Sandy Spring Bancorp Inc (SASR) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp Inc. earnings call and webcast for the second quarter 2013. 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 Mr. Daniel J. Schrider, President and CEO. Please go ahead.

Thank you, Laura, and good afternoon, everyone. Welcome to Sandy Spring Bancorp's conference call to cover our performance for the second quarter of 2013. 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 Spring Bancorp.

As usual, today's call will be open to all investors, analysts and the news media and there will be a live webcast of today's call, as well as a replay of the call available at our website beginning later on today. We will take your questions after I cover a 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 statements of goals, intentions, earnings and other expectations, estimates of risks and future costs and benefits, estimates 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 rate, 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 operations do not necessarily indicate its future results.

Thank you, Ron. Today, we will go through some brief prepared remarks and then move right your questions.

First, it was another solid three months, and we were pleased with the consistency with which we have been able to sustain good profitability, diversified revenue stream and very favorable credit quality. And this performance has been ongoing now for the last couple of years despite the fact that the economic environment, both across our footprint and nationally, continues to be soft and unpredictable as it slowly improves.

As stated in our press release issued earlier today, net income for the second quarter of 2013 was $12.1 million. That's $0.49 per diluted share and is a healthy advance over last year's second quarter. Our market cap advanced to just over $596 million as of the close last Friday. And by comparison, when we held this earnings call just three months ago, our market cap was $490 million. Obviously, we have benefited from the rising tide affecting valuations on better-performing community banks.

It is clear that investors are obviously giving increasing credit to the community banking sector, as many of us have been able to successfully work through problem credits down to manageable levels that are more in line with where we were at the outset of the cycle a few years ago. We are currently trading at about 148% of tangible book versus 121% a year ago.

The net interest margin came in at 3.55% for the first six months compared to 3.59% for the first half of 2012. As we have noted before, this is attributable to our consistent, ongoing focus on intensively managing towards a lower cost of deposits and borrowings. Also, the margin for the second quarter came in at 3.51%, which is down 11 basis points from the second quarter of last year.

As you may expect, we could see a modest decline in the margin over the next couple of quarters, but I do want to point out that the margin for the second quarter just ended is really very normalized for the first time in a while, and that's because we did not have many non-accruals and workouts where we were adjusting interest accruals.

Today's press release also reports a $135 million increase in FHLB advances, and let me provide some color on that. These advances represent short-term, 30-day fixed-rate credits which we believe, given the current interest rate environment coupled with our interest-rate risk profile, allows us to pick up some short-term net interest income and in turn generate a higher ROE. We do see this as a unique opportunity given short-term rates and would not expect these advances to grow beyond the current level.

On the credit side, nonperforming assets to total assets were 1.25% at quarter-end compared to 1.92% a year ago. Of further note regarding credit quality improvement, recent timing was such that a number of what had been charge-offs are finally turning into recoveries, thanks to the diligent and persistent work by our internal credit and workout groups. Our folks have been able to renegotiate and work us out of several commercial real estate credits to produce some quite favorable recoveries for us, which in turn has enabled us to release -- the release of related reserves, and the allowance dropped to 1.50% at quarter-end from 1.83% a year ago.

I should point out that these situations involve credit relationships that are all situated in our core market, which is central Maryland and Northern Virginia, and we see this as encouraging evidence that commercial real estate is making a slow but steady comeback.

We saw modest loan growth of 1.5% to 2%, as it was the third straight quarter where growth of total loans outpaced total deposit growth. However, during this period, non-interest-bearing deposits were up about 5%, which is certainly healthy and consistent with our plan as we've been running off higher-cost CDs that we acquired during our CommerceFirst acquisition.

Just to wrap it up, I think the main takeaway here at midyear is that our performance can be summed up in one word -- balanced. Net interest income is stable, noninterest income continues to grow and represents a significant portion of overall revenue and the sources are well-diversified. That said, we did see a bit of a dip in mortgage-related revenue as rates spiked during the last month of the quarter, but that's not unique to us. And on the very positive side, we saw a much greater percentage of our mortgage production in purchase money transactions as the quarter ended.

