Sandy Spring Bancorp Inc (SASR) 2007 Q4 法說會逐字稿

Hello and welcome to the Sandy Spring Bancorp fourth quarter 2007 earnings webcast. All participants will be in a listening only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded.

Now I would like to turn the conference over to Hunter Hollar, President and CEO of Sandy Spring Bancorp. Sir, please begin.

Good afternoon. Welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter and full year of 2007. Joining me here today is Phil Mantua, our Chief Financial Officer, Dan Schrider, our Chief Credit 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 Sandy Springs website beginning later today. We can take your questions after a brief review of the key highlights. Before we make our remarks and then take your questions, Ron will give the Safe Harbor statement.

Thank you, Hunter. 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 in 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 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 necessarily indicate its future results..

Thanks, Ron. I will recap a few of the key financial performance highlights and then we'll move on to a discussion of where we are with Project LIFT and after that we'll take your questions. First, net income for the fourth quarter of 2007 was $8.4 million, $0.51 per diluted share, compared to $8.3 million, $0.55 per diluted share, for the fourth quarter of 2006. On a linked quarter basis net income was $8.2 million, $0.50 per diluted share, for the third quarter of 2007. So there was year-over-year growth in the final quarter and there was also an improvement over the third quarter, which is encouraging in this environment. For the full year of 2007 net income was $32.3 million versus $32.9 million for the prior year 2006. Keep in mind that the net income number for 2007 includes after tax merger costs of $900,000 for the acquisitions of Potomac Bank of Virginia and CN Bancorp Inc. Those were completed in the first and second quarters of 2007.

As we noted in our press release, our fourth quarter highlights included a 16% increase in net interest income for the quarter and an 11% improvement for the full year, when both are compared to comparable prior periods. Non-interest income increased 13% for the quarter and 14% for the year. Loans and deposits at year-end increased 26% and 14% respectively when compared to December 31, 2006. The provision for loan losses was increased for both the quarter and full year in response to a larger portfolio, as well as a higher level of nonperforming loans. The provision totaled $1.7 million for the fourth quarter of 2007 compared to $250,000 for the fourth quarter of 2006 and $750,000 for the linked quarter of 2007. For the full year the provision totaled $4.1 million compared to $2.8 million for the prior year. This allowance for loan losses represents coverage of 1.10% of outstanding loans at December 31, 2007.

We are comfortable with that ratio, especially when you consider our relatively low level of net charge-offs for the year at 0.06% of total loans. Nonperforming assets totaled $34.9 million at December 31, 2007, compared to $3.9 million a year earlier. On a linked quarter basis nonperformers were $25.8 million at September 30, 2007. The $9.1 million increase from September to December was caused primarily by one nonperforming commercial construction loan totaling $5.3 million, on which we believe that we are adequately reserved. In addition, there are four nonperforming commercial real estate loans totaling $5.8 million, which are well secured. The big year-over-year increase in nonperformers also includes one loan totaling $13.6 million that was put on non-accrual status in the second quarter of 2007 and is still there

You may recall from our third quarter call that Dan Schrider, our Chief Credit Officer, commented that we continue to be in discussions with the borrower about how we move forward to make full payment a reality. This statement is still true today as our best judgment remains that we will be repaid on this loan. Generally we think asset quality remains very good even though some of our measures are higher than traditional Sandy Spring standards. Given the current slow down and turmoil in the economy and considering that we have the one nonperforming loan of $13.6 million, we are still confident that our overall portfolio quality is solid and well diversified. Our net interest margin improved to 4.19% for the fourth quarter compared to 4.14% for the prior year quarter and 4.16% for the linked quarter, third quarter of 2007. This trend is both positive and welcome.

We eliminated an executive medical plan in the fourth quarter and approved a freeze of the defined benefit pension plan effective January 1, 2008. These are both significant cost reduction initiatives and we will go into more detail on this area in a minute. We also repurchased approximately 101,000 shares of Company stock during the quarter at an average cost of $28.35 per share. I will now move to some comments on our expectations from LIFT, or Looking Inward for Tomorrow. During the past few months we completed the initial groundwork and analysis for LIFT. This stage included a Companywide evaluation of business practices, staffing levels, facilities and branches with the fundamental goal of improving Sandy Spring's overall efficiency and focusing resources on more strategic value-added activities.

