Sandy Spring Bancorp Inc (SASR) 2011 Q4 法說會逐字稿

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

Thank you, Mike, and good afternoon, everyone, and welcome to Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter of 2011. This is Dan Schrider speaking and today I'm joined by Phil Mantua, our Chief Financial Officer; and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always today's call is open to all investors, analysts and the news media, and there will a live webcast of today's call, and a replay of the call available at our website beginning later on today. We will take your questions after a brief review of some key highlights. But before we get started, Ron will give the customary Safe Harbor Statement.

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risk and uncertainties. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk and future 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's estimates and projections of future interest rate, market behavior, and other economic conditions, future laws and regulations, and a variety of other matters, which by their very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operations do not necessarily indicate its future results.

Thank you, Ron. We produced another good, profitable quarter. Net income for the fourth quarter of 2011 was $7.3 million or $0.30 per diluted share, albeit a bit lower when compared to net income of $8.3 million or $0.34 per diluted share for the fourth quarter of 2010, and net income of $11.3 million or $0.47 per diluted share for the linked third quarter of 2011. For the full year of 2011, we earned $34.1 million or $1.41 per diluted share. Which we are very pleased to note was up 45% when compared to net income of $23.5 million or $1.05 a share for the prior year of 2010. In this banking environment, an increase of 45% in year-over-year net income is very encouraging for us.

There are a few factors that impacted the fourth quarter financial results that I would like to address. These include an increased provision expense over the third quarter provision credit, substantial loan growth, increased incentive compensation expense, and additional costs associated with the disposal of Oreo properties. Obviously, the loan loss provision is at the top of that list. The provision for the fourth quarters of both 2011 and 2010 amounted to a charge of $2.3 million in each quarter, compared to a credit of $3.5 million for the third quarter of 2011. At the very end of the third quarter, we had substantive increase in our NPA number. This was due to the addition of one large commercial real estate credit that we identified as an addition to NPAs just as we were closing out the quarter. As I mentioned last quarter, it's a $13.5 million real estate loan that's the majority of a borrower relationship totaling about $16 million.

Then, within a matter of several days into the fourth quarter, further deterioration of the borrower caused a reevaluation of the credit relationship, which resulted in a need to increase our overall provision for the fourth quarter to a much higher level. So, the end result was that while overall nonperforming assets decreased in the fourth quarter, the provision expense actually went up due, to the movement of that one large relationship to NPA status right at the end of the third quarter and the subsequent reevaluation of the asset. Looking at the annual impact, the provision expense for the full year of 2011 totaled $1.4 million compared to a very much larger charge of $25.9 million for 2010. So, obviously lower provisioning over the course of this past year helped drive improved results for 2011.

A second area to touch on in the fourth quarter is loan growth. As I mentioned in our release, we were very encouraged with the lending activity as we closed out the fourth quarter. We had a very large increase in loan production within the last two weeks of the year, about $60 million of new commercial outstandings, all closed and funded that based on our allowance methodology resulted in a corresponding further addition to provision expense. To provide a little more insight on the nature of the loan production, the majority of new loan production was the result of a healthy and growing organic loan pipeline and more aggressive and successful sales efforts by our commercial banking teams throughout the year. Both of which should remain solid forces as we move through 2012.

Approximately 20% of the $60 million in loan growth came as a result of a seasonal draw-down of lines of credit within our government contracting customer segment. In addition to the impact that the loan growth had on provision expense, there was a corresponding impact on the salary and benefit expense. Why? Because much of this new lending activity drove increases in incentive compensation. Thus, you are going to see a bit of an increase in our salary expense not the result of an increase in head count, but rather the timing of incentive accruals due to year-end increases of loan balances.

Lastly, which is also related to expense increase, involved the disposal of a good number of Oreo properties through a series of auctions during the fourth quarter. There was approximately $600,000 in expense related to the disposition of Oreo properties resulting as you can see in a meaningful reduction in Oreo balances. I hope this is meaningful background to help you get behind the fourth quarter numbers.

Just to touch on a few other financial highlights without repeating what's already in our press release from earlier today, let me just hit a few. The net interest margin came in at 3.51% for the fourth quarter of 2011, compared to 3.61% for the fourth quarter of 2010, and 3.53% for the third quarter of 2011. Customer funding sources, which includes deposits and other short term borrowings from customers were ahead 3% compared to the fourth quarter of 2010. This increase was driven encouragingly by a 15% increase in non-interest bearing and interest bearing checking accounts, which more than offset a 7% planned decline in CDs due to ongoing rate reductions under our net interest margin strategy.

