Q2 2019 Earnings Call
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I'm, calling for the Sandy Spring Bancorp earnings call.
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Corp. incorporated earnings conference call and webcast for second quarter 2019.
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I would now like to turn the conference over to President and CEO , Dan Schrider Dan. Please proceed.
Thank you and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy spring Bancorps performance for the second quarter of 2019, and this is Dan Schrider speaking and Im joined here by my colleagues feel man too.
Chief Financial Officer, and Ron Herman Dollar General Counsel for Sandy Spring Bancorp.
Today's call is open to all investors analysts and the media.
There will be a live webcast of today's call and a replay will be available on our website later today.
Before we get started covering highlights from the quarter and taking your question Ron will give the customary safe Harbor statement.
Thank you Dan good afternoon, ladies and gentlemen, Sandy spring Bancorp will make forward looking statements. In this webcast that are subject to risk and uncertainties. These forward looking statements include statements of goals intentions earnings and other expectations estimates of risk and future 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, but because they are based upon or affected by managements 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 surrounding 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.
Overall performance in the second quarter was solid and we continue to demonstrate sustained success and our ability to generate balanced quality earnings. We are pleased with the results. We delivered an exceptional level of client service, we have been able to maintain especially as we've grown.
For some companies the type of growth, we've achieved both organically and through M&A could impact your culture or start to dilute your identity.
But I can say with confidence that that has not been the case for us we've held strong to the values integrity and high level of personal service that makes us uniquely Sandy spring bank.
Our shared commitment to this organization and one another is what has made US successful as we work through the many business decisions and logistical hurdles that come with acquisition and growth.
Not surprising the banking industry and the greater Washington region remains fiercely competitive.
And the interest rate environment remains a challenge.
The continued consolidation in financial services, new entrants to the market and this competitive landscape is nothing new for us.
This is where we have successfully operated for more than 150 years.
And it is where we thrive.
Competition drives us and it keeps a sharp.
We remain laser focused on delivering outstanding client service and taking care of our employees.
There are few areas I'd like to highlight from the press release, we issued this morning.
Net income for the second quarter of 2019.
Was $28.3 million or 79 cents per diluted share compared to net income of $24.4 million or 68 cents per diluted share for the second quarter of 2018, and net income of $30.3 million or 85 cents per diluted share for the first quarter of 2019.
It is worth noting that there were a few one off items in the prior year's earnings for the second quarter and in the first quarter of 2019 that includes $2.2 million in merger related expenses in the second quarter of 2018 as well as in 1.8 million interest recovery from acquired impaired loans and credit versus a provision expense for loan losses and $600000 in life insurance mortality proceeds in the first quarter.
There were no such items this time around so by comparison the core earnings reported today remain very strong.
Compared to the second quarter of 2018 total assets increased 3% loans increased 5% and deposits grew 9%.
We are especially pleased with the progress we made in the second quarter and growing deposits, reducing our loan to deposit ratio to 103% at the end of the second quarter compared to 111% at year end 2018.
Our year to date deposit growth included a 16% increase in non interest bearing deposits and a 20% reduction in wholesale deposits.
In January I commented on the many initiatives, we put into place to strategically grow deposits and I'm pleased to report today that those initiatives have been effective and we continue to work hard to deepen deposit relationships.
Our success in deposit gathering together with repositioning some FHLB advances has allowed our net interest margin to remain strong coming in at 3.54%.
Compared to 3.56% for the second quarter of 2018, and 3.52% for the first quarter of 2019. After adjusting for recovered interest income of $1.8 million on acquired credit impaired loans.
On the lending side of things, we reported growth compared to the prior year second quarter. However, loans remained flat compared to the linked first quarter I will comment more and more detail on this in just a few moments.
Our credit quality remains strong.
With an 8.4% decrease in nonperforming loans compared to last quarter. We also saw a meaningful reduction in the watch list credits and our allowance coverage of nonperforming loans remained strong at 148%.
Noninterest income also increased 11% from the prior year's quarter, driven primarily by income from mortgage banking activities.
To that end our mortgage division continues to deliver great results increase in gain on sale revenue in this area to $3.3 million compared to $2.9 million last quarter.
We are thrilled with the overall mortgage loan production across our footprint.
As I mentioned last quarter, we built out a strong sales team that is delivering results.
