Sandy Spring Bancorp Inc (SASR) 2016 Q1 法說會逐字稿

Good afternoon, and welcome to the Sandy Spring Bancorp Incorporated conference call and web cast for first quarter 2016 earnings.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Schrider, President and CEO.

Thank you and good afternoon, everyone. Welcome to our conference call to discuss Sandy Spring Bancorp's performance for the first quarter of 2016. This is Dan Schrider speaking and I'm joined here today by my colleagues, Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. We really appreciate you joining today's call.

As always, the call is open to all investors, analysts and the news media and there will be a live webcast of today's call, and a replay of the call available at our web site beginning later today. We will take your questions after a brief review of some key highlights. Before we get started, Ron will give the customary Safe Harbor statement. Ron?

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in its webcasts that are subject to risks 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 rate, 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 operation do not necessarily indicate as future results.

Thank you, Ron. Today as usual we will move to your questions immediately after some brief remarks.

Overall we produced another solid quarter of performance. At the same time, we executed on some important strategic decisions that resulted in more noise than usual and I will cover those items in a moment. As I've said in previous calls, we continue to strive for and achieve balanced results in a highly competitive market across the Washington, Baltimore, Northern Virginia region.

Here's a quick run down of the main highlights from the release we issued earlier today. Net income for the first quarter of 2016 was $10.8 million or $0.45 per diluted share compared to net income of $11.2 million or $0.45 per diluted share for the first quarter of 2015, and net income of $12.8 million, or $0.52 per diluted share for the linked fourth quarter of 2015.

On a core basis, pretax, preprovision income for the first quarter was $17.2 million compared to $17.5 million for the first quarter of 2015 and $16.6 million for the linked fourth quarter of 2015. You may recall that during the fourth quarter we recognized a $4.5 million recapture of litigation expense that was recognized in prior periods. Overall, our performance this quarter indicates strong core results.

A key strategic move during the quarter was the sale of a portion of our higher cost segment of wealth assets under management. Approximately $540 million in assets under management was sold. This sale allowed us to transition eight individual advisers with their clients and freed us to focus our resources in the more profitable and growing segments of our wealth management franchise. The 2016 bottom line impact, given the decrease in revenue reduction and operating costs and initial payment received, is neutral, with an earnout in the transaction that could benefit the Company in future years.

A second strategic move positions us for continued loan growth, and that was the reclassification of all investments held by the Company as available for sale. From a liquidity perspective, we are better prepared to continue the shift in our balance sheet toward loan growth. Additionally, as reported in our press release, we executed the sale of approximately $40 million of AFS mortgage-backed securities which funded the prepayment of an equal amount of FHLB advances. The gain on the sale of securities was nearly equal to the prepayment costs related to the FHLB advances. While revenue neutral in the first quarter, we expect this transaction will have a positive impact on our net interest margin in future periods.

Speaking of net interest margin, our margin was 3.44% for the first quarter compared to 3.45% for the fourth quarter of 2015, and 3.44% for the first quarter of 2015. We are modeling a stable margin in 2016, given continued strong loan growth, the potential for a pricier deposit market and liquidity management given the success in our lending businesses.

Our rate forecast has the Fed moving rates in both the third and fourth quarter of 2016. Our continued strong core performance was driven by a continued increase in net interest income due to loan growth at a double digit year-over-year rate. Total loans increased 13% compared to the first quarter last year and were up 2% compared to the fourth quarter of 2015. The provision for loan and lease losses for the first quarter of 2016 was a charge of $1.2 million compared to a charge of $1.9 million for the fourth quarter of 2015, consistent with our solid ongoing loan growth.

On the deposit side, at March 31 combined noninterest bearing and interest bearing transaction account balances, a primary driver of our multiple product banking relationships with clients, increased 7% compared to balances one year ago. Total deposits and other short-term borrowings that are part of overall funding sources derived from clients increased 10% compared to a year ago.

Fee income was impacted by the sale of a portion of our wealth assets under management I mentioned earlier. However, we see our core wealth businesses positioned for growth in 2016. Our insurance and mortgage operations experienced a typically softer first quarter for the season and are positioned for growth for the remainder of 2016. Expenses continue to be well managed. Adjusting for the litigation recovery in the fourth quarter of 2015 and the FHLB prepayment penalties in the first quarter of this year, noninterest expenses remain very stable.

