Sandy Spring Bancorp Inc (SASR) 2015 Q2 法說會逐字稿

Good day and welcome to the Sandy Spring Bancorp Incorporated earnings conference call and webcast for the second quarter of 2015.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to President and CEO, Daniel J Schrider. Please go ahead.

Thanks, Cassia. Good afternoon, everyone, and welcome to Sandy Spring Bancorp's conference call to discuss our performance for the second quarter of 2015. This is Dan Schrider speaking and I am joined here today by Phil Mantua, our Chief Financial Officer; and Don Schuster, Senior Corporate Counsel for Sandy Spring Bancorp.

As always, 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 on today. We will take your questions after a brief review of some key highlights, but before we get started Don will give the customary Safe Harbor statement. Don?

Thanks, Dan. 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're 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.

Thanks, Don. Today, as usual, we'll move to your questions immediately after I make some brief remarks. Overall, we produced another respectable quarter and first half of 2015.

As I've repeated previously, we continue to show balanced results in a very highly competitive marketplace. Our stock price has advanced over 18% year over year, which suggests investors appreciate the quality of our business model as well as our consistent performance.

Here's just a quick rundown of the main highlights from the release with a bit of added color where appropriate. Net income for the second quarter of 2015 was $10.3 million or $0.42 per diluted share, compared to net income of $7 million or $0.28 per diluted share for the second quarter of 2014, and net income of $11.2 million or $0.45 per share for the first quarter of 2015. For the six months ended June 30, 2015 net income was $21.6 million or $0.87 per diluted share, compared to net income of $17.9 million or $0.71 per diluted share for the same period of the prior year.

Second-quarter results were driven by the ongoing momentum that we developed in the first quarter. Net interest income from our larger loan portfolio was healthy and revenue from mortgage banking and wealth management was also strong. On a linked-quarter basis, there was balanced growth in each loan portfolio, with commercial loans growing a strong 16% during the quarter. Deposit growth was also very healthy. Combined non-interest-bearing and interest-bearing transaction balances increased 11% to $1.6 billion at quarter end compared to $1.5 billion a year ago.

On a side note, on the deposit gathering front, we are seeing success so far this year in reemphasizing time deposits, and are seeing a resurgence of CDs for the first time in many years. But just as a frame of reference however, while CD balances are up 10% or $44 million year to date, they still only represent 15% of total deposits. We're using periodic rate specials at varied terms, some increased advertising and, importantly, effective salesmanship throughout our branch network. We're also very focused on driving time deposit growth within the context of full banking relationships as opposed to the one-off single-service product. Total non-interest-bearing deposits, they're up to nearly 34% of total deposits now, and we see nice growth in deposits coming from the small business sector. So with our ongoing loan growth and the healthy deposit story, the deposit story is certainly welcome on the funding side, and is a key element of our strategy.

Another significant strategic priority that we've been reporting on for some time now revolves around what we call the Sandy Spring client experience. Proof that all the work we've been doing to create an outstanding focus in this area with tangible results is the global recognition we recently earned for a unique Company-wide initiative to improve the client experience. The International Customer Experience Professionals Association, or CXPA, named Sandy Spring Bank a 2015 CX innovation award winner for our coordinated approach to engaging our nearly 730 employees on ways to better serve clients and one another.

Five years ago, we made a commitment to put the client at the very center of every business decision. It sounds simple in theory, but we knew that putting it into practice would require extensive education and a cultural transformation. In 2010 we cast a new vision and launched our client experience initiative which engages every employee through monthly meetings, routine trainings and a constant Company-wide dialogue, all to maintain a sustainable client-focused culture. Bank clients have also participated in discussions with senior leadership and provide us valuable feedback about the issues that matter most to them.

We were specifically recognized by CXPA for our training initiative called Meeting in a Box. Each month employees discuss a designated topic and learn by using a common language. Managers across every division of our Company facilitate these activities, which gives them the opportunity to relate the issues at hand to their employees' roles within the bank. This is a synchronized hub-and-spokes model, so we are all connected in our efforts to improve the client experience. And while educating our employees is important, we also hope to inspire ownership at every level of our Company as we work towards being consistently remarkable, as well as making a difference in the communities in which we operate. In addition to Sandy Spring, Crowe Horvath LLP, John Deere, Optum and Western National Insurance Group were also recognized as innovation award winners. These four companies are all far larger with far more geographic reach than our Company and we are very pleased to join such an elite group.

Shifting gears, the margin met our ongoing expectations, remaining in the range between 3.4% and 3.45%. We believe that our margin will benefit from a rise in short-term rates that is executed in smaller controlled increments. As mentioned in our release today, during the second quarter of 2015, we repurchased 224,103 shares as part of our existing share repurchase program. For the year to date, we have repurchased over 575,000 shares.

Tangible common equity totaled $435 million at June 30, 2015 compared to $427 million at June 30 of 2014. The ratio of tangible common equity to tangible assets decreased to 9.84% at June 30 from 10.29% at June 30 of last year, due primarily to the growth in assets and share repurchases. Dividends per common share were $0.44 per share for the first six months of 2015 compared to $0.36 per share for the first six months of 2014, a 22% increase.

At June 30, 2015 the Company had total risk-based capital ratio of 14.65%, a common equity tier-one risk-based capital ratio of 12.53%, a tier-one risk-based capital ratio of 13.54% and a tier-one leverage ratio of 10.83%. We are in a strong capital position in a great market, and as we said previously, our deployment strategy continues to include a focus mainly on organic growth along with strategic M&A activity, dividend payouts and share repurchases when prudent to do so.

So that concludes my comments for today and we will now move to your questions. Cassia, we can go ahead and start taking questions.

(Operator Instructions)

David Bishop, Drexel Hamilton.

Quick question. I noted that the strong growth on the loan side there, across all the different various categories. Give us an update in terms of economic environment you're seeing in some of your markets, especially in that Northern Virginia, DC quarter. Curious what you're seeing overall from an economic macro perspective.

Dave, this is Dan. I think the behavior of the Greater Washington Metro region, whether it be inside the beltway in Maryland or around into Northern Virginia, are pretty comparable in terms of economic stability. Still room for improvement, but yet as you can see from our numbers, we're still seeing pretty decent opportunities. This quarter, a little more growth in the commercial sector, which we think is a really good indication of economic activity, and that would go for our general market as well as Northern Virginia. Another indicator, which wasn't part of your question, but really for the first time in, I think, the last two to three years, we've seen an increase in line utilization on the commercial portfolio, up from about 50% to 55%, which is a pretty meaningful move. And again, typically an indication that the economy is heating up a bit.

Any thoughts, any early indications of any sort of imbalance there on the real estate side there from a supply-demand? Or things are pretty well balanced from an equilibrium perspective?

In the world we play in, which tends to be -- whether it's retail, it's small, not big-box stuff, neighborhood centers and key elements of our market, and it's the same for us with office. We have some office exposure, both owner-occupied and for-lease, but we don't play in the big products. Some of that for us has been -- most of the past couple years has been on the refinance side, some liquidity coming off the sidelines. And then more so this year we've seen some newer projects come along as well. So I wouldn't say that we see an imbalance, but we're also not playing in the large office market, which quite frankly, we pay close attention to just because of the migration of folks that are working at home. And the demand from large corporate users to not need quite as much space. And what is the overall work-study? And what's the overall impact in that marketplace as it relates to that migration?

Got it. Just an update in terms of loan pricing relative to last quarter, what you've seen on that front. That's my final question.

Really, really staying -- we're right in the same ballpark as we were last quarter. Not a lot of fluctuation at all.

Great, thank you, guys.

Matt Schultheis, Boenning.

Couple of quick questions, if I could. With regard to the increase in line utilization, what would you argue is historically your normal utilization level? And what's the peak level over the past few cycles?

Matt, I don't have a good number on that. I can tell you that what I do know is that when things started to deteriorate at the end of 2008 through 2009 and even into a bit of 2010, that fell off quite a bit. What I don't know is what it fell from. And I know that it hasn't moved back to where it was. But this is the first indication that we've seen line utilization even move. But I can circle back with you on those two parts of that question in terms of what's typical and what was peak.

Okay, thank you. With regard to the M&A environment, are you seeing more books, hearing more chatter? Or is it a steady state of where it's been over the past year or so?

I would say steady-state. I think most conversations, at least from our perspective and the way we believe that we would ultimately be successful, is when we are initiating conversations with key strategic partners that we think make a lot of sense for us as opposed to reacting to a book. But to answer your question as to activity, it's about the same.

Any change in your geographic focus with regard to that?

No.

Okay. And one that I know you can't really answer, but I'm going to have to -- obligated to ask, I guess. (laughter) You had the litigation settlement, or reserve, from last year and you guys said you were going to continue to fight that. I was wondering if you have any update as to whether you're still fighting that or whether you're thinking of just letting it go. Or if there's been any progress towards something that's a little more tolerable as far as a settlement.

That's a fair question and I can comment on that. We have moved through the process, which is lengthy, to even get to a point where you would be begin an appeal process, and that is where we are today. So we do continue to move down that road. That process, while we bear some costs on an ongoing basis because of the interest rate that's attributed to that settlement reserve that we set aside, the legal aspect of that from the appeals standpoint is still being borne by our insurer. And we still believe we have coverage, but we're going to need to move through that appeal process in order to resolve both the legal aspect as well as the coverage aspect. And we're going to continue to go down that road; it's just going to be longer. I think there may be some interim opportunities to talk about a more reasonable outcome, but I'm not holding my breath on that.

