Sandy Spring Bancorp Inc (SASR) 2008 Q4 法說會逐字稿

Good day everyone, and welcome to the Sandy Springs Bancorp fourth quarter 2008 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Daniel J. Schrider. Please go ahead, sir.

Thank you, and good afternoon everyone, this is Dan Schrider. Welcome to Sandy Springs Bancorp's conference call, to discuss our performance for the final quarter of 2008. Joining me here today is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, our General Counsel. As you all know, Hunter Hollar has retired from the Company, and although he will continue to serve as Chairman of the Board, it is my privilege as the new CEO of the Company to be hosting today's call.

As always, the call today is open to all investors, analysts, and the news media. There will also be a live webcast of today's call, and a replay of the call available at Sandy Springs' website beginning later today. We will take your questions after a review of key highlights.

Before we make our remarks and then take your questions, Ron will provide the Safe Harbor statement.

Thank you Dan, and congratulations on your recent appointment.

Sandy Springs 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 risks and future costs 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 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 very nature are subject to significant uncertainties.

Because of these uncertainties, Sandy Springs Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operation, do not necessarily indicate it's future results.

Thank you, Ron. I think everyone will agree that the major news in the fourth quarter of 2008 is that we recorded a provision of $17.8 million. The other item as noted on our prerelease of January 15th, that impacted our results, was the pretax impairment charge of $1.9 million to write-down the remaining goodwill value in our leasing subsidiary, which we don't think is much of a surprise. The good news here is that there is no further leasing company goodwill for us to deal with.

Back to the $17.8 million provision, which clearly is the main driver behind the net loss of $3.8 million for the quarter, as a frame of reference, our provisioning trend over the last several quarters is as follows, we set aside $1.7 million in the fourth quarter of 2007. Then $2.7 million for the first quarter of '08, $6.2 million for the second quarter, and $6.5 million in the third. The $17.8 million provision for the fourth quarter exceeds the proceeding four quarters combined, by about $0.5 million. For the year 2008 the provision for loan and lease losses totaled $33.2 million, compared to $4.1 million in 2007.

On December 31st, the allowance for loan and lease losses stood at 2.03% of outstanding loans and leases, and 70% of nonperforming assets. A year ago the allowance was 72% of nonperforming assets. Clearly, this is a significant increase, and reflects our recognition of the continuing decline in economic conditions, both nationwide and in our markets.

At this point in the cycle, there is no denying that the so-called recession-proof, or maybe even highly recession-resistant, Maryland, DC, and northern Virginia markets are now under stress. And although the local economy has performed better here, and thus lagged many of the other national markets for quite some time, this region is not immune. Unemployment is creeping up, credit problems are not just confined to the real estate side of the business, and now we are faced with the uncertainty of a new Presidential administration's transition on employment, in all of the government-related sectors. These forces impact all of the markets in general, not just Sandy Spring.

Now to take a closer look at our loan portfolio, we have had an increased number of internal risk rating downgrades to existing credits, combined with higher charge-offs. Loan charge-offs net of recoveries totaled $5.5 million for the fourth quarter, compared to $1.7 million for the third quarter of 2008. So higher charge-offs accounted for a large portion of the fourth quarter provision this year. If we drill down one last level, there was a focus component consisting of additional specific reserves, primarily associated with loans in our residential real estate development portfolio.

Nonperforming assets totaled $72.2 million at December 31st, compared to $68.4 million at September 30, 2008, and $34.9 million at December 31, 2007. The increase over the third quarter of 2008, was primarily due three commercial loans and one residential real estate development loan, altogether totaling $5.2 million. The full-year increase over the prior year, also includes six residential real estate development loans, in addition to the four loans I mentioned previously, totaling $22.6 million.

The components of nonperforming assets are as follows, 56.4%, or $40.7 million are from our residential building portfolio, clearly the largest portion of our NPAs. 16.82% are from our retail mortgage portfolio, or 12.1 million. 14.7% , or $10.7 million are from the C&I portfolio. 7%, or 5.1 million in our investment and real estate portfolio. And less than 0.5% is from our home equity portfolio.

From a credit risk management perspective, we are operating under what I would call the new normal, given the current economic environment. We have added and continue to add resources and new processes to our historically robust credit risk management system. We have added professionals who work with clients in a very hands-on approach, and have established ongoing review processes to identify weak credits early. Getting a jump on potential trouble credits is a key to successfully working through this economic cycle.

Also I want to comment on a couple of portfolio segments that our industry is watching, and we too, are watching closely. And that is retail and office buildings. We currently have $108 million in retail properties to 68 borrowers, with an average loan size of $1.5 million, and $81 million in office building loans to 67 borrowers, with an average loan size of $1.2 million.