At March 31 our capital position remains very strong with total risk-based capital at 14.02%, a tier 1 risk-based capital ratio of 12.88%, a tier 1 leverage ratio of 10.28% and a tangible common equity at a tangible asset ratio of 9.37%.

During the first quarter of 2016, the company repurchased 512,000 shares of its common stock at an average price of $25.90 as part of our robust existing share purchase program. With organic growth our main priority we continue to seek both bank and fee-based acquisition opportunities. As I've commented previously, those conversations continue and will be aimed at organizations that value our approach to clients and employees, meet our financial objectives and enhance the value of your company.

Our underlying goal is unchanged. We strive to produce consistent results by growing a diverse revenue stream driven by creating meaningful, remarkable experiences for our clients and employees.

And that concludes my general comments for today, and we will now move to your questions. So we'll take 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)

The first question comes from Catherine Mealor from KVW. Please go ahead.

Hi, good afternoon, everyone.

Good afternoon.

Hi, Catherine.

On the expense side, once we back out the FHLB expense, new expenses were fairly flat, and so how should we think about expenses moving forward? I mean, you've done a great job keeping expenses around this $29 million, $30 million range for a number of quarters. What is your outlook for the pace of expense growth? What could tick that up, or do you think you'll be able to maintain this level of fairly flat expenses moving forward?

Catherine, this is Phil.

Your range in that $29 million to $30 million level is probably pretty much on point, and I would even suggest that the kind of real run rate there is right smack in the middle of that.

Just from a growth standpoint, we normally plan for overall expense growth to be 2%, 3% year over year on a somewhat normalized basis. And I don't think we see any reason for that to be any different for the remainder of this year. And I don't know that we see anything, again, on a core basis that will lead us to believe that's going to be altered in any significant way.

And then your NIM forecast was for fairly stable NIM, but that includes two rate hikes this year. And so how do you think about trends in the margin if we do not see any rate hikes this year?

Yes, Catherine, this is Phil again. I think as we discussed on the call last time that with the possibility of those couple of rate increases in the latter part of the year we might actually see a little bit of expansion in the NIM. And absent of those is where we would truly look for the NIM to be fairly stable for the rest of the year. Now, the action that we took in the first quarter here in terms of the trade we made between some -- in mortgage-backed securities and the payoffs of some advances should only help to bolster the ability for the NIM to be at least stable if not to initially expand a little bit.

The net interest impact of that trade is about $0.5 million annualized, because it was $40 million on both sides of the balance sheet at an overall spread relationship of 130 basis points. So that certainly helps, and we would continue to look for other similar opportunities in the coming quarters to help keep the margin where it is and/or expand it, all again as we discussed before, being predicated on continued loan growth and the asset mix changing accordingly.

Great. Thank you. That's all I got.

Thanks, Catherine.

Thanks, Catherine.

The next question comes from Will Curtiss of SunTrust. Will, please go ahead.

Hello. Good afternoon.

Hi, Will.

Maybe really back quickly on the expense. I think I know the answer, but on the occupancy expense, is that just a seasonal increase and -- because it looks like it's pretty similar level to last year. Just curious if there's anything driving that this quarter.

Yes, Will, this is Phil.

You're correct. Every time we get a nice heavy snowstorm, it costs us some money to get everything back in working order. And absent of that, there's really nothing else in there that would be unusual, and since those things happen in the winter months and this is the first quarter and that's what it is.

Understood. Thank you.

And then the loan growth outlook, any change? I think previously you have always guided to that 10% to 12% range. Any change there?

Will, this is Dan. No, that's the way we continue to look at the overall picture with regard to loan growth, double digit.

And maybe some of the drivers to continuing the pace that you are on?

Well, I think, as we reported and talked about, we have been pretty balanced with activity, both commercial and res mortgage. The res mortgage growth is dictated a little bit more by the rate environment and the activity on our construction perm business. But I would say we're looking, as we look forward, for commercial to continue, commercial real estate to be a key component and driver to loan growth, but not anything really different than what we have been producing here the last several quarters.

Okay. Great. And then maybe that last one for me is it looks like the reserve ratio has been holding pretty stable here, so just curious how we should think about the level of provisioning going forward?

Driven by what you see on the loan growth side of things, I mean, we, too, would agree when you look at our methodology, one, it's being driven by growth as opposed to any moves within the quality of the portfolio. But it does seem to have kind of settled in around that 115%, 117% level here for a bit, and that's probably a good way to think about it.

