Sandy Spring Bancorp Inc (SASR) 2005 Q1 法說會逐字稿

Good day. All sites are now online in a listen-only mode. Now, at this time, I'd like to turn the program over to your moderator, Hunter Hollar. Go ahead, please.

Thank you. Good afternoon and welcome to Sandy Spring Bancorp's conference call to discuss our performance for the first quarter of 2005. As usual, joining me here today is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel and Corporate Secretary of our company. The call today is open to all investors, analysts and the news media. We're also doing the usual webcast of today's call, and there will be a replay of this call available at our website beginning later today, and it will be up for about 48 hours. We intend to open up the call very quickly here so we can take your questions after just a very brief review of the highlights. Before we make our remarks and then take your questions, Ron Kuykendall will make the obligatory Safe Harbor statement.

Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risk and uncertainties. These forward-looking statements include statements and goals, intentions, earnings, and other expectations, estimates of risk and future cost 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 very 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.

I think the main news we would like everybody to take away from the earnings release issued earlier today and from this call is that our first-quarter results begin to provide evidence that we know how to restore our performance to a high-performing category. In fact, we have already gone a long way toward achieving that goal, given an ROE for the first quarter of about 16.2% versus 12.9% for the third quarter of last year and a loss for the fourth quarter when we prepaid Federal Home Loan Bank debt, incurring prepayment penalties, and sold some certain securities.

We certainly have a renewed sense of enthusiasm here among our leaders of the various business units because we are now out from under the performance drag of the leverage program and all of the attention that that had previously gotten. Let me reiterate that we have been doing a good job all along, even during that emphasis on the leverage program, in executing the fundamental elements of community banking which include certainly making quality loans, taking deposits -- both of those at above average growth rates -- while continuing to throw our fee-based businesses and setting standards of excellence for service while we get better and better at true client relationship management. So all of those pieces have been in place.

However, over the last several quarters, our fundamental success has unfortunately been largely obscured. So it is understandable why now we have a renewed sense of enthusiasm to help drive the process of refocusing on our core businesses to get us back into a high-performance club once again. It is fair to say the commercial loan pipelines are healthy, and there are good signs that the demand in volume we have shown will be sustainable. Net interest income increased by about 12%, due primarily to an improved net interest margin first quarter to first quarter. The margin increased to 4.39% in 2005 from 3.81% in 2004, because of the loan growth and also from the exiting of the leverage program.

Our local economy is performing well, maybe even a bit better than expected, although a bit of caution is always in order with higher oil prices behaving as they have and interest rates likely to continue to rise. But nonetheless, we think our local market is in good shape and we are fortunate, of course, to operate in such a good market. Our loan quality continues to be outstanding. At the end of the first quarter, the allowance for loan and lease losses represented coverage of about 6.5 times nonperforming loans, which is certainly a strong coverage. On the deposit side, we are satisfied with our trends, even though this is one of the most competitive deposit markets on the East Coast. We have made some recent investments in our branch network to improve our coverage in a couple of the high-growth areas in our footprint.

Our non-interest income source, or I should say one non-interest income source where we are undergoing a strategic change is fees on sale of investment products. In essence, we are shifting our emphasis and our target clients from transactions to acquiring assets under management through our broker-dealer partner, UVEST. This strategic shift tends to lower our current income, but it helps us build a more annuitized stream of income for the future. In addition, it helps us form stronger relationships with our clients. So our growth in this fee income area for 2005 may be modest, and it is down this quarter, but we should see stronger growth in future years. So I wanted to take a minute to explain that particular non-interest income area. Certainly not a de-emphasis there but a change in strategy.

Our insurance business had a good quarter. Insurance agency commissions increased 62% over a year ago, due to higher premiums from the commercial property and casualty lines, and also, of course, we acquired an additional insurance agency, Wolfe & Reichelt, in December of last year. So the revenue stream from this is coming online now as well. The trust business is growing, continuing to grow; produced a 16% increase in fee income. Suffice it to say that we recognize how important it is to develop new sources of fee-based revenue, and we intend to concentrate on creating new opportunities there as we move through 2005.

So those are just a few of the highlights which we can expand on as we take your questions. Operator, can we have the first question, please? We would appreciate if you would state your name and company affiliation as you come on, so we will all know with whom we are speaking.

(OPERATOR INSTRUCTIONS) Jennifer Demba, SunTrust Robinson.

Jennifer Demba, SunTrust Robinson Humphrey. You had a pretty strong increase in insurance commissions. Was any of that contingency income?

Yes, there is some contingency income there, and you have identified one of the characteristics of this type of income. There is some lumpiness when those contingency fees are received. So yes, our percentage increase is driven up a little bit by the fact that there was more contingency income in this quarter than the quarter a year ago. That is a result of increased business and good experience of the agency. So it is a positive factor.

