Sandy Spring Bancorp Inc (SASR) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sandy Spring Bancorp Incorporated fourth quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Hunter Hollar, President and Chief Executive Officer. Thank you, Mr. Hollar, you may begin.

Thank you. Good afternoon. Welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the last quarter of 2006, as well as the full year. Joining me here today as usual is Phil Mantua, our Chief Financial Officer and Ron Kuykendall, our Chief Counsel. 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 a brief review of the key highlights before I make some remarks and 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 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 operations do not necessarily indicate its future results. Thank you.

Thank you, Ron. Let's take a few minutes to briefly review some of the main performance highlights and then we have some summary comments about the transaction we announced December 14th involving the acquisition of CN Bancorp and then we'll of course take your questions about any of these topics. Comparing December 31st, 2006 balances to December 31st a year earlier, total assets increased 6% to $2.6 billion with growth in the loan portfolio as the main driver. Total loans and leases increased 7% to $1.8 billion compared to the prior year.

On the other side of the balance sheet, customer funding sources, which include deposits plus other short-term borrowings from core customers increased 6% to $2.1 billion at December 31st, 2006. Stockholders' equity totaled $237.8 million at year-end and represented 9.1% of total assets compared to 8.9% a year earlier. For 2006, return on average stockholders' equity was 14.33% compared to 16.21% for the prior year. Return on average assets for 2006 was 1.28% compared to 1.41% for the prior year. The other two major pieces of the picture, non-interest income and asset quality, were as follows: on the non-interest income side we continued to see stellar performance from West Financial Services and now that we've completed the first full year of operations with the West integrated into the Sandy Spring organization we couldn't be more pleased.

Separately, coming out of Sandy Spring Bank itself we saw significant growth in non-interest income due to good gains on the sales of investment products through our branch system, as well as from trust and investment management fees. The continuing ramp up of production from Sandy Spring Bank is being driven by a greater number of financial advisors working throughout the branch network and we've been building their ranks throughout the year and are now at about full capacity. Essentially every business line producing non-interest income was favorable ahead for the year with the exception of mortgage banking, which is really just a reflection of overall market conditions, having trailed off from -- for where we were over the past couple of years. I would note, though, that the quarterly trends over the last two quarters in mortgage gains have been positive.

In the area of credit quality, the story remains the same. It's excellent. Across all the portfolios, net charge-offs were less than 1/10th of 1% of total loans. The provision for loan and lease losses totaled $250,000 for the fourth quarter of 2006 compared to $1 million for the fourth quarter of 2005. And for the full year, the provision was $2.8 million compared to $2.6 million for the prior year.

Just a quick note on expenses. Non-entry -- non-interest expenses were $22.2 million in the fourth quarter of 2006 compared to $20.9 million in 2005, an increase of $1.3 million or 7%. Marketing expenses increased substantially over the fourth quarter of 2005, which is a provision of our strategic plan to raise brand awareness across our markets. Other non-interest expenses increased 43% over the prior-year quarter due primarily to increases in consulting and other professional services fees. More specifically, this involved technology-related consulting fees and professional fees for enhancing our treasury management product offerings.

Quickly I'll turn to the pending acquisition of CN Bancorp announced in mid-December, which we expect to close during the second quarter of the current year. Upon completion of the deal County National Bank will become a new division of Sandy Spring Bank and will initially operate under the County brand. The plan is for the current CN Bancorp Chairman and CEO Jan Clark to serve as its president and John Warner will also continue as a senior officer. This is a logical fit that fills in our existing network in Anne Arundel County and adds about $151 million in total assets, $97.4 million in net loans, $129.4 million in total deposits. Solid core deposits by the way. And also four full-service branches located in Glen Burnie, Pasadena, Odenton, and Millersville, Maryland. There's also an administrative center in Glen Burnie. These locations are all in the northern half of Anne Arundel County whereas the existing offices are clustered around Minneapolis in the central region of the county.