Now we have moved into the implementation phase of a variety of initiatives with the majority of the implementation efforts to be started in 2008. And with the expectation that this process will continue well through mid-2009. So, toward the end of the fourth quarter we instituted a hiring freeze across the core bank and we began to rollout new more stringent expense controls with respect to discretionary expenses. For example, and as I noted earlier, we eliminated an executive medical plan and have frozen the defined benefit pension plan. We also significantly restructured our supplemental executive retirement plan and combined these three initiatives alone will constitute an annual expense savings of over $1.5 million in the coming year.

Before getting into too much additional detail, let me stop here and make some overview statements about LIFT as it relates to 2008 and into 2009. First, the financial benefits derived from LIFT will be from both expense management initiatives, meaning cost savings, and also from revenue enhancements. Let me also say that we want to come away from this with a much stronger culture of efficiency at Sandy Spring by emphasizing the importance of expense discipline to our long-term success. Now, specifically, Sandy Spring Bank plans to achieve approximately $5.1 million of cost savings in 2008 through a combination of work force reduction, changes in corporate benefit plans and other efficiencies. Our work force reductions are broad-based and across the entire organization, not specifically focused on any one area of the Company.

Included is the retail portion of our franchise and several support areas where we believe we can more efficiently serve our internal and external client base by doing more with less. It will require us to do certain things we do today better and to no longer do certain things we have done in the past. When I refer to other efficiencies, this includes opportunities that we've identified in reduced corporate real estate and occupancy costs, more controlled discretionary spending and streamlining certain processes. In corporate real estate we have identified opportunities to consolidate offices, sell certain properties and where feasible leaseback others. We expect the majority of these occupancy-related savings to occur toward the end of 2008 or more likely in early 2009, as we recognize that the realities of our current real estate market will have an impact on our ability to negotiate these transactions.

We have decided to close one existing branch by the end of the first quarter and will continue to evaluate the performance of others for possible closure or consolidation in the future. When we speak of discretionary spending, we've identified several key expense categories, such as consulting and professional fees, seminars and conferences, travel, and overtime where we will cut back the overall level of spending and also instill more stringent approval and monitoring process for more controlled spending in the future. An example of process re-engineering is the adoption of remote captured capability in our branch system, which takes advantage of current technology advancements, thus eliminating the need for costly courier runs with paper. These changes and others are expected to result in employee severance and other implementation costs of about $1.5 million. The majority of which will be recognized during the first half of 2008.

In addition, we intend to achieve at least $2.2 million in net revenue growth through the implementation of various pricing and business growth enhancements driven by LIFT. Much of this revenue growth comes in conjunction with a greater emphasis on meeting the needs of the small business owner and will be derived by the realignment of certain Sandy Spring bankers, who will be focused on capturing both the deposit and loan relationship of clients in this segment of the the market. So in total Sandy Spring Bank expects to realize a net pre-tax financial benefit from LIFT of approximately $5.8 million in 2008, primarily in the latter half of the year. During 2009 we expect to realize an additional $4 million of total pre-tax earnings benefit from all of this activity. So that's it for our comments today, which we can expand on as we take your questions.

(OPERATOR INSTRUCTIONS) Our first question is from Matt Schultheis of Ferris, Baker and Watts. Please go ahead.

Good afternoon, gentlemen.

Hi, Matt.

Quick question for you just to make sure I'm understanding your LIFT cost initiatives or cost saves. You had what, about $98 million in expense in '07. So you're budgeting or you're expecting to get about $93 million in '08? Is that correct?

Matt, this is Phil. I think it's a little bit dangerous to take that quick approach to taking an overall amount of expense here for 2007 and then hair cutting it entirely by the amount of cost savings into '08.

Okay.

Because there are some other categories of expense that will probably increase that will offset some of the overall cost reduction that's been discussed as part of LIFT. I understand what you're trying to get at in terms of the run rate there, but I think there will be some other spending in certain areas that will impact the overall number.

Okay. Actually that's my only question. So thank you very much.

You're welcome.

Gentlemen, there are no other questions in the queue. Would you like me to give the instructions again? I'm sorry, I spoke a little too soon. Our next question is from Bryce Rowe of Baird. Please go ahead.

Morning or afternoon.

Hi, Bryce.

Hi, Bryce.

She's a little quick on the draw there. Can you kind of expand on as far as the LIFT goes, Phil, can you tell me what the FTE count was for the fourth quarter and where you expect it to go by, I guess, maybe by the end of '08?

Sure. Overall FTE number at the end of the year was around 711.

Okay.

That's FTE, not employees.

Right.

