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

Sandy Spring Bancorp Inc. (NASDAQ:SASR)

Q3 2007 Earnings Call

October 23, 2007 2:00 pm ET

Executives

Hunter R. Hollar - President, Chief Executive Officer andDirector

Don Schuster - Associate Counsel

Daniel J. Schrider - Executive VicePresident and Chief Credit Officer of the Bank

Philip J. Mantua - Chief Financial Officer, Executive VicePresident

Analysts

Matt Schultheis - Ferris Baker Watts

Steve Moss - Janney Montgomery Scott

Michael Kohn - Sinova Capital

Jennifer Demba - Suntrust Robinson Humphrey

Mark Hughes - Lafayette Investments

Bryce Rowe - Robert W. Baird

Operator

Greetings and welcome to the Sandy Spring BancorpIncorporated third quarter 2007 earnings conference call. (OperatorInstructions) It is now my pleasure to introduce your host, Hunter Hollar,President and CEO for Sandy Spring Bancorp Incorporated. Thank you, Mr. Hollar.You may begin.

Hunter R. Hollar

Good afternoon and welcome, everyone, to Sandy SpringBancorp’s conference call to discuss our performance for the third quarter of2007. Joining me here today is Phil Mantua, our Chief Financial Officer; Dan Schrider,our Chief Credit Officer; and Don Schuster, Associate Counsel for Sandy SpringBancorp.

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 andthere will be a replay of the call available at our website beginning latertoday.

We can take your questions as usual after a brief review ofthe key highlights. Before we make our remarks and then take your questions,Don Schuster, who is standing in for our General Counsel, Ron Kuykendall, whois out of the office today, will give the Safe Harbor statement.

Don Schuster

Thank you, Hunter. Good afternoon, ladies and gentlemen.Sandy Spring Bancorp will make forward-looking statements in this webcast thatare subject to risks and uncertainties. These forward-looking statementsinclude statements of goals, intentions, earnings and other expectations,estimates of risks and future costs and benefits, assessment of probable loanand lease losses, assessments of market risk and statements of the ability toachieve financial and other goals.

These forward-looking statements are subject to significantuncertainties because they are based upon or affected by management’s estimatesand projections of future interest rates, market behavior, and other economicconditions, future laws and regulations and a variety of other matters which bytheir nature are subject to significant uncertainties.

Because of these uncertainties, Sandy Spring Bancorp’sactual future results may differ materially from those indicated. In addition,the company’s past results of operations do not necessarily indicate its futureresults.

Hunter R. Hollar

Thanks, Don. It was a fairly straightforward quarter for usand we didn’t have a lot of things going on in terms of one-time charges orextraordinary items, so I’ll just recap a few of the key financial performancehighlights and then we’ll move on to your questions.

First, let me say overall that we were not satisfied withthe earnings per share for the quarter and so far this year, but there were anumber of positive aspects to our performance in the third quarter.

Our net income for the third quarter was essentially flatcompared to the same quarter a year ago and the second quarter of this year.The positives are that our net interest income and our non-interest income bothincreased at a double-digit pace. Significantly, our net interest marginincreased nicely to 4.16%, reflecting management focus on this important coremeasure.

Loans and deposits increased 21% and 17% respectively overthe levels we reported a year ago, mainly due to our recently completed twoacquisitions. On the loan side, we’ve been seeing consistent single-digitorganic growth, predominantly in the small and middle market business sectors,and the loan pipeline is solid, moving in to the fourth quarter.

Excluding the impact of mergers, commercial loan growthadvanced about 6% in the third quarter over the prior year’s third quarter.

As you’d expect, we’ve been experiencing a slowdown inresidential construction and overall consumer lending.

Based on period end balances, our customer funding sourcesmade up of deposits and customer repurchase agreements decreased 3.9%, notannualized. Our average customer funding sources increased 2.2% from the secondquarter to the third quarter. Modest growth by historical standards but growth nonethelessin an environment of very slow deposit growth in the market.

