Sandy Spring Bancorp Inc (SASR) 2007 Q3 法說會逐字稿

Greetings and welcome to the Sandy Spring Bancorp Inc. third quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Hunter Hollar, President and CEO for Sandy Spring Bancorp Inc. Thank you. You may begin.

Good afternoon and welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2007. Joining me here today is Philip Mantua, our Chief Financial Officer; Dan Schroeder, our Chief Credit Officer; and Don Schuster, Associate Counsel for Sandy Spring Bancorp. As always, this call today is open to all investors, analysts, and the news media. There will be a live webcast of today's call and there will be a replay of the call available at our website beginning later today. We can take your questions as usual after a brief review of the key highlights before we make our remarks and then take your questions, Don Schuster, who is standing in for our General Counsel Ron Kuykendall who is out of the office today will give the Safe Harbor statement.

Thank you, Hunter. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks 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 risk, and statements of the ability to achieve financial and other goals.

These forward-looking statements are subject to significant uncertainties because they are based upon or affected by management's estimates and projections of future interest rates, market behavior, and other economic conditions. Future laws and regulations and a variety of other matters which by their nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operations do not necessarily indicate its future results.

Thanks, Don. It was a fairly straight-forward quarter for us, and we didn't have a lot of things going on in terms of one time charges or extraordinary items, so I will just recap a few of the key financial performance highlights and then we'll move on to your questions.

First let me say overall that we were not satisfied with the earnings per share for the quarter and so far this year, but there were a number of positive aspects to our performance in the third quarter. Our net income for the third quarter was essentially flat compared to the same quarter a year ago and the second quarter of this year. The positives are that our net interest income and our noninterest income both increased at a double-digit pace. Significantly our net interest margin increased nicely to 4.16% reflecting management focus on this important core measure. Loans and deposits increased 21% and 17% respectively over the levels we reported a year ago mainly due to our recently completed two acquisitions.

On the loan side we've been seeing consistent single-digit organic growth predominantly in the small and middle market business sectors and the loan pipeline is solid moving into the fourth quarter. Excluding the impact of mergers, commercial loan growth advanced about 6% in the third quarter over the prior year's third quarter. As you would expect, we've been experiencing a slowdown in residential construction and overall consumer lending.

Based on period end balances our customer funding sources made up of deposits and customer repurchase agreements decreased 3.9%, not annualized. Our average customer funding sources increased 2.2% from the second quarter to the third quarter. Modest growth by historical standards, but growth nonetheless in an environment of vary slow deposit growth in the market. Overall deposit balances are being affected by our conservative pricing philosophy on certificates of deposit and some initial run off of high cost balances in our two acquisitions.

Our asset quality remains very strong even with some measures being higher than traditional Sandy Spring standards given the current slow down and turmoil in the economy and considering that we have one nonperforming loan of $13.6 million we're still confident that our overall portfolio quality is strong. Dan Schrider, our Chief Credit Officer will have more to say about this shortly.

Areas where we intend to focus in the future continue to be in expense control and our efficiency ratio. Even though our efficiency ratio remained virtually flat as compared with the second quarter, we're now in the process of examining our staffing, our processes, and all elements of our business model to ensure long-term success with a rational and sustainable expense base. As many of you listening to this call are aware, our focus is on a much longer time horizon than the next few quarters, and we intend to make good decisions for the long-term health of this Company as a new banking paradigm emerges. We're paying very close attention to this new paradigm as more products become commoditized, branch break even points increase, and large banks improve their service. We're convinced that Sandy Spring Bank has the talent and the resources to compete but maybe not in exactly the same way as it has always been done. As the old song goes, times they are a changing, and Sandy Spring will change to meet the challenge.

Meanwhile we have a sound, well capitalized Company with an experienced management team to negotiate through the industry changes. One of those experienced managers is Dan Schrider, our Executive Vice President and Chief Credit Officer. Dan has been with Sandy Spring Bank for over 18 years and has been Chief Credit Officer since 2003. I will now call on Dan to talk about our large nonperforming loan and its current status along with some other comments on our credit quality.

