Sandy Spring Bancorp Inc (SASR) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Sandy Spring Bancorp Incorporated earnings conference call and webcast for the fourth quarter of 2014. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Daniel J. Schrider, President and CEO. Sir, please go ahead.

Thank you, Jamie. And good afternoon, everyone. Thank you for joining us for Sandy Spring Bancorp's conference call to discuss our performance for the fourth quarter of 2014 and the full year just ended. This is Dan Schrider speaking and I'm joined here today by Phil Mantua, our Chief Financial Officer; and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.

As is normally the case, 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 replay of the call available on our website beginning later today.

A technical setback on our part delayed distribution of today's press release by approximately 2 hours. I know that many of you rely on those two hours to prepare for our call and prepare your questions, so I apologize for any inconvenience this caused and we are very happy to answer any questions you might have either today on the call or after. Before we get started, Ron will cover the customary Safe Harbor statement.

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp 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 uncertainty 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 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, as usual, I will share prepared remarks as I look back on the fourth quarter and also the full year and then we will move to your questions. The goal of the call is to both hit the highlights and provide a better sense of core operating performance, given a number of unique expense items that impacted both the fourth quarter and full year.

As reported earlier, net income for 2014 was $38.2 million versus $44.4 million for 2013. And net income for the fourth quarter of 2014 was $9.1 million compared to $9.6 million in Q4 of 2013 and $11.1 million in the linked third quarter of 2014.

Obviously, our performance in the most recent quarter is less than the Street expected and we intend to provide some color as to why. But let me first detail what excites us about where we are and how well we believe we are positioned for the future going to 2015.

During our earnings call in January of last year, I shared with you our strategic initiatives to align our unique culture and team of outstanding employees with the very things that our clients say are important to them, all to create a consistent and remarkable experience for our clients. We believe the outcome of this effort will be consistent financial results from a fiercely loyal client base made up of our greatest advocates and will create a competitive advantage that is unique, identifiable, and lasting. This strategic journey continues and is driving both results and ongoing strategic direction.

Total loans, they increased 12% compared to the fourth quarter of 2013 and 5% on a linked quarter basis. As we have stated previously, we continue to look for balance loan growth from our key segments of commercial, residential mortgage, and consumer lending. This is all organic, representing core client relationships and without compromising traditional sound underwriting practices in what has been a prolonged soft economy. This is and will continue to be the hallmark of Sandy Spring's lending philosophy.

We have also had wonderful success in growing both retail and commercial deposit relationships, which is driven year-over-year increase of 18% in combined non-interest-bearing and interest-bearing transaction account balances. Again, all organic core, representing net growth in retail and commercial and households as well as growing the penetration of these relationships with complementary product and services.

Given our lending success and management of our funding cost, our net interest margin expanded to 3.44% for the fourth quarter of 2014 compared to the linked third quarter and lacked the noise of interest recoveries that occurred in the third quarter of 2013, so a pretty clean margin for the quarter.

We continue to be encouraged by the success of our wealth management business lines in growing revenue and new client relationships. This is an increasingly strong niche for us in the greater Washington region with assets under management now at $2.76 billion at quarter end. We like the diversification that our fee-based businesses of wealth and insurance contribute to our revenue stream, while also recognizing that we had a soft fourth quarter. However, this is not indicative of our confidence in these business lines moving forward. After all, wealth management revenue grew 9% year over year.

Our channel optimization work has led us to consolidate two additional branches in the quarter as well as relocate and transform an office within the vibrant Bethesda market into a state-of-the-art financial center where we are using technology and innovative staffing approaches to meet the ever-changing ways in which clients desire to do business. We believe continuing to rationalize our branch footprint is critical to our long-term success.

Tomorrow, we begin relocating 300 employees into a newly designed work environment which provokes collaboration, creativity, and teamwork. We have capitalized on the lease rates available in the current market to provide our employees a much improved work environment. Our Columbia Center, which is located in Howard County, Maryland, houses multiple divisions and departments within our Company. While the expense run rate implications of this move is neutral, fourth quarter expenses were impacted on a nonrecurring basis.

Capital remains a core strength for us with total risk-based at 15.06%, Tier 1 at 13.95%, and Tier 1 leverage at 11.26%. Our capital deployment strategy remains unchanged since our last call and includes continued consideration of all the following -- bank M&A, non-bank M&A, dividend payouts, and share repurchases.