And last, on the expense side, we continue to maintain good controls and a solid handle on expense management. The efficiency ratio on a non-GAAP basis came in at 60.92% for the quarter, down from 61.55% a year ago. And for the first half, it was 60.86%.

At June 30, 2013, the Company had total risk-based capital ratio of 15.55%, a Tier 1 risk-based capital ratio of 14.3% and a Tier 1 leverage ratio of 11.28%.

That does wrap up my comments, as we've covered most of the other key financial highlights and statistics in our press release. We will now move to your questions. So Laura, we can take the first question, 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.

(Operator Instructions). Jennifer Demba, SunTrust Robinson Humphrey.

Good afternoon. Just a question on the mortgage fees. They have been coming down, I guess, for the past few quarters. If you look at third-quarter activity, what level of purchase versus refi activity are you seeing? And how much do you expect it to tail off in the second half of this year?

To answer the first part of your question, we have typically run, Jennifer, 65/35 or 65/40 relationship between refis to purchase money. And as the quarter was coming to a close, and specifically during the month of June, the inverse happened. We were finding that -- and it's through an effort to drive up the purchase money side of our business.

In terms of how we envision the mortgage-related revenue going forward, we still think that obviously the spike in rates had an effect in the short run. The question is what's going to happen through the balance of the year. We have over the course of the last 12 months built our team out, so we have more originators out there than we had previously.

I mean, it's our hope that while we may have some ebbs and flows, that we can continue a pretty decent flow of mortgage-related revenue, and as well as portfolio balances, which obviously have helped on the loan growth side during the course of the first six months.

Okay, thank you very much.

David Peppard, Janney.

Good morning. Thanks for taking my call. I was hoping you guys could comment on the loan pipeline a little bit. You had some okay growth linked-quarter. It was certainly less growth than what we saw in the fourth quarter last year. And maybe around that pipeline discussion, could you frame out your expectation for yields both coming in and for the total portfolio?

Dave, this is Dan. I think the second and sometimes even the third quarter tend to have a little bit of a seasonal impact, particularly in the commercial side of things. If you think about the second quarter, we had about 55% of our production coming out of our commercial effort, about 35% from a portfolio basis coming out of our mortgage group, and the remaining 10% consumer-related. So pretty good balance there.

We feel pretty good about the pipeline as we enter the third quarter, the opportunities that we've been working on here the last couple months, 90 days. But it goes with our overall expectation that we are still looking at kind of a middle-single-digit loan growth view for the year.

And that is still facing not only the competitive headwinds, because it's very much so, both on rate and structure, but our continued resolution of problem credits, which is a good news story and benefited us this quarter. But obviously, it's a headwind to portfolio growth as well.

In terms of what's coming in the portfolio from a yield standpoint and our existing portfolio, I will let Phil comment on that.

Dave, how are you?

Good, thanks.

Good. Yes, I would say from the standpoint of kind of an overall loan yield view, when you mix together the combination of what's leaving the balance sheet and of course what's coming on here, to Dan's comments, we are probably anticipating that the overall yield on the total portfolio would continue to compress.

Now this quarter, the compression looks like about 14 basis points. But you have to remember that there was some anomaly in terms of the owner-occupied yield in the prior quarter based on some interest accrual reversals that did not reoccur. So I don't anticipate the quarter-over-quarter compression to be near to that level. But there will certainly be some, but I would expect it to be less than a double-digit basis point change.

And then also, my last question was on credit costs. Looking over the last two years, the loan-loss provision has been unconventional. Could you maybe give us a little forward-looking guidance on how you expect the provision expense to be over the next couple quarters?

