Sandy Spring Bancorp Inc (SASR) 2006 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Sandy Spring Bancorp Inc. second-quarter 2006 earnings. 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 our pleasure to introduce your host, Mr. Hunter Hollar, President and Chief Executive Officer. Thank you Mr. Hollar, you may begin.

Good afternoon. Welcome, everyone, to Sandy Spring Bancorp conference call to discuss our performance for the second quarter's first six months of 2006. Joining me here today is Ron Kuykendall, General Counsel and Corporate Secretary of our company, along with Phil Mantua, our Chief Financial Officer who is calling in from outside the bank. 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 can take your questions after review of the key highlights briefly; before I make those remarks and then we move to questions Ron Kuykendall 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 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 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 operation do not necessarily indicate its future results.

Thank you, Ron. As we noted in this morning's press release, loan growth in the second quarter was strong, 17% ahead of the comparable period last year, and net income for the quarter in the six months were up 4% and 5%, respectively. The same external factors continue to be in play at midyear as we faced for several ongoing quarters now, it is a tough rate environment and competition remains intense for both loans and deposits. This is essentially consistent with our expectations for the balance of the year.

Under these conditions our relationship managers and others in contact with our clients on a day-to-day basis are doing an effective job working a very active marketplace to continue to bring in transactions that are consistent with our goals of not compromising either credit quality or pricing simply for the sake of booking higher volume. On the deposit side we continue to face the challenge of growing traditional core deposits in extremely tough interest rate environment and an equally tough and competitive marketplace. As reported, our net interest margin declined by 9 basis points over the same period last year and 5 basis points from the first quarter of this year.

Time deposit pricing is key and the growth we've experienced in commercial related accounts quickly sweeps into interest-bearing repurchase agreements priced to the short end of the yield curve. These repurchase agreement totals are now shown in the tables which accompany our press release regarding earnings.

A few other significant elements of managing our business growing fee-based income and controlling expenses, continue to show positive results and trends. Excluding securities gains, non-interest income increased 14% in the second quarter as compared to 2005. Trust and investment management fees increased to 133% due to the growth in trust assets under management and the acquisition of West Financial Services in the fourth quarter of 2005. Of the increase 238,000 was due to the trust side of the business, a 26% increase over 2005 and about 1 million came from West, and both of these according to plan.

Insurance agency commissions also increased 32% compared to 2005 due to higher premiums from commercial property and casualty lines and the acquisition of Neff & Associates in the first quarter of 2006. Fees on sales of investment products are up 19% over the prior year as a result of higher sales volumes. Visa check fees increased 11%, reflecting ongoing higher volume of electronic banking transactions. As expected, these increases were partially offset by a 38% decline in gains on sales of mortgage loans as that market has been receding as is well-known.

Noninterest expenses were $20.8 million in the second quarter of 2006 compared to $19.2 million in '05, an increase of $1.6 million or 9%. However, a large part of the increased overhead is attributable to higher salaries and benefits coming into our books following the acquisitions of West Financial Services and Neff and Associates. And of course the expanded staff we now have as a result of those acquisitions.

Taking out the expenses from West and Neff our noninterest expenses grew by 4.8% over the same time period in 2005. Outside data services grew during the quarter by 19%, mainly attributable to enhancements we've made to our data warehousing capabilities, and as we noted in our press release marketing expenses were also up 16% over the second quarter of 2005. Both of these areas are receiving long-term investments that are addressed under our strategic plan.

That is a brief outline of our news for today, which we can expand on as we take your questions. And as usual, please state your name and company affiliation as you come on. So operator, we can have the first question.

(OPERATOR INSTRUCTIONS) Matt Schultheis, Ferris Baker Watts.

Good afternoon. How are you? I have three quick questions. Is there some seasonality in the insurance commission line? It looks to me as if you have a linked quarter drop in insurance commissions.

Yes, not extremely seasonal, but the first quarter usually contains some contingent income. So it is not unusual for there to be a little seasonality and a bit of a drop from first quarter to second quarter.

Do you think that contingent income may decrease over time given some of the regulatory pressure on contingent commissions that we've seen?

We don't think that's going to have a significant impact. We, obviously that is kind of a current news topic, and probably still continues to evolve, but the kinds of contingent income that our agency gets on property and casual, we don't think is under significant attack. But again, that probably is yet to be totally seen.

Okay, I understand. You talked about loan growth, and on a linked quarter annualized basis your loan growth actually decreased. It was about 8.5% or so which was a decrease from the first quarter and the preceding several quarters. Do you see loan demand slowing in your market, or are you backing away from certain deals where you don't like the clauses that people are expecting?