In the retail and office portfolio segments, we have very good diversification, with no tenant concentrations. We have no exposure to big box tenants within the retail portfolio. It primarily consists of neighborhood centers located within our footprint, with good tenant diversification.

Let me transition to make a couple of comments on non credit-related items. You all know by now that we completed the transaction, that resulted in us receiving $83 million in TARP capital, which obviously adds further strength to our balance sheet, and will create the opportunity to continue to grow our loan portfolio. I should point out that total loans and leases increased 9% to $2.5 billion in 2008 compared to the prior year. By any measure this is decent loan growth, and it is also evidence that we are out there lending, as we should be, to support and retain our client relationships.

It is important to note that the growth was comprised mainly of a 13% increase in commercial loans. That is our sweet spot. Commercial, small business. We are local, we are good at it. Competition in the community bank sector continues to consolidate to our benefit.

Competition on the deposit side remains intense. That said, the total of our customer funding sources, which includes deposits, plus other short-term borrowings from core customers increased 3% at December 31, 2008, compared to the prior year. On a linked quarter basis, customer funding sources grew by 5% compared to the third quarter of 2008.

The increases were primarily due to higher rates that we paid on selected Certificate of Deposit products, and encouragingly from a new premiere Money Market Account, which has exceeded our expectations in attracting new money.

Expenses were flats versus a year ago, excluding the goodwill impairment charge. This is mainly due to the ongoing effect of Project LIFT. We also elected not to pay any executive bonuses in 2008. To conclude, certainly we are concerned with the depth, breadth, and duration of the current economy. We are highly focused on recognizing problems early, and tackling them proactively.

I want to reiterate a point that we made last quarter. All of my colleagues, our team here at Sandy Spring, clearly understand that we will continue to meet the needs of our clients, and take advantage of sound credit opportunities that will help us and our clients grow. We look forward to the opportunities created by consolidation. The same consolidation that would result in Sandy Spring, not only being the oldest, but now the largest bank headquartered in the state of Maryland.

Thank concludes my comments for today, which we can certainly expand on as we take your questions. Operator, can we now have the first question,

Thank you, sir. Today's question-and-answer session will be conducted electronically. (Operator Instructions).

We will take our first question from Jennifer Demba with SunTrust Robinson Humphrey.

Thank you. Good afternoon.

Good afternoon, Jennifer.

Hi, Jennifer.

Just wondering what you see in terms of competitive opportunities from the recent sales or pending sales of Chevy Chase and Provident?

Jennifer, when you look at breakdown our branch locations into micromarkets, which is how we look at it, to identify particularly deposit opportunities, there are several billion dollars at play so to speak, in terms of the banks that are being acquired. Wachovia, which has obviously already had legal day one, Provident and Chevy Chase, collectively represent 10 billion to $12 billion in deposits. And we think, obviously our goal is to take advantage of that. So significant opportunities for us.

Is there more opportunity with Chevy Chase, than with Wachovia and Provident?

Chevy Chase probably maps to our location, or our geography better than the other two. So yes, the answer to that question is a yes.

Thank you.

Thank you.

(Operator Instructions). We will go next to Steve Moss with Janney Montgomery Scott.

Hi, good afternoon, guys. Want to touch on what you are seeing for loan demand and growth expectations in 2009?

Right now, as you might imagine, what we are finding, is that commercially and from a retail perspective, the economy has got folks pretty hunkered down. From a retail standpoint, working their way out of debt, and commercially, a pretty conservative approach to expansion right now. So we think our net gains in the loan portfolio are going to be predominantly from our commercial portfolio growth, and related to the last call, which is us being a beneficiary from some of the consolidation.

So the combination of our client base growing, but also we think we can attract some new clients to our Company through the consolidation. So we are looking at a pretty modest loan growth number, when compared to the last couple years of history.

Okay. And within the commercial loan balances, just wondering what is the mix of residential mortgage construction, residential lot loans, and acquisition development as of period end?

Our residential mortgage business, which includes the construction lots and our ARM portfolio, is just under $650 million, or 26% of our total portfolio today. Our AD&C portfolio which we have commented on previously, is down significantly from prior quarters, at approximately $180 million.

And how much do you guys have in lot loans outstanding roughly?

Lot loans to individual homeowners is about $135 million.

Okay.

That is about 5.5% of our portfolio.

Okay. And then how is deposit pricing these days, as well?

Steve, this is Phil. I would say that deposit pricing has probably eased some here in the last portion of the quarter, as opposed to what it was a little bit earlier on. But there are still a few kind of high rate fliers that are out there as normal. I would say overall the pressure has come back. And we have actually through our premiere Money Market Account, been a little bit of a leader in that regard. And I think our growth there, which was about $170 million in that one category over the quarter alone, is indicative of that.