It's also important to note that we made the strategic decision to drive more production off balance sheet in the form of gain on sale revenue versus portfolio growth.
And our expectation for mortgage revenue is that it will hold at approximately two and a half million per quarter for the remainder of 2019.
Both our wealth and insurance divisions also saw nice increases this quarter.
Compared to the first quarter of the year, our wealth division increased revenue by 5.8% and assets under management increased by 4% to $3.2 billion.
Our insurance agency had a strong quarter and also increased commissions by 7.2% compared to the second quarter of 2018.
We continue to effectively manage expenses with a slight decrease compared to the previous quarter. The non-GAAP efficiency ratio was 51 71 for the current quarter compared to 50 to 98 for the second quarter of 2018, and 51 44 for the first quarter of 2019.
So going back to some of my earlier comments regarding loan growth I want to share a few more details with you about what was happening in the second quarter.
As I noted previously our loans this quarter remained flat, which was a result of a shift in mortgage strategy the level of funded production and higher levels of unanticipated runoff.
Given lower spreads and the portfolio mortgage market, we made a conscious decision to sell the majority of our mortgage loan production for games instead of retaining them in portfolio.
Additionally, permit prepayment speeds are increasing and we are selling more of our construction to perm loans in the secondary market as clients prefer a fixed rate financing.
The commercial portfolio production remains strong and on a year to date basis was consistent with 2018.
The composition of 2019 production shifted to include less fully funded investment real estate loans and more higher yielding ADC projects with a lower level of initial funding.
Our year to date utilization percentage of production dropped to 61% compared to 75% in the prior year.
And as a matter of timing we had several payoffs in the final days of the quarter totaling between 50 and $60 million. It's important to note that we saw a good bit of self liquidating from successful construction projects not representing clients, leaving the bank.
We remain focused on recruiting top talent and achieving balanced profitable production across commercial portfolios.
Given our experience in the first two quarters of 2019, we believe average loan growth for the year 2019 will produce a mid single digit average growth rate.
Our capital base continues to grow and our positioning remains strong to support continued growth.
The total risk based capital ratio of 12 79.
A tier one risk based capital ratio 11 59.
Tier one leverage ratio of 9.8, and a tangible comment to tangible asset ratio of 954.
And we're pleased to once again raise the dividend during the quarter, which continues in annual trend of increases since 2010.
I'd like to now shift and update you on some special initiatives in news going on Sandy Springs.
We know that small businesses play a pivotable pivotal role in fueling our local economy, creating jobs, making critical investments in our communities and helping to grow our region.
With that in mind, we partnered with the Washington business Journal to conduct an independent survey of local business owners and decision makers.
Our goal was to here with these business leaders had to say about their opportunities and challenges and their views of our local economy.
What we heard overall is that greater Washington is a great place for business.
Business leaders years see tremendous opportunity and have optimism about the region's future.
There were also some some specific priorities that came to light among women owned businesses and minority owned businesses and their interest in contrast in the responses from businesses in Maryland, Virginia, and Washington DC.
The small businesses, who participated in the survey gave as many new insights and validated some things we heard directly from the businesses that we serve.
Given what we learn through the research what we heard from our clients and what we've seen in our own performance, we're responding and actionable and practical ways that will continue to help our small business partners succeed and help grow the bank.
This includes a strategic focus on cnine lending as well as recruiting local talent that truly understands the unique small business communities, we serve and greater Washington.
The results of that survey were published in the second quarter, and the Washington business Journal and their assessable via our wits website by simply searching the state of small business on Sandy Spring Bank Dotcom.
And with small businesses in mind, we're excited to open a new office in Beltsville community of Prince George's County.
Coming later this month this office will serve retail and business clients. However, it will have a dedicated focus on serving the small businesses in this community.
As I shared with you last quarter, we continued to invest in our people and technology that will help us deliver a more streamlined client experience.
We're making great strides in our in senior loan origination system as well as a new online account opening portal both of which we look forward to rolling out later this year.
We also proactively and seamlessly introduced a number of enhanced security features in order to further bolster the safety and security of our personal online banking clients.
We continue to remain keenly focused on delivering a personalized client experience and an exceptional workplace for our employees.
That's why we're especially pleased this quarter to be named 2019 best in state Bank by fours and a Washington post 2019 top workplace.
Forbes ranked us number one the number one bank in Maryland, However, our companywide efforts across our entire region is what made that possible.
