Sandy Spring Bancorp, Inc. Q1 2010 Earnings Call Transcript

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 |  About: Sandy Spring Bancorp, Inc. (SASR)
by: SA Transcripts

Sandy Spring Bancorp, Inc. (SASR)

Q1 2010 Earnings Call Transcript

April 22, 2010 2:00 pm ET

Executives

Daniel Schrider – President and CEO

Ron Kuykendall – EVP, General Counsel & Secretary

Analysts

Steve Moss – Janney Montgomery

Avi Barak – Sandler O'Neill

Bryce Rowe – Robert W. Baird

Mike Shafir – Sterne, Agee

Operator

Good day, ladies and gentlemen and thank you for your patience. You've joined the Sandy Spring Bancorp Incorporated first quarter 2010 conference. 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 that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the conference over to the President and CEO of Sandy Spring Bancorp Incorporated Mr. Daniel J. Schrider. Sir, you may begin.

Daniel Schrider

(Audio Gap) Officer and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always, this call today is open to all investors, analysts and the news media. There will be a live webcast of today's call and there will be 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 before we make our remarks and then take your questions, Ron will give the Safe Harbor statement.

Ron Kuykendall

Thank you, Daniel and 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 and intentions, earnings and other expectations, estimates of risk and future cost and benefits, assessments of probably 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 uncertainty as 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 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 necessary indicate its future results.

Daniel Schrider

Thank you, Ron. In today's press release we announced the net loss available to common stockholders for the first quarter of 2010 at $700,000 or $0.04 per diluted share compared to net income available to common stockholders of $1 million or $0.06 per diluted share for the first quarter of 2009 and the net loss available to common stockholders of $4.4 million or $0.27 per diluted share for the fourth quarter of 2009.

Certainly the main highlight of the quarter was our recent comment stock offering of 7.5 million shares, which was very well received and resulted in net proceeds of $95.6 million. As I stated in today's press release, repayment of TARP remains as one of our highest port for priorities and the successful offering was a key step towards achieving this goal.

Stockholders equity totaled $471.9 million at March 31st and represented 12.9% of total assets compared to 11.2% at March 31, a year ago. So, at quarter end the Company had total risk-based capital ratio of 17.04%, the tier 1 risk-based capital ratio of 15.77% and the tier 1 leverage ratio of 12.01%, which are all above amounts needed in order to be categorized as well capitalized for regulatory purposes.

Obviously our regulatory capital ratio is due include proceeds from the offering. Last quarter, I talked about our net interest margin, which continues to be a main focus and I'm pleased to report that the margin was 3.56% for the first quarter compared to 339 for the first quarter of 2009 and 3.4% for the linked fourth quarter of '09.

We think this is especially positive concerning the total loans and lease is decreased 8% to $2.3 billion compared to the prior year and 2% lower than they were at year-end. This decrease in loans was attributable to declines in all major categories of the loan portfolio primarily due to the lack of loan demand, which is being driven by ongoing soft, regional and economic conditions.

Additionally, our proactive credit risk management is also resulted in run-off of undesirable loans in excess of newly originated lending relationships. On the deposit side, customer funding sources, which include deposits and other short-term borrowings from core customers, were head 3% to $2.3 billion at quarter end compared to the prior year with the increase primarily attributable to consisting growth and balances and our premier money market account and noninterest-bearing deposits.

I should also point out that the total deposits were down slightly by 1% compared to the fourth quarter of 2009 due to seasonal fluctuations, some intentional run-offs of both high cost time deposit and higher price public funds. So, as I've explained before managing our cost of funds is key to sustain end growth of margin in this tough cycle, and keeping a tight rate on the noninterest expenses remains critical in order to maximize our pre-tax, pre-provision earnings.

To give you some perspective on the performance of their core company, pre-tax, pre-provision earnings for the first quarter of 2010 was the second highest ever $14 million compared to $12 million, $0.75 million at the first quarter of 2009 and $13.9 million in the late fourth quarter of '09.

Comparing the fourth quarter of 2010 and 2009, net interest income increased by $3.1 million at 13%. This increase was due to our continuing efforts to manage rates paid on deposits and borrowings together with a higher level of interest earnings assets. Clearly, the margin is also affected by the current level of non-performing assets, which were about $143 million at March 31, compared to $126 million a year ago and $141 million at year-end.