Thank you, Hunter, and good afternoon. As a quick reminder our $13.6 million loan is to an experienced developer in the lower shore of Delaware, about 67 miles from our easternmost office in Annapolis, Maryland. This area of southern Delaware has been rapidly growing over the past several years driven by demand for both inland and coastal properties. The market is within about an hour-and-a-half of major metropolitan areas and is appealing to those desiring proximity to Delaware's shore and its attractive tax structure. Buyers in the market are typically those relocating or retiring from Maryland, Pennsylvania, New Jersey, or New York.

Again, this loan is to an experienced developer who had originally contracted with a major national builder to take down over time 450 single-family, 342 townhome, 266 condo, and 30,000 square foot of retail space which now has all entitlements in place, that is the local authorities have approved the development of this land for the intended use. In this case the large national builder walked away from the investment leaving dollars in the deal. Since the end of the last quarter, we have examined appraisals which take into account the much different market factors which now exist compared to those which has existed in December of 2005 when we closed this had loan. Our appraisals confirm for us that this loan is still supported by value sufficient to repay our loans 100%. Further we're in discussions with the borrower continuously about how we move forward to make full payment a reality. While it's impossible to say exactly when that might happen our best judgment now is that we will be repaid in full.

Let me comment just a little bit further on the other elements making up the total of $25.8 million in nonperforming assets. At the end of the period our nonaccrual loans are actually down slightly when compared to the second quarter. The increase in nonperforming assets is driven by primarily by three credits that reached reached 90 days past their maturity during a prolonged negotiation process with the clients. Fortunately as we speak all three credits are current.

You will also notice that net charge-offs spiked to 844,000 in the third quarter and represent charge-offs of the unguaranteed portion of government guaranteed commercial credits that were specifically reserved for in 2006. In other words, the impact of these particular loans affected the loan loss reserve when the assets were specifically reserved for in 2006.

Thank you, Dan. Let me just mention to add to Dan's comments about our large nonaccrual loan, that the effect of this one loan on our earnings per share is about $1.25 since this quarter, so it is easy to imagine that we're very focused on working out of this situation.

I also want to remind you that we have no exposure to subprime or alt-A mortgage loans either in our loan portfolio or our investment portfolio. In fact, we're in the process of letting our customers know that we're very much still in the residential mortgage business. Those borrowers locally whose mortgage brokers have shut down are encouraged to come to Sandy Spring Bank as a source of stable mortgage financing. You will notice an increase in our residential mortgage loans this quarter, and we think there will continue to be an opportunity for to us make adjustable rate mortgages in construction loans to homeowners in our market while other nonbank lenders drop out of the market. That's our brief comments for today which we can expand on as we take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Matt Schultheis with Ferris, Baker Watts.

Good afternoon. How are you guys?

Good, good.

That's good. Related to your 90 days past due, obvious there was the increase linked quarter, and you said that was tied to three credits that are all now current.

That is correct, Matt.

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

None whatsoever in our home equity portfolio at this point in terms of past dues or problem credits, absolutely none.

You continue to sort of shift your asset mix towards loans away from securities. How long do you think you can keep that up as far as your liquidity is concerned? You obviously have a better picture of pledged securities than I would at this point.

Matt, this is Phil. We're probably at the break point on that today with our portfolio being about 15% of total assets. You may recall from a goal or target standpoint that's about the low end of where we wanted to take the investment portfolio and you are correct on a pledge basis we're starting to be up against it a little bit in that respect, so we're probably about as far as we can go in that respect in terms of using that vehicle for funding future loan growth.

Basically if you continue to grow loans faster than deposits, you're going to have to increase your liability -- your wholesale funding some?

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

Okay. And lastly, you guys mentioned your lift program, and was wondering if you're willing to start giving us some benchmarks we can measure by as far as cost saves, cost containments? And related to that whether you expect to see noninterest expenses grow in '08 versus '07 or whether this lift program may actually drive your overhead costs, your noninterest expenses down year-over-year?

Matt, it is a little too early for us to be specific about that. We are encouraged by some of the initial facts finding that's going on right now with the help of an outside consultant. We've said in the past that as a general matter we think that our traditional efficiency ratio should be down in 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 finish the discovery process this year and really move into implementation next year, but I don't have anything specific for you on that at this point.

As far as just a general view of how you guys are looking at this rather than hard dollar figures, are you looking to sort of save money in some areas and then reinvesting those funds? Or do you think it is just straight to the bottom line?

