Sandy Spring Bancorp Inc (SASR) 2016 Q2 法說會逐字稿

Good afternoon, and welcome to the Sandy Spring Bancorp, Inc. conference call and webcast for second-quarter 2016 earnings.

(Operator Instructions)

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

Thank you, and good afternoon, everyone. Welcome to our conference call to discuss Sandy Spring Bancorp's performance for the second 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 the call today. As always, this 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 website beginning later today. As mentioned, we will take your questions after a review of some highlights. But before we get started, Ron will give 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 the 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 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.

Thanks, Ron, and thanks again for joining us today. As mentioned, we will move to your questions after I make some brief remarks. The second quarter of 2016 represents another solid quarter of core performance. We executed on additional balance sheet restructuring initiatives that reduced our borrowing costs, enhanced our net interest margin, and should favorably impact our run rate going forward. I will cover those items in just a moment. But as I've said in previous calls, we continue to strive for and achieve strong growth and balanced results in a highly competitive market across the Washington, Baltimore, and northern Virginia region.

Here's just a quick rundown of the main highlights from the release we issued earlier this morning. Net income for the second quarter of 2016 was $10.6 million, or $0.44 per diluted share, compared to net income of $10.3 million, or $0.42 per diluted share, for the second quarter 2015, and net income of $10.8 million, or $0.45 per diluted share, for the linked first quarter of 2016. On a core basis, pre-tax, pre-provision income for the second quarter was $18.6 million, compared to $16.7 million for the second quarter of 2015, and $17.2 for the linked first quarter of 2016. This is the highest level of pre-tax, pre-provision income since the third quarter of 2013, a quarter in which we had the positive effect of several loan-related recoveries.

Relating to the strategic balance sheet moves mentioned previously, during the second quarter, we extinguished $5 million in subordinated debentures at a significant discount. This discount provided the miscellaneous income to cover the fees associated with the prepayment of $35 million in FHLB advances. While essentially neutral with respect to net income for the quarter, we expect a positive impact on future borrowing costs and interest expense. This restructuring should help stabilize our net interest margin going forward, which came in at 3.51% for the first quarter, compared to 3.44% for the first quarter of 2016 and 3.42% for the second quarter of 2015. We are modeling a stable margin for the remainder of 2016 given continued strong loan growth, the possibility for a pricier deposit market, and liquidity management, given the success in our lending businesses. Our rate forecast has one Fed move in the fourth quarter of 2016.

Our continued strong core performance was driven by a continued increase in net interest income of 8% percent year over year which was due to loan growth, coupled with a strong deposit base with low overall cost of deposits. Total loans increased 12%, compared to the second quarter of 2015, and were up 3% compared to the first quarter of 2016. Loan growth is particularly strong when considering the substantial reduction of nonperforming assets and the sale of between $18 million to $19 million of residential mortgages out of portfolio that occurred during the second quarter. It is important to note that a significant portion of our loan growth occurred at the very end of the second quarter. As a result, the provision expense related to loan growth impacted this quarter while the benefit of those additional earning assets will have a positive effect in future periods.

The provision for loan and lease losses for the second quarter of 2016 was a charge of $3 million, compared to a charge of $1.2 million for the first quarter, again, primarily the result of our solid ongoing loan growth. Credit quality continues a positive trend, with reduction in nonperforming assets and loans, strong allowance coverage of our NPAs, and a well-managed, diverse lending portfolio.

On the deposit side, at June 30, combined non-interest-bearing and interest-bearing transaction account balances, a primary driver of our multi-product banking relationships with clients, increased 8% compared to balances a year ago. Our ability to grow retail and commercial transaction relationships and balances are a key strength of our franchise. Total deposits and other short-term borrowings that are part of overall funding sources derived from customers also increased 8% percent compared to a year ago. Fee income -- it continues to be impacted by the sale of a portion of our wealth assets under management that occurred early in the first quarter. However, we see core wealth business positioned for growth in 2016, absent untimely market fluctuations.