And we expect that from an FTE standpoint that the LIFT efforts will probably adjust that number by somewhere in the low 50 range and again it's important to talk about it from an FTE standpoint because there are some things there that are related to things like changing branch hours and the like that are impacts on FTE but aren't necessarily impacts on individual people, if you follow me. Or individual employee counts.

Okay. Just less overtime type of situation?

Exactly. As Hunter stated in his comments, reducing the kind of per hour amount of expense or having people work less hours as opposed to having less people.

Right, okay. And then other questions, could you guys expand on, you said you feel comfortable with the additions or the -- you feel well secured on the additions to nonperforming loans. Can you tell us why and also can you just touch on deposit pricing. I saw that deposit pricing actually came down quite a bit in the quarter and if you could tell us on how sustainable that trend is.

Bryce, Hunter, let me ask Dan to respond to you a little bit on the first part of your question, then we'll come back to the deposit pricing.

Good afternoon, Bryce.

Hi.

With regard to the nonperformers, the loans that make up that category are predominantly residential related real estate loans and the one that was added and mentioned specifically is one where based on current appraisal and our estimate of value and hair cut and all those types of things, we're in good shape from a collateral value standpoint. So we think with our nonperformers it's really just a matter of time of working through these situations with borrowers to make a full repayment a reality.

Okay.

Bryce, this is Phil again on your deposit pricing question. I don't think there is any question that in the fourth quarter we were pretty successful of managing our margin through just that in terms of being pretty strong managers on the deposit side. But you also notice that we didn't incur an awful lot of overall growth in the deposit portfolios and so that's part of the tradeoff as you know. Going forward that's probably going to be more difficult to do in general. It has been in most recent times just because of some liquidity issues that are in the overall market and how other competitors have priced up deposits in particular, time deposits. Now with the events of the last couple days in terms of overall rates shifting significantly, I think that will change some, but I think we're going to have to be more aggressive going foward for deposit growth than we were certainly in the fourth quarter and so relatively speaking, we're going to have to have some increase I believe in what we're going to have to pay for those deposits.

Okay. And, Phil, what's the duration of the CD portfolio? What's repricing in the next six to nine months?

Probably a fair amount. I think our overall duration is probably a year or less, just thinking through it as it relates to the kinds of CD specials, in particular, we've been running in recent times, which have been less than a year for quite some time and so we will probably have a fair amount of cash flows related to that coming through the system here in the next six months. I think that's a pretty good estimate. Of time.

Okay. That's great. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question is from Mark Hughes of Lafayette Investments. Please go ahead.

Good afternoon.

Hi, Mark.

Hi, Mark.

With your LIFT initiative where do you see the efficiency ratio settling down say a year or so from now?

Well, I think that we've been on record before, at least in some settings, and, Mark, by the way, this is Phil, in terms of wanting our efficiency ratio to eventually land in the mid-50s range. We're pretty confident that what we're doing here with LIFT throughout '08 and '09 will take us towards that goal. I don't think we see that completely materializing through '08 as we work our way through this, but it will clearly take us in the right direction.

I can't remember that far back, but have you been at mid-50s before in recent history?

Yes. Probably within the last three to five years we were definitely in that range. I don't know we've ever been lower than in the 52 or 53 range. It's possible, but that was also at a time where we had our balance sheet fairly leveraged, you may recall, and so there was an awful lot of net interest dollars coming from that source and so the efficiency ratio was certainly much better stead because of it.

Last question is with interest rates coming down, at least some interest rates quite dramatically, what effect is that going to be on your whole business this year?

Mark, Phil again. I think it's clearly going to put some pressure on our margin. I don't think there's any question about that. I think the magnitude and the swiftness that the Fed moved the other day is a part of the issue, because it's just hard for us to adjust as quickly on the other side of the balance sheet. So I think we're going to have margin pressures. I don't think there's any question about that and we're clearly have to factor that into the overall equation. I mean we have growth expectations, obviously, for the balance sheet, but they're just going to come at less marginal dollars. I don't think there's any other way to look at it.

Right. And last question, what's your feeling or attitude at the moment on more share repurchases?

Yes. We still have authorization out there. We certainly have noted that the last couple days our stock has had a nice run-up, but certainly in the kind of average cost areas that we've been in in the past we would be there again with repurchases.

Okay. Thank you very much.

Thanks, Mark.

You bet, Mark.

The next question is from Michael Cohen of SuNOVA Capital. Please go ahead.

Hi, thank you for taking my questions. Can you talk about with kind of a little more granularity your outlook for credit kind of by major loan category.

