Sandy Spring Bancorp Inc (SASR) 2005 Q4 法說會逐字稿

Good day. All sites are now on the conference line in the listen-only mode. Please note this call may be recorded. I would now like to turn the program over to Hunter Hollar.

Good afternoon. Welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter of 2005 along with a brief year end wrapup. Joining me here today as usual is Phil 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 at Sandy Spring's website beginning later today and it will be available for about 48 hours.

We can take your questions after a brief review of our key highlights. Before we make our remarks and take your questions, Ron Kuykendall will give the Safe Harbor statement.

Thank you, Hunter. Good afternoon, ladies and gentlemen. In this webcast Sandy Spring Bancorp will make forward-looking statements that are subject to risk and uncertainty. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk 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 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 operation do not necessarily indicate its future results. Thank you.

Thank you, Ron. As we noted in this morning's press release, it's our fourth consecutive strong quarter in terms of earnings per share and net income, which were all at healthy levels, even if you take out some fairly substantial securities gains that we took during the fourth quarter of this year to help fund what turned out to be even better than expected loan growth as we finished out the year. Loan growth during the quarter was quite strong and especially strong in the final month of the quarter.

Our returns on equity and assets are back where they belonged, where we like them, at 14.76 and 1.31, respectively, for the quarter and 16.21% and 1.41%, respectively, for the full year. We think it's fair to note that these measures of our performance are back near our historical levels.

On the basic performance highlights, we are pleased to report that net income for the full year was just over $33 million or $2.24 per share, compared with $14.4 million or $0.98 a share for 2004.

Comparing December 31, 2005 balances to December 31, 2004, total assets increased 7% to 2.5 billion, due mainly to strong loan growth. Total loans and leases increased 17% to $1.7 billion compared to the prior year. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 6% to $2 billion at year end. Also at year end, the stockholders equity increased 12% to $218 [million] or 9% of total assets.

During 2005, the stock price reached a 52-week high of $38.55 on December 19th, recovering from the 52-week low for the year of $30.40 on April 12th. The stock price closed yesterday at $36.10, off a bit from where it was in late December.

We think asset quality is excellent. We see no signs of deterioration. While there has been substantial loan growth throughout the year along with a good strong pipeline of new business continuing, essentially nothing has changed concerning our loan underwriting standards or the credit approval process.

It's worth noting that we had a loan loss provision of $2.6 million in 2006. We have maintained a consistent and detailed methodology for analyzing the adequacy of our loan loss reserve. Of course, we can calculate a very low level of reserve based on past losses, which have been almost nonexistent. However, we do track numerous softer factors including loan growth trends and problem loan and delinquent loan trends.

In addition, we do take into consideration current economic conditions, large loans relative to the total portfolio, the quality of our risk identification systems, and concentration of loan types. We believe our level of reserves to be fully adequate and we believe we will need to continue to make provisions to the reserve in 2006, particularly in light of the volume trends that we are seeing.

The loan growth is there primarily because we have a seasoned commercial lending team who are executing according to their potential over the course of the year. And yes, we have also added some depth from several new hires we made. The local economy is obviously healthy; that certainly helped. Our lender deposit percentage ended 2005 at 93%, higher than we had experienced going back many years and more in line with peer banks. We have intentionally, of course, emphasized loan growth and have desired a higher loan-to-deposit ratio. Comparing the full year of 2005 with 2004, net interest income increased by $14 million or 19%, due primarily to increased loan growth and our early payoff of Federal Home Loan Bank advances in 2004. These factors resulted in an increase in the net interest margin to 4.39% for the year 2005 compared to 3.68% for 2004.

The margin held just about steady for the entire year, which is good news and validates the earlier decisions we made and is good news, considering the problems that many banks of our size are having holding their net interest margin in this rate environment.

One highlight in today's news release that I would like to mention is that we just reached an agreement to acquire Neff and Associates, an independent insurance agency located in Ocean City, Maryland. As you know, we have said it has been our goal to broaden our insurance agency business. This particular acquisition gives us the opportunity to further serve the small-business customer base that is so valuable to us strategically. The firm's principal, Keith Neff, will continue in the sales and service capacity after we close the transaction during the first quarter.

We already offer the small-business community a good range of products through our Chesapeake Insurance Group, but what is unique about Neff and Associates is they specialize in physician liability insurance with approximately $1.2 million in annual revenues. The medical community is already a very good small-business customer segment for Sandy Spring Bank, so we think it has great potential for cross selling not just in terms of specific insurance products.

We also like to think in terms of the broader opportunities we now have with West Financial, which we also acquired recently, and which has had significant experience working with physicians, and our expertise on the asset management site with our trust department. So we think this all fits together very nicely.

