Sandy Spring Bancorp Inc (SASR) 2008 Q1 法說會逐字稿

Hello. And welcome to the Sandy Spring Bancorp first quarter earnings release conference call. All participants will be in a listen-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 Mr. Hunter Hollar. Mr. Hollar, the floor is yours, sir.

Thank you, good afternoon, and welcome, everyone to Sandy Spring Bancorp's conference call to discuss our performance for the first quarter of 2008. Joining me here today is Phil Mantua, our Chief Financial Officer; Dan Schrider, our Chief Credit Officer and the new President of our company, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. As always, this call today is open to all investors, analysts and the news media. This will be a live webcast of today's call, and there will be a replay of the call available at Sandy Spring's website beginning later today. We can take your questions after a brief review of the key highlights. Before we are make our remarks and then take your questions, Ron will give the Safe Harbor statement.

Thank you Hunter, good afternoon. 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 of market risks, and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties, because they are based upon are affected by management's estimate 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.

Thank you, Ron. I will recap just a few of the key financial performance highlights, and then we'll move on to a brief discussion of where we are with Project LIFT: Looking Inward For Tomorrow, and then Dan Schrider has a quick update on credit quality, and after that, we'll take your questions. First, net income for the first quarter of 2008 was $8.2 million or $0.50 per share compared to $7.5 million or $0.49 a share for the first quarter of 2007, and $8.4 million or $0.51 per share for the linked fourth quarter of 2007. So there was year-over-year growth for the first quarter, but we were down slightly compared to the linked quarter. On a link quarter basis however, loans and deposits increased 4% and 3% respectively for the first quarter compared to December 31, 2007. In this environment, where the focus is so intent on booking only the highest quality loans, and where competition for deposits is as tough as we've ever seen, that's decent progress. Not great, but we hope to build an improving trend in both areas over the course of the year.

As we noted in our press release, some of the other key first quarter numbers were as follows. First, the net interest margin declined to 3.99% for the first quarter compared to 4.07% for the prior-year quarter, and 4.19% for the linked fourth quarter of 2007. This shouldn't be a surprise as the Fed cut rates 200 basis points. Second, the provision for loan and lease losses totaled $2.7 million for the quarter, compared to $800,000 for the first quarter of 2007, and $1.7 million for the linked fourth quarter of 2007. We increased the provision as a result of two factors, growth in the overall loan portfolio from new originations, and also in response to a higher level of non-performing loans. Third, there was the continuing favorable impact of expense management initiatives as part of the company's overall strategic business improvement program, Project LIFT.

We contained the growth of non-interest expenses to 5% compared to the prior year, and notably, a decrease of 2%, compared to the linked fourth quarter of 2007. This reduction in non-interest expenses together with a 16% increase in non-interest income in the quarter produced an improved efficiency ratio of 59.2%, compared to 63% for the prior-year quarter, and 60.2% for the linked fourth quarter. Obviously, driving our efficiency ratio lower is a major objective of the overall LIFT effort. Just to expand a bit on what has been happening with Project LIFT which was was in the implementation phase for the first full quarter over these past three months, salary expense decreased by $500,000, or 5% inclusive of planned severance-related costs. Expenses related to corporate benefit plans and discretionary spending decreased by $800,000 or 20%. There were significant decreases in pension expense and consulting or professional fees of 72% and 54% respectively. Overall, discretionary spending decreased by 37% from the linked fourth quarter of 2007, and this was the major driver of the $1 million or 20% decline in the other expense category. Suffice it to say that all of the extensive project LIFT planning that we did during the fourth quarter of last year is producing the desired effects, and the expense reductions that I just reviewed are very consistent with our expectations from LIFT.

Before I call on Dan Schrider for a credit update, I just wanted to say how very pleased I am that we were able to announce Dan as our organization's new President, and that he will also be transitioning in to the role of Chief Executive Officer over the next several months in advance of the point where I will be retiring. I really am looking forward to working with Dan to pass the leadership baton, and I know I speak for every member of our Board of Directors and the company's employees as well. Many of you may not know that Dan Schrider has actually been with Sandy Spring longer than I have. Over the course of his career, he has not only held responsibility for numerous management functions, but his outstanding people skills have really won the hearts and minds of everyone across the company. We are quite fortunate to have the depth of talent that enables us to promote top leadership from within the company, and also to be able to surround Dan with a core group of very well-qualified senior managers from which to build his team. One of the hallmarks of Sandy Spring is that our performance and the nature of our culture have both been very consistent, and we feel that having an internally focused management succession process will ensure that this consistency is ongoing.

