Sandy Spring Bancorp Inc (SASR) 2004 Q3 法說會逐字稿

(OPERATOR INSTRUCTIONS) At this time I would like to turn the program over to Mr. Hunter Hollar. Please go ahead, sir.

Good afternoon. Welcome everyone to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2004. Joining me here today is Phil Mantua, our new Chief Financial Officer and Frank Small, Chief Operating Officer of our company. Later on, as we work our way through taking your questions, you will be hearing from Phil on some of the answers, I'm sure. We will take your questions after a few brief comments as we usually do. Please note that this live call today is open to all investors, analysts and members of the news media.

As usual, we also are doing a live webcast of today's call on the Internet through our website and there will also be a replay of the call available at Sandy Spring's website beginning later today and up for about a 48-hour period. Before we cover our remarks and then take your questions, Frank Small will read the obligatory Safe Harbor statement. Frank is subbing for our general counsel Ron Kuykendall, who normally does this but he is on vacation today. Frank.

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 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, Frank. As we said in the news release that we issued on Tuesday, we have a new CFO, Phil Mantua, who has been with the organization for several years and is already as firmly established as a member of the management team here. He serves on a variety of senior level committees that manage the day-to-day financial affairs of the Company. Phil's qualifications are outstanding and I am quite confident along with our Board of Directors that he is absolutely the right choice for this job. Phil has been the Vice Chairman of our Asset Liability Committee and will now become its Chairman. And he has also been closely involved with the leveraging program, which we are winding down and the overall repositioning of our investment portfolio.

I would also add that Phil is very well-known in the industry, serving on the faculty of the Maryland Banking School and the American Bankers Association's Stonier Graduate School of Banking. He has also done conference speaking engagements across the country and particularly in the area of asset and liability management and financial modeling.

Just to briefly review the main points in today's news release, earnings release, net income for the third quarter and nine months were both lower compared to same periods for last year. This is primarily the result of lower net interest margins in a historically low interest rate environment. Margin contraction continues to depress our earnings power.

We are also seeing very competitive loan pricing in terms from other banks operating in this market, and in many cases they are focused on buying market share with profitability in their case taking a back seat. And as they attempt to go after our customers in many cases we counter this competition with defensive pricing in order to retain the business. And yes, this does have an impact on our pricing and in turn our commercial loan yields.

But we are growing our loan outstandings even in the face of this tactic by some competitors. And we are retaining our better customers by doing a good job of showing them there's more to relationship banking than just price.

Aside from the competitive battles on the commercial lending side, there was the expected decline in gains on sale of mortgage loans as refinancings continue to wind down. That segment was off significantly year-over-year. On the plus side, as I mentioned, total loan and deposit growth has been consistent and is increased on a sequential or linked quarter basis throughout 2004. Fee income growth was good with trust revenues and such things as visa check fees being strong contributors for the quarter. On the expense side, we are happy to report that core noninterest expense growth has moderated and is about 6 percent year-over-year. In fact we saw a slight decline in expenses for this quarter versus the second quarter of 2004 as we continue to very actively manage that aspect of our company.

Asset quality continues to be very strong. In speaking of asset quality and loan growth, we have not been adding to the loan loss reserve because we are confident that our reserve levels are adequate. Particularly in view of our continuing credit quality indicators. As of September 30th, our nonperforming assets to total assets is at its lowest point over the last six quarters. Of course our overall levels of nonperformers have been very low in absolute terms almost no matter how far you look back.

Our charge off experience this year has again been almost nonexistent. Some of the soft factors that we consider such as economic conditions are seeing improvements even if gradual. We do a detailed analysis each month with regard to our allowance for loan and lease losses, and we continue to be very diligent in comparing our absolute level of reserves to the amount that our analysis says we need.

As for the future, we do think that additions to the reserve may become necessary, and this is particularly true if loan growth continues strong and our efforts in this area continue to show success. So in effect we think we are coming to the end of the time period of no additions to the reserve.

With that, we will be happy to take your questions and talk in greater detail about any of the information covered in the press release or comments that I've made today or whatever you would like to discuss. Operator, we can take the first question.

(OPERATOR INSTRUCTIONS) Jennifer Demba, SunTrust Robinson Humphries.

I was wondering if you could give us some of your thoughts on where you think the margin might go in the next couple of quarters given that you are winding down the leverage program.

Well, we haven't given as you know, the earnings guidance on the future yet. We do think that the leverage program continues to operate at about a breakeven and has not had significant contribution to earnings or earnings per share this year. So the margin in the future depends on how interest rates move and some factors that I really couldn't predict totally at this point.

Hunter how much of your margin compression in this quarter was kind of the result of tougher loan pricing versus a flattening yield curve?

