Daniel Schrider - CEO, President & Director Ronald Kuykendall - General Counsel, EVP & Secretary Philip Mantua - CFO and EVP.

Catherine Mealor - KBW Austin Nicholas - Stephens Inc..

Good day, and welcome to the Sandy Spring Bancorp, Inc. Conference Call and Webcast for the Third Quarter 2017 Earnings. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Daniel Schrider, President and Chief Executive Officer. Please go ahead, sir..

Thank you, and good afternoon, everyone. Welcome to our conference call this afternoon to discuss Sandy Spring Bancorp's performance for the third quarter of 2017. This is Dan Schrider speaking, and I'm joined here today by our Chief Financial Officer, Phil Mantua; and General Counsel for Sandy Spring Bancorp, Ron Kuykendall.

We appreciate your time this afternoon. 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 on 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, and good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are certain to risks and uncertainties.

These forward-looking statements include, statements of goals, intentions, earnings and other expectations; estimates of risks and future costs and benefits; estimates 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, and other economic conditions; future laws and regulations; and a variety of other matters which, by their 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 you to everyone on the call for joining us. We will be happy to take your questions immediately after I share some brief remarks. As our press release issued earlier today indicates, we demonstrated solid performance during the quarter, as we prepared for the closing of our acquisition of WashingtonFirst Bank.

As has been the case in recent quarters, our results continue to be driven by a high-performing team, generating strong core operating performance with a focus on operating efficiency. Our growth and balanced results are generating very consistent performance in this highly competitive greater Washington, DC region.

And here's just a quick rundown of the main highlights from the release.

Net income for the third quarter of 2017 was $15.1 million or $0.62 per diluted share compared to net income of $13.5 million or $0.56 per diluted share for the third quarter of 2016, and net income of $14.7 million or $0.61 per diluted share for the linked second quarter of this year.

On a core basis, pretax pre-provision income for the quarter was $25 million compared to $21 million for the third quarter of 2016. That's a year-over-year increase of 17%. Our continued strong core performance was driven by higher net interest income, which increased 13% in the third quarter of 2017 compared to the third quarter of 2016.

Total loan growth for the quarter was solid and in line with expectations as total loans increased to 11% compared to the third quarter of last year and up 1% compared to the linked second quarter. The third quarter did include the sale of approximately $22 million in first-time homebuyer fixed rate mortgages out of the portfolio.

These types of sales will continue on a periodic basis. Growth within our commercial loan segments of 15% led to year-over-year growth. And our outlook for remainder of 2017 loan growth continues to be consistent with our experience in 2016.

The provision for loan and lease losses was a charge of $900,000 for the third quarter compared with the charge of $800,000 for the third quarter of 2016 and $1.3 million for the linked second quarter. Our credit quality metrics continue to be very solid and the portfolios are performing very well.

Going forward, we do expect provision expense will be primarily the result of net loan growth. The net interest margin was 3.54% for the third quarter compared to 3.50% for the third quarter of 2016, and consistent with the core margin we experienced for the second quarter of this year.

Our margin improvement reflects the impact our team has had by driving loan growth, executing on funding strategies and managing earning asset yields and funding costs. We continue growing core deposits from both retail and commercial banking relationships.

At September 30, combined non-interest-bearing and interest-bearing transaction account balances increased to 11% compared to balances a year ago.

Our continued ability to fund new asset growth through the expansion in core deposits is a key strength of our company, and a strength that we can look forward to using once we're able to integrate bankers and branches from WashingtonFirst.

Noninterest income was solid at $12.7 million for the third quarter, and level with the same quarter of 2016, despite a $0.5 million decline in mortgage banking income from the prior year. On the positive side, wealth management income for the third quarter increased to $4.9 million or 12% compared to the third quarter of 2016.

Agency commissions from our insurance business increased 9% for the third quarter compared to the same period last year, given our expansion through acquisition that occurred in 2016.

Expenses continue to be well-managed as evidenced by our non-GAAP efficiency ratio of 53.76% for the current quarter compared to 56.33% for the third quarter of last year and 54.10% for the second quarter of 2017.

This marks consecutive quarters of improved efficiency, even in the face of merger-related costs of approximately $300,000 in this quarter. Our success is primarily the result of growth in net interest income, coupled with the effects of focused expense management.

Our capital position remains strong with total risk-based capital ratio of 12.01%, a Tier 1 risk-based capital ratio of 10.99%, a Tier 1 leverage ratio of 9.28% and a tangible common to tangible asset ratio of 9.18%. Overall, organic growth continues to be strong, and we continue to build our revenue-producing teams with newly acquired talent.

Our client experience work continues as we build a unique banking company focused on delivering the best possible solutions for our clients through a consistently remarkable experience. And lastly, the merger integration work is in full force as we look forward to moving ahead on our definitive agreement to acquire WashingtonFirst bank.

Shareholders of both organizations have approved the transaction, all regulatory applications and filings have been submitted. The work between the teams at Sandy Spring and WashingtonFirst is going well, and they're working closely together to deliver a smooth and successful transition.

And as we've said, we continue to look towards a fourth quarter closing and a first quarter of 2018 core systems conversion. That concludes my general comments for today. We'll now move to your questions. If you can just identify yourself when you come on we'd appreciate it, so we know with whom we are speaking..

[Operator Instructions]. First up is Catherine Mealor with KBW..

I want to start with the margin. If you look at your increase in deposit costs, it looks like the money market accounts had the highest linked quarter increase, about 15 bps.

Can you give any color around the dynamics there, and then your outlook for how we should think about deposit betas moving forward for you at this level of growth?.

