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Sandy Spring Bancorp Inc. (NASDAQ:SASR)

Q1 2013 Results Earnings Call

April 18, 2013 2:00 PM ET

Executives

Dan Schrider - President and CEO

Phil Mantua - Chief Financial Officer

Ron Kuykendall - General Counsel

Analysts

Jennifer Demba - SunTrust Robinson

William Wallace - Raymond James

Bryce Rowe - Robert W. Baird

Matt Schultheis - Boenning & Scattergood

Operator

Good afternoon. And welcome to the Sandy Spring Bancorp Inc. Earnings Conference Call and Webcast for the First Quarter of 2013. 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 over to Mr. Daniel J. Schrider, President and CEO. Please go ahead.

Dan Schrider

Thank you, Yousaf, and good afternoon, everyone. And welcome to Sandy Spring Bancorp’s conference call to discuss our first quarter of 2013 performance. 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.

As usual, today’s call is open to our investors, analysts and the news media, and will be a live webcast of today’s call, and we will also publish a replay of our call on our website beginning later today.

We will take your questions after a brief review of some key highlights but before we get started, Ron Kuykendall will give the customary Safe Harbor statement.

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 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 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 varied 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.

Dan Schrider

Thank you, Ron. Today I will briefly cover our prepared remarks and then we’ll move right to your questions. Our company again produced a solid quarter with no unexpected developments, and as I said at year end, we are pleased that our quarterly results over the past several months have been very consistent and predictable, and will continues to be an unpredictable economic environment.

As stated in our press release issued earlier today, net income for the first quarter of 2013 was $10.6 million that’s $0.42 per diluted share. The increase in net income was healthy 25% advance over last year’s first quarter. Our total assets have been close to crossing the $4 billion mark at the end of the last two quarters and our market cap was a solid $490.2 million as of the close last Friday.

We continue to effectively manage the net interest margin which came in at 3.59% at quarter end versus 3.56% a year ago. This is attributable to our consistent ongoing focus or managing towards a lower cost deposits and borrowings.

Over the past two quarters we’ve executed on the strategy to modify approximately $160 million of FHLB advances to drive down our borrowing costs and the full effect of that being realized in the first quarter of 2013.

So the modifications coupled with the effective strong fourth quarter 2012 loan growth and positive NPA moves helped support and slightly expand our margin. Going forward, continued growth in our lending portfolios is key to protecting our net interest margin.

The efficiency ratio on a non-GAAP basis improved from 62.97% a year ago down to 60.80% at the end of this year’s first quarter and consistent on a linked quarter basis.

Total loans increased 13% over the first quarter of 2012 due primarily to organic loan growth. However loans acquired in the CommerceFirst acquisition also were contributing factor.

Total loans increased 1% compared to the fourth quarter of 2012 building growth in commercial investor real estate and residential mortgage loans even in the face of only moderate demand and consistently tough price and credit competition.

Non-interest income increased 13% for the quarter compared to the prior year quarter and 1% on a linked quarter basis. The increase over the prior year quarter was due primarily to growth in income from our mortgage banking activities, fees generated from the sale of SBA loans and improvement in our insurance agency commissions.

As per credit quality highlights, non-performing loans totaled $49.5 million at March 31st, compared $72.2 million at March 31, 2012 and $57.9 million at December 31, 2012. We are pleased to report our progress and as we’ve indicated on previous calls, we expected that our credit metrics would continue the positive trend, albeit a bit lumpy from quarter-to-quarter.

The coverage ratio of the allowance for loan and lease losses to non-performing loans increased to 83% at March 31, 2013, compared to a coverage ratio of 62% at March 31, 2012 and 74% at December 31, 2012, again, we think this is very good progress.

Loan charge-offs, net of recoveries, totaled $1.8 million for the first quarter of 2013, compared to net charge-offs of $5 million for the first quarter of 2012 and net charge-offs of $0.8 million for the fourth quarter of 2012. The allowance for loan and lease losses currently stands at 1.61% of outstanding loans and leases at quarter end.

At March 31, 2013, the company had total risk-based capital ratio of 15.48%, a Tier 1 risk-based capital ratio of 14.23% and a tangible common equity ratio of 10.19%.

