Sandy Spring Bancorp Inc (SASR) 2013 Q3 法說會逐字稿

Hello, and welcome to Sandy Spring Bancorp Inc. earnings conference call and webcast for the third quarter 2013. (Operator Instructions). This conference is being recorded. I now would like to turn the conference over to Daniel J. Schrider, President and CEO of Sandy Spring Bancorp. Mr. Schrider.

Thank you, Keith, and good afternoon, everyone. And welcome again to Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2013. This is Dan Schrider speaking. 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 is 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 today. We will take your questions after a brief review of some prepared remarks and key 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 risks and future cost and benefit; assessments of probable loan and lease losses; assessments of market risk; and statements 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 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 as normal, I have some brief prepared remarks and then we will move to your questions.

First, it was another solid three months, and we continue to be pleased with our consistent and balanced results even as a variety of unique factors, both internal and external, came into play during this past quarter.

From a high level, we have been able to sustain profitability. We continue to produce a steady stream of noninterest income, despite diminishing revenue on the mortgage banking side. There was respectable commercial loan growth mostly in latter September and our overall credit quality metrics continue to improve quite favorably.

As I have observed during previous calls, our solid 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. And with the federal government shutdown behind us for now, at least one area of uncertainty has been removed from the local market.

In response to the recent shutdown, we did develop multiple ways to assist furloughed federal employees during this difficult time, and many have taken us up on our offer of assistance and have expressed appreciation for our personal attention to our clients.

As stated in our press release issued earlier today, net income for the third quarter of 2013 was $12.1 million. That is $0.48 per diluted share, up 10% over year ago. Third-quarter net income was flat when compared to the linked second quarter of 2013. A major factor affecting this quarter was the positive impact on the net interest margin and also on noninterest income and expense generated from major recoveries of two previously nonperforming commercial real estate credits. When considering the financial impact of these recoveries, our analysis would result in a core EPS of $0.38 for the quarter.

These recoveries consists of a combination of interest income, loan fees, substantial legal fees, et cetera, not to mention the intangible costs associated with all the time of our internal work out and loan resolution teams that put this effort forth. We appreciate the folks in this team for their hard, persistent work over many months.

In addition to the recoveries, there were two specific areas impacting the quarter. The first included lower gains from mortgage banking activity resulting from the impact of increased rates and the corresponding abrupt decrease in refinancing activity. The second area was a higher provision expense driven by a very strong quarter in loan growth which was heavily weighted toward the quarter end. And given the timing of this loan growth, the benefit of it will kick in during the fourth quarter.

The net interest margin was 3.88% the third quarter of 2013 compared to 3.67% for the third quarter of 2012 and 3.51% for the second quarter of 2013. However, excluding the effect of the loan recoveries I just mentioned, the net interest margin was 3.49% for the quarter, so on a normalized basis, the margin held up quite well when compared to the second quarter of this year. As expected, the decrease in margin year over year was due primarily to a decline in the yield on a higher level of earning assets, and this more than offset our lower cost of borrowings and deposits.

As mentioned, loan growth ramped up toward the end of September and was the primary driver of the $1.1 million provision expense. The two major commercial loan growth categories were investment real estate and owner-occupied real estate. And as we look forward, we have a good solid pipeline leading into the fourth quarter.

Unlike commercial loan growth which ramped up late in the quarter, mortgage banking activity was spread more throughout the quarter and began to ramp down throughout the quarter as rates continued to move higher. But a bright spot in mortgage banking was the linked-quarter portfolio growth of 5%. Obviously, all of the area's banking companies are experiencing a decline in the mortgage-related business, especially refinancings. Also on the fee income side, both our wealth management and insurance businesses performed well with steady and improving results, especially in the wealth management area.

On the credit front, we see reserves being maintained as around the 1.5% mark, which is consistent with our focus on improved credit metrics, meaning solid reserve coverage as well as continued ongoing efforts to lower our NPAs.

On a related note, there was a charge-off associated with one commercial real estate loan during the quarter. Our nonperforming loans decreased to just over $38 million at September 30 compared to about $59 million a year ago and $46 million at June 30, 2013. And the coverage ratio of the allowance for loan and lease losses to nonperforming loans was at 103% at September 30 compared to 72% a year ago and 84% last quarter.

