Sandy Spring Bancorp Inc (SASR) 2015 Q1 法說會逐字稿

Good day, and welcome to the Sandy Spring Bancorp Inc., earnings conference call and webcast for the first-quarter 2015.

(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, sir.

Thank you, Dan. And good afternoon, everyone, and thank you for joining us today for Sandy Spring Bancorp's conference call to discuss our performance for the first quarter of 2015. 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 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 a replay of the call available at our website beginning later today.

Before we get started, Ron will cover 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 risk, and future cost 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 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.

Thanks, Ron.

Today, as usual, I will cover some brief remarks as I look back on the first quarter, and then we'll move to your questions. The goal of the call is to both hit the highlights and also add a few thoughts that might provide some additional color around what was covered in this morning's earnings release.

As reported earlier, net income for the first quarter was $11.2 million versus $10 million a year earlier. And our net income for the first quarter of 2015 compared favorably to the $9.1 million reported for the linked fourth quarter of 2014. On a per-share basis, the $0.45 we reported also compared favorably to the $0.41 Street consensus for EPS.

Pre-tax, pre-provision revenue was strong at $17.5 million, which is better than any quarter last year, and among the best on a historical basis, particularly given it was a very clean quarter, lacking any significant impact of extraordinary items. As noted in our release, we saw higher net interest income as a result of good growth in all three major segments of our loan portfolio. The loan pipeline reflects a steady trend over the past three to four months, and is consistent with the run rates we've planned for.

On the mortgage banking side, balance sheet growth was somewhat slower than planned, due to the volatility in rates, and seasonality that affected the construction business. But on the positive side, originations drove a significantly higher level of revenue from mortgage banking activity. It was more residential re-fi activity that drove our mortgage performance and gains, as opposed to new home sales or construction originations. Almost 75% of loans were residential re-fi's this quarter versus about 45% in the first quarter of 2014.

Aside from the rate volatility that helped drive re-fi activity, another factor that likely drove lower residential construction activity was the weather. We had more frequent snow and a much colder winter in the first quarter than we've seen in this area for quite some time.

The fee-based income coming from wealth management, trust and insurance was strong. Overall fee-based revenue currently comprises a solid 28.3% of total revenue, and that's up from 26% last year. And as you recall, the insurance business always tends to be seasonally higher in the first quarter. So, overall, we're quite pleased with the balance, as well as the diversity of our revenue mix.

As for deposits, at March 31, 2015, combined non-interest-bearing and interest-bearing checking account balances, the principal performance driver of multiple product banking relationships, increased 13% compared to balances at March 31, 2014. Total deposits and other short-term borrowings that comprise the funding sources derived from customers increased 6% compared to a year ago.

Given the loan growth, our continued success in growing transaction account balances, as well as management of our funding costs, our net interest margin held up at 3.44% for the first quarter of 2015 compared to the same level for the linked fourth quarter of last year. So, our net interest margin is in line with our expectations, and consistent with our prior comments.

Credit quality -- it remains strong. Non-performing loans totaled $36 million at quarter end compared to $38.7 million a year ago, and $34 million at December 31, 2014. Our level of non-performing loans to total loans decreased to 1.14% at March 31, 2015, compared to 1.37% a year earlier, mainly due to growth in the overall loan portfolio.

The increase to non-performing loans at March 31 compared to December 31 was a result of loans which were watch-list credits, and classified as non-performing during the first quarter. There were no surprises there, and these were somewhat offset by recoveries and loan payoffs.

Let me take a minute to talk about capital, and what we're doing with respect to capital deployment. Tangible common equity grew to $435 million at quarter end, up from $424 million a year ago.

Dividends per common share were $0.22 per share for the quarter, compared to $0.18 per common share for the first quarter of 2014; that's a 22% increase. This results in a very healthy current dividend yield of 3.4%.

I'm also pleased to note that the dividend yield and pay-out ratio have nearly returned to levels where we were prior to the economic downturn. We entered this cycle with an annualized dividend rate of $0.96 per share. So, at $0.88 per share now, just one more $0.02-per-share increase would restore us to where we were previously.

Further, during the quarter we were consistently active buying back stock. Total shares repurchased amounted to over 351,000 shares. As a side note, the impact of this repurchase volume was about $0.01 a share in EPS. This all reflects our intention to consistently return value to shareholders as part of our overall capital deployment strategy.

At March 31, the Company had total risk-based capital ratio of 15.12%; a common equity Tier 1 risk-based capital ratio of 14.01%; a Tier 1 risk-based capital ratio of the same, 14.01%; and a Tier 1 leverage ratio of 11%. We are pleased to see our valuation has improved, with steady stock price appreciation year over year, both in terms of improved book value, as well as our PE. It's nice to see this, as the value of our currency is an essential element of our growth strategy.

In general, we continue to look carefully at all M&A opportunities; and beyond bank M&A, we like fee-based ideas such as on the wealth management and insurance fronts. These types of transactions can be quickly accretive, they do not consume large amounts of capital, and they already represent a core competency for us. We also think pricing expectations by potential sellers are beginning to move in a more realistic direction. These areas that I've highlighted represent some of the central elements of our strategies and performance that cause us to continue to be optimistic as we move through 2015.