Our insurance and mortgage operations are performing as planned and are positioned for growth for the remainder of the year. Expenses continue to be well managed. Adjusting for the FHLB prepayment penalties in both the first and second quarter of this year, non-interest expenses remain very stable. The non-GAAP efficiency ratio was 60.47% for the first six months of 2016, compared to 60.75% for the first six months of 2015.

At June 30, our capital position remains very strong, with a total risk-based capital ratio of 13.57%, a tier 1 risk-based capital ratio of 12.42%, and a tier 1 leverage ratio of 10.29%. And our tangible-common-equity-to-tangible-assets ratio came in at 9.44%. Given the market value of our shares throughout the second quarter, there were no share repurchases during that quarter. But we do remain open to repurchases, should conditions warrant. With organic growth the main priority, we continue to seek both bank and fee-based acquisition opportunities. And 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 stream of revenue driven by creating meaningful, remarkable experiences for our clients and our employees.

That concludes my general comments for today, and we will now move to your questions. So, operator, if we can have the first question. If you could please state your name and company affiliation as you come on so we know with whom we are speaking.

We will now begin the question-and-answer session.

(Operator Instructions)

Catherine Mealor, KBW.

Thank you, good afternoon, everyone.

Hello, Catherine.

One question on the expense line, there was a decline in the personnel line, was that thusly related to the sale of the wealth platform or anything else going on in that number?

Catherine, this is Phil. A portion of it was certainly due to the reduction in what would have been commissioned compensation, it was related to the asset sale that occurred in the first quarter. We also benefited here in the second quarter from some significantly reduced benefit costs especially in the healthcare area. As you may know or remember, we are self-insured so depending on our experience over time, we adjust our roles accordingly. In the benefit area this period between that and just compensation related matches on 401(k) and taxes, etc., we dropped back about $700,000 from the first quarter.

Okay, makes sense. Then this quarter's run rate is a probably a good starting point going into the back half of the year to grow from.

Yes. When you take out the amount of the prepayment penalties, excuse me, that were identified as roughly 3.2 for the [extinguishment] of the advancements, that is correct.

Okay, great. And then on the margin theme of the funding side on deposit cost, so I think we viewed as [DC] as a very competitive market, you've got a lot of banks with high loan to deposit ratios and everyone is growing, or most are growing at a double-digit pace, and so we already started to see funding cost become very competitive in this market in suspicion the higher rate. And now that the rate environment looks little bit different, do you think that that takes some of the pressure off the funding side or does the growth piece of that still keep deposit cost slightly moving higher throughout the year even if we do not have another rate hike?

Catherine, this is Phil again, I think there's always that pressure that comes to bear with just being able to kind of self market fund our growth which is obviously always been our core strategy. But having said that, I can tell you that we have already adjusted our deposit offering rates down from where we were at the end of the first quarter by anywhere from at least, on the time deposit side, anywhere from 20 to 45 basis points on a given maturity base or on any type of a special. And we've also done similarly as it relates to some of what we would refer to as our teaser rates and our premier money market account, we backed that off during that time period by about 20 basis points as well.

So I think that we are recognizing that we can still be competitive in the market and preserve as much of the margin is we can. I mean even during that three-month period we still grew our time deposits by about 6%, almost 7%. I think it can be done with the proper balance given the current rate environment in what we perceive for the remainder of the year.

That makes sense. All right. Thank you. Congratulations on a good quarter.

Thank you.

(Operator Instructions)

Austin Nicholas, Stephens.

Hey, guys, good morning. Just a quick question on loan growth. Just geographically around DC and maybe by product type, what are areas of opportunity that you're seeing and what areas are looking less attractive maybe on the product type?

Austin, this is Dan. As we mentioned, as you know when you dig into our portfolio, we pride ourselves on the diversity of our loan portfolio. But what we are seeing in terms of production and growth opportunities it still continues to be pretty diverse. Small business, middle market clients, obviously real estate and in those product types tend to be small retail, warehouse, professional office space, on the small side. A little bit of multifamily, while that's not been something that we're a significant player in, owner-occupied real estate, so those are all providing opportunities for us in the market.

