Sandy Spring Bancorp Inc (SASR) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the First Quarter of 2018. (Operator Instructions) Please note that 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, Cole, and good afternoon, everyone. And thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the first quarter of 2018. This is Dan Schrider, and I'm joined here by my colleagues Phil Mantua, our Chief Financial Officer; and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.

As usual, 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 on today.

After covering key highlights of the quarter and commenting on the financial impact of our recently closed transaction with WashingtonFirst Bank, we will move to your questions. But before we get started, Ron will give the customary safe harbor statement.

Thank you, Dan. Good afternoon, ladies and gentlemen. Please note that 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 risk 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 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. On the heels of a record-breaking year performance in 2017, the first quarter of 2018 has us even more enthusiastic about our future as the largest community bank in the greater Washington region, serving clients in Maryland, Virginia and the District of Columbia.

We were thrilled to come to terms with such a strong and compatible partner right here in our market, where we could leverage existing locations and brand presence to create a premier company.

The integration of WashingtonFirst into our company in the first quarter brought $2.1 billion in assets, $1.7 billion in loans, $1.6 billion in deposits to our balance sheet. And more significant is the talent and additional depths and breadth of relationships and the potential for new ones, given our competencies in banking, wealth and insurance, diverse product offerings, multiple access channels for clients and our approach to connecting with clients on their terms.

Through this acquisition, we added nearly 20,000 accounts with both retail and commercial clients. We are now operating 55 community banking offices, providing greater coverage of our region, while also achieving significant cost savings and efficiencies. We've added 169 talented employees to our company from influential senior leaders and relationship managers to the familiar faces of tellers and personal bankers. We welcomed these employees and did everything we could to create a remarkable transition, because we know that a frustrated, unhappy employee is not likely to deliver a remarkable experience that our clients have come to expect.

Completion of the acquisition and integration marks a significant milestone for Sandy Spring Bank as we celebrate our 150th anniversary. We are well positioned to continue our legacy of profitable growth while taking care of the needs of clients, employees, shareholders and those that live and work within our communities.

So let me now cover some of the highlights from the first quarter of 2018. As we discuss our financial performance and respond to your questions, we will attempt to pull apart the effect of merger-related items to provide the most accurate view of our core performance. So here's just a quick rundown of the main highlights from today's release. Net income for the first quarter of 2018 was $21.7 million or $0.61 per diluted share compared to net income of $15.1 million or $0.63 per diluted share for the first quarter of 2017 and net income of $8.3 million or $0.34 for the linked fourth quarter of 2017.

On a core basis, after taking into consideration merger-related expenses and the additional income tax expense in the fourth quarter of 2017, for comparative purposes, quarter results look like this: first quarter of 2017, EPS of $0.63. Fourth quarter of 2017, EPS was $0.64. And the first quarter of 2018 is an EPS of $0.80.

This yields a non-GAAP return on average assets of 1.47% and a non-GAAP return on average common equity of 11.40%. As you can see, a very solid first quarter of the combined companies.

Pretax preprovision income for the quarter of $39.3 million compares to $22.9 million for the first quarter of 2017, a 72% year-over-year increase.

The net interest margin was 3.58% for the first quarter compared to 3.51% for the first quarter of 2017 and 3.57% for the linked fourth quarter. But after adjusting for an interest recovery in the fourth quarter, the margin would have come in at 3.53%.

Let me pull apart the effects of tax reform and purchase accounting on the margin for comparative purposes. Overall, we view the margin as basically flat linked-quarter when you take into consideration the following. As mentioned, the fourth quarter of 2017, margin, after adjusting for an interest recovery, was 3.53%. And the negative impact of tax reform on FTE yields is about 5 basis points, which would have further impacted fourth quarter margin for comparison purposes to 3.48%.

The purchase accounting adjustment in the first quarter is worth 9 basis points. Therefore, our reported margin of 3.58%, less the 9 basis point, yields a flat core margin of 3.49%. Average loan growth for the quarter was solid and in line with expectations. If you assume both loan portfolios were combined in prior quarters, average organic loan growth on a year-over-year basis was approximately 9%, and on a linked quarter basis, 2.3%, both consistent with our overall outlook for 2018.

Our teams continue to build strong pipelines of new lending opportunities. The greater Washington market has always been extremely competitive and will continue to win our fair share of business in this environment. Pricing power continues to lag the move in market rates, and our teams continue to be disciplined in selling full banking relationships into multiple business lines. The provision for loan and lease losses was a charge of $2 million for the quarter compared to a charge of $200,000 for the first quarter of '17. The provision expense reflects the impact of organic growth during the first quarter.

Overall, all credit metrics remain strong, and our reserve coverage of nonperforming loans is exceptional. We continue growing core deposits from both retail and commercial banking relationships. Using the same assumption of combined balance sheet in prior periods as I did with loans, year-over-year average growth and average deposits was approximately 7%, led by DDA growth.

On a linked-quarter basis, average deposits decreased 1.4%, as was anticipated, on both the impact of the merger and our strategy to de-emphasize broker deposits that came with the acquisition.

Looking specifically at the moves within the former WashingtonFirst deposit base in the first quarter, transaction balances actually increased, while the most significant runoff was in broker and time deposits, all part of our strategy to reposition the acquired deposit base over time.

Our continued ability to fund new asset grew through expansion in core deposits is a key strength of our company and core strategy. We continue to be focused on the importance of generating deposit growth as we move through 2018.

To that end, all incentive plans have been modified, placing more value and reward opportunity for deposit gathering. With our presence and coverage in the greater Washington market, we are well positioned to continue our legacy of core deposit growth and are excited about the opportunities to take market share. We continue to price our deposits in the top third of the market in key interest-bearing deposit products, and our sales teams continue their focus on driving core transaction account business as we win new relationships. We have reached a point in the rate cycle where our deposit betas in the premier money market products are nearing 100% and are approximately 80% in our time deposits.

In the noninterest income area, we are well positioned in the mortgage, wealth and insurance lines of the business to further penetrate our existing client base and to drive a new relationships. The operating leverage from the acquisition and resulting non-GAAP efficiency ratio continued to improve to 49.54% for the first quarter compared to 55.69% for the fourth quarter of 2017. We have yet to absorb all of the assumed synergies from the acquisition. For example, 6 community branch offices were consolidated this month that will have a positive impact going forward.

Our capital position remains strong to support growth, with a total risk-based capital ratio of 12.27%, a Tier 1 risk-based ratio of 11.08%, a Tier 1 leverage ratio of 9.21% and a tangible common equity to tangible asset ratio of 8.99%.

As we look forward, we continue to invest in the people, systems and technology that will prepare us for the future, that will provide greater access for our clients that will enhance opportunities for our people and take advantage of being a one-of-a-kind premier bank in one of the best markets in the nation.

In closing, our strategic priorities for 2018 continue to be the successful integration of the employees and clients of the former WashingtonFirst Bank and to continue the realization of projected cost saves. Also, to enhance Sandy Spring client experience, to ensure consistently high levels of responsiveness and engagement through all of our delivery channels, to leverage our sales culture by utilizing our people and our salesforce.com technology to connect our clients to the right person, the right product and the right solution that is all about them and achieving the financial performance and returns that satisfy our shareholders and position us for continued success for future generations.

That concludes my general comments for today. And we will now move to your questions.

(Operator Instructions) And the first question comes from Austin Nicholas from Stephens.

As you look at maybe your loan growth outlook for 2018, should we still be thinking somewhere in the high single digits as you layer on both legacy Sandy Spring and WashingtonFirst?

Austin, this is Dan. That is how we would expect to -- for '18 to be. Yes, high singles.

Okay, great. And then maybe just on the acquisition, given the conversion a couple of weeks ago, could you maybe give an update on, I guess, any changes in the assumptions on purchase accounting accretion? Or in the -- maybe the reported margin? And then maybe how talent retention is going?

Yes, Austin, this is Phil. I think as it relates to the purchase accounting adjustments, that 9 basis points that Dan referred to in his opening remarks is really the annualized effect, as we see it, for the entire amount of 2018. Now as you get out beyond this year, based on the shorter kind of duration, especially in the loan and in the time deposit areas on both sides of balance sheet that came with the WashingtonFirst transaction, that the amount related to that 9 basis point adjustment represents about 45% of the total accounting purchase adjustments over the life of those assets and liabilities. So we're going to be much more heavily loaded or front-end loaded here this year and to a lesser degree, next year and the year after relative to the impact of that to those purchase accounting adjustments. And so we'll get -- we'll have less -- obviously -- therefore, less impact on the NIM related to that as we go through this year and certainly into next year and the years beyond. I think the -- what was the other part to your question, I'm sorry?

Talent retention. I can speak to that. Austin, we've -- one of the most, obviously, critical areas going into the whole planning process towards closing and integration process was the retention of the folks that were going to be part of the team and the revenue-producing aspects of that. We've done, I would say, extremely well in retaining that key talent. We have had a couple of relationship managers leave us since legal day one, one at legal day one, one at customer day one, which was early March. And we certainly had an expectation that some of that may occur but, by and large, we've retained those folks that are accustomed to dealing with our new clients. And I think that speaks to -- or as reflective of the effort that's been put in from the day we announced our transaction to the day we closed it in engaging employees, welcoming them to our organization and our culture. And I think hopefully at the end of the day, they, like we, see tremendous opportunity in being part of a nearly $8 billion bank in a great market and what we can allow them to continue to do for their clients. So retention's been really strong.

Understood, thanks for the color there. And then maybe just one last one. Back to the NIM, as I look at the 3.49%, call it, core NIM this quarter, is that a good number to use, kind of, going forward? Or should we maybe bias that down a little bit, given what your comments on the deposit beta is?

Yes. Austin, this is Phil, again. I was, kind of, follow up on that. Just given that -- likely looking for -- everybody's looking for some kind of general outlook on the margin. I think it's safe to say that as it relates to using that core, but that's probably a good place to land as we move through the rest of the year. There may be some additional couple of basis point compression as it -- as we're required to try to continue to fund this type of loan growth that we started this conversation with. And -- but I think, overall, it should be fairly stable over the course of the year. And that, also, by the way, has us continuing in our rate forecast to assume that the Fed will continue to move forward with at least 2 more short-term increases as we go through the rest of the year. And that the yield curve in general will continue to flatten out. I think our projections have -- for example, and this more in the interim rate to longer-rate scheme. But we've got the 2- to 10-year spread narrowing as far as 32 basis points by the end of this year. So having said all that, I think getting back to your question that -- fairly stable, but maybe a couple basis points in compression as we go through.

And our next question come from Bryce Rowe from Baird.

Phil, this might be too much of a nitpicky question, but I was maybe hoping to get a little bit more clarity around that 9 basis points of margin impact from purchase accounting. Is there a way to understand how loan yields were affected? And then how deposit costs might have been affected?