Okay, thank you very much.

Catherine Mealor, KBW.

You mentioned CD growth earlier in the call and your increased focus there. Certainly we saw deposit cost up a little bit this quarter. Can you talk about your market in terms of deposits and competition and rate, and what you're seeing in your markets? What are you seeing competitors doing? And what do you have to do to show the kind of growth that you've shown? Give some examples of some rate specials that you have right out right now.

Catherine, we'll probably tag-team this a little bit. This is Dan. I think our fundamental focus continues to be on driving transaction accounts from both small business, commercial and retail, which we're doing and continuing to grow. As you probably recall from our prior calls or conversations, and talking about loan to deposit ratio, that's really when we thought we'd return on a little bit more of an appetite on the time-deposit front, which we knew we could, but we've been out of that game for a little bit. I'll let Phil talk about the specificity around what we're offering. It is a competitive market, both on the non-interest-bearing as well as the CD and money market side of things. So everybody's beginning to play, as you probably know, Cap One is in our market and they've begun to introduce and pretty heavily market, within their whole footprint, some money market products as well. But we typically have taken a short- to interim-term strategy on those specials. I'll let Phil speak to that.

Catherine, yes, this is Phil. Dan's exactly right. We normally try to fill in maturity gaps with specials that are a one or two month off of a more standard type of offering. The majority of what we're doing there is in between the two- and three-year range, something like a 21-month or a 29-month special. Probably what we are focused mainly on is right in the middle of that two-year window. We've got a 27-month special out there today that would yield about a 1.65% rate. I think that's where the predominant amount of the growth is coming from. We've actually grown the CD portfolio a little over $53 million from the beginning of the year, which is well on the way to what we thought we would need to do this year, which was an original plan or target for about $90 million worth of growth there. So what we are doing is certainly being successful and is giving us the kind of results that we were hoping for.

Okay. What's your target loan-to-deposit ratio too, as you weigh the strong loan growth and then balancing as you grow the CD portfolio? Maybe a second part of that is, how do we think about what the loan-to-deposit ratio does over time and then how that parlays into the securities to average earning asset ratio, as that comes down?

I think I wouldn't say that we target a specific loan to deposit ratio. I think we try to manage within a range that we are comfortable with. I think today we're 101%, maybe 102%, somewhere in that range. It's in the lower end of being a little bit over 100%. And we can tolerate that being 105%, maybe 106%. When we get into the areas that start to approach 110% is where we really, really get uncomfortable and probably start to take different types of actions to ease that. That could manifest itself in a lot of different types of activities. But I think that's where we are today, we're very comfortable with. So I think that if we maintain the kind of balance on growth on both sides of the ledger, then we'll be very comfortable with exactly where we are now. I didn't quite catch the second part of that question, Catherine. Can you restate that?

You've been bringing securities to average earning assets down over time.

Got you.

It's come from mid-20%s. Now you're around 20% and I know you've got a goal to get that down to mid-teens.

Right.

I just wanted to see if that was still on track and in your outlook for the end of next year.

Very much so. We're roughly around 19% of actual total assets today in the investment portfolio. We certainly want to get that, we stated before, in the 10% to 15% range, probably initially in that 15% range. And then I think we look at that stage of the game, what the margin looks like, what overall net interest income is, et cetera, to determine if we want to redeploy in that area or just continue to let it move down into loans, which it certainly has worked perfectly along the lines of the plan right a long time.

Okay, very helpful, thank you.

(Operator Instructions)

Matt Schultheis, Boenning.

Sorry to double dip. Really quickly, looking at the loan growth for the quarter, was there any timing issues where there was pent-up demand in the first quarter that got realized in the second quarter? In other words, would we expect to see it tail off from this quarter's pace going forward? Or is this just the demand that's out there right now?

Matt, this is Phil. This quarter, the growth throughout the quarter in the second quarter was actually more balanced than it was even in the first quarter. You may remember, we probably made some comments when we had this call last time, that a significant amount of that growth came in the month of March and therefore at the tail end of the quarter. That was not the case here. The loan growth, even though it did have an upward trend throughout the quarter, building some momentum, it was a lot more evenly balanced month to month to month than it had been in the first quarter. I think that the outlook in the pipelines are for that to continue into the foreseeable future.

Okay, thank you.

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

Thanks, Cassia, and thanks, everyone, for participating on our call today. I appreciate you taking time to participate with us. And we'd love to receive your feedback, if you have some, to let us know how we've done. You can e-mail your comments to ir@sandyspringbanc.com. You all have a wonderful afternoon.