Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sandy Spring Bancorp Inc. (NASDAQ:SASR)

Q3 2008 Earnings Call

October 23, 2008 2:00 pm ET

Executives

Hunter Hollar - Chairman and Chief Executive Officer

Phil Mantua - Chief Financial Officer

Dan Schrider - President

Ron Kuykendall - General Counsel

Analysts

Dave West - Davenport & Company

Jennifer Demba - SunTrust Robinson

Bryce Rowe - Robert W Baird

Mark Hughes - Lafayette Investments

Steve Moskowitz - Janney Montgomery Scott

Operator

Good day everyone and welcome to the Sandy Spring Bancorp Incorporated third quarter 2008 earnings conference call. This call is being recorded. At this time I’d like to turn the call over to Chairman and Chief Executive Officer, Hunter R. Hollar; please go ahead sir.

Hunter Hollar

Good afternoon and welcome, everyone. Joining me here today as usual is Phil Mantua, our Chief Financial Officer; Dan Schrider our President; and Ron Kuykendall, General Counsel, for Sandy Spring Bancorp.

As always this call today is opened to all investors, analysts and the news media. Therell 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’ll take your questions after a brief review of the key highlights, but before we make our remarks and then take your questions, Ron will give the Safe Harbor Statement.

Ron Kuykendall

Thank you, Hunter. 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 risks and future cost and benefits, assessments 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 subjected 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.

Hunter Hollar

Thanks Ron, I want to start by talking briefly about the first part of the quote I made in our press release reporting on the third quarter. First of all we treat the press release has a communications pieces primarily aimed at our shareholders analyst and the investment community. Secondly we clearly see the primary purpose of the release is to report the numbers and provide some brief management commentary on what drove our performance and why the results turned out the way they did. Then we expand on all that and take questions during the conference call which we are about to do shortly.

There are however two other important audiences who see our press release especially, especially the releases in which we report quarterly results. They also tune into this conference call. These two groups are our customers and also the local news media. My remarks are aimed in this direction. So let me just reiterated what I said in that release and then we will move on.

Here is what I said and this is “our company is a good old fashion profitable community bank that has been conservatively managed for over a 100 years. We are locally run, well capitalized, locally headquartered. Our employees live in the same neighborhoods where they worked and we are continuing to safely support the daily needs and growth plans of our local customers through this economic cycle.

We think it is important to not loose sight of these facts despite the daily report of huge losses and ongoing major problems at many of the Nations largest investment and financial companies. The extraordinary events of the past months have reshaped the entire U.S. financial system, yet we believe there are well managed better performing community banks such as ours should have solid prospects now and in the future”.

The point is this and I’m in no way trying to paint a overly rosy picture considering the gravity of what’s going in the economy right now, but the point is that we’ve been around a long time, we are profitable company, with no set prime loans, no collateralize debt obligations, no structured investment vehicles and on a day-to-day basis we are totally focused on safely meeting all the banking needs our customers have.

I’ll also say that we are very actively managing our elevated levels of non-performing loans; Dan will have a little more to say about that later. We are also modeling on a frequent basis certain loan loss assumptions and their effect on our capital ratio is primarily our risk weighted assets to equity ratio. Those loss assumptions are calculated from our best estimates of the right down that might result from the continuing slump in the housing industry, hence there is a weakness in the economy.

Our modeling indicates that we will continue to be a well capitalize bank in the future and that’s certainly our goal and intention. However, we’ve been following with interest to recent developments with regard to the top capital purchase program.

While we have not made a final decision on whether or not to participate in the senior preferred debt offering to be held by the United States department of the treasury, we will be studying the program carefully over the next few weeks in order to make an informed decision by the November 14 deadline. Everything we’ve learned about this potential source at capital is positive at this point including our impression that the FED and treasury intend that it be used by strong healthy institution institutions.

Okay, just a couple of financial highlights from the quarter. Net income of $5.4 million or $0.33 a share was essentially flat compared to $5.7 million or $0.34 a share for the second quarter of this year. We were down substantially compared to the third quarter a year ago when we earned $8.2 million or $0.50 a share.