Yes. That's a good question and sometimes I think it gets a little bit lost in the concern about residential real estate around the country and certainly to some degree here in our market, but we do have a very well diversified portfolio that I will ask Dan to comment on here just a little bit, but certainly residential development activity represents a relatively small portion of our portfolio with some other very safe and well diversified kind of components.

Yes. Our total portfolio of about $2.3 billion slightly under 9% of that is represented by that real estate builder developer business that Hunter speaks of. So it's a very small part of our business, but given the current environment is what the key driver behind our credit issues or nonperformers are. The balance of our portfolio is made up of a very sound and well managed residential mortgage business, which is both on the short-term three and five one ARM side as well as construction and lot loan business we've been in for many, many years and that continues to perform very well. Average loan size is in the approximately $250,000 range. So very well diversified. Our consumer portfolio, which is slightly under $377 million at period end, is predominantly home equity paper, both line and term credit, very high credit scores, very conservative underwriting standards and that continues to perform well.

So those categories themselves on the more retail side are not driving any of our asset quality metrics that are spiking. On the CNI side we have tended to focus on that small, what we consider to be a community banking market. Our average loan size in that category is about $138,000, $140,000 per note, which is very low, very well diversified and that's not a category that's also not driving any of our nonperforming issues. So, a lot of our numbers are getting a little bit skewed by virtue of what's going on in that builder business today, but we have very robust risk management practices, risk ID, problem loan management. Our underwriting standards have been solid and sound for many, many years and so we're not -- those are not changing. If anything, they're tightening up over time in the current environment.

Sure. That makes sense. So of your sort of $2.3 billion, right, the 9% that you refer to, that's what would be the sort of residential construction loans.

That's correct.

And then within -- I'm sorry, I thought I heard you say something to the effect of lots and land. Those are to individuals or to builders or what is that?

That slightly under 9% represents the builder-related portfolio. Within our residential we do have a small lot portfolio for typical homeowner building their own home. So that's not a raw land portfolio.

Right, okay. And you don't have a raw land portfolio within the commercial side, do you?

That's correct.

No.

That's correct, we do not.

You do not, okay. That's great. And then if you could be a little bit more specific on the margin. I guess I was -- I thought that you guys were kind of a little more liability sensitive over time than it sounds like you guys are. I guess my question becomes sort of from here, from 4Q margin what would you of 4-19, where do you kind of project out '08 margin to be and what is that kind of assuming in terms of future Fed rate cuts or that kind of thing?

Michael, this is Phil. I think it's certainly clear that our margin -- it will be difficult for our margin to expand from this point, let's put it it that way, given again what's just occurred and the volatility in the last few days. Now also because it's been within the last few days, I think it's a little hard to completely predict where the margin's going to go from here, because I don't think anybody anticipated, us included, what the Fed did the other day and so I think it's a little hard to quantify exactly where it's going to go from this point foward. We do believe, though, that the Fed will continue to cut rates and do so throughout the course of the year, but I don't know that I could give you an exact basis point type of an adjustment on that margin at this point just because it's, in many ways, too early to tell exactly how that's going to impact things.

Just to add one thing to that, we've said in some past calls, I believe, that from purely a GAAP basis we're fairly balanced between an asset and liability amount. So we're not -- we're neither significantly liability sensitive or asset sensitive and the unknown portion that Phil refers to, I think, is just the competition for deposits and really how is that going to shake out in this new rate, lower rate environment.

Essentially, if I understand this correctly, essentially your loans are going to reprice fairly quickly and then the question, the challenge on your part, is gee, how much of this can we capture back in lower deposit cost. Is that the right way to think about it?

That's exactly right, Michael. I mean we know as a fact that about one third of our loan portfolio is variable rate prime based type loans. So, you can do the math on that pretty quickly and understand the impact from that perspective. What is more difficult, as Hunter just mentioned and you correctly assessed, is just how quickly we're able, based on competitive pressures, to react to that on the other side and price the deposits down accordingly and that's the way it's been here for some period of time. But again in the immediate term because of the swiftness of the change in the rate environment and how it's -- the volatility in it right now it's really hard to predict just how successful we'll be in doing that.

Great. I appreciate your help. Thank you very much.

You're welcome.

And congratulations on announcing some of the LIFT initiatives.

Thank you.

Gentlemen, at this time there are no other questions in the queue.

Okay. So that wraps up our questions. We want to thank everyone for participating today. We want to remind you that we appreciate receiving your feedback to help us evaluate how we did. You can always e-mail us comments at our@sandyspringbank.com. Thanks again and that concludes our call.

Thank you, gentlemen. At this time you may now disconnect your lines.