Okay. Great. Thank you very much.

Thanks, Will.

The next question comes from Casey Orr of Sandler O'Neill. Go ahead.

Good afternoon.

Hi, Casey.

I was just hoping to dive into what was going on with deposits this quarter, because it looked like deposits grew pretty nicely on an end-of-period basis, but not as much on the average balance sheet. So it's safe to say you had an inflow of deposits at the end of the quarter and could that have some drag on the second quarter margin, or has that liquidity already been put to work?

Yes, Casey, this is Dan. You hit it right on the head. We did have some inflows toward the end of the quarter, but when we talk about stable NIM, we have taken that into consideration. With the growth of noninterest bearing deposits within the commercial side of our business, we're seeing a lot more volatility in those balances intraquarter, but overall, we continue to see growth and we have modeled that into our margin forecast.

Okay. Great. And just when you think about the loan deposit ratio, is there sort of a range you would like to bring it down to or are you comfortable with it staying above 100% here?

I wouldn't suggest we're looking to bring it down. It's in a range where we're comfortable, in that 100%, 105% range, and so that's how we think about a comfortable place.

Great; that's helpful. I'll hop off. Thanks.

Thank you, Casey.

(Operator Instructions)

The next question comes from Bryce Rowe of Baird. Mr. Rowe, go ahead.

Great, thanks. Hello, Dan and Phil.

Hi, Bryce.

I just wanted to follow up on the balance sheet with the liquidity that you were holding at the end of the quarter. I assume we expect that to run into the loans and to keep the securities portfolio from around $700 million. I assume that's going to be relatively static here going forward?

Yes, I think that's accurate, Bryce. The balance sheet certainly shows a fair bit more of period-end liquidity, kind of cash-based liquidity, and that would certainly be temporary, some end-of-quarter timing type things. As far as the investment portfolio is concerned, we moved everything into AFS to just give us the ultimate amount of flexibility, and we'll come in and out of that portfolio as necessary between what happens with calls that might force some cash flows back to us, and timing between that and loan demands.

So it's not really much different than the way it's been for the last year or so. And we'll continue to move there. I guess, as a bit of a reminder, we've been kind of strategically pushing the investment portfolio somewhere between 10% and 15% of assets, and that's still the goal.

Great. Okay. That's helpful. And then Dan, just wanted to kind of maybe get a better feel for the wealth management related sale. How that came about and ultimately what was the driver behind that? The reason I ask is a lot of banks are trying to push into those fee-generating areas, wealth management being one, so this is a bit counter to what we would hear from some others in the industry. Thanks.

Yes.

No, good question, Bryce. I think you had two parts to your question, kind of how did it come about and why is it counter to what might be traditional thinking on that business or why?

The why, it's a pretty short answer. We have three legs of the wealth management stool, our trust operation, the RIA that we own, West Financial Services and this piece, which is predominantly made up of the sale of mutual funds and annuities originating through our retail network. Those have been the three legs of that business.

This by far was the least profitable and less efficient delivery model that we had relative to our other business lines. And so over time, we work to try to create a model within it to be more profitable, provide greater returns, and it did not work the way we wanted it to work. So we made it a decision to vacate that business so we can put the resources towards those other two wealth functions that are very profitable and efficient.

So that was the driver, but we still feel that wealth is an extremely important segment to our business. We will continue to invest in growing it, as well as looking for other RIAs to fold into the business. It was really identifying one segment that wasn't providing the returns on our invested capital that we desired.

That's great information. I appreciate it, Dan. One follow-up, if I could. You guys were pretty aggressive or more aggressive with the buyback this quarter. Was that more opportunistic with the bank stocks being relatively weak in the first quarter?

Absolutely. Yes, totally based on that.

Great. Thank you.

Yes. Thanks, Bryce.

(Operator Instructions)

Our next question comes from Marc Hughes of Lafayette Investments. Marc, you're ready.

My question was just asked by the previous caller. Thank you.

Thanks, Marc.

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

Thanks, Aaron, and thanks for everybody who took the time to participate with us this afternoon. And remember, we'd appreciate receiving your feedback to help us evaluate how we've done. You can e-mail your comments to ir@sandyspringbank.com. Thanks again. Have a great afternoon.

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