Sandy Spring Bancorp Inc (SASR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sandy Spring Bancorp Incorporated, second quarter 2007 earnings conference call. (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, sir, you may begin.

Thank you. Good afternoon and welcome everyone to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2007. 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 our website beginning later today. We can take your questions after a brief review of the key highlights. 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 risk and uncertainties. These forward-looking statements include statements of goals, intentions, earnings, and other expectation, estimates of risk and future cost and benefits, assessments of probable loan and lease losses, assessments of market risk, and the 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, 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.

Thank you, Ron. We intend to keep our comments brief as usual in order to get right to your questions. So we'll cover the main points on our list now. The basic overview remark is that we held our own during the quarter in terms of loan growth, deposit growth and fee income growth in a tough banking environment that essentially remains unchanged. As we noted in our press release, the costs associated with closing two mergers during the first half of 2007 have had an impact on earnings but the effect of merger related expenses should be behind us now as we move into the second half of the year with good momentum and an expanded platform in two new markets.

We think our margin held up pretty well at 40.8% as we have seen this number at many banks declining steadily to south of the 4% mark. Our margin is down about 22 basis points at the end of the first half, compared to where it had been a year earlier. Non interest income growth remains strong at 10.9 million in the second quarter of 2007 versus 9.4 million in 2006, an increase of about 16%. Service charges on deposit accounts increased 35%, due primarily to higher overdraft fees while gains on the sale of mortgages increased 41%, as origination volumes picked up over what we were seeing a year ago. Fees on sale of investment products increased 19% coming from good growth in sales of mutual funds.

Visa check fees grew by 17% which reflects the continuing trend in growth in electronic transactions. These combined increases were somewhat offset by an 11% decline in insurance agency commissions which was a result of lower premium volume on commercial loans and the departure of one producer whom we sold a book of business at the end of 2006. So overall, non interest income is a big success for us, continues to be.

On the expense side, as we move into the second half, we expect to be launching a formal efficiency project now that the majority of our integration efforts are complete. Excluding the two acquisitions, the loan portfolio increased 5% over the second quarter of the prior year. The underlying driver was mainly a 12% increase in commercial loans. The provision for loan and lease losses totaled $0.8 million for the second quarter of 2007, compared to $1.0 million for the second quarter of 2006, and 0.8 million for the linked first quarter of this year. On a six month basis, the provision was $1.6 million at the end of June 2007 versus 2.0 million for the same period in 2006. So the allowance for loan and lease losses represented 1.09% of outstanding loans at June 30, 2007.

Non performing assets increased by $19.5 million, compared to a year ago to $22.2 million at June 30, 2007. This is primarily attributable to one loan totaling $14.4 million which is a well secured credit and one where we do not expect an actual principle loss. The loan is part of our residential acquisition development and construction lending activities included in our commercial construction loans category in the schedules which accompany our press release. The loan is supported by an appraisal well in excess of what our loan balance is so that our loan to value is less than 70%. The loan may take a while to work out, but again, we don't believe we will ultimately take a principle loss. Further, the loan has been on our watch list and has been fully considered when we assessed the adequacy of our loan loss reserve which we do believe to be adequate.

Before we wrap up, just a general comment on our results in the context of our market. The competition here is as tough as anywhere in the United States. If operating in a franchise in the Baltimore, Washington metroplex, which is one of the handful of most desirable markets in the nation, as many of you know. And consequently, one of the most competitive. Then it reasonably follows that a successful bank in this area needs to be very good at executing the basic banking fundamentals in order to deliver consistent profitability and predictable results and a decent dividend payout. We have very good competitors here on our home turf and yet we consistently deliver predictable results and credit quality and we service a very desirable slice of the market from a demographic perspective.

As investors participate in the cyclical rotation to shift the focus away from community banks, the community bank sector due to the interest rate environment and concerns about real estate related credit quality, we recognize that those who remain interested in bank stocks seek both quality and consistency of performance. We think we deliver both of those at a currently very reasonable valuation. So, that's a brief version of our comments for today, which we can expand on as we take your questions. Operator, we can have the questions now.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Mark Hughes with Lafayette Investments. Please proceed with your questions.

Good afternoon.

Hey, Mark.

Hi, Mark.

Could you confirm something for me? Looking at your most recent filings, it doesn't appear you have any subprime securities in your investment portfolio. Is that in fact true?

Yes, it is.

Okay. Good to hear.

