Sandy Spring Bancorp Inc (SASR) 2004 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS).

And at this time, I would like to hand the conference over to your host, Mr. Hunter Hollar. Go ahead please.

Thank you, good afternoon and welcome everyone to Sandy Spring Bancorp’s conference call to discuss our performance for the final quarter of 2004 and the full year.

Joining me here today is Phil Mantua, our Chief Financial Officer and Ron Kuykendall, General Counsel and Corporate Secretary of our Company. We intend to open up the call very quickly so we can take your questions after a brief review of the key highlights. We want to point out that this call today is open to all investors, analysts, and the news media. We’re also doing the customary live webcast of today’s call, and there will be a replay of the call available at our website beginning later today, and it will be up for about 48 hours.

Before we make our remarks and then take your questions, Ron Kuykendall will read the obligatory Safe Harbor Statement.

Thank you Hunter. Good afternoon.

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 risks 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 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 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. As we reported in the news release that we issued earlier today, net income for both the full year and for the fourth quarter amounted to substantially less than both of the comparable periods. We don’t expect that this news comes as much of a surprise because we announced back on November 17 that we would be making changes on our balance sheet to reposition it in light of what’s happened with interest rates. And that included, as many of you know, exiting our leveraging program with a prepayment of Federal Home Loan Bank advances at a pre-tax expense of $18.4 million. I might say that that was somewhat less than the estimated $21.6 million that we indicated in our November press release, so we’re happy that that cost was less than originally anticipated.

Our fourth quarter also is clear right now of good will in our leasing company. There were some other essentially one-time charges that we took in the fourth quarter that further reduced net income, and we outlined those in the press release in order to help everyone extrapolate a more normalized picture of what our earnings and financial performance looks like.

In any event, it all adds up to a short-term hit that we took affecting how we did in the fourth quarter and the year that has now ended. These were tough decisions that we made over the past several weeks, and we believe we have now eliminated what could well have turned out to be a sustained drag on earnings over the next 3 or 4 years by winding down our leverage strategy now.

So what we’ve done is consistent with our emphasis on managing the institution for the longer term on continuing to focus on the basics and fundamentals of good community banking that have served us well already for so many years. That means concentrating on sustainable performance drivers that we know we can control and reducing risks associated with factors we do not control, such as adverse movement of interest rates.

In thinking about these developments, it’s important that we don’t lose perspective on the positive aspects of what Sandy Spring Bancorp accomplished during the year, and especially during the latter part of the year. The fundamentals of our balance sheet continue to be quite strong. As we noted in today’s press release, loan and deposit growth accelerated during the year, and this is indicative of not only the local economy continuing to ramp up steadily, but our small business base is clearly showing good momentum. And that’s allowed us to book new loans and good volume with a full pipeline feeding the growth. We’ve been able to increase loan volume, and we’ve done it with a corresponding reduction in turnaround time and in back office paperwork and expense.

Furthermore, our loan quality is excellent, and we’ve also been seeing good deposit inflows across the bank, but including on the business banking side as well. So we think it’s clear that our brand of relationship banking is working and working well.

One of the major highlights of the year is that we’ve made so many process improvements that I have talked about in the past and in so many areas across the organization, as well as reined in some expenses. And a big measure of our success in doing this is that we’ve cut down delivery time on products for our small business base. We all know that nimbleness is a big selling point for community banks, especially in this very competitive market place.

Back to the balance sheet, briefly comparing December 31, 2004 balances to December 31, 2003 total assets were virtually unchanged at $2.3 billion. More importantly as I alluded to earlier, total deposits increased 11 percent to $1.7 billion, while total loans and leases increased 25 percent to $1.4 billion compared to the prior year.

At December 31, stockholders’ equity totaled $195 million, increasing to 8.48 percent total assets. All of these key numbers compare favorably to our peer banks.

Now let me offer a few comments concerning our perspective on the future. We said earlier that we believe we made some tough decisions lately, correct decisions we believe that are consistent with our emphasis on managing the institution for longer-term results, long-term stability and less risks associated with factors over which we have little or no control. On this note, after much internal discussion, we have decided not to provide earnings guidance for 2005. Frankly, in today’s litigious environment we think that the burden is too great, and the benefits too small. And as John Allison of BB&T also said last Friday in announcing a similar decision, some of you might feel that this expresses a lack of confidence or that we’re worried about 2005, but that is really not so, and that is not what this decision is about.