Revenue from wealth management services, which includes fees from trust and investment management and sales of investment products increased 7% for the fourth quarter of 2011, compared to the fourth quarter of 2010. There was very healthy growth in average assets under management as we continued to add new clients and better market conditions helped us produce more favorable returns.

On the capital front, tangible common equity stood at healthy $351.3 million at December 31, compared to $326.8 million at December 31, 2010. Tangible equity -- common equity to tangible assets was at 9.68% at year-end. At December 31, 2011, the Company had total risk base capital ratio of 15.38%, a tier 1 risk base capital ratio of 14.57%, and tier 1 leverage ratio of 10.84%. It is clear that during this prolonged economic recovery and unprecedented low rate environment, key priorities for 2012 include improvement in our earning asset yield via loan growth and management of corporate efficiency in as many ways as prudently possible.

Shifting to some non-financial highlights, we announced in December on the 20th our acquisition of Annapolis, Maryland based Commerce First Bancorp, just shy of $205 million in total assets. As principal operating unit, Commerce First Bank in a stock and cash transaction that was valued at approximately $25.4 million. It is a relatively small transaction but we believe a very meaningful one that we expect to close in the second quarter and will be immediately accretive. The acquisition will add approximately $205 million in total assets, $181 million in gross loans, and $180 million in total deposits before purchase accounting adjustments. The additional branches will expand Sandy Spring's presence in Arundel, Howard, and Prince George's counties in central Maryland where Commerce First currently operates five branch offices.

We see the situation as a great new source of small business and commercial loans. We like their branch model which functions very cost effectively as a series of commercial loan production offices that also offer full service customer convenience. It's a bit on a non-traditional model that is very intriguing to us. We see this as a good way to fill in our network with a very logical deal, and we like to continue to pursue similar fill-in acquisitions in other areas of our core geography. The Commerce First President and CEO, Rick Morgan, he'll join Sandy Spring as Market President for the greater Annapolis region and will help build upon the Bank's presence in the Prince George's county market as well.

On another note, we added to our senior level talent in two other significant areas. We hired Nina Baranchuk as Vice President and Chief Investment Officer of the Bank's Investment, Management and Fiduciary services division. She will be developing investment strategies for the Bank's Trust Division and overseeing the Portfolio Management function. Nina brings over 25 years of investment and asset management experience to Sandy Spring.

We also hired Denise Stokes as Senior Vice President and Director of Marketing. She joins Sandy Spring Bank with more than 30 years experience in financial services managing various aspects of banking such as retail, small business, consumer lending, and mortgage. Denise will be responsible for coordinating the Bank's marketing efforts and enhancing the Company's brand and image. That wraps up my comments as we covered most of the other key financial highlights and statistics in our press release today. We will now move on to your questions. Mike, we can now have the first question but we would appreciate it if you would state your name and company affiliation as you come on so we know with whom we are speaking.

(Operator Instructions) The first question we have comes from Mike Shafir of Sterne Agee. Please go ahead, sir.

Good afternoon.

Good afternoon, Mike.

Hey, Mike.

In terms of thinking about the provision moving forward, certainly with some of the growth that you kind of have outlined or you had the potential growth, I'm assuming that there is going to be some addition to that provision line as function of that. But how should we think about it relative to 2011 as it's been -- it's fluctuated quite a bit?

Mike, this is Dan. And that little bit of noise in the quarter obviously makes that a little bit more difficult to determine. Just to give you a sense of the provision expense that we did experience in the fourth quarter and this may be a question that others have as well. About 35% of that provision expense was associated with growth that we achieved in the quarter just to give you a sense. Other noise within the allowance methodology had to do with, obviously, movements and reevaluations of credits that I mentioned as well as the impact of historical loss factors continuing to move in the right direction for us.

So I do think it would be safe to assume that based on our expectations that loan growth continues that we would not be as bumpy with the credit involvement as we move forward. Oh, possible if they are under certain circumstances, but we think on a more normalized basis, it should be a little more steady, obviously, absent spikes in growth. I don't know if I'm answering your question --

No, I think you -- very helpful in terms of kind of breaking out what piece of it was related to the larger relationship and then also what you guys are setting aside for growth. And then just what are the loan growth expectations for the year? You've seen a robust pipeline it seems like and this quarter it was certainly very healthy. So can we see -- is it going to be kind of a low single digit scenario potentially in 2012 or mid-single digits?

Good question, Mike. We feel, -- obviously still have -- while we've had tremendous success on the NPA front, obviously we are still working hard at reducing some of those numbers. So our best thinking right now based upon how we finished up the year is probably a mid-single digit loan growth expectation.