We added $6.5 million though our provision for possible loan losses in the third quarter compared to a set aside of $6.2 million in the second quarter and compared to a relatively small provision of $800,000 in the third quarter a year ago. These increases are in response to internal risk rating downgrades on existing loans primarily in the residential real estate development portfolio.

We continue to hold a tight rein on expenses. Non-interest expenses increased just 2% versus the linked second quarter of 2008 and compared to a year ago third quarter expenses in 2008 were down 2%. With everything going on in the external environment that affects our performance and is outside of our direct control, expense management is one factor that we can control and we are doing that.

Non-performing assets totaled $68.7 million at September 30 compared to $64.9 million at June 30, and $25.8 million at September 30 a year ago. The increase over the linked quarter of 2008 was due primarily to two residential real estate development loans totaling $3.9 million which we believe are adequately reserved or well secured. The increase over the prior year also was driven primarily by five residential real estate development loans in addition to the two I just mentioned totaling $26.3 million; again we believe these are all adequately reserved or well secured.

Just to recap a couple of statistics having to do with our capital strength, let me say that our total common equity available to shareholders currently stands at $319.7 million with our risk based capital ratio of 10.98% which is well in excess of the regulatory minimum level for an institution to be considered well capitalized and we certainly don’t intend to do anything to compromise that capital strength.

Before we move to questions, I’ll call on Dan to provide some further detail on credit quality and the lending side of our business.

Dan Schrider

Thank you, Hunter. Despite the traditionally strong metropolitan region in and around Washington and Baltimore, it’s clear that the current economic environment continues to have an impact on our credit quality and at this point we don’t see convincing evidence that there will be any short term improvement.

The demographics of our market remain relatively strong; resilience between Baltimore and Washington and in North of Virginia or typically more resilient than those of the states as a whole, but we are not immune to the same factors that are challenging community banks across the country.

Evidence of the economic impact on our portfolios is reflected in our provision of loan losses of $6.5 million during the quarter. The elevated levels of nonperforming loans in our allowance for loan and week losses are 1.54% of total loans at quarter end. We continue to see the greatest impact on the portfolios as associated with residential home development and construction and to a lesser extent specific segment of our residential home mortgage portfolio in-loans to small businesses that have yet to stand the test of time.

Provisions continue to be driven by two factors. Primarily is internal risk rating downgrades and the corresponding reserve analysis of specific loans. Secondarily the provision is driven by our analysis of how the local economic conditions and other qualitative factors influence our portfolios in general.

I want to briefly comment on the components of our non-performing assets. 64% or $43.3 million come from our residential builder portfolio and as mentioned previously this is the largest portion of our non-performing assets. 16.23% are from our retail mortgage portfolio or $11 million. 10.4% or $7.1 million of our NPA are from our C&I portfolio and less than 1.5% is originated from our home equity portfolio.

Also I think it will be helpful to comment on couple of portfolios that maybe more affected by weakening residential real-estate values. 7.9% or $196 million of our total portfolio represents our residential development and construction or builder business. This portfolio is spread over 52 builders and as you would expect we are not seeing the originations or growth in the portfolio.

As mentioned this portfolio was a source of our largest portion of NPAs and receives a significant amount of our risk management resources. As I have explained in prior quarters our company has historically been a very active lock and construction lender in our market. To be clear about exactly what type of lending this is, these are loans to individual borrowers originated in our residential mortgage division.

Our lot and construction portfolio represents 6.2% and 9% of our total portfolio respectively. Our delinquencies are well managed, we are seeing some stress in this portfolio and our current reserve levels take into account the unique circumstances of specific borrowers and the value of underlying collateral.

Our home equity portfolio consists of lines and loans totaling just over $340 million or 13.7% of our portfolio at quarter end. Our usage rate on home equity loans remain consistent at just under 40%. We are please to say that our delinquencies in this portfolio continue to hold up very well. Our conservative underwriting moderate uses levels and ongoing moderating processes are serving us very well.

Average credit scores in this portfolio are 755 for lines of credit and 729 for home equity term loans. Our average loan-to-value at origination is 60.5% and 56.5% for lines and term loans respectively.