We continue to be successful in expanding our team by adding to our existing competencies. For example, new talent in our wealth management businesses, enhancing our financial planning and portfolio program management capabilities. We hired additional mortgage originators to expand our presence in key markets within our geography.

Finally, our credit quality metrics remain strong with the solid allowance, excellent NPA coverage and a nice reduction in nonperforming loans. These areas that I just highlighted represent some of the core elements our strategies and performance that causes to be optimistic as we continue in 2015.

And now, I would like to give you some more detail on the items that specifically impacted our earnings miss in the fourth quarter. If there are additional questions, Phil and I will be glad to address them.

First we experienced heightened EFT fraud losses, which peaked and subsided within the fourth quarter. Second, branch closing expenses impacted the fourth quarter and were about equal year over year to similar expenses in the fourth quarter of 2013. Third, the nonrecurring overlap of occupancy costs in the fourth quarter related to the new Columbia Center I had mentioned earlier. Fourth, there was a one-time accounts receivable right off in the insurance subsidiary during the fourth quarter. And last impacting our earnings for the year and as reported previously, was the $6.5 million in unexpected litigation expense that continues to accrue interest as we work through the appeal process. We remain optimistic regarding a positive outcome, though it will be a slow, drawn-out process. Our press release dated May 16, 2014, provides more details on the case.

All in all, the after-tax EPS impact of these items is estimated at $0.06 for the fourth quarter of 2014 and $0.22 for the year. Hopefully, that provides the needed detail to appreciate our core performance.

So with the impact of the aforementioned expenses behind us, momentum of the balance loan and core deposit growth, continued success in wealth management and other fee-based business lines, the quality of our team of experienced bankers, and multiple initiatives creating remarkable client experiences, we are well positioned for a bright future as a premier community bank in one of the nation's most attractive markets.

That concludes my comments for today, and we will now move to your questions.

(Operator Instructions).

Catherine Mealor from KBW.

Dan, can you talk a little bit about the insurance line as well and remind us of the typical seasonality that we may see in that line?

Catherine, this is Phil. There is no question that there is some seasonality in that business. And that would normally include the fourth quarter as well as some seasonality in the first quarter, which will be upon us here in the next couple months. The first quarter usually has some of that, primarily due to the receipt of contingency-based income from the carriers. And the fourth quarter normally has some seasonality in our physicians' liability type insurance, which actually is more normally to the accretive side than what we had here.

But as part of our accounts receivable work, we also looked at some of our revenue recognition efforts that take place through the subsidiary. And some of that income that we normally received by the end of December is actually going to fall into the first part of January, and therefore make the first quarter even that much different than it might have in the past.

So those are the places that we normally see that. But on balance, we normally have somewhere between $4.5 million, $5 million of revenue annually and look for the growth rate in that part of the business to be low double digits year over year.

Okay. Thank you, that's helpful. Dan, I appreciate your commentary around the expenses and just wanted to ask about one of those line items you talked about in the occupancy expense. So it looked like that came up just because of the double occupancy expense with the Columbia Center. So backing that out, would we fall back to the similar occupancy run rate that we've seen in the front half of the year, around $3.2 million, $3.3 million?

Go ahead, Catherine. Finish. I'm sorry; I jumped in on you.

No, I was just going to say where should we see growth from there from the new Bethesda office and some of the hires that you talked about too?

Okay. Yes, this is Phil again, if you didn't already know from my jump in there. In that number in the fourth quarter is a combination of the rent expense that we incurred by virtue of technically having occupied both facilities. That's worth about $400,000 in the quarter. And then there's also in that delta from the third quarter some of the cost from when we closed the branches that Dan referred to in his opening remarks. So the majority of that -- I think it's $800,000 and some-odd variances is going to head back and not reoccur. There is some incremental occupancy cost from the change in the Bethesda operations between the branch we left in the financial service center that we are occupying. It is not going to materially change that number here right away but there will be some increase.

Bryce Rowe from Robert W. Baird.