As for the Washington Post recognition, what makes us so special as knowing that our employees think the Sandy spring Bank is a great place to be.
To be acknowledged as a top workplaces tremendous affirmation that our employees truly value and embraced the culture, we've built together.
The culture that prioritizes people and authentic relationships with our clients community and one another.
As we look to the future we're optimistic and we know what we have to do to achieve continued success and growth.
We will make adjustments as needed and focus on delivering value to clients and shareholders by doing what we do best and remaining true to all that makes us Sandy spring bank.
This concludes my general comments for today, and we'll now move to your questions.
And if we can have the first question and we'd appreciate it if you could let us know who you are and the company affiliation as you come on so we know with whom were speaking.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Austin, Nicholas with Stephens Mr. Nicholas Please proceed.
Hey, guys good afternoon.
Good afternoon, Austin I don't often.
Pretty pretty good.
Hi, Thanks for taking my questions.
I guess just on the margin can can you confirm that I think it was five basis points of.
Accretion was in that number.
Hi, RJ office facility correct.
Right around that this period without any.
Kind of noise relative to that from in comparison to other periods prior.
Okay. So it's fair to say the core the core margin was maybe closer to three three fifth our 350 50.
Yes, I think thats about right and I would anticipate is knowing what last.
From the standpoint of adjustments from.
Fair value adjustments. It next couple of quarters that probably comes down for being five basis points to two to three basis points per quarter.
Okay. That's helpful. And then maybe just on the core margin outlook can you maybe just give some thoughts on.
What year.
Expecting for.
No fed rate cuts over the next couple of couple of quarters, and then any comments on where where you think the margin could could trend.
Especially now that you guys have brought down your your loan to deposit ratio too.
Much more much more manageable level today at that kind of one or three level.
Sure So I would I would.
First of all I think that we are.
Like most people down the camp that theres going to be a cut.
Probably the end of this month and certainly by the time, we get to the end of this current quarter.
Ian.
So we're we're looking at the margin being pretty much where it may be down a couple basis points, given that that could occur and I'd say that without actually having.
Also layered in there is the opportunity to and I think we'll have to restart to reprice down the liability side.
We've done a little bit of that here in the latter part of the quarter on some of the kind of specials and upgrade offerings that we've done in there.
Time deposit base, but I think that the way I look at it is the.
The.
The consumer market really don't see rate movements unfold. The fed does something so once I think that that occurs then I think that will change the psyche of the of the retail customer will allow us to probably moderate some of the rates down maybe we can get caught in a little bit of the business.
Lose basis points back.
Thanks makes sense and then maybe just on that point what percentage of your deposits are you would you classify as commercial versus retail and then.
Of that commercial does commercial deposits, maybe what what percentage of those would be.
Kind of tied to tied to it kind of.
Short term monthly index.
Or any way you kind of wanted to disclose that that number yes, I mean I think that.
Hi, good rule of thumb for US has been 60 60 40 retail to commercial just in the general mix of our of our core deposit base.
So I think we'd look bad in that regard.
It's more than anything it's really tied to an index directly retail or commercial we've only got one.
One through product the money market legacy money market product, it's got a relatively small balance to it it's actually tied directly to an index.
And.
Yes, we we adjust the course with things enter.
In our more premier offered money market as.
The rate environment changes, but were not.
We are not legally tied to doing so so.
Managed only thing that I could get that suggest to you that.
And the ones that one product that actually would move automatically let's say.
Got it so there is not a.
I don't have a large municipal book that maybe is tied directly to the fed funds or anything right now in fact, we ran down.
During the quarter, even with the loan growth or excuse me mother deposit growth that we had we actually ran down the public funds position.
In the quarter as we did as Dan mentioned with our broker.
Cds as well, so I think those things.
Our part and parcel of Allied we were able to keep the cost of funds fairly constant.
During during the quarter, while we still have significant loan excuse me significant deposit growth.
Got it.
Okay. That's helpful. And then maybe just on the expense side of the picture.
Is this a good a good run rate to kind of build off of through through the rest of the year and then just maybe any commentary on kind of the year. The natural rate of expense growth, we should see in any any kind of hiring you might be doing that good.
The change that.
Sure so.
I think.
In General I think we've commented on this for.
If you were going to look at.
Core expenses year over year, given where we are now and then how we'll finish the year I would I would suggest we're expecting that the 19 growth of expensive 18 is probably around 5%.
Now quarter to quarter. There is some seasonality in a couple areas of cost for US for example next quarter.
No. There are there are a couple of categories slum in compensation related to higher fee income on the insurance business that will.
Create a little bit of a bump up in the overall level of expenses from this current quarter.
And then it will drop back down again in the fourth quarter as it usually does if you look at the pattern in the past. So I think if you if you use the.
5% kind to.
Guideline is for looking at year over year, excluding of course, but.
The merger related expenses from last year that surprised me pretty good idea, how the rest of year looks.
Got it.
Okay. That's helpful. And then maybe just one last one.
You know with the Washington first transaction behind you.
And.
Excuse me.
And kind of capital kind of hovering hovering around that 11, 11.5% in kind of incrementing up on the CP. One I guess can you maybe remind us of your your message on uses of capital and then any thoughts on that.
On the M&A and kind of where you where you seek to grow is that part of the strategy.
Yes, Austin. This is this is Dan probably sound.
Repetitive as it relates to our view toward capital.
Predominantly focused on allowing us to drive organic growth.
You know continue to support.
A strong dividend.
And and we are.
We continue to be thoughtful about M&A inactive and building those relationships.
And so.
Having having a decent level of capital in the anticipation of it at some point continuing activity there.
And then we do have a share repurchase authorization in place.
Which we have in the past quarter not been active.
But that doesn't mean that we would not consider that as theres. We believe there's weakness in the shares. So I think it's really all four of those things.
Combine as we think about capital levels.
Okay got it and then just on the tax rate should we be for the full year 19 is.
The 24% range still kind of where we should be.
Yes, I think thats, a thats a good basis to use for the for the overall year Austin, Yes.
Got it okay, great. Thanks for taking my questions I'll hop off.
Thanks Austin.
Our next question comes from Catherine Mealor of KBW Catherine. Please. Please proceed.
Thanks, Good afternoon.
Good afternoon.
One other one just on the margin I remind us if there are any other plans to lower on FHLB borrowings as you guys think about your NIM outlook.
Kevin This is Phil.
Not necessarily.
Per se, but again, we will we will adjust our position in between.
That the home loan bank as a form of wholesale borrowing.
So again, what we think we can do in the brokered CD market, depending on which one of those is going to give us.
Yes, better economic.
Result, so.
But as it relates to what.
On the books right now for home loan Bank advances.
There may be some things that are going to start to mature out of there but.
No other than that I don't know if there's a there's a specific plan in place to fish.
Directly just reduce the physician.
Got it Okay and then on the on the security side is good thing about this.
This does the balance sheet and about the securities balances should we still feel like you're at a bottom there do you still feel like Theres.
Similar to more room to bring that balance down further.
Yes, and I wouldn't anticipate seeing our overall securities portfolio shrink any further from where it is.
I mean, we have.
Normally targeted to that for that portfolio to be between 12, and 15% of assets it's below that today.
And I think Thats part of what gave rise to a little bit bigger kind of short term cash position at the end of the quarter that wasn't the only thing but that was a part of it.
I think we'll start to get a little bit more fully invested in the investment portfolio here as we move out through the rest of the year.
Okay great.
And then.
On credit I mean, you're right. It was really strong this quarter.
A local competitor in your market.
Earlier.
Talked about pulling back in construction and had a couple of.
He kind of single family credits that moved NPL this quarter and just kind of wanted to get your take on just anything locally that you're seeing.
Even just stepped pockets within DC, where there's a little bit more sauces and others that are.
You bet.
You're paying closer attention to as part of the cycle.
Catherine This is Dan I mean, when you look at credit quality.
Peeling back the onion from the high level. If you look at every really every category, particularly as it relates to CRT, including the builder related.
Business everything is really solid so I would not knowing.
What youre referencing to from earlier I would imagine that may be.
Client specific but in terms of.
Trends within the market.
Things continue to look.
And perform extremely well some of.
What I intended to communicate and one of my comments as some of our.
Increased runoff from this past quarter is is from that from successful projects coming to completion prior to anticipated maturity meeting builders building out projects and and successfully selling out of them. So we're I think we're pretty well diversified and pretty well balanced around our region. We're not heavy in any one type of product type or one sub market.
Our our multifamily stuff tends to be.
You know around around Metro stops and Redeveloped properties.
So.