To give a summary overview we believe we have a thorough understanding of our portfolios and the potential effects of NPAs on our capital position. Equally important I’m confident that our risk management practices position us well to recognize weak spots early. It will make a big difference if we can get a jump on potential trouble spots before things begin to escalate.

So our basic approach is to deal with problem assets proactively. We don’t take a wait-and-see approach, we think we have appropriately ramped up internal resources especially the members or staff who go outside of the banks and work directly with clients in a very hands-on approach.

I do want to mention that as part of our ongoing management succession and transition process, I’m very pleased we have hired Jeffery Welsh as our chief credit officer during the third quarter. Jeff brings to our company over 27 years of banking experience with specific expertise in credit risk management. Jeff is a tremendous addition to our team, particularly during this time.

To conclude we are certainly concerned with the depth, breadth and duration of the current economy. We are highly focused on recognizing problems early and tackling them proactively without waiting to second guess ourselves.

Let me also make one very important point. All of my colleagues clearly understand that we will continue to meet the needs of our clients and take advantage of sound credit opportunities that will help move our company forward. We are not stuck in a gridlock mode where customers are being underserved. The business of being a great relationship bank means that we support our good customers whether times are tough or not and I think the feedback we are getting indicates we are doing an effective job. That wraps up my comments today; I’ll turn it back to Hunter.

Hunter Hollar

Okay, we can go to questions now and give us the opportunity to explain on anything of interest.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jennifer Demba - SunTrust Robinson.

Jennifer Demba - SunTrust Robinson

You mentioned the residential builder portfolio, how much of that is Virginia versus Maryland?

Hunter Hollar

It is as you might expect much more concentrated in Maryland than in Virginia. Since the acquisition we did in Virginia was rather small in terms of total assets, so their ability to do larger acquisition development lending was relatively small. Dan you have some other?

Dan Schrider

Jennifer that percentage of the portfolio will be less than 10% as out of Virginia.

Jennifer Demba - SunTrust Robinson

And it looks like you had some growth in that portfolio from second to third quarter in residential construction loans?

Hunter Hollar

The builder business has not seen growth. We may have had some shifting or re-categorization or recoding of some of the loans in our portfolio, but the core portfolio of our builder business did not grow.

Jennifer Demba - SunTrust Robinson

Okay and what’s the nonperforming asset percentage in that portfolio right now?

Dan Schrider

Out of the total non-performers just under 64% are from that portfolio.

Hunter Hollar

We’ll certainly we’ll go back to your specific question. We’ll do some calculations here Jennifer.

Operator

Our next question comes from Steve Moskowitz - Janney Montgomery Scott.

Steve Moskowitz - Janney Montgomery Scott

Just with regard to the loan loss reserve here, where do you expect it to go forward?

Dan Schrider

This is Dan, Steve good afternoon. I think the expectations we would have as we said in the prior quarters is that the current levels of provision, we would expect our best crystal ball that they would stay and pretty consistent with what we have seeing in our past couple of quarters.

Steve Moskowitz - Janney Montgomery Scott

With regard to loan demands in general, how is it and where you’re seeing it from these days.

Hunter Hollar

Certainly loan demanded in general is down. Of course we are seeing virtually none in the residential development builder categories, still some small business lending from healthy borrowers who have some track record. We are kind of amazed constantly at various subcontractors in the commercial spaces. People like electrical or drywall contractors, glass contractors, those kinds of folks have full backlogs and so they can see out typically for at least a year of continued healthy results. So there’s still health there and naturally even they are skeptical “okay what happens after this pipeline of another year runs out, but I would say in many areas we are still seeing some loan demand from those kinds of customers.

Steve Moskowitz - Janney Montgomery Scott

Okay, and with regard to the margin here going forward, a nice little bump but that obviously reached only cut rates what are your expectations to that?

Phil Mantua

Hey this is Phil, and our expectations would be that we’ll probably pace for the time being as the margin will come back down in the other direction as we go out through the rest of the year. The 50 basis points move that just occurred, we’ll probably take a little more than a month to completely be absorbed here just by the way we re-price to various aspect sub-prime within our loan portfolio, but we are clearly asset sensitive to that degree and so that will hurt the margin initially.

