Daniel Schrider - President and Chief Executive Officer Ron Kuykendall - General Counsel Philip Mantua - Chief Financial Officer.

Catherine Mealor - KBW Austin Nicholas - Stephens Bryce Rowe - Baird Casey Whitman - Sandler O'Neill.

Good afternoon and welcome to the Sandy Spring Bancorp, Inc. Conference Call and Webcast for Fourth Quarter 2016 Earnings. 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 also note that this event is being recorded.

I would now like to turn the conference over to Mr. Daniel Schrider. Please go ahead..

Thank you and good afternoon everyone. And welcome to our conference call to discuss Sandy Spring Bancorp’s performance for the fourth quarter of 2016. This is Dan Schrider speaking and I am joined here today by our Chief Financial Officer Phil Mantua and General Counsel for Sandy Spring Bancorp Ron Kuykendall.

We appreciate you all joining our call today. 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 at our website 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?.

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 risks and future cost and benefits, assessments of probable loan and lease losses, assessments of market risks 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 in 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, and thank all of you again for joining the call. As I mentioned, we will move to your questions after I share some brief remarks. As the headline of our press release issued earlier today indicates we achieved very strong net income for the fourth and final quarter resulting in record annual earnings for 2016.

The results continue to be driven by a terrific team of bankers, strong core operating performance, prudent balance sheet management and a focus on operating efficiency.

Our team continues to strive for and achieve strong growth and balanced results in a highly competitive market, proving that the Sandy Spring Community bank business model is working. So here’s just a quick rundown of the main highlights from the release we issued earlier this morning.

Net income for the fourth quarter of 2016 was $13.3 million or $0.55 per diluted share compared to net income of $12.8 million or $0.52 per diluted share for the fourth quarter of 2015 and an income of $13.5 million or $0.56 per diluted share for the linked third quarter of 2016 As you may recall the prior year quarter included a $4.4 million pretax recapture of previously accrued litigation expenses as well as a $1 million share of contribution.

On a core basis, pre tax pre provision income for the quarter was $20.8 million compared to $16.7 million for the fourth quarter of 2015, a robust 25% increase. Net income for the year ended December 31, 2016, was $48.3 million or $2.00 per diluted share compared to net income of $45.4 million or $1.84 per diluted share for the prior year.

Our continued strong core performance was driven by higher net interest income which increased 9% in the fourth quarter of 2016 compared to the same quarter in 2015. Building on the first three quarters of the year loan growth continued steadily at double digit year-over-year rate.

Total loans they increased 12% compared to the fourth quarter of last year and were up 4% compared to the third quarter of 2016. This was driven primarily by year-over-year growth of 17% in our commercial loan portfolio which is a key focus of our corporate strategy.

The provision for loan and lease losses for the fourth quarter of 2016 was a charge of $600,000 compared to a charge of $1.9 million for the fourth quarter of 2015 and a charge of $800,000 for the linked quarter of 2016.

The decrease in the current quarters charge versus the prior year quarter is a result of lower net charge offs and continued improvement in our loan metrics which partially offset the effects of healthy loan growth. The provision expense for all of 2016 totaled $5.5 million compared to a charge of $5.4 million for 2015.

Our net interest margin expanded to 3.52% for the fourth quarter compared to 3.45% for the fourth quarter of 2015 and 3.50% for the linked third quarter of 2016. Our team has done an excellent job managing all variables in the margin equation.

And on the deposit side at December 31, combined on interest bearing and interest bearing transaction account balances increased 12% compared to the balances a year ago. Our ability to continue to grow retail and commercial transaction relationships and balances are key strengths of our franchise.

Total deposits and certain other short-term borrowings that are part of overall funding sources derived from our clients also increased 10% compared to December 31, 2015.

Fee income, it was solid for the fourth quarter increasing to $12.3 million for the quarter compared to $12.2 million for the fourth quarter of 2015 did a higher mortgage banking income that more than offset the decrease in income from wealth management.

As you will recall, we sold a portion of our loan -- assets under management in the first quarter of 2016. Our wealth business lines mortgage banking division and insurance agency are well positioned for the future.

Our key businesses are not independent units, they are rather into integrated lines of business aimed at meeting the needs of clients and enhancing their overall engagement with our company.

Expenses continue to be well managed and adjusting for the FHLB pre payment penalties in both the first and second quarter of this year noninterest expenses remained very stable. For the fourth quarter of 2016 our non-GAAP efficiency ratio was 57.54% compared to 63.08% for the fourth quarter of last year and 56.33% for the third quarter of 2016.

For the 12-months ended December 31, 2016 the non-GAAP efficiency ratio was 58.66% compared to 61.09% for the 12-months ended 12/31 2015.

At December 31 our capital position remained very strong with total risk based capital ratio of 12.8%, a tier 1 risk based capital ratio of 11.74% a tier 1 leverage ratio of 10.14 and a tangible common equity to tangible asset ratio of 9.07. And given the performance of our shares there were no share repurchases during the quarter.