Our only involvement with subprime, I think we've mentioned before, is that we have for some time originated subprime mortgage loans strictly for other investors. And so we've sold those off and really keep none even of the loans, let alone securities in our portfolio.

Okay. Great. The insurance agency commissions dropped quite a bit from the first quarter, from 2.69 million to 1.438. Is that just the kind of business that's always going to be lumpy like that or was there something exceptional about the first quarter?

It's actually both, because the first quarter traditionally always includes contingency based fees that we may or may not receive based on that book of business and it is always going to be seasonal or lumpy, depending on how you want to look at it, in the first quarter of the year. And that represented about $900,000 worth of the overall commissions in the first quarter of this year. There was only about 400 -- or $42,000 of that same like income in the second quarter.

Okay. Great. And could you talk a little bit about -- it sounds like you're getting ready to do -- attack the cost structure a little bit. Can you talk at all now, or is it premature to talk about what type of initiatives you might be undertaking.

Probably a little premature, Mark. We have said on a number of occasions that we wanted our efficiency ratio lower. It's been moving in the wrong direction in the last few quarters. So we're going to be looking across the organization to try to figure out how we do things better, do things more efficiently, so it's going to be a comprehensive look. But it's a little early yet for us to point to specific places where that will occur. But we think it will be pretty broad.

Would you anticipate a write-down coming out of this or is this going to be something you can just hand over in the normal course of things?

Yes, I don't believe we anticipate any write-down of assets, if that's what you're getting at. No.

Or one-time restructuring charges, that sort of thing.

No, because we're not looking at it from a -- necessarily a balance sheet perspective, if that's where you're headed, Mark, in terms of that type of an effect. This is more on a pure expense basis.

Last question, stock price near or hovering around a four-year low. What's your appetite for share repurchases?

Well, we have a repurchase plan in place and approved by the Board. Our attitude toward that at this point is that we have stated our intention to be open to acquisitions. We obviously just closed two and so I think our powder needs to remain dry to take advantage of those opportunities, we we think there will be in the coming quarters.

But I mean, I would argue that your stock is cheaper than the ones you've been purchasing. I don't understand why, if that is true, and maybe you look at it differently, why your own stock wouldn't be at the top of the list.

Well, we certainly hear you. It's something we look at continuously.

Okay. Thank you.

Thanks.

Thank you. Our next question comes from the line of Ms. Jennifer Demba with SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. Just want to reiterate my feelings are similar to the previous caller's on the subject of the buyback. Seems like you guys at these levels should be looking at a buyback more actively. Question on loan growth. It was only 5% year-over-year. What is your outlook over the next, 6, 9, 12 months on loan growth and where most of that will be coming from?

Yes, we think the prospects for loan growth are still good. Our commercial pipelines remain strong. There is certainly going to be some pull back in residential development. I mean, that's been in place now for a while. But we still think loan growth is going to be pretty good. So not really a pessimistic outlook there. Certainly it will be predominantly in the commercial area, versus consumer and mortgage. That's really where we have targeted is the commercial loan growth.

Do you think it can return to double-digit level or is high single digit more realistic?

I think the double-digit is possible, certainly.

Okay. And one other thing. This $14.4 million A&D credit, can you tell us how much A&D exposure you have in total in your loan portfolio and just some detail on that portfolio?

Yes. Jennifer, the acquisition and development financing is that category on our historical trends and quarterly financial data that accompanies our press release. It's all in that category called commercial construction loans which is, as of the end of the second quarter $236.278 million. The actual residential acquisition development and construction number is closer to 178 million. So the remainder of that number in our historical trends is the commercial development which is a relatively small piece of it, but about 178 million is the residential acquisition development and construction portion. So it's a relatively small part of our overall portfolio but that's the number.

What's your average loan to value on that and I assume most of that is in Maryland or is some of it in Northern Virginia?

Mostly in Maryland. A smattering of it in Northern Virginia. A smattering in Delaware. Tends to be all in this Washington, D.C. area. But predominantly Maryland.

Your loan to value on it?

Loan to values are very typically 60 to 70%.

Okay. Thank you.

Thank you. Our next question comes from the line of Rick Weiss with Janney Montgomery.

Just to follow-up on Jennifer's question, talking about the big loans, non performing. I just want to know kind of your rationale why you don't expect a loss. Is it due to the LTV on it? What else is there?

We think the value is in the property-- in the property is there. There are actually or there is actually a lien behind us on that property. The property is right at record plat, so this is a completed piece of residential property that a large national home builder walked away from and we think the market, it may take us a little time to get out of it as the residential market remains a little softer, but we definitely think it's a good asset in terms of getting all of our principle back. The interest reserve ran out. The loan is actually not even 30 days past due at this point. But we knew that it was going to take a while to work out of it so we have placed it in a non accrual status.