I think Catherine covered my questions about the expenses, the non-core expenses. I just wanted to also touch on maybe some of the pricing on the loan side. Obviously, in a handful of the loan portfolio buckets you saw some good growth, especially from an average perspective, and we saw a loan pricing go down, particularly in the construction and development bucket, the commercial real estate non-owner occupied bucket, and the C&I buckets. So just trying to get a feel for what do you expect from those loan segments going forward from a pricing and growth perspective.

This is Dan. I'll comment more on the growth. I know Phil is digging out some of the pricing information. We are really pleased with, obviously, with the growth that we had have achieved in 2014 as a whole, which lines up the way we were commenting on the year. In fact, fourth quarter obviously ended up being pretty darn strong toward the end of the quarter. And our outlook in those buckets continues to be -- it's still a difficult economy but we are proving that we can win our fair share of business, which still is often times stealing business to continue the growth that we are seeing.

I wouldn't apply the fourth-quarter growth rate necessarily across the 2015, but that double-digit loan growth is still something we think we can achieve. And I think it's important, as I commented, to realize that we are not stepping outside of our credit box or our credit appetite to achieve that. We continue to apply our consistent underwriting principles, and part of that underwriting view from our perspective is not taking out-of-sized bites within the marketplace. So we still have a very conservative hold position, very conservative in-house limit, and not a real appetite for speculative type of exposure. So, we are getting at the way that we wanted. I'll let Phil comment little bit on the pricing aspect.

Yes, Bryce, in terms of a little bit of granularity there without getting into too much detail, our current overall commercial loan portfolio yields about 4.74%, 4.75%. And the majority on a blended average basis that was booked in the overall commercial portfolio during the fourth quarter was more like 4.45% to maybe 4.50%. So just within the commercial loan book, certainly there's still some compression to be had on a portfolio average versus current production rate basis.

I think, though, that what we also recognize, though, in terms of our overall margin, which is part of where we want to get to an answer, too, is that the stability there or expansion related to that, though, is again that the pickup from no longer being as dependent on investment portfolio yields that's more like 3% to 3.05% and even picking up 4.45% or 4.50% in the loan portfolio. So the yields within some of those specific categories are on both sides of the average, as you might imagine. With maybe one or two category exceptions, though, we're still looking at current production yields that are less than the yields which are most likely going to continue to roll down. And so, that's probably the best way to view the yield within the commercial portfolio itself and also within the context of the broader margin.

Great, that's helpful. Last time, Phil, you guys talked about the securities portfolio being a source of liquidity and with the potential for it to trade down to maybe 15% of assets over time. Is that still a pretty good target for us to think about?

I don't think there's any question about that. Yes. We've made some progress here as we got through -- to that end, to the end of the year. Investment portfolio at year-end was down to 21%. It could certainly be lower, but as we have discussed before, we have chosen to take advantage of the interest rate environment and continue to use some short-term Home Loan Bank funding and allow us to even maintain some of that 3% yield for the time being.

And based on some of the timing with some of the loan growth, during the quarter you may also recognize that the year-end position of the Home Loan Bank advances is elevated from other times during the year, not terribly different than what we happened at the end of the last year as well. And we slowly migrate down some of that excess, as is possible through either deposit growth or other changes on the asset side.

Great, that's helpful. Thank you.

Matt Schultheis from Boenning.

Couple really quick questions, and I'm sorry if I missed some of this during the prepared remarks or even answering some of the questions. But your other income decreased linked quarter fairly substantially below what the long-term run rate is for that, usually. What do you think that -- what explains that?

Phil again -- a couple things. One of the things that's in that category during this quarter is the way that we account for the disposition of fixed assets that might be involved in branch closures. We didn't net a gain or loss on to the other income side of the equation, and there's about $225,000 worth of that that brings that category down from prior quarters or even the fourth quarter of last year. So that's one aspect of it.

The other thing is, and we have just been fortunate in some of these other areas throughout the year in that category. By its nature, as we run things like prepayment fees that we collect, as loans get extinguished early or whatever, we have actually had a fair amount of that in prior quarters. We did not have it in any great degree in the fourth quarter.

And then the other thing that runs through there that bounces around is any success we have with the gain on the sale of SBA loans. So to more directly answer your question, I think a reasonable level in that category on average or on balance is more like $1.4 million, not maybe $1.7 million like it has been at other times and certainly not $1 million like it is in this quarter but kind of right square in the middle of that range.