How much contingency income was there in the quarter; do you know?

I don't know that figure. Phil, you can help me out there?

Yes. Jennifer, state it this way, it was about $400,000 more in contingent income the first quarter of this year than it was the first quarter of last year. So if you want to look for what kind of was the incremental piece here, that is about what it was. It was about 38% of the total agency commission income for the quarter.

Okay, thank you.

Matt Schultheis, Ferris, Baker Watts.

Good morning, this is Matt Schultheis with Ferris, Baker Watts. You mentioned in your lower deposit fees that you were experiencing lower insufficient funds charges. Can you elaborate on what you think might be driving that?

Yes, that is I think in part a little bit of an industry question that a lot of banks, if not most, are experiencing, and certainly we are. There are several theories there. I don't know that we can pin it down precisely, but certainly a change in customer behavior is one theory; that customers are becoming more sophisticated, understanding what the cost of overdrafts really are. So we think that is in there. The propensity of people to use electronic means of payments is another factor. So certainly we don't like the trend particularly. We don't think it is unique to us, and we don't think it is because we are necessarily losing customers, but we do recognize that it could be a result of some of the segments we are pursuing being higher income. And, of course, our whole market tends to be a higher income market that may have a better handle on how to avoid those charges. We also think there is a greater use of overdraft lines of credit, which does produce some fee income, but not the per-check kinds of fee income.

Okay. Next question, do you think this 18.4 million in non-interest expense is a reasonable quarterly run rate going forward, adjusting for cost of living type of things?

Matt, I would say that is pretty accurate. I think if you were to go back and look at the fourth quarter and pull out the onetime nonrecurring things that have certainly been covered in the past, you would see that we had it that level pretty consistently now for the last two, almost three quarters of total non-interest expense. So I would say that is probably a pretty good bet.

Two more questions. Do you know what your mortgage volume, origination volume, was for the quarter?

I'm not sure if we have that exact number. We are checking here right now, Matt. Certainly the volumes have stayed pretty good. The mortgage business is significant for us. It is not like we are in and out of it.

Yes, I would say probably about $100 million in total overall loans between what was sold to the outside investors and what we added to our own portfolio.

Okay. Do you have seasonality in the rest of your loan portfolio? Do you find that the first quarter is slower than any other quarter?

Typically, yes. A little slower in the first quarter, usually because of the kind of year-end slowdown or December slowdown in applications and so forth, and then a little slower in the first quarter and then picking up, exactly.

The last question I have is related to your net interest margin. Your loan to deposit spread didn't really change on a link quarter basis. Obviously, you had significant adjustments to your average balance sheet. Do you see your margin basically staying fairly stable where it is right now?

Yes, I would say that is our outlook there, Matt. Again, the key is going to be what it is going to take for us in terms of deposit prices to get the type of deposit growth we want to fuel whatever the loan growth on the other side of the balance sheet is going to be. So if we have to adjust there, you could see some impact to the margin. But overall, we are pretty comfortable with where it is right now. And with prospect for rates rising going through the rest of the year, at least the way we see it, we think that is a sustainable level.

Thank you very much.

Rick Weiss, Janney Montgomery Scott.

Let me follow up a little bit on Matt's question. I guess the loan growth, it looks like it was pretty good but slower than the sequential quarter of growth between September and December. Would you think that is going to be picking up again because of the seasonal factors?

Yes, we do think it is going to be picking up again. I think we even noticed in the prior year kind of a lag in the first quarter, so we think that is kind of typical, Rick. So yes, the pipeline information, the anecdotal information from our commercial relationship managers, we think that is going to pick back up.

When it comes to funding these loans, how do you anticipate doing that?

I think we're going to hopefully do it the old-fashioned way through our core deposits as a primary source. And then as necessary, I think you will continue to see us liquidate the investment portfolio as necessary to fund anything additionally. The investment portfolio now is around 27% of assets, and we think that that number as a percentage will probably continue to decline. And it will decline according to what is necessary to fund the additional loan growth.

What ratio would you think the securities assets would be, just for liquidity purposes? Could you take it down below 20%?

Twenty is probably a pretty good level to look at and feel comfortable with. Again, it could go lower than that, but that is probably a level spot to go towards right now.

One more question with the loan portfolio. About what percentage of your loans would you say are adjustable?

Between prime-based loans in the commercial loan portfolio and some adjustable-rate loans in the mortgage portfolio, it is significant, Rick. It is probably somewhere in the neighborhood of half or maybe a little more of our loans.

Just one more question. I have been reading -- hearing commerce is coming down, and a lot of your competitors are doing defensive strategies, longer hours. Some of them, I think, was even having a coin counting machine in their lobby. Are you doing anything in anticipation of commerce or in response to the competition?