Thanks a lot. I appreciate all that detail.

Thank you, Mike.

The next question we have comes from David Peppard of Janney.

Hello, David Peppard from Janney.

Hi, Dave.

How are you, Dave?

Good. Since we are going to stay in this low absolute rate environment for a little bit of time, what is your thinking on the margin going forward, especially as you experience some of this loan growth?

Dave, this is Phil. I think that in the more immediate term here, first of all, you notice that the margin held up pretty well here as we made our way through the fourth quarter and ended right around the 350, 351 range. And we can probably, especially given the loan growth that we got at the end of quarter, probably look for that to hold up for at least a quarter or two into the future. But I would think given with that and what's going on in the broader rate environment based on what the Fed had to say yesterday, et cetera; that over the course of the year, it will be hard to stay at that kind of level throughout. We also do have in our mortgage portfolio a fair number of our ARM-based product that by contract is going to start flipping from their three and five year fixed term into some adjustable rate categories. So I think that that's going to impact that as well. So you could see the margin from that 350 range kind of work its way through into the mid-340 range by the time the year comes to pass.

It terms of the securities portfolio, what type of normal amortizing cash flows are you getting from there on a monthly basis right now, and how much of that can you put into loans versus back into the securities portfolio?

Probably anywhere from $8 million to $10 million to $12 million a month that comes off the investment portfolio in amortizing-type flows. And we can probably -- given again, you assume we have similar kinds of loan growth as we head towards the end of the quarter, we can clearly absorb that as we go through. But we also have other callable and bullet-based maturities in that portfolio that we're not going to be able to absorb for some period of time. And so I think the amortizing, I think we can, the others we probably are not going to be able to completely absorb.

We have about $380-some million outside the amortizing cash flows that are either being called or matured during the year of 2012. And so that's a significant block obviously of securities that we will need to, in some way, be reinvested back into the portfolio. And just while I'm think being it too, as it relates to the margin element of things, my comments as it relates to the trends there do not take into consideration anything related to our acquisition with Commerce First as we close that in the middle of the second quarter, and we know that their margins based on the pricing of their commercial portfolio are actually better than ours. So there will be some positive impacts related to that as we move through the year.

And last question, are you seeing any opportunities right now to reduce your level of borrowings on the balance sheet?

Let me explain that too. That's something else that is a little bit of a phenomenon there at the end of the year. Again with the buildup on the loan growth at the tail end of the quarter, we actually went out and borrowed $80 million in an overnight basis with Home Loan Bank as opposed to unwinding any of the securities at that stage. The majority of that's already been paid back. I think we might have maybe somewhere between $10 million and $20 million of that still remaining on the balance sheet today. So that part of the borrowings piece was clearly temporary.

And we also do continue to evaluate, though, if there is an opportunity to rework the other longer-term advances. But they are still fairly out of the money, so to speak. The penalties in that regard and the ability to do so without significant movements in the investment portfolio to counteract that are still pretty significant.

All right. Thank you for the time.

You're welcome.

And the next question we have comes from the location of Carter Bundy of Stifel Nicolaus.

Good afternoon, everyone.

Hey, Carter.

Could you talk a little bit about your appetite for potential share repurchases post the Commerce First deal should additional acquisitive activity not surface?

Carter, this is Dan. I think that probably not too dissimilar from what I've commented on before, we'd like to do a combination of organic growth and continuing to look for opportunities to grow through M&A, make those the priority capital deployment strategies. However, share repurchases and dividends are both on that list as well; but obviously not as high in the priorities. So not something we would automatically write off, it's just a matter of gauging it relative to other opportunities that may not materialize.

Okay. And then moving on to loan growth. It looks like basically every single category of loans was up pretty meaningfully linked quarter. Could you help me understand where that growth came from, was that moving share? Was that -- I know you provided some color earlier in the call on line of credits draw-downs, but could you help me understand why all of a sudden we had such resurgence in loan growth this quarter?

Carter, Dan again. And you acknowledged a key point is just the diversification and the different sources of growth. I think, quite frankly, it's the effect of a year long of activity and getting out on the street, growing the pipeline and we saw the benefit of a lot of that coming to fruition at the end of the year. There were no purchase loans in that growth, it was all from feet on the street activity that kind of all fell within the fourth quarter as it relates to 2011 growth. Although, we have had -- not significant, but continuing to move directionally in the growth mode throughout the year, just a lot of it hit in the fourth quarter. By no means did we empty our pipelines, it was a -- so we're continuing to build opportunities, but it can't be explained beyond the fact that a lot of success all fell into one quarter.

