Sandy Spring Bancorp, Inc.
Q2 2010 Earnings Call Transcript

Published: 23 Jul 2010

[Operator:]

Good day ladies and gentlemen and welcome to the Sandy Spring Bancorp’s Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today’s call is being recorded. At this time I would now like to turn the conference over to your host Daniel J. Schrider, President and CEO of Sandy Spring Bancorp; sir you may begin.

[Daniel J. Schrider:]

Thank you and good afternoon everyone and welcome to Sandy Spring Bancorp’s conference call to discuss our performance for the second quarter of 2010. This is Dan Schrider and I’m joined here today by Phil Mantua, Chief Financial Officer and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always, the call today is open to our investors, analysts and the news media and there will also 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 financial highlights but before we get started, Ron will give the customer a safe harbor statement.

[Ronald E. Kuykendall:]

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 risk and future cost and benefits, assessments of probable loan and lease losses, assessments on 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, estimates and projections of future interest rates, market behavior or other economic conditions, future laws and regulations and a variety of other matters which by their varied 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.

[Daniel J. Schrider:]

Thanks Ron. During our conference call at the end of the first quarter, we noted that one of the main highlights was a very successful common stock offering of 7.5 million shares which resulted in net proceeds of $95.6 million. Based on the approval from the US Treasury, we’re thrilled to announce that yesterday we repaid half of the top proceeds worth $41.5 million. And it continues to be a high priority to repay remaining top funds and we do anticipate doing so sooner rather than later. As noted in our press release from earlier today, we are also very pleased to have reported a profit for the second quarter of $5.1 million or $0.21 per diluted share compared to a net loss of $1.5 million or $0.09 per diluted share for the second quarter of last year and a net loss of $700,000 or $0.04 per diluted share for the linked first quarter of 2010. Obviously, the main driver of the quarter’s results is continued improvement in our asset quality metrics as non-performing assets declined for the third quarter in a row to $118 million compared to $146.3 million at June 30, 2009 and $143.3 million in March 31st of this year. Our lending and credit teams; they’ve done a great job in effectively managing down our problem assets. This decrease also resulted in a coverage ratio of the allowance for loan and lease losses compared to non-performing loans which includes restructured loans and ninety-days past due of 65% compared to a ratio of 42% at June 30, 2009 and 51% at March 31st 2010. A quarter in our allowance for loan and lease losses stood at 3.22% of outstanding loans compared to 2.44 at June 30, 2009 and 3.08% at March 31st of 2010. Loan charge loss netted recoveries decreased to 4.3 million for the quarter compared to 12.1 million for the second quarter of ’09 and 10 million for the first quarter of 2010. As a result of these improvements, we are encouraged with the second quarter provision which was lower and amounted to only 6.1 million compared to 10.6 million for the second quarter of 2009 and about 15 million for the linked first quarter this year. We really like the way the provision and other credit metrics are trending at this time. Shifting to a year to day view for the first six months of 2010, we earned 4.4 million compared to a net loss of $465,000 for the first half of last year. Of course our 2010 year to date results included a very sizable provision totaling 21.1 million while the results for the first six months of 2009 included both the provision for loan and lease losses of 21.2 million and an industry-wide FDIC special assessment charge of 1.7 million. As we’ve now posted three linked quarters where the provision expenses declined, our level of net charge loss and non-performing loans are also trending down. We feel confident that we’ve turned the corner. We are also seeing a meaningful decrease and new problem credits as we move through the cycle. Shifting gears a bit, it goes without saying that the companion story to the resolution of problem assets is the business of generating high quality new assets; an underlying driver of our revenue growth and profitability. Suffice it to say the [sluggest] economy has resulted in weak loan demand. So one factor that we believe is differentiating us from many of the larger competitors right now is that we are not so internally focused and consumed with our problems. We are making a concerted effort to be on the offensive with our existing customers and in our efforts to take away relationships from some of the larger out-of-town banks. An example of one recent initiative involves some new leadership and senior talent we brought in to help ramp up our lending to government contractors which we see as a great opportunity given the dynamics of the local market. On a related note, we are also pursuing and delivering on a number of initiatives on the deposit side with focused efforts aimed at small business DDAs, non-profit organizations and a fluent retail prospects that value dealing with the local, high quality and high touch bank. While consumer funding sources remain virtually even compared to the linked quarter and prior year, we have successfully attracted targeted small businesses and retail DDA relationships while at the same time enhancing margins by driving down the cost and in some cases the balances of higher cost accounts. As mentioned in our release, we did see some improvement in the margin which was at 3.58% for the second quarter compared to 3.11% for the second quarter of ’09 and 3.56% for the first quarter of 2010. Another further point worth noting is that the growth in our wealth management business was well ahead of where we were last year for the first six months; up over 11% and for the second quarter of 2010 versus the second quarter a year ago, we saw a 16% surge in fee income related to all wealth management activity. Assets under management were 1.7 billion in quarter end. Essentially, all three major components of our wealth management business did well including our subsidiary West Financial Services as well as our bank trust division. And we were especially pleased with the performance of our financial advisors that delivered through our branches where revenue was up 50% on a quarter two versus quarter two basis and 27% on a year to day basis. Mutual funds are currently selling quite well and as expected, the annuity business has leveled off compared to prior quarters. Stockholders equity totaled 483.7 million at June 30, 2010 and represented 13.1% of total assets compared to 10.8% at June 30 of ‘09. At June 30, 2010 the company had total risk base capital ratio of 17.6%, a Q1 risk based capital ratio of 16.33% in a tier 1 leverage ratio of 12%, all which were above amounts needed to be considered well capitalized for regulatory purposes. I believe we’ve covered most of the other key financial highlights in our press release today so I will not read them over again and we will now move on to your questions. Operator, we will now take the first question and we would appreciate it if you would state your name and company affiliation as you come on so we know with whom we’re speaking.

