Sandy Spring Bancorp Inc (SASR) 2014 Q3 法說會逐字稿

Good day, everyone. Welcome to the Sandy Spring Bancorp, Incorporated earnings conference call and webcast for third quarter 2014.

(Operator Instructions)

Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Daniel J Schrider, President and CEO. Sir, please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us for Sandy Spring Bancorp's conference call to discuss our performance for the third quarter of 2014. 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 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, 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 key highlights, but before we get started, Don will cover the customary Safe Harbor statement.

Thanks, Dan, and welcome to everyone.

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'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, Don.

We delivered another solid sequential quarter, with EPS coming in at $0.44, which is in line with our expectations. There were no surprises and the obvious takeaway is that, when looking at our core earnings over many quarters now, our performance is solid and consistent.

A key focus is achieving balance growth throughout the various segments of our loan portfolios. This emphasis produced 12% year-over-year total loan growth at quarter-end and 2% over the linked second quarter. We believe that, even despite a highly competitive lending market, there is a substantial number of quality lending opportunities.

As you know, loan growth is the key ingredient for us to reposition investments into loans in an effort to sustain and ultimately expand our net interest margin. As we have stated previously, the investment portfolio would ideally represent about 10% to 15% of total assets, so at 22% of assets at quarter end, we still is have a bit of repositioning to do.

As noted in our release, at quarter end we had produced $314 million of new loan growth over the prior year, of which 33% was derived from mortgage banking, mostly 5/1 and 7/1 ARM products. The loan and deposit production from our commercial teams is balanced among our markets and we have been continuing to add personnel there to further improve our momentum, and particularly in our northern Virginia region.

On the loan quality side, the third-quarter loan loss provision was a credit, as was also the case in the second quarter of 2014. Overall credit quality remains stable, in step with the aforementioned growth in total outstandings. Non-performing loans continue to be manageable, both on an absolute basis, and as a percentage of total loans, as all segments with one exception declined from the prior year.

The exception was a slight increase in non-performing owner-occupied loans, including several smaller relationships, only one of which was over $2 million. The leading indicators of delinquency trends and criticized and classified assets continue their positive trend. So with that said, we have reached a point where provision expense will be driven by loan portfolio growth and future releases are unlikely.

Now shifting to a few remarks about the deposit side of the balance sheet. Total deposits improved 4% over the prior year's third quarter. There is a more important piece of this statistic, however, and that's checking account growth. Given multiple deposit growth initiatives across various business lines, we have experienced 11% growth over last year in combined non-interest bearing and interest bearing checking account balances.

The deposit growth is occurring in line with our expectations and includes not just growth in balances from existing accounts but healthy growth in the number of commercial and retail households. Additionally, at quarter end, our non-interest bearing balances represented just under 33% of total deposits, which is a real strength of our deposit base.

Finally, a note about our non-interest income growth, as is always an important component of balanced revenue production. Non-interest income increased 12% for the quarter compared to the prior-year quarter, as expected. There were significant gains in income from our insurance and wealth management activities, and we continue to focus on expanding the relative percentage of non-interest income to total income, predominantly in the wealth and insurance business lines. We will continue organic growth initiatives in these areas while also pursuing opportunities for team lift-outs or fold-in acquisitions

Tangible common equity totaled $434 million at September 30, 2014, compared to $411 million at September 30 of 2013, resulting in an increase in the ratio of tangible common equity to tangible assets to 10.42% at September 30, 2014, from 10.36% at September 30, 2013. Tangible common equity increased during this period as dividends per common share were raised to $0.56 per share from $0.46 per common share, a 22% year-over-year increase.

During the quarter, dividends were raised $0.02 per share to $0.20 per common share. At September 30, 2014, we had a total risk-based capital ratio of 15.68%, a Tier 1 risk-based capital ratio of 14.52%, and Tier 1 leverage ratio of 11.36%. We continue to execute on our capital strategy, as well as our channel rationalization strategy, which will yield the consolidation of two additional branch offices by year end.

To wrap things up, we previously outlined in our press release dated May 16, the results of a jury verdict in the case involving the conduct of a former employee of CommerceFirst Bank in 2011, which we later acquired in mid-2012. Just to provide a brief update, we will continue the post-verdict legal process and proceed with all claims with regard to our insurance coverage of these damages. And as we stated in our second-quarter earnings release, we do not expect any long-term impact to earnings beyond the second quarter of 2014.

So that concludes my prepared comments for today. We will now move to your questions. Operator, 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)

Our first question today comes from Catherine Mealor from KBW. Please go ahead with your question.

Good afternoon, everyone.