I now ask Dan for his commentary from a credit perspective.

Thank you Hunter. I'm very honored and excited to have been named Hunter's successor, and very enthusiastic about our future. Our company has the benefit of a very strong balance sheet, a terrific reputation, a history of high performance and a wonderful market. Top it off with the best employees, and I believe we have a great future.

I will comment briefly and more specifically on our company's credit quality. Hunter commented on the increase in our provision for loan and lease losses as a result of both loan growth and a higher level of non-performing loans. Non-performing assets totaled $46.9 million at March 31, 2008, compared to $7 million a year earlier. On a linked quarter basis, non-performers were at $34.9 million at December 31, 2007. The increase from December to March was due primarily to two commercial construction loans totaling $11.3 million, which we believe are adequately reserved. The large year-over-year increase in non-performing loans is primarily driven by weakness in the housing sector, and includes one loan totaling $13.4 million, that was placed on non-accrual in the second quarter of 2007. As we reported previously, we continue to work with our borrowers to make full payment on these credits a reality.

It's also important to note that our entire acquisition, development, and construction portfolio, in other words our builder business, represents less than 10% of our entire loan portfolio. Additionally, the builder business is well diversified in terms of product type and geography. Our non-performing loans also include approximately $6.5 million of loans from our residential mortgage portfolio. These loans represent a rather small group of borrowers that are suffering the effects of a slower economy such as job loss or a reduction in household earnings. We continue to work with these retail borrowers and believe that we are well secured or adequately reserved.

Our consumer portfolio, a majority of which is made up of home equity loans and lines is performing well. We continue to underwrite conservatively and adjust underwriting standards appropriately. Our provision during the first quarter of 2000 -- of $2.7 million resulted in an allowance for loan and lease losses of 1.18% of outstanding loans. When you consider our relatively low level of net charge-offs historically, we're comfortable with this ratio. Generally, we believe the asset quality remains very strong even though some of our metrics are higher than traditional Sandy Spring standards. Given the turmoil in the economy and its impact regionally, we remain confident that our portfolio quality remains solid.

Okay. So that's our comments for today, which we're happy to extend on as we take your questions.

(OPERATOR INSTRUCTIONS) It looks like the first question we have comes from Matt Schultheis.

Good afternoon, gentlemen.

Hi, Matt. Good afternoon.

Couple of quick questions for you. What were the severance costs associated with LIFT in this quarter?

Matt, this is Phil. So far to date, the severance costs in the first quarter were roughly around $100,000.

Oh, okay. And you'll probably have more in the future, I'm assuming.

It's possible that we could, as we continue to roll out the other elements of the initiative.

Okay. As I look at your breakdown of non-interest income, there's a -- and I normalized it for security gains. There's a large jump in the insurance commissions, and was wondering if those are contingent commissions coming in in the first quarter.

Yes, they are, about $600,000, slightly down -- more than slightly down from the first quarter of last year, but nevertheless, $600,000 that won't recur in any of the other quarters for the rest of the year.

So you are up roughly, say, $200,000 over the fourth quarter, adjusted for that.

Yes. That's correct. Although there's -- there's one other one-time item that is running through non-interest income. It's also related to the Visa settlement. $175,000 of a reversal, although it's running through non-interest income, of an accrual we made for potential litigation back in the fourth quarter that you may recall.

Yep.

That $175,000 won't occur in the non-interest category either. It's in a miscellaneous category.

Okay. As far as your non-performers, what was the impact on your net interest margin this quarter?

Let's see. Trying to think of what we -- how we quantified that. It's probably worth -- probably 10 or 15 basis points.

Okay. And is some of that reversal as well as just simply carrying them on the balance sheet?

No. I would say that's primarily just -- just a carry effect.

Okay. Thank you very much, gentlemen.

Sure.

Thanks, Matt.

Thank you.

And the next question comes from Jennifer Demba.

Good afternoon.

Hi, Jennifer.

Hi. You mentioned the non-performing increase is primarily related to commercial construction credits. To date we haven't heard many banks talk about deterioration in their commercial portfolio. So I was wondering if you could give us some color there about what you are seeing in those two credits specifically, and then what you are seeing in the rest of your portfolio as well.

Actually Jennifer, great question for clarification. These projects I referred to are in our commercial portfolios, but they are actually residential projects.

