Sandy Spring Bancorp Inc (SASR) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp Inc. third-quarter 2012 earnings conference call and webcast. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded, and now I'd like to turn the conference over to Mr. Daniel Schrider, President and CEO. Mr. Schrider, please go ahead.

Thank you, Emily, and good afternoon, everyone. Welcome to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of this year. This is Dan Schrider speaking, and I'm joined here today by Phil Mantua, our Chief Financial officer, and Don Schuster, Senior Corporate Counsel for Sandy Spring Bank.

As usual, today's call is open to all investors, analysts, and the news media. There will be a live webcast of today's call and a replay available at our website beginning later on today.

As usual, we'll also take your questions after a brief review of some key financial highlights. But before we get started, Don will give our customary Safe Harbor statement.

Thanks, Dan. 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 of risks 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 actually 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, Don. As we've been doing lately, we're going to keep our prepared remarks rather brief today and then move to your questions.

We, again, produced a strong, straight forward quarter with no unexpected developments, and it is satisfying to report that we're continuing to move quite successfully beyond the cycle that took its toll on so many community banks over the past few years. As you know, we were not immune from the impact of that period, but we are relieved that we've weathered it, and it is now largely behind us.

As stated in our press release issued earlier today, net income for the third quarter of 2012 was $11 million. That's $0.44 per diluted share comparing to net income of $11.3 million, or $0.44 per diluted share, for the third quarter of 2011 and net income of $7.2 million, or $0.30 per diluted share, for the second quarter of this year.

Year-to-date net income for the nine-month period ended September 30, 2012, totaled $26.7 million, or $1.09 per diluted share, compared to net income of $26.8 million, which is $1.11 per diluted share for the prior year's nine-month period.

Taking a look at our core operating earnings, our pretax, pre-provision income for the third quarter totaled $17 million compared to $14 million in the second quarter and $13.8 million in the third quarter of 2011. This is an area where we're very pleased with our progress during 2012.

At the end of the second quarter, my remarks about the impact of our acquisition of CommerceFirst Bancorp were centered around merger-related expenses. But this quarter, it's the flip side of the coin as we saw the first full quarter of accretive contribution from the full integration of CommerceFirst.

In the second quarter, there was only one month of accreted earnings contribution from CommerceFirst included since we closed the transaction on May 31, and that was offset by about $2.2 million of merger-related expenses. As we've said previously, we continue to expect that by year-end the accretive contribution from CommerceFirst should more than offset the one-time costs of doing the deal. We are seeing a better benefit from their margin than we anticipated, and we have been effective at managing down their higher-cost broker deposits, which has made a big difference in our ability to fund their loan portfolio, which is also reflected in our margin. Our team did a great job of managing and integrating this acquisition.

The overall net interest margin at Sandy Spring Bancorp was 3.67% for the third quarter of 2012 compared to 3.53% for the third quarter of 2011 and 3.62% for the second quarter of 2012. And in this environment, we consider that decent improvement.

Non-interest income increased 8% for the quarter compared to the prior year quarter, primarily due to higher income for mortgage banking activities, which have been very strong.

In addition, wealth management income and Visa check fees both increased 6% over the prior-year quarter. We believe we're well positioned in terms of diverse sources of fee income and our ability to sustain a meaningful revenue stream in these areas, especially as margins and competition on the loan origination side remain very tight.

As noted in today's release, total loans and leases increased 15% to $2.5 billion compared to the prior-year end at the end of the third quarter -- the prior year third quarter. This increase consisted of $157.2 million in loans from the acquisition of CommerceFirst and $166.4 million of internally-generated loan growth, primarily in the commercial portfolio.

Total loans were up 10% compared to balances at December 31, 2011. And if we back out the loans acquired in the CommerceFirst acquisition, total loans increased 7% compared to both September 30, 2011 and December 31, 2011.

One factor affecting the level of total loans between the end of the second quarter and the end of the third quarter was pre-payments -- some from anticipated success in real estate projects, others from the migration of struggling credits to new lenders. And also, just as an example, we had one $6 million to $7 million loan relationship that was paid off early from the proceeds of the sale of the company.

There were a few other smaller pre-payments that cumulatively affected loans, but we shouldn't read anything specific into this activity, except perhaps the ongoing gradual improvement to the local economy has enabled some commercial customers to advance their loan payoff timetables a bit.

On the deposit side, DDA balances have been trending up nicely. Deposits and other short-term borrowings from customers increased 8% compared to September 30, 2011, and this advance was due primarily to a 22% increase in non-interest-bearing and interest-bearing checking accounts.

As for credit quality, nonperforming loans decreased to $65.4 million at September 30, 2012 compared to $82.8 million at September 30, 2011 and $67 million at June 30, 2012. Our overall credit quality metrics showed continued improvement as a result of our continuing focus on resolving existing problem credits and the fact that we have been able to minimize the addition of new credits through non-performing status.