Overall deposit balances are being affected by ourconservative pricing philosophy on certificates of deposit and some initialrun-off of high-cost balances in our two acquisitions.

Our asset quality remains very strong, even with somemeasures being higher than traditional Sandy Spring standards, given thecurrent slowdown and turmoil in the economy, and considering that we have onenon-performing loan of $13.6 million, we are still confident that our overallportfolio quality is strong.

Dan Schrider, our Chief Credit Officer, will have more tosay about this shortly.

Areas where we intend to focus in the future continue to bein expense control and our efficiency ratio. Even though our efficiency ratioremained virtually flat as compared with the second quarter, we are now in theprocess of examining our staffing, our processes, and all elements of ourbusiness model to ensure long-term success with a rational and sustainableexpense base.

As many of you listening to this call are aware, our focusis on a much longer time horizon than the next few quarters and we intend tomake good decisions for the long-term health of this company as a new bankingparadigm emerges. We are paying very close attention to this new paradigm asmore products become commoditized, branch break-even points increase and largebanks improve their service.

We are convinced that Sandy Spring Bank has the talent andthe resources to compete but maybe not in exactly the same way as it’s alwaysbeen done. As the old song goes, times they are a’changing, and Sandy Spring will change to meet thechallenge.

Meanwhile, we have a sound, well-capitalized company with anexperienced management team to negotiated through the industry changes. One ofthose experienced managers is Dan Schrider, Executive Vice President and ChiefCredit Officer. Dan’s been with Sandy Spring Bank for over 18 years and hasbeen Chief Credit Officer since 2003. I will now call on Dan to talk about ourlarge, non-performing loan and its current status, along with some othercomments on our credit quality.

Daniel J. Schrider

Thank you, Hunter and good afternoon. As a quick reminder,our $13.6 million loan is to an experienced developer in the lower shore ofDelaware, about 67 milesfrom our easternmost office in Annapolis, Maryland. This area of SouthernDelaware has been rapidly growing over the past several years, driven by demandfor both inland and coastal properties. The market is within about anhour-and-a-half of major metropolitan areas, and is appealing to those desiringproximity to Delaware’s shore and its attractive tax structure.

Buyers in the market are typically those relocating orretiring from Maryland, Pennsylvania, New Jersey, or New York.

Again, this loan is to an experienced developer who hadoriginally contracted with a major national builder to take down over time 450single family, 342 town home, 266 condo, and 30,000 square foot ofretail space, which now has all entitlements in place -- that is, the localauthorities have approved the development of this land for the intended use.

In this case, the large national builder walked away fromthe investment, leaving dollars in the deal. Since the end of the last quarter,we have examined appraisals which take into account the much different marketfactors which now exist, compared to those which existed in December, 2005,when we closed this loan.

Our appraisals confirm for us that this loan is stillsupported by value sufficient to repay our loans 100%. Further, we are indiscussions with the borrower continuously about how we move forward to makefull payment a reality. And while it’s impossible to say exactly when thatmight happen, our best judgment now is that we will be repaid in full.

Let me comment just a little bit further on the otherelements making up the total of $25.8 million in non-performing assets. At theend of the period, our non-accrual loans are actually down slightly whencompared to the second quarter. The increase in non-performing assets is drivenprimarily by three credits that reached 90 days past their maturity during aprolonged negotiation process with the clients. Fortunately, as we speak, allthree credits are current.

You will also notice that net charge-offs spiked to $844,000in the third quarter and represent charge-offs of the un-guaranteed portion ofgovernment guaranteed commercial credits that were specifically reserved for in2006. In otherwords, the impact of these particular loans affected the loan loss reserve whenthe assets were specifically reserved for in 2006.

Hunter R. Hollar

Thank you, Dan. Let me just mention to add to Dan’s commentsabout our large, non-accrual loan. The effect of this one loan on our earningsper share is about $0.0125 this quarter, so it is easy to imaging that we arevery focused on working out of this situation.

