Sandy Spring Bancorp Inc (SASR) 2008 Q3 法說會逐字稿

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.

Good afternoon. 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 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 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.

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 risk and future costs and benefits, assessments of probable loan and lease losses, assessments of market risks and statements of the able to achieve financial and other goals.

These forward-looking statements are subject to significant uncertainties because they are based upon or are 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, 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 as a communications piece primarily aimed at our shareholders, analysts 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're about to do shortly.

There are, however, two other important audiences who see our press releases 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 reiterate what I said in the release and then we'll move on.

Here is what I said and this is a quote. "Our Company is a good old-fashioned profitable community bank that has been conservatively managed for over 100 years. We are locally run, well capitalized, locally headquartered. Our employees live in the same neighborhoods where's they work 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 lose sight of these facts despite the daily reports of huge losses and ongoing major problems at many of the nation's largest and best-known financial companies. The extraordinary events of the past month have reshaped the entire US financial system yet we believe the 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 an overly rosey picture considering the gravity of what's going on in the economy right now, but the point is that we've been around a long time. We're a profitable Company with no subprime loans, no collateralized debt obligations, no structured investment vehicles, and on a day-to-day basis, we're totally focused on safely meeting all the banking needs our customers have. Also say that we very actively are managing our elevated levels of non-performing loans. Dan will have a little more to say about that later.

We're also modeling on a frequent basis certain loan loss assumptions and their effect on our capital ratios,primarily our risk-weighted assets to equity ratio. Those loss assumptions are calculated from our best estimates of the write-downs that might result from a continuing slump in the housing industry and general weakness in the economy. Our modeling indicates that we'll continue to be a well-capitalized bank in the future and that's certainly our goal and intention.

However, we've been following with interest the recent developments with regard to the [TARP] capital purchase program. While we have not made a final decision on whether or not to participate in this 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 Nov. 14 deadline. Everything we've learned about this potential source of capital is positive at this point, including our impression that the Fed and Treasury intend that it be used by strong, healthy 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 to 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're 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 link 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.

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 there will be any short-term improvement.

The demographics of our market remain relatively strong. The zones between Baltimore and Washington and in Northern Virginia are typically more resilient than both 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 non-performing loans and our allowance for loan and lease losses of 1.54% of total loans at quarter-end. We continue to see the greatest impact on the portfolios associated with residential home development and construction, and to a lesser extent, specific segments of our residential loan home mortgage portfolio and loans to small businesses that have yet to stand the test of time.

Provisions continue to be driven by two factors. Primarily, it 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 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 NPAs are from our CNI portfolio, and less than 0.5% is originated from our home equity portfolio.

I also think it would be helpful to comment on a couple of portfolios that may be 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 new originations or growth in the portfolio. As mentioned, this portfolio is a source of our largest portion of NPAs, and receives a significant amount of our risk management resources.

As I've explained in prior quarters, our company has historically been a very active lot and construction lender in our market. And 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 portfolios represent 6.2% and 9% of our total portfolio respectively.

While 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 has remained consistent at under 40%. We are pleased to say that our delinquencies in this portfolio continue to hold up very well.

Our conservative underwriting, moderate usage levels and ongoing [modeling] 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 am 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 of staff that go outside the Bank and work directly with clients on a very hands-on approach.

I do want to mention that as part of our ongoing management succession and transitioning process, I'm very pleased to have hired Jeffrey 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're certainly concerned with the depth, breadth and duration of 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 our 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're getting indicates we're doing an effective job. That wraps up my comments today. Turn it back to Hunter.

Okay. We can go to questions now and give us an opportunity to expand on anything of interest.

We'll take our first question form Jennifer Demba with Suntrust Robinson.

Good afternoon. I jumped on late, so bear with me. You mentioned the residential builder portfolio. How much of that is Virginia versus Maryland?

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 the variability to do the larger acquisition development lending was relatively small. Dan, you have some other?

Yes. Jennifer, that percentage of the portfolio would be less than 10% is out of Virginia.

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

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

Okay. And what's the non-performing asset percentage in that portfolio right now?

Of our non-performers -- of the total non-performers, just under 64% are from that portfolio. Let me -- we'll circle back with you on that.

We'll circle back to get to your specific question, do some calculations here, Jennifer.

All right. Thank you.

Thanks.

And we'll take our next question from Steve Moskowitz with Janney Montgomery Scott.

Good afternoon, guys.

Good afternoon, Steve.

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

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

Okay. And then with regard to loan demand in general, how is it and where are you seeing it from these days?

Certainly loan demand in general is down. Of course, we're seeing virtually none in the residential development builder categories. Still some small business lending from healthy borrowers who, you know, have some track record. We're kind of amazed constantly at various subcontractors in the commercial space, people like electrical or drywall contractors, glass contractors, those kind 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. Naturally even they are skeptical -- okay, what happens after this pipeline of another year runs out, but I would say in many areas we're still seeing some loan demand from those kinds of customers.

Okay. And with regard to the margin here going forward, nice little bump, but the Fed obviously recently cut rates. What are your expectations there?