Great. Thank you all very much.

The next question we have comes from Bryce Rowe of Robert W Baird. Please go ahead.

Hi. Just wanted to ask about the commercial AD&C loan portfolio. You had some growth in those average balances and some pretty meaningful growth in that loan yield. And if you could just help us understand that.

Yes. I think we probably talked about this previously -- a question as to whether that's still going to be a meaningful part of what we do, and I think the numbers would prove out that it will be. Albeit we are approaching it a little differently in terms of size of transactions, nature of the bar where in terms of their staying power and equity and the nature of the projects in terms of duration. So tend to be smaller, fewer number of units, infill, that type of thing; and quite frankly, we are probably able to demand a little more yield on those today just relative to the players in the market that understand and are doing that business. So that's the yield question is we are pricing it up to make sure we get paid for the risk we take.

And are there kind of deals behind the growth we saw there in the quarter? Do you have a pipeline of commercial AD&C loans?

Not something that is, I would say, is substantial or meaningful. I think that a lot of segments of our market in and around the beltway have rebounded. So we were seeing absorption take place. A lot of the activity in 2011 were folks getting back in the game and getting projects ready to produce and deliver for 2012 and 2013. Again, it will be continuing to be a part of what we are doing and -- but it's not going to drive our result, and I think our fourth quarter production numbers would evidence that. We also had some reductions in MPAs out of that bucket in the fourth quarter, which also obviously impacts yield, too.

Okay. Thank you.

(Operator Instructions) The next question we have comes from the location of Mark Lynch of Wellington Management.

Good afternoon. My question is sort of about the dance between expenses and revenue growth, and year-over-year, you had expenses up -- personnel expense up 10% fourth quarter over fourth quarter revenue down and now we're starting to see the line's headed in the right direction with a very good fourth quarter loan growth. And my question essentially is where are you in terms of adding more expenses, revenue producers, or not, in the course of the next year and how much is that dependent on continued loan growth?

Mark, this is Phil. I think, clearly, based on the way that the existing incentive plans in general were constructed that it yielded the kind of complementary expense to the increase in both production and overall contributions, so to speak, to revenue. And we also have to remember that there were other elements of incentive comp that in past years just weren't even at play at all that are also part of the overall number. But I would say that as we look forward here, I think that we're going to look hard at that relationship between value that's being generated and what we are paying for it, especially in light of some of the other things we've already talked about on the call related to margin pressures and other related costs of just doing business as we move forward. I think that there is a good possibility of a kind of a reset on exactly how we drive that particular line item in expense as we move forward.

Excellent. Thank you.

You're welcome.

The next question we have comes from Mark Hughes of Lafayette Investments.

Good afternoon. Just to follow-up a little bit more on the previous question. It's probably a good thing that the -- instead of comp line is going up as it relates to loan growth. But could you just talk a little bit philosophically about how your loan people are compensated? How much is for originating the loan, how you track the profitability of loans, if a loan goes bad is there claw backs to some of the incentive paid that might been previously been paid? Could you just kind of tell us the general philosophy of the bank in terms of compensating those kind of people?

Sure. Mark, this is Dan. I will focus probably more on the commercial banker front because I think as you know, in the mortgage banking business it tends to be a little different being commission based. But as it relates to the core area of producing commercial business, typically it's intended to be a mix of a variety of factors that are all about driving value. So there is an element of hitting a production threshold, which that threshold will be based upon what type of base compensation is paid, portfolio that's managed of existing business and value required out of that producer in new business to make sure Bank Corp is getting the return it needs out of that production. So there is always a threshold over which you have to achieve in a variety of areas, not only just lending but in deposit gathering and fee based business, to be in the money, so to speak.

And then once you are in the money, it's those same factors of fee base business, deposit growth, referrals, lending activity that will drive the incentive payment or the bonus opportunity; and then you -- obviously as you mention, there are things for which -- come back at you as well. And delinquency and proper portfolio management are both part of those dings. I hope that equation makes sense. The issue that Phil brought up in his answer to the prior question is that in today's banking world and particularly with today's unprecedented interest rate environment that according to yesterday is supposed to last here for the next couple of years, we have to evaluate and make sure that the value that we are getting out of that production and those activities is aligned appropriately and that's what we are looking at hard now.