I also want to remind you that we have no exposure tosub-prime or Alt-A mortgage loans either in our loan portfolio or ourinvestment portfolio. In fact, we are in the process of letting our customersknow that we are very much still in the residential mortgage business. Thoseborrowers locally whose mortgage brokers have shut down are encouraged to cometo Sandy Spring Bank as a source of stable mortgage financing.

You will notice an increase in our residential mortgageloans this quarter and we think there will continue to be an opportunity for usto make adjustable rate mortgages in construction loans to homeowners in ourmarket while other, non-bank lenders drop out of the market.

So that’s our brief comments for today, which we can expandon as we take your questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question comes from Matt Schultheiswith Ferris Baker Watts.

Matt Schultheis -Ferris Baker Watts

Good afternoon. Related to your 90 days past due, obviouslythere was the increase one quarter, and you said that was tied to three creditsthat are all now current?

Hunter R. Hollar

That is correct, Matt.

Matt Schultheis -Ferris Baker Watts

Did you see any slippage in credit quality tied to your homeequity portfolio?

Hunter R. Hollar

None whatsoever in our home equity portfolio at this pointin terms of past dues or problem credit -- absolutely none.

Matt Schultheis -Ferris Baker Watts

You continue to shift your asset mix towards loans away fromsecurities. How long do you think you can keep that up, as far as yourliquidity is concerned? You obviously have a better picture of pledgesecurities than I would at this point, so --

Philip J. Mantua

We are probably at the break point on that today with ourportfolio being about 15% of total assets. You may recall from a goal or targetstandpoint, that’s about the low-end of where we wanted to take the investmentportfolio, and you are correct; on a pledge basis, we are starting to be upagainst it a little bit in that respect, so we are probably about as far as wecan go in that respect and in terms of using the vehicle for funding futureloan growth.

Matt Schultheis -Ferris Baker Watts

So basically if you continue to grow loans faster than deposits,you are going to have to increase your wholesale --

Philip J. Mantua

We will either borrow at appropriate rates or we will be alittle more aggressive in the local markets, as we were at a point in timebefore for special CD monies, which I think is, as you know, one of the moresignificant tools available to us within the customer base.

Matt Schultheis -Ferris Baker Watts

Lastly, you guys mentioned your LIFT program and I waswondering if you are willing to start giving us some benchmarks we couldmeasure by as far as cost phase, cost containment? And related to that, whetheryou expect to see non-interest expenses grow in ’08 versus ’07 or whether thislift program may actually drive your overhead costs, you know, yournon-interest expenses down year over year.

Hunter R. Hollar

Matt, it’s a little too early for us to be specific aboutthat. We are encouraged by some of the initial fact finding that is going onright now with the help of an outside consultant. We’ve said in the past thatas a general matter, we think our traditional efficiency ratio should be downin the mid-50s, or in that range, as opposed to low 60s where it is now.

But we do intend to give further information as we finishthe discovery process this year and really move in to implementation next year.But I don’t have any specific for you on that at this point.

Matt Schultheis -Ferris Baker Watts

As far as just a general view of how you guys are looking atthis, rather than hard dollar figures, are you looking to save money in someareas and then reinvest in those funds? Or do you think it’s just straight tothe bottom line?

Hunter R. Hollar

Well, certainly there will be some of that reinvestment orsaving money some places to reinvest others, but I would say on a net netbasis, we’re looking for cost savings.

Matt Schultheis -Ferris Baker Watts

Okay. Thank you very much.

Operator

Our next question comes from the line of Steve Moss with JanneyMontgomery Scott.

Steve Moss - JanneyMontgomery Scott

Good afternoon. Sorry if I missed it during Matt’squestions, but is the $25 million here a good run-rate, or should we expectsome pull back from this quarter’s expense level?