In keeping with our basic acquisition criteria, this transaction is expected to be accretive to Sandy Spring in the first full year following the closing and we expect to reduce operating expenses by 25% by eliminating operational redundancies. At $44.1 million in cash in stock, we like the pricing, we like to be able to find more such opportunities within our footprint. It's a comfortable size, good branch locations are very complementary with where we already have offices, a stable core deposit base as I mentioned earlier. We think great cross-selling opportunities for Sandy Spring with our broader product offerings and a solid group of employees. So now along with Potomac Bank, we have announced two acquisitions during the latter part of 2006. And we will be working to close and integrate those over the next few quarters. So that's an outline of our news today, which we can expand on as we take your questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please, while we poll for questions. Our first question comes from the line of Julienne Cassarino with Prospector Partners. Please proceed with your question.

Hi. Good afternoon.

Good afternoon.

Hi. I just wanted to ask about the deposit growth. It's very strong in the quarter. I was just wondering if any of that were off balance sheet deposits coming back on the balance sheet for whatever reason?

Uh, in part I believe some of the deposit growth in the quarter can be attributed to a change in some products that we sold to our commercial customers, namely repurchase agreements and some of those repurchase agreements which were shown on our balance sheet as other borrowings moving from that category, other borrowings, into deposits. So that's one of the reasons that, in our press release, we talk about customer-generated funding because we add those together, we really think they're core, they are core funding for us because they come from our customer base. So we add those two together and think that's probably a little better way to measure period-to-period increases in customer-generated funding as opposed to just looking at the deposits.

Okay. Great. Thank you.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one. Our next question comes from the line of Matt Schultheis with Ferris, Baker Watts, Inc.. Please proceed with your question.

Good afternoon.

Hi, Matt.

Hi, Matt.

You may already have touched on this and sorry if I missed it. You obviously had a slowdown in residential construction loans, decrease in your overall loan balances dropped on a one-quarter basis. Are there any trends there that you could discuss or are there any actions that you're taking consciously to slow down lending in any of these areas?

Yes. Good -- good question. In a sense there is. And let me explain that.

I think some of the loan growth or lower loan growth in some of those categories is just market-driven -- residential construction loans, for example, just aren't quite as healthy in the market, so those were down somewhat. When we look at residential mortgage loans, and that is a category that also declined, we are intentionally changing the mix of our portfolios. I think we touched on this in a prior conference call. So the former 3/1 and 5/1 R mortgage loans that we were booking into our portfolio because we were comfortable with that interest rate risk, we are now selling those in order to reposition our loan portfolio over time more toward higher-yielding commercial loans. So, in part, that residential mortgage line is down because we are selling those loans and that has helped our gains on mortgage sales, which you will notice had a nice uptick in the fourth quarter, but it hurts our balances in that category.

Commercial loans continue to move up. Consumer loans have been kind of flat over the year. We continue to be active in home equity and lending primarily generating new loans, but they pay up, pay down and have been somewhat flat. Our commercial loan pipeline continues to be strong, probably not as strong as it was going back a year or 18 months ago. But still pretty strong and robust commercial lending activity.

Okay. That's it for me. Thanks.

Our next question comes from the line of Steve Moss with Janney Montgomery Scott. Please proceed with your question.

Good afternoon, guys.

Hi, Steve.

Hi, Steve.

I just wanted a little color with regard to your expectations for the margin going forward.

Steve, I would say we are probably not going to be very different than a lot of other banks as you've seen here throughout this quarter going into the next quarter or two, we anticipate that the margin will continue to compress some, given what we think is a continuation of the inverted yield curve until at least sometime into the second quarter of the year. I mean, as you know, most banks, like ourselves, have done the majority of our funding in recent months with CD-based products, which even as rates move initially are going to be slower to react because of the term, nature of the account. So there's going to be some lag there even as rates move in the other direction for us to be able to recoup on that cost. So I think we'll continue to see some similar compression as we have here recently through the first half of next year.