Sure. You are making an acquisition either this quarter or next quarter, I forget when you said it closed, and you have done acquisitions in the past. And this is the first one I think you've really done since the '08, '09 crisis where you probably have to take a tougher look at their allowance -- the people that you are purchasing. Just because it's a different world than when things were good before. How do you get comfortable that their allowance is adequate or you have a certain set of standards internally; do you have to kind of true them up to Sandy Spring's standards, or how do you work with that?

You are exactly right. I think what actually with the accounting rules today, it's a little different than it used to be, so we don't bring their allowance over, so to speak. We go in and look at their book. In this case we looked at the large majority of the lending book loan by loan. And then we apply our allowance methodology to what we discover in that book. So that when we -- when that transaction closes and it will be in the second quarter, then it folds right into our allowance methodology to ensure that the reserves are Sandy Spring-like reserves based upon our analysis of their book.

Can you comment at all, is there going to be much of a change from where it is today, or is it too premature to ask that question?

If it were a point in time, obviously there would be as we add that portfolio of loans from Commerce First into the combined Company, there obviously would be an impact -- increased impact on the reserve. The end -- trying to quantify that now is too difficult because we don't know what our numbers will do between now and then.

And, Mark, the accounting dictates that you basically identify that mark at the time you close the transaction, and you effectively then book the assets in this case predicated on that overall market or fair value that includes whatever your assessment of the underlying credit quality might be. And then you move forward from there. And we clearly took our initial estimate into consideration in the way that we priced the transaction to recognize what that impact might potentially be.

Mark, this is Dan. Not to prolong it, but to also say that what we have discovered and continue to discover as we work with Commerce First is that they are very much on top of their game as it related to credit risk management. I believe they released their numbers a day or two ago and they are moving in the right direction as well. We are really happy with the team we're going to be partnering with.

Great. And last question. I realize this is a board issue, but in reference to the dividend, your payout ratio now is kind of below where you were before the financial crisis hit. Is your sense that over a period of time that you would kind of move back towards the payout ratio you had before?

Clearly, at the -- I guess the beginning of the cycle as our earnings began to be impacted by additional provision expense, we let the payout ratio get a little higher than our range of 25% to 45%. So right now we are right in the middle of that range or darn close to the middle of it. But we do -- we're hopeful that the performance we are able to produce going forward will allow us to move up in the range clearly. We'd love to restore the dividend to those types of payout ratio levels.

Great. Thank you very much. Good luck.

Thank you.

Thanks, Mark.

The next question we have is a follow-up from David Peppard of Janney.

Hi.

Hey, Dave.

My question was actually about the dividend. But while I have you on the line here, in regard to the salaries and benefits expense, do you have any programs in place at the bank where you could organically harvest new lenders to get some incremental loan growth in a more economic fashion?

Dave, we do not have -- we are not at the size right now where we have a formal kind of farm club so to speak. But we do, through the areas of credit risk management, and in the past couple of years, our loan workout area which is tremendous training ground, will bring people in with the idea of growing our own; and we do have a number of them. Within our relationship manager ranks, which is what we call a commercial lender, we do have a variety of levels of experience within that. So we have over the course of the last few years brought some lesser experienced folks that are either coming into banking for the first time or transitioning out of other roles within banking into a commercial sales role, and we've done that. But I'll also say at the same time, we are a very attractive bank for proven players in the marketplace to want to hang their shingle and become a part of what we are doing, so it's probably a blend of the two.

Are you using that attractiveness in your recruiting techniques in terms of pay scales?

I think our competitive advantage from an employment standpoint is being the largest bank here in the state of Maryland and in this region. We've got a tremendous reputation and history. We can deliver very sophisticated products. We have large loan capacity. But we can do it in a very small community bank touch and feel. And that's our focus.

And quite frankly, I think there are a number of bankers in a variety of areas of financial services that long for a day to be a part of a Company that is about something more than maybe what the larger bank could offer. So we are very entrenched in community. We want to make a difference in the lives of our clients and our employees and that's something that people want to be a part of. So as long as we are competitive as it relates to compensation and benefits, and we are very much competitive, we think the other elements will attract folks to our Company.

All right. Thank you.

It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to President and Chief Executive Officer, Daniel J Schrider and to the rest of Sandy Spring Management for any closing remarks.

Thank you, Mike, and thank you, everyone, who has been on the call and those that took the time to ask questions. We really do appreciate you taking the time to participate with us this afternoon, and we would like to remind you that we'd appreciate receiving your feedback to help us evaluate how we have done. You can e-mail any comments to IR@SandySpringBank.com. Thank you again and have a wonderful afternoon.

And you also, sir. And we thank you to the rest of the Management for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you.