And then on the retail side as you know, we continue to be very active on the residential construction for our fluent retail client. We try to drive into other areas of business like wealth and insurance. And then on the consumer side, still drive some home equity business to our branch network.

Okay, great, thank you. That's very helpful. And then just more on a top-level, when you think about when your M&A strategy, has there been any changes to that strategy and are you looking, are you still looking at whole bank transactions and fee income kind of bolt on businesses and I guess what are you seeing in the market now and has there been any change message.

I would say the message has not been changed. We continue to focus on looking in the community bank space for those that would value being part of the Sandy Spring franchise knowing that we have, are looking to perform over the long run. At the same time, I'm very interested in, we think we have a good foundation in both the wealth space as well as the insurance agency space. And so we think we can be very effective with finding, again, the right partners to fold into what we offer both in terms of our existing client base to tap into, but also that culture of Sandy Spring. So both banks, non-banks, continue to be our strategy.

Okay, thanks, I appreciate that. And then just real quick on the margin, I know that within your model you assume a fed raise in the fourth quarter. If we don't get that fed raise, is it safe to assume that your margin would still be relatively stable just given your interest rate as a sensitivity profile?

Austin, this is Phil. I would suggest that would be true and just to note, our fed raise in the fourth quarter is actually in December so there would be negligible impact to the quarter or the full-year, obviously by virtue of it happening that late in the year. But yes, I think that given that timing in particular, we don't see that there is anything else that should preclude us from keeping that margin fairly stable.

Okay, great. I appreciate the color on these questions, I think that's it for me.

Bryce Rowe, Baird.

Thanks, hello, guys. Just wanted to ask about commercial real estate, pricing data, if you wouldn't mind. We've heard from a couple of other institutions here this quarter that some of the regulatory scrutiny around commercial real estate lending, relative to capital level, is potentially creating some opportunities for commercial real estate growth and opportunities for improved pricing or at least more stable pricing. I'm just curious if that had anything to do with the increased yield on that commercial real estate portfolio of yours this quarter.

Thanks, Bryce. That's a good question because we hear it often and as you know, we compete against both community banks of comparable size and larger that are much heavier in CRE then we are. In terms of pricing, when you compare what we are writing today which is in the mid-fours in terms of averages, that compares pretty favorably to the 12 month rolling average. So we're not seeing significant yield pickups as a result of some of the regulatory pressure, but I do think that we're winning probably a little more of our fair share in there.

So I don't know whether, I do not see it in the pricing as much as I see it potentially in the players that are going after the same transactions. But I think the result of the growth is just part of our ongoing calling effort, the reputation that we built in the market place for the ease of business in doing business with Sandy Spring. But it would be nice if pick up some of the yield.

To give you a little bit of perspective in terms of capacity around that issue, at quarter end we were about 260% in terms of the 300% regulatory guideline. That's not a magic guideline as it relates to what we're willing to do just to give you some perspective. We have the underlying credit risk management infrastructure that would be necessary to exceed that, but that is your sense of where we are.

Yes, that's helpful. And then maybe a follow-up for Phil, are there other prepayment, FHLB prepayment opportunities within that FHLB portfolio that we could expect?

There may be an opportunity down the road, Bryce, to do some more of that. I do not have anything that I would tell you definitively. I think that it's just got a be the right timing with the right environment there and as you can see what we have tried to do is tried to offset what we can, current period. That's probably where we have to make decisions about liquidating other types of various assets or whatever, to accomplish that.

But I don't think we have anything definitively planned for at the moment, because we have also, as you may or may not recall, we did a fair amount of blend and extend to some of the other longer-term advances that we've had for some period of time a few years ago and they're not going to be a position to be able to be repaid. So there could be some, but I am not anticipating anything in the immediate future.

Okay, that's it for me. Thanks, guys.

Thanks, Bryce.

Thank you.

(Operator Instructions)

This concludes our question and answer session. I would now like to turn the conference back over to Daniel Schrider for any closing remarks. Please go ahead.

Sure, thank you. And thanks everyone again for participating with us this afternoon. We'd appreciate your feedback if you'd offer it to us at ir@sandyspringbank.com. Thank you again and have a great afternoon.

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