The other element is we are continuing to be fairly aggressive on the liability side for funding within the market here, so those two things are clearly working against us from the ability to keep the margin at its current level.

Operator

(Operator Instructions)

Hunter Hollar

This is Hunter Hollar, let me circle back to Jennifer’s earlier question where I think she was trying to get a sense of what percentage of our acquisition development and construction business is in a non-performing status. Yes, that percentage of that total portfolio Jennifer is 22% of the portfolio is currently in our NPA category.

Operator

We will take our next question from Mark Hughes - Lafayette Investments.

Mark Hughes – Lafayette Investments

Two weeks ago when those problems in the money market world, some of the bigger name banks reported some quick deposit inflows; did you see any of the same?

Hunter Hollar

We’d have some what I would term steady deposit inflows and some as a result of our premier money market account that we are advertising heavily right now to 3.5% rate guaranteed for nine months. So we certainly are seeing good deposit growth in that category, so I suspect that some of the deposits growth we’ve seen have come from some of those money market kinds of accounts, because that’s exactly what we were aiming for.

Mark Hughes

And then getting to the bigger problem on and the real estate portfolio, typically how long does it take to resolve one of these loans realizing that you are dealing in a tough market, it’s not easy to get out of these things, but typically how long for the bigger ones does it take for you to get it resolved and off your books or whatever happens to them?

Hunter Hollar

Mark this is Dan. I don’t think there is a typical in today’s environment. I think each one of these situations is unique to the borrower and the project and trying to figure out a creative solution to either work with or exit out of our a loan situation.

Clearly our experience by virtue of when we began to see an uptike in our non-performers which was in the fourth quarter of last year, its taking longer than you might have certainly expected or we would have expected just by virtue of the duration of this current economic situation that we are in and so I think it’s going to take longer than we certainly would like and we are diligently working on each one, on a deal-by-deal, client-by-client basis to resolve it as quickly as possible, but there really is not a typical time frame.

Operator

Your next question comes from Bryce Rowe - Robert W Baird.

Bryce Rowe - Robert W Baird

I’ve got a couple of questions here. Dan if you could speak to the 30 to 89 days passed due trends?

Dan Schrider

We are seeing consistent performance in our home equity portfolios as you know which is clearly an area that in the market place other banks are not fairing quite as well, so a very solid portfolio there. As I mentioned earlier we are seeing some weakness in certain segments of our home mortgage portfolio which is predominantly driven by our lot and construction sub-portfolio within that, although it’s elevated but remaining consistent.

The swing that we are seeing on the 30 to 90 is really again driven by that builder business, simply because they tend to be larger transactions that have a significant more significant influence on the past due rates and you’ll also have noticed that our movement into NPA within that portfolio sometimes skips the thirty to ninety delinquency simply by virtue of how we’re classifying those loans much earlier in the process than waiting for delinquencies of the state. In today’s world the predictive nature of 30 to 90 is a little different than it has been throughout history.

Bryce Rowe - Robert W Baird

Okay and would you say it’s more predictive for a C&I type of credit then obviously construction loans?

Dan Schrider

Yes.

Bryce Rowe - Robert W Baird

Okay Dan do you have the specific number loan volume of loans 30 to 89 days past due.

Dan Schrider

I believe they are just a back on that price.

Bryce Rowe - Robert W Baird

Okay, and I guess my next question is for Phil. Phil obviously you made good progress with the lift program; is there more efficiency to be had there?

Phil Mantua

I think as far as it relates to our continuing expectations on some of these discretion area expenses Brice I think there’s still some room for year-over-year improvement if nothing else because our levels of a lot of those expenses last year in the fourth quarter where higher than we certainly expect them to be here this year in the fourth quarter. By virtue of the actions we’ve already taken to control those; so from that prospective I would say there are still more in that regard to come.

As it relates to some of the other things we’ve talked about in terms of benefit costs and personal related things I think we’ve made the progress to date that we’ve expected to in all of those areas and the one other kind of major area that I think is still out there, some things we’re planning to do from an occupancy stand point which really have not executed on at this point.