Our capital deployment strategy continues, which includes the combination of organic growth, seeking accretive and strategic M&A opportunities, evaluation of our quarterly dividend and consideration of executing under our approved share repurchase plan.

That wraps up my comment as we covered most of the other key financial highlights and stats in our press release today, and we will now move to your questions. So, Yousaf, we can now take the first question. We’d appreciate if you would state your name and company affiliation as you come on so we know with whom we’re speaking.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question comes from Jennifer Demba with SunTrust Robinson. Please go ahead.

Jennifer Demba - SunTrust Robinson

Good afternoon. Jennifer Demba, SunTrust Robinson Humphrey. Just curious, there was obviously a big deal announced in the northern Virginia market in the last 90 days. And I’m curious as to how you guys plan to take advantage of that disruption, if at all?

Dan Schrider

Hi, Jen. This is Dan. As that deal moves towards -- progressing towards closing, I think there’s obviously a couple of places that we can at least put effort toward seizing on. And obviously, the client relationships during any disruption are right for considering a new banking relationship.

And then second to that is talent that may be available from the acquired institution. And there has been some information published with regard to some cutbacks that the target is planning on making. So as we would with any consolidation, we are poised to take advantage of disruption predominantly within client relationships and clearly in key talent that we think would be beneficial to us.

Jennifer Demba - SunTrust Robinson

Okay. Thank you.

Dan Schrider

Thanks Jen.

Operator

Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace - Raymond James

Good afternoon, gentlemen.

Dan Schrider

Good afternoon.

William Wallace - Raymond James

Dan or Phil, in your press release you highlight that your non-interest income benefited from a legal settlement. Can you tell me how much that settlement impacted the other income line in the quarter?

Phil Mantua

Wallace, this is Phil. The other income part of the noninterest income component of the income statement was impacted by about $260,000 related to that settlement.

William Wallace - Raymond James

Was it -- what’s the nature of the settlement?

Phil Mantua

It was in conjunction with a number of leases that we had acquired while we were operating our equipment leasing corporation number years ago that had been tied up in legal proceedings for probably a couple of years now and had finally settled here during the quarter.

The overall outstanding amount of leases involved there was approximately about $850,000. So we took a write-off on the leases amount themselves. And then given the nature of it, after the fact, just put the remaining net proceeds into other income.

William Wallace - Raymond James

Okay. All right. So the second question is with the mortgage banking fee income down, I would have expected to see a decline in your comp, your salary and employee benefit line. Could you tell me why, what offset the decline in variable comp expense from a decline in mortgage banking in your comp, your salary employment line?

Phil Mantua

Yeah. The salary and benefit line has a couple of things going there that are really away from the mortgage business per se. Probably the biggest thing there is that in the first quarter every year, we pay out on the incentive plans that were related to the prior year. So when we do that since it’s on a cash basis, we then incur heightened levels of salary related types of costs, things like unemployment taxes, security tax. We had more significant 401(k) match expense that happened during the quarter.

And so those things really, in addition, to some true-up on the plan themselves are really the most significant aspects of that $940,000 increase in the salary and benefit line. We also have -- in the first quarter, we had some heightened health insurance costs. So as that continues to just be more difficult, given the changes that are taking place in that aspect of business. So those are really the things that drove the -- drove the increase.

William Wallace - Raymond James

So assuming your mortgage banking is flat, variable comp line is also flat. What should the second quarter expense on the client, assuming we’ll invest in more ways or anything?

Phil Mantua

Yeah. It’s probably somewhere between the two quarters. I would say somewhere, kind of right, in the middle of the two quarters between the fourth quarter and what we actually incurred in the first quarter.

I think some of that stuff related to examples. Social security gets reinstituted on high earners in the first quarter and then lasts for a while and then that dissipates as the year goes on as well. So I would think we’re going to settle somewhere in between the two quarters from an overall salary and benefits basis just the way we’re looking at it.

William Wallace - Raymond James

Okay. And then the other question I have, as it relates to margin, in the prepared remarks, Dan you mentioned the FHLB restructuring was a positive impact. Then you also made a comment about some, maybe some positive NPA move. When I look at your loan yields, your average balance statement, there seems to be a lot of volatility on the yields on, specifically your owner-occupied line. So is that being driven by accrual recapture?