Hunter R. Hollar

My answer to Matt specifically was that we are in the earlydiscovery stages of what we referred to as LIFT -- Looking Inward For Tomorrow-- so we don’t have specific numbers with regard to non-interest expenses. Butas Matt asked us to clarify, we may be looking to do some reinvestment; thatis, spending less money in one area to spend more in another. But on a net netbasis, we’re looking to get our non-interest expenses moving down.

Steve Moss - JanneyMontgomery Scott

Okay, and with regard to your commercial constructionportfolio, could you give us a little more color with what type of loans youare doing in this environment and where you are seeing most activity?

Hunter R. Hollar

I might as Dan Schrider, our Chief Credit Officer, tocomment on that a little bit. Generally speaking, we are dealing with smallerlocal builders, small to mid-sized local builders. We have been veryintentional for some time in dealing with builders who have staying power and atrack record. We just have not dealt with less experienced builders, so theytend to be very local and we think with some ability to withstand marketcycles. In most cases, the builders we are dealing with have experienced marketcycles before. They’ve been around a while and we think have some ability to dothat in this case.

They continue to sell houses, generally speaking. Salespaces are lower, as is generally the case in the market, but that’s -- so thesetend to be some land development and builder, loans to build houses. Generallyno big, speculative advances on houses or townhouses, just a model or enough tokeep the project going. And in the case of loans for lots, it’s today very muchdevelopment of lots for people who are also builders and who have some abilityto build on those lots. So that’s a general capsule of that category. We don’texpect the category to grow a lot, obviously in this kind of market, and it isnot a huge part of our overall loan portfolio, but it is one that we obviouslywant to manage carefully in this market.

Daniel J. Schrider

Within that portfolio of commercial construction, we runabout 60% to 65% of that portfolio is towards the residential, as Hunter spoketo, and the balance represents traditional commercial projects for commercialborrowers, and the majority of that is owner-occupied type real estate. Sothat’s how that construction category breaks down.

Steve Moss - JanneyMontgomery Scott

Okay. Thank you.

Operator

Our next question comes from Michael [Kohn] with [Sinova]Capital.

MichaelKohn - Sinova Capital

Thanks for taking my question. Could you address maybe --let me take another crack at Matt and Steve’s question in terms of the LIFTprogram. Is there a time horizon in which you might begin to articulate thegoals? If you are not necessarily ready to articulate those goals yet, is therea time in which you envision you might be able to come to the market and sayall right, here’s where -- aside from kind of the efficiency goal, is there apoint at which you could sort of set out a time horizon for getting there?

Hunter R. Hollar

We will be working for a good part of the fourth quarter onidentification of opportunities and I would say we would be ready for that --this is an estimate -- in the latter part of the fourth quarter or early in thefirst quarter next year.

Michael Kohn - SinovaCapital

Okay, great. And then, on the construction portfolio andspecifically on the NPA that was recently reappraised, have you guys alreadytaken position of the land and are able to market it yet, so that it can moveout of MPA? Or is that going to be a nine-month process? How should we thinkabout that?

Daniel J. Schrider

This project, we do not have possession of at this point. Wehave a situation where we have a very cooperative borrower that we believewe’ve got some nice options of working this out outside of taking possession.At least, that’s our take at this point.

As I mentioned earlier, it’s tough to predict exactly whenthat will happen, but we believe it is something that will happen in the nearterm.

Michael Kohn - SinovaCapital

And are you at all concerned -- I mean, the reason I’m sortof emphasizing some sense of urgency is we don’t know where the housing marketsare going to be six months from now, three months from now and such, andappraisals today are -- say X could be 90% of X three months from now. It couldalso be 110% of X, but you get the point.

Hunter R. Hollar

Sure. We certainly have urgency around this one. We thinkthere is some strength in the market and it is significant that the project hasall the entitlements in place, so if there is even a small market bounce-backor no further deterioration, we think this is a valuable piece of property.Timing is hard to predict.