Yes, we can do that. So let me give you kind of a big picture perspective in terms of the -- that the overall amount of the purchase accounting that we calculated on the -- on both sides. So the overall number over the course of the life of both the assets and liabilities was roughly about $15 million. But $9.3 million of that is on -- is marks on our loan portfolio. And about little over $3 million or is related to the CDs. And the remainder of it's related to the borrowings, whether it be home loan bank advances or the preferred -- trust prefers and sub debt that WashingtonFirst had that we took onto our balance sheet. So clearly the large majority of it is in the loan book, as you would expect. I think as we think about how we originally estimated what kind of credit loan marks they might be, offset by interest rate marks at the beginning of this. I think the loan marks held up pretty much as we -- the credit marks on loans held up pretty much as we expected they would, even as far back as our diligence. And if anything, the interest rate portion to that probably ended up being a little bit less as rates migrated north relative to the market rate on those loans from the time that we acquired WashingtonFirst till the time we actually did the marks at the end of the last year. So hopefully you can take those numbers and kind of put them together in terms of what percentage of the overall marks hit the different parts of the balance sheet. Again, the marks on the liability side, especially on the CD portfolio, we're going to roll off fairly quickly, just because of the maturities on those are fairly short. And on the loan side, again, within the next couple of years after this year, they'll virtually be pretty much gone.

Great, that's -- that is helpful, Phil. Then I had one more question on -- kind of on the expense side of things. With the conversion completed in early March and then, Dan, you mentioned the consolidation of 6 community offices, I was curious, what might be a good run rate for expenses as we move out into second, third quarter? Just something kind of rough would be helpful.

Yes, Bryce, this is Phil, again. I would suggest take the first quarter levels, eliminate the amount of M&A expense and maybe add 1% or 2% growth throughout the rest of the year would probably be a good, conservative way to look at it. Because again, there are in addition to the savings that will come to the run rate by virtue of the branches that Dan mentioned. There are still some other synergy things that I think will manifest themselves through the rest of the year as well. So I think on a net-net basis that would be the way I would look at our quarter-to-quarter, kind of, run rate of overall expenses.

And our next question comes from Cathleen -- Catherine Mealor from KBW.

One more follow-up to the margin. Is there -- another way to ask the deposit cost question, but is there is a way outside of just accretable yield, I mean WashingtonFirst had a higher cost deposit book, so even outside of just the accretable yield piece. So is there a way to just break down that 13 bps increase in interest-bearing deposit cost? To think about how much of it came from just core Sandy Spring and how much of it was impacted by just WashingtonFirst higher cost funding base coming onboard?

Catherine, that's a real good question. Let me think about that for a second. In terms of what we might view as, kind of, their contribution to that overall increase. And I didn't necessarily bring with me kind of what their cost -- their former standalone cost of funds was. I can probably find it here and follow before the -- before we get off the call to try to give you a little bit better insight on that. Because I don't know that I can tell you right off top off my head.

Okay, that's all right. I guess I was trying to just -- try to calculate more of your organic deposit data on a whole? I know you mentioned that the premier is coming in at a 100%, and time is coming in at 80%. But if we can't think about the entire deposit base, just trying to think about what was your organic deposit beta going into this quarter? And I don't want to over calculate it because I know WashingtonFirst had some impact on that number.

You're right about that. Although, again, I think that, by and large, as it relates to what we'll reprice out of them. Let's say, their time deposit book, even when you include some of their wholesale money in the short run, I think we're still pricing that up from here just based on what's happened to rates in the marketplace. And so I think it's still a safe bet that those betas are still -- are pretty applicable to our overall deposit base as we move through the year. I think that's probably the best way to answer that, because I would suggest that that's the way we looked at it when we calculated what Dan suggested in his remarks, if that's helpful. So I think that, that is reality of it. Now same time, we have not yet to this point and have no intention of moving the other more traditional savings and interest checking type products at all and they still remain very, very inexpensive sources of deposits. And we have continued to have success in growing those in addition to the other more rate sensitive parts of the funding base. So I mean, the only other thing I can tell you is that as we move through this kind of transitionary period of time, we continue to use some fairly short-term home loan advance type funding till we get to the point where we can better convert the WashingtonFirst base to ours. And currently, on a 30-day basis, we're borrowing at roughly 170 basis points. And we know how those rates kind of move in lockstep with other shorter-term LIBOR-type rates or whatever. So I think that's the other component of, kind of, filling in that gap.

