Sandy Spring Bancorp Inc (SASR) 2005 Q2 法說會逐字稿

{OPERATOR INSTRUCTIONS}

At this time, I'd like to turn the call over to your moderator, Mr. Hunter Hollar. Please go ahead, sir.

Good afternoon and welcome, everybody, to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2005. Joining me here today is Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel and Corporate Secretary of our company.

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. And that will be up for about 48 hours. We can take your questions here, shortly after a brief review of the key highlights.

Before I make my remarks and then take your questions, Ron Kuykendall will read the obligatory 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, risks, and future costs and benefits; assessments of probable loan and lease losses; assessments of market risks; 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 of 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, Ron. As I've said in the press release, it's really rewarding for us to post a second solid quarter following the financial decisions we made last year involving our investment portfolio. I want to also give you the details behind our announcements that we'll be acquiring an asset management and financial planning company, in just a minute. But first let me do just a brief review of our results.

On the basic performance highlights, our net income is up 22% second quarter to second quarter and up 14%, first half of the year this year compared to first half of last year. Our ROE for the second quarter is 15.6%. Our ROA was 1.36%. Both nice increases over the similar periods in prior year. Total deposits, quarter-to-quarter -- second quarter last year to second quarter this year, total deposits up 6% and total loans and leases up 20%. Both increases we are very happy with.

As would be expected on a year- over-year basis, the second-quarter net interest income increased nicely, about 21% due primarily to an improved net interest margin. The margin for the second quarter was 4.39%, up from 3.56% in 2004. That's attributable to a combination of increased loan volume, our active management of deposit rates, plus the early payoff of federal home loan bank advances in the fourth quarter of 2004.

Our loan quality continues to be where we like it. The good growth -- good loan growth that we have had led us to add $900,000 to the provision for the second quarter, compared to no provision in the second quarter of 2004. So, the total allowance for loans and lease losses amounted to 1.03% of outstanding loans, at June 30, 2005 compared to just 1.00, a flat 1%, at the end of the first quarter.

As I've commented in earlier calls, we do a careful analysis of this -- at the adequacy of our loan loss provisions. And I know that many of you look at just the percentage of the provision to outstanding loans, and that is up, as I've pointed out.

Non-interest income was about $17 million for the six months in '05 compared to about 16 million for the same period last year, so up about 6%. Primarily, these increases came from increases of 41% in insurance agency commissions, 13% increase in Visa check fees. Those two good factors were offset somewhat by a 10% decline in gains on sale of mortgage loans and a decline of 16% in fees on sale of investment products.

And on that latter number, I actually spoke a little bit about that in our last conference call, where we've shifted our strategy in how we are selling our investment products. Our units of sales are not down, but we are taking our fees on more of a charge for managing the whole portfolio as opposed to transaction fees. So the decline there is not unsettling to us at all.

Now, let me turn to a few details about West Financial Services, a matter that we're just thrilled with. As we have been saying for some time, one of our major goals is to diversify our non-interest income sources. And with this transaction with West, we'll be more than doubling our assets under management. Prior to completing the transaction, we already have almost $500 million in assets under management.

First, in terms of timing the transaction, it's expected to be completed by October 31, 2005, pending regulatory approval. And it should be immediately accretive. West Financial is a fee-only registered investment advisory firm located in McLean, Virginia. The company was founded in 1982 and currently has over $550 million in assets under management. West Financial specializes in comprehensive financial planning and investment management services to high net worth individuals and families, corporations, small businesses and associations.

The business will continue to operate under the name of West Financial Services Incorporated because we think that has value and Ronald L. West, President and Founder, will continue to lead the company as Chief Executive Officer. Two other principals, Glen Buco and Andy Krone, are also with the firm and will continue as part of the West Financial management team. There are a total of 18 employees, most of them are highly trained, experienced people and hold CFP, CFA, CPA or CEBS, certifications with numerous CFP certifications.

While West Financial is located in Virginia, they are immediately contiguous to our markets in Maryland and about 20% of their client base is also in Maryland. Our first priority will be for this fine organization to grow its business, utilizing its successful practices that have been employed since it was founded in 1982. The extent to which we can refer clients to each other will add benefit for both of us.

As many of you know, we have not been an extremely acquisitive organization over the years and this is in large part because we care a lot about the fit of acquired companies with our existing organization. We're just thrilled of being able to acquire an organization like West Financial Services. West Financial has a similar philosophy to Sandy Spring with regards to putting clients first and we found a real affinity between the West management and the Sandy Spring management. So, purely from a financial standpoint, it increases our non-interest income. But more importantly, it allows us to come together to serve our clients better over the long haul and it's the long haul perspective that Sandy Spring always has in mind.

So, that is an outline of our news for today, which we can expand on as we take your questions. Operator, we can take the first question, please.

{OPERATOR INSTRUCTIONS}

And first we'll go to the site of Jennifer Demba with SunTrust Robinson. Please go ahead.

Good afternoon.

Hi Jennifer.

I was just wondering if you could kind of give us some more color on your decision to increase the loan loss provision so dramatically from the first quarter to the second quarter. I know you noted loan growth -- but your loan growth has been strong for the past several quarters. Just wondering if we should expect that type of provision to -- should we expect that type of provision in future quarters as well?

Well, a little difficult to answer your question in terms of exactly what can be expected. I'll try to respond as best I can here. Certainly, the loan growth has been good over time. We have also tried to take into account other factors, as I often mentioned. When we do all that analysis together, then of course we're expected, within good financial management practices, to have a reserve that's adequate at any given point in time, not one that tries to anticipate what we might need later or what we needed in the past.

So to the best of our ability, we analyze this very carefully and come up with a number that makes sense for us--makes sense for us now. We do think that this cumulative loan growth, it has occurred to on a point that will cause us to continue to make provisions, Jennifer, as I think we've said in the past. There were, I think two full years where we made no provision whatever and we certainly don't think we will return to a zero provision. But beyond that, it's little hard to be specific about that.

Okay. How much does West have in annual revenue right now?

We have not disclosed exact terms of the transaction, so we are not really prepared to go there. What we have said, and what I'll remind you of, is that assets under management, that they have, are very similar to what we already have. So it's about 550 million, that they have currently, compared to our almost 500 million. So, that'll give you some relative size there.

Okay. Thank you.

Sure.

Thank you. And next we'll go to the site of Matthew Schultheis with Ferris Baker and Watts. Please go ahead.

Good afternoon.

Hi, Matt.

Hi, Matt.

With regard to West, I was wondering if they had any specialty or any specific asset class that they manage?

They do lots of things very well. I know that in addition to generically serving high network clients, businesses, they also have gotten a good reputation in the medical field, for example. They have some specialty with regard to working with physicians, for example. They're not highly specialized, but that's just one area they have done particularly well in.

But, they're not necessarily just in an equity investment house or they don't have -- they are not managing just fixed income assets?

No. Correct, No.

Okay. And I guess actually that's about it for me then. Thanks.

Thanks.

And next, we will go to the site of Steve Moss. Please go ahead, your line is open.

Good afternoon. I was wondering if we could get some color on net interest margin expectations for the remainder of the year?

Steve, this is Phil. I would say, as we've pretty much said for some period of time, that we believe that our margin is sustainable at the level it is today. We do anticipate the market rates on the short end to continue to rise here into the remaining half of the year and we believe that will be favorable for our margin because of the way our balance sheet is positioned.

Okay. Thank you.

And next we have a question from the site of Collyn Gilbert with Ryan, Beck. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Collyn.

Collyn Gilbert What was the composition of the 820,000 in securities gains in the quarter?

Composition you mean, what exactly was sold?

Correct.

It was a mix of both municipal securities and some agencies that we had been holding.

Okay. Is that kind of a one -- I mean, in terms of gains left in the portfolio, what can we anticipate going-forward?

Well, I think that our general strategy there is really as it has been now for sometime, as the fund, the loan growth that we have by -- certainly deposit growth first and foremost, but in situations where we believe we need the additional funding to sellout of the investment portfolio, in order to do that. And that's really -- basically what was done here as well in anticipation of continued growth.

Okay. And can you just remind us again what your targeted goals are in terms of getting those securities portfolio down to a percent of earning assets?

Yes. I think that we have said before that, we are currently right now a shade under 25%...

Okay.

...coming off high as much as may be 40 to 45 in past years. I think we will continue to move that down somewhere into the teens over time. And again, it's going to be mainly predicated on just what funding we need as it relates to loan growth.

Okay. And then just two other quick questions. This non-interest bearing deposit growth, at least on the period-end basis, was very, very strong during the quarter. Was there anything specific that was driving that?

Not anything other than our good relationship characteristics here, Collyn. But not anything specific, other than that we can point , too.

Okay. And then finally, just on the mortgage banking side, that also seems pretty strong in the quarter. Was there -- I mean, what are you seeing in terms of the outlook there?

Nothing special going on there other than just continuing healthy market. New home sales are good. We have some relationships with builders of new homes that have certainly helped that. But nothing other than just a healthy market here and battling for our share of that mortgage market I think.

Okay. Great. That was all. Thanks, guys.

Thanks.

Next we have a question from the site of Bryce Rowe with Legg Mason. Please go ahead.

Good afternoon, guys.

Hi, Bryce.

Can you guys talk a little bit about the newer branches that have recently opened and the success you're having there?

Well, you might be referring to Fredrick. We have still some fairly new branches there. I guess we first entered Frederick about three years ago and, or Frederick county. We also recently opened an office in Mount Airy, just back in April of this year. So, a little too early to tell on some of those. In general, our Frederick experience has run pretty much as we expected. It takes into the third year to get to profitability. So, we think we are pretty much on track there with our -- really the first branch we opened in Frederick now reaching that point. We have been very interested in further branching in Howard county, which is obviously a very healthy county from a demographic standpoint.

And we just opened an office in June at Fulton, Maryland, which is in the heart of Howard county at the intersections of route 29 and 216, a very rapidly growing area. So, as we have said before, growing at a couple of branches -- a couple of pre-branches a year at a pace we like and hope to continue. And we think that the recent branches we've opened are doing what we want them to do, particularly with regard to deposit generation but also giving us opportunity for investment sales and developing a full relationship. So we like the branching that we've done and plan to continue it.

Can you guys speak a little bit to the staffing of those branches especially, let's use as an example, the Howard county branch? Is that easy, hard, just moderately easy?

Finding the staff has not been extremely difficult by any means. We do staff those offices with professionals with Series 6 and 7 licenses, for example, to make sure that we are able to talk with the client about their full needs. And certainly, I would say the labor market is tight here, so it's not extremely easy market. But we do approach these branches from sort of a pipeline standpoint; that is we know these branches are coming online at a certain point, so we'll actually hire people in anticipation of those branch openings to make sure they're through the training and ready to hit the ground running down with the new branch opens. So, very much of the staffing is an anticipated kind of the pipeline approach.

Great. thanks, Hollar.

Thanks.

And next we go to Paul Woo with Friedman Billings. Please go ahead.

Good afternoon, guys.

Good afternoon.

Hello Paul.

Could you give us a picture of loan growth going forward, what the pipeline looks like?

Generally, and of course as you might anticipate, we are a little careful about being very specific on future expectations. But, I will say that our pipelines are good. They have been good for months. They remain good. We don't see any slowdown in the pipeline so, based on what we are seeing particularly commercial lending-- that's where we follow these pipelines more closely-- and they are still looking very strong. So I think the kind of growth that you have seen was based on strong pipelines and we still continue to have those.

Okay. And on the deposit side, are you seeing increased competition in markets or your growth still looks pretty good there, too?

Growth in the deposit side is a little harder to predict, and certainly we are in a very, very competitive market. But we've consistently been able to grow deposits. We look particularly, as we mentioned earlier, at non- interest bearing deposits as a good indicator of how well we are doing from a standpoint of developing relationships with clients and getting new customers. And we think as long as we stay focused on a relationship banking approach, and I know a lot of banks say that, but we think that- that's the best way of growing deposits as opposed to flashy specials, although we do a special from time to time. We think it's more about the blocking and tackling of customer relationships and that's what will allow us to grow deposits in the future, we think.

Okay. And on the loan side, what is the percentage that's adjustable rate and priced off of prime?

Yes, Paul, at this point, it's about one-third of our overall portfolio that is what we would consider to be variable rate and almost entire balance of that is tied to prime. We have a few pieces of portfolio that are LIBOR based, but we are still predominantly prime based in terms of our floating-rate position.

Okay. And final question. The securities portfolio duration, is that still around 3.5- 4 years?

No, actually that's come down a little bit to somewhere between 2.7, 2.8 years, even though it's still predominantly, well it's still about 50% in a municipal area. With some of the sales that took place here as Collyn was asking about earlier and some other run off, that portfolio duration has dropped down a little bit.

Okay. Thank you, guys.

Thanks.

Next we go to site of Brian Hagler with Kennedy Capital. Please go ahead.

Good afternoon.

Hey Brian.

Hi, Brian.

I guess my original question was answered but just real quick going back to the Loan Loss provision, obviously you said that going forward you're probably going to realize one since but possibly not the magnitude that you did this quarter. I mean, is it fair to say that you are maybe a little opportunistic with the securities gains you had this quarter?

I can see why you'd connect those dots, we talked about that a little bit -- that really wasn't our approach there. It's really more of viewing the securities portfolio as a source of loan growth, as Phil mentioned earlier. So, that the similarities of those two numbers, it was coincidental as opposed to planned

Yes. I appreciate it. Thanks.

Sure.

And next we have a question from the site of Mark Muth with FTN Midwest. Please go ahead.

Good afternoon, guys. Just a follow-up question on the West. I know you said didn't want to disclose too much here, but first of all, is there a cash component under consideration in addition to the shares that you disclosed on the 8-K today?

Yes. We have just decided not to go into the specific compensation on that. This is a relatively small transaction for us from a materiality standpoint, so for that reason we have chosen not to get into the deal structure.

Okay. Could you give us some background on what caused West to sell, since it seems like all the key partners are staying on board? Just give us a background on the transaction, I guess.

Sure. Yes. You know I think it's probably a combination of factors. Certainly, the -- I think the principles were interested in looking beyond even their own careers to the continuation of the organization and seeing an affiliation with a strong banking company as a way to ensure continuation for some years to come. I think they see the benefit of the potential for cross-fertilization, sharing customers, while that's not our first priority right out of the box.

Our first priority is to make sure that they continue to do what they have done to be successful and of course Sandy Spring Bank do the same. But then over time, for us to learn from each other and get some synergies from our affiliations. So, I think their respect for the kind of reputation that Sandy Spring Bank has for taking care of clients has something to do with their desire to be acquired by us. And I can definitely tell you that our impression of their willingness and ability to take care of their clients made us very interested in them.

Okay. Thanks.

Sure.

(OPERATOR INSTRUCTIONS)

And we do have a follow-up question from the site of Collyn Gilbert with Ryan Beck. Please go ahead.

Sure.

Thanks. Sorry guys. Just one quick follow-up. What was the -- can you just talk little bit about the increase in NPA's and non-accrual loans? I think it went from, I don't know, 400 or something to a million. What was driving that?

Yes, there is not a -- Collyn that's not a situation where there is one large loan. And frankly, as you know, our ratios are so low that any little blip causes something that looks significant. But in general, we are not seeing overall deterioration in portfolios. They're just a collection of loans that have moved into those categories but not anything that we see as a sign of deteriorating economy or deterioration are overall loan portfolio. So nothing going on there that we think is indicative of some sort of a beginning of the trend or anything of that sort.

Okay. Great. Thank you.

Sure

And it does appear Mr. Hollar that that was the final question.

Okay. So thank you all for your questions. We appreciate your participating. We remind you that we appreciate any feedback you have for us. You can e-mail us at ir@SandySpringBank.com. Thanks again and that concludes the call.