Sandy Spring Bancorp Inc (SASR) 2012 Q1 法說會逐字稿

Good day and welcome to the Sandy Spring Bancorp Incorporated first-quarter 2012 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Daniel J. Schrider, President and CEO. Mr. Schrider, the floor is yours, sir.

Thank you and good afternoon, everyone, and welcome to Sandy Spring Bancorp's earnings call to discuss our performance for the first quarter of 2012. This is Dan Schrider speaking and I'm here with Phil Mantua our Chief Financial Officer, as well as Ron Kuykendall, our General Counsel. And as usual today's call is open to all investors, all analysts and the news media, and there will be a live webcast of today's call and a replay of the call available at our website beginning later today. After some brief review of highlights, we will take your questions. And before we get started, Ron will give our customary Safe Harbor Statement.

Thank you, good afternoon, everyone. 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 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 or 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 operation do not necessarily indicate its future results.

Thank you, Ron. Today we're going to keep our prepared remarks rather brief as it was a solid straight forward quarter with no unexpected developments. As reported in our Press Release issued this morning, net income for the first quarter of 2012 was $8.5 million, that's $0.35 per diluted share. And this compares favorably to net income of $7.3 million, or $0.30 per diluted share, coincidently that we reported both for the first quarter and fourth quarter of 2011. So we're off to a solid start for the forthcoming year. We think it's a good indicator that total loans increased for the third straight quarter and are also encouraged that this growth was nicely distributed across our commercial and small business portfolios, investor real estate, residential mortgages and the residential construction portfolio. Competition, it's still as intense as ever but the economy across our footprint appears to be trending a bit better which is creating a wider range of opportunities for our lenders to evaluate higher quality transactions and to maintain a nice pipeline of new business opportunities.

New commercial loan originations totaled a healthy $98 million for the first quarter of 2012. As an encouraging counterpoint to the loan growth story, non-performing loans declined to $72.2 million at March 31, 2012 compared to $88.3 million at March 31 of 2011 and $79.1 million at December 31, 2011. The coverage ratio of the allowance for loan and lease losses to non-performing loans remained at 62% at March 31 compared to December31. We're comfortable with the level of coverage as we continue to work the NPAs off our balance sheet. The net interest margin, it declined to 3.56% for the first quarter of 2012 compared to 3.65% for the first quarter 2011, but the margin was up a bit when compared to 3.51% that we posted in the fourth quarter of 2011. On the deposit front, customer funding sources which includes deposits and other short-term borrowings from our clients, increased 3% compared to March 31, 2011. This was attributable to a 12% increase in non-interest bearing and interest bearing checking accounts which more than offset the 9% planned reduction in our timed deposit portfolio. We continue to execute on a strategy to improve our deposit mix and in turn push the margin higher.

On a related note, we see the growth trend in checking accounts as a very important element of our overall deposit strategy as it consistently creates new opportunities to grow multiple product banking relationships with our clients. Our front line bankers have always been quite good at across-selling other services off the basic checking account platform that initiates a core relationship and a long-lasting relationship with us. Evidence of our continuing success at building multiple product relationships is an inherent in the revenue growth from our various wealth management services. This growth is coming from fees from trust and investment management as well as the sales investment products, which increased overall 11% for the first quarter of 2012 compared to the first quarter of 2011. In fairness, while the addition of new clients was the primary driver of the increase, improved market conditions during the first quarter obviously had a positive impact on the value of assets under management upon which most of our fees are based.

On the non financial highlights side, a couple of examples which include excellent progress on integrating the acquisition of CommerceFirst Bank into our organization. The acquisition teams on both side of the transaction have been working diligently. We have received all of the necessary regulatory approvals and we do expect to complete a seamless transition in the second quarter with a target date of June 1. And one development that we're very proud of occurred within the past few weeks as we are once again ranked among the top 100 most trustworthy companies on a list compiled by Forbes by Government Metrics International. GMI is a New York based independent global leader in corporate governance. We were about 1 of 15 repeaters among the 100 on the list this year.

