Sandy Spring Bancorp Inc (SASR) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sandy Spring Bancorp, Inc. first quarter 2007 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] As a reminder, this conference is being recorded.

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 and welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the first quarter of 2007. As usual joining me here today is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, our General 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, but before we make our remarks and then 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 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 affected by management's estimates and projections of future interest rate, 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. We intend to keep our comments rather brief today in order to take your questions, so we'll cut right to the chase here right away with the major points on our list here. First off, to be candid, we were not satisfied with the net income and earnings per share numbers for the quarter, but we do believe that we continue to have numerous bright spots in our performance and that our approach to the business continues to be sound. The net interest margin declined to 4.07% from 4.14% at December 31, 2006, and 4.35% a year ago. On a comparative basis against the SNL $1 to $5 billion in assets index at year-end, we were at 4.14 in the margin. Average for the 164 U.S. banks that make up this index was 3.92, so we were 22 basis points better than the index at year-end. A year ago for the first quarter of 2006, the index was 4.00 and we were at 4.35. So it's likely when the reports are all in for this year's first quarter, our margin at 4.07 will still continue to have outperformed the $1 to $5 billion bank index.

That said, however, competition for demand deposits continues to be very tough across all of our markets. We're doing a good job growing loans and improving loan yields but obviously raising deposit rates are substantially offsetting these efforts. It's important to note that our deposit rate setting strategy is very focused, defensive as it relates to transaction product pricing and competitive for time deposits when asset growth warrants and in time periods when it doesn't, being less aggressive to protect our margin. So let's shift to what else is going on in this rate environment to support and continue to diversify our earnings growth. Non-interest income from sales of investment products and in trust and investment management fees continue to be favorable. As we've said before, West Financial Services continues to meet or exceed all of the expectations we had when the Company joined the Sandy Spring organization over five years ago. In our insurance agency business the contribution from Neff & Associates during the quarter was substantial, as revenue from physician liability insurance was up over 250% from the first quarter of 2006.

Insurance related contingency fees were also up by 25% over the first quarter of '06. As we have said in the press release this morning, one message that we do not want to be lost in the first quarter news is that across all portfolios, credit quality continued to be excellent. The increase in 90-day past dues that you may have noticed is largely result of one $2.3 million loan which we believe will be paid off in the second quarter. The level of 90-day past due loans, of course, is still very low relative to peers. Net charge-offs are continuing to run at less than one tenth of 1% of total loans. The loan loss provision for the first quarter was about 800,000 compared to 1 million for the first quarter of 2006. And so the allowance for loan and lease loss is representing 1.09% of outstanding loans at March 31, '07. We do not see any adverse trends in our real estate portfolios and the overall loan pipelines, commercial loan primarily, are very healthy and actually better than at this point in either of the last two years. Sub prime loans, we have never booked so-called sub prime mortgage loans.

We do originate such loans for sale on a flow basis, meaning the buyer of the loan takes them from us -- takes the loan loan-by-loan, so we don't even have the risk of selling a package of originated loans. So subprime quality issue in the industry is not an issue for us. Just to wrap up with a brief comment about the Potomac Bank merger, which we closed in mid-quarter. Clearly we are encouraged that we finally have the opportunity to launch into northern Virginia with a very solid platform and a good group of people. As the numbers in our press release indicate the contribution from Potomac this quarter is substantial in terms of both deposit and loan activity. Now let me ask Phil Mantua , our Chief Financial Officer, to make a few brief comments related to merger costs in the quarter and our overall level of operating expenses.

Thank you, Hunter. Consistent with our stated expectations related to the acquisition of the Potomac Bank transaction, we still believe that the transaction will be accretive to earnings within the first full year of combined operations. We really did anticipate the one-time merger costs that are outlined in our release. But we did feel it was necessary though to isolate the costs in light of our overall lower than expected results for the quarter. We also, by the way, expect to have similar one-time costs in the second quarter that would be related to the County National transaction that plans to close sometime during that quarter. As for general operating expenses, and the Potomac division being included, these results in the quarter were consistent with our overall expectations.

We do continue to believe that our overall business model is sound and that, as we've stated in the past, our top priority for the first half of this year is to assure that the integration of the announced transaction goes according to plan. During the second half of the year, though, we do plan to step back and take a broad holistic view of our fully integrated Company to look for efficiencies gains. However, that is not to say that more prudent expense management may be called for in the interim if we believe slower net interest income growth persists, as we experienced here during the first quarter.

Thanks, Phil. Okay, so that's an outline of our comments for today, which we can expand on in any area you would like in your questions. So operator, we can move into the question and answer period now.

