Sandy Spring Bancorp Inc (SASR) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp, Inc., fourth-quarter 2012 earnings release 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.

Thank you, Andrew. Good afternoon, everyone, and welcome to Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter of 2012.

This is Dan Schrider speaking and I'm joined here today, as usual, by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.

Today's call 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 at our website beginning later on today. We will take your questions after a brief review of some key financial highlights. But before we get started, Ron 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 statements of goals, intentions, earnings, and other expectations; estimates of risk and future cost and benefits; assessments of probable loan and lease losses; assessments of market risk; and statements of the ability to achieve financial and other goals.

These forward-looking statements are subject to significant uncertainties because they are based upon or affected by management's 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's future results may differ materially from those indicated. In addition, the Company's past results of operation do not necessarily indicate its future results.

Thanks, Ron. As we have in the past, we will briefly cover our prepared remarks, then move right to your questions. Our team again produced a solid, straight-forward quarter with no unexpected developments. We are pleased that our quarterly results this year have been very consistent and predictable in what has been an unpredictable economic environment.

Our stock price, which as of last Friday's close is up a healthy 8% over a year ago and reached a 52-week high of $20.27 on the fourth of January.

As stated in our press release issued earlier today, net income for the third quarter -- I'm sorry, for the fourth quarter of 2012 was $9.9 million. That's $0.40 per diluted share. This compares to net income of $7.3 million, or $0.30 per diluted share, for the last quarter of 2011 and a net income of $11 million, or $0.44 per diluted share, for the linked third quarter of 2012.

So for the full year we reported net income of $36.6 million, which is $1.48 per share, versus $34.1 million, or $1.41 per share, in 2011, which is a 7% increase.

Pretax, pre-provision income, while down from the third quarter of 2012, remained solid at $15.7 million for the fourth quarter of 2012. As you might expect, these results enabled us to raise the quarterly cash dividend by $0.02 during the fourth quarter to $0.14 a share. That's a hike of about 16% quarter over quarter and an increase of 40% over last year's level.

Even with the higher payout, we are continuing to accumulate capital at a healthy rate to support our ongoing growth and expansion.

We are pleased with linked-quarter period end loan growth of 2.5% where we experienced net growth in all three categories of mortgage loans, consumer loans, and commercial loans. Of particular note is the linked-quarter growth of 7.6% in our strategically important C&I portfolio and a 4.7 percent increase in the permanent residential loan portfolio.

We continue to optimize our deposit mix and our costs by generating 3.5% linked-quarter growth in our non-interest-bearing deposits, the majority of which is the result of new retail and commercial households.

Our net interest margin moved ahead to 3.60% for the full year, up from 3.57% for 2011. However, the margin did experience a linked-quarter decline from 3.67% in the third quarter of 2012 to 3.53% in the fourth quarter. The linked-quarter decrease was driven by essentially asset yield compression in both our residential mortgage and investment portfolio. So it's obvious to say that continuing our loan growth momentum is the key to stabilizing our margin at its current level.

Non-interest income remained very strong in the fourth quarter, virtually level with linked-quarter and up 8% over the fourth quarter of 2011. This is driven by continued success in our mortgage area, wealth management area, and Visa check revenue. At the same time, non-interest expenses were well-managed in 2012, evidenced by our non-GAAP efficiency ratio of 60.54% for 2012 compared to 63.75% for 2011.

Our related interest is ongoing improvement in overall credit quality as non-performing loans declined to $58 million at year-end versus $79 million a year ago. We do expect that trend to continue as we move forward through 2013. The allowance for loan and lease losses stood at 1.7% of total outstandings and 74% of non-performing loans at year-end, which we think give us a very good, strong position of coverage.

On the capital front, tangible common equity was $384 million at year-end compared to $351 million a year ago, which put tangible common equity as a percentage of tangible assets at 9.94% for 2012. And our total risk-based capital ratio at year-end was at 15.40%, which we think is quite healthy when we compare to our peer group.

Anecdotally, we are pleased to be able to include the second full quarter of accretion from our CommerceFirst acquisition in the fourth-quarter results. The performance included some good SBA loan production and we see a strong forthcoming pipeline for us moving into 2013.

Also, thanks to a great integration team, the merger integration process was very smooth. All of our expectations have been fully met or exceeded. We do learn something new with each transaction, but suffice it to say, at this point we feel very comfortable with our ability to quickly accomplish the assimilation process should another opportunity present itself.

That wraps up my comments as we've covered most of the other key financial highlights and statistics in our press release today, so now I will move on to your questions.

Andrew, we can now have the first question. 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.

(Operator Instructions) William Wallace, Raymond James.

Good afternoon, guys. A couple of quick questions. Was wondering if we could talk a little more about margin. In your prepared remarks you talk about yield compression, but in your press release you talk about the accrual status of specific commercial loans.

Yes, Wally, this is Phil. I can elaborate little bit on that. I think that when we step back and look at the comparison between the two quarters in terms of the absolute margin, probably after the fact realized that the third-quarter margin was probably a little bit artificially inflated by some of the movements that we are kind of alluding to in the press release in terms of a couple of credits there in the third quarter that came back to accrual status and, therefore, bumped the interest to income that was reinstated by virtue of the change in that status.

Then it's a little bit of a similar experience with one or two credits early in the fourth quarter going in the other direction, so there's some reversal involved there as well. So I think that that is really what the press release was designed to address, without getting into specifics.

But I think the overriding element of the decline quarter over quarter is still related to yield compression, both in the investment portfolio, which I think was about a 9 basis point compression quarter over quarter. And then within the loan portfolio, as Dan mentioned, residential mortgage loans, which we did expect and continue to expect will occur just by virtue of our portfolio being adjustable ARM-based credits, that was about a 22 basis point decline quarter over quarter.

Then there was also some similar compression in the commercial portfolio as well. I think that part of it is as much indicative of the pricing pressures in the market. We obviously reported it. We had some low growth, especially in the C&I portfolio. I think there and in the other real estate-based commercial portfolios the competitive pressures are really making it tough to get yields in certain places.

So let's think about this. Obviously you are seeing loan growth, so to the extent that you can deploy liquidity from your securities into your loan portfolio that will help margin. But let's take that off the table and let's just kind of think about yield pressures.

You are going to continue to see ARM resets that I imagine are going to continue to drive pretty meaningful compression on the loan yields and you will see it in the commercial book. So if you exclude the benefit from deploying liquidity, do you think you could continue to see 15 to 20 basis points of pressure on your loan portfolio yields per quarter?

I don't think it will be quite -- I wouldn't think it would be quite that extreme. To my earlier point about some of the noise between the quarters, I would venture to guess that the combination of things between the third and fourth quarter in that regard was probably worth 5 to 7 basis points of the drop.

So you take that out of what was a 14 basis point decline, kind of gets you down more so into the higher single-digit type of thing. Our expectation with -- this is not exactly the answer, but to give you perspective -- with continuation of loan growth is that margin will settle down in that low 3.50%, maybe high 3.40% range into the next couple of quarters here. So maybe to answer your question somewhat more directly, the 7 to 9 basis point type of decline is maybe possible without redeployment from one asset pool to the next.

Okay. Then so throughout the quarter -- we know all over the country that loan pricing is very competitive. Are you seeing any change; any new entrants or anybody exiting in your markets?

I am just kind of getting a sense of how competitive. Is a getting more competitive on the pricing side for good credits?

Well, this is Dan. I think to several parts of your question, we are not seeing certainly any one exit the market in terms of the competitive environment for lending, nor have we seen a whole lot of new entrants into the market per se.

But I would say the competitive environment pricing is consistent with what it has been the last several quarters, which is certainly a heightened level of competitiveness and willingness for some shops to go pretty far out on the curve at pretty low rates. And that's really what we are battling against in trying to stay pretty short.

How do you manage the decision matrix between trying to compete and go out, go along with low rates versus letting alone -- letting a customer ago?

Well, there is -- we do use profitability modeling at a relationship level. This is where we are taking into consideration what we perceive the value of a deposit relationship, any fee-type businesses and potential thereof in making that decision. But transaction for transaction's sake is an easy one to let go if it falls outside of kind of our duration parameters.

Okay, fair enough. Then just want to switch gears real quick to M&A. It's been a few quarters, I think, since this question was asked, but how big of a deal are you willing to consider?

Good question and it has been a few quarters. When you look at the environment, the geography which is important for us strategically and the population of players within that area, we tend to focus our efforts in that $200 million to $1 billion range. And that's not absolute, but that's where I am focusing our efforts right now.

All right. Thanks, guys. I will let somebody else hop in and ask a question. Appreciate your time.

(Operator Instructions) Seeing that there are no other questions, this concludes our question-and-answer session. Excuse me, someone has just come into the queue.

Mark Hughes, Lafayette Investments.

Good afternoon.

Good afternoon, Mark. I'm glad you came on. We couldn't have this call with just one question.

That's why I came on late. I couldn't just let it go at that.

Quick question, back in 2011, I think it was August of 2011, you announced a $750,000 -- authorization for 750,000 share buybacks. Have you done anything on that?

We did -- Mark, this is Dan. We immediately -- I think it was in September of that year, late September, there was a window of time when shares were trading right at tangible book. And we did -- we were in the market maybe for a couple days before the blackout period and our shares recovered, but since that time we have not. That's really a function more of where the stock price has been.

Are you using tangible book as kind of your -- would you buy in above that or is that kind of the level that you target for buybacks?

I think right now that is where our thinking is, but within the context of really other organic opportunities we believe we could achieve M&A opportunities that we may consider. And, obviously, the dividend being a part of that capital deployment view as well. So it is in relation to those other three, how we foresee the next several quarters in that way.

So, clearly, high priority would be organic and finding other transactions similar to the one we were able to do this year. But right now I would think that it would be an environment where we would approach at kind of a tangible book type number where it makes clear sense.

Great, thanks a lot.

Thanks, Mark.

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

Thank you, Andrew, and thank you for your questions and participating today. We know your time is valuable, so we appreciate you taking it to participate today.

I want to remind you we would love to receive your feedback and help us evaluate our call and how we have done. You can e-mail your comments to IR@SandySpringBank.com.

Thank you again and have a great afternoon.

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