Good afternoon everyone and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for Fourth Quarter 2018. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

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

Thank you, and good afternoon, everyone. We appreciate you joining us for our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2018. This is Dan Schrider, and I'm joined here by colleagues Phil Mantua, Chief Financial Officer; and Ron Kuykendall, General Counsel for Sandy Spring Bancorp.

As usual, our call is open to all investors, analysts, and the media, there s a live webcast of today's call and a replay that will be available on our website later today. After covering key highlights of the quarter, we will move to take your questions. But before we get started, 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 risks 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'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 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. Overall, 2018 produced record annual earnings. We completed a very successful integration of WashingtonFirst Bank, expanding our presence throughout the region and achieving solid core growth. And at the same time, our fourth quarter results were mixed, and I'll explain the strategic initiatives that are already underway.

However, the fact remains that the Company is fundamentally strong and we are well-positioned as we move through 2019.

Positive results in the quarter were driven by deepening existing and acquired client relationships, driving strong loan growth in all key client segments, managing costs and operating efficiently while continuing to invest in talent and technology.

We've broadened our funding strategies to facilitate ongoing growth in the Greater Washington region and bringing together two very successful organizations. And we are thrilled to have a team of professionals and clients from WashingtonFirst together as one as we enter 2019.

However, results in the quarter were hampered by disappointing mortgage gains, volatility in the equity markets affecting our wealth business, and soft insurance revenue. And I'll comment on this fee-based businesses later in my remarks. But, now, I'll cover some of the highlights from our press release issued this morning.

Net income for the fourth quarter of 2018 was $25.6 million or $0.72 per share compared to net income of $8.3 million or $0.34 per share for the fourth quarter of 2017, and net income of $29.2 million or $0.82 per share for the linked third quarter of 2018.

As stated in today's release, the third quarter results did include $2 million of recovered interest income from a previously acquired credit impaired loan and $600,000 in merger expenses. Excluding the after-tax impact of these items, the net income for the third quarter would have been $28.2 million or $0.79 per share.

The fourth quarter of 2017 results included $1.8 million of merger expenses and $5.6 million in additional income tax expense from the revaluation of DTAs. Excluding the impact of these items, the fourth quarter of 2017 EPS would approximate to $0.67 per share. Net income for the full year 2018 was a record $100.9 million, or $2.82 per diluted share.

The after tax effect of merger expenses, net of interest recoveries, was approximately $0.19 per share for the full-year of 2018. The net interest margin for the fourth quarter was stable at 3.57% compared to 3.57% for the fourth quarter of 2017, and 3.71% for the linked third quarter.

Excluding the interest recoveries recognized in the third quarter, net interest margin would have been 3.6%. The momentum in growth in our lending businesses in the quarter was very strong. On a linked quarter basis, total average loans grew by 2.4% and grew 9% when compared to the post acquisition combined portfolio at the beginning of 2018.

Our teams across the market continue to build strong pipelines of new opportunities in the highly competitive Greater Washington market. Average loan yields when compared to the third quarter, expanded 9 basis points comparing to 10 basis points on total deposits. This is net of all fair value marks and non-accrual interest adjustments.

This is on par with our experience in the third quarter. The provision for loan and lease losses was a charge of $3.4 million for the fourth quarter compared to a charge of $500,000 for the fourth quarter of ‘17 and $1.9 million in the linked third quarter.

The provision expense reflects the impact of a very strong fourth quarter of organic production and the impact of acquired loans being refinanced as they reach maturity during the quarter. Overall, credit metrics across the portfolios remained strong and all segments of our portfolios are performing very well.

Our reserve coverage of non-performing loans is very strong at 151%. With our newly expanded market and the momentum in our lending activity, deposit growth is among our most important objectives.

2018 proved a bit more challenging on the deposit front, due to more substantial deposit run-off in the WashingtonFirst portfolio prior to closing on 1/1/2018. And then there is changes in the deposit environment, which led to fierce competition and aggressive rates.

Consumers and businesses started watching rates more closely which drove shifts in cash management behavior. And we experienced approximately $150 million in the non-core deposit runoff in the fourth quarter and also experienced the normal seasonal fluctuations in the core commercial DDA base, primarily in our title business.