In other words, as you might expect, after working diligently at it for several quarters now, our problem asset resolution teams have become very effective.

On another note, the non-GAAP efficiency ratio was 61.1% for the first nine months of 2012 compared to 63.3% for the first nine months of 2011, and the ratio stood at 61.5% at the end of the second quarter.

Now, on a final note, capital remains very strong. At September 30, 2012, the Company had total risk-based capital of 15.56%, a Tier 1 risk-based capital ratio of 14.31%, and a Tier 1 leverage ratio of 10.99%.

And that wraps up my comments, and Phil and I will now move to your questions. So Emily, we can now have the first question, please.

(Operator Instructions). Jennifer Demba, SunTrust Robinson.

Just a question -- a question on provisioning and environmental credit costs. Your provision was much, much lower, I guess, than it was in the last couple of quarters this quarter. Just wondering how much further you would see running the loan loss reserve percentage down.

And can you quantify for us what your total environmental cost run rate is right now and where you think it could go over time?

Jennifer, this is Dan. I think one of the -- I think we've commented on it in prior quarters is we've gotten to a point where our provisioning is likely to be -- the majority of that will be driven by growth in the portfolio based upon the trends we're seeing from a critical standpoint.

The quarter was also impacted a bit by some resolution of credits that had some reserves being recovered, or charge-offs being recovered, I should say. So that impacted the third quarter a bit.

To get to the essence of your question is, how far do we see it going down? We don't see that movement at least in this environment for the foreseeable future below [150] in terms of a comfortable reserve level. Now obviously, driven by our methodology, but just from a reality standpoint, we wouldn't see it moving there. But, again, provisions will be largely driven by loan production going forward than anything else.

I want to make sure I understand your other question about environmental.

Yes, obviously, we can see your OREO costs on the expense breakdown, but just wondering in terms of legal, professional that may be related or other costs that may be related to higher problem assets, is there any leverage to move those costs down next year?

This is Phil. I think we do believe that there is some room for those types of credit-related costs to reduce into 2013. We know there are a couple of specific situations where some of those costs have been heightened here in trying to work through the second half of the year. So I would say that yes, there's definitely room for that to move down as we go into 2013. And, in fact, we're looking at it that way as we plan for next year.

Okay. And one final question if I can, what's your interest in mergers going forward? Would you want to wait until next year to do something, and what kind of pipeline of activity are you seeing out there right now?

Good question. We continue to develop relationships with banks that would appear on our target list, which tend to be obviously the smaller community banks in and around our market. And, as you know, obviously, a lot of conversation about the pace of consolidation and whether that will pick up or not. We'd like to find another transaction that looks very similar to the CommerceFirst transaction in terms of the economics. And if that presented itself, we would be prepared to move on that, although we are not at that stage with anyone at this point. So I think from a preparedness standpoint, we're certainly in great shape to be able to do another transaction if one were to come along.

Thank you very much.

William Wallace, Raymond James.

I'll ask about the margin. So in your press release and in your prepared remarks, you talk about the accretion impact related to the acquisition of CommerceFirst. So my question is, are you speaking specifically on purchase accounting accretion, like the marks coming back in, or are you just talking about the impact of the additional net interest income?

Wally, this is Phil. To clarify there, I mean obviously there is some accretable yield related to the way we did -- we're required to do the mark-to-market on the loan, counting on the loans. But I think we're more broadly speaking about the accretive nature of the assets that were acquired and the yields that came along with those as it affects our margin and our net interest income. And I think that we're probably quantifying that the straight margin impact is somewhere between maybe 3 and 4 basis points in terms of what is added to the margin here initially in looking at the differential between what's being earned on the loan book and what's left of the deposits that were acquired in the transaction.

So, as I look at your average balance sheet, to me it looks like the bigger driver is actually on the yield sign than on the cost side.

Correct; that's correct.

So is that -- and why is it, it looks like their C&I loans must have been significantly higher yielding loans. And if that's the case, if it's not a reflection of the mark on those books, what is -- why are there commercial business loans yielding so much greater than the core Sandy Spring book?

Dan here. I think it's probably more a reflection of the business focus. That is one of the attractive things that came with that franchise is the small business focus and specifically their success in SBA lending, which by the nature of those credits there's probably one segment of the marketplace that can provide a little richer yield, and that's what they have been good at. So it was that niche.

In effect, it was exclusively business-related credit, so it did not have the mix like we have in our balance sheet.

So can you actually continue to improve that yield in that portfolio by shifting the mix toward the small business in SBA?

To the extent that we're successful, which is our expectation of applying their small business lending platform, the SBA, specifically platform across our franchise, then in that particular segment, there will be, I think, an opportunity to do better on yields and/or generate fee-based income from the sale of the guaranteed portion of those credits. In this market, will we expect to see yields as rich as what they were generating before? That could be a bit challenging given the competitive environment today.

Okay. So now that the CommerceFirst deal is fully layered in and we have all the impact from a full quarter of them in your numbers, we'll probably expect to see then some pressure to the margin, but perhaps not as great as what we're seeing across the industry given some shift opportunities here.

It is Phil again. I would think that's fair. We have said pretty much all along that we would anticipate the broad level of our margin being in that low 3.60% range. Obviously we came out a little bit better in this particular quarter than that, but I think we would still hold true to that kind of expectation moving forward that this being a bit of a peak period here and that we continue to hang in there in that low 3.60% range for the foreseeable future.

Okay, very good. I'll hop off and let somebody else ask a question. Thanks, guys.

You bet.

Matt Schultheis, Boenning & Scattergood.

A quick question. You are sitting on a boat load of capital. And so to deploy that capital would require either a tremendous amount of organic loan growth, a fairly sizable acquisition, but you also have the prospect of increasing your dividend or repurchasing stock. Can you prioritize what you think those would work out to be?

Yes. We certainly can. Obviously if all avenues were equal in terms of opportunity, organic growth is always going to be at the top of that list and continuing to do what we do well. Because of the environment, the economic environment and the prospect of finding some other institutions that believe that 1+1 is equal to greater than 2, M&A is up that there given our capital position and given what we think may be some opportunities coming.

We do have some room in third place with the dividend. When we look at our internal guidelines on payout ratio and yield, Matt, we obviously look back at prior quarter earnings and our prospects for future quarters and make those decisions. And based upon those guidelines, we do have room to increase the dividend as we have looking back here the last several quarters.

And then lastly would be the repurchases. And that's doesn't mean it's off the table. It just -- it would be an indication of what we think the growth prospects would be, both in option one and two, as well as where we're trading, quite frankly.

Okay. Well, thank you very much.

Thanks, Matt.

David Peppard, Janney Montgomery Scott.

Can we just talk about maybe the opportunity that you're seeing in wealth management income and also the pipeline in the mortgage banking? And then could you follow that up with some anything that you could do with expense control for the end of the year going into next year, please?

Sure. Dave, this is Dan. I think the wealth management business has obviously been a strong area for us, and we expect that that's a fee-based line of business we'll continue to build upon, which will require us to continue to look for additions to talent in terms of the folks that are on the street, building relationships. The demographics of our marketplace and the strength of our current client base fits extremely well with the wealth management business, so it's a great flow of opportunity. And that pipeline continues to be strong, so we would expect that we would continue to grow that.

Mortgage -- the mortgage business, obviously, has been good to us, as well as others in the community bank space this year. Our pipelines continue to be strong as we move into the fourth quarter. We don't see reason for that to change. And, in fact, we're about 78% refinanced, 30% purchase money on the mortgage, which we like that relationship in what's been a pretty soft market, and we're seeing housing in pockets around our market pickup as well. So we feel good about the mortgage business.

It is an area in which the talent pool -- everyone is trying to find quality mortgage bankers and quality mortgage professionals. We've got a great group of mortgage people who are looking to add to that as well. And Phil will comment on the expenses, being the guy that likes to focus on that around here.

Well, whether or not I like to focus on it or not is a matter of opinion, but it is part of my job. So I guess that's why I get to comment on it.

But before I do that, Dave, one other kind of note on the mortgage side because I imagine you want to know just where the gain on sale number might be at or going as we move forward. And I agree with Dan, clearly know that our pipelines are strong. But normally just from a seasonality standpoint, the fourth quarter is usually a little bit shier quarter than others just because of the nature of the time of the year.

And so an element of what's in that gain number, I think, as you know, are some accounting adjustments related to our mortgage commitment and our best efforts approach to the way that we go about selling loans that are in the pipeline.

So where I am getting at is in the $1.9 million to $2 million in this quarter there's about $600 million embedded in that number that's related to the accounting treatment of commitments and loans to be sold, which at some point it may reverse if volumes and/or rate trends are not going in the same direction. So I just want to make sure that everybody recognizes there's an element of that in that number.

As it relates to expenses, I think that we talked about this I think on the call last quarter, that we believe that our current run rate of expenses is pretty solid, and we would expect it to stay in that same level, especially now that we've absorbed the CommerceFirst acquisition and we know how much of our run rate is related to running that part of our franchise in addition to what we were doing before.

So absent of, in particular, any types of adjustments we may make on the value of our other real estate owned portfolio, which is not terribly big, but we do have to evaluate the value of those assets from time to time. I would, again, expect that our level of expenses would be fairly flat in the fourth quarter to what we just reported here in the third quarter.

Okay. Thank you, guys. I appreciate it.

Bryce Rowe, Robert W. Baird.

I wanted to ask a little bit about the mortgage and what your appetite is for portfolioing the mortgage activity. I see that you've had some growth there, and is there a point at which you hold the line as far as the mortgage composition within a loan portfolio?

This is Dan. I think given the opportunities in the marketplace today and, as you may recall, what we put in the portfolio on the mortgage side is obviously the short-term construction credits and predominantly 5.1 in some cases, 7.1 ARM. And as long as we have those priced right and they generate a full banking relationship, which is what we aspire to do as we generate portfolio product, and we would continue to grow that.

But, however, over the long run, the mix of commercial to retail or consumer-based credit, we like being north of 60% mix in the commercial side. But in this interim phase, we would take more into the portfolio in the mortgage, as long as the pricing fits our parameters, as well as the nature of those relationships.

Okay. And second question for me, on the CommerceFirst deposits, are there more opportunities to rotate out some of those higher cost CommerceFirst deposits still?

Yes, there is still an element of what we acquired there that we are continuing to run off in that brokered and wholesale book. So I think, yes, there's still some room for that to occur as we go forward. I think last time we talked about it we estimated that probably into the good portion of next year there's about probably about $6 million a month's worth on average of those CDs that can continue to come off and give us some further benefit.

Okay. That's helpful.

Just to circle back on the mortgage, I think it's something that we don't often talk about that I think is important to point out because every shop is different. Our mortgage production is exclusively in our core markets, and so there are relationships that we are building a high-quality shop, whereas obviously many other community banks reach, in some cases, on a nation-wide basis to generate mortgage products. We stick close to home with relationships that can be more than just a mortgage.

Great. Thanks, again.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Phil, if you could give us an update on the bond book in terms of maturities and cash flows over the next year or so, that would be really helpful.

I'd be glad to. Overall, maturity has not really changed dramatically from what we talked about before roughly in the three and a half year range just in terms of an average, average duration, so to speak, and so that's not terribly different.

What is maturing or calling in the next 24 to 30 months is still pretty significant. It's roughly about $450 million spread pretty much from 12 -- the rest of this year, all of next year, and then into 2014.

We've got about $150 million of callable agencies that we see coming to be called between the remainder of this year and in 2013. And then we continue to have somewhere between $10 million and $12 million of monthly cash flow off the mortgage back and CMO book, which would be included in that broader number. So still significant amount of cash flows available to us from a liquidity standpoint.

And if loan growth doesn't significantly accelerate and you continue to get nice deposits inflows, how do you think about deploying that liquidity?

I think we've talked about this before, too. I think we stand firm to not wanting to take any extension risk down the road, and and we would prefer it to then stay in the same liquidity position that we are, sacrifice some margin in terms of the reinvestment yields available and move down the road.

And so just to give you an example here, in the month of September, the average yield that left the books was in the 2.50%, 2.60% range, and the purchases that were made during that period were probably in the 1.90% to 2% range. So the obvious impact of that is to tighten the overall margin if that continues to occur.

Okay. That's helpful. And Dan, if you could talk just a little about the loan growth expectations, it sounds like the payoffs are pretty elevated this quarter. We've heard that at other banks, but it sounds like your expectation is that's not going to continue going forward.

No, I think the third quarter definitely was elevated relative to what we have expected norm to be. So our outlook on loan growth continues to be in the mid single-digit number as we move into 2013. But I wouldn't expect to see that level of runoff in future quarters.

Okay. And then finally, following up on Matt's question on the capital strategy, you've got a lot of capital. You're generating a lot of capital. It sounds like share repurchases are -- is it fair to say they're just not really part of that capital allocation strategy right now, and is there a point should capital continue to build and additional deals like a CommerceFirst don't come along that, in fact, maybe the share repurchases move up the priority list?

Yes, Carter, this is Phil, just to follow up. I think your last statement is exactly how we view the repurchase aspect of capital management, and I think we've talked about that before. It would move closer to the top of the list once we are convinced that we are not able to utilize it either from an organic or an M&A perspective.

The other thing that we continue to think about that everyone knows is looming out there is the potential implications from a Basel III proposal. We've done some pro forma on that, and we're perfectly comfortable that the capital levels we have today are more than sufficient to be able to satisfy what's going to be required, at least under the current proposal.

But knowing that there's going to be pressures on capital in a lot of different ways going forward, we're pretty comfortable with the position we've got here and not really ashamed of having some rich capital ratios at this stage of the game.

Great. Good place to be. Thank you all very much.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Schrider for any closing remarks.

Thank you, Emily, and appreciate everyone taking time to participate with us this afternoon. And if you're on the call and are a current shareholder, we appreciate your confidence in us.

We want to remind you that we appreciate receiving your feedback to help us evaluate how we've done, and you can email your comments to IR@sandyspringbank.com. We take your feedback seriously.

Thank you, again, and have a great afternoon.

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