I guess how many homes were on this property? Is it like a -- I guess like a development type of thing?

Yes. It's a bunch of lots, Rick. I don't know if I have an exact number here but it's platted for a fairly large number of lots. Let me see. It's over 1,000 lots.

And just, is that also in Maryland too, the property?

It's in Delaware.

Oh, okay. And then in general, would you -- a lot of banks are starting to see maybe some signs of credit slippage. Do you see that more systemically? Do you think it's time the charge-offs are still really low for you -- but would you think that they're going to trend north? Also do you think it's time to start building the reserve? Kind of what your feeling is about that?

My answer would be a little moderate on that. Yes to the essence of your question. We think there will be come creep-up in charge-offs, some creep-up in possibly some past-dues. But at this point, other than this one loan, we're not seeing a lot of larger loans slip into a watch list category. This particular one that's going on non accrual has been identified in a watch list category, so not big spikes in that. Some creep-up, yes.

Okay. Great. Thank you very much.

Thanks, Rick.

Thank you. (OPERATOR INSTRUCTIONS) We have a question from the line of Bryce Rowe with Baird. Please proceed with your question.

Thanks, good afternoon.

Hey, Bryce.

Two questions for you guys. First, you talked about the efficiency initiative. Very generally, where do you want to see that operating efficiency ratio go over time?

Well, we have said before that we like it much better in the low to mid-50s, probably mid-50s realistically now and I guess part of the reason we say that is because we operated there at one point. We recognize that getting from where we are down to the mid-50s is a pretty fair distance. But over some period of time, that's where we would like to get, back into the mid-50s, may not happen in one year. But that's where we would like to hit.

Okay. Second question is really for Phil. Phil, the securities portfolio came down a good bit here in the second quarter and saw that the interest-bearing balances with other banks went up considerably. Can you talk a little bit about the earning asset mix going forward?

I would -- well, yes, I think that the interest bearing deposit position right now is certainly temporary and primarily there because of the little bit less in terms of loan growth. You may also notice that we, as Hunter mentioned the margin has been holding up really well. We've been really backing down somewhat on our deposit pricing just because of being in a pretty flush liquidity position. And given the interest rate environment and knowing that we anticipate loan demand to be better, to Hunter's point in that low double-digit range here sometime in the future, we just decided to hold a short term cash position as much as possible in various overnight funds. I think we've also stated in the past that our optimal position from a mix standpoint is to have overall security somewhere between 15 and 20%. We're in that range today. And just because there's really no other opportunity without extension in the portfolio, we're going to hold that money as short as possible for the time being.

Okay. Thank you.

You bet.

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

This is for Hunter. Hunter, in the letter to the shareholders in the annual report this year you mentioned that you look to be more aggressive in the marketing area. Have you been spending additional dollars in that area this year? And if so, where have you been doing so?

Yes, we have spent more dollars in the marketing area in some things that I'll call more behind the scenes. We've been more aggressive in direct mail. We have actually brought in a new marketing director to help us be more specific in our marketing programs. We have spent some resources to bring online a direct, Sandy Spring direct account which we are in final testing of right now so that if we choose to do so in the future we can compete in that online account opening kind of market. So yes, we have spent the money in marketing. We recognized in the past that we had not probably spent enough so we have ratcheted it up in those areas I mentioned.

One last question. Service charges on deposit accounts increased 35% and you said primarily because of higher overdraft fees. Did you change the terms of that or what caused that spike?

Yes, there were some -- we've done some changes over the years, just in terms of bringing our practices into more consistency with what other banks are doing in terms of order of payment, in terms of lining up debit and check clearings together, rather than in two separate channels. And our ATM point of sale also has the ability to create an overdraft in essence.

Was any of that attributable to your -- when I see a lot of higher overdrafts, are you getting a sense that your customers are struggling a bit more today, versus a year ago, making payments?

No, not at all. It's expansion of client base and people spending money. I mean, the indication we get is that it's still an expression of the willingness of a customer to -- our customers to spend money. We have not had markedly higher losses in charging off overdrafts and that sort of thing.

Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Gentlemen, at this time there are no further questions. Do you have any closing comments?

Okay. Just to say that that wraps up our questions. We want to thank everybody for participating today and we would be very open to your feedback at IR@SandySpringBank.com. Thanks again.

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