[Operator:]

Thank you sir. (Operator Instructions). Our first question comes from Mike Shafir

[Mike Shafir:]

Hi this is Mike Shafir from Sterne Agee.

[Daniel J. Schrider:]

Hi Mike

[Mike Shafir:]

I was wondering, the non-performing asset drop was pretty substantial; about 25 million. So I was wondering if maybe you guys could go over kind of the -- how some of those loans either got cured or charged off, or what was the resolution process in terms of maybe some of the larger credits?

[Daniel J. Schrider:]

The lion share of what we experienced in the second quarter were over the result of payoffs and that in some cases was successfully moving the creditor out of the bank either by the initiation of our initiative of the bar or by actions that we have taken. And really the resolution process varies on a credit by credit relationship by relationship basis but the result of predominantly payoffs.

[Mike Shafir:]

And then, also the $118 million that’s left in non-performing assets is that still predominantly like construction and development?

[Daniel J. Schrider:]

Right now approximately 40% of our non-performing assets which would include the 90 days are from that ADNC portfolio which is substantially down over prior periods. So a lot of the resolutions may be coming out of that portfolio.

[Mike Shafir:]

And then you guys did mention that you saw kind of a slow down in new non-performance commitment door, what-- so the charge of number was actually pretty small so it seems like there was a lot of payoffs and very little in terms of -- in the way of new problem credit for the quarter.

[Daniel J. Schrider:]

Yeah, a couple of different points; one is the migration -- the risk rating migration that we are seeing in the commercial portfolios is clearly slowed over the last few quarters and so we’re really pleased with the slow down of new problem launch from that portfolio. We are also seeing a reduction in 30 day delinquency volume in both in terms of dollars and number of loans from our residential portfolio. And one of the observations we had and digging deeper into that is the vast majority of the defaults or the delinquency are repeat offenders, meaning that we are not seeing first time or new defaulters coming to that portfolio as well. So the signs are all pointing in positive directions in both of those portfolios and we did not have any meaningful asset quality issues coming out of our consumer portfolio.

[Mike Shafir:]

Would you guys be able to quantify the 3 to 89 day this quarter versus last quarter?

[Daniel J. Schrider:]

What I can talk about is within the press release, we talked a lot about our 90 day past two numbers which are relatively flat with the prior quarter at about 24 million, I think there’s a notable difference though on what that’s comprised of. In that 24 million, approximately 22 million is from the residential portfolio and the balance is really split pretty evenly between the consumer and commercial portfolio which isn’t much; but within that $22 million residential portfolio 90 day number, a little over 6 million of that are loans that have already received a charge off against them and are awaiting movement into OREO and just awaiting ratification on some foreclosures. So it’s important to note that the composition of that 90 day number which is different than it has been in the past, we actually see the core coming down as a matter of timing of how we move, when we move credits into OREO which will see obviously uptake as we resolve issues.

[Mike Shafir:]

And then just kind of – as we start to think about the provisioning line moving forward, clearly a substantial drop this quarter, do you guys feel like it will be more of a smoother kind of downward progression or is it till going to remain lumpy depending on resolution of certain problem with credit?

[Daniel J. Schrider:]

I think there’s always the possibility that it could be a little bit lumpy but at the same time we think the overall trend of what we are seeing in credit metrics is sustainable, but the provision just given the nature of when specifically make it resolved could still create a little bit lumpiness.

[Mike Shafir:]

Thanks a lot; I really appreciate all that clarity

[Daniel J. Schrider:]

Thank you.

[Operator:]

Our next question comes from Bryce Rowe with Robert W. Baird.

[Bryce Rowe:]

Thanks, good afternoon.

[Daniel J. Schrider:]

Good afternoon Bryce.

