Sandy Spring Bancorp Inc (SASR) 2005 Q3 法說會逐字稿

Good day and welcome to the Sandy Spring Bank third-quarter 2005 earnings teleconference call. All sites are on line and in the listen-only mode. You will have the opportunity for questions towards the end of the call. This call is being recorded. At this time, I will turn the call over to President and Chief Executive Officer, Hunter Hollar. 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 just ended third quarter of 2005. As usual, joining me here today is Philip Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel and Corporate Secretary of our Company. As always, the 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 on our website beginning later today; it will be up for about 48 hours. We can take your questions after I do a brief review of the key highlights. But as usual, before we make our remarks and take your questions, I will call on Ron Kuykendall for our 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 (technical difficulty). These forward-looking statements will 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 estimate 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 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, of course, the Company's past results of operation do not necessarily indicate its future results. Thank you.

Thank you, Ron. As we noted in the press release released this morning, it is our third consecutive strong quarter in terms of earnings per share, net income, loan and deposit growth, fee income, and returns on equity and assets. On the basic performance highlights, net income for the third quarter of 2005 was up 48%; or if you exclude the securities gain we took, it was up 33%. Net income for the nine-month period came in at 25.1 million or $1.70, which is up a 25% increase. If you back out the securities gain for the nine-month period, the net was up 19%. We think that is a good solid performance by any measure.

I will just address to comment on the securities gain a bit. That was a result of a sale from our equities portfolio, whereby we own bank stocks that we have some interest in, and then we sell those stocks when we no longer have an interest for whatever reason that might be. That is what happened in this quarter.

ROE was 18.31% for the quarter, compared to 12.89% for the same period last year. ROA came in at 1.58% for the quarter, compared to 1.03% for the third quarter last year. For the nine months, ROE at 16.74 versus 13.65 for last year; and ROA was 1.44% compared to 1.12% last year.

Total deposits increased 6% for the quarter over last year's third quarter, which is healthy growth in this competitive environment. Total loans and leases increased 16% over the prior year's third quarter, which we feel is very solid growth considering we have not been relaxing our credit underwriting standards to help beef up loan volume, as we hear may be going on with some other institutions and others that we compete with.

Our net interest income for the quarter increased by 4.2 million or 23% year-over-year, due primarily to an improved net interest margin. The margin increased to 4.39% in 2005 from 3.54% in 2004, primarily as a result of increased loan growth and active management of deposit rates, combined with the early payoff of Federal Home Loan Bank advances in the fourth quarter of 2004.

Noninterest income increased $2.7 million or 36% in the third quarter; and on a non-GAAP basis, when you exclude the effect of securities gains of 1.8 million in 2005 and 100,000 in 2004, non-interest income increased $1 million or about 14%. The improvement in non-interest income was primarily as a result of three factors. First, there was a 69% increase in the gain on sale of mortgage loans resulting from higher loan volumes. New home sales and refinancings are continuing to churn away throughout our local markets, even as rates are beginning to creep up.

Second, trust income increased 37% due largely to growth in assets under management; and that does not include the impact of our recent acquisition of West Financial, which closed on October 3 after the end of the third quarter. We're looking forward to having that come onstream in the fourth quarter and bolster our results there. West, as we have previously indicated, has ever $550 million in assets under management.

Third, insurance agency commissions increased 18% compared to 2004, due primarily to the acquisitions of the Wolfe & Reichelt Insurance Agency in December 2004. So our efforts to diversify our revenue stream and build fee income are producing satisfying results.

So that is an outline of our news for today, which we can expand on as we take your questions. Operator, if we can have the first question. We appreciate if you would, as usual, state your name and company affiliation as you come on, so we will all know with whom we're speaking.

(OPERATOR INSTRUCTIONS) Jennifer Demba with SunTrust Robinson.

Good quarter. Two questions. First, said you sold some bank stocks during the quarter. Do you expect any of that in future quarters?

That is really a pretty unusual event. That is not something that is going to happen with much regularity at all. So, short answer, no, I don't expect that.

Okay, and your loan growth has been very good. What kind of outlook do you have? Can you kind of comment on the pipeline right now?

Yes. Pipeline is still very strong for commercial deals. Commercial real estate pipeline maybe not quite as strong, as that tends to have kind of large loans that come and go as projects payoff. Frankly, a lot of the projects that we have been involved in have gone so well they have paid off early and that sort of thing. So even though our pipeline is down a little bit in commercial real estate, we think the prospects in this area are still very good.

Gains on sales of mortgage loans or volumes of mortgage loans still seem to be pretty good. Obviously rates are ticking up. But still a lot of activity in this area. So generally, a positive outlook for loan growth.

Thank you.

(OPERATOR INSTRUCTIONS) Chris Marinac with FIG Partners.

Hunter, I wanted to ask you about acquisitions and the small acquisition that you did this quarter. Should we look at that as perhaps being more active, even if it is not banks, but other related businesses?

Well, we have been interested in bank and nonbank acquisitions for some time, and we often say that publicly in various forums. Our interest is not any greater than it has been or really any less than it has been. We think it is just critical to continue to build that stream of non-interest income. We think it's important to continue to look at opportunities for bank deals in our market, even though the number of possibilities is smaller.

But we are fairly picky. We have a fairly high hurdle in the sense that we want something that is going to be accretive right out of the chute in the first year. So not every deal is going to meet our criteria. So I would not say that you should expect very frequent acquisitions. But we are constantly, almost continually evaluating various opportunities.

Great. A separate question, Hunter, on new entrants into your markets, whether that be de novo banks or perhaps other banks out of market. Any feel on sort of their impact thus far?

It is interesting, with some of the higher profile institutions, like Commerce and PNC with the Riggs acquisition coming into the market. Probably the reaction of some other market participants who have been here, like Chevy Chase, affects us more than the new players. So certainly we compete with Chevy Chase, for example, day-to-day; and they are reacting to some of the new entrants with additional hours and free coin counters and that sort of thing.

So we try to be very aware of what is going on in the market. We don't think there has been any significant negative reaction to what we try to do. We know that our strength is relationship banking; it is not necessarily being as convenient as banks who have more of a saturation strategy. But we think that from a relationship standpoint we do well. So again, short answer, we monitor what is going on; we want to make sure we know what is happening competitively; but we think so far that we have stick to our knitting and done pretty well.

Great, thanks so much.

Steve Moss (ph) with Janney Montgomery.

Nice quarter. I was wondering about your net interest margin expectations going forward.

Yes Steve, this is Phil. We anticipate that we can continue to kind of retain the level we have got here in that 439, 440 range. If the Fed continues to move up on the short end, and it looks like there going to even more of that through the remainder of this quarter and into the first quarter, that that would bode well for us going forward. So I think our outlook is that the margin we have been able to build here the first three quarters is solid, and that we ought to be able to continue along that same level going forward.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) Collyn Gilbert with Ryan Beck.

Thanks. Good afternoon guys. Just a follow-up to Steve's question. How about if we were to bake in an assumption that the curve starts to invert? How would that play out with the margin?

I don't know again that that would really bother us a whole lot, Collyn. I think as we said before, we don't tend to go out on the longer end of the curve to begin with. The type of loans we have been putting on the asset side of the balance sheet here have been fairly short, in terms of duration and repricing capability. So I think in that regard, we would be fine. I don't think that we envision that if that were to occur that it would have a negative impact on us.

Okay, okay. Just a couple other questions. How big is the bank stock portfolio?

We haven't disclosed that on a separate basis. It is part of the investment portfolio as indicated on our balance sheet. It is not a significant player. It is not something we do in a great amount. But we haven't disclosed, have not separated that out; so I would rather not disclose that in this context.

Okay, okay. Is it safe to assume that the gain, the large gain this quarter came from one equity? Or was it a grouping of stock?

In this quarter, it was actually one equity. But again, and somebody asked earlier, I believe, that is not the historic thing (multiple speakers) going to happen very often.

Sure, okay, okay. Can you guys talk a little bit about the commercial construction portfolio? Just the types of loans you're putting in there, kind of the average size, the type of pricing you're seeing. Because that has been a segment of the portfolio that has grown pretty aggressively over the last couple quarters.

Of course, we do two types of construction lending. One to builders for acquisition development, construction of homes; and then we also do residential construction loans for the home owner. I think in both cases, those portfolios are going well. They tend to be, particularly on the commercial side -- well, really on both those categories -- prime based, typically. So that is how those are priced.

Okay. Just within specifically the commercial construction portfolio that is up 15% this quarter; I think it was up 26% last quarter, looking on a linked-quarter basis. Just to gauge kind of the average size of those loans, to see if it is more a function of loan volume or individual loan size, or if it is -- ?

Yes, the loan size of those commercial construction, they tend to fall into the several million dollars, a couple million kinds of sizes are typical for us. We're not dealing with the huge national builders. We are dealing with more local builders. So in that, couple of million is a typical size there. Sometimes smaller, sometimes larger, but that is fairly typical.

Okay, when you talked, Hunter, about the pipeline on the commercial side being strong, were you talking about C&I, or were you talking about the commercial construction?

Well, C&I is particularly strong. The commercial construction, our pipeline is a little lower right now than it has been, because we have had some deals that have paid off early. In other words, lots have sold faster, houses have moved more quickly than we thought they would. So the pipeline is a little lower than we like it. But we don't think there's any underlying weakness; it's just a matter of finding some more deals in a market.

If there is a restriction on the market, it's local governments who are concerned about growth prospects and various moratoriums on building permits. Some of those kinds of things could dampen some loan growth in this entire market. But we think other than that the market is healthy. Our pipeline will rebuild.

Okay, to that point, are you concerned about that? Do you think the likelihood of some sort of moratorium being put on is there?

In Frederick County, for example, there have been some water issues; and in other jurisdictions there have been various kinds of controls put on. The job growth in this area tends to continue to say there has got to be housing growth. So yes, individual jurisdictions go through their pains, but we don't think that is going to stop growth.

Okay. Just one final question on the expense side. Can you just speak a little bit about some of the expense trends in the quarter? I guess specifically other-other, which I know was (indiscernible) in the second quarter. But if that is a good run rate that we're seeing? And then too the salary line was down, I guess, which was somewhat of a surprise.

In terms of an overall level of expenses here, I think where we are at here in the third quarter is a pretty good run rate overall looking forward. Other expenses, you are correct. We had some seasonal things that pop into the second quarter that again were the case this year; that as you move into the third quarter therefore were not evident again. There is nothing else in there. It is a little bit of this in one direction, a little bit of that in the other direction kind of thing. So that is probably at a good normalized level in terms of other expenses.

As far as salaries and benefits are concerned, I think it is primarily just the amount of salary and benefits per employee has been down slightly here in the third quarter. We certainly added some personnel to the overall ranks of the Company, in particular, because we opened at least the one branch in the Fulton area in the third quarter. But by and large I think it is just the amount per employee has kind of moderated here, and that number is probably pretty good for run rate purposes as well.

Okay, great. Thanks very much, guys.

Jennifer Demba of SunTrust Robinson.

Your tax rate seemed a little higher this quarter. Can you give us some color behind that and what you are looking for in the future?

Jennifer, primarily the gain that we took there in terms of the sale of the security was at more of a full freight type of a tax rate. So that primarily is the reason that it kind of popped a little bit here in the third quarter. Our overall trend, though, because of what we have been doing in the investment portfolio is for the tax rate -- if you have looked over the past number of quarters -- to be a little bit higher than it had been traditionally.

We have been in the -- forgetting about what happened here in the third quarter, where it was almost 29 -- we have been roughly 26 (technical difficulty). I think that is probably a reasonable tax rate for the time being. Now as we continue to look at things like adding West Financial and other revenues like that, that not going to be as tax preferenced, naturally the tax rate is going to rise a little bit over time.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There appears to be no further questions.

That wraps up our questions. On behalf of Ron Kuykendall and Phil Mantua this is (technical difficulty) you for participating in the call today.