And then related to this $1.1 million in nonrecurring expenses for bank card license and adjustments to insurance receivables, how much of that is tied to the fraud losses that you talked about? And related to that, should we be viewing fraud losses -- not just for Sandy Spring but for maybe everybody we follow -- as an ongoing operating expense, given the nature of how people are using their cards and certainly exposure to cyber-security issues and things of that nature?

This is Dan. That category was from a breakdown of the first part of the question --

Yes, answer the first part of your question is, in the quarter that it's about half of each, about $500,000 to $550,000 a piece in terms of the mix of that number.

I think the letter part of your question -- the short answer, Matt, is yes. I think it is -- while what occurred, we certainly don't expect what occurred in the fourth quarter, the absolute level that we experienced would be typical. But I think it's the nature of the business today and even more so the result of the fact that there has been no resolution to breaches of retailers and the ultimate liability that's falling to financial institutions. So, I know that's something Congress is working on later in 2015, October specifically, is when the EMV card mandate comes into play, which we are actually prepared to do around midyear and which will impact some of it but not all of it. So I think it's the nature of the business right now.

Okay, thank you very much.

(Operator Instructions).

William Wallace from Raymond James.

Phil, maybe expanding a little bit on some of Bryce's questions, if you put it altogether it sounds like your budget is for low double-digit loan growth, some continued funding of that growth out of your securities portfolio with pressure from loan yields, just given the competitive environment. So if you just put it altogether, what is your expectation for the movement in margin 2015?

I would suggest that we think it's fairly, overall, not taking into consideration for the Fed might do, which always continues to be a wild card, or even trying not to prognosticate on the long end and which direction it might go on, too. Just based on the things that you suggested we think that that means that that margin is fairly stable.

Okay. And if I look at your reserves, and you have had some pretty good loan growth the past couple of years and you've really been bleeding the reserves just from a reserves-to-loan perspective, I know you have to weigh the requirements for GAAP versus what the regulators are telling you. What's the level if you think about your reserve to loans as a ratio, what is a level that you guys think you wouldn't be comfortable crossing below?

This is Dan. Obviously, you've recognized this trend we've been through, fourth quarter we did have some provision expense. And I think as you move into 2015 we are darn near that bottom on the reserve to loans. And so, our expectation would be that would travel in that [120s] band. Again, still methodology driven but, to your point of our comfort level, we are pretty close to where we think the provisions would increase, much like we actually talked last year. We kind of expected that, but the way loan growth and the way resolutions came in, we just didn't see it materialize. So it showed on a quarter-by-quarter basis.

And I might add to that, Wally, a little bit below the surface is that we are getting to the point where our NPA levels are that there is not a lot of specific reserve left in that reserve to be released on loan-by-loan basis, based on the way the accounting works. So that's part of how we have released in the past is when we had specific transactions or whatever. And we don't have the need for that as we exit those credits. That's where the releases will come from for the most part.

Okay, thanks. And then my last question, just shifting gears a little bit -- maybe you could just give us a little bit of color about what happened with that insurance accounts receivable that cost you in the quarter?

Yes, it's basically an analysis of our aging within the receivables and the agency, and determining that, based on the practice of when receivables are flowing through there versus the aging of the balance itself, we just deemed that there was likely some of that that was uncollectible and decided to adjust and deal with that here in the fourth quarter of the year. So it's something we have looked at for a while and then finally came to the conclusion that we needed to write off a portion of it.

This is multiple receivables, then?

Yes, this is something that probably a little bit of the time over a period of time builds its way through to a balance that was probably greater than it really should have been. And so we recognized that here, made the adjustment. And it does not have any bearing on future collections or future cash flows that are related to the revenue stream. It's just something that we felt we needed to address looking back over time.

Okay. Thanks, Phil, Dan, I appreciate your time.

(Operator Instructions). Sir, at this time, I am showing no additional questions. I would like to hand the conference call back over for any closing remarks.

Thank you, Jamie, and thank you all for participating with us this afternoon. We value you that and we want to remind you that we'd appreciate receiving your feedback to help us evaluate the effectiveness of our call. You can email your comments at IR@SandySpringBank.com. Thanks again and have a great afternoon.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.