Just as has been the case with Chesapeake insurance Group and West Financial, the Neff Insurance Agency has an outstanding reputation for superior client service, which is one of the hallmarks of the Sandy So it's a great fit from that standpoint, and we're going to continue to look for more opportunities to require fee-based businesses that make strategic sense.

While we are on the subject of the diversification of revenues, I should point out that non-interest income increased $2.3 million or 30% in the fourth quarter of 2005 as compared to 2004 excluding the effect of securities gains; that increases still 22%, so it's still significant. As suggested in my earlier comment, this was due primarily to an increase of 159% in trust and investment management fees, reflecting in part the acquisition of West Financial Services early in the fourth quarter of 2005. Similarly, insurance agency commissions increased 28% compared to 2004, including the acquisition of the Wolfe & Reichel Insurance agency in December of 2004.

So that's a quick outline of our news for today, and we would be happy to expand on this as we take your questions. So I would ask the operator if we can have our first question. And we would ask the questioners as usual, to state your name and company affiliation so we will all know with whom we are speaking.

(OPERATOR INSTRUCTIONS). Rick Weiss with Janney.

I had a couple of questions, just on some line items, if you could. You started with salaries and employee benefits. It looks like it went up from the third quarter. I was just wondering, to know why.

Well, first of all, Rick, we've got the salary benefit cost of having West Financial on board for a full quarter so that's one component of the answer. The other major component of the answer is just incentive compensation costs in the fourth quarter were pretty significant, a lot of it being driven by, of course, the loan growth and the production that we got,m as well as just some broader programs we have on a bank-wide basis. So those are the two most significant things.

We also incurred some pretty good run-off in the health insurance area as well over the third quarter, considering a little bit higher level of claims within our employee base.

Would this be kind of like year-end bonus situation, or is this kind of like incentive comp that could go on?

It's probably a combination of the two. Some of it is making sure that we've got everything covered for the year. And again, in the production area, especially on the loan site, we had a very, very strong close here in the month of December. So some of that's related to it; and then other parts of it are more annual components that help us close out the year as well.

Just to add to that quickly, West Financial has 18 employees. So that was, as Phil said, part of the answer.

So there's nothing like stock options or accelerated vesting in that; right?

There's no stock option cost in 2005 at all. We will start, obviously, to incur those costs in this year, but there's no option cost at all in the year or in the quarter.

Any kind of estimate for 2006, to use for the stock option?

Short answer, no; we don't have any estimate on that at this point. And as you know, we haven't been giving earnings guidance. So we really don't have anything to disclose on that.

And one other question, if I could. Just with regards to short-term borrowings, it looks like you increased a decent amount from the third quarter, like -- was it 100 million?

Yes. First of all, there, if you look at the balance sheet bonus, it's just a reclassification from long-term to short-term. The second part of it, though, is we have a significant amount of customer repurchase agreements that fall into short-term borrowings. You may have noticed in the press release we talked about customer-oriented sources of funds and the growth there. A significant amount of that coming from these customer repurchase or sweep accounts that are commercial customers. And an inordinate amount of that growth between the end of last year end this year in the short-term borrowing areas because of those customer repurchase agreements. Probably to the tune of about $53 million year-over-year to pin point the endpoint.

(OPERATOR INSTRUCTIONS). Mark Muth with FTN Midwest.

Could you talk about what your expectations are for 2006 in terms of de novo branching? In the past I know we've talked about two to three a year. If you think that sort of holds this year and if it's -- what kind of areas you are looking at, I guess.

We have said in the past we like that couple branches a year pace, and we hope to duplicate that in 2006. At this point, we only have one new branch that we know of that is coming online in 2006, and that happens to be in Western Frederick County. So if we're going to have a second one in 2006 we're going to need to locate it pretty soon, and we don't know exactly where that's going to come from.

But we do have constant efforts in that regard. So, not sure where the second or certainly a third one are coming from in 2006, but we are continuing to work on that.

(OPERATOR INSTRUCTIONS).

(OPERATOR INSTRUCTIONS). Rick Weiss. Janney.

Hunter, I wonder if you could talk about some of the competition in the D.C. area. Has it changed since PNC came in or commerce is starting to move down? Have you noticed anything?

That's an interesting question, certainly something I think we're monitoring more closely and probably most of our competitors monitoring more closely as some of the well-publicized entries here with Commerce Bank and PNC, and acquiring Riggs and Sovereign Bank coming in here.