That is an interesting question, and certainly we stay current on what new competitors are planning to do. We know that some specific banks have answered some of the commerce strategies with coin counters and so forth. But I would say in general, our answer is just continuing to get better and better at that interrelationship with the customer, reacting to their needs, understanding their needs, targeting our efforts based on good marketing data, so that we are going to clients and potential clients with financial services that they need based on their income and lifestyle and point in the demographic curve. So I think that is really our answer.

It is not as headline grabbing maybe as some of those other items, but I think in our individual market here, we have gained a pretty good reputation with that high-touch approach. I would say that is our answer, and we like that answer. It reflects who we are, reflects how we go about things. And I think some of those other types of strategies are just not reflective of how we have approached the business. Not that there is anything wrong with coin counters or longer hours and, in fact, we'll monitor hours and really try to give clients what they need in terms of expanded hours. We haven't made a decision to expand any hours at this particular point. We have opened some new branches in high-growth areas, so that is in part our answer to this. So we will continue those types of responses.

Thank you very much.

Collyn Gilbert from Ryan Beck.

Good afternoon, guys. Let me start with a couple of follow-ups to some things that have been asked. First of all, following up on Rick's question, in terms of the percent, Hunter, you had said 50% was adjustable. What about specifically repricing with time. Do you know what percentage of the portfolio does that?

Yes. We don't have specific information on that, Collyn. I would be pressing a little bit to give you a specific answer. As I said earlier, it is significant, and certainly rising rates give us some help there. I know that is what you're trying to get a better handle on. We are just sitting here looking at some information. It is probably a third, roughly, prime-based.

Okay. Just spend a couple of minutes here on the leverage in the securities portfolio. Can you remind us again of what exactly was taken off in the first quarter and what the spread was on that leverage that was taken off?

We thought we were never going to have to talk about this.

I waited till the end.

First of all, it was all in the fourth quarter, not in the first quarter.

So the 160 million that you saw, the reduction in the securities portfolio coupled with the reduction in borrowings, I think was like 140?

In the fourth quarter we took $195 million off of both sides of the balance sheet; advances on the liability side and primarily agency securities on the asset side. That was the transaction or series of transactions that took place back in November last year.

What about this quarter, though?

This quarter there have been some further reductions on both the investment portfolio and the borrowings, but those are primarily by maturity. Although there has been a couple of sales out of the investment portfolio, very minor for periodic cash flow purposes, but that has been about it. On the liability side, the home loan advance position now is about 140 million. So it went down maybe 20, 25 million again. That was primarily through natural maturity.

Okay.

I guess the point there is that even though there is some securities left that may have been similar to those in the leverage program, there are some advances left, of course, with much lower dollar amount. We think the whole structure of the balance sheet is now much more traditional. So there is nothing that we track as a separate leverage type program. This is just much more traditional community bank funding going on in our balance sheet now.

Okay. In order to get that 5.5% yield on the securities portfolio that you're getting, have you had to extend the duration a little bit in the first quarter, or what is now the duration of that portfolio?

Well, by virtue of what we took off, which is a lot shorter term, the duration naturally extended by virtue of what was left. If you were to look at the composition there between the available for sale and in particular held to maturity grouping, there is a fair amount of municipal securities that were there are all along that are longer term in their nature. So that gives rise to the overall average yield being significantly higher than what it was before. As far as the overall duration of the portfolio, it is probably somewhere between 3 1/2 and 4 years. It has been that way pretty consistently now, since we did the delevering in the fourth quarter.

Okay. Do you all have a targeted goal for the efficiency ratio or where you think now with a lot of the noise out of the numbers and we're going back to kind of the basics here, where you anticipate that efficiency ratio to go?

Yes, Collyn, we would love to see that lower than it is now, down more in the solid mid 50%. I'm talking about the traditional ratio now, as opposed to where it is now, a little over 58 or so. So 53, 54, that is the kind of area we want to get to. We approach that not just as a cost-cutting matter. It is obviously growing revenues faster than costs.

Sure, okay. Then on the reserve side, obviously your history here of impeccable asset quality and low charge-offs can justify that 1%, but do you anticipate holding it steady there? Do you see it dipping down below 1%?

I don't see it dipping much below 1%. As you can see, we funded a bit in the first quarter, and we think we are going to need to fund throughout the remainder of the year. In fact, hopefully fund, because that will be based on loan growth. As we have said before, I know this is a little hard to get a handle on, but we do analysis that takes into consideration all of the regulatory factors that we have to, and so it is more than just a percentage of loans or assets, but I would not anticipate that going below 1%.

Okay. Finally, Hunter, you had mentioned in your opening comments just some recent investment in branches, and maybe that is the same thing when you then followed up by saying you had opened a couple branches in high-growth markets. Can you just give a little bit more detail on what you've done and maybe what the plans are from a de novo standpoint?