With organic growth our priority we continue to see both and bank and fee based acquisition opportunities as well as adding to our revenue generating teams through individual hires and team lift outs.

Our focus and commitment to shareholders remains unchanged consistently produce strong and balanced operating earnings from a diverse revenue stream that results from creating meaningful remarkable experiences for our clients, our Sandy Spring employees and our communities and I hope that you find our results this quarter and the year a demonstration of that focus.

That concludes my general comments for today and we will now move to your questions. [Andrew] if you have the first quarter please I would appreciate if you would state your name and company affiliation as you come on, so we know with whom we are speaking..

We will now begin question-and-answer session. [Operator Instructions] At this time we will take our first question from Catherine Mealor of KBW. Please go ahead..

Thanks, good afternoon..

Good afternoon, Catherine..

Hi, Catherine..

And Phil, you had mentioned in the past that you believe the margin would be relatively stable with fee rate hikes and then would move slightly lower if we didn’t see any rate hikes. We already got one in December and clearly with the move in rates there is an optimism that we’ll see more this year.

Can you just kind of update us on your thoughts on how you see the margin moving from here just given the new rate outlook?.

Sure, I’ll be glad to. I think that it’s very similar to the way we’ve discussed things in the past. I think that we’ll certainly maintain the level that we ended the year into the first quarter here. We actually ended in December with a margin of 353 so it’s another basis point higher than the quarter’s average.

I could see that expanding a little bit basis point or two in the first quarter, again maintaining throughout and then we have an expectation at the moment that there might be a second rate increase in the third quarter, [Indiscernible] in the third quarter and then from there we might see a further expansion but I don’t have anything at the moment to your question about rates being more on the upside than not, that doesn’t tell us that we are going to at least maintain margin if not have it expand at some modest amount throughout the course of the year..

And what kind of trends are you seeing so far in deposit competition in the markets.

Are you seeing if your competitors move aggressively at or still too early and how do you think that’s going to play out over the next couple of rate hikes?.

Yes I don’t know that we’ve seen any over writing significant move in terms of the competitive landscape on deposit rates if anything we’ve got more aggressive and probably moved up the ranking so to speak relative to the areas where we think that outside of what we are doing in terms of core commercial [BBA] relationships et cetera and we need to augment for liquidity purposes which would be our money market premier, which we’ve got more aggressive loan in terms of teaser rate and our time deposits where I would suggest we are probably now in the upper third of offerings in that part of the market as oppose to maybe having been more in the middle before.

So, it’s important enough for us to almost get out in front of some of the other folks in some ways and yet hasn't seen anybody else really react in any way different than in the past based on where rates have gone..

And borrowings were up a lot this quarter, how do you expect we should model kind of management growing borrowing versus managing your loan to deposit ratio?.

Well, I think that the liquidity management is certainly something that we really going to be focused for obvious reasons.

I mean we ended the year from a loan to deposit standpoint fairly close to one-ten, that year end kind of uptick and that ratio is not unusual because of what happens on some of our deposit relationships, but then rebuild again early in the year.

But I think that the reason we’re being as aggressive as we are in terms of the deposit pricing, part-time deposit pricing whatever is to help alleviate that pressure and that within in turn minimize the need to maintain the kind of borrowings level that we have.

One thing we do have to remember that in terms of that borrowing level at year-end and again that's not unusual for it to be higher than other times during the course of the year, as we also kind pre-funded what we anticipated doing and we disclosed in the release related to paying off our remaining trust preferred debt which was $30 million of that run-up.

So that occurred in and we’ve adjusted accordingly..

Okay, great. Make sense. Great quarter. Thank you so much..

Thanks Catherine..

Thanks Catherine..

Our next question comes from Austin Nicholas of Stephens. Please go ahead..

Hey, guys. Good afternoon. It’s Austin. Nice quarter. Hey, guys.

So, just on – maybe just on fees and your outlook there going into 2017 with the rate hike behind us, and another one coming, maybe you just talk about how that impacts both the mortgage business and maybe your other businesses as wealth and insurance?.

Austin, this is Dan.

As I mentioned in my comments, we did some rightsizing on the wealth side early in the year with the divestiture of part of the wealth assets, so we are – we feel like we’re in a pretty good spot right now in terms of that business and the ability to grow our fee-based going forward, while the same time we do expect to continue to invest and revenue producing people in our wealth business throughout the years as well.

The mortgage side had a solid year and apart from the fluctuations that come with fast or speedy swings in rates we would expect their ability to generate fee income to be pretty consistent throughout the year based upon how we performed in 2016. So, I think outlook on both of those as well as insurances is a consistent trend..

Okay. That’s helpful. And maybe….

Austin, I might add, also remember on the insurance line we did buy the one agency in August the last year, so we’re going to get annual effect of having their income stream throughout the course of the totality of 2017 which by itself will grow that revenue line absent of any other organic growth that we expect..

Right, right. Hope that makes sense.