The negative impact to our net interest margin from our non-performing assets is approximately 25 basis points at quarter end. We took a $15 million provision for loan losses in the first quarter, which was higher than the $11 million set aside from March a year ago, but notably lower than the $21 million provision at year-end and about $34 million for the third quarter of last year, which we are optimistic was the peak.

In terms of other credit trends, we continued to ensure the advocacy of our allowance for loan and lease losses, which now stand to $3.08% of total loans and 51% of non-performing loans compared to an allowance of 2.81% and NPL coverage of 48% at December 31st. This coverage ratio is included loans that are 90 days or more passed to that continues to accrue interest.

To jilt down a bit, as it has been in the case throughout the cycle, solid credit risk management practices and specifically the resolution of problem loans remains a high priority especially in the residential acquisition development and construction portfolios since 50.5% or $72 million are from this segment that by far are the most significant portion of non-performing assets involving some of our largest relationships.

Less than 1% of NPAs are in our income producing commercial real estate portfolio. Our commercial mortgages secured by retail properties totaled $91 million representing some 56 relationships, the largest relationship is around 10 million and the average loan is $1.6 million. There is no big box exposure. These are mostly neighborhood centers with good diversification and strong guarantor support.

Our office portfolio is approximately $79 million with an average loan size of $1.2 million. We have no tenant concentration and like retail, these projects are generally small properties with a diverse tenant mix. The C&I in our occupied real estate portfolios represent traditional community banks small business relationships and as you might expect some of these business owners are struggling with the current economic environment.

15.1% or $21.5 million of our NPAs are from our C&I portfolio and 6.54% or $9.3 million are in our occupied portfolio. Our residential mortgage business that is loans to individuals is comprised of the three expected specific segments. That's lot loans, construction loans and permanent adjustable-rate mortgages.

With continued elevated unemployment levels and depressed property values, these portfolios have been a substantial source of NPA throughout this cycle. 4.2% or $6 million of NPAs are from the lot portfolio. 5.45% or $7.8 million from the construction loan portfolio and 10.5% or $15 million are from our permanent adjustable-rate mortgage portfolio.

And as I noted last quarter, our home equity loan portfolio continues to perform with healthy metrics and consistent usage rates online of about 44%, and our home equity loan portfolio represents less than 1% of our non-performing assets. We've covered most of the other key financial highlights in our press release today, so I'll not read them over again, and now we will move to your questions.

Operator, we can have the first question please. We would appreciate if you would state your name and Company affiliation as you come on, so we know with whom we are speaking.

Question-and-Answer Session

Operator

Thank you, Sir. (Operator Instructions). Thank you. Our first question comes from Steve Moss of Janney Montgomery.

Steve Moss – Janney Montgomery

Hi guys.

Daniel Schrider

Steve, hi are you doing?

Steve Moss – Janney Montgomery

Just one start-off on the – what are the AB&C balances appeared and I might have missed that in your discussion there?

Daniel Schrider

We will pull that up for you. Steve, as I flip through some pages, total of $179 million approximately.

Steve Moss – Janney Montgomery

Okay, and with regard to commercial business loans and CRE loans were down a bit quarter-over-quarter. How is loan demand looking for those two segments?

Daniel Schrider

Both commercial and material demand has been softer several quarters. Fortunately, in March we finally saw a turn to where we are hitting our loan growth or loan production expectations in the commercial portfolio, but Steve it will be tempered by our ongoing efforts to move problem credits off from our balance sheet including some success we are having in moving balances out of some watch credit categories that are not necessarily NPAs. So, while demand is picking up, net growth will be challenging as we work through the NPA portfolio.

Steve Moss – Janney Montgomery

Great, okay and then onto TARP where are our discussions with regulators at this point?

Daniel Schrider

Well, as I mentioned repayment in TARP continues to be one of our highest priorities and the offering was a key step toward that end. Repayment, as you know Steve is not as simple as writing a check and the process includes dialogue with the U.S. Treasury and our Federal Regulator and we begun that dialogue, and beyond that I'm not in a position to comment further.

Steve Moss – Janney Montgomery

Okay, thank you very much guys.