Certainly there will be some of that reinvestment or saving money some places to reinvest others, but I would say on a net-net basis we're looking for cost savings.

Okay. Thank you very much.

Our next question comes from the the line of Steve Janney Montgomery Scott.

Sorry if I missed it during Matt's questions, but is the 25 million here a good run rate or should we expect some pullback from this quarter's expense level?

Yes, my answer to Matt specifically was that we're in the early discovery stages of what we referred to as lift looking inward for tomorrow, so we don't have specific numbers with regard to noninterest expenses, but as Matt asked us to clarify, we may be looking to do some reinvestment, that is spending less money in one area to spend more in another, but on a net-net basis, we're looking to get our noninterest expenses moving down.

Okay. And with regard to your commercial construction portfolio could you give us a little more color with what type of loans you're doing in this environment and where you're seeing most activity?

Yes. I might ask Dan Schrider, our Chief Credit Officer to comment on that a little bit. Generally speaking we are dealing with smaller, local builders, small to mid-sized local builders. We have been very intentional for some time in dealing with builders who have staying power and a track record. We have not dealt with less experienced builders, so they tend to be very local and we think with some ability to withstand market cycles in most cases the builders we're dealing with have experienced market cycles before. They've been around awhile, and we think have some ability to do that in this case. They continue to sell houses generally speaking, sales paces are lower as is generally the case in the market, but that's -- so these tend to be some land development and builder -- loans to build houses generally no big speculative advances on houses or townhouses, just a model or enough to keep the project going, and in the case of loans for lots, it is today very much development of lots for people who are also builders, and who have some ability to build on those lots. So that's a general capsule of that category. We don't expect the category to grow a lot obviously in this kind of market, and it is not a huge part of our overall loan portfolio, but it is one that we obviously want to manage carefully in this market.

Within that portfolio of commercial construction we run about 60 to 65% of that portfolio is towards the residential land that Hunter spoke to, and the balance represents traditional commercial projects for commercial borrowers and the majority of that is owner occupied type real estate, so that's how this construction category breaks down.

Okay. Thank you.

Our next question comes from Michael Cohen with SuNOVA Capital.

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

We will be working for a good part of the fourth quarter on identification 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 the first quarter next year.

Great. And then on the construction portfolio and specifically on the NPA that was recently reappraised, have you guys already taken possession of the land and are able to market it yet so that it can move out of NPA? Or is that going to be a six or a nine-month process? How should we think about that?

Hi, Michael, this is Dan Schrider. This project we do not have possession of at this point. We have a situation where we have a very cooperative borrower that we believe we'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, tough to predict exactly when that will happen, but we believe it is something that will happen in the near term.

And are you at all concerned, the reason I am sort of emphasizing some sense of urgency is we don't know where the housing markets are going to be six months from now, three months from now and such, and appraisals that today are, say, X would could be 90% of X three months from now and could also be 110 of X, but you get the point.

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

And within a context of just all of your construction book, anything that perhaps has been renegotiated or has run out of interest reserves or something like that where you've extended it, you would have put on NPA, so there is nothing sort of that exists that is not on NPA status that hasn't performed to the original contract, correct?

That is correct.

Yes, correct.

Great. Thank you so much.

Thank you.

Our next question comes from the line of Jennifer Demba with SunTrust.

Good afternoon.

Hi, Jennifer.

If you could kind of characterize any stress you're seeing in other parts of your residential construction portfolio?

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

And what kind of watch list trends are you seeing with regard to your construction portfolio?

Watch list trends are in general increasing. I would say the residential portfolio is participating less in that than just commercial credits in general. We're seeing some distress, again just to give you a flavor in small businesses, in as we mentioned earlier in the SBA type loans where we went into higher risk credits with a portion of the principle being guaranteed, and so you would expect those businesses to have stress sooner, so we are seeing some of that increase in watch list activity in the institution.

Thank you.

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

Good afternoon.

Hey, Mark.