By forecasting and then focusing all the time on whether we’re going to make our quarterly numbers by consistently asking ourselves, “Who’s going to be right with their estimates, and whose estimates might we miss,” we too often find ourselves not managing the Company for longer-term stability and returns. We’re not focusing on that enough, and so our decision not to provide earnings guidance in the future is meant to permit us to have that kind of emphasis on longer-term stability.

Despite our having had a disappointing year, our shareholders we think still strongly believe in the Sandy Spring organization, and they stand behind our track record. We believe they support us because we’ve rewarded them over the longer term. Our market cap has held up very well. Compared to our peers, all the major measures of our success are favorable. And our compounded returns to investors remain very strong. And we really do believe it’s a long-term gain and we manage ourselves accordingly.

So those are a few highlights, which we can expand on as we take your questions. Operator if we can have the first question please.

(OPERATOR INSTRUCTIONS). Rick Weiss, Janney.

Hi guys.

Hi Rick.

I guess the first question has to do with asset quality. I know it’s been very good in ’04, and it’s great this quarter. Looking forward though, what do you think is going to happen to your reserve levels and provisioning?

Yes Rick I think we indicated last time, and certainly would continue to indicate this time that we believe we will need to provide for the loan loss reserve in 2005. And it appears to us that that reserving will need to start in the first quarter, so the years that we’ve had of no provision we think have come to an end.

And basically if there are no losses, how do you peg it now so that the regulators’ accounts don’t say, “Well you can’t hit a target of say 120 basis points”, or how do you do it these days if you don’t have any losses?

Well, we really are continuing to do it in the same manner we have in the past, and that is to evaluate a number of soft factors which are required by regulation by looking at our watch list, our trend in large loans, trends in concentrations. We have a very detailed and somewhat intricate process that takes all those things into consideration.

But you are correct; we can’t base much of that on historical losses because they have been so low. We’ve used a process that has worked for us in the past, and we think will continue to work. So we’ll continue to evaluate those soft factors and watch-list factors to reach a reserve level that we think is adequate.

Okay, I guess if I can just kind of flesh this out a little bit more would you think like a reserve that is adequate somewhere like around 100 to 125 basis points? Is that a range that, or could you tighten that range somehow for modeling purposes?

It’s a little hard, and I understand your question certainly, it’s a little hard to pin that down to a percentage of assets or loans because again our modeling takes into consideration a lot of different things. So I really don’t think I can peg you exactly to that percentage.

Okay, I’m sorry; I’m not trying to paint you into a corner.

No, I understand.

Okay, I guess with the net interest margin, where do you see it going from here now, or will deposit costs be rising along with the short end of the yield curve? How do you see things there?

Well, we certainly think it’s significant. We’ve had the best increase in tax equivalent net interest income this quarter than we’ve had for 8 quarters.

Yes Rick, what Hunter is saying there is exactly on target. This is the first quarter since the fourth quarter of ’02 where our highest level of net interest income that we’ve seen, and of course, a lot of that had to do with what we did in November related to the leverage program. And so we see that the margin will continue to move forward here. It’s not real reflective in the fourth quarter number because there was really only one month in which you could get effect from taking those actions.

At the same time, I think we do realize we’ve got to be pretty diligent in terms of how we manage our deposit pricing tier, because we do anticipate as you mentioned that the short end of the curve will go up as the Fed continues their march. But we do see the curve overall flattening out. But again, we’ll have some challenges here trying to keep deposit rates under control.

Okay, thank you very much.

Thank you Rick. Mark Ruth [ph], Suntrust Robinson.

Hi, it’s Jennifer Demba. Do you have any plans for branch expansion in 2005?

Yes, we’ll have a couple of branches, 2 to 3 branches depending a little bit on the exact timing that we’ll open in 2005. Frederick market continues to be an area we’re interested in. So yes.

Okay and I want to make sure I understand, can you go through all the costs that you considered non-recurring in the fourth quarter? I mean, obviously even the exit of the leverage program, the severance cost, and the impairment of the good will, the leasing. Was there anything else that you considered non-recurring?

Well Jennifer, there’s also as is stated in the press release, there are some out-of-pocket costs for Sarbanes-Oxley compliance that we certainly don’t believe will be repeated. Obviously, we’ll continue to have some costs related to ongoing compliance with the Act, but not to the degree that we reported here, which was about $700,000.

We also finalized the accelerated amortization of debt issuance cost on our original trust preferred, and that was worth about $0.5 million in the fourth quarter alone as well. So those things in conjunction with what you mentioned, which are the severance expenses, and of course the cost of getting out from under the leverage program were the key things that we viewed as being one-time type charges.