[OPERATOR INSTRUCTIONS] Our first question comes from Rick Weiss with Janney Montgomery Scott. Please proceed with your question. Okay. Thank you.

Hi, guys.

Hi, Rick.

I was wondering if you could talk a little bit about residential construction loans. It fell a little bit again this quarter and just want to talk about your market for that.

Yes, residential construction loans, that line on our loan breakdown is strictly our one-off loans to the home owner who is building a house. And those move a little bit with the overall market, so certainly the slow-down in the overall real estate market, I think, is the explanation there. It's certainly not a de-emphasis on our part or a lack of effort. We have the same mortgage lenders on the street and the same appetite for those loans, so I think they'll ebb and flow with the overall real estate market.

Is there any kind of changing in the pricing as well as the construction loans that you are doing?

No, no change in pricing. Those tend to be prime based.

Okay. And then I guess I want to focus just a little bit on the non-interest kind of expense. I was wondering if you can kind of give a run rate, excluding the merger related charges that you would see, per quarter this year?

Rick, in terms of growth in that area, over the remaining part of the year, I would think that kind of normalized run rate there is probably going to be somewhere in the 8% to 10% range. Again, notwithstanding the implications of the Potomac expenses as we move forward here.

I'm sorry, 8% to 10% year-over-year?

That's correct. Yes, 8% to 10% year-over-year, that's correct.

Okay. And also just, what were the merger related charges that were incurred for that, I guess, roughly 600,000.

They were all primarily related to systems conversion efforts that needed to be taken as a period expense.

Okay. Thank you very much.

You're welcome.

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

Good afternoon guys.

Hi, Mark.

Hunter, you mentioned a $2.3 million loan made up the bulk of the increase in 90-plus. Was wondering if you could give us some more color on that, specifically is that a legacy Sandy Spring loan or is it a Potomac loan? And then also just sort of how you see the Potomac asset quality now that you have integrated the deal and been able to really get in there and scrub the books.

Yes, absolutely. Happy to respond to that. The $2.3 million loan I referred to is a Sandy Spring loan and is something that we really don't think represents an ongoing problem, as I said. We think it will be paid off in the fairly normal course of business here in the second quarter. The Potomac Bank asset quality we believe is good, even excellent. We thought that going in and now that they have become a part of us, we have seen nothing to change our minds on that. Their level of 90-day past dues or non-accruals when folded into Sandy Spring were extremely low, very low.

Okay. Thanks.

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

Good afternoon.

Hi, Mark.

Hi, Mark.

Hi. Just a question, you mentioned a lot of these costs that, merger-related costs and I can see what your efficiency ratio was. Do you have any long-term goals for bringing that down? Or where you think it might settle in after you get through this quarter and next quarter?

Yes, we have talked for sometime, Mark, about really liking that traditional efficiency ratio as contrasted with the GAAP ratio, but the traditional one more to into the mid to low 50s. That's becoming, certainly for us right now, a challenge in moving in the wrong direction. The other little bit of a head wind that we fight there is that in acquiring non-banking companies they tend to have higher efficiency ratios than banking, even though they add to our stream of non-interest income. But as Phil mentioned in his comments, we are going to be focussed in the second half of this year. We think it's important to stay focused on the integration of the two acquisitions in the first half, make sure we do those well, that we address the integration risks, since we hadn't done one since 1996. But in the second half of the year, we're really going to turn our attention to stepping back, taking a look at the business as a whole and really looking for ways to both increase revenues and reduce costs, but with a particular eye towards the cost side of the equation.

The integration and merger costs, are they in the other expenses line item?

Yes.

That's up about-- almost 1.5 million, that's where those costs are in that -- ?

That's exactly right.

That's correct.

Okay, great. Thank you very much.

Thanks.

Gentlemen, there will are no further questions in the queue at this time. Our next -- we do have another question.

Okay.

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

This is actually Lauren Johnson for Jenny, who is also on the line. Gentlemen, do you have a period end diluted share count?

Period end diluted share count.

Trying to work out the impact of the two acquisitions.

Bear with us just one second here we're seeing if we have that with us. Obviously that information is available.

Yes. I don't know if I brought it in with me or not. I don't think I have got it. Lauren, I didn't bring it in with me. I can certainly follow up with you, though, and provide that information.

I would appreciate it. Thank you.

Sure.

Sure.

Gentlemen, there are no further questions in the queue. Do you have any closing comments?

No, that-- just to thank everybody for participating and remind you that we are always open to receiving feedback on the calls and the kind of information we're providing. Thank you.

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