Phil Mantua

Wallace, it’s Phil again. There is an element of that and then there is also the fact that we worked out three fairly significant credits in that portfolio to the tune of about $7.8 million in balances. So we’re getting a rebound effect of reducing out the NPA effect on that yield.

That effect with those three credits which happened fairly late in the quarter is probably about eight basis points of the increase on a quarter-over-quarter basis in that portfolio. And then there’s also to your question and rightly so an element of increase in that yield that’s related to some recapture all on some other NPA-related credits that probably drove the other 5 or 6 basis points pop in that overall yield in that category.

William Wallace - Raymond James

Okay. So we could see a bounce back down in your margin than in the second quarter as that normalizes.

Phil Mantua

Yeah. You could probably look at it that way. Again, the other thing that is happening here and we’ve talked about this before that continues to mitigate against that is just redeployment on the asset side of the balance sheet and there was some of that that took place. I mean, in the investment portfolio, we actually only bought about $11.5 million of investments in the quarter and ran out -- ran off by maturity or call about $30 million. So that migration, again as we’ve talked about many times is our main longer-term mitigating factor on margin compression, at least on the asset side.

William Wallace - Raymond James

Okay. Okay. Great. I will hop out and let somebody else ask the question. Thanks, Phil.

Phil Mantua

You’re welcome.

Operator

Our next question comes from Bryce Rowe with Robert W. Baird. Please go ahead.

Bryce Rowe - Robert W. Baird

Thanks. Wanted to kind of follow up to Wallace question there, Phil, on the loan yield side to the commercial real estate owner occupied component of the loan portfolio. I’m still in almost 50 basis points of loan yield expansion tied to that category alone. Sounds like you worked out the three credits that accounted for about 8 basis point and then some of the recapture accounted for some more. Just wondering as we model that that segment out, are we going to see that particular loan yield dropped or will it stay around the 570 level, as we move out over the next couple of quarters notwithstanding any kind of compression you get from competition?

Phil Mantua

I would -- prices fell again. I would suggest that we are going to see that yield drop in the coming quarters. The loans that are being booked to that portfolio today and competition is certainly part of the equation on where these yields are falling are probably more in a 4.5 range, let’s say on average. So just naturally, any additional growth there at that level is going to kind of dampen the overall yield as a portfolio.

Bryce Rowe - Robert W. Baird

Okay. That’s helpful. And then some other questions. Dan, you talked about capital deployments and I know we’ve talked about this in the past, not necessarily prioritizing how you would use capital. But to think of it from a timing perspective, obviously with more than 10% annual common equity ratio, how do you think about deploying that capital if an acquisition doesn’t present itself and is there any priority over dividend increases or share buybacks?

Dan Schrider

Yeah. Obviously the dividend increases, I mean there are limitations to that element of our capital deployment strategy and it’s self governed by virtue of payout ratios and yield targets and those types of things. As we said before, we think we still have some room there. And so, we’ve spoken in the past in terms of our list of priorities there. I think in reality they probably work more in tandem with one another, with obviously organic growth being the most significant long-term priority, and M&A being more of an opportunistic priority in light of the current environment.

We do have an approved share repurchase plan, which authorizes up to 3%. We’ve been minimally active when we put that plan in place. It’s something that we are going to continue to consider as part of the equation of capital deployment. The plan comes due in August at which time we will reconsider what that plan should look like on a going forward basis. But we haven’t ruled that out. It’s just one of the mix of things we have in the toolbox.

Bryce Rowe - Robert W. Baird

That’s great. And on the M&A front, I know you guys are active in talking to potential partners there. Just maybe give us an update if you wouldn’t mind on how sentiment has changed over the last three to six months relative to potential dollars?

Dan Schrider

Yeah. I think, as we’ve indicated before, we are active in making ourselves known as hopefully a ideal partner for a community bank, looking to partner someone else. I think that the only thing I can say, over the last couple quarters is that little has changed in terms of the outlook for a small bank that might be struggling to drive topline and therefore bottom line. And so, I don’t think there’s, if some of the hesitancy to see more consolidation in industry existed six months ago on the hopes that things would begin to turn. I don’t think banks that kind of are in the target list or are seeing that turn and therefore perhaps more open to further dialogue and deeper dialogue. But apart from that, I don’t have a whole lot more to comment on it.

Bryce Rowe - Robert W. Baird

Okay. That’s helpful. Thank you.

Dan Schrider

Thank you, Bryce.

Operator

(Operator Instructions) Our next question comes from Matt Schultheis with Boenning & Scattergood. Please go ahead.

Matt Schultheis - Boenning & Scattergood

Good afternoon, gentlemen.

Dan Schrider

Hello, Matt.

Phil Mantua

Hi, Matt.

Matt Schultheis - Boenning & Scattergood

Most of my questions have been answered, but I do have a couple of quick ones. I think your press release mentioned miscellaneous loan sales. What are miscellaneous loan sales?

Dan Schrider

We are referring to gains on the sale of SBA loans.

Matt Schultheis - Boenning & Scattergood

Okay.

Dan Schrider

And predominate that’s the essence of that category. And that goes back to our CommerceFirst acquisition strategy. They were a player, as we’ve said before in the SBA world to a greater extend than we were and that’s just indicative of us taking their model and deploying it across our footprint. So we are excited to see more fee coming, driven from that area.

Matt Schultheis - Boenning & Scattergood

Okay. Excellent, Dan.

Phil Mantua

Matt, this is a quantification. It was about $264,000 worth of gains in the quarter and it is probably a misnomer having used that moniker for it, given that we expect that to continue to be a part of our non-interest income stream going forward.

Matt Schultheis - Boenning & Scattergood

Okay. Sounds good. And can you provide any color on the work outs for those owner-occupied? Were they just paid off -- did other banks basically financed these projects and take some off your books or were they -- did they borrowers or actually just have the cash on hand and finally just rollover and pay you guys?

Dan Schrider

I think it’s a blend. I don’t think there is anyone driver there. In most cases, we were dealing with real estate that was sold, which ultimately paid us off.

Matt Schultheis - Boenning & Scattergood

Okay. And I guess that’s it for me. Thank you very much.

Dan Schrider

Thanks, Matt.

Operator

Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace - Raymond James

Just a one follow-up on credit. The $1.7 million release of reserves, how much did you release was specific reserves in the quarter?

Dan Schrider

I don’t know that I have that specific number here. If you spare me for 10 seconds or so, I’ll tell you whether to do or whether we need to search it backwards.

William Wallace - Raymond James

While you’re looking for that, let me ask one question on the SBA business. Was the increase quarter-over-quarter, looks like there was an increase quarter-over-quarter. Was that driven by volume or are you getting better premiums on the sales?

Dan Schrider

That’s driven by volume. I feel like Rush Limbaugh, shuffling my papers here Wally. Let me -- I actually have a -- I don’t have a quarterly number on that release.

William Wallace - Raymond James

Anecdotally, I mean, was the large majority of the release or even maybe, in another way, I’ll ask the question, did you add to your general was driving the quarter for loan growth or did not need to?

Dan Schrider

Wally, I would think that we did add to the reserve based on a growth factor sure, albeit not terribly large given the modest growth in the portfolio itself. I do have the specific reserve number here for the current quarter. What I don’t have at my hand but I’m looking diligently of course well is the …

William Wallace - Raymond James

Only for the current quarter, I can look it up for the five -- for the five quarters?

Dan Schrider

Specific reserves at 331 are just to shade over $4 million.

William Wallace - Raymond James

Okay. I’ll look at the proprietary balance? That’s all I had. Thanks guys.

Dan Schrider

Thank you, Wally.

Operator

I’m showing no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Schrider. Please go ahead.

Dan Schrider

Thank you, Yousaf. And we appreciate everyone on the call taking the time to participate with us this afternoon. We do want to remind you that we’d appreciate your feedback to help us evaluate how our call was today. You can e-mail your comments to ir@sandyspringbank.com. Thank you all again and have a great afternoon.

Operator

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

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