Michael Kohn - SinovaCapital

And within the context of just all of your constructionbook, you -- anything that perhaps has sort of been renegotiated or has run outof interest reserves, or something like that, where you’ve extended it, youwould have put on MPA, so there is nothing that exists that is kind of not on MPAstatus that hasn’t performed to the original contract, correct?

Daniel J. Schrider

That is correct.

Michael Kohn - SinovaCapital

Great. Thank you so much.

Operator

Our next question comes from the line of Jennifer Demba withSuntrust.

Jennifer Demba -Suntrust Robinson Humphrey

Good afternoon. If you could characterize any stress you areseeing in other parts of your residential construction portfolio.

Hunter R. Hollar

Well, probably what you would expect. I mean, home salesamong new home builders are down. They are moving more slowly. They have notcertainly gone to zero. I think every builder we are dealing with is sellinghomes and so it’s not a panic scenario from that standpoint, but the --generally the sales levels are down in half of what they were back in a morenormalized period, just to put a rough estimate on it.

Jennifer Demba -Suntrust Robinson Humphrey

And what kind of watchlist trend are you seeing with regardto your construction portfolio?

Hunter R. Hollar

Watchlist trends are in general increasing. I would say theresidential portfolio is participating less in that than just commercialcredits in general. We are seeing some distress -- again, just to give you aflavor, in small businesses. As we mentioned earlier, in the SPA type loans,where we went into higher risk credits with a portion of the principal beingguaranteed, and so you would expect those businesses to have stress sooner.

So we are seeing some of that increase in watch list activityin the institution.

Jennifer Demba -Suntrust Robinson Humphrey

Thank you.

Operator

Our next question comes from the line of Mark Hughes withLafayette Investments. Please proceed with your question.

Mark Hughes -Lafayette Investments

Good afternoon. Looking at the stock price where it is here,obviously the market is sending a loud message that current results areunacceptable. Yet, and from the number of questions that have already beenasked, there seems to be a sense that there isn’t a sense of urgency out of youall to get costs under control better. Maybe we’re not hearing it loud andclear but I think the question has been asked three different ways.

With earnings that are going to be lower this year than theywere five years ago, I would think there is more of a sense of urgency. Andwhen I hear that we’re doing a study and maybe the first quarter next year,things are going to -- we’re going to have some things to report to you all andstuff -- you know, it’s not sending a good message to me that next year isgoing to be any better than this year, and then you have the whole issue ofcredit issues looming over your head, which we really haven’t had to deal withthe last five years.

Can you be a little more specific, or maybe I’m not hearingyou right and the other people on this call aren’t hearing you right, but we’retrying to understand how that efficiency ratio is going to get down to -- youknow, what your long-term goal is. Because I’ve heard you talk about theefficiency ratio for a number of years now and it doesn’t seem to get better.

So could you give us some more specifics? I know you may beearly in your presses here but it’s getting very frustrating.

Hunter R. Hollar

I certainly understand what you are saying and I’m glad youraised the question because we definitely feel urgency around the whole costissue. What I tried to communicate in my opening comments was that we arelooking at the business models in all of our different businesses, we’relooking at headcounts, we’re looking at the new branch model; that is, the factthat branches are experiencing much slower growth in transactions, the cost ofthe branches. We will be examining closing of branches. We haven’t reached aconclusion that that is the right move, but that’s certainly something we willlook at as we look at carefully at the profitability of each branch.

I mean, there is nothing here that’s untouchable. Youmentioned how serious we are about this or how much urgency, this is the firsttime we’ve brought in an outside group to really focus 100% of their time onidentifying best practices and processes that we can improve.

So this is going to be -- we are currently in the mostsignificant process for examining costs that we’ve ever been in, and ourinability to give you a specific number is not that we don’t have urgencyaround this. It’s just that we haven’t identified enough to really put somenumber out there on the street.