That concludes my comments for today, and we will now move to your questions. So, Dan, we can have 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)

And our first question comes from Catherine Mealor of KBW. Please go ahead.

I wanted to ask about the buyback this quarter that increased a little bit. Can you talk about how you're envisioning the pace of buybacks for the rest of the year, particularly now that your stock has bounced back a little bit, and M&A activity may be coming back too, your currency's improved. How do you think about that versus doing another buyback at the current levels, throughout the rest of the year?

Thanks.

Sure. Catherine, this is Dan.

We give it to you in a couple different ways. Right now, that level that I represented represents about 33% of the authorized shares under our current plan, which actually expires later this year.

But I think to get to the point of level, we became active as we believed there was opportunities on the value front there, to be active. But at the same time, we're approaching some pretty nice levels, in terms of where our stock is relative to multiples, also relative to market estimates. So we were obviously -- have been more active as we were approaching those.

So I think that's the -- there is no specific answers as to the level of activity, but we -- our thoughts there is that it's part of a four-pronged approach of capital deployment. But clearly consider the absolute level of PE, book value, how you all view our share value, and that will really drive our level of activity.

But we're trading nicely right now, and that would tend to slow the spigot down a little bit. But not the only strategy as it relates to capital. We would certainly like to continue to see organic growth and M&A opportunities.

Got it, okay. That's really helpful, Dan, thanks. Maybe a follow-up on the margin. Can you talk a little about your outlook for the margin?

You've done a really nice job keeping that stable, and a part of that is the loan to deposit ratio came over 100% this quarter. How do you think about maintaining that margin, as you try to manage the loan to deposit ratio not getting too high?

Catherine, this is Phil.

I think, generally speaking, we like the consistency in the margin as to where it is now, certainly without having any further compression. I think it would be our desire to try to keep it at that mid-340 level, plus or minus a basis point from quarter to quarter, would be good, in absence of any significant rate change, obviously, in the broader markets.

I think we're comfortable with the loan to deposit ratio being above 100%, and being in that 100% to maybe 105% range. We start to get a little bit more concerned when it gets above that, and heads in the 110% direction. I don't think we'd be very comfortable there at all.

We already have taken some strides in terms of being a little bit more aggressive in our outreach and marketing of time deposits, which we had not really done for a significant period of time in anticipation that we will need some other types of funding here, as we move forward. And that's probably the one thing that could move the margin if we have to -- if we think we have to really pay for some of those monies, as opposed to not.

But so far, we grew time deposits in the quarter about the same pace as overall total deposits, a little over 1%. We haven't done that in a long time, and yet the margin held up pretty well, as we can see there. So that's where we'd like to stay, and I try to take that same approach throughout the rest of the year.

Okay. That sounds great. Thank you very much. Congratulations on a good quarter.

Our next question comes from Matt Schultheis of Boenning. Please go ahead.

Quick question. Realizing that there are a lot of capital deployment strategies in place, what would your target capital ratios be? And let's use the Tier 1 common risk weighted assets ratio. What would you want that to be in an ideal setting, regardless of how you get there?

Matt, this is Phil.

I think, and not so much about the Tier 1 ratio per se, but I think we've talked on numerous occasions that from a long-term perspective, if we focus on the tangible common to tangible asset ratio, that we would be comfortable with that being down in the mid-8% to 8.5% range, and that would obviously take the combination of things that Dan described earlier, as part of our deployment strategy to get there, and we have mentioned this before.

Just on an M&A basis, given current levels, it would probably take -- we could probably take another $1 billion worth of assets on, and still feel comfortable in that range. So that's the way we viewed it to date, and we'll probably continue to do so.

Okay. Thank you very much.

Our next question comes from William Wallace of Raymond James. Please go ahead.

Couple questions. First, in the mortgage bank, into the second quarter, has the re-fi activity remained as strong as it was in the first quarter?

Yes, I would -- this is Phil, Wally. I would say that just looking at where we ended the quarter, and looking a little bit into April, the re-fi levels have held up pretty well. The percentage of our overall production was actually a little bit higher in re-fi by quarter end, than it was on average for the quarter itself, not a lot, be but a little bit more. So I would say yes, that seems to have held up pretty well.

Now that we've finally got some decent weather, have you seen any pick-up on the purchase activity?

Wally, this is Dan.

I think we're starting to see some pipeline growth on the construction side, relative to where we were in the first quarter, but I will also tell you that's become a much more competitive marketplace. As you may know, this has been a niche for us for some time.

We've had some new entrants into the market, and they're competing more on providing a combo long-term fixed rate type of product, which is not part of how we view the best way to approach that line of business.

So I think the market has begun to heat up a bit. I think we're going to have to work harder to get our share of growth in that construction side. I have not -- I don't have a good feel for whether we're seeing new home sales or the new originations of purchased moneys bumping up yet.

Okay. And Dan, that comment that you made about -- it seems like the pricing expectations of potential sellers is beginning to possibly move in a more realistic direction, that's the first time I've heard that, so I'm curious if you have a potential view on why that might be. Is there any concern maybe, some of the smaller banks, about credit or interest rates, or regulatory pressure? Do you have a feeling as to why that might be?