Yes, Matt, there is a specific fact there that we need to mention, but let me address your overall question. We don't see loan growth decreasing or loan demand decreasing. Our pipelines of commercial business remains strong, and we see -- we don't see any cracks in that at all. As a result of the strong loan growth and our desire to change the mix of our balance sheet a little bit, we did sell $68 million in mortgage loans in the first quarter. So that had an effect on the loan growth number that you are looking at. But obviously those tend to be lower yielding loans than the segment that is growing the fastest, which is our commercial area. So loan growth still looks, prospects look good.

And lastly, and I think you might have touched on this but I think I missed it, asset quality during the quarter compared to first quarter, your nonperformers ticked up. Beginning of a trend or one relationship type of thing?

Let me get back to your previous question a second, Matt. I think I may have said that we sold mortgage loans in the first quarter. I was referring to the current quarter. In the second quarter we sold $68 million in loans, so I wanted to clarify that. If you would repeat your question again.

It looked on a linked-quarter basis like you had an uptick in your nonperforming assets. I was wondering if this is the beginning of a trend, or is this a one relationship that went on the nonperforming status?

We don't see any indicators of significant loan weakness or a trend beginning. I think some of those categories shifted around a little bit between nonaccruals and 90-day past dues, but and they are so small that they tend to be insignificant in terms of the total loan portfolio. But no, we don't see a trend beginning there. Actually from first quarter to second quarter our total nonperforming assets actually decreased. That's when you add nonaccruals and loans and leases 90 days or more past due. So there is some shifting around between those two categories, but the totals actually were down a little bit.

Okay. Thanks for your time today.

Mark Muth, FTN Midwest.

Good afternoon, guys. First question, with regard to de novo branching, the press release noted you recently opened a Frederick office. Are there any other near-term planned openings or any on the drawing board at this point that you can tell us about?

Yes, nothing that is close enough to talk about at this point. We are constantly looking for branches and have indicated that a couple a year is a pace that we were comfortable with, and I think if anything we may be comfortable with a little more than that going forward. Finding branch site -- we mentioned competition for loans to deposits, competition for branch sites is also pretty fierce, so you've got to work harder to find the sites. So don't expect us to stop de novo branching at all, but nothing else to announce or talk about specifically at this point.

Okay, and with respect to the deposit environment, obviously difficult for the entire industry right now. Can you talk about your thoughts with regard to paying up for end market CDs versus using other wholesale sources or continuing to remix securities under loans? And just what your thoughts with that going forward would be?

I might give you a couple comments, and Phil may want to add to that. I mean generally probably won't surprise you to hear that we much prefer end market CDs. We currently don't have any bought brokered kinds of CDs. It is an option we will continue to look at depending on what our funding needs are. But generally we are very much oriented toward paying up more for end market CDs where we can hopefully gain some relationships and some ability to sell other services. So we've run various CD specials in recent times to grow those non-interest deposits, and we will continue to do that although our core philosophy of relationship building not based only on price competition, will continue. There are certainly times when like now when you need to pay up in market to grow and we intend to do that. Phil, do you want to add anything to that?

The only thing I would add is based on Hunter's other comments about our sales in the mortgage portfolio from a liquidity management standpoint, we will continue to look at the various alternatives, probably like (indiscernible) before we would go out in the wholesale market and pay for those funds in comparison to what we're doing in the local markets.

Okay. Thanks, guys.

Rick Weiss, Janney Montgomery Scott.

I'd like to follow up on Mark's question. Just have you had any success in cross selling other products and services to your CD holders?

I don't know that I can quote you specifically there. We've bragged for a long time about our ability to interact with customers on a relationship basis and to -- and we have a well-developed sales culture. By the same token we recognize that certain CDs are, seek the best rate or are very competitive rates that we don't think we'll cross sell 100% of them by any means. But we do think many of the profiling processes we use in our branch, the proactive ways that we contact customers will give us a shot at some of them. I realize I am not quantifying an answer, but I think we are pretty well equipped to take advantage of opportunities that present themselves.

Let me ask, Hunter, are you seeing a lot of customers who are starting to want to shift into the CDs from your savings accounts? Is there a lot of pressure coming in that direction?

Phil, you want to comment on that?

Rick, there is probably a little bit of migration in that regard. (technical difficulty) the balance position in our traditional savings and money market accounts. They are basically flat to being down a little bit. You could probably surmise (technical difficulty) on there. But I think most of (technical difficulty) the majority of those monies that are (technical difficulty) the growth in CDs are (technical difficulty) from outside the bank. But to your other question, (technical difficulty) fairly significant increases in the fees on sale of investment products last year not that I have anything definitive but I would think that some of that is also attributed to us mining out some additional (technical difficulty) some of those folks that are bringing their CD money and having that flow into our mutual fund and annuity products.

Okay.

The other shift that is clearly going on, not specifically to your question but our repurchase balances are growing significantly, and so clearly we think there is some shift going on from what may have been in past times commercial demand deposits shifting over to where they can earn a significant interest rate. When rates were lower probably was not as much pressure to make that shift, but now there is economic pressure to make that shift.

