Sandy Spring Bancorp Inc (SASR) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the Sandy Spring Bancorp, Inc. Earning Conference Call and Webcast for the Fourth Quarter 2017. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Daniel J. Schrider, President and CEO. Please go ahead.

Thank you, and good afternoon, everyone. And thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter and year-end 2017. This is Dan Schrider speaking, and I'm joined here with our Chief Financial Officer, Phil Mantua; and General Counsel for Sandy Spring Bancorp, Ron Kuykendall.

Our 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 on our website later today. After covering key highlights of the fourth quarter and commenting on our recently closed transaction of WashingtonFirst Bank on January 1, we will take your questions. But before we get started, Ron will give the customary safe harbor statement. Ron?

Thank you, Dan, and good afternoon, ladies and gentlemen. 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 the 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.

Thank you, Ron, and thanks again everyone for joining us. As our press release issued earlier this morning indicates, we demonstrated solid performance during the quarter and record net income for 2017, while also recognizing the impact of the recently enacted tax legislation and merger-related expenses. Our team is doing an excellent job generating strong core operating performance, executing on the merger integration and focusing on operating efficiency. We continue to be very pleased with our growth and balanced results that generate consistent performance we are known for in the greater Washington, D.C. region.

Here is just a quick rundown of the main highlights from the release. Our net income for the fourth quarter of 2017 was $8.3 million or $0.34 per diluted share compared to net income of $13.3 million or $0.55 per diluted share for the fourth quarter of 2016 and net income of $15.1 million or $0.62 per diluted share for the linked third quarter of 2017. Net income for the full year 2017 was a record $53.2 million or $2.20 per diluted share compared to $2 per diluted share for the full year 2016. But to help you better understand our core performance for the fourth quarter and full year, I will peel back the effects of the additional tax expense related to the revaluation of deferred tax assets, merger-related expenses and branch closure expenses, and detail their effect on EPS.

For the fourth quarter and full year, the tax expense related to the revaluation of deferred tax assets was $0.23 per share. Fourth quarter merger-related expenses were $0.07 per share and $0.11 per share for the full year 2017. And branch closure expenses were between $0.01 and $0.02 per share in the fourth quarter and full year.

After adjusting for these expenses on a core basis, EPS would be $0.65 per diluted share for the fourth quarter compared to $0.55 in the fourth quarter of 2016, an increase of over 19.5%. And for the full year, an adjusted EPS of $2.55 per diluted share compared to $2 per diluted share for 2016, that's a 27.5% increase.

Pretax preprovision income for the quarter was $23.6 million compared to $21 million for the fourth quarter of 2016. That's a year-over-year increase of 14%. Our continued strong core performance was driven by higher net interest income, which increased 12% in the fourth quarter of 2017 compared to the same quarter of 2016.

Our net interest margin improved to 3.57% for the fourth quarter compared to 3.52% for the fourth quarter of 2016. And after adjusting for an interest recovery during this past quarter, the margin would have come in at 3.53%. The stability of the margin compared to the prior year's quarter demonstrate the impact of loan growth together with rate increases during the year and the execution of proactive funding and investment portfolio management strategies.

Total loan growth for the quarter was solid and in line with expectations, as total loans increased 10% compared to the fourth quarter of last year and up 3% compared to the linked third quarter.

Growth within our commercial segments of 11% led the year-over-year growth and our pipelines heading into 2018 remains strong.

The provision for loan and lease losses was a charge of $500,000 for the fourth quarter compared to a charge of $600,000 for the fourth quarter of '16 and $900,000 for the linked third quarter. The level of provision expense and our allowance reflects the continuation of the improvement in credit quality of our growing portfolio.

We continue to grow core deposits from both retail and commercial banking relationships. Total deposits increased 11% from the fourth quarter of 2016. At quarter-end, combined noninterest-bearing and interest-bearing transaction account balances increased 10% compared to balances a year ago. Our continued ability to fund new asset growth through expansion in core deposits is a key strength of our company, a strength that we will expand on in our newly combined footprint with WashingtonFirst Bank branches. We continue to be focused on the importance of generating deposit growth as we move through 2018.

Noninterest income was stable at $12.3 million for the fourth quarter and level with the same quarter of 2016, despite a 49% or $625,000 decline in mortgage banking income for the -- from the fourth quarter of 2016.

On the positive side, wealth management income for the fourth quarter increased 10% compared to the fourth quarter of 2016, and insurance agency commissions and deposit service charges each increased 6% for the fourth quarter compared to the same period last year.

Noninterest expenses increased 15% for the fourth quarter of 2017 compared to the fourth quarter of 2016. The increase was primarily driven by merger-related expenses and $600,000 in salary and benefit costs.

The non-GAAP efficiency ratio was 55.69% for the fourth quarter compared to 57.54% for the fourth quarter of 2016 and ended at 54.59% for the full year 2017, driven by growth in our net interest income.

Our capital position remains solid with total risk-based capital ratio of 11.85%, a Tier 1 risk-based capital ratio of 10.84%, Tier 1 leverage ratio of 9.24% and a tangible common equity of tangible asset ratio of 9.04%.

Overall, organic growth momentum continues to be strong, and we have enhanced our revenue-producing teams in commercial banking, treasury management and wealth management throughout 2017 with newly acquired talent. Our client and employee experience journey continues as we work together to build a unique banking company focused on delivering the best possible solutions for our clients and the best possible career for our employees through our consistently remarkable experience.

We are thrilled to have completed our acquisition of WashingtonFirst Bank on January 1, the month of integration planning are paying off and we are finally one company. As we celebrate our 150th year in business this April, we are thrilled to have added this talented group to the Sandy Spring Bank team and provide greater access, enhanced capabilities and unmatched commitment to our combined retail and commercial clients.

Our integration is progressing day by day. Work continues as we assimilate and train employees and introduce our clients to a new level of premier community banking. The full system conversion and rebranding will occur in early March.

We are also working to determine the full impact of the Tax Cuts and Jobs Act on 2018 performance. The tax savings will provide additional capital to fuel organic growth and also providing resources to execute on existing strategies to invest in our employees, our communities and innovation that will improve delivery and attract new clients.

That concludes my general comments for today, and we will now move to your questions. So we can take the first question. We would appreciate that if you'd state your name and company affiliation as you come on, so we know with whom we are speaking.

(Operator Instructions) Our first question comes from Catherine Mealor with KBW.

Maybe first, just on the tax rate. Can you give us some thoughts on what you're thinking will tax rate should shakeout to next year?

Catherine, this is Phil. Are you talking about how it might look like from an effective rate standpoint?

Yes.

Yes, I think -- my preliminary estimates are probably 26%, 27% range. Our current effective rate has been in the 33% to 34% range. The other element of that, that we are still trying to quantify once we get the adjustment, in addition to just not knowing what the impact of some of the other components of the bill will be. It's just the blending of our effective tax rate with what was formerly WashingtonFirst. Theirs' a little bit higher than ours. But right now, that's kind of where my head is as it relates to what that might look like.

Okay. All right, that's helpful. And then on WashingtonFirst, can you give us any updates, given its been a few months since the acquisition was announced just anything on marks given the moving rate since then? And then any thoughts on a DTA impairment that they may have that may change the initial tangible book dilution? I think it was originally around 5%, just kind of making sure there wasn't any changes that could make that higher initially?

Sure. This is Phil again, Catherine. We're still working through all of the marks, as we speak. Probably are about a week to 10 days away from having a better idea to what that's going to look like. But I will say that through the work we've done so far, I don't think we've seen anything that's dramatically different than what we expected in terms of looking at the marks on the individual portfolios, whether they be loan deposits or otherwise. So I think we're probably still fairly on track in that regard. And as it relates to what WashingtonFirst took in terms of their adjustment to the deferred tax asset, I don't think it was terribly material based on what I recollect from looking at their fourth quarter. But there could be some impact, obviously, from that.

Okay. And any update for cost saving there? I think, Dan, you said that the conversion will happen in early March. Is that right?

Yes. Conversion will happen, weekend around March 5 is the system's conversion. So that's obviously customer day 1 is obviously the focus that our integration team's working on. In terms of kind of cost saves, I would say we're in line directionally with what we projected on the front-end with the majority of those coming in '18 and a good portion's still coming yet in '19.

Our next question comes from Austin Nicholas with Stephens Inc.

Maybe just on the margin and your outlook there, clearly the top line is going to be affected by movement on the marks in the WashingtonFirst portfolio and the accretion that will come from those? But could you maybe give some clarity on what we could be looking for on a quarter basis from here over the next, call it, a couple of quarters?

Yes, Austin, this is Phil. I think that we have pretty much been of the opinion and of the viewpoint that when you combine the 2 balance sheets and take into consideration the marks, especially on the loan portfolio, both the credit and the interest rate marks, that we would essentially kind of end up in the same place in terms of an overall net interest margin. And that would be comparable to probably what we reported here in the fourth quarter in that mid-3.50% range.

Now having said that, of course, with the change in the tax law, we are probably going to see some diminution of the tax effect that we have through our immunity portfolio, which would probably shave a couple 3 or 4 basis points off of that over time. And that's kind of my best estimate on that part of it at this point as well.

On the other hand, the other thing that is clearly in the offing is just how many times of that is going to move to short end of the curve. I think with us thinking about 2018, when we put our plan together, I think we only had one additional rate increase in there. I think we've got a little varying change of opinion now that, that might be 2. So kind of bake all that in there. I'm still thinking overall we're 3.50% to -- between 3.50% and 3.55% when it's all said and done.

Got it. Okay, that's helpful. And then maybe just when we're talking about the margin, can you maybe remind us of your deposit and CD growth strategy, if you're still continuing kind of promotional rates there? And then maybe just -- bigger picture, anything you're seeing so far here in the first quarter in terms of higher deposit betas coming through given the rate hike that we saw in the fourth quarter?

Sure. I think that as it relates to an overall strategy approach to the market, nothing's really changed there. I think we still continue to play in a fairly aggressive way, positioning ourselves in really the top third of providers, especially as it relates to time deposits and our premier money market account. I mean, the current kind of teaser offering on the premier account and this is taking into consideration moving to fourth quarter -- the end of the fourth quarter is we're about 1.24%, almost 1.25% offering on the 3-month guarantee and that's as high as it's been for some period of time relative to that. And I think if you looked at that in the current -- in the market -- current market environment here today, that will be pretty attractive.

On the time deposit side, some of the specials and promotional items that we have out there now, mostly are mid-maturity, 2, 3 years out trying to lengthen duration, while we pay up, so to speak. Those rates are between 1.85% to 2%. And as it relates to deposit betas, so for example, we've got -- we've probably got a block of 24- to 35-month CDs that would be maturing at some point here in the next couple of months that will probably rolling off at 1.25%. So 1.25% rolling off in 1.85% to 2% coming back on kind of give you a sense as to what that beta looks like.

Our next question comes from Casey Whitman with Sandler O'Neill.

Just continuing on the question about deposits. So this quarter, I saw noninterest-bearing deposits were down maybe about $50 million. Can you give us just some color as to what was driving that? And then, also curious if you saw any impact from tax reform on customers' behavior towards the end of the quarter?

Yes, Casey, this is Phil. I don't think that the drop-off on the DDAs here in the fourth quarter is anything different than what normally occurs at the end of the year. I think when we put our plans together, we almost always make an assumption that we're going to have runoff at the end of the year, predominantly in a lot of our commercial checking relationships, and then that bounces back over the first couple of months of the following year. So as we go through January and February, those balances seem to make their way back onto the -- excuse me, onto our balance sheet. So I don't think there's anything alarming there from our perspective as it relates to what occurred there at the end of the fourth quarter.

Casey, I may comment on, I guess, the second part of your question with regard to any activity we're seeing from our client base as a result of the announced tax reform is what I think your question was. I don't have anything that specifically speaks to that, but I will tell you that in the quarter, we probably saw a couple of things that would be probably more anecdotal but at least hopeful. When you look at our loan production for the quarter, which was really solid, the diversity of that production angled more towards the more C&I type of activity than it had been. So about 1/4 of our loan production in the quarter was in the C&I book, another 10% to 12% coming out of the owner-occupied book. And so that's a really nice indication. When you couple that with the fact that our utilization rates or advance rates online saw a little bit of a tick up, which would be an indication of more robust business activity is really nice as well. And that's all the while hitting an overall delinquency rate in our portfolios that are near the lowest mark in the past 10 years. So credit quality is really solid and we're seeing some more diversity in what's coming in from C&I. The buzz within the client base is obviously that this is a really good news story for the local economy and for borrowers, and hopefully households as well. So more to come on that as we move into '18.

Got it, helpful. And would you also tribute the expansion of the C&I book to new hires in that group?

Yes, we -- yes, in 2017, we brought in some folks that probably were fully up and running in the fourth quarter. So definitely that aided in that diversity of production, yes.

Okay. And can you give us an update, while we're talking about loan growth, as to your outlook for organic loan growth next year or this year, I should say? Is low double-digit still good pace for the combined institutions?

I don't see anything within core Sandy Spring going into '18 that would kind of change our thoughts about loan growth. But I think at the same time, you might temper that a little bit given the fact that we are moving through a significant integration and client retention. So I would say, probably more in that 8% to 10% range is more of our outlook. We could perform much better than that, but that's how we're thinking about it. Nothing from an economic standpoint that would drive us to think differently than how we've performed in the past couple of years.

Okay, last question. Apologize if you've already mentioned this, but what was the actual dollar amount of those branch closure costs you mentioned? And was that what drove the increase in other expenses this quarter?

Yes, Casey, this is Phil. It was about a $600,000 hit in the fourth quarter. Yes, I think, stripping away the M&A expenses during the period, I think, the quarter-to-quarter growth was around 4%. Almost all of that was solely fourth quarter-related expenses. The branch closure is the most significant one and then there's a couple of other areas where we, for year-end purposes, had some corporative-wise bonuses that were paid as well as some additional tools to cover the ultimate payment of incentive compensation that was earned during the year. So those things together really make up the lion's share of the 4% increase.

(Operator Instructions) Our next question comes from Steven Comery with Gabelli.

Just wanted to ask you guys about the loan recovery you called out in the press release? Was that an owner-occupied? I just wanted to make sure.

This is Dan. I'm trying to find the detail on that recovery. It's not right in front of me.

Yes, it's just -- that was the category that saw yields up the most, so I figured that would be it. But just wanted to verify that.

Actually, Steve, I believe that is correct. Yes, I believe that is correct. Yes, we got $370-some thousand interest recovery from that loan.

Okay, very good. And then, I have only one other question. You guys took about $3 million merger charge this quarter. I was just wondering if you guys had an update as to kind of the total amount of merger charges in 2018 and sort of the timing of those?

Yes, Steve, this is Phil. I think that when we put the original estimate together of the combined merger costs between the 2 companies, it was in the $25 million range. I don't think we have anything that tells us that the actual amount will be dramatically different. It may actually be a little bit less when it's all said and done. I think we recorded last year about $4.2 million in cost and I think WashingtonFirst actually, when it was all said and done, incurred probably somewhere around $11 million to $11.4 million. So if you back out what's already been spent, which is what $15 million to $16 million, it probably gives you about what's left somewhere between $9 million -- excuse me, $9 million and $10 million. And I'd expect the timing of that to be predominantly first and second quarter.

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

Thank you. And thank you, again, everyone for participating with our call this afternoon. We would appreciate your feedback as to how we did and you can e-mail your comments to ir@sandyspringbank.com. So thank you all again, and have a great afternoon.

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