On the expense side, we continue to maintain good controls and a solid handle on expense management. Expenses were flat notwithstanding those recoveries.

In past quarters, we have commented on our analysis of our branch delivery and channel optimization. As we begin to execute on our findings, we are finalizing plans to close several branch locations early in 2014.

At September 30, 2013, the Company had total risk-based capital ratio of 15.70%; a Tier 1 risk-based capital ratio of 14.50%; and a Tier 1 leverage ratio of 11.30%.

Our capital deployment strategy continues to include a focus on organic growth, strategic M&A activity, dividend payouts, and share repurchases when prudent to do so. And you may have noticed the approval of a share repurchase plan by our Board earlier in the third quarter.

And to wrap up, we are very pleased to be included in the Sandler O'Neill & Partners 2013 Bank & Thrift All Stars. It was great to be recognized for our balanced financial performance and to be among those 31 peer banks from across the country.

And that wraps up my comments for today, and we will now move to your questions. So Keith, we can have the first question, please. 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.

My first question, I would like to maybe dig into the mortgage banking results a little bit. Can I assume that there are some rep and warranty expense or something in there?

Wally, no. There's nothing along those lines. The real gist of the change quarter over quarter relative to what we referred to as the gain on mortgage banking activities is really -- was being driven by the lower volumes throughout quarter and that impact on the valuation from a fair value standpoint on the commitments that are involved in arriving at that number. So it's really -- the economic impact is really based on the change in the interest rate environment and the lesser number of loans that are just going through that pipeline. The accounting for it is what really then drives the number to end up being a slight negative for the period.

Okay, so let's maybe dig in a little bit then to some of the numbers. What was the production in the quarter? And I would like to get a sense of maybe what the purchase production was and then how that compared to the prior quarter.

In terms of within the quarter, let me just give you a perspective this way. In terms of loans that were held for sale that eventually make their way through the gain number, in the second quarter the balance there was about $33.9 million. At the end of the fourth quarter the balance in the loans held for sale was a little bit more than $10.4 million in the third quarter. That's a one-third position than what it was at the end of the prior quarter, which was also a third to the quarter prior to that, as well. So, I mean, it is a dramatic drop off from any of the first two quarters of the year.

Okay. So if I want to try to think about moving forward, maybe you can tell me what portion or what was the amount of valuation adjustment on the held-for-sale portfolio that drove the number negative in the third quarter.

Yes, I think what it really is is a reversal of the accrual related to commitments from the prior period which was roughly about $1.8 million. And I think that is the biggest element of what impacted that final slight loss number as opposed to a gain.

Now looking forward to, I think, to the essence of your question, looking forward, unless we have another whipsaw in interest rates like we did during the quarter, that aspect of things on to stabilize itself, and we shouldn't have that large of a reversal of an accounting accrual to be a significant offset against the actual gain in the period. So, I would not expect that kind of result to continue as we move forward.

Assuming rates are stable.

Right, right. And at the same time I would also say that the overall level of the reported gains will certainly not approach the levels from prior period either, just because of a lesser amount of activity in the area.

Okay. Thanks. And then if we look at the -- I have a couple of questions on the two credits that you had recoveries from. One is, what was the dollar amount of the benefit in the noninterest expense?

Overall dollar amount of benefit related to those two credits in noninterest expense was roughly $500,000. And that was also related to the recovery of attorneys' fees that had been paid prior to working on those two loans.

Okay, so you had a benefit in other and then in the professional fees line. Or was that all in the professional fees line?

I think it is primarily all in other if I am not mistaken.

Because your professional fees line was down to $500,000 from about $1.3 million in each of the first two quarters.

Correct. Actually, I'd take that back. I think the attorneys' fees are in professional fees, and then there was some very small, a couple of hundred thousand dollars amounts that were in the other expenses.

Okay.

Related to those credits.

Okay, that helps. And then last, before I let somebody else hop on, you mentioned in the prepared remarks that you have located several branches that you would consolidate beginning in 2014. Can we talk about roughly how many branches there are and what the expected cost savings would be?

I don't know that we are prepared to quantify the actual cost savings. We do have -- right now have identified three branches at this point that we've identified that would be early first quarter events.

Thanks a million for your time, guys. I will let somebody else ask a question.

Thanks, Wally.

Thanks, Wally.

Damon DelMonte, KBW.