Yes, back to Dan here. I think, as we've mentioned previously, we have got a variety of things working to our favor in terms of the resolution, which is generating, as you saw this quarter, with some release of provision and some net recoveries. And that type of activity could continue in the future, so that could create some lumpiness. And as we've said previously, the driver of additional provisioning expenses is likely to be driven by growth in the portfolio more so than any inflow of problems, because we are seeing that slow to a trickle.

So it's really difficult to paint a picture for you, because we could continue to have quarters, I should say, where -- with some growth and modest recoveries or resolutions, where we could have modest expense. And then flip side, we could continue to see a quarter here and there where we post a credit.

I think maybe the best way for me to try to comment is, again, as we've said previously, we think our current reserve level in that 150 range is kind of near our bottom of where we see -- we follow our methodology, but we think that's kind of a prudent level for us going forward in this environment.

So again, it's going to be -- provision expense is going to be driven by loan growth. And at a mid-single-digit expectation, coupled with continued credit quality improvement and recoveries, it could be lumpy and we could still see some recoveries or credits here and there.

All right. Thank you. I'll jump back in.

Bryce Rowe, Robert W. Baird.

Thanks, good afternoon. A couple questions for you. Phil, if you could just talk through the increase in the FHLB. I know, Dan, you mentioned it in your prepared comments. But just maybe a little more detail around that transaction or series of transactions.

Sure, sure. I think -- as Dan stated in the opening comments, I think we just are in a position that we believe we can take advantage of what the market is giving to us in terms of borrowing on a fairly short term, i.e. 30-day maturity type basis, from the Home Loan Bank, Anywhere from 17 to 20 basis points on a cost perspective. And then just invest in that on the other side of the balance sheet and probably creating a couple hundred basis point spread just in kind of that match.

So I mean, there's nothing really more than that to it. We are still in the camp that the short-term side of things on the rate curve are not going anywhere for the foreseeable future. And so we're just trying to take advantage of what the market has given us at this point in terms of generating some additional net interest income dollars for the bottom line.

Okay, that's helpful. Makes sense. And then I guess a more strategic question for you, Dan. Obviously, you noted your improved currency and valuation in your prepared remarks. Just wondering how you think about that relative to acquisition opportunities, especially in light of some of the increased acquisition activity we have seen in smaller cap banks really throughout the country.

Yes, it certainly helps, put it that way, in terms of just a little bit greater purchasing power, while also not being at a level where your upside potential is eroded. I think we are at a really healthy place right now in terms of value for currency, but also value of share for a potential acquired institution to hold our currency.

Our strategy remains the same, I think, and we are certainly benefiting from our performance, coupled with, I think, a more favorable view towards high-performing community banks, like I stated in my comments. So I'm hoping that that will continue to allow conversations with potential targets to continue and maybe accelerate.

Okay. And the last question, I know you guys have talked in the past about a focus on efficiency. And again, you mentioned it in your prepared comments. Any more work around efficiency initiatives within the organization?

Bryce, I think Phil has probably commented on this previously, around some branch rationalization and channel rationalization work, and we are really in the midst of that. I don't have anything really more to comment on, other than we certainly realize that, like other institutions have, that getting the most out of a very expensive part of our infrastructure, which is a branch network, is critical. So we are considering all of the things that go along with that, and we will be acting upon that as well.

Okay. Any timeline, Dan, in terms of when you think you'll be finished with the analysis around the rationalization?

I think the analytical side of things probably wraps up as we move through the remainder of this year. And then any actions that we would take would not probably be part of a widespread, announced action, but as we deal with lease maturities, improved or better locations, consolidations, those types of considerations. And that's the work we are doing now from an analytical side.

Okay. Thank you. I appreciate it.

(Operator Instructions) And showing no further questions, I would like to turn the conference back over to Mr. Schrider for any closing remarks.

Thank you, Laura, and thank you all for taking the time to participate with us this afternoon. We remind you that we would love to receive your feedback to help us evaluate how we've done and the value of our call, and you can email your comments to IR at SandySpringBank.com. So thank you for your time and have a great afternoon.

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