The chief executive of Maryland's third-largest independent banking company says it will refocus on making money from traditional banking activities, a day after the company disclosed two top finance executives had departed amid problems with its unusually large bond portfolio.
Hunter R. Hollar, president and CEO of Sandy Spring Bancorp, said the company will look to increase loans and deposits and generate income from fees, with "less emphasis on the investment portfolio," and is committed to remaining independent.
"We are very much alive and well," Hollar said yesterday, on the eve of the bank's release of third-quarter earnings. "We have a large investment portfolio relative to the size of the bank. We are just de-emphasizing some of the borrowing and investing activity that we had done in the past."
On Tuesday, the company said Lawrence T. Lewis III, executive vice president and chief investment officer, retired, and James H. Langmead, executive vice president and chief financial officer, was no longer working at the bank. The company named Philip Mantua as CFO and gave him responsibilities for the investment portfolio.
Neither former executive could be reached for comment.
Sandy Spring, which is based in eastern Montgomery County and has expanded into Howard and Anne Arundel counties, has run into problems by relying heavily on a strategy of borrowing money for short terms at low interest rates and investing the money in bonds, most of them with maturities of more than five years.
Hurt by rising rates
The strategy worked well while long-term interest rates remained at historic lows, but turned against the bank as rates began to rise in August 2003. Sandy Spring's second-quarter profit fell 26 percent, to $6.4 million, and the company blamed it in part on reduced returns in the securities portfolio, which represented 37 percent of Sandy Spring's $2.4 billion in assets June 30. Hollar said yesterday that the portfolio is at "break- even."
"Strategically, this is never a winning strategy," said Henry J. Coffey, a banking analyst at Ferris, Baker Watts in Baltimore, who has had a "hold" rating on Sandy Spring's stock since July 2002. "We just looked at all of that and threw up our hands. I have never seen those strategies work. They always eat you up."
Strategy not unusual
Collyn Bement Gilbert, a banking analyst at Ryan Beck & Co. in Conshohocken, Pa., said Sandy Spring's investment strategy is not unusual, but said the size of the portfolio has raised questions among investors. She said 43 percent of the company's earning assets are in the securities portfolio.
"Forty-three percent, that is ... unusually high," Gilbert said. "That definitely would be at the high end of the industry."
Hollar said he had no specific timetable for reducing the portfolio, which stood at $892 million at the end of the second quarter, or an amount by which he wanted to reduce it.
"We haven't set any particular benchmark," he said.
He said the company has strong core operations and experienced management, and operates in one of the most lucrative areas in the country.
"We know we need to back that up with excellent financial results," Hollar said. "We want to be focused on getting them back up and being an independent company."
Sandy Spring's shares fell $1.07, or 3.13 percent, yesterday to $33.10.
The bank built its securities portfolio by borrowing cheap, short-term money from the Federal Home Loan Bank of Atlanta and investing it in debt instruments issued by mortgage giants Fannie Mae and Freddie Mac. But as interest rates began to rise, the money the bank borrowed came due, forcing it to borrow more money at higher rates to fund its investments, analysts said. As a result, the bank's yield on its securities was squeezed, crimping profits.
"You can make more money in leverage strategies but it does involve a high level of risk," said Bradley J. Ness, a bank analyst at Friedman, Billings, Ramsey, an investment banking firm in Arlington, Va. "The strongest balance sheet out there is a bank that does not use a leveraged strategy."
Analysts don't believe the bank will be forced to put itself up for sale because of the stumble, but it is always a possibility, they said.
`A great franchise'
"They have a great franchise in a very good market with a good strong core deposit base that would be highly coveted by a long list of buyers," Gilbert said. "They have had some earnings missteps along the way; sometimes that can be a recipe for a sale."
Coffey, the Ferris, Baker analyst, expects Hollar to work to clean up the problem.
"He sees an opportunity to fix something," Coffey said. "If he's smart, he will take this opportunity to wipe his brow, thank his lucky stars and fix it."
Sandy Spring Bancorp
Assets: $2.4 billion
Branches: 30 in Anne Arundel, Frederick, Howard, Montgomery and Prince George's counties.