Of the Sarbanes-Oxley cost, what do you think your ongoing costs will be per year?

I don’t know that we’ve got, to be honest, a real strong handle on that at this point. I don’t know that anybody does to be honest with you. But we certainly know what it did cost us in true consulting and other out-of-pocket type things in the fourth quarter here.

Okay, thank you very much.

You’re welcome.

Thank you. Collyn Gilbert, Ryan Beck.

Great, thanks, good afternoon guys. I wanted to just follow up on Jennifer’s question and make sure I’m calculating it right. Do you have a core, are you looking at kind of a core EPS number or core net income number backing all these expenses? I mean I’ve done it and sort of tax-affected it as best as I can and came up with a $0.47 number. But that might be kind of high, so I don’t know if you guys have a number that you’re using?

Collyn unfortunately as we indicated we’re trying to get out of the business of providing guidance, I really don’t want to react specifically to that number. I think we’ve tried to outline those one-time things to help you do what you’re trying to do there, and I don’t know that we can add much to that.

Okay, well let me ask you that. If I were to add these back, should I just tax-affect it at your normalized rate? I mean what would be an appropriate tax rate that I should affect it at?

I would go back and look at what we’ve been traditionally in in the last couple of quarters prior to fourth quarter Collyn, in terms of the tax rate in the low-20 percentage range I think is kind of where we’ve been historically.

Okay.

And as far as expenses are concerned, I think if you do go back and do the math here on those items we just iterated on, you’ll find that the fourth quarter expenses should probably be pretty much what the third quarter was.

Okay.

And I think that’s a reasonable level for us to expect.

Yes, okay and Jennifer mentioned the severance, which I actually didn’t -- I don’t know if you wrote it in the text of the release. I missed it, which made me think for some reason that severance cost wasn’t in there. So you did see $1.5 million then in severance?

Actually the severance cost is $800,000.

Oh there it is $800,000. I’m sorry, yes okay. And then just other questions tied to the portfolio and sort of what your intentions are going forward. I guess maybe what kind of growth can we expect in that portfolio and what your strategy is going to be from here, if you could sort of speak to that.

Well, I think as you can see our loan portfolio has continued to move ahead here in pretty good stead, and in anticipation that that’s not to go away the growth in the investment portfolio is going to be secondary to the rest of the balance sheet. And I think that it’s our intention with the portfolio for it to be, I’ll use the term “more traditional” in its position on the balance sheet in terms of providing liquidity and then earnings in terms of a priority there. So I wouldn’t anticipate we would add a lot of positions in the portfolio. And in fact, we’ll probably need the portfolios as a means for funding and loan growth.

Okay, and then final question, which maybe I won’t get an answer on, but just wanted to get a sense if you all have a goal for where you’d like your efficiency ratio to be.

Well Collyn, I would say in general back in the days when we were sort of mid to low-50s is a kind of number we felt pretty good about. And where we are today is not a number we feel real good about.

Okay.

So that gives you sort of an idea.

Okay, that was it. Thanks guys.

Thank you. (OPERATOR INSTRUCTIONS). Mark Muth, FTN Securities.

Good afternoon. I’ve got a couple of quick follow up, and I apologize if I missed this earlier. But did you give what the margin was for December? I guess if we could have an idea of what a fair run rate would be given that it was only a one-month effect.

No Mark we didn’t. We just have not typically given monthly numbers, but you’re certainly on the right track in the sense that there really wasn’t a lot of time for our action to take effect in the fourth quarter, just one month basically of the three. So we certainly look for some improvement in that interest margin, more so than would be indicative by third to fourth quarter comparisons.

Okay, and could you also comment I guess more generally about any changes you’re seeing competitively there in the local market, maybe specifically with regard to deposit pricing, what kind of pressures you’re seeing on that? You’ve generally discussed it.

Yes, I mean obviously, this is a very competitive market. We’ve seen some upward pressure in deposit pricing; I would say not an extreme amount of pressure. So we felt it some. We’ll continue to manage that very carefully and try to get some advantage out of not increasing as fast as the market. And we think that we’ve shown that we can do that, and so we’ll be doing that going forward here.

Okay, thanks.

Thank you. (OPERATOR INSTRUCTIONS). And at this time Mr. Hollar, I’m showing that we have no further questions.

Okay, thank you. So that does wrap up our questions. We want to thank everybody for participating today, and we want to remind you that we appreciate having your feedback, and you can email us comments at IR@SandySpringBank.com. Thank you and that concludes our call.

You may now disconnect, and have a wonderful day.