It is a little hard to quantify that exactly. Certainly we think that both of those things contributed. I am not sure that we could quantify those two very exactly. The competitive loan pricing is certainly a factor. It seems to come from larger banks in some cases, smaller banks in others. But it is a fact of life, and I think it is particularly relevant here in a market that is so well-known and so competitive that folks are attracted to. So I still think we carry a great reputation in terms of the nonprice elements, and we don't think we always necessarily have to be the lowest price or meet the lowest price in all cases. But certainly the pricing is a hot topic here because others are leading or tend to lead with price.

One more question. What are you seeing in terms of your loan pipeline? Is your loan growth thus far in fourth-quarter looking as strong as it was for the past couple of quarters?

I think our pipeline still looks strong. Our C&I loans as a single category actually showed a small decline in this quarter compared to last quarter, and I think that is just the result of the nature of commercial lending lines of credit. There was a similar decline in the second to third quarter last year. So I think that is more related to seasonal matters as opposed to an overall trend. Yes, our pipelines continue to look good. There continues to be good activity, and that has continued, has been strong and continues to be strong.

Thank you.

Christopher Marinac from Fig Partners.

To follow up on the end of your last answer, you would suggest that the distractions internally in the last several quarters have not really made a difference to your actual production on the field?

No, absolutely not. Those folks know what their charge is, and we've got strong people in the field. And they have not been distracted from our mission at all.

Can you elaborate on deposit pricing in your footprint in particularly, do you feel any necessity to raise prices given the last couple of prime rate moves?

Well, we have said in the past that we have been pretty focused on managing the funds on cost and as you are probably aware, we do have very low costs in terms of comparisons to our peers. But having said that, there without a doubt has been some competitive pressure to raise rates to some degree over this period where rates including prime have gone up. So we've gone up some, not huge increases, but there is that pressure. And we see the beginning of competition in that area. Our philosophy hasn't changed in that we don't lead with price on the loan or the deposit side. So we will manage those rates carefully.

Richard Weiss.

First, I guess with the investment securities portfolio I see you have been winding it down, it still seems a little high. Do you think if Phil is taking over this is an opportunity to do a massive restructuring next quarter or so, or would you rather just bleed it out slowly?

Rick, that is a good question, and it is one that is on our minds. And I think that the best answer I can give you right now is that we analytically I think have a handle on what those options look like. The analytics change as rates and yield curves change and so forth. But I think it is would be accurate to say that we're going to be monitoring that going forward. Our intention is clear. We want to concentrate back on loans, deposits, fee income, community banking activities where we think we just have a stellar reputation and continue to deemphasize the investment portfolio so the exact speed of that or whether it would be rapid or slow, we don't have the final answer to that yet.

What would be some of the variables that you would look at that would determine (indiscernible) going to blow it all out at one time, would interest rates I guess move up suddenly? Would that precipitate that kind of change?

Rick, I would say the speed at which interest rates move would probably have a pretty significant bearing on how quickly we might move to dismantle the program in a quicker fashion. So that is certainly one of the main variables there, especially given the borrowings position and the costs that are involved in trying to unwind that portion of the program.

Okay, great. And I guess another question with respect to the departures of Larry and Jim, would there be any kind of I guess any kind of like one time payments coming up in the next quarter for their departures? Is there something that we should like figure on in the fourth quarter?

Yes, there could be some in the fourth quarter some onetime charges, yes, that's accurate.

Okay. I guess that's it for me. Thank you very much.

Matt Schultheis from Ferris, Baker, Watts.

This is actually Henry Coffey. A couple of questions then I will put you back on the speaker phone. Have you quantified what it would cost today for you to close out your leverage program?

Henry we have done some calculating on that. We are not at a point where we are prepared to talk about specifics as to how much that would cost us. But we will be calculating that. We will be trying to look at various scenarios there. So I think the question is relevant. I am just not prepared to give a specific answer on that yet.

Can you tell us what is the current size of the program?

Yes, the total leverage program topped out at its highest point several quarters back at about $350 million, and it's now down to about 275.

And that is being funded with? FHLV advances?

Yes, essentially yes.

And what is the size of the liability? Because you have some equity in this. What are the sizes of your FHLV advances that you dedicated to this?

It is essentially the same, equal. They are matched in amounts roughly speaking.

At the -- in your 10-K you did show some numbers when you did show your mark to marks in your footnotes. What would the costs be of just simply prepaying $275 million worth of FHLV advances?

We don't have that number available right at this time, Henry.

And just a completely unrelated question. We were looking at your deposits. Can you give us a sense of what the mix is between core deposits and institutional CDs?

Essentially we have no institutional certificates to deposit whatsoever. Our entire deposit portfolio is what is generally considered core deposits.

What about the $100,000 plus CDs?

Yes, those tend to be individuals and some businesses we deal with, not institutional at all.

All right. Thank you.

Collyn Gilbert from Ryan Beck.

