anything different, or are you thinking about putting something similar to what you did in the past? What are you thinking along those lines?

Mark, this is Phil. I think one of the reasons that some of our souring benefit expenses year-to-date over last year are elevated from before are -- is because of the fact that we have been accruing under primarily programs that we had in place in the past, up and down the management and employee spectrum that we obviously didn't have the -- either the need or the ability in some cases to accrue for over the course of the last couple years. So I think we have reinstated some things along those lines.

But, having said that, I think we've also been sensitive to knowing that what we're accruing in that regard is to measure it with what our performance is on the way back as opposed to what it ought to be at a more normalized type of environment, where at least what we were used to having been normalized in the past. So, I think that we have returned to, again, accruing for it, but I think we've done so fairly prudently, knowing that it's still a long way to go before we're really where we want to be from a profitability standpoint.

Sure. 1 last question for you, Phil. In the prior question, did you say you've been buying some munis with 3% to 5% --

Tax-equivalized yields, Mark.

Okay. Thanks, okay.

Tax-equivalized yields, I'm sorry, I should have been more clear about that, but that would be on a fully tax equivalent basis.

Got you.

Mark, this is Dan. Just to -- something that probably goes without saying, but anything we do on the incentive side related to executive management is decided on or handled by our compensation committee of the Board.

Sure, sure. I would think it's time to start readdressing those -- that issue. Certainly people need to be rewarded for their efforts in recent years. Thank you.

(Operator Instructions)

Mike Shafir, Sterne Agee.

Sorry about that. A little bit of housekeeping, I was wondering on the tax rate, obviously, went up this quarter because of the additional revenues. If we just think about moving forward, what's a good number to use?

Mike, I would use an effective rate, annualized effective rate, probably 34%.

Okay.

That's the way I would see it, knowing what the composition of our revenues are at today and as we look forward, that's probably reasonable.

Okay. And then, just the mortgage piece, in terms of the gain on sale, it's pretty robust as a function of where rates are. How is that pipeline so far this quarter, and are you guys seeing potential downturn in that for next quarter? It seems like you would have some off.

Yes, Mike, I don't have -- we're looking through to see whether we have any intelligence on the pipeline this quarter. I know things continue to be strong, but it's also -- there's always the seasonality built into that business. But I don't have a good sense of a pipeline at this point.

Okay. Thanks a lot, guys.

Carter Bundy, Stifel Nicolaus.

Afternoon, everyone. I -- all my questions have been answered, but if I could ask just 1 quick question, Phil, on the securities book. It's continued to move up, obviously, without the loan demand out there and with the deposit inflows, and a follow-up on Bryce's question, but how big will that book eventually get? Is there any target as a percent of the earning asset mix where you get uncomfortable with how big it gets?

I'm not sure that I like where it is today, honestly, Carter, at around 32%, maybe 33% of assets. I think we stated before, our overall objective, and we were there a number of years ago, which for the portfolio, it would be more like 10% to 15%, and we're obviously a long way away from that at this stage of the game. If you look over the course of the last year or so, the size of that portfolio and, really, our overall footings have not really moved much. And so I'm not sure -- given that we're in the same environment, let's say, today as we've been over the course of this year -- that either of those is going to move significantly north from this point forward. Again, absent of some other ability to grow loans, but even then, given the size of the portfolio, we ought to be able to self-fund that thing for some period of time. So, it's not our desire to have the investment portfolio really go any greater than what it is today at approximately $1.2 billion.

Okay. And then, with additional deposit inflows, just assuming that there's still tepid loan demand, would that continue to be placed in the securities book then, or will you all be, like you had discussed, very, very diligent on the deposit pricing, which really is going to be tough, given how low you are already?

Yes, I think we'll do everything we can first on the deposit pricing side so that we don't have any additional funding than what we need, and I think that's what we've been able to do so far. And then, from there, if need be, we continue to park things in the investment portfolio and try to be just as conservative as we can in terms of structure and duration, so that we don't lock ourselves up for the long term.

Okay. And just 1 final question on the share repurchases. Sorry to ask another, but if we could get -- if you had to think about your priorities for capital allocation right now, is it moving up the list towards the top at this point?

Well, by virtue of where the market -- the level of volatility in the market and where you've seen us trade, clearly, it's an opportunity that we probably wouldn't have expected if we were talking at the end of the second quarter. So, something that we'll be active in when the opportunity presents itself. I wouldn't say that it's moved up the priority list apart from just the opportunity of where the market has been.

Okay. And then, I guess on that capital allocation question, still looking at doing potential acquisitions with the excess capital?

We continue, as we've said in the past, to be very open to looking at those opportunities.

Okay. Thank you all very much. Thanks Dan and Phil.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Schrider and the rest of our leaders for any closing remarks they may have.

Thank you, and thank you all for participating, and I hope that the answers to your questions are helpful to you. We would love to receive your feedback, and you can help us evaluate how we've done today. You can e-mail your comments to us at ir@sandyspringbank.com. So, thank you again for participating. Have a wonderful afternoon.

The conference is now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.