And then maybe just real quick on mortgage, what percentage was your purchase versus refinement in the fourth quarter if you have it?.

Yes. Let me see if I have that often, I’m not sure if I do. And if not try to get that before we get off the call as others may ask some questions here. We got broken down in a couple other ways in front of me but I don't have it in that respect at the moment..

Okay. No worries we can take that offline or later if need be.

And then just my question, bigger picture, M&A, any change in the message there, anything you're seeing in terms of potential partners being more willing to look at a partnership just given the run-up in valuations?.

Austin, it’s Dan. I would not – I wouldn’t say that there's been any change in the number of and frequency of dialogue that goes on there.

I obviously have the same question myself with kind of the effect over the last 60 to 90 days in terms how share is performed, but I think those that are interested in exploring the idea of a partnership or kind of committed to that process, so I haven’t anybody kind of back off of those conversations as result of the latest moves in bank stock.

So I think our overall messages and activities there are consistent with prior quarters..

Okay, great. Well, thanks for the questions, guys. I think that’s all I have..

Thanks, Austin..

Thanks, Austin..

Our next question comes from Bryce Rowe of Baird. Please go ahead..

Thanks. Afternoon guys..

Hi, Bryce..

Just a quick one on the allowance, so I’m sorry to ask this, I know this just gets asked almost every quarter, but you’ll continue to see the allowance go down as a percentage of loans, clearly a good indication of healthy credit quality within the bank, but just curious how much lower that can go? And then maybe a secondary question is roughly where do you see new loans being book in terms of pricing and in terms of providing an allowance to begin? Thanks..

Bryce, this is Dan.

Our moves that you’re seeing in terms of provision expense and then overall allowance relative to loans is being driven by as we said before pretty consistent application of our methodology and the driver behind the last couple quarters here is really improvement in loan metrics, while at the same time we are growing the portfolio.

So, we’ll continue to move down that path. I would expect that again it will be – our provision expense would be driven by overall improvement in our metrics and growth.

Our credit quality metrics in really good spot right now, so how much how that contracts and therefore drive provision expense down probably tapers at some point but it's really methodology driven.

What we’re seeing in terms of loan pricing which I think was a second part of your equation or question on the commercial side is expansion in yields this last quarter as we look at kind of our pricing month by month, but probably not necessarily in lockstep with the degree in market rates have change, so we’re probably picking up about half of that expansion and that is driven by competitive pressures to not fully embrace where market rates have moved yet and that’s, but that’s goes from banks and non-bank that are active particularly on the CRE side of things.

But overall we’re seeing yields pickup and we would expect to see that to continue..

All right. Exactly what I was looking for. Thanks..

[Operator Instructions] Our next question is coming from Casey Whitman of Sandler O'Neill. Please go ahead..

Good afternoon..

Hi, Casey..

Hi, Casey..

Just to tack on to Catherine and Austin’s questions on deposits and M&A, just hoping to get an idea of how your high loan deposit ratio might play into M&A decisions here, I know we saw branch deal just outside your market recently, is that the kind transaction – that kind of transaction something you guys would look at it as mean to get deposits – to get more deposits?.

Casey, I think we probably look at it more from a longer-term strategic view of the value of whether it’s branches or whether it’s a whole bank acquisition and how we complement either geographically or by business line. But I will tell you that the value of the deposit franchise and its composition is an important part of that.

We feel very confident that we can continue to raise deposits and grow that book, but certainly the deposit composition of a target and the quality of that versus weather is organically grown or brokered or those types of thing certainly go into the equation as to attract to the target..

Okay, great. And then one more just the housekeeping item, other expenses they were down last quarter and tick back this quarter.

I guess what's in that line item exactly and is fourth quarter or third quarter better run rate?.

Casey, this is Phil. The fourth quarter if we look back over time there always a kind of a handful of timing related expenses for consulting services and the like that tend to hit us in the fourth quarter.

That just – I mean we can look back at last year’s and see the same thing, absent in the noise relate to the litigation reversal, but I would tell you that there is probably about $400,000 worth of expenses in this fourth quarter number and that other category that are not really going to recur as we move forward.

So I would adjust based on that as oppose to saying one or the other quarter is the more appropriate one to use for run rate. I think we were fortunate in the third quarter in some ways to have the number come where it is and so the answer kind of lies between the two would be the best way to look at it..

Great. Thanks. Good quarter..

Thank you..

This concludes our question and answer session. I would like to turn the conference back over to Mr. Daniel Schrider for any closing remarks. Please go ahead..

Thanks Andrea, and thank you all again for participating with us this afternoon. We appreciate receiving your feedback to help us evaluate the value of our call to you and actually I think we might have an answer to often this question that we might be able to offer here..

Yes very quickly, it looks like the overall percentage of loans that were purchased were about is about a third of everything that was produced, just to clarify..

All right. Thanks Phil and thanks everyone again. You can email your comments to ir@standyspringbank.com to again help us evaluate the value of today’s call. So thanks again and have a great afternoon..

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