Sandy Spring Bancorp, Inc.
Q4 2013 Earnings Call Transcript

Published: 23 Jan 2014

[Operator:]

Good day and welcome to the Sandy Spring Bancorp Incorporated Fourth Quarter Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference call over to President and CEO, Daniel Schrider. Please go ahead sir.

[Daniel Schrider:]

Thank you, Chad and good very cold afternoon everyone. And welcome to the Sandy Spring Bancorp’s conference call to discuss our performance for the fourth quarter of 2013. This is Dan Schrider speaking and I’m joined here today by Phil Mantua, our Chief Financial Officer, and Ron Kuykendall, General Counsel for Sandy Spring Bancorp. Today’s 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. We will take your questions after a brief review of some key highlights, but before we get started, Ron will give the customary Safe Harbor statement. Ron?

[Ron Kuykendall:]

Thank you, Dan. 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 and 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, 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.

[Daniel Schrider:]

Thank you, Ron. Today as usual, after I cover some prepared remarks, I will move to your questions. First, it was another solid three months and we continue to be pleased with our consistency and balanced results not just for the final quarter but for the full year of 2013 as well. For many quarters now in the midst of a soft economic environment we’ve been able to sustain profitability, we continue to produce a steady stream of non-interest income despite diminishing revenue on the mortgage banking side. There was very respectable commercial loan growth and our overall credit quality metrics continue to improve quite favorably along with other fee income. Nearly three years ago we began an important strategic initiative which has taken us on a journey to align a unique culture and team of employees with the very things that our clients say are important to them. Why? To create a consistently remarkable experience for our clients and employees to drive consistent financial results from a loyal client base who become our greatest advocates in the marketplace, and to create a competitive advantage that is unique, identifiable and lasting. We are taking the time to systematically listen to our clients and our business lines are then able to collaborate around what our clients say is important. And as our success continues to build, we expect a measurable impact on growth, profitability and retention not to mention the morale of our teams. Let me explain why this strategy is working using a few examples. Loan growth was a big plus both quarter-over-quarter and year-over-year. Total loans increased 10% compared to the fourth quarter of 2012 and 5% compared to the third quarter of this year. There was very balanced growth in every portfolio category in the fourth quarter. Yes, there was a decent pipeline coming out of the third quarter which we noted in our last call. But more importantly there was good growth in each month of the last quarter. This means our relationship managers were consistently sourcing new opportunities and then closing them on a steady basis. Further, the quarter was not dominated by a handful of large transactions. So, the actual loan sizes were balanced as well. We are a skilled retail small business and middle market lender and the complexion of the portfolio diversity shows it now as well as ever. We’re also very encouraged by the referrals across multiple business lines including commercial, retail, wealth management, insurance and mortgage. We anticipate a sustainable trend in loan growth to continue moving forward due to the very meaningful cross functional sales activity among different business lines. Obviously mortgage production volume continues to be down due to lower refinance activity but there is a volume of purchase money in construction transactions that have driven meaningful portfolio growth and banking relationships. And the trend in purchase money transactions should continue as we move into the spring selling season. Wealth management has been quite strong with revenue growth of 10% for the year and we see this continuing. And finally year-over-year insurance growth is solid with agency commissions up 7% year-over-year and new business being driven by referrals from other business lines. We see our strategic initiative working as planned and producing expanding customer relationships and performance results that we like. Moving to our press release issued earlier today, net income for the fourth quarter of 2013 was $9.6 million or $0.38 per diluted share, compared to net income of $9.9 million or $0.40 per diluted share for the fourth quarter of 2012 and income of $12.1 million or $0.48 per diluted share for the third quarter of 2013. Net income for the year ended 12-31-13, totaled $44.4 million or $1.77 per diluted share compared to net income of $36.6 million or $1.48 per diluted share for the prior year and increase for the year of 21%. The net interest margin was 3.53% for the fourth quarter of 2013, compared to same 3.53% for the fourth quarter of 2012 and 3.88% for the third quarter of 2013. Excluding the effect of interest recoveries in the third quarter on two previously non-performing loans, the net interest margin would have been 3.49% for the third quarter. Non-interest income decreased 5% to $11.7 million for the fourth quarter of 2013 compared to $12.2 million for the fourth quarter of 2012. This decrease was driven by a lack of mortgage banking income due primarily to lower mortgage origination volumes and a decline in client refinancing activity. This decrease was somewhat offset by a 13% increase in wealth management income due to higher assets under management. In addition, other non-interest income increased 34% primarily due to gains on a sale of SBA loans. As stated in our release, we’ve recognized $800,000 in one-time expenses related to the closure of three branch offices. These closures represent the initial phases of our channel rationalization work that we have previously discussed and represent $0.02 of EPS for the fourth quarter. During the quarter, we also experienced the full expense impact of key revenue and/or efficiency investments such as the Director of Real Estate to execute on a rationalization project as well as improve the efficiency and effectiveness of bank operated real estate. A list out team of three wealth management professionals that will help continue to momentum of revenue growth as well as further penetration into the key market of Bethesda, Maryland. An experienced business line manager for cards ended improving the penetration and usage of check cards within our client base. We think there is real revenue potential in that area. And related to our wealth management business, we’ve invested in building a private banking group to ensure that we meet the diverse needs of our most affluent clients. On the credit front, the provision for loan and lease losses was a credit of $1.1 million for the year end 12-31-13 compared to a charge of $3.6 million for the year ended 12-31-12. The decrease in the provision for the year was due primarily to a decline in historical losses, a lower migration of new problem loans into non-performing status and a significant reduction of net charge-offs compared to the prior year. The coverage ratio of the allowance for loan and lease losses to NPLs was 97% at 12-31 compared to 74% a year ago and 103% last quarter. At 12-31-2013, the company had total risk-based capital of 15.65%, a Tier 1 risk-based capital ratio of 14.42%, and a Tier 1 leverage ratio of 11.32%. Our capital deployment strategy continues to include a focus on organic growth, strategic M&A activity, dividend payouts and share repurchases when prudent to do so. That wraps up my comments for today. And we will now move to your questions. Chad, we can now have the first question. And we would appreciate it if you would state your name and company affiliation as you come on. So, we know with whom we’re speaking.

[Operator:]

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from William Wallace with Raymond James. Please go ahead.

[William Wallace:]

Good afternoon guys. Hope you’re staying warm.

[Daniel Schrider:]

Good afternoon Wally. You too.

[William Wallace:]

Couple of questions for you. In the press release, you referenced I think I came up you said it was an acceleration but you referenced increase in SBA loan sales. Are you seeing strengthen in that business or was it just in the quarter you had a couple of sales that were bigger credits or what were you referring to specifically there?

[Daniel Schrider:]

Yes, we had a – the year was much stronger than 2012 as it relates to the gain on sale of SBA loans. Let me give you a little bit of background there, one was the attractive – one of the many attractive features of our acquisition of CommerceFirst Bank in 2012 was their success and activity in the area of SBA lending. So, one of the pieces of that business that we have folded into Sandy Spring is that SBA platform. And so we have an expectation that we would be able to lever what they were doing on a much smaller scale across our footprint I think 2013 that shows evidence of that. And so we would expect the trend of SBA gains to continue.

[William Wallace:]

Do you think that it’s a business that is getting big enough that you might start separating it out as a line item?

[Phil Mantua:]

Wally, it’s Phil. It is possible that we could get to that point. That the gain number for the quarter was about a $177,000.

[William Wallace:]

Okay. So, still relatively small.

[Phil Mantua:]

Relatively, but at some point we would really like for it to be big enough to certainly separate it out and be able to point to it as a positive contributor to our non-interest income.

[William Wallace:]

Do you know where you are like where you are ranked in the State of Maryland in 2013 versus 2012?

[Phil Mantua:]

I don’t know off the top of my head. Traditionally, from what was being done from CommerceFirst and now being expanded on our behalf, it would have been within the top three or four somewhere in that range, top five for sure, maybe top two or three, that’s just be a guess at this point.

[Daniel Schrider:]

One of the challenges in answering that questions is the former CommerceFirst was exclusively within the Baltimore office and our current market bifurcates the D.C. and Baltimore markets those rankings tend to be split…

[William Wallace:]

True.

[Daniel Schrider:]

…between those two areas. So, we don’t know what 2013 numbers report – should be reported soon but we don’t have those yet.

[William Wallace:]

Okay. Fair enough. And then on the expense side, you had another kind of jump in the salaries and employee benefits line item. Is that being driven by investments you made on the headcount side or was there anything kind of one-time in there?

[Phil Mantua:]

Well this is Phil again. It’s probably some of both – excuse me, but it’s more predominantly related to the investments that Dan have referred to in his opening comments. Being the fourth quarter, there is always a handful of things here or there that are related to either incentive comp or bonuses and things along those lines that kind of pop through there but generally speaking that increase is more related to the investments that we’re making in select area again to Dan’s comments.

[William Wallace:]

Okay. And then have the three branches - are those all closed now or are you still getting those closed?

[Daniel Schrider:]

They’re scheduled, they’re scheduled for a closure in mid-February.

[William Wallace:]

My last question is on the balance sheet. I just wonder if you could talk little bit about the decline in the demand deposits. I’m assuming there is some seasonality there but it’s the first time, I think we’ve seen a year-over-year decline since I have data for.

[Phil Mantua:]

Yes. Well, this is Phil again. Most of that really occurred very late in the month of December. We do believe a fair amount of that but as you suggest it was seasonal. They also maybe reflects a little bit of a kind of level setting within the title company element of that portfolio relative of course to the mortgage business. So, I think that we certainly went through and analyzed evaluated the individual situation, there’s a couple of clients here or there with some significant dollars. It’s clearly stabilized as we’ve moved into early part of 2014 here. So, I mean it was – we think – we don’t think there is a trend there at this point but we’re clearly keeping our eye on it.

[William Wallace:]

Okay. Thanks Phil. Thanks guys. I’ll let somebody else hop in.

[Phil Mantua:]

Thanks Wallace.

[Daniel Schrider:]

Thank you, Wally.

[Operator:]

Our next question comes from Damon DelMonte with KBW.

[Damon DelMonte:]

Hi. Good afternoon guys. How you’re doing?

[Daniel Schrider:]

Hi, Damon.

[Phil Mantua:]

Hey Damon.

[Damon DelMonte:]

Just my first question just dealing with your loan growth outlook, obviously a very strong quarter which was a – which is a pleasant surprise. How you’re looking at 2014 shaping up, do you think you could see something in the upper single-digit level or possibly correcting into double-digits?

[Daniel Schrider:]

Yes, we are pleased with the results of 2013 as well and the diversification of the portfolios that we’re adding to that growth number. We think that momentum could continue, I mean we would certainly expect it to be in that high single-digits and if we break through into double-digits that would be great but in our outlook that we’ve come in, in the past has been kind of that mid to high single-digit and we think that’s a really safe place to look going forward.

[Damon DelMonte:]

Would you expect the growth to be kind of spread out like you saw here, you had some in residential mortgages, you had commercial real estate, it’s a different categories or to be one particular category you think that would perform better than the others?

[Daniel Schrider:]

Now, we think at this point that we should continue to see growth spread across these categories. When you look – despite the –particularly related to mortgage business, despite the fall off of overall volumes due to the refinance activity our purchase money business, construction loan business is largely driving portfolio growth. And that quite frankly was pretty consistent throughout the calendar year, quarter after quarter. And so, we think that trend should continue. So, I would expect to see diversification within those loan growth categories.

[Damon DelMonte:]

Okay. That’s helpful. Thanks. And then I guess is probably more for Phil on the outlook for the margins. Can you give us a little guidance as to what you expect for 2014?

[Phil Mantua:]

Damon, be glad to. As we reported the average over the quarter was 3.53. We ended the year in the month of December more in the 3.48 range. So, kind of looking ahead using that as our jump off point I would think that that’s kind of again in that high 3.40 range is probably what I would peg for us. As we look ahead, again given some of the other comments about our expectations for loan growth and asset redeployment because of that that’s kind of where I would look at it as we go through the first quarter and beyond here for 2014.

[Damon DelMonte:]

Okay. That’s helpful. And then just lastly, with regard to the provision I mean obviously pinpointing the provision each quarter is not the easiest task but with credit continuing to improve is the provisions, should we think about them more as a function of the pace of loan growth?

[Daniel Schrider:]

Absolutely.

[Phil Mantua:]

Yes.