GMI uses a complex quantitative and qualitative analysis that goes way beyond just comparing the raw data of a company's income statement and balance sheet, in order to assess the true quality of corporate accounting and management practices. GMI examined over 8,000 companies traded on the US exchanges in order to boil it down to the top 100. They use a model that identifies practices that historically have had a high correlation with increasing shareholder risk. Then they assigned each company an accounting and governance risk score. So we are especially gratified to have done so well considering the underlying purpose of the most trusted companies list commissioned by Forbes. Our financial reporting, our governance and our credit groups have really distinguished themselves with this recognition.

And that wraps up my comments as we've covered most of the other key financial highlights and stats in our press release today and we will now move to your questions. So Mike, we can have the first question please and we would appreciate it if you would state your name and Company affiliation as you come on so we know with whom we are speaking.

And thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Mike Shafir of Sterne, Agee.

I was just wondering if we could just talk about the margin for a bit, great job this quarter in terms of getting that to raise up. But I was thinking about looking at the securities yield it looks like it-- the securities yield actually when up, the overall securities yield when up this quarter and I was wondering did you guys -- what did you guys add because the securities portfolio as a whole shrunk, so I was just wondering how that came about?

Mike, this is Phil, a couple of thing in that regard. First of all, thank you, we're quite pleased to have the margin hold up and do what it did here in the first quarter. And I think you're on point as it relates to the most contributing factor there being what is going on in the investment portfolio. I think it's a couple of things. I think in the middle of the quarter, we had some opportunity to take into yield some premiums related to some repayments or whatever in the mortgage-backed portion of the portfolio.

But then I think also toward the end of the quarter and especially in March, given what happened to the long end of the curve here for a temporary period of time we found that there was some buying opportunities and values in the municipal portion of the portfolio. So I think we were able to effectively replace some higher yielding type things that were either being called or maturing off with some respectable yields without having to really extend our duration of the overall portfolio, which is still pretty much around 3.3 years. So I think we just -- I think we took advantage of some opportunity there and it allowed us to prop that yield up even though the overall portfolio declined in size.

Okay, and as just said moving forward as we kind of think about that obviously the tenure's kind of retraced it's path and so forth--

Right.

Would we expect to see a little bit of pressure on that current overall yield then in the next several quarters if we kind of--

Yes, I would think so, I think that we continue to believe that the overall rate environment is going to stay at the current levels. And absent of some bumps up and down in a trading range for example that you might find let's say on the 10-year that generally speaking that would be the impact, yes.

And then just on the funding mix side it looks like you guys have done a pretty good job of reducing your reliance on CDs or actually I would say lack thereof, but that CD portfolio continues to come down.

Correct.

As we move along, but the yields on the core deposits were getting kind of bare minimum I think your core deposit yield inclusive of money market, savings and interest-bearing demand at this point is around 18 basis points. It doesn't seem like there is a lot of room left to maneuver.

No, yes, I would agree with you. And I think that we've taken that into consideration as we looked to the rest of the year and as we've discussed before where we think the margin is probably going to drift downward some as we get closer to the end of the year as opposed to where we are now. And then in conjunction with that, which we don't really have a reference to it yet, is the impact of the influx of funds on both sides of the balance sheet from the acquisitions that'll close next quarter. I think that what we've tried to do in just recent times here is position our rates across the deposit side so that we can have a smooth transition with the core element of the rate deposit -- rate position for commerce first and then factor that through, so -- I think that's kind of where we stand.

Okay. And then just on the loan growth side, last quarter when we had this call, you guys seemed a little bit more upbeat about the growth prospects. What would you kind of expect in terms of exclusive of the acquisition or an annual growth rate for 2012?

Yes, we had a pretty robust fourth quarter as you remember, Mike, and I think our outlook is not too dissimilar right now and that's on a average growth basis in the mid-single digits. We're still cautiously optimistic about loan growth just because of the competitive environment is as it is and we are staying pretty disciplined, or I should say very disciplined, to both the pricing as well as the credit structure side. So, we think that's our outlook right now in terms of loan growth. It could be a little bit lumpy from quarter to quarter as we work out some NPAs, but overall that's what we look to see.