I would not say that we noticed any particular change in the market -- increased hours get some discussion in the press when financial writers talk about the banking industry, but we haven't seen a lot of talk about that among our customer base. So it's our sense that the extended hours is not a big deal although, again, we continue to monitor what others are doing to make sure that we stay very competitive.

So I would say, other than the buzz in the press and probably competition for branch sites, I think it has become pretty obvious that branch sites in our area are hard to find and lots of people are looking for them. I'd say that's probably the thing we have noticed the most at this point.

I might add that there's been what I'll call in some places localized kinds of occurrences where someone like Chevy Chase, for example, is reacting -- at least, I think -- to the onset of the Commerce and the existence of PNC now. And they are doing things with time deposit rates and combination types of accounts or whatever. But in specific markets within our broader overall market here that we from time to time have to react to. So more of that kind of localized business, to characterize it, than anything broad-based.

How has the competition been with respect to both loans and deposit gathering?

This market is always competitive. We just sort of get used to that. We have not seen particularly overheated competition in deposit rates, at least yet. Certainly, rates are going up but nothing that seems really intense other than just it's always competitive.

On the loan side, I think it's a pretty well documented fact, and we experience it on a daily basis, that for commercial deals from fairly small on up to larger, very price competitive. No question about that.

Have you been walking away from any business, either because of the pricing isn't (indiscernible) or people want you to give up some underwriting standards?

The underwriting standards seem to be holding fairly firm; but yes, we have walked away from some deals on price or been rejected because of price on loan deals, yes.

Jennifer Demba with Robinson Humphrey.

I was wondering what day you are expecting the [Ness] transaction to close and if that is going to be immediately accretive?

It will certainly be immediately accretive. There's no question about that. And that's certainly the basis for which we evaluated the deal. As far as the closing is concerned, the press release really states as such that it's going to be during the first quarter. And depending on what it's going to take to just pull everything together now that we just signed the definitive within the last couple days, it's kind of hard to really put a specific date on that yet.

And back to the auctions expense question. It looks like in your last 10-Q, that would have impacted you buy a few hundred thousand a quarter. Is that a good estimate as we move into 2006?

Well, certainly used in the past disclosures that we put out either from the Q or from the K or annual last year it's probably about your best means for getting out an estimate. So I would say [as for anything else], that is probably the place to go, yes.

(OPERATOR INSTRUCTIONS). Carter Bundy with Stifel Nicolaus.

Hi guys, this is Bryce. A couple of questions, one just general pipeline for loans and deposits into 2006. How does it look? And then the second question would be more on the capital side. It looks like capital is growing slightly here, and wondering if you are targeting any kind of dividend payout ratio or if we should expect any more repurchase activity going into 2006?

Let me comment on a couple, and maybe Phil can handle some of that. In terms of the pipelines, loans and deposits, we have a stronger pipeline, and of course in the commercial areas where we track that stronger pipeline going into 2006 than we had going into 2005. And we thought 2005 was pretty strong. So I think good news there on loan demand.

We did notice a little bit of more downturn than is typical in our small business, and we kind of separate between small business and then our primary kind of larger businesses or middle market, but a little more drop-off at year end in the small business arena. So we are going to be watching that to see if that's a signal of any sort of downturn. But we don't think it is, because among larger businesses our pipeline is very strong.

On the deposit side, as we have talked about, clearly this is a competitive area. And as we have strategized about 2006 and beyond, there's no question that deposit growth is going to be very much an area of emphasis and attention for us because we think that the competition there is going to be strong; we think banks are desiring deposit growth, and certainly we are. So I think that's going to be a real emphasis for 2006.

(OPERATOR INSTRUCTIONS). It appears we have no further questions at this time.

That wraps up our questions. We want to think everyone for participating, and we want to remind you we appreciate your feedback on these calls. And you can e-mail us at any time at [IRF]SandySpringBank.com. Thanks again, and that concludes the call.

Good day. All sites are now on the conference line in the listen-only mode. Please note this call may be recorded. I would Alley Katrina program over to Hunter Hollar.

Good afternoon. Welcome, everyone, to Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter of 2005 along with a brief year end wrapup. Joining me here today as usual is Phil 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 at Sandy Spring's website beginning later today and it will be available for about 48 hours.

We can take your questions after a brief review of our key highlights. Before we make our remarks and take your questions, Ron Kuykendall will give the Safe Harbor statement.

Thank you, Hunter. Good afternoon, ladies and gentlemen. In this webcast Sandy Spring Bancorp will make forward-looking statements that are subject to risk and uncertainty. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk 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 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 operation do not necessarily indicate its future results. Thank you.

Thank you, Ron. As we noted in this morning's press release, it's our fourth consecutive strong quarter in terms of earnings per share and net income, which were all at healthy levels, even if you take out some fairly substantial securities gains that we took during the fourth quarter of this year to help fund what turned out to be even better than expected loan growth as we finished out the year. Loan growth during the quarter was quite strong and especially strong in the final month of the quarter.

Our returns on equity and assets are back where they belonged, where we like them, at 14.76 and 1.31, respectively, for the quarter and 16.21% and 1.41%, respectively, for the full year. We think it's fair to note that these measures of our performance are back near our historical levels.

On the basic performance highlights, we are pleased to report that net income for the full year was just over $33 million or $2.24 per share, compared with $14.4 million or $0.98 a share for 2004.

Comparing December 31, 2005 balances to December 31, 2004, total assets increased 7% to 2.5 billion, due mainly to strong loan growth. Total loans and leases increased 17% to $1.7 billion compared to the prior year. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 6% to $2 billion at year end. Also at year end, the stockholders equity increased 12% to $218 [million] or 9% of total assets.

During 2005, the stock price reached a 52-week high of $38.55 on December 19th, recovering from the 52-week low for the year of $30.40 on April 12th. The stock price closed yesterday at $36.10, off a bit from where it was in late December.

We think asset quality is excellent. We see no signs of deterioration. While there has been substantial loan growth throughout the year along with a good strong pipeline of new business continuing, essentially nothing has changed concerning our loan underwriting standards or the credit approval process.

It's worth noting that we had a loan loss provision of $2.6 million in 2006. We have maintained a consistent and detailed methodology for analyzing the adequacy of our loan loss reserve. Of course, we can calculate a very low level of reserve based on past losses, which have been almost nonexistent. However, we do track numerous softer factors including loan growth trends and problem loan and delinquent loan trends.

In addition, we do take into consideration current economic conditions, large loans relative to the total portfolio, the quality of our risk identification systems, and concentration of loan types. We believe our level of reserves to be fully adequate and we believe we will need to continue to make provisions to the reserve in 2006, particularly in light of the volume trends that we are seeing.

The loan growth is there primarily because we have a seasoned commercial lending team who are executing according to their potential over the course of the year. And yes, we have also added some depth from several new hires we made. The local economy is obviously healthy; that certainly helped. Our lender deposit percentage ended 2005 at 93%, higher than we had experienced going back many years and more in line with peer banks. Would have intentionally, of course, emphasized loan growth and have desired a higher loan-to-deposit ratio. Comparing the full year of 2005 with 2004, net interest income increased by $14 million or 19%, due primarily to increased loan growth and our early payoff of Federal Home Loan Bank advances in 2004. These factors resulted in an increase in the net interest margin to 4.39% for the year 2005 compared to 3.68% for 2004. The marginal just about steady for the entire year, which is good news and validates the earlier decisions we made and is good news considering the problems that many banks of our signs are having holding their net interest margin in this rate environment.

One highlight in today's news release that I would like to mention is that we just reached an agreement to acquire [math] and associates, and independent insurance agency located in Ocean City, Maryland. As you know, we have said it has been our goal to broaden our insurance agency business. This particular acquisition gives us the opportunity to further serve the small-business customer base that is so valuable to a strategically. The firm's principal, to the, [Keith math], will continue in the sales and service capacity after we close the transaction during the first quarter.

We already offer the small-business community a good range of products through our our Chesapeake insurance group, but what is unique about [Neff] associates is they specialize in position liability insurance with approximately $1.2 million in annual revenues. The medical community is already a very good small-business customer segment for Sandy Spring Bank, so we think it is great potential for cross selling not just in terms of specific insurance product. We also like to think in terms of the broader opportunities we now have with West Financial, which we also acquired recently and which has had significant experience working with physicians, and our expertise on the asset management site with our trust department. So we think this off its together very nicely.

Just as has been the case with Chesapeake insurance group and West Financial, the [Neff] insurance agency has an outstanding reputation for superior client service, which is one of the hallmarks of the Sandy Springs superior client service, which is one of the hallmarks of the Sandy Springs's culture. So it's a great kid from that standpoint, and we're going to continue to look for more opportunities to require fee-based businesses that make strategic sense.

While we are on the subject of the diversification of revenues, I should plan to non-interest income increased $2.3 million or 30% in the fourth quarter of 2005 as compared to 2004 excluding the effect of securities gains; that increases still 22%, so it's still significant. As suggested in my earlier, and, this was due primarily to an increase of 159% and trust and investment management fees, reflecting in part acquisition of West Financial services early in the fourth quarter of 2005. Similarly, insurance agency commissions increased 28% compared to 2004, including the acquisition of the wealth in Reichel to insurance agency in December 2004