Okay. And Phil, with regard to the margin, what are your expectations here for Q1?

Well, I think as you and everyone else, Steve, has seen, in the past four quarters is the Fed has made their dramatic moves each time, and again, they did in December. That there is an immediate downward impact to our margin. So I think clearly with the 75 basis point change that occurred through December, you are going to see a similar kind of impact to our margin here in the first quarter. And as we absorb that, in addition to the way we have priced some of our liabilities as I just mentioned on the premiere account.

So I mean the simple answer is further compression, and then hopefully some leveling through the year. We do not anticipate any changes in the overall structure of interest rates throughout the entire year of 2009. Obviously can't go any lower on the short end. Even over the scope of the yield curve, we don't see a whole lot of change.

And with regard also to the margin and interest income for the quarter, were there any significant interest reversals associated with the $5 million in nonperformers?

No material reversals that I can think of. Actually, the only place there was any real reversal of accrual of all things, was related to our home loan bank stock, where we had been accruing for dividend there, and reversed that entirely. Anticipating that there would not be a payment made of that dividend here in the first quarter.

How much is that?

I think that reversal was about $95,000 if I am not mistaken, in the quarter. We are anticipating that we are just not going to receive that dividend at all. And that would be in the investment portfolio.

Okay, thank you very much, guys.

You are welcome.

Thank you, Steve.

We will take our next question from Avi Barak with Sandler O'Neill.

Good afternoon, guys.

Hey, Avi.

Two quick questions from me of the first, obviously, it is a pretty tough environment out there. Wondering how often and how you evaluate your dividend policy on the common stock?

We obviously, Avi, are dealing with that I would say on a month-by-month basis right now, as we look at our current earnings, and what we would project into '09. So something that the Board and management are dialoguing about on a continual basis.

Okay. Secondly, you did about $33 million in provisions for 2008. As you look at the world right now, is that a good number to use for 2009? And what is your thought process there?

I guess we clearly think that, the fourth quarter obviously sticks out, as I commented, as a spike, so I wouldn't necessarily think that that is a quarter that we would model off of. But I think they will continue to remain at an elevated level compared to our history.

Okay. Appreciate it. Thank you.

(Operator Instructions). We will go next to Mark Hughes with Lafayette Investments.

Good afternoon.

Hi, Mark.

Hi. Question, is the fourth quarter move up in the provision, from 6.5 the previous quarter to 17.8 in the fourth quarter, was a lot more than the increase in the nonperformers and write-offs. Was that an attempt to get out a little bit ahead this thing, or does that indicate that the nonperformers had deteriorated more than you had thought in the fourth quarter?

Yes. Good question, Mark. It is the result of two things. One, risk rating downgrades within the portfolio. Even within the NPA category there have been changes to our assessment of risk, as well as the reevaluation of collateral values in that portfolio. So those are the key drivers there. So no, not getting out ahead, just current valuations and risk assessments.

Got you. Has there been any developments in the, I forget if it was three or four of the big real estate loans that kind of started a year or so ago? The big bump-up in nonperformers? Anything new on those nonperformers?

There has been nothing material to report today. There has been some progress, but clearly not as much as we would like to see those move out of the NPA category. And it is clearly the result of what is going on in the market. And the continued question as to when do values hit bottom. So I think unfortunately the workout of some of these credits is going to be rather prolonged.

Okay. When the government raised the insurance for banks from $100,000 to $250,000, did you see an increase in interest from people maybe already there, just bumping up what they are willing to buy from you all?

Yes, Mark. This is Phil. I would say that we have. I mentioned the premiere Money Market Account that we introduced during the quarter. A fair amount of growth in that account, came from existing shareholders who were willing to put further funds with us.

So I think that is very indicative of that comment. And in other places, as well. I mean, we had some significant deposit growth, especially at the year end through the month of December. That I think came both from external, new money sources, as well as additional funds from existing clients.

And that is a money market fund that you are talking about?

Yes. That is correct. It is a money market product that has a guaranteed rate right now for a three-month period of 2.5%.

Is that a fund that you actually do the investing for, or are you subbed out from somewhere else?

No, it is on our balance sheet. It is a deposit account that sits on our balance sheet, like anything else.

And what does that invest in?

Well, it is normal funds utilized on the asset side of the balance sheet, whether that be investment portfolio, or out in loans.

Okay. Got you. All right.

It is a true liability. It is not an off-balance sheet position. It is a true liability.

Got you. All right. Thank you very much.

Thanks, Mark.

Sure.

We will take our next question from Ross Haberman with Haberman Fund.

Good morning, gentlemen. How are you?

Good afternoon, Ross.

Hi, good afternoon, Ross.

Hi, quick question. I got on a little late, I might have missed it. Did you talk about the refis, if you are seeing any, if so what degree? And are you keeping any, are you modifying them, or what are you seeing there?