Operator

Thank you again. (Operator Instructions). Our next question comes from Avi Barak of Sandler O'Neill.

Avi Barak – Sandler O'Neill

Hello.

Daniel Schrider

Hi Avi.

Avi Barak – Sandler O'Neill

Hi guys. Two quick questions for you. Number one, noticed continued building of the reserves through over providing relative to net charge-offs was wondering when you anticipate or day you anticipate an eventual reserve release is that something we could maybe at the end of this year, or is that maybe something out in 2011?

Daniel Schrider

Yes. We see, definitely see provision expense moving into the right direction to specific timing and extent of further decreases and expense that will really depend upon specific timing and resolution of some, some larger credits. I think the key is we've seen NPA stabilize and the trend of the pipeline of potential problems improve. So, our provision expense and our reserve methodology is based up and I think it is important to know the very realistic view of values in the market and so we are going to continue to view things at way but definitely see the provision expense moving in the right direction.

Avi Barak – Sandler O'Neill

Okay thanks and then separately on an unrelated issue. I know first quarter is usually seasonally a little slower for deposit service charges, overdraft etcetera compared to the fourth quarter but how should we be thinking about that more broadly it might have kept coming real changes to overdraft and what systems or what ideas do you guys have in place to recapture maybe some of what will be lost.

Ron Kuykendall

I think you are correct in terms of the seasonality effect in general terms on service charges as much as so the seasonality that really occurs during the fourth quarter of the year and then the trail off of that during the first quarter. But as we look ahead here I would think you should expect that, that service charge level of income is not going to come back up to prior levels and in fact with some of the impending regulatory pressures going forward I think we ever expected that level would initially go down before it comes back up and come back up primarily related to any growth that we get in transaction or into the accounts as opposed to the types of fees per account that we have been able to enjoy in the past.

Avi Barak – Sandler O'Neill

Okay thanks a lot guys.

Daniel Schrider

Sure.

Operator

Thank you. (Operator Instructions). Our next question comes from Bryce Rowe of Robert W. Baird.

Bryce Rowe – Robert W. Baird

Thanks. Good afternoon guys.

Daniel Schrider

Hi Bryce.

Ron Kuykendall

Hi Bryce.

Bryce Rowe – Robert W. Baird

Can you guys speak to the – I guess the source or the mix of the loans 90 day past due and still accruing and if secondly if you could talk about any kind of movement into and out of the OREL and then thirdly if you had the 30 to 89 days past due balances.

Daniel Schrider

Bryce this is Daniel first on the 90 day quarterly trend. The major changes we are seeing in that trend or at least an uptick in this first quarter which is really the driver behind the slight increase in overall NPAs is in the residential permanent portfolio solely and so from the trend that’s one that saw an uptick in the first quarter in terms of 90s and over and that’s really the simply due to what we are seeing in the regional economy as well as the depressed values. When you look at the 30 to 89 trend however quarter-over-quarter, we are actually down substantially in the first quarter relative to fourth quarter '09, almost cutting half.

So, the pipeline coming in as we feel pretty good about that from the 30 to 89. OREO as you can tell is it not materially growing out of that portfolio. We are selling predominantly residential lot that we have taken in early in the cycle. There tends to be a number of relationships but smaller dollar balances. We continue our strategy price of trying to move the larger commercial of AB&C projects out of the portfolio. If at all possible without having a flow through OREO and that’s simply a strategy not to take title and ownership of the projects.

Bryce Rowe – Robert W. Baird

Okay and Daniel I would assume that the residential lots are tied to that consumer lot loan portfolio or is it different?

Daniel Schrider

Absolutely thanks for that clarification. It is tied to that consumer lot portfolio.

Bryce Rowe – Robert W. Baird

Okay and kind of following up on Steve's question there. You have the loan balances for the consumer lot portfolio and then the consumer residential construction portfolio as well?

Daniel Schrider

Yeah the lot portfolio is just shy of a $110 million quarter end and the construction portfolio about $83 million.

Bryce Rowe – Robert W. Baird

Okay. Thank you guys. I appreciate it.

Daniel Schrider

Sure.

Operator

Our next question comes from Mike Shafir of Sterne, Agee.

Mike Shafir – Sterne, Agee

Good afternoon guys.

Ron Kuykendall

Hi Mike.