Bryce Rowe - Robert W Baird

Okay, and Phil one more question; the use of borrowings has obviously gone up with deposit pricing pressures in those markets. At what point the reach of threshold where you prefer not to use those borrowings anymore?

Phil Mantua

I’d say we’ve probably reached that point and are trying everything that we can. Hunter referred to a special we’ve been running in the local markets, for the premier money market with a guaranteed rate. That and being as aggressive as we think we need to be on time deposits are think we’ve already put in place here with some success I would say to try to extent the tide of having to rely on a federal home loan bank and we continue to monitor just where we are with that. We have in that regard trying to keep those borrowings as short term as possible by holding the daily rate credit position as opposed to going out into the convertible advanced market.

Hunter Hollar

Right, there’s two other comments on that; one is we’ve talked a little bit about loan demand and there is still some loan demand, but certainly we anticipate loan growth per say to level off even further. So I think the 2% growth for the linked quarter, we could see that leveling off even more, so the loan growth is not going to continue to the extent we’ve seen it in the past. The other thing is we’re still hopeful that these times that we’re in are going to continue to drive deposit growth for us, so those two factors together should moderate our need for borrowings.

Operator

Your next question comed from Jennifer Demba - SunTrust Robinson and Humphrey.

Jennifer Demba - SunTrust Robinson

Of the residential builder loans in your nonperforming asset bucket, what kind of curing value have you written it down to on average as the percentage of the original loan amount?

Hunter Hollar

Let me see if I can get at your question. In most cases there was sufficient equity going in to the deals that we haven’t had to actually take significant right downs. At this point in the process we have assigned specific reserves to some loans and each loan situation kind of is unique and so I’m not sure if there is an average set aside for the loan loss provision that I could give to you, but in most cases the asset is still being carried at original value.

Jennifer Demba - SunTrust Robinson

Okay, and have you sold any of your foreclosed properties yet?

Hunter Hollar

We’ve actually had very few foreclosures at this point, we have very little in OREO; so no, it’s hasn’t moved to that point yet.

Jennifer Demba - SunTrust Robinson

Are you anticipating going that rout or would you rather do kind of a bulk loan sale; I mean you don’t have it as much MPAs as lot of companies but --?

Hunter Hollar

Yes I mean our assessment is at this point bulk loans sales are difficult. We don’t see that as a really viable option at this point, so I suspect we will see some foreclosures in the future.

Operator

Your final question comes from Dave West - Davenport & Company.

Dave West - Davenport & Company

Could you provide or do you have a breakdown of how much Royal Land is in the residential construction category?

Dan Schrider

Yes Dave this is Dan. We’ve added just about 4% of our AB&C portfolio as Royal Land.

Dave West - Davenport & Company

Only 4% okay, great and then lastly you talked a little bit in your press release about still continuing to look at the goodwill associated with the leasing company. Can you do goodwill impairment testing every quarter or is this just aim at that specific unit?

Phil Mantua

Dave, this is Phil. We are required by the accounting rules to do an annual impairment testing on all of our reporting segments and that is normally done at September 30, but we are also cognizant of the fact that during the year we are monitoring what the potential impairment might be on a quarter-by-quarter basis and then in the event that you have which refer to as a triggering event for the accounting requirements, you are then required in that quarter to do a more extensive review and that is essentially what we did in the third quarter here with equipment leasing company and then through the annual process at September 30 is kind of a true-up that we are referring too in both of the press release as related to that item.

Operator

(Operator Instructions)

Hunter Hollar

I might just add to Bryce Rowe’s earlier comment about 30 to 89 day past due loans; we don’t have the number here today and that all does get disclosed in the context of the call reports.

Operator

And with no further questions in the queue, I’d like to turn the presentation back over to our presenters for any additional or closing remarks.

Hunter Hollar

Okay, well that wraps up our comments for today. Thank you for your questions and we would certainly love any feedback after the call that you’ve had. Thank you and that concludes our call.

Operator

This concludes today’s conference. We thank you for your participation and have a great day. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sandy Spring Bancorp Incorporated Q3 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts