Sandy Spring Bancorp Inc (SASR) 2012 Q2 法說會逐字稿

Good day, and welcome to the Sandy Spring Bancorp Bank second-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 that this event is being recorded. I would now like to turn the conference over to Mr. Daniel J. Schrider, President and CEO. Mr. Schrider, please go ahead.

Good afternoon, everyone and welcome to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2012. This is Dan Schrider speaking, and I am joined here today by Phil Mantua, our Chief Financial Officer, and our General Counsel for Sandy Spring Bancorp Ron Kuykendall.

As usual, our call today is open to all investors, analysts and the news media, and there will be a live webcast of today's call and a replay of the call available on our website later today. After review of some key highlights, we will take your questions. But before we get started, Ron Kuykendall will give the customary Safe Harbor Statement.

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risk and uncertainties. These forward-looking statements include statement of goals; intentions and earnings and other expectations; estimates of risk of future costs and benefits; assessments of probable loan and lease losses; assessment 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 very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp 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. We're going to keep our remarks today rather brief, as it was a solid, straightforward quarter with no expected developments -- unexpected developments. As reported in our press release issued earlier today, net income for the second quarter of 2012 was $7.2 million, that is $0.30 per diluted share. This compares to net income of $8.3 million, or $0.34 per diluted share for the second quarter of 2011, and net income of $8.5 million, or $0.35 per diluted share for the first quarter of this year.

Year-to-date net income for the six-month period ending June 30, 2012 totalled $15.7 million, that is $0.65 per diluted share, which compares to net income of $15.6 million, again $0.65 per diluted share for the prior-year period. I would like to point out one major factor which is included in both the second quarter and our year-to-date results, and this is the impact of our acquisition of CommerceFirst Bancorp. For the second quarter, we booked one-time, pretax, merger-related expenses of $2.2 million, and on a year-to-date basis it comes to $2.6 million, also pretax.

To provide some context related to EPS, on an after tax earnings per share basis, merger-related costs represents $0.06 per share. On a related note, the consolidated results of operations for CommerceFirst are included subsequent to the close of business on May 31, 2012, as we officially closed the transaction on the last day of May.

So in other words, there is one month of earnings contribution from CommerceFirst included in the second quarter results, combined with $2.2 million of merger-related expense. As we noted in this morning's release, as of the date of purchase, CommerceFirst had total loans of $169 million, and total deposits of $170 million. Pretax, pre-provision income on a non-GAAP basis, excluding merger expenses, was $14.6 million for the second quarter, up 11% over the second quarter of 2011 and up 12% over the 1st quarter of 2012. We expect that by year-end, the accretive contribution from CommerceFirst should more than offset the one-time cost of doing a deal.

In fact, our original expectations for accretions are looking a bit on the conservative side, as we are seeing a better benefit from their margin than we anticipated, that there is a positive effect on our ability to run off their higher-cost brokerage deposits, allowing us to fund their loan portfolio at our lower cost of funds.

So, on balance, we continue to be very pleased with the opportunities that CommerceFirst brings to the table, and excited to finally have our teams working together.

As for other highlights, the margins held up versus our expectation going into the quarter that it may have slacked off. There were positive trends in wealth management and on the mortgage banking side. There was good overall loan growths in the various portfolios, and especially on the commercial side, plus residential construction loans to individual homeowners.

Our total loans increased 16%, or $337.2 million at June 30, 2012, compared to mid-year of 2011. Excluding loans acquired in the CommerceFirst acquisition, this was the Company's fourth straight quarterly organic increase.

We attribute our continued success with organic loan growth to the efforts of our front-line bankers, but I believe we are as focused as ever, calling on both business and retail clients that value dealing with a local bank that has the depth and breadth out all of their branch needs. And that said, we do remain disciplined to our credit and pricing standards in a market that can be a bit irrational at times.

And on the quality front, non-performing loans continue to decline to $67 million at June 30, versus $76.5 million a year earlier and $72.2 million at March 31, 2012.

The net interest margin was 3.62% for the second quarter of 2012, compared to 3.58% for the second quarter of 2011 and 3.56% for the first quarter of 2012 we think the margin is quite respectable in the current environment.

Another important highlight is the fact that our non-GAAP efficiency ratio improved to 61.5% for the second quarter of 2012, compared to 62.8% for the second quarter of 2011.

On a final note, capital remains strong. At June 30, 2012, the Company had total risk-based capital at 15.37%, a tier one risk-based capital ratio of 14.12%, and a tier one leverage ratio of 11.21%. That wraps up my comments, as we covered most of the other key financial highlights and stats in our press release today. And we will now move to your questions.

Keith, we can now have the first question. But we would appreciate it if you would state you name and company affiliation as you come on, so we know with whom we are speaking.

Very good we will now begin the question and answer session. (Operator Instructions) At this time I will pause momentarily to assemble the roster. Mike Shafir, Sterne, Agee & Leach, Inc.

I just have a quick question on the $2.2 million in merger expense. That came in on the other line, in the non-interest expense?

Not necessarily, Mike. We actually booked it to the appropriate category, so it spread amongst a number of the key expense lines. Some of it is in salary and benefits, a fair portion of it is in outside data services related to conversion costs and some contract buyout work that we had to do. And then there is some things in Other and also Professional Fees, which is broken out, which is related to attorneys, et cetera. So, it is spread amongst a number of categories.

Okay. So then as we think about your original cost save numbers, how much, with only a month of having the merger this quarter, how much or that is in there? And what are you guys thinking about moving forward in the expense side? Should we see some more realized benefit on some of the -- some of those lines?

In terms of how we compare the cost saves, I think we're very comfortable that we are, almost immediately, getting towards the mark that we had put out there when we evaluated the deal, which was at least 30%. And again, the $2.2 million is going to come off the top and then realize what is actually happening from that point forward.

So I think that we feel that we are in pretty good shape as it relates to that, and then as we look at expenses from this point out, I don't know that we see a tremendous amount of increase from where we are -- again, absent of the merger costs for the following couple of quarters. It's just not necessarily that material. And I would hope that we could continue to see our efficiency ratio actually improve throughout the remaining half of the year.

So, basically, operating expenses then are right under $27 million for this quarter, and you guys feel like that should stay relatively flat to potentially down? As we --

I think we can stay in that general range, Mike, yes. Because I think we've been doing some other things in the core operation of the Company that are off-setting the additional costs of the -- primarily the personnel that was added in the acquisition.

Okay, great. Just on the margin. As we think about the accretable yield coming through, from the transaction?

Yes.

How long do you think this is -- we are going to continue to see that benefit?

I know you guys are also gaining benefit from a lot of the funding mix in the non-interest-bearing deposits accounting, replacing some of these CDs. But that accretable piece, how long do think we are going to continue to see that benefit?

I don't have it right in my hands, Mike, but I think that it's probably -- maybe out 24 to 30 months, just in recollection of the way we did the calculation. I can tell you that it's really -- it's not that significant --

Okay.

-- in the larger scheme of things. It might be a basis point or two. So it's not that big of a deal. The bigger advantage is really coming from the sheer difference in their yields on the loan portfolio we inherited, and our ability to run off, as we said before, the brokered and more wholesale-based CDs and replacing it with our funding sources.

I think that's really where the significant pop comes from, the margin, from where we would have been in terms of margin continuing to compress going forward. And now looking at it being on a much more stable basis for the rest of the year, similar to where we are in the quarter.

As we think about the ten-years sitting here at 150 -- and certainly there is going to be continued pressure on reinvestment yields in that securities book. That, this last quarter actually, held up relatively well from an overall securities yield standpoint --

Yes.

-- Only down a couple of basis points.

Yes.

Just how should we about that then? It seems like you have a lot of benefit coming on on the loan side and that deposit-funding mix. It seems to me like we are going see a relatively stable NIM for the remainder of the year.

That's exactly my expectation. Is that when you add it all -- add, subtract all the different elements of it, now that we have folded in the additional loans into the portfolio, that that's pretty much how we see the NIM for the rest of the year, I would agree.

And then just kind of a housekeeping question on the tax rate. Where you think we should be looking at that, moving forward? Still around 32%?

Yes, we had -- the quarter got a little bit affected by -- as we took the merger costs, some of them are not tax-deductible. It wasn't a significant amount, but some of them were not tax-deductible, so that impacted the effective tax rate in the quarter because of that.

But yes, I think that otherwise we are looking out the rest of the year, our general tax rate should be similar to where it's been.

Okay. Just on the core basis, you guys are looking at additional $0.06 -- so a core number of $0.36 -- excluding the merger costs for the quarter? Correct?

That's accurate, yes.

All right. Thanks a lot, guys. I appreciate all that detail.

William Wallace, Raymond James.

Just as a quick follow-up. Just to make sure I am understanding everything that you guys were saying. In -- on the margin front, you had benefit mostly just from the fact that you are picking up a lot of the yield in their loan portfolio. So you picked up six basis point sequentially. However, that was only for one month of contribution, but you are not expecting to pick up additional benefit as the other two months that you did not get in the second quarter come in in the third quarter?

Yes, that's a legitimate question, Wally. There -- in the month of June, in addition to the one-month pickup on the CommerceFirst portfolio, we also had some non-accrual reversal that came through in the -- in our residential construction portfolio that was a one-time type of item that also popped the margin at the end of the month. So we don't expect that to re-occur, just so you know. And that was -- I think it was a $60,000 adjustment. So, that is not normal.

And, again, as to Mike's question before, there are some mitigating -- again, some mitigating factors that we talked before about having the margin expand any further. Because, if you recall from earlier, if you were on any of the earlier calls and maybe you weren't. We had expected a margin to actually compress through the rest of the year, and actually get into the mid-3.40% range. I think that where we are at, and going forward, and having it be as stable as we think it is going to be is really the answer.

Okay. All right. That helps to clarify it for me. I appreciate that.

Okay. No problem.

And then, also more clarification for my questions on the expense side. It seems like you're hesitant to break out where the $2.2 million is on a dollar basis, which makes a little bit tougher for us to model. Is there a way you can tell us where it is weighted? Is there one line-item that has 50% or 60% of that number? Or is it really just spread pretty evenly across all the (multiple speakers)you mentioned.

Actually I am not necessarily hesitant to tell you that. Of the $2.2 million, almost half of it is -- was in the outside data services area, and those -- and a lot of that, again, conversion-based cost. And then we had one contract that we had to buy out, unfortunately, that contributed to that.

Behind that, the other major category would be salaries and benefits, as you might expect, related to severance costs, pay-to-stay, those types of activities. And that was probably somewhere around $700,000 in the quarter. And then the remainder would have been in the other category.

Okay.

So, what really, if you look at the comparison in quarters, one of the things that should pop out is that absent of the merger costs, our salary and benefit line would have really gone down in the quarter.

Yes. Okay. Which is pretty, pretty impressive, considering you also had a month of the additional salary from the acquisition. So clearly --

Correct.

That changes internally.

Yes. That's correct.

Okay. And then one less question I would like to ask is, moving to the revenue part of the equation, specifically in the mortgage banking. Another very strong quarter -- not surprising given what we've seen across the industry. Be curious to know how you are seeing the volumes in that business, maybe in June? And, if you're seeing any change in the re-fi versus purchase mix, and if you can remind us what that mix is?

Wally, this is Dan. The demand in originations and new apps, the whole -- all the leading indicators continue to remain very strong through June and into this current period. Phil is pulling out the data in terms of the mix between re-fi and purchase money.

Wally, I will give it to you this way, because it's the information I have. On a year-to-date basis, the refinance elements was about a little over 68%, and that has changed slightly for the month of June down to about 66.5%. So there is some movement more towards purchase money activity, but not that significant quite yet.

Okay. It looks like the demand is just never-ending. Take it while we can, I guess. That's all the questions I had. I appreciate your time.

Matt Schultheis, Boenning & Scattergood, Inc.

A couple of more strategic questions, I suppose. With this acquisition behind you, assuming that there was a transaction or a company you actually wanted to acquire that put itself up for sale. Do you think you would be ready to do another deal at this stage? Or do you feel you need to wait a little bit longer and then [rate] this a little more?

Yes. Matt, that's a good question. I can tell you that, from the beginning, which is really -- was back in last fall -- through diligence, integration, systems convergence, the team here at Sandy Spring just did a tremendous job. And if the right opportunity came along, and fit strategically, and was priced right, we would be ready to move.

Okay. Additionally, in the state of Maryland, certain municipalities have started moving some of their smaller agency working accounts out of the big banks, which I guess B of A is the big cash management firm for the state and a lot of the larger municipalities. Have you been able to take advantage of that at all? Are you interested in taking advantage of that at all?

And I am thinking of, specifically, of Montgomery County moved a few million dollars in deposits and if you were willing to do certain types of loans within the county? Does it interest you at all?

Yes. Matt, good question. That's a relatively new program that was developed with the -- obviously the desire among the community banks those, like us, to have the county deposit locally where we are going to turn around and make loans locally.

That program, quite frankly, may scratch the surface. It is -- we think it is just good business for the municipalities and the counties to do business locally, but not necessarily through the programs like the one that was designed. I think the main issue here in Maryland is making the RFP process one that does not require a staff of half a dozen attorneys in order to bid for that business at the state level and county level. So that's what we're working on.

The answer to your question is we are interested in any consistent stable funding base that fits our cost strategy, but that program in and of itself did not have a great deal of interest as designed.

Okay, very glad to speak. I think that's it for me. I appreciate your time.

Dave Peppard, Janney Montgomery Scott.

Excluding the CommerceFirst loans, looks like you had some organic growth in the quarter. Could you talk about some of the loan growth you experienced and what you expect for the rest of the year?

Yes. Good question, Dave. We were just under 2% growth period-to-period. And -- from the core organic basis. And largely driven by what is happening within our commercial bank. And then, to a lesser extent, through some of the residential construction activity that's to the individual homeowner. Within the commercial book, it's largely coming within what we love, which is owner-occupied real estate and, to a lesser degree, C&I.

Folks are doing a good job of winning some quality relationships. We have -- we stayed pretty consistent with pulling aside the impact of CommerceFirst with our view of a mid-single-digit loan growth expectation for the year. And that really is, in the light of what we think the market will provide in quality opportunities that are priced within our -- where we see things going. So, mid-single-digits is still our outlook.

Yes. And on the asset quality front, things appear stable. How should we look at credit costs going for the rest of the year here?

Yes, I think stable to improving is the way we view it. Obviously had some decent moves in the right direction, even with bringing on a new portfolio to the Company. I think we are hitting that place with that MPA portfolio, where big improvements quarter-to-quarter probably a bit more difficult to come by as we work through it, so it's going to be a slower improvement.

I think credit -- from a credit cost perspective, anything you see different in future quarters from a provision expense will be driven more by our ability to grow the portfolio than the expectation of it to deteriorate in quality. So, probably not inconsistent with what you see this quarter.

All right. Thank you for the time, gentlemen.

Mike Shafir, Sterne, Agee & Leach.

My follow-up question has been answered, so thank you very much.

(Operator Instructions) Okay, there are no more questions at the present time, so let's turn the call back over to management for any closing remarks.

Thank you for your questions, and we really appreciate you taking the time to participate with us this afternoon. We'd love to receive your feedback on the value of this call, so if you could let us know by e-mailing your comments to ir@sandyspringbank.com. That would be great. Thank you all again, and have a wonderful afternoon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.