Okay.

Yeah, Jennifer, just to add to that. Our typical language we use as Dan just said, if it's a builder who is building commercially for resale that gets put in our commercial loans. So we use that commercial real estate very loosely, but in this case these are residential builders.

Okay. And you said before your builder portfolio is about 10% of the total book.

Yes, less than 10% total book. Yes.

Less than. Okay. Thank you very much.

Thank you.

And the next question we have comes from Steve Moss.

Good afternoon, guys.

Hi, Steve.

Just wondering with regard to the commercial construction credits what is the average loan to value ratio?

That would -- we have guidelines that really are based upon the nature of the project. So for instance, if this is a project that is -- lots to be developed for residential builders, we generally stick with a standard of 65% or under.

Okay.

And that's the majority of what we have in our non-performer category now at origination, obviously.

Okay. And also, what is the average size for your commercial construction portfolio here?

I would say, Steve, that that is probably in the 5 to $10 million range is -- is the typical project for us. On deal size. That obviously ranges based on product type, but that's our sweet spot.

Okay. And just for clarification with the LIFT project, going forward, should we expect further declines in expenses for Q2?

Yes, I think in -- in certain elements of our overall expense categories, there should continue to be some -- some decline in future expenses. Especially as it relates to continuation in some of these discretionary areas, which are primarily in the other expense category on the income statement. And then at some point later, as we move closer towards working on elements of property management and things like that, we should see some -- some changes in our level of occupancy expenses. But that is clearly towards the latter part, end of year 2009.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) It looks like we have a question from Bryce Rowe.

Thanks. Good afternoon, guys.

Hi, Bryce.

Hi, Bryce.

Phil, do you have the FTE count, or the headcount at the end of the quarter?

Yes, I do. The FTE count as of March 31 is 699.

Okay. 699.

And that compares for what it is worth, to 712, as of the end of the year, FTE again.

Right. Okay. The two builder loans that were add here to non-accrual, can you guys tell us where they are, what counties they are located in?

Yes. We have a project in Washington County Maryland, and Frederick County, Maryland.

Okay. Are they -- are those predominantly in development? Or are they -- are those homes -- are they in different stages of completion or are they finished?

No, these were projects that were finished lots for developed for national home builders that have backed off.

Okay. So same situation as the one in Delaware?

Similar, yes.

Okay. All right. Thank you.

Gentlemen, I'm showing no further questions at that time. Would you like me to give the instructions, again?

Please.

Yes, sir. (OPERATOR INSTRUCTIONS) It looks like we have a question that comes from Kyle Cavanaugh.

Hi, good afternoon, gentlemen.

Hi, Kyle. The non-performing -- the NPA portfolio is about -- about $24 million for the three home builder credits; is that correct?

Yes.

Yes.

All right. Could you go over what the remaining portion of it is?

Their input -- the portfolio as a whole?

Yes, if there's any other larger credits within the NPA?

Yes. Our non-performers are -- the builder relationships primarily driven by a handful of builder relationships that are struggling as a result of what is going on in the housing sector. As I mentioned, we do have a relatively small $6.5 million portion from our residential portfolio as well. And then the only other signs of weakness that are included in the NPAs are sample of credits from our SBA guaranteed commercial portfolio.

Okay.

Which are included in that as well.

Okay. And then you had recoveries this quarter. Could you kind of connect that to -- to where the recoveries came from?

Absolutely. The recover is actually a recovery that was received through a previously charged off loan from one of the banks we acquired.

Okay.

-- National Bank.

So that was actually from -- all right. Okay. Thank you.

Thanks, Kyle.

The next question we have call comes from Allan Bach.

I was wondering if you could give a little extra color on the security gains in the quarter?

The predominant piece of that is the gain related to the Visa stock that we were granted in that ownership situation. About 425 to $430,000 of that gain was related to that. The rest of it was gains that were taken as certain securities that we mark to market and the acquisitions matured and had premiums in them.

Great. Thank you very much.

You bet.

Thanks.

Gentlemen, I'm showing no further questions again. Would you like me to give the instructions again?

I think we have allowed enough time to give folks enough opportunity to ask questions, so I'll assume we have no more questions and that wraps them up. I certainly do want to thank everyone for participating in our call today.

Okay. Thank you, sir. Okay. The conference is now concluded. We thank you for attending today's presentation. At this time, you may disconnect your lines.