Maybe if I could switch gears a little bit to look at the noninterest side of the income statement, both on the income and expense side. The fee side of the business has seemed to be pretty volatile or have been pretty volatile this year and showing pretty significant declines in the third quarter relative to the second. Can you just kind of speak to any initiatives sort of going on there and incentives, or if the margin is compressing if you are putting more emphasis into growing those lines of the business?

Collyn, yes, and to the last part of your question, absolutely more emphasis. It has been an emphasis of ours for some time, but continuing to stress the importance of fee-based income as being important to us from the standpoint of a consistent income stream. I believe, if I understood the other part of your question correctly, that variability is pretty much totally a result of mortgage banking revenues and the changes that occur in that based on the interest rate cycles.

Insurance agency commissions have been down, and I think that in the second quarter there was -- I think you guys attribute it to seasonality, but then it was again down in the third quarter and investment product sales were down pretty substantially again in this quarter, as well as on the trust side.

Collyn, on the trust side, in the second quarter there was a one-time adjustment made related to the way we were accounting for certain fees in that area. So the highness of that number is more the aberration than the trend. But if you look back over the other quarters of this year and into the latter quarters of '03, you will see that the trust department income continues to grow on a steady pace.

Okay. And then on the expense side, I think it probably is the first quarter I've ever seen you guys have a decline in -- a linked-quarter decline in operating expenses. Can you speak to what specifically you are doing on that front and if we could expect to see continued expense controls going forward?

Well, yes, expense control has been a definite, kind of an emphasis here for some time since our earnings have moderated and we aren't getting the kind of increases we like. That has mostly been around such things as managing personnel numbers and costs, looking at opportunities when positions are open to consolidate positions and create more efficiencies. So there has been a real emphasis on controlling human resources costs.

There has been an emphasis on looking and on the contractual relationships we have with outside vendors for various things. And as a matter-of-fact, we have had some significant renegotiation with our primary data processing provider. So those kinds of things have been important to us and are really ongoing. We understand that the efficiency ratio is higher, not where we want it, and we are working hard on the expense side to get it down. Part of the answer is also revenues. That is also part of the answer, we think. We don't think it's an all one or the other. But clearly expense control is high on our agenda.

Okay, and then just a last question, and I think, Hunter, maybe you alluded to it. Are you no longer giving earnings guidance? I mean you guys gave guidance or lowered guidance or whatever it was two weeks ago. Is that the last that we are going to hear from guidance then from you all, or do we still stick to what you had said then, or are we starting from a clean slate?

We don't have any new comments on earnings guidance for '04. And we are not yet ready to comment on '05. And I don't think in our past practices we have given guidance this early for this next year.

There is no changes necessarily to the guidance you gave in '04, 2 weeks ago or whatever?

That's correct.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Bryce Rowe, Legg Mason.

Thank you. Good afternoon. A couple questions. First one is can you all talk about the efforts to expand in Frederick County? Second question would be what is the interest rate sensitivity analysis yielding at this time? And then possibly a third question.

Frederick has been, as you know, an area of interest for us, and we continue to develop branches there. We have plans to continue to expand in that area. So we haven't changed our mind on Frederick. It is maybe a little too early to pass judgment totally on the success there in terms of deposit growth and loan growth. But we are very encouraged by what is going on there. We went in there, as you may remember, as at least in part because of independent banks that were in that market that exited or were purchased. So we are very optimistic about Frederick County and plan to continue -- Frederick City and County -- and plan to expand there. Interest sensitivity analysis, Phil will make a comment on that.

Bryce, I think if we continue to see the trends in the positive direction of both the short-term and the long-term interest rate risk position. A lot of that having stemming from the changes we made, the repositionings that we talked about before in terms of on the asset side of the balance sheet and so that position continues from a risk standpoint to improve. And we also continue to see a tremendous amount of premium, so to speak, in our core deposit base as we continue, as discussed in earlier comments about our abilities to control our cost of funds there as rates at least on the short end, continue to rise a little bit.

Okay, thanks. And I guess the last question is more qualitative than anything else. Can you talk about -- you may not be able to answer this, but what is the Board thinking right now especially given the tougher year of earnings that you experienced the last 12 months, 12 to 18 months?

Bryce I understand what you're getting at, I think the Board is committed as ever to being the kind of institution that we have carved out a reputation for being. And that is high-touch, very involved in our local communities, a real equality community bank and an independent bank. I think our Board values that type of organization and values what we've been. They want to continue that. I think they as well as management are fully aware that that has to be a company with good financial results, and that's why we are so focused on getting those back to more high-performance type levels. We think we can, and I think the Board is optimistic that we can. And committed to being (technical difficulty) organization.

Okay. Thanks.

Mr. Hollar, at this time we have no further questions.

Okay. That wraps up our questions. We want to thank everybody for participating and remind you that we love to receive your feedback on any improvements we can make on the call. You can e-mail us at IR@SandySpringBank.com. Thanks for joining us today.

Thank you, and this does conclude today's conference. You may disconnect at any time, and have a great day.