Q3 2019 Earnings Call

Good day and welcome to the Sandy Spring Bancorp Inc. earnings conference call and webcast for third quarter 2019.

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Please note. This event is being recorded I.

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

Thank you and good afternoon, everyone. Thank you for joining us for a conference call to discuss Sandy Spring Bancorp performance for the third quarter of 2019, but this is Dan Schrider speaking I'm joined here today by my colleagues until May of two of our Chief Financial Officer, and Aaron Kessler General Counsel for Sandy Spring Bancorp.

As usual today's call is open to all investors analysts in the media no real out like webcast of today's call and a replay available on our website later today.

Before we get started covering highlights from the quarter and taking your questions Air and we'll give the customary safe Harbor statement.

Thank you Dan good afternoon, everyone.

Spring Bancorp will make forward looking statements in this webcast.

Subject to risks and uncertainties.

Forward looking statements include statements of gold Retentions earnings and other expectations estimates of risks and future cost benefit [laughter] probable loan and lease losses.

The market risk statements of the ability to achieve financial another goal.

Forward looking statements are subject to significant uncertainties because they are based upon are affected by management estimates projections of future interest rates market behavior, other economic conditions future laws and regulations variety of other matters, which by their very nature are subject to significant uncertainties because of these uncertainties Sandy spring Bancorp.

Actual future results.

Very materially from those indicated in addition, the company's past results of operations do not necessarily indicate its future results.

Thank you Aaron.

Please report today that we delivered a strong financial performance and the third quarter. The results show that we're hitting on all cylinders and that all key segments of the company are contributing to our overall success.

Our ability to execute on the fundamentals are solid and we're going to use this momentum to springboard.

The fourth quarter.

As you know last month, we also announced our plans to acquire Revere Bank I'll comment on this partnership a little later.

However, the results from this past quarter put us on a great position as we prepare to begin integrating revere into Sandy spring.

Our continued success is evidence that are highly personalized approach to client service works.

As we grow we remain deeply committed to delivering the personal service.

Our customers.

Come to know and being a true advocate for our clients.

There are few areas I want to highlight from the press release, we issued this morning.

Net income for the third quarter, 2019 was 29.4 million or 82 cents per diluted share compared to net income of 29.2 million also 82 cents per diluted share for the third quarter of 2018.

Net income of 28.3 million or 79 cents per diluted share for the second quarter 2019.

We achieved a 10% increase in deposit growth from year end 2018, and our loan to deposit ratio went from 111% to 102%.

The year to date deposit growth included a 19% increase in noninterest bearing deposits and a 45% reduction in wholesale deposits.

This impressive increase in deposits allowed us to reduced higher cost borrowings, which decreased by 533 million from year end and provided a positive impact on net interest income.

All year, we have executed our business plans to strategically grow core deposits and we continue to see great results from our teams in both retail and commercial banking.

Our net interest margin was a 3.51% for the third quarter 2019, compared to 3.7% to 1% for the third quarter 2018, and 3.54% for the linked second quarter.

In prior years quarterly margin included a $2 million recovery. So we would have otherwise been 3.6%.

Quarter to quarter. We've also seen a significant reduction in interest costs. This was driven by substantial end market deposit growth coupled with lower interest expense on FHLB borrowing.

Compared to the third quarter of 2018 total loans increased 3% and commercial loans grew 6%.

Specifically funded loan production increased 62% quarter over quarter. This was driven by an increase in utilization and an increased level of commercial production.

Commercial loans were offset by a decline in the mortgage portfolio due to refinance activity and our strategic decision to sell the majority of new mortgage loan production.

Nonperforming loans in the third quarter totaled 40 million compared to 38 million in the prior quarter and 33 million in the third quarter of 2018. This modest increase is primarily due to an increase in segments of the portfolio secured by residential real estate.

We're working with these consumer borrowers to get them current and we feel very confident about resolution.

We had a truly remarkable quarter generating noninterest income delivering a 24% increase compared to the same period in the prior year, notably our mortgage banking activities were up by 2.7 million and we achieved growth in both wealth and insurance.

We saw a 6% increase in noninterest expenses in the third quarter, which can be attributed to several non run rate items. This includes higher compensation costs associated with hiring bonuses and seasonal incentive based sales programs onetime marketing expenses in the beginning of some M&A expense as well as the cost of consolidating.