Just to circle back on the recovery impact, what was the impact to net interest income that caused the margin to go up so much?

Damon, this is Phil. The impact to the net interest income was roughly $2.9 million.

Okay, great. And then the two credits you had recoveries on, could you just tell us what the size of those credits were?

Let me see here.

It was roughly about $13.5 million.

Okay, for the two of them?

Actually, let's call it $13.8 million in the two of them combined.

The two of them together.

Yes, two of them together. One was obviously much larger than the other.

Okay. And then with regards to the portfolio of mortgages this quarter, could you just talk a little bit about that strategy going forward? Is that a category we can expect to see you continue to grow?

In terms of the portfolio mortgages?

Yes.

Yes, it's a good question. Our mortgage business has long been kind of a two-pronged approach of both providing salable product on the long-term fixed-rate, 15-, 30-year product. But our targeted segments retail-wise are the mass affluent which typically would drive some pretty significant jumbo mortgages, which often fall into either construction products or into 5/1, 7/1 ARM product. So we waited continue to expect that we would originate and grow that portfolio.

Interest rate environment salable market, the investors' appetite will often times drive what is getting the bulk of that production, but we would continue to expect that we would be able to grow the mortgage portfolio.

Okay. And then my last question just also in regards to loan growth and the outlook, I think in past quarters or so you have targeted mid-single-digit for 2013. Is that a number you are still comfortable or would you expect something a little bit higher?

Yes, as we look forward, part of our outlook has always been tempered by the effect of the economic environment but also our resolution of NPAs. So with our NPAs down to a pretty healthy level of under $39 million, $38 million, we would expect that mid- to upper-single-digit is an area that we are targeting for 2014.

Okay, that's all I had. Thank you very much.

Thanks, Damon.

[Mark Hughes], Lafayette Investments.

A couple questions. The line-item loans placed on nonaccrual have been running in the $5 million a quarter range for a number of quarters and then this quarter jumped up to about $11.5 million. Anything, one item significant there or was this a lots of little things? What's going on there?

Mark, this is Dan. We did have one commercial real estate credit move into nonperforming status this past quarter in the $9 million to $10 million range, which drove -- driving that number bit higher than prior quarters. So not multiple credits, just one that we had been watching for several quarters. There was some distress within the borrower world and many of the projects that pushed it in that direction.

Got you. And one question on the branch closing, kind of unusual for you all, I think, you haven't had too many through the years. Do you expect a charge-off related to that or is it no P&L impact?

Yes, there will be some up-front costs associated with unwinding those three branches as we progress towards 2014.

Okay, traffic. Thank you, guys.

Thank you.

Bryce Rowe, Robert W. Baird.

A couple of my questions have been answered. Just wanted to dig a little more on the recovery of interest in the impact on the loan yield, Phil. You had quite a spike-up in loan yield in the commercial AD&C and then the commercial investor real estate bucket. Wondering what kind of dollar impact or even basis point impact those recoveries had on those loan yields.

Yes, Bryce, this is Phil. I will give you exactly what those yields by category would have been. Commercial AD&C, the average yield for the quarter would have been 5.27%, which was only one basis point different than the prior quarter. Commercial investor real estate would have been 4.99%, which would have been down a bit. And owner-occupied, actually, those are the two major categories where the two loans were. And then the overall yield on loans would have been 4.47%.

Okay. And that jumps into the next question, just trying to get a feel for the competitive dynamics. We heard M&T this morning talk about the mid-Atlantic region being their most competitive from a loan-pricing and structure perspective. I just wanted to get your take on that dynamic, as well.

Yes, Bryce, this is Dan. It clearly has been really the dominant theme going back probably eight quarters, if not more, as we have emerged from the cycle with still tepid real live organic growth in the market. It is still predominantly a taking share type of market which is driving the pricing. And it is a considerable issue both the large guys that we compete against, as well as the smaller institutions.

So for us the challenge is to make sure we're picking our spots along the yield curve that we think create the best value for us as well as full banking relationships that can augment the returns.

Yes, and on the yield side, Bryce, you might have an expectation because of what was going on with the long end of the yield curve that the commercial deals would be able to get priced up a little bit, but because of those competitive pressures in this market, nobody really stepped forward with that. So the actual yields that were earned held the line and really didn't move very much.