Steve, this is Phil and our expectations would be that we've probably peaked 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 other 50 basis point move that just occurred will probably take a little more than a month to completely be absorbed here just by the way we've repriced to various aspects of prime within our loan portfolio. But we are clearly at incentive to that degree, so that will hurt the margin initially. The other element is we're 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.

All right. Thank you very much.

You bet.

(OPERATOR INSTRUCTIONS).

Let me -- 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.

That percentage of that total portfolio, Jennifer, is -- 22% of the portfolio is currently in our NPA category.

We'll take our next question from Mark Hughes with Lafayette Investments.

Good afternoon.

Hello, Mark.

Hi. Question, a few weeks ago when there were problems in the money market world, some of the bigger name banks reported seeing good deposit inflows. Did you see any of the same?

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

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

Mark, this is Dan. You know, I think it's tough to -- 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 in trying to figure out a creative solution to either work with or exit out of a loan situation. Clearly, our experience by virtue of when we began to see an uptick in our non-performers which was in the fourth quarter of last year, it's 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're in. And so I think it's going to take longer than we certainly would like, and we're 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.

Okay. Thank you very much.

And we'll take our next question from Bryce Rowe with Robert W. Baird.

Thanks. Good afternoon, guys.

Hi, Bryce.

Wondering if -- a couple questions here. Dan, if you could speak to the 30- to 89-day past due trends.

We are seeing consistent performance in our home equity portfolio as you know, which is clearly an area that in the marketplace, other banks are not faring quite as well. So very solid portfolio there. We are, as I mentioned earlier, we're 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 that's elevated but remaining consistent. And the swings that we're seeing on the 30-to-90s are really, again, driven by that builder business simply because they tend to be larger transactions that have a -- more significant influence on the past-due rates. And you'll also notice that they tend to -- our movement into NPAs within that portfolio sometimes skips the 30-to-90 delinquency simply by virtue of how we're classifying those loans much earlier in the process than waiting for a delinquency, so to speak. So in today's world, the predictive nature of 30-to-90s is a little different than it has been in throughout history.

Okay. Would you say it's more predictive for a CNI type of credit than obviously a construction loan?

Yes.

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

I believe they're on the -- circle back on that, Bryce.

Okay. And I guess my next question is for Phil. Phil, any -- obviously you've made good progress with the lift program. Is there more efficiency to be had there?

I think as far as it relates to our expectations, continuing expectations, on some of the discretionary expenses, Bryce, 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 were 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 perspective I would say they're still more in that regard to come. As it relates to some of the other things we've talked about in terms of benefits costs and personnel-related things, I think we've made the progress to date that we've expected to in all of those areas. And then one other kind of major area that I think is still out there, are some things we were planning to do from an occupancy standpoint, which we really have not executed on at this point.

Okay. And then, Phil, one more question.

Sure.

The use of borrowings has obviously gone up with the deposit pricing pressures in those markets. At what point do you reach a threshold where you prefer not to use those borrowings anymore?

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 things we've already put in place here with some success I would say to try to stem the tide of having to rely on the Federal Home Loan Bank. And we continue to monitor just where we are with that. We have, in that regard, tried to keep those borrowings as short-term as possible by holding the daily rate credit position as opposed to going out in the convertible advanced market.

Bryce, just two other comments on that. This is Hunter. One, is we talked a little bit about loan demand earlier, and there is still some loan demand, but certainly we anticipate loan growth per se to level off even further. So I think 2% growth for the link 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.

Okay. Thank you, guys.

Sure.

And we'll take a follow-up question from Jennifer Demba with Suntrust Robinson Humphrey.

Question. Of the residential builder loans in your non-performing asset bucket, what on average -- what kind of carrying value have you written it down to, on average, as a percentage of the original loan amount?

In most cases, Jennifer, let me see if I can get at your question. In most cases there was sufficient equity going into the deals that we haven't had to actually take significant write-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 there's an average set-aside for the loan loss provision that I could give to you. But in most cases the loan, the asset, is still being carried at its original value.

Okay. And have you sold any of your foreclosed properties yet?

We've actually had very few foreclosures at this point. We have very little in [OREO], so no, it hasn't moved to that point yet.

Are you anticipating going that route or would you rather do kind of a bulk loan sale? I mean you don't have as much NPAs as a lot of companies, but --

Yes. I mean our assessment is at this point, that bulk loan 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.

Thank you.

And we'll take our next question from David West with Davenport & Company.

Good afternoon. Could you provide or do you have a breakdown of how much raw land is in the residential construction category?

Yes. David, this is Dan. We've added just about 4% of our AD and C portfolio is raw land.

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

David, this is Phil. We are required by 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 what's referred to as a triggering event per 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 the equipment leasing company and then through the annual process at September 30 is kind of the true-up that we are referring to in both of the press releases related to that item.

Thanks so much.

You're welcome.

(OPERATOR INSTRUCTIONS).

I might just add to Bryce'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.

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.

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 have. Thank you and that concludes our call.

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