Daniel Schrider

Hi Mike.

Mike Shafir – Sterne, Agee

I was just wondering if you could just maybe go over the NPA balances by loan book it again. I am sorry I didn’t have a chance to catch all those at the beginning of your presentation.

Daniel Schrider

I will just run through the three primary categories of consumer loans, mortgage loans and maybe give you a little detail on the commercial in the first quarter. Overall, consumer loans that every bucket is right around 1% of our NPAs but that’s only about a $1.5 million.

Our total mortgage loan non-performing assets at quarter end which is just shy of $29 million where 20% NPAs are commercial loan bucket which includes AB&C overall represent 74% of our NPAs with 50.5% of overall NPAs coming from that AB&C portfolio.

Mike Shafir – Sterne, Agee

Okay. Thank you and then in the commercial side that residential construction , commercial construction land in all the different lot?

Daniel Schrider

The residential which is a consumer portfolio, residential mortgage portfolio and in my comment I really spoke about three different components that are all loans to individual and that’s construction loans, lot loan and permanent adjustable rate mortgages and that’s the bucket that represents the 20% of our non-performing assets. Those are loans to individuals, some are construction, some are lot loans. Within the commercial category and that would be loans to builders or developers within that non-performing loan balances approximately $72 million or in that builder related business which represents about half of our non-performing assets.

Mike Shafir – Sterne, Agee

Half of the total non-performing number?

Daniel Schrider

Correct.

Mike Shafir – Sterne, Agee

And as far as the 30 to 89 days, you actually have those balances or percentages may in change from the fourth quarter and the first quarter?

Daniel Schrider

Yeah I can, I think those numbers will be published in the call report I believe when its filed but I can tell you that the overall 30 to 89 from fourth quarter to first quarter was cut in half.

Mike Shafir – Sterne, Agee

Okay. Thanks a lot. I appreciate that detail.

Daniel Schrider

Thank you.

Operator

Thank you. Our next question comes from Avi Barak of Sandler O'Neill.

Avi Barak – Sandler O'Neill

Two quick follows up for you talking about more broadly the market that you operate in, obviously there has been a lot of disruption over the last few years as far as bank M&A and larger players coming in and that’s been part of your strategy. I am wondering if that’s changed off late, have the larger banks finally maybe gotten their act together a little bit or are you still seeing significant opportunities from market share.

Daniel Schrider

Avi, Dan. We still believe there is significant opportunity for market share. That’s a little bit challenged simply by the current economic conditions and that is small business relationships tend to be a little hunkered down and waiting for a little more visibility in terms of their own businesses economically but in terms of our position in the market we still feel very fortunate to be in a market that we are the largest independent publicly traded bank in the State of Maryland and when we look at the landscape across our market we think we got great opportunities to take share overtime particularly as the economy starts emerging from its current cycle.

Avi Barak – Sandler O'Neill

Okay thanks and then separately unrelated issue. FDIC-assisted transaction that’s obviously all the rave right now and we also know there is not too many "sick banks" in your market. Could you maybe give us an idea of how you are evaluating potential acquisitions at the point either FDIC or those traditional M&A and anything outside of the banks space maybe sort of the unrelated.

Daniel Schrider

I think we will continue to be very thoughtful now and in the future about opportunities for us to grow our business through acquisition that will be bank and non-bank. As far as and that’s a strategy that’s unchanged from what you have heard us speak of in the past and actually I think we spoke the FDIC possibilities last quarter and much like you said we don’t see they are being a great opportunities for Sandy Spring in that space just by virtue who you would might anticipate and where they maybe located and strategic fit. We just don’t see ourselves have being a great opportunity for us.

Avi Barak – Sandler O'Neill

Okay. Thank you.

Daniel Schrider

Thank you.

Operator

Thank you and there appear to be no further questions in queue at this time. So, do you have any closing remarks?

Daniel Schrider

Obviously that wraps up our questions and we just want to thank you. We appreciate the time you are spending with us this afternoon. We would like to receive your feedback to help us evaluate how we did and you can email it to your comments at ir@sandyspringbank.com. Thank you again and have a wonderful afternoon.

Operator

Thank you sir and thank you ladies and gentlemen for your participation. This does conclude your program. You may disconnect your lines at this time. Have a great day.

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