Okay. And changing subjects. On the M & A front, obviously you've done two deals here. Are you still seeing additional opportunities and are you interested in doing another deal?

Yes. We have said for the last number of quarters that we really wanted to be more active and be a little more intentional about seeking out good opportunities. As you mentioned, we have these two, which are still pending, of course. One is -- we think will close later this quarter and the other in the second quarter of '07. But we'll continue to look for deals of this size, particularly that these two pending transactions are.

We still want to be pretty disciplined about price, but we also want to recognize that we think we have some strength in this market, which can be leveraged and used. And there are still a number of banks in Maryland and Virginia, surrounding areas in this size range that we think would probably be more interested in affiliating with an organization like Sandy Spring than a larger out-of-state bank in some cases. So the short answer is yes, we'll keep our eyes open and continue to look for opportunities. We also don't want to forget -- and this is a fine line that we walk, of course -- we don't want to forget the importance of being good at integrating, closing and integrating these two pending transactions. So we'll really be focused on that in the short run here, but then lifting our eyes to other opportunities thereafter.

Okay. Thank you.

Our next question comes from the line of Bryce Rowe with Robert W. Baird & Co., Inc. Please proceed with your question.

Thanks. Good afternoon, guys.

Hi, Bryce.

Hi, Bryce.

Just a question on the marketing budget for next year. Is it in the same range as we've seen in the last couple quarters?

I would say it's probably more so in the same range as what we've done over the course of the entire year.

Okay.

With some incremental growth, comparable to what we'll do across most expense lines here. But not nearly to the degree of what we did in '06 over '05.

You may recall -- and we've talked about this a number of times -- that we're looking at bringing the marketing element of what we're doing up to a certain level here, for which we haven't been for a number of years, primarily in, as Hunter said in his opening comments, related to brand awareness and that will have to continue. Of course with also the new market in the Northern Virginia area, that is going to come on board as part of the Potomac deal, as well. So from the standpoint of the core element of marketing expenses as we know them now, I think comparable levels and then slightly above as we move forward.

Okay. Hunter, the -- the consulting fees you noted in your comments, the Treasury Management product, is that -- was that more one-time in nature, or is that ongoing?

That specifically is more one-time in nature as we got a new product up and running, which I really referred to a little bit earlier as we were able to bring some balances from short-term borrowings to a deposit product. So that was more one-time, yes.

Okay. And can you guys share what that number was?

Well, it's -- there are some other -- other elements of those numbers that are more one-time as well, Bryce. I would say on the -- on a length basis where we're looking at -- it looks like about a $1.2 million in increase between the third and the fourth quarter.

Right.

I'd say roughly half of that for a variety of different reasons, including the ones Hunter mentioned earlier are one-time in their nature.

Okay.

There's some other stuff in there that is more runrate-oriented for the -- as you look at the overall year, but there were some timing elements to just when those things occurred here between the third and the fourth quarter that are mainly the other half of that $1.2 million increase.

Okay. And then the last question goes to deposit pricing. Are you all seeing any letup from a competitive perspective in terms of deposit pricing?

I would say not really. We've taken some opportunities from time to time here where we thought because it -- just our own liquidity needs that -- where we could shave a couple of basis points, we would. And got the desired effect, as you might suspect, which is less volume. So given that insight and experience, I would say, no, things are still as hot and heavy as they have been for some period of time.

Okay. Thanks, guys.

Sure.

Thanks.

Our next question comes from the line of Mark Hughes with Lafayette Investments. Please proceed with your question.

Good afternoon.

Hi, Mark.

Hi. Two questions. First is on the loan loss provision. You know, this was -- I guess it was about a $1 million in the second quarter, $600,000 in the third and now $300,000. Is that a case of, you were trying to build it to a certain level, asset quality remains good and you don't feel you need to keep it at that $1.25 million rate, or is there something else there?

Yeah, no. I think your assumption there is roughly accurate and we go through a very detailed analysis of all kinds of factors, including economic conditions and large loans relative to total portfolio, some things that are kind of soft in nature, problem loans being one of the more specific factors that we look at. And when we mixed all those together we simply didn't need to provide as much in the fourth quarter as we had earlier in the year.