Wally, that's a great question, and I probably may have misspoke. I was referring more to the non-bank side of things on that comment. On the wealth and insurance fronts, we're seeing more realistic multiples there. But I did not intend that to reflect the banking environment. Unfortunately.

Again, thanks for that clarification. My last question, Phil, I was expecting that we were going to see the reserve ratio flatten out. Looks like you continued to tick down. Any updated thoughts on how we should think about the reserve levels?

Talking about the loan loss reserve, Wally?

Yes, sir. Yes.

I think we've talked for a while of wanting it to level out right in the 120 range. I guess we ended the quarter a couple ticks below that, at 118. That's still our view forward and the provisioning this quarter reflects what we're thinking, relative again, to loan growth and less reserve release going forward. So it's not exactly right on the nose, but that's that area where we're most comfortable at this point, and are looking for it to stay there.

So maybe from our perspective, would a way to think about it be maybe somewhere between the 115 to 120 is probably a relatively good number, given the current environment?

I think that's a reasonable place to look, yes. Given what we're done in the past and the way that our methodology works as we know it, I think that's some -- that's probably right.

We don't have a whole lot of larger credits left with any real big specific reserves that would get pushed out of there, if they were either charged off, or paid down, or paid off. So some of that experience that's driven the reserve down in the past is pretty close to nonexistent. So I think that's another element that's under the surface.

Okay. And then last question along the lines, just on the credit side, I'll ask this question, and you can answer it generally or specific to a category. But Dan, you had mentioned seeing the construction environment heating up. Are you seeing any competitors starting to loosen their underwriting standards, or is the competition still more on price and structure?

You're talking about on the mortgage construction side?

Yes, or if you're seeing it in other categories, I'd love to hear that.

I would say, generally, it's still more on the price and price structure side. A willingness to move out on the fixed rate curve a little further out, than we would in this current environment, more so, than it is on the credit quality front.

Okay. Thanks.

That would be the case both commercially as well as residential.

Thank you.

(Operator Instructions)

Our next question comes from Mark Hughes of Lafayette Investments. Please go ahead.

Just a question on non-performers. Prior to the financial crisis, your non-performers were literally almost zero. At the end of 2006, for example it was $3.7 million, and you've done a great job in recent years working that number down to where it is today.

Seems like we've leveled off in the mid to upper $30 million, $30 million of non-performers. Should we look at that as that period before the financial crisis, that's just another era, not likely to go back to that quality, if that's the right word? And that more -- given the economy, where it is, that we're likely to leveled off in the range we are today?

Mark, this is Dan.

I think that there are probably a few things at play. One is, the level where we are today, in terms of the inflows and movement in some of those watch list categories, that normally would be a predictor of future NPAs, that feels like those levels are really back to a normal level. And that's the credit risk rating evaluation of different loans within our various portfolios.

I would say that we -- the absolute level of NPAs probably still has some holdover from the cycle, and things that are taking a little longer to work through, and our decision, quite frankly to work through them with clients as opposed to taking a more aggressive approach than we did earlier in the cycle, as we were moving through it. But I also think that credit risk management in the industry, and even in the bank has much improved through the cycle, and that is we're much more granular in terms of how we manage risk, which then causes us to evaluate risk, to quantify risk, and fill those buckets up a little differently. So I think it's a combination of all those things, if that makes sense.

It does. Thank you. That's it from me, and congratulations on the share buyback. We like to see that. Thank you.

Our next question comes from Casey Orr of Sandler O'Neill. Please go ahead.

Just had one quick question on the rise in other fee income. I believe last quarter, Phil, you said a good run rate was in the $1.4 million range. It came in at $1.8 million. Can you walk us through what contributed to that, and would you still peg the long-term run rate at $1.4 million, or has that changed?

I would just quickly say I would continue to look at that same level on a run rate basis. There's nothing -- there's really just a couple of things in the quarter of note that take it to the $1.7 million, $1.8 million range.

But these things could and should occur from time to time, and that's where we get some prepayment penalty fees on loans that pay off in advance. That's why we put those things in the contracts, so that there's some benefit when that occurs. And that's an element of that.

And then the other thing in this quarter was some strong SBA gains, which we would hope to continue going forward, which we did not have in the past. And so I would include that going forward to getting at the same level as commented on before, at $1.4 million. But then not anticipate that we'll always get some prepayment penalty quarter-over-quarter.

Okay. Great. And actually, can you walk through how much was SBA gains this quarter?

Oh, sure. I'm sorry. It was about $250,000.

Okay. Do you have that number for last quarter as well?

Last quarter it was only about $20,000 to $21,000. So it's up at a level that we would more plan for it to be, as opposed to what came through in the fourth quarter.

Very helpful. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Daniel Schrider for closing remarks.

Thank you.

Just wanted to thank everyone for taking the time this afternoon to participate with us. We want to remind you, as always, we'd like to receive your feedback to help you us evaluate the effectiveness of our call. You can e-mail your comments at IR@SandySpringBank.com. So thank you all, and have a great afternoon.

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