Hi. Looking at the stock price where it is here, obviously the market is sending a loud message that current results are unacceptable yet from the number of questions that have already been asked, there seems to be a sense that there isn't a sense of urgency out of you all to get costs under control better, maybe we're not hearing it loud and clear, but I think the question has been asked three different ways, and with earnings we're going to be lower this year than they were five years ago. I would think there is more a sense of urgency, and when 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 on stuff, it is not sending a good message to me that next year is going to be any better than this year. And then you have the whole issue of credit issues looming over your head which we really haven't had to deal with the last five years. Can you be a little more specific or maybe I am not hearing you right and the other people on this call aren't hearing you right, but we're trying to understand how that efficiency ratio is going to get down to what your your long-term goal is, or because I have heard you talk about they efficiency ratio for a number of years now, and is it doesn't seem to get better. Could you give us some more specifics? I know it may be early in your process here, but it is getting very frustrating.

Yes. I certainly understand what you are saying, and I am glad you raised the question because we definitely feel urgency around the whole cost issue. What I tried to communicate in my opening comments was that we're looking at the business models in all of our different businesses. We're looking at head counts. We're looking at the new branch model, that is the fact that branches are experiencing much slower growth in transactions, the cost of the branches. We will be examining closing of branches. We haven't reached a conclusion that that is the right move, but that's certainly something we will look at as we look at, carefully at the profitability of each branch. So there is nothing here that's untouchable.

You mentioned how serious we are about this or how much urgency. This is the first time we have brought in an outside group to really focus 100% of their time on identifying best practices and processes that we can improve. So this is going to be -- we are currently in the most significant process for examining costs that we've ever been in, and our inability to give you a specific number is not that we don't have urgency around this, it is just that we haven't identified it enough to really put some number out there on the Street, but we intend to get very specific internally as to how we're going to save money.

Thank you. Good luck.

Thank you.

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

Thanks. Good afternoon, guys.

Hey, Bryce.

A couple questions. One, housekeeping. What was the FTE count for the third quarter or at the end of the third quarter?

Yes, I don't know that we have a specific number on that, Bryce. It is in the range of 650 or thereabouts. Yes, 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 to that, but FTE counts of course increased with the two acquisitions.

Sure.

And as I mentioned earlier, that's one area that we'll be looking at, so we'll see if we can find that before we wrap up the call here today.

Okay. And you mentioned in the press release that integration of Potomac and County were completed in the third quarter. Can you speak to what -- if you met expectations either from a call save perspective or timing perspective?

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

Okay. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. I would like it turn the floor back over to you for any -- actually, sir, we do have another question from Michael Cohen with SuNOVA Capital.

One last follow-up. As you guys look out strategically at your very attractive marketplace, would you guys envision kind of continuing to look for acquisition opportunities?

We think that there are going to be acquisition opportunities within or immediately adjacent to our attractive market here. Certainly the lift project that I mentioned earlier has our attention in this immediate fourth quarter and then certainly there will be more attention as we move into the implementation stage next year, but I do think that we will continue as we have said before, to look for opportunities for sensible acquisitions that fit well with us from from a culture standpoint and from a loan quality perspective, obviously all those things are extremely important to us. So, yes, we'll continue to look for those, but our immediate, most intense concentration is on the lift project for rec in the current quarter.

Is there a specific sort of geography that, or sort of specific geography that you're targeting if you would look to expand? Would it be in footprint or adjacent to footprint? What adjacent areas are most attractive to you?

It would tend to be within or immediately adjacent, certainly with our entry into Virginia, we know there are other opportunities that could come up in that footprint now that we're there and have a foothold. Certainly there are areas of Maryland where Merck & Teal had been very much an acquirer, and since their acquisition by PNC, we think Sandy Spring could fill in a void there, and some of that that we're keeping an eye on as we've mentioned before is in the, even the eastern shore of Maryland as that market starts to grow or I should say continues to grow.

So logically that probably won't happen this quarter as you had mentioned because of sort of the focus on lift, but you would expect to be back in the market sometime in 2008 if the opportunity presented itself?

Yes, that's something we definitely would consider.

Great. Thanks so much for your time, guys.

Thank you. Let me just mention for those on the call and in follow-up to Bryce Rowe's earlier question about FTE count, it is currently 716, and that would include of course, two recent acquisitions.

(OPERATOR INSTRUCTIONS) Mr. Hollar, there are to further questions at this time. I would like it turn the floor back over to you for any closing comments.

Thank you all for participating, and love to hear any feedback you have for how we're handling the call, and you can always e-mail us at IR@SandySpringBank.com. That's IR@SandySpringBank.com. Thanks again.

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