[Damon DelMonte:]

Okay. So, I mean this quarter, you had good loan growth but you had $600,000 or so for a provision but I mean is that level – is that sustainable or do you expect it to kind of be more indicative of what we saw in the third quarter?

[Daniel Schrider:]

Yes, I would expect Damon that with [like] [ph] loan growth we would see that provision expense be a little higher than what we saw in the fourth quarter.

[Damon DelMonte:]

Okay. Okay. That’s all I have for now. I can jump back in the queue. Thanks.

[Daniel Schrider:]

Thanks, Damon.

[Phil Mantua:]

Great.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from Bryce Rowe with Robert W. Baird.

[Bryce Rowe:]

Hi. Thanks. Good afternoon guys.

[Daniel Schrider:]

Good afternoon Bryce.

[Phil Mantua:]

Hey, Bryce.

[Bryce Rowe:]

Phil, a couple of questions for you on the balance sheet and you alluded to it here with Damon’s question but obviously you guys are using a little bit more FHLB funding and letting the securities portfolio run off a bit. Just curious how you plan to fund projected loan growth here in the future. Do you expect to continue to use that FHLB line and will you let the securities portfolio run off if you continue to have loan demand?

[Phil Mantua:]

Bryce, I think that first of all part of what’s in that year end number on the balances is similar to last year and some timing relative to both some of that later in the year loan growth. And then also the earlier commented on runoff in some of our deposits demand deposits there. So, I think right now about $65 million of that is really very temporary in terms of the position within that advance line. Having said that, the other kind of levels that we’ve been running within that $500 million to $530 million range of advances. We’ll probably continue to rely on just because of the opportunity and spread relationship between what we do have in both the investment and a loan portfolios and the cost of those. Those shorter term advances which continues to be sub 20 basis points. So, I think we will continue to allow that to be part of the equation for the time being but our loan as we set our loan our ultimate objective in terms of funding loan growth over time is to continue to knock down an investment portfolio. And to that end, we haven’t bought us a theory and put it in the portfolio since August.

[Bryce Rowe:]

Okay. Okay. And then I guess a follow up on Wallace’s questions around expense. So, you get the three branches closing in mid-February. And Dan you spoke the recent additions from a personal perspective. I guess just trying to get a sense for what a good run rate might be on the expense side considering all those factors at least as far as you can tell.

[Daniel Schrider:]

Yes. I would suggest that – we’ll of course we had some noise in the third quarter that really had the third quarter number lower than it should have been. And if you remember there was at least $500,000 worth of non-interest expenses that were involved in the couple of loan recoveries. And then of course we have the $800,000 that’s in this quarter that’s one-time related to the closure of those branches. Feel a little bit of math and then kind of level it out. I would suggest that the run rate of overall expenses is probably net $28 million range per quarter. So, it’s a little bit less than even after adjusting for what we had one-time this quarter but it certainly heightened from what it was in earlier quarters on a kind of a normalized basis as well.

[Bryce Rowe:]

Okay. And then the last question around the – again around the SBA loans and that business bond is that something you guys expected to do on a quarterly basis in terms of selling the SBA loans?

[Daniel Schrider:]

Yes, yes that activity should be spread out throughout the year if that’s not a – it’s not a hold it until the end of the year type of activity.

[Bryce Rowe:]

That’s an overall…

[Phil Mantua:]

Yes, in fact Bryce it’s not even a hold it to the end of the quarter kind of activity, it’s an ongoing activity, it’s a normal course of business month to month to month. The overall amount for 2013 was almost $800,000. So, it’s not something it’s bit of a phenomenon just in the quarter that’s being going on all year and our expectations for this year or for to continue to move north from that number. So, I mean it’s engrained in what we’re doing in that part of the world.

[Bryce Rowe:]

Okay. That’s great. Thank you.

[Phil Mantua:]

You’re welcome. Thank you, Bryce.

[Operator:]

And we have no further questions at this time. I like to turn the conference back over to Daniel Schrider for any closing remarks.

[Daniel Schrider:]

Thank you, Chad. And thank you all for your questions and your participation this afternoon. We like to remind you that we would love to receive your feedback to help us evaluate the effectiveness of our call and you can email you comments to [e-mail]. Thank you again and have a great afternoon.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.