Okay. No, that's helpful. And on the other side of balance sheet, with loan yields, is there a way to think about maybe one, pro forma, what percentage of your loan book is variable and repricing immediately? And then, two, how you think about asset betas moving forward with WashingtonFirst later down?

Yes, we're in the process now of running some of our quarter-end interest rate, kind of, risk analysis. And I think, as I've said in the past, I would expect that -- in the WashingtonFirst portfolio, they were about 80% variable to 20% fixed. We were probably more about 40% variable. And this is predominately in the commercial portfolio, by the way. And we were about 40% variable and about 60% fixed. And just throughout this first quarter, we've actually probably added more variable-rate type product in the commercial portfolio than anything else on a combined basis. And so I'm expecting and thinking that our profile will change to the degree that at a minimum we'll reflect being less liability sensitive and maybe fairly neutral to maybe slightly asset sensitive over time. But again, I think given the nature of the 2 portfolios, you can probably stitch together what the combined percentage of fixed and variable would be. And just going back to your other question. As it related to WashingtonFirst deposit base, their overall total interest-bearing deposit cost in the fourth quarter would've been about [1 02] and the time deposit part of that would have been about [1 35]. And so you can get some perspective what was coming to our balance sheet from theirs in comparison to our core rates.

Great. And what was the [1 02], again?

[1 02] was total interest-bearing deposits.

Total, okay. And then time deposit was [1 35]?

[1 35] average for the fourth quarter, yes.

(Operator Instructions) And our next question comes from Steve Comery from Gabelli & Company.

Yes, I was wondering if you guys could give maybe some guidance on the -- your expectations for the provision expense going forward through 2018?

Yes, Steve, this is Dan. I think it's -- as it has -- as is the case in the first quarter, we would expect the provision expense to be driven by growth in the portfolios. And based on our outlook of growth, I think the first quarter experience is probably not too far off on what we'd expect on a quarter-by-quarter basis going forward, assuming that all of our growth rates that I spoke of hold true.

Yes, Steve, this is Phil. The only thing I would add to that is, based on the way that the accounting works in this regard has some of what would have been legacy WashingtonFirst loans were new or -- and are brought back into the portfolio, we're then compelled in those case -- what if they're modified in some predictable way, then we're compelled to start a provide and reserve against them we're -- obviously, when we did the purchase accounting, it was -- that was covered through the adjustments that were made on the credit marks. So you'll have that impact of those loans in addition to, as Dan suggested, what growth goes on throughout the remainder of the year.

Okay, very good. That's helpful. And then just kind of wondering on the efficiency ratio, you guys ticked under 50%, that's obviously a really good print for this quarter. I was just kind of wondering if you guys have sort of a goal either on a quarterly basis or annual basis going forward.

Yes, we're kind of chuckling, Steve, because for a long time we had a goal of getting that under 55% on an organic basis. And obviously, very pleased with where we ended up this quarter. And I think that's where we would've expect to level out is about what you saw, focusing on keeping that sub-50 on a going forward basis.

Okay, so you expect that level to be about sustainable for the rest of the year?

Yes.

Okay. And then one final one for me. Mortgage banking in the quarter, looks like it was up significantly. Just kind of wondering, is there anything going on there? Are you just integrating the WashingtonFirst business? What's going on there?

Yes, Steve, really the effect of the integration of the 2 mortgage shops into 1 division. So really gives us, obviously, the potential to really grow origination significantly. Opening up some of our products to their originators in our construction niche and then, obviously, driving again on sale production, which is where their expertise was heavier. So it's really the effect of both companies coming together.

And this concludes the question-and-answer session. I would now like to turn the conference over to Mr. Daniel Schrider for any closing remarks.

Thank you, Cole. And thank you, everybody, on the line for taking time to participate with us today. As always, we'd love to receive any feedback you have to help us evaluate the effectiveness on our call, and you can e-mail your comments to ir@sandyspringbank.com. Thank you, again. Have a great afternoon.

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