Good afternoon, Catherine.

Hey, Catherine.

I wanted to see if we could dive into the margin a little bit. Dan, you mentioned that we're going to see -- or you would think there would be some upward bias to the margin, given the remix that you talked about a little bit in your prepared remarks, but loan yields came down a little bit more than I was expecting this quarter. So, could you talk a little bit about how those two forces balance each other out and can we still see an upward bias on the margin, even with loan yields coming down at the pace we saw this quarter? Thanks.

Catherine, this is Phil. I would agree with you that certainly, based on how we were reviewing the margin at the end of the prior quarter, having it compressed to the degree that it did here in the third quarter, was a little bit larger than probably all of us did anticipate at that point. Looking through and understanding the dynamics of that, I would say that the majority of what occurred there was by virtue of the type of loans and the yields that were present on the things that got booked late in the second quarter and then throughout the quarter, were certainly lower, probably by competitive pressures as much as anything else, than we would have probably anticipated going into the quarter.

Part of that, which may ultimately be a good thing, is that the mix of those loans probably skewed a little bit more towards the variable side in a couple of categories, especially in the ADC portfolio and in a couple of commercial real estate deals, and so that certainly has given us a little bit more compression here than we initially anticipated. But whenever interest rates move, and that is truly whenever, that should bode us a little bit better. In the short run, though, I would think that our margin is anchored where it is here in that low 3.4% range, as we look out through the rest of the year.

Okay, great and do you have a sense as to where [lines] are maybe rolling off and where they came on this quarter? Generally, I know it will be different per category?

Right. That's exactly the question and I could give you some examples in categories. But for example, in the ADC portfolio, let's take the variable component of that because that's where some of that activity was. We booked loans in that area in the 3.75% to 4% range and the things that were in there on a blended basis, existing were in the high 4%s, so that's the kind of trade-off that we encountered in that area in the quarter.

In the commercial portfolio, it's fairly similar. Commercial variable rate loans booked during the period where there were significant volumes, were in the high 4% to 4.25% range and a lot of the stuff that would be running off there would probably be in the high 4% to low 5% range. So there's some significant give up there, in terms of the trade-offs, in what's been booked versus what's been continuing to run-off.

And then, I remember you mentioning last quarter, in the residential mortgage book that you were actually seeing some of the new production coming in at higher yields than the average blend. Are you still seeing that?

We were throughout the quarter. The mortgage portfolio yields held up pretty well in comparison to the rest of the loan portfolio. Now, given the event of the last couple days here, though, and the volatility in the long end of the curve, I'm not sure that will continue to be the case. We'll have to wait and see, but as it relates to what happened during the current quarter, I think that that was still true.

Okay. All right, great. Thank you for the color, I appreciate it.

You bet.

Thanks, Catherine.

(Operator Instructions)

Our next question comes from Bryce Rowe from Robert W. Baird. Please go ahead with your question.

Hi. Dan and Phil, a question about, you mentioned a couple more branches closing here by the end of the year. Just wanted to be sure on that point? And then the second question was, you mentioned some infill opportunities from a lender perspective in the northern Virginia market. Just curious where that opportunity is coming from. Are other lenders leaving other banks or how are you able to attract them? Thanks.

Thanks, Bryce. On the issue of lenders -- first question was just validating my comment with regard to the consolidation of branches. We continue our work on the channel or branch rationalization work and identified two additional branches that we believe we could consolidate while also continuing to meet the needs of that client base, so we're moving forward with that and that will happen and fully be absorbed in the fourth quarter of 2014.

In terms of the lending staff that we picked up, and probably more in the northern Virginia market than we have in Maryland, just by virtue of our desire to get critical mass there, there hasn't been one giver, so to speak, of talent. We hired a new market leader out of a large regional bank whose just a known entity in the market.

We're thrilled to have him on board and then he's been successful, given his name in the market, of recruiting some other very seasoned talent on the commercial banking side. So, I think there is a continued opportunity for community banks, and particularly us, given the nature of our culture, to pull talent out of larger institutions where folks want to get a little bit closer to community. We provide that alternative. So that's been the source.

Great, that's helpful. Thanks, Dan.

Thank you, Bryce.

(Operator Instructions)

At this time, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. Schrider for any closing remarks.

Thank you very much. Thank you all for joining the call today. Appreciate you taking the time to participate with us and we would like to remind you we'd appreciate your feedback, if you could let us know the effectiveness of our call. You can e-mail your comments to IR@sandyspringbank.com. Thank you again and have a great afternoon.

And at this time, that does conclude today's conference call. You may now disconnect your telephone lines. We thank you for attending.