[Bryce Rowe:]

My follow up on some of Mike’s questions there, but just want again – wanted to get a fill for how the, I guess the conversation or the discussions with regulators went as far as repaying the TARP and how you all agreed on paying half now and then half at some point here in the future? .

[Daniel Schrider:]

Yeah, you obviously alluded to the key point and that is any repayment subject to the regulatory approval and working through our primary regulated which is the fair, they have been very good to work with through this process, and we are obviously comfortable with approving repayment of half, it’s my belief, my sense that it’s continued asset quality trends in the right direction and sustainable profitability or sustained profitability that they will be looking for, we think that that is something that can happen sooner rather than later, it’s the best intelligence I have.

[Bryce Rowe:]

That’s great, that’s helpful, and then just again follow up on Mike’s question; if we think about where it’s most problematic loan portfolios are, the AD&C portfolio and the consumer and the residential construction portfolios of vertical construction in lot loans, can you give us a feel for how much they paid down over the quarter? I think the AD&C portfolio was close to 180 million in the first quarter and the residential construction piece to the consumers was let’s call it almost $200 million combined at the end of the first quarter.

[Daniel Schrider:]

Yeah, let me put through some data here Bryce to get to you – the AD&C portfolio at the end of the quarter as you said was about 180 at the end of the first quarter and ended up at about 158 say, the residential mortgage piece actually grew by 2 or 3 million bucks during the quarter period end.

[Bryce Rowe:]

Is that, Dan does that include the lot loans to consumers as well?

[Daniel Schrider:]

That would include the lot loans to consumer. On the table in our release, the residential construction loans were broken out; there a little bit of growth in that category, the lot loans portfolios continues to decrease but not meaningful, a million bucks or so.

[Bryce Rowe:]

And the pay downs that you got there in the AD&C portfolio, is that more kind of in the category of you pushing those loans out of the bank or it’s just a normal course of those deals maturing or those projects maturing ?

[Daniel Schrider:]

The former versus the latter, continue pushing assets out of the bank in problem categories.

[Bryce Rowe:]

That’s great, and one last question kind of a logistics’ question for Phil. Phil the other non-interest income was a little over $2 million for the second quarter, anything going on there that we need to know about?

[Phil Mantua:]

Bryce, not other than the quarter end adjustments made for gains on the customer level derivatives or things that are related to the mortgage banking world per the market-to-market accounting requirements; otherwise nothing in significance from a true operational stand point.

[Bryce Rowe:]

Thank you guys I appreciate it.

[Daniel Schrider:]

Thanks Bryce.

[Operator:]

Our next question comes from Steve Moss.

[Steve Moss:]

Good afternoon guys, nice quarter progress here. I was wondering if give a little color if there are any non-performers that are under contracts perhaps from the AD&C side that you’d expect to move out this quarter?

[Daniel Schrider:]

I think it’s tough to -- Steve, we have quite a few that are in the works of solving for exactly what quarter that falls into it’s probably a little difficult to predict right now.

[Steve Moss:]

And then I guess with regard to Reg E and service charges here, do you have any feel for what your opt in rates are and what the potential impact is to service charges?

[Daniel Schrider:]

We fortunately as a community player Steve, we have ability to have a little more of robust process and targeted approach on the opt ins, and what I mean by that is given the size of institutions, the direct mail, the internet banking emails and then the phone calls mostly importantly from branch staff as well as our client service center have been very effective, really focusing on those that have the heavy revenue producers. We’re still finishing up that work but at last count, we were approaching the 40% positive response rate on some of those targeted segments which far exceeds our expectation at this point; but we are still working on it and trying to drive that number up.

[Steve Moss:]

Okay, and then lastly with regard to the margin here, I guess give a little clarity on what you expect on your way forward.

[Daniel Schrider:]

I’m sorry Steve, you kind of broke up there, what was the question?

[Steve Moss:]

Just wanted a little color with regard to the (indiscernible) margin here going forward.

[Daniel Schrider:]

Okay, sure. I think that we clearly like the progress that we’ve made to date in terms of the quarter-over-quarter improvement. We think that 355 – 360 range is certainly very solid as we move ahead given what’s going on in the markets around us and especially in terms of what’s happening across the board with interest rates, we are desired to try to continue to expand that margin through what we are doing on the deposit side of the balance sheet, so we could see a little bit more expansion between now and the end of the year as opposed to any significant contraction. The other element of that is also just continue to put more assets back into the performing category which would certainly help.

[Steve Moss:]

Alright, well thanks very much guys.

[Operator:]

Our next question comes from Avi Barak with Sandler O'Neill.

[Avi Barak:]

Good afternoon guys

[Daniel Schrider:]

Hi Avi

[Phil Mantua:]

Hi Avi

[Avi Barak:]

If I could just follow up briefly on the earlier question about TARP I was just hoping to understand a little better the rationale behind paying back the TARP in pieces as opposed to maybe waiting another quarter to get that definitive sign that credit is stabilizing and then just paying back whole TARP all at once?