But we intend to get very specific internally as to how weare going to save money.

Mark Hughes -Lafayette Investments

Thank you. Good luck.

Operator

Our next question comes from the line of Bryce Rowe withRobert W. Baird and Company. Please proceed with your question.

Bryce Rowe - RobertW. Baird

Thanks. Good afternoon, guys. Just a couple of questions,one housekeeping; what was the FTE count for the third quarter, or at the endof the third quarter?

Hunter R. Hollar

I don’t know that we have a specific number on that, Bryce.It’s in the range of 650 or thereabouts. We don’t have that number right here.If we have a chance to find it here as the call moves along, we’ll return tothat. But FTE count, of course, increased with the two acquisitions and as Imentioned earlier, that’s one area that we’ll be looking at. So we’ll see if wecan find that before we wrap up the call here today.

Bryce Rowe - RobertW. Baird

And you mentioned in the press release that integration ofPotomac and County were completed in the third quarter. Can you speak to what-- if you met expectations either from a cost-save perspective or timingperspective?

Hunter R. Hollar

From a cost-save perspective, definitely met expectations.Timing and completion of the integration of the systems and that sort of thingwent right on schedule.

Bryce Rowe - RobertW. Baird

Okay. Thank you.

Operator

(Operator Instructions) Mr. Hollar, there are no furtherquestions at this time. I would like to turn the floor over to -- actually,sir, we do have another question from Michael Kohn with Sinova Capital. Pleaseproceed with your question, sir.

Michael Kohn - SinovaCapital

One last follow-up; as you guys look out strategically atyour very attractive marketplace, would you guys envision continuing to lookfor acquisition opportunities?

Hunter R. Hollar

We think that there are going to be acquisitionopportunities within or immediately adjacent to our attractive market here.Certainly the LIFT project that I mentioned earlier has our attention in thisimmediate fourth quarter and then certainly there will be more attention as wemove into the implementation stage next year, but I do think that we willcontinue, as we’ve said before, to look for opportunities for sensibleacquisitions that fit well with us from a culture standpoint and from a loanquality perspective, obviously all those things are extremely important to us.

So yes, we will continue to look for those but ourimmediate, most intense concentration is on the LIFT project for the currentquarter.

Michael Kohn - SinovaCapital

Is there a specific geography that you are targeting? If youwould look to expand, would it be in footprint or adjacent to footprint or whatadjacent areas are most attractive to you?

Hunter R. Hollar

It would tend to be within or immediately adjacent.Certainly with our entry into Virginia, we know there are other opportunitiesthat could come up in that footprint, now that we are there and have afoothold. Certainly there are areas of Maryland where Mercantile had been verymuch an acquirer, and since their acquisition by PNC, we think Sandy Springcould fill in a void there and some of that that we’re keeping an eye on, aswe’ve mentioned before, is in even the eastern shore of Maryland as that marketstarts to grow, or I should say continues to grow.

Michael Kohn - SinovaCapital

So logically, that probably won’t happen this quarter, asyou had mentioned, because of the focus on LIFT, but you would expect to beback in the market sometime in 2008 if the opportunity presented itself?

Hunter R. Hollar

Yes, that’s something we would definitely consider.

Michael Kohn - SinovaCapital

Great. Thanks so much for your time, guys.

Hunter R. Hollar

Let me just mention, for those on the call, in follow-up to BryceRowe’s earlier question about FTE count, it is currently 716, and that wouldinclude, of course, two recent acquisitions.

Operator

(Operator Instructions) Mr. Hollar, there are no furtherquestions at this time. I would like to turn the floor back over to you for anyclosing comments.

Hunter R. Hollar

Thank you all for participating and we’d love to hear anyfeedback you have for how we are handling the call. You can always e-mail us atIR@sandyspringsinc.com. Thanks again.

Operator

This concludes today’s teleconference. You may disconnectyour lines at this time. Thank you for your participation.

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 Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts