Sandy Spring Bancorp Inc (SASR) 2013 Q1 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp, Inc. earnings conference call and webcast for the first quarter of 2013.

All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Daniel J. Schrider, President and CEO. Please go ahead.

Thank you, Yousef. Good afternoon, everyone, and welcome to Sandy Spring Bancorp's conference call to discuss our first quarter of 2013 performance. This is Dan Schrider speaking and I am joined here today by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Springs Bancorp.

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

We will take your questions after a brief review of some key highlights. 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, earnings, and other expectations; estimates of risk and other 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 statement is 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 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 I will briefly cover our prepared remarks and then we will move right to your questions.

Our company again produced a solid a solid quarter with no unexpected developments. And as I said at year-end, we are pleased that our quarterly results over the past several months have been very consistent and predictable in what continues to be an unpredictable economic environment.

As stated in our press release issued earlier today, net income for the first quarter of 2013 was $10.6 million. That's $0.42 per diluted share. The increase in net income is a healthy 25% advance over last year's first quarter. Our total assets have been close to crossing the $4 billion mark at the end of the last two quarters and our market cap was a solid $490.2 million as of the close last Friday.

We continue to effectively manage the net interest margin, which came in at 3.59% at quarter end versus 3.56% from a year ago. This is attributable to our consistent ongoing focus on managing towards a lower cost of deposits and borrowings. Over the past two quarters, we have executed on a strategy to modify approximately $160 million of FHLB advances to drive down our borrowing costs and the full effect of that being realized in the first quarter of 2013.

So the modifications, coupled with the effective strong fourth-quarter 2012 loan growth and positive NPA moves, help support and slightly expand our margin. Going forward, continued growth in our lending portfolios is key to protecting our net interest margin.

The efficiency ratio on a non-GAAP basis improved from 62.97% a year ago down to 60.80% at the end of this year's first quarter and consistent on a linked-quarter basis. Total loans increased 13% over the first quarter of 2012, due primarily to organic loan growth. However, loans acquired in the CommerceFirst acquisition also were a contributing factor.

Total loans increased 1% compared to the fourth quarter of 2012 due to growth in commercial investor real estate and residential mortgage loans, even in the face of only moderate demand and consistently tough price and credit competition. Non-interest income increased 13% for the quarter compared to the prior-year quarter and 1% on a linked-quarter basis. The increase over the prior-year quarter was due properly to growth in income from our mortgage banking activities, fees generated from the sale of SBA loans, and improvement in our insurance agency commissions.

As for credit quality highlights, non-performing loans totaled $49.5 million at March 31 compared to $72.2 million at March 31 of 2012 and $57.9 million at December 31, 2012. We are pleased to report our progress, and as we have indicated on previous calls, we expected that our credit metrics would continue the positive trend, albeit a bit lumpy from quarter to quarter.

The coverage ratio of the allowance for loan and lease losses to nonperforming loans increased 83% at March 31, 2013, compared to a coverage ratio of 62% at March 31, 2012, and 74% at December 31, 2012. Again, we think this is very good progress.

Loan charge-offs net of recoveries totaled $1.8 million for the first quarter of 2013 compared to net charge-offs of $5 million for the first quarter of 2012 and net charge-offs of $0.8 million for the fourth quarter of 2012. The allowance for loan and lease losses currently stands at 1.61% of outstanding loans and leases at quarter end. At March 31, 2013, the Company had total risk-based capital ratio of 15.48%, a Tier 1 risk-based capital ratio of 14.23%, and a tangible common equity ratio of 10.19%.

Our capital deployment strategy continues, which includes the combination of organic growth seeking accretive and strategic M&A opportunities, evaluation of our quarterly dividend, and consideration of executing under our approved share repurchase plan.

That wraps up my comments as we have covered most of the other key financial highlights and stats in our press release today. We will now move to your questions, so, Yousef, we can now take 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) Jennifer Demba, SunTrust Robinson.

Good afternoon, Jennifer Demba, SunTrust Robinson Humphrey. Just curious -� there was obviously a big deal announced in the northern Virginia market in the last 90 days and I am curious as to how you guys plan to take advantage of that disruption, if it all.

Hi, Jen; this is Dan. As that deal moves towards progressing towards closing, I think there's obviously a couple places that we can at least put effort towards seizing on. Obviously, the client relationships during any disruption are ripe for considering a new banking relationship.

Then second to that is talent that may be available from the acquired institution. There has been some information published with regard to some cutbacks that the target is planning on making. So as we would with any consolidation, we are poised to take advantage of disruption, predominantly within client relationships and then clearly in key talent that we think would be beneficial to us.

William Wallace, Raymond James.

Good afternoon, gentlemen. Dan or Phil, in your press release you highlight that your non-interest income benefited from a legal settlement. Can you tell me how much that settlement impacted the other income line in the quarter?

This is Phil. The other income part of the noninterest income component of the income statement was impacted by about $260,000 related to that settlement.

Was it -- what was the nature of the settlement?

It was in conjunction with a number of leases that we had acquired while we were operating our equipment leasing corporation a number of years ago that had been tied up in legal proceedings for probably a couple of years now and had finally settled here during the quarter. The overall outstanding amount of leases involved there was approximately about $850,000, so we took a write-off on the leases amounts themselves. And then, given the nature of it after the fact, just put the remaining net proceeds into other income.

Okay, all right. The second question is with the mortgage banking fee income down I would have expected to see a decline in your comp, your salary and employee benefit line item. Can you tell me why or what offset the decline in variable comp expense from a decline in mortgage banking in your salary and employment line?

Yes, the salary and benefit line has a couple things going there that are really away from the mortgage business per se. Probably the biggest thing there is that in the first quarter every year we payout on the incentive plans that were related to the prior year.

So when we do that, since it's on a cash basis, we then incur heightened levels of salary-related types of costs, things like unemployment tax, Social Security tax. We had more significant 401(k) match expense that happened during the quarter. And so those things really, in addition to some true-up on the plans themselves, are really the most significant aspects of that $940,000 increase in the salary and benefit line.

We also have -- in the first quarter we had some heightened health insurance costs as that continues to just be more difficult given the changes that are taking place in that aspect of business. So those are really the things that drove the increase.

So, in normal -- assuming your mortgage banking is flat and the variable comp line is also flat, what should the second-quarter expense line decline to, all else equal? Assuming you don't invest in more employees or anything.

Yes, it's probably somewhere between the two quarters I would say. Somewhere kind of right in the middle of the two quarters, between the fourth quarter and what we actually incurred in the first quarter.

Because some of that stuff related to -- example, Social Security gets reinstituted on high earners in the first quarter and then lasts for a while, and then that dissipates as the year goes on as well. So I would think we are going to settle somewhere in between the two quarters from an overall salary and benefits basis, just the way we are looking at it.

Okay. Then the other question I have as it relates to margin. In the prepared remarks, Dan, you mentioned the FHLB restructuring was a positive impact, but then you also made a comment about some, I believe you said, positive NPA moves.

I look at your loan yields and your average balance statement there seems to be a lot of volatility in the yields on specifically your owner-occupied line. So is that being driven by accrual recapture?

This is Phil again. There's an element of that and then there's also the fact that we worked out three fairly significant credits in that portfolio to the tune of about $7.8 million in balances. So we are getting the rebound effect of reducing out the NPA effect on that yield.

That effect with those three credits, which happened fairly late in the quarter, is probably about 8 basis points of the increase on a quarter-over-quarter basis in that portfolio. Then there's also, to your question, and rightly so, an element of increase in yield that is related to some recapture on some other NPA-related credits that probably drove the other 5 or 6 basis point pop in that overall yield in that category.

Okay. So we could see a bounce back down in your margin then in the second quarter as that normalizes?

Yes, you could probably look at it that way. Again, the other thing that is happening here, and we have talked about this before, that it continues to mitigate against that, is just redeployment on the asset side of the balance sheet. And there was some of that that took place.

In the investment portfolio we actually only bought about $11.5 million of investments in the quarter and ran out, or ran off by maturity or call about $30 million. So that migration, again, as we have talked about many times, is our main longer-term mitigating factor on margin compression, at least on the asset side.

Okay, great. I will hop out and let somebody else ask some questions. Thanks, Phil.

Bryce Rowe, Robert W. Baird.

I wanted to kind of follow up to Wally's question there, Phil, on the loan yield ties to the commercial real estate owner-occupied component of the loan portfolio.

I'm showing almost 50 basis points of loan yield expansion tied to that category alone. It sounds like you worked out the three credits that accounted for about 8 basis points and then some of the recapture accounted for some more.

Just wondering if, as we model that segment out, are we going to see that particular loan yield drop, or will it stay around this 5.70% level as we move out over the next couple of quarters, notwithstanding any kind of compression you get from competition?

Bryce, this is Phil again. I would suggest that we are going to see that yield drop in the coming quarters. The loans that are being booked to that portfolio today, and competition is certainly a part of the equation on where these yields are falling, are probably more in the 4.5% range, let's say, on average. So just naturally any additional growth there at that level is going to dampen the overall yield as a portfolio.

Okay, that's helpful. Then some other questions. Dan, you talked about capital deployment and I know we've talked about this in the past. Not necessarily prioritizing how you would use capital, but to think of it from a timing perspective, obviously with more than 10% tangible common equity ratio.

How do you think about deploying that capital if an acquisition doesn't present itself? And is there any priority over dividend increases or share buybacks?

Yes, obviously the dividend increase is -- there are limitations to that element of our capital deployment strategy. It is self-governed by virtue of payout ratios and yield targets and those types of things.

As we've said before, we think we still have some room there. And so we have spoken in the past in terms of our list of priorities there. I think in reality they probably work more in tandem with one another, with obviously organic growth being the most significant long-term priority and M&A being more of an opportunistic priority in light of the current environment.

We do have an approved share repurchase plan which authorizes up to 3%. We have been minimally active and when we put that plan in place it's something that we are going to continue to consider as part of the equation of capital deployment. That plan comes due in August, at which time we will reconsider what that plan should look like on a going-forward basis.

But we haven't ruled that out. It's just one of a mix of things we have in the toolbox.

That's great. On the M&A front, I know you guys are active in talking to potential partners there. Just maybe give us an update, if you wouldn't mind, on how sentiment has changed over the last three to six months relative to potential sellers.

I think, as we have indicated before, we are active in making ourselves known as, hopefully, an ideal partner for a Community Bank looking to partner with someone else. I think that -- the only thing I can say over the last couple quarters is that little has changed in terms of the outlook for a small bank that might be struggling to drive top line and, therefore, bottom line.

And so I don't think there is -- if some of the hesitancy to see more consolidation in the industry existed six months ago on the hopes that things would begin to turn, I don't think the banks that are kind of in our target list are seeing that turn and, therefore, are perhaps more open to further dialogue and deeper dialogue. But apart from that I don't have a lot more to comment on.

That's helpful, thank you.

(Operator Instructions) Matt Schultheis, Boenning & Scattergood.

Good afternoon, gentlemen. A couple of -- most of my questions have been answered, but I do have a couple of quick ones. I think your press release mentioned miscellaneous loan sales. What are miscellaneous loan sales?

We are referring to gains on the sale of SBA loans predominant. That is the essence of that category.

That goes back to our CommerceFirst acquisition strategy. They were a player, as we have said before, in the SBA world to the greater extent than we were. And that's just indicative of us taking their model and deploying it across our footprint, so we are excited to see more fee income being driven from that area.

Matt, just as a quantification, that was about $264,000 worth of gains in the quarter. It's probably a misnomer having used that moniker for it, given that we expect that to continue to be a part of our noninterest income stream going forward.

Okay, sounds good. Can you provide any color on the workouts for those owner-occupied? Were they just paid off by -- did other banks basically finance these projects and take them off your books? Or were they -- did the borrowers actually just have the cash on hand and finally just roll over and pay you guys?

I think it's a blend. I don't think there's any one driver there. In most cases, we are dealing with real estate that was sold which ultimately paid us off.

Okay, I guess that's it for me. Thank you very much.

William Wallace, Raymond James.

Just one follow-up on credit. The $1.7 million release of reserves; how much did you release of specific reserves in the quarter?

I don't know that I have that specific number here. If you will bear with me for 10 seconds or so, I will tell you whether I do or whether we will need to circle back to you.

While you are looking for that, let me ask one question on the SBA business. Was the increase quarter over quarter -- it looks like there was an increase quarter over quarter. Was that driven by volume or are you getting better premiums on the loan sales?

That is driven by volume.

I feel like Rush Limbaugh shuffling my papers here, Wally. I actually don't have a quarterly number on that release.

Anecdotally, was the large majority of the release -- or even maybe, if you had another way of asking the question, did you add to your general reserve in the quarter for loan growth or did not need to?

Wally, I would think that we did add to the reserve based on a growth factor for sure, albeit not terribly large given the modest growth in the portfolio itself. I do have the specific reserve number here for the current quarter. What I don't have at my hands, but am looking diligently for as well is the --

What is it for the current quarter? I can look it up for the prior quarter.

Specific reserves at 3/31 are just a shade over $4 million.

Okay, I will look up the prior-period balance. That's all I have. Thanks, guys.

I'm showing no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Schrider. Please go ahead.

Thank you, Yousef. We appreciate everyone on the call taking the time to participate with us this afternoon.

We do want to remind you that we appreciate your feedback to help us evaluate how our call was today. You can email your comments to ir@sandyspringbank.com.

Thank you all again and have a great afternoon.

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