All right, thanks a lot for all that detail, guys, I appreciate it.

You're welcome, Mike.

(Operator Instructions) Carter Bundy of Stifel Nicholas.

Phil, a question for you, jumping back in on the bond book here, could you remind me if I'm correct here in this number, I think you had about $380 million that you expected to be called this year and then you're running about $30 million of cash flow a month off the bond book?

Yes, in terms of the cash flow, that $30 million, actually it's about $8 million to $10 million a month in cash flow off the mortgage-backed or the asset-backed portion of the portfolio and at the moment our projection for overall maturity, let's say or call out of the portfolio for the rest of this year, is about $260 million with another $160 million or more to come off approximately in the -- in 2013. So over the course of the remainder of this year and through the end of next year, it is about 43% of the total portfolio that could come to maturity or be called away.

43% of the book and that includes the stuff that could be called away in 2013?

That's correct.

Okay.

That's an all-inclusive number, both of those numbers are all inclusive of anything that's either maturing called or the cash flow runoff that we talked about a little bit earlier.

Okay, and outside of what we saw jump around in the fourth or I guess in late March where you made the investments, would it be reasonable to say that a lot of that cash flow would probably be going into new money somewhere around 2%, 2.25%, 2.5%?

Yes, that's probably a good place to put it in terms of a range, yes, that makes sense because I think that what we did do in-- we were able to do in March on a kind of blended basis which had some municipal purchases and also had some agency type paper in it, was probably a blended average of around 2.65%. So figuring that the opportunities that we took advantage of the Muni side would be as great that probably bring that down into the range you just quoted, yes.

Okay, and then in terms of the MBS book this quarter you're saying prepayments accelerated?

I think at one point during the quarter, if I'm not mistaken, I think they did accelerate for a short period of time, but then worked their way back based on the rally there in March.

Which is why we saw the gap back up then in yields from the pressure you saw in fourth quarter.

That's correct.

Okay, and then on the loan side, we've been hearing a lot of commentary on the competitive environment getting very very strong including your comments, Dan. Could you talk about -- do you still feel confident in that sort of loan growth outlook given that sort of competitive environment and will that mean that you'll have to incrementally I guess sacrifice on pricing to get that growth?

No. I think our outlook is based upon staying close to we want to put on the book both from a quality and a pricing standpoint. The prepays both from-- that we experienced in probably the last eight quarters have slowed, so that's coming back to us while production is picking up. So we think that growth expectation at least right now is not far out of line from what we should expect again while staying pretty disciplined on what we want to put in the book. We're still winning our fair share of opportunities when the prospect values dealing with the local community bank that's strong and stable. But there is -- the competitive environment certainly has heated up quite a bit and we're seeing some stretching around the edges.

Could I ask a question, if you can sort of ballpark this, is this a function of the market getting better or is this a function of recent hires moving book to business? What's driving the growth right now?

Yes, I think it's probably -- it's not necessarily a function of hiring and pulling books away. In our case it's probably a couple of things that play into it, Carter. One is, the progress that our teams have made in dealing with the asset quality issues that we faced back in '08, '09 and into '10, and so that has fundamentally allowed our front line to get back out and be more aggressive. And then beginning about a year ago, or little bit more than a year ago, we really rallied our teams both in the Commercial and the Wealth and the Mortgage and the Retail together to get back out on the street. And so we've had a higher number of opportunities driven by a much greater calling activity, which we were prohibited from doing during a time when we were really internally focused on working through credit. So, I think it's the combination.

And then final question and I'll hop out of the queue, here. Has it been more so regional competitor -- or excuse me, large cap competitors or more so community bank competitors that had been aggressive in pricing?

Community bank competitors.

Okay.

And I would say as competitive on structure as on price.

Okay, great. thank you all very much.

Thanks, Carter.

Matt Schultheis of Boenning & Scattergood.

I know you've covered this in the past, but if you could just remind me. Would you guys be interested in doing FDIC assisted deals or even buying anything maybe not FDIC assisted but something that's clearly a sub optimal performer on the credit standpoint?

Yes, Matt, this is Dan. The-- a couple of things, one is we made a decision a while back that that probably was not an area where whether it was FDIC assisted or it just had non FDIC hair on it that we would necessarily go after that and predominately because we don't see a lot of that in our market. The FDIC assisted transactions thus far have typically been out of the geography where we are and those that tend to be more troubled institution, maybe not rising to the level of FDIC aren't a good strategic fits for us. And so, it's not likely we would play in that game.

And do you have any sense of -- obviously they're sold not necessarily bought but assuming that your current acquisition gets integrated well, how often -- how long do you think it would take before you were willing to do another transaction?

I think the-- our experience does thus really going back to our '07 experience with the two acquisitions which occurred within one calendar year and how smooth this one is working, we would, if the right opportunity came along, we would not be hesitant to move along right away. That's not to say that there is one, but we would be prepared to move.

Okay, thank you very much.

Thanks, Matt.

David Peppard of Janney Capital Markets.

Two questions, the first one is on the credit, things did get a little better this quarter and credit costs appear to have to do more with the resolution of existing problem credits and the limited migration of new credits. How should we look at credit costs going forward for the rest of the year here?

That's a good pick up, Dave. The-- what you saw in the net charge off number is just that. It's continuing to work through credits that have been-- that are on the books that have had specific reserves and just the process of working through them and taking the write-downs when appropriate. As opposed to kind of kicking the can down the road. So what we're seeing in terms of provision expense is driven more by a function of loan growth and activity on that side than it is a deterioration in the existing book. And so if you kind of look at our outlook for loan growth should give you some indication that we're not -- we're looking at pretty modest provisioning levels throughout the year relative to our ability to produce new credits for the book.

Right, where did your problem loans balances end the quarter as compared to the end of the year?

In terms of our NPA balances?

No, like substandard and doubtful, classified?

Give me one second here. Yes, our classifieds have moved down significantly by about $10 million from end of the year to the end of the first quarter. And our total criticized assets, which include our special mention credits, are about level.

Okay.

Migration is -- continues to be at a trickle pace.

Okay, and lastly in the non-interest expense line, specifically compensation expense, how should we look at compensation expense relative to the loan growth you're talking about for rest of the year?

I would -- in terms of the connection between those two in particular and those are not completely readily identifiable, but just using that as a proxy for overall levels, I would think that you could see it pretty much on a comparable basis in terms of the levels of incentive comp et cetera that we've incurred here in the first quarter being similar throughout the rest of the year given a similar type of loan growth and as Stan kind of estimated a little bit earlier in reference to one of the other questions.

Okay, so the $15.7 million is a good run rate for rest of the year to say contained at that level?

Well, that's-- in terms of the overall salary and benefit level which has a number of other things in their that move around a little bit based on timing or whatever, that number is probably a little bit higher here in the first quarter. We had some additional payouts on incentives that were accrued for last year that then had higher levels of Social Security tax and payroll related type taxes, 401(K) match type expenses that occurred in the first quarter that are likely to smooth back out a little bit as you move ahead here. So there might have been in that regard, a couple $300,000 worth of that that probably won't recur in that particular item of the non-interest expense and the overall area of non-interest expense.

Okay, thank you very much for taking my call, guys.

Thank you, Dave.

Well at this time, there appears to be no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Daniel Schrider for any closing remarks. Sir?

Thank you and thanks to all of you for participating with us today and for your questions, hope it was valuable. We'd love to hear your feedback on how we've done and the effectiveness of our call. You can e-mail your comments to ir@sandyspringbank.com, that will help us improve our process and make it more valuable for you in the future. So thanks again for participating and have a great afternoon.

And we thank you sir for your time and you also have a great afternoon. This concludes our question-and-answer session. We thank you all for attending. At this time, you may disconnect your lines. Thank you.