[Daniel Schrider:]

Obviously something, Avi, that we wrestled with and obviously the economic decision -- the opportunity to get out from under that dividend and put some of that cash to work, so that’s really the bottom line as to why we are doing it in pieces.

[Avi Barak:]

Okay, and then a follow up to that, would -- as far as you are thinking about it right now, would the repayment of the remaining piece potentially involve an additional capital raise of any form?

[Daniel Schrider:]

That’s certainly not what we are expecting.

[Avi Barak:]

And then totally separate issue, do you have your TDR balances off hand and just hoping to get an idea what re-default rates you’re seeing there.

[Daniel Schrider:]

We’ll be right with you here with you Avi.

[Avi Barak:]

Thank you.

[Daniel Schrider:]

Right now at the end of the quarter, we were at about 1.2 million in total TDRs, so not a significant balance for us.

[Avi Barak:]

Okay, thanks very much.

[Operator:]

(Operator instruction). Our next question comes from Matt Schultheis with Boenning & Scatter Matthew Schultheis - Boenning & Scatter Hi, how are you guys

[Daniel Schrider:]

Welcome back to the call Matt.

[Phil Mantua:]

Hi Matt Matthew Schultheis - Boenning & Scatter Thanks. Quick questions for your follow up on the Reg E, I’m going to try to get you quantify this a little bit more if you can; as it stands today, assuming nothing changes from today, what do you think the dollar figure impact is per quarter on you guys?

[Phil Mantua:]

Matt, this is Phil, when we originally evaluated this while we were doing our planning for the year, I think we estimated that the outside impact on an annual basis was about $1.5 million so meaning divide that quarterly to get the quarter-to-quarter impact; then given what’s happen so far and reactions, we are hopeful that’ll be less than that but that’s kind of what we put out there as the outside kind of boundary of what we might expect. Matthew Schultheis - Boenning & Scatter Okay, and one last question with regard to repayment of TARP, am assuming that there is a clause to that a charge -- increase of the issuance cost, do you know what that’s going to be?

[Phil Mantua:]

I don’t believe that that is at least through the P&L, I don’t know that that is truly the case Matt, so I don’t believe that there is any and we hadn’t really anticipated that that would be the case. Matthew Schultheis - Boenning & Scatter Okay, and do you think you’ll negotiate to repurchase the warrants when it’s all said and done, or do you think you’ll just let the treasury deal with those that are going to deal with them?

[Phil Mantua:]

I think we’ll wrestle with that when we make the repayment. Matthew Schultheis - Boenning & Scatter Okay, thank you very much.

[Operator:]

Our next question comes from Jennifer Demba with SunTrust.

[David Grayson:]

Good afternoon Dan and Phil, this David Grayson filling in for Jenny. Most of my questions have been answered but I guess I just want to touch back on credit a little bit, you’re body language on early stage indicators is favorable, things aren’t filling up the pipeline, you’re resolving your credit issues at a pretty healthy clip, charge offs were down; all the numbers look really good, but I’m just wondering the thought process behind why the reserve build and what we should be thinking about going forward.

[Phil Mantua:]

Fair question, I think a good portion of our reserve methodology is reflective of historical loss methodology David, and so that will if our trends continue, which we think they will, that will be tampered over time as a part of that allowance calculation and then be a driver of that for how it backs off and if and when.

[David Grayson:]

Okay, and then I guess sort of an open ended question if you will, just maybe some thoughts on what you’re seeing in the competitive landscape there around Baltimore, Washington corridor now that a lot of the market disruption is kind of in the rearview mirror from an M&A perspective for a while, how is the dust sort of settling there, what are you seeing?

[Phil Mantua:]

I think it still needs to settle a bit more in terms of what the competitive landscape will ultimately look like because there is still some weak end players in the market and -- but the bottom line, we think the opportunity that we have in front of us as the largest bank headquartered here in the States doing business in probably one of the premier demographic areas in the country is tremendous. We have longevity in the market, we have a name that is reorganized and we have the people and products to win business and so we think that combination is perfect for us to drive growth in the future before it’s taken advantage of.

[David Grayson:]

Okay, thanks. That’s all I had guys, thank you, good quarter.

[Phil Mantua:]

Thank you

[Daniel Schrider:]

Thank you

[Operator:]

I’m showing no further questions on the phone, so I’ll now turn the conference back over to Mr. Schrider.

[Daniel Schrider:]

Thank you very much for taking the time this afternoon to participate with us, we want to remind you that it would be great to receive your feedback to help us evaluate how we did and how to make our call more effective in the future. You can email your comments to [e-mail]. Thanks again and have a wonderful afternoon.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.