Catherine, this is Phil. There is no question that the single biggest driver in overall deposit costs here through the quarter and probably the last few quarters is related to the money market account.

I think it's predominantly driven by trying to keep pace with the change in short-term interest rates and having that product be the most affected, right and even more so, in the pricing of our tiers within that as much or more than the teaser rate or whatever that we have -- that we offer to get folks in the door.

I think it's also -- and I think we have talked about this before that and just the way we positioned our time deposits from a pricing standpoint, are all also designed to help with the transition of the deposit base of WashingtonFirst down the road after everything is integrated and knowing that we'll need to translate some of the nature of their deposits into more core and trying to anticipate that by being more aggressive at this point to the detriment, let's say, of the margins.

So as we look at the fourth quarter, I would think our margin will stay probably about where it is, maybe even compressed 1 basis point or 2 basis points. And that will be probably dependent both on our need to continue to price that way and also just the level of loan growth we get on the asset side..

Okay. That's really helpful. And then any update you can give on WashingtonFirst, how that's going? I know you said that you still expect it to close in the fourth quarter.

Any update on retention of talent and then also new recruiting for lenders around that area as we move into next year?.

Sure. Catherine, Dan. We have, as I mentioned prior quarters, we had informed employees of WashingtonFirst that we intended to retain early -- very early back in July.

And then we're just about completing the process of having those formal -- those formal communications have occurred and then we have folks accepting their new employment assignment, where they're going to be working, who they're going to be working for.

We had -- leading into that, we had work groups from both companies collaborating to determine what's in the best interest of both the client relationship and the employees. So in most cases, folks that have been sitting in a seat in their headquarters will continue to do so.

And we're modifying our process to put our now new team together as close to the client as possible. So we've been very successful in holding onto the frontline talent, which has been key. We obviously did not anticipate not offering all of those folks a position. And so we're in really good shape there.

We are awaiting regulatory approval, which is really the last piece of the puzzle that will allow us to close in the fourth quarter. And we, at this point, continue to anticipate doing so. So things are moving along really well with the combined groups. I think there's a lot of enthusiasm, a lot of energy.

Both companies are continuing to perform well, and we'll take that momentum into the combined entity in the first quarter..

[Operator Instructions]. The next question comes from Austin Nicholas with Stephens..

Maybe just on loan growth.

Could you remind us of your outlook there? And any opportunities that you are looking to grow in terms of government contracting or any specialty lines from here?.

Austin, this is Dan. Happy to comment there. We have -- most of our talent acquisitions that we've brought into the bank here for this year, have been on more of a focus on C&I and even closer to the middle market in the C&I space in addition to bringing in talent on the government contracting area.

So clearly, what does that reveal? That reveals we've been really solid at growing diversity of our lead portfolio over time, and we want to complement that by amping up our C&I loan generation.

And so that's where the talent that we have brought in and we'll continue to focus on bringing in what the -- most of that has come from folks that are joining us after the Cardinal merger with United Bank..

Understood. That's helpful. Maybe just turning to credit real quick.

Could you maybe give some color on the commercial loan charge-off that drove that number up a bit this quarter in terms of what industry it's in, if you can, and then maybe your outlook on credit?.

Sure. Austin, this was really put in the isolated category, a C&I transaction within health care provider and one that we've early identified, been working through, it was fully reserved in advance of this activity. But we're going to continue to work towards achieving any type of recovery effort we can.

But we felt this was the appropriate time to go ahead and write that asset off. And not indicative, I think, it's important, it's not indicative of an issue within a segment of the portfolio, really isolated to one issue that one borrower had. And our outlook going forward, we had nice reduction in NPA's during the quarter.

Our measures look really solid going forward. And outlook is that we're really pretty stable from a credit metric standpoint. Delinquency is down this quarter over last. So everything is pointing in the right direction.

And at the same time, I'll say that in anticipation of being a much larger organization once we close on the transaction, it's anticipated here. We put a lot of effort into kind of continuing to build our credit risk management infrastructure, anticipating that will continue to be -- continued growth in the portfolio.

So feel really good about where we are from a credit standpoint..

Great. That's helpful. And maybe just 1 last question on your fee income. I know you had a goal of kind of increasing that concentration to total revenue over time. And you've seen some nice growth in the wealth management side of things.

Are you continuing to target the kind of RIAs potentially to grow that from an, I guess, an inorganic perspective? And is that kind of off the table right now with WashingtonFirst kind of the focus and is that -- could we maybe expect that to kind of ramp back up once that transaction is integrated?.

Austin, this is Phil. I think the first thing to recognize, of course, is the overall percentage of fee-based income as -- to total revenues is probably reduced as much by the growth in our net interest income through our balance sheet success in growing both loans and deposits with a more modest growth rate within the fee category themselves.

But having said that, we still continue to have a focus on, I think, as you referred to inorganic or through acquisition growth in both the wealth space and on the insurance front, we continue to work on those opportunities even as we're working through the integration on the bank side.

So I think we would continue to be hopeful to add to both of those fee areas over time through either our other RIAs or other agencies that would fit the nature of our business. That hasn't changed..

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

Thank you. And thanks everyone again for joining the call. We continue to be very enthusiastic and excited about what the future holds as we conclude this integration with WashingtonFirst and what it will mean for us and for you, our shareholders that are on the call. And we really appreciate the time you spent with us today.

And I look forward to giving you further update as we move forward on this integration. We'd appreciate receiving your feedback, if you have any, as to the value of the call. And you can e-mail us or any comments you have at IR at sandyspringbank.com. Thank you, again, for your time, and have a great afternoon..

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