We have as you might imagine in the last 60 days, seen quite a bit of activity on the refis, as rates have moved around, and down to some of the historic lows. Quite a bit of activity there. Our game plan obviously is to generate fee income, or gain on sale off of that. We would put those in a salable product as much as possible. Still challenged as you know on the jumbo portfolio, in terms of availability in the market. So we are selectively booking 3-1/5-1 ARMs for high quality jumbo clients.

Are you keeping the jumbos, or you are selling those as well?

In some case we will keep them. In other cases, we will move them off.

And just one implication of that. If this continues for another couple of months, do you see that negatively affecting the spread of the margin over the next couple quarters?

No, the pricing for anything we are putting on balance sheet, should not have a negative impact on margin.

Okay. Thank you, guys.

We will take our next question from Bryce Roe of Robert W. Baird.

Thanks. Good afternoon.

Hi, Bryce.

Two quick questions. One, what do you anticipate the all-in costs of the TARP dividend to be? Two, anything abnormal on the operating expense side this quarter?

Okay. Let's see, TARP first. All-in cost is probably, let me break it down for you, in terms of what we have done there, Bryce. Our original deployment of the funds is in the investment portfolio through some mortgage-backed Ginny Mae and agency-type securities, that are probably yielding on average somewhere pretax around 3.7 to 3.75 on that block of monies. And of course over time, parts of our rationale for the mortgage backs are the cash flows, so they can eventually be deployed into loans. So that is the earnings side of the deployment. We did not leverage that at all. In other words, it is one for one.

And then on the other side, of course is the $4.2 million after-tax dividend, along with the bit of accretion that goes with the assignment of value to the warrants. So you can calculate out the net effect, and then drop that down through earnings per share, along with the dilutive effect of the warrants themselves.

What are you assuming the amortization expense is for the warrants?

I think it is about $600,000 a year.

Okay.

If I am not mistaken, somewhere in that ballpark.

Okay. That is great. And then, the second part of the question was anything abnormal in the operating expense structure for the quarter?

Just a couple of things that were through there that might have been one-time. The other thing to remember in comparison between the third and fourth quarter, first of all, is beyond the impairment charges, remember the third quarter was low because we had a prior service cost credit related to our pension plan. So just in that comparison, that is just something else that didn't reoccur in the fourth quarter as well.

But other than that, we had a couple of one-time items related in the fourth quarter to some severance costs. We had some EFT losses in the quarter, that shouldn't and hopefully wouldn't recur, and then we had some increased marketing expenses related to the promotion of the premiere account that we have been discussing. But that is about it.

Okay. And the severance costs were roughly what?

I don't recall exactly, maybe a couple hundred thousand dollars if I am not mistaken.

Okay. Thank you. Appreciate it.

Sure.

We will take our next question come from Carter Bundy of Stifel Nicolaus.

Good afternoon.

Hi, Carter.

Good afternoon, Carter.

I was trying to get an idea given that we have not seen much migration of nonaccruals into the real estate owned category? What is your appetite and what would sort of be the expectation, in terms of seeing other real estate owned go up here over time, and secondly, how long and how difficult is that process going right now?

I think it is very logical to assume that OREO balances will increase over the course of time. And so I guess the other part of your question is how difficult is it. I think it is very difficult as we move through this to determine, again where the bottom is, where values ultimately are, we are trying to work with clients that we think are going to be players at the end of the day, in particular in some of these projects.

So all of that gets stirred up into the pot of determining how and when we will take more aggressive action, and when it would move into OREO. But we will see our OREO balances grow undoubtedly.

Dan, what would be your appetite now for getting it off the balance sheet? Would you all be willing to take some big haircuts on it, or would you all continue to hold it, if you think that stuff is very, very depressed at these levels?

I think in some projects, our appetite for a haircut is going to be greater than others. Particularly as you look at, most our NPAs are in our core market, as you know, and as we have spoken of previously. We do have a couple that are on the outskirts of our geography, which we would probably have a greater appetite to move.

Okay.

So it is really on a case-by-case basis.

Could we comfortably assume that based on most recent appraisal information, that we don't see a lot of OREO write-downs at least at this point, based on current market values?

OREO write-downs, we are billing all of the current values into our loan and lease loss methodology, so we are taking those provisions against current values today.

Okay. Thank you all very much.

Thank you.

And gentlemen, we have no further questions at this time.

Well, that wraps up our questions. I know that you all have many options as to how you spend your time. I just want to say thank you for taking the time to participate with us this afternoon, and we would love to have your feedback. And to help us evaluate how we did, you can email your comments to IR@sandyspringbank.com.

Thank you again. And have a wonderful afternoon.

Thank you, sir. That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.