Now, of course, the absolute provision number, probably depends as much on loan growth in the future as anything, so loan growth will affect it. And the other factor that -- being an old credit administration guy, I am always thinking about, is the much anticipated crack in asset quality. So if we should experience any decline in asset quality like many are expecting to some degree, then that would affect loan loss provision and how much we needed. So we don't necessarily expect that. We don't see any signs of asset quality, loan quality deterioration at this point.

But I just throw that in because under some circumstances if it became prevalent within the total market we would probably feel it to some degree. So all those things get mixed in to arrive at what's needed for the loan loss provision. But I would say we're -- we have gotten it to a very comfortable level. We think it's very adequate.

Good. Changing directions here a little bit. A couple years ago when you bought West and the insurance company, your acquisitions tended to be in the -- something that's generating non-interest income. The last two acquisitions you've done have both been banks. Is that just -- that's the way things happen to come along, or are you thinking more -- we're more interested in the banking side to that? Or is this just -- it happened to be that way?

Yes. It is probably a little more of the former than the latter. In other words, it just happened that way. Opportunities came along in that order. But we are -- we're still interested in both.

The question earlier about net interest margin and our continued expectation that there's going to be pressure on the net interest margin just means the importance of non-interest income continues. So making key acquisitions that will add non-interest income is important to us. So it's a matter of when the opportunities come up and where they are and more so than us emphasizing one over the other. We're interested in both.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Jennifer Demba with SunTrust. Please proceed with your question.

Good afternoon.

Hi, Jennifer.

Hi, Jennifer.

Back to the topic of M & A. I'm just wondering what submarkets are the highest priority for you? And are you -- what's the seller's temperature right now? Are you seeing a lot of opportunities since companies are having so much pressure on the spread income right now?

Yes. Just some general comments there. I mean, we are more interested in organizations that would be closer to our center and the center of our organization is Montgomery County, Maryland. But we're -- we also recognize there's some attractive potential candidates as you move a little further in a hundred mile radius or something of that nature. So we're open to things that would be within that general kind of radius.

I would say that I have not seen what I would call a super-heated dash on the part of potential sellers to put themselves on the market. I think obviously there have been some who are interested in partnering with us. We think there will continue to be. But I don't see the -- all the pressure brought on by net interest margin and other challenges. I haven't seen a lot of evidence of here, although it could happen in the future as the pressure continues.

Great. Thank you.

Our next question comes from the line of Mark Muth with Ftn Midwest. Please proceed with your question.

Good afternoon, guys.

Hi, Mark.

Hunter, after the Potomac deal was announced, you indicated that de novo branching was still something that you intended to do and I wonder how that stands now in light of (a) another deal and also the much more difficult operating environment. Is that something that we should not expect much of going in the near term, or are you still going to be your typical annual few branches?

Yes. That's a good question. And I would say that just because of the way the pipeline has developed, we -- if you think of it in three segments: non-banking, acquisitions, bank acquisitions, and de novo branching as three pieces, it just seems that the pipeline opportunities have come up more in the bank acquisitions recently. So it just so happens we don't have currently in the pipeline any branches that are ready to be opened in the near future. That does not mean that we're not continuing to seek out sites, but there's just a lead time on some of those.

Mark, we -- in the two deals that have been announced there's actually one new de novo per each of those deals already underway. In Potomac's case they've got a branch that's well under construction and should actually probably open if not within the next couple of weeks or sometime in early February. And then in the County's case, they have a location -- another location in Anne Arundel County that is also intended to be full steam ahead. So you could look at it that way and say there are really two within the overall proposed franchise that are already underway.

Okay. Thanks, guys.

Yes.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions at this time.

Okay. Thanks, everybody. Thank you for participating and the -- this call will be up at our website and we appreciate any comments you have at IR@ Sandy Spring.com.

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