Sure. In early March we opened an office in Mount Airy, which is a portion of Maryland that actually right at the quarter of Frederick County and Montgomery County and Howard County and Carroll County, and it is a very high-growth -- what once was considered a far-out suburb of both Washington and Baltimore, but then a very high-growth area. So we are happy to have that office open. Then in early April, we opened a brand-new office in Rockville on Rockville Pike. Now, that was a former office, but located in an unattractive building and something that really needed to be upgraded. So we put a major facility at that site on Rockville Pike right near downtown Rockville, which we think is really going to make a statement for Sandy Spring Bank and give us some punch there in a very visible place in Montgomery County.

Then, in June, we hope to open an additional office in Howard County at the intersection of Route 216 and 29 in an area called Fulton, which also has a major residential development going on right now and throughout that entire quadrant. And then before the year is over, probably toward the fourth quarter, we hope to have an additional site in Frederick County in a high-growth area there. So that is sort of the quick rundown, and we continue to look for additional sites that makes sense as we fill in our map. But those are the ones that we know about at this point.

Okay. I said that was the last one, but I have one quick more just quickly. Looking at the average balances versus the period balances in the loan portfolio, I guess averages were up about 4% where period-end was up, what, about 2% on a link quarter basis. Was there some timing issues or something specific going on in there, in terms of what number we really should look at on a run rate going forward?

I don't think there is really anything that I could put my finger on other than just that seasonality. Things kind of grind to a halt in December, which then kind of spills over into a slower first quarter. I think if you look at past trends in quarter to quarter, in other words, slower first quarters in past years and then kind of what happens from there, I think that at least that can give some general feel for what happens. But we think it has picked up in the second quarter in the past, and will do so again this year.

All right, great. Thanks.

Bryce Rowe, Legg Mason.

Good afternoon. Two questions. One will kind of follow up to what Collyn was talking about. The first one, is there any level of a loan to deposit ratio where you guys start to feel a little uncomfortable? The second question is relating to the branch openings, and let's just talk about Mount Airy and Rockville for now. What kind of deposit growth do you expect out of them and what deposit products are you leading with initially?

First of all, on the branch openings, I guess your second question there, we are leading with some nice statement stuffers and mailings, highlighting some time deposits that have some unique features and are priced reasonably aggressively to gain new deposits there. Generally, we have looked at about a three-year, we think. It takes a branch about three years to get to a breakeven or to earning money, which occurs somewhere in the 20 to $25 million total deposit category. And we think these sites, Mount Airy being new, of course, Rockville is a former site. It is already much higher than that, but we think Mount Airy and Fulton in Howard County very much have the potential of getting there on time or possibly even ahead of time. Excuse me, your other question would you restate, Bryce?

Sure. Loan to deposit ratio, is there any level where you guys start to feel uncomfortable?

Well, we're probably right now sitting in the low 80% range, which is pretty significant for us historically; I think you would recognize, and actually feeling good about the fact that we have gotten to that point. And I think as long as we continue to stay in that 80, 85, to maybe 90% range is where we will continue to be comfortable. And if we get beyond that, I think we will have to start looking at it a little bit closer as to what we might have to do to ease that. But I would say from where we are right now and what we hope is going to happen, we are quite comfortable with where we are.

Is there anything unique going on in the market as far as deposit competition goes today versus maybe three or six months ago?

Well, I don't know that there is anything specifically going on. This continues to be a very competitive market. Every bank is running or it seems like almost everyone running some kind of special at one time or another. So it is just a matter of finding a unique spot on the spectrum to introduce a product that is of interest. But the other thing, though, I think it is important to understand from a strategic standpoint is we do try to avoid that direct head-to-head competition by emphasizing relationships with customers. And one of the ways we measure the success of that is the growth of non-interest-bearing deposits. So we have had good historical growth there, and we think we can continue that.

It certainly doesn't mean we don't react to competition on the interest-bearing side. We need to from time to time, and may need to more strongly as loan growth stays strong. But what we really like is that relationship kind of approach that gives us also the non-interest-bearing deposits.

Okay.

Mark Muth, FTN Financial.

Just a quick follow-up on the insurance questions from earlier. Do you have a break on how much was the result of the acquisition in December, how much of the revenue?

We don't have that breakdown right with us. Let me see if we can back into that. The Wolfe & Reichelt agency was a small agency, about 700,000, 750,000 in annual premiums. What I'm not sure is if there may be some again contingencies in that first quarter. I suspect there might be, but that is the rough revenue size of Wolfe & Reichelt on an annual basis.

Okay, great.

(OPERATOR INSTRUCTIONS) It appears we have no further questions.

So that wraps up the questions. Thanks everybody for participating in the call today. Please give us any feedback at IR at SandySpringBank.com at any time. Again, we appreciate your participation. The call will now end. Thank you.

This concludes today's conference. You may disconnect at any time.