Couple of our office locations, which is a last items related to the Washington first acquisition. However, these items were significantly offset by a reduction in FDIC insurance expenses.

The non-GAAP efficiency ratio came in at 550.95 for the third quarter compared to 49.27 for the same quarter of the prior year.

The company a total risk based capital ratio of 12, 70, a common equity tier one risk based ratio of 11 37, a tier one risk based capital ratio of 11, 52, and a tier one leverage ratio of 996 overall, our capital position remains in good shape to fuel continued growth.

Like no update you on a couple of other initiatives and news at Sandy spring.

As previously mentioned last month, we announced or intend to acquire root beer bank.

Revera is a strategic end market acquisition that will deepen our presence in our core market and pushes through the 10 billion dollar threshold in a meaningful way.

Upon closing, which we anticipate to occur late in the first quarter of 2020.

We'll be more than 11 billion in assets offerings sophisticated products and services.

Delivered in a very personal way and focused on helping our clients in communities achieve success.

As we prepare to begin the integration we are focused on ensuring a seamless transition for our clients and employees alike.

Revere banks is co Ceos can cook, Andrew flood, joining sandy spring and executive roles. We will cost we're confident that we'll achieve just that.

In other leadership news. We also recently welcomed a new general Counsel, one executive Vice President to the company Aaron Caswell, Aaron joined our company last quarter upon the retirement of our prior general counsel.

Aaron comes with extensive experience working with financial service companies of all sizes as well as a deep understanding of this local market.

And we also continue to look for ways to invest in our people and to prepare for the next generation.

That's why this quarter, we launched a training and development program aimed at preparing individuals for career specifically in commercial banking.

Whenever wherever possible, we want to grow from within and provide meaningful career paths for our employees through this program and other training and development initiatives. We have throughout the bank you will continue to build out a pipeline of talented professionals to serve our local business community and help ensure our sustained success.

So overall, we're very happy with the quarter and its evidenced that we're producing the kind of results that we need the strategic acquisition of Revere enhances the momentum we already have working in our favor and we look forward to continuing to build on that success. This concludes my general comments for today and we'll now move to your questions.

We will now begin the question and answer fashion to ask a question you make press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

This time, we will pause momentarily to assemble a roster.

Our first question comes from Casey wet men with Sandler O'neil. Please go ahead.

Good afternoon.

Afternoon case by case.

I just wanted to start with <unk> expenses, you know first I think you just mentioned I'm a bunch of kind of more one time items that impacted this quarter between bonuses marketing.

Maybe some consolidation of back office can you be I guess more specific as to its actually a what those numbers were this quarter impacting the expenses.

Yes, Casey this is Phil I think when you take all the things that Dan mentioned add those up in comparison to the.

Kind of rebate, we want to call it related to the FDIC insurance was about net differential of about a million dollars.

Better all really in our eyes kind of one time or seasonal type of expenses here.

In this particular quarter. So have you take that move that back out we were bad effectively flat to the prior quarter. When you net everything in each directionally.

Okay got it so you're saying those expenses all around.

2 million versus the 1.2 FDIC correct, yeah. Okay. That's exactly right Q2, Q2 versus wanting to net out to about a million dollars difference.

Got it.

Okay and then another question just on the FDIC assessment credit do you expect to get a credit in the fourth quarter as well and you have any idea what that amount might be or should we not consider that in.

Yeah, we certainly believe we could I'm not sure that we know for sure that we will I don't believe if we do it will be as large as the credit we got in this quarter just based on what might for main so as an estimate.

We might get maybe to have half of what that looked like this quarter in the fourth quarter, if we get it at all.

Okay, great. Thank you and then let me just asking about the margin you did a very nice job holding it this quarter I guess, what Phil what's your outlook. There just over the next few quarters with potentially more rate cuts and before we get revere on there.

Yeah, I would I would think that.

Yeah, we will probably trend down a little bit ended a high 340 range in the next quarter. So I mean, we're going to see the.

Bigger impact other September cut obviously coming through in.

In.

Future periods as well as an expectation that will be another cut.

Here shortly so I would I would think overall margin levels in the mid 340 for the fourth quarter and then into.

The first part of next year prior to the acquisition.

Our next question comes from Kathryn Miller with KBW. Please go ahead.

Thanks, Good afternoon.

Good afternoon Kinda Kathryn.

One follow up to Casey's expense question, how are you thinking about expense growth as we move into next year in and eat your you're building up towards the 10 billion dollar across.

Yeah, Catherine this is Phil.

Absent again, what we know will happen when we combined the two companies said.

Yes.

Ended the first quarter.

Kindness legacy Sandy spring I would we would look to probably grow expenses, just naturally 4% to 5% and on an annualized basis.

No that we really see significant amount of additional build up relative to crossing 10, I think we've talked about this for a while it we feel like we've made other investments to this point in a variety of ways that.

Put us in a pretty good position for doing.

Doing just that.

Okay, great perfect and then on the gross outlook.

You talked a little bit about how you're thinking about growth and how much of that the strategy to sell residential mortgages. You think will continue in into next year.

Catherine Dan I think you know that that was that decision was driven by a couple of things one is to become much more effective and driving driving mortgage production.

From new sales home sales as well as refinances and so we moved we've moved the percentage of our production.

You know from from our realtor connections and centers of influence on on the sale side of residential much higher than we had in the past as you recall, we were highly dependent upon our construction perm business.

So I think we've we've achieved great success in driving that type of production. We want that all occurred at the same time that the the competitive rates on the construction Perm business and the terms being offered by some key competitors just made that have a less attractive business for us. So I think as that is that business.

Returns I think this is.

Not a not forever phenomenon in terms of the competitive market around the construction firm will hopefully see production come back which would be portfolio production and well at the same times maximizing opportunities to sell so that clearly has had an impact on.

Net loan growth over the course over the year.

As as we continue in this current rate environment I mean, we hope to continue to drive the type of gain on sale numbers, but that's in there is a.

Obviously, a rate phenomena associated with that so as long as we're in this rate cycle. We would expect to continue to see that occur. Good news on the production front just to kind of give you a sense.

Hi behind the scenes.

In the current quarter, we had 450 to 500 million in commercial loan production, we had another north of 400 million and mortgage production. So we're we're cranking out north of 850 million and overall production with between those two books. It's just so much of it went off balance sheet to drive game.

So we like that we like the momentum in terms of production.

And we would expect that to a two you know effect loan growth on a go forward basis in a positive way.

Okay. So it's.

So you see my guidance for loan growth for next year maybe.

I am on organic basis outside of Revere kind of mid to high single digit how are you thinking about that yeah. I think that's fair based upon what we've seen thus far in 2019 in the and the and the production momentum that we're seeing now okay. All right great and then one last if I could any thoughts on Cecil.

And what you're the one time increase to there is our focus in 120 that was an open ended question Catherine [laughter] loving you could talk about [laughter] [laughter] no comment in any way shape.

[laughter] opinions all of it.

And then might get [laughter].

Well, we're still working our way through getting getting ourselves prepare for what that might look like at the at the for in the first quarter of next year, but we're not we're not still at a point, where we're comfortable kind of given an idea as to what that number's going to necessarily look like.

Okay No worries there all right. Thank you so much thanks guys. Thank you.

Again, if you'd like to ask a question. Please press Star then one.

The next question is from Steve Comrie.

Gee Research. Please go ahead.

Hey, guys good afternoon.

Hi, Steve I see.

Oh I just wanted to ask about the deposits I'm really strong growth again like in the second quarter. I was just wondering you know kind of how much of that you attribute to sort of the seasonal effects you guys usually have a known what you'd expect that to attract going forward.

Yes, Steve This is Phil I'm, not I'm not sure, but I wouldn't Miss in this particular quarter look at that growth is being seasonal.

Pretty much at all a I think it's a continuation of the momentum we have established in the market, even as weve moderated some of our pricing to.

Protect protect the margin and when you really kind of Peel back what happened there that deposit growth is actually even stronger because we paid.

Paid down.

Over $100 million or brokered Cds and loud another 15 to 20 million in public funds to run off so the real organic market driven growth. This is quite a bit more.

And it continues to be in a you know in all portion go the other deposit base.

Everywhere from commercial checking in on come our noninterest bearing demand deposits right on through money markets and time and so I think that it's I think it's just a continuation of our concentrated focus on efforts on on gathering deposits.

Okay very good that's all thank you.

Thanks, Steve there.

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

Thank you and thanks, everyone for joining todays call. We really appreciate you participating and we welcome your feedback. So you can always email that to us at IR and Sandy Spring Bank.

Dot com. So thanks, again and have a great afternoon.

This kind of the conference has now concluded. Thank you for attending today's presentation you may now disconnect.