One more question. The sale I guess the residential mortgage loans, $6 to $8 million, were they primarily fixed rate?

No, these were primarily adjustable rates. We don't book, have never really booked lots of long-term fixed-rate, so these tended to be adjustable rates. But again, not priced as advantageously as the kind of loans we're booking now. But the specific answer to your question there are mostly adjustable rate mortgages.

So as a result I guess that is why your loan loss allowance reserve ratio jumped up to 1.06?

That is a part of it, yes.

Okay. Thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Good afternoon. You said your loan pipeline still remain strong, and obviously there has been a lot of press on the slowing housing market in your area. I was wondering if you could kind of give us some more detail if you can on your pipeline and what you are seeing by loan category.

Of course where we track pipeline most carefully is in commercial deals, commercial real estate and more traditional C&I loans. And in both of those cases the pipeline remain strong. It has been strong throughout this current calendar year, even of course back into last year. So it has remained at the kind of levels we have become used to. Now clearly in the residential mortgage side the refinances are off; the applications that we are taking are down somewhat. But again, the commercial pipeline remains good. And new home sales and lot development continues to be moving along, and certainly the heated market is no longer here, existing homes that go on the market now are staying there for 30 days or so. But for land and residential development and new home sales at least in the projects that we are in, continue to be moving along fairly well. And the limiting factor seems to continue to be the permitting process and several local jurisdictions as opposed to the market coming to a halt. We certainly have not seen it come to a halt.

Thanks. I appreciate it.

(OPERATOR INSTRUCTIONS) Collyn Gilbert, Ryan Beck.

Good afternoon, guys. A couple follow ups, and I apologize because you may have just answered this with Jennifer's question, but maybe Hunter if you could just speak to the construction portfolios and some of the trend you're seeing in that business and if she asked that -- is that what she just asked?

Similar, maybe not specifically that question, but the construction portfolios, there actually two of those, you are probably asking about the more commercial construction where we're doing the residential development and that sort of thing continues to be pretty strong. And the projects we are involved in continue to perform. Where we have another little niche business where we do residential construction lending for homeowners that is probably off a little bit, but generally residential construction market remains pretty strong.

And the timeline for these projects is still within what would you say?

Most of the absorption rates are continuing on kind of on original budgets. You know it varies by project and market and so forth, but tending to stay pretty much on original projections.

And then this question may be for you, Phil. If you could just talk a little bit about what your strategy is now with the securities portfolio and it looked as if borrowings and investments rose this quarter. And I was just curious as to what might be driving that.

On the borrowings side, and Hunter talked a little bit about this, that is where we classify the customer repurchase agreements along with any short-term borrowings that we might go out and acquire. And some of the borrowings (technical difficulty) another means for having to (technical difficulty) from the end of the first-quarter primarily because of requirements (technical difficulty). Other than that (technical difficulty) continuing to be longer term to have the securities portfolio decline as (technical difficulty). That really hasn't changed. It has just been more by necessity here from a collateralization standpoint that we've had to buy a couple of issues.

Okay, and then finally on the credit side Hunter you had said you are pretty comfortable currently with the outlook for credit. But what, then, was sort of driving the increase in the reserve level? I guess going from 102 to 106 from the first to the second quarter?

I think just in general we've got a whole analysis we go through which considers several factors. But I think to boil it down we recognize that shifting the portfolio from residential mortgage loans to more commercial relationships in some sense increases the risk parameters of the portfolio and calls for a higher reserve. I think that is the short answer.

Okay, and actually just one final question. If you had to indicate where you saw the most competitive pressures, pricing pressures on the lending side, which areas are you seeing, and what sort of is the landscape of competition? Is it some of the bigger guys, some of the smaller guys?

That is in some ways a hard question to answer. It is on the market and the type of loan and so forth. So I would say for the most part the competition is from other community banks, particularly as I'm sure you are aware in the commercial real estate area we don't compete with larger banks too much. And even in traditional C&I lending it is more from other community banks, certainly including the Maryland-based banks, all the mercantile affiliates and the Providence offices; certainly competition from there, that the Fulton organization with Columbia still here. So I would say as we battle day-to-day those are some of the ones we probably compete with most frequently.

Is there any one sector that has just gotten out of hand from a pricing perspective more than another?

No, I don't think so. As I said in my opening comments we really try to avoid wholesale kind of giving in to pricing pressure just to book loans. So we are pretty careful on that. So I would say no particular segment comes to mind there.

Okay, great. Thank you.

I'm showing no further questions in queue.

So that wraps up our questions. We want to thank everybody for participating, and remind you we appreciate receiving your feedback to help us evaluate how we do these calls. Thank you for participating.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.