Short answer is we're not really seeing signs of weakness.
But.
We obviously continue to pay attention to what's cooking.
Great. Thank you very much great quarter.
Thank you Kathy.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Stephen Kilmer of GE Research Steven. Please proceed.
Hey, guys good afternoon.
I see.
I was wondering if you could just contrast on kind of the the relatively.
A low level of loan growth this quarter versus last quarter, where the dynamics kind of the same there or was there something unique going on here.
Yes, Steve This this is Dan.
I think we did have.
As a.
Tried to allude to in my comments, our actual commercial loan when a couple of things move it. We clearly made were more active in selling mortgage production.
In the second quarter and not putting as much in portfolio at the same time that some prepayment speeds increased.
In the second quarter, given what happened to to rates and drive of activity there.
On the commercial side actually our originations in the second quarter.
Were significantly higher than they were in the first.
But the nature of that production.
Was far different with being less fully funded.
Perm loans on the Investor and owner occupied real estate and more in the construction related book, which which meant that our our.
Our funding from those originations was quite a bit lower than it than it was in the first quarter and what it had been historically.
And then and on top of that we just happen to have a couple of large large.
Credits refinanced out of the portfolio right at the end of the quarter, which.
Had a kind of a material effect on on quarter end balances and therefore average growth so.
Yeah, we feel really good about the the ramp up of commercial production from first to second quarter. Just a few of those things I mentioned had it at a direct impact on on the net growth.
For the quarter.
And Sharon obviously re shapes.
Our former outlook for the entire year growth rate.
Okay, Yes that makes sense so soon.
On tax I mean, do you expect funding to pick up over the next quarter or is this sort of a longer term.
Kind of adjustment.
You know the the.
Well, that's the nature of the credits that drove a lower funding level are typically shorter term credits. So 12 to 18 month construction draw periods.
So you should see funding in that in that type of production ramp up over the course of the next couple of quarters.
What will offset that is continued success and other projects that may that may have some of those self liquidating. So good self liquidating pay offs.
But our efforts around driving.
More cnine business.
And and hopefully picking up some additional owner occupied and investor real estate opportunities hopefully will moderate that that.
Utilization or funding and funding rate.
Okay. Okay. Good and then just on the on the mortgage banking front I mean, you did put out the put out the guidance for expected.
Fee revenue.
For mortgage banking going forward I was just kind of wondering what your thoughts are as far as I was putting on the balance sheet I would have to happen for you for you guys to find that more attractive or are less attractive.
Yeah the.
That that decision.
A couple of different things that play into that we originate.
A good volume of CR, a related long term fixed rate.
Mortgages.
That we heretofore have been originating and then pulling together and selling those off balance sheet, because we don't want to interest rate risk now we're doing that on a flow basis, and so there never really hitting never really hitting portfolio. The other aspect and probably even more meaningful is that.
The construction Perm business for us, which typically flows into construction category and then to a permanent mortgage we typically or have right on a 5171 in some cases, we'll go as far as a 10, one arm on that product the competitive environment for a good bit of 2018 into 2019 has been local competitors that have been writing that on 30 year fixed at spreads that are just.
Incredibly unattractive and and so Thats why we had.
Taking a pause.
In that business not that we won't originate we're just going to originated at a profitable level.
So that will probably reverse itself at some point I mean, there's got to be a tolerance or a bucket that our competitors will fill up and realize that.
Not as advantageous as maybe they think today.
Okay, and then just finally for me.
You know any any sort of.
General commentary on the pipeline going forward and how you guys look at that.
You talking about lending pipeline, yes, yes, yes, yes.
We feel really good about our commercial pipeline.
As we built throughout the course of the year so.
Our expectation is that.
Production will continue to be strong.
And our efforts will pay off its.
Got a few moving parts here in the second quarter that will.
Rectify on the back door side of things.
But but.
Speaking directly we've got strong pipeline heading into the third and expect through the fourth quarter.
In the commercial space.
Okay very good thanks.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to the President and CEO , Dan Schrider for any closing remarks.
Yes, Thanks, Ian just wanted to thank everyone for taking the time to participate this afternoon.
As I always we would appreciate your feedback to let us know how effective our call was today and you can email your comments to IR at Sandy Spring Bank.
Dot com so have a great afternoon, everyone.
The conference is now concluded. Thank you for a time todays presentation you may now disconnect.