Okay. And last topic, Dan, we've obviously heard you talk about having built up the capital base and on the lookout for acquisitions. We've gone through this year without hearing about any. Just wanted to get a feel for why you think maybe sellers haven't accepted the offers. What is the disconnect between getting a deal done?

Yes, that is a good question and probably only the population of sellers can give you the most accurate answer. But I will give you my shot at that, Bryce.

I think in a lot of cases there is -- some of the pricing from stronger currencies outside of the market have perhaps caused some folks to have a greater perception of value. You have seen a few of the deals that have happened. And I think in a lot of cases you have very, very patient capital waiting perhaps for a better day. I think the reality is we move into yet another year ahead of us where in just rate environment is not anticipated to change here for the next 24 months or so. It's going to be an earnings challenge for all of us as well as the smaller community banks.

So, I'm still optimistic that there will be opportunities, but there -- it obviously hasn't been a heavily populated list of deals that have been announced. We continue to work it. We continue to think that we have a long-term view and will allow community banks that continue to want to have an identity locally, that we're a great option and a good currency and a good liquidity for them.

The other thing that we don't necessarily offer by strategy is the double-dip. And some may look for that.

Okay. Just the last question, on the CRE loan that moved into nonaccrual, can you just tell me if you already did -- I might have missed -- what the charge-off associated with that was?

Yes, that charge-off this quarter on that particular credit was about $4 million, $4.5 million.

Okay. Thank you guys. Appreciate it.

Sure. Thank you, Bryce.

Matt Schultheis, Boenning & Scattergood.

A quick question on the recovery. I think you mentioned something about an increase to noninterest income or benefit to noninterest income. Can you quantify that?

I sure can. That was related to the recovery of some late fees that had not been collected before and that was roughly about $235,000.

Okay. And I suppose -- I have one more question but I'm not sure -- frankly, I'm not sure if you can answer it. But with regard to your buyback, you had one; you didn't really use it aggressively, to say the least. And was wondering if your view on using the authorization has changed at all with current market conditions.

Matt, this is Dan. I would say that it has not materially changed with the current market conditions. With that said, another way that that could be deployed at some point -- you see other companies do it -- so it's, is on the back end of a transaction. But our overall view has not materially changed.

Okay. Thank you very much.

Thank you, Matt.

William Wallace, Raymond James.

I just wanted to ask a couple more questions on the mortgage bank. That line item, are you reporting that net of the associated variable compensation expense?

Yes.

Okay. Are there any -- are you making any changes to the business given the slowdown in the refinance side? Are you cutting costs at all?

Wally, this is Dan. We have -- we began to do that in the quarter and continue to evaluate that as we move forward. But yes, it is a scalable business and we will continue to evaluate that as we go forward.

But we will see some relief in the fourth quarter related to changes at the end of the third?

Yes, within that unit, yes.

Okay. And then one follow-up on the two CRE credits, just so I am 100% clear. So did these loans, did they pay off or did they just did they start accruing again and you recovered --?

Okay, great question. Both of these transactions paid off and one was through the outright sale of a piece of real estate. It never flowed through OREO; it was sold without taking title to it, which allowed us to have a significant recovery as we described. And the other was a longer-term work out of an AD&C credit, which at one point was much larger. And then we worked that out through the sale of the underlying residential lots, which have all sold, and paid that off and also allowed us to post some recovery.

Okay and this was all --?

Both assets are off the books.

Okay. And so that was -- they were carried at $13.8 million to the question that Phil answered earlier -- or that was the full value of the recovery?

They --.

They were carried at the $13.8 million.

Okay, so some of the recovery was related to charge-offs of collateral and some of it was related to interest that had not been accrued.

That is correct.

Correct.

Great. That helps for me. Thanks a million, guys, I appreciate it.

Thank you, Wally.

Sure, Wally.

Thank you. And as there are no more questions at the present time, I'd like to turn the conference back over to Mr. Schrider for any closing remarks.

Well, first of all, we'd like to thank you for taking the time to participate with us this afternoon, and secondly, we'd like to remind you that we appreciate receiving your feedback to help us evaluate the effectiveness of our call. You can email your comments to IR@SandySpringBank.com. So thank you again and have a great afternoon.

Thank you. That concludes today's teleconference. Thank you for participating and have a nice day. You may now disconnect.