On a linked quarter basis, total average deposits were flat and post acquisition growth for the year 2018 was 6%. The combination of heavier runoff in the fourth quarter combined with strong yearend loan growth, our loan to deposit ratio came in higher at 111%. We view the current level as short-term.

And as we have previously indicated, we are comfortable operating with this ratio in the 105% to 110% range. As we move through the current quarter, we will price deposits on select interest-bearing products at or near the top of the market, and our sales teams continue their focus on driving core transaction accounts as we win new relationships.

We have many initiatives underway to enhance our deposit gathering success. We are also keenly focused on turning rate seekers into full banking relationships. A few of the initiatives include revamped incentive plans across the Company, emphasizing deposit and client or household growth.

We are also modifying the roles and goals of certain revenue positions. In short, we realize, it's all of our jobs to drive deposits and help earn our clients full banking relationship. We'll have more aggressive pricing and promotion for select deposit products such as our premier money market account, time deposits and checking products.

We're leveraging data analytics through Salesforce.com, we call it CX360 to develop additional strategies and calling lists to reach prospective deposit clients.

We're continuing to invest in additional talent to pursue deposit-rich industries in the Greater DC market, and implementation of a new online account creation platform that will launch in late second or early third quarter, allowing for a more seamless and expedited account opening experience for our clients.

The bottom line is that we're engaged in a corporate-wide coordinated effort to continue to drive new deposit relationships to enable continued asset growth. We've been in these environments before and we know what to do. It's one of the benefits of being 150 years old.

We've successfully navigated through times like these while growing new and existing client relationships and we look forward to doing it again in 2019. Non-interest income for the quarter increased 14% compared to the fourth quarter of 2017 and expanded 19% for the year.

But for the fourth quarter 2018, noninterest income declined 6.7% compared to the linked third quarter of 2018. Mortgage gains declined 32% compared to the linked third quarter, the result of a 23% decline in overall production, all in purchase money transactions.

In the mortgage banking market, both purchase money and refinance activity volumes have decreased. This is due to higher rates, lower demand and a decrease in the availability of new homes.

Additionally, we experienced some disruption during the integration of the mortgage company from WashingtonFirst, and a number of legacy originators departed the company during the third and fourth quarter. While this affected our fourth quarter production, we are actively hiring additional mortgage originators to drive additional production in 2019.

Insurance agency commissions experienced typical fourth quarter seasonality and declined 43.5% compared to the linked third quarter. Comparing 2018 to 2017, overall insurance agency commissions were flat, while our commercial and personal lines experienced decent growth. Softness was in the physicians' liability and bond business.

In an effort to grow revenue, we continue to focus on hiring new producers, identifying strategic partners and driving revenue from existing bank clients. Wealth management revenue continues to be strong despite a 7% decline in market value at yearend.

On a linked quarter basis, wealth management revenue increased 2.7% and was bolstered by one time fiduciary fees from our trust division. Comparing year-end 2018 to year-end 2017, wealth management revenue increased 8.7%. Assets under management totaled $2.9 billion at year-end compared to $2.8 billion at year-end 2017.

Our wealth management business is staffed with accomplished professionals and poised for continued growth and success. On the expense side, expenses are well-managed. And while we continue to invest in talented people and the new technology that will drive future performance.

For instance, we increased minimum wage, we established the bank-wide incentive plan that aligns with the interest of our shareholders and rewards our employees for the success of the Company, and we enhanced our 401(k) company match.

We made these enhancements and announced this previously because it’s the right thing to do and it will help us attract to retain the best people to serve our clients throughout their life time. On the technology front, we also invested in new loan origination system and online account opening technology that will be realized in 2019.

The non-GAAP efficiency ratio was 51.78% for the fourth quarter compared to 55.69% for the fourth quarter of 2017 and 49.27% for the third quarter of 2018. Excluding the interest recovery, the non-GAAP efficiency ratio for the third quarter would have been 50.48%.

Our capital position remains strong to support continued growth with total risk-based capital of 12.27, a tier 1 risk-based capital ratio of 11.07, a tier 1 leverage ratio 9.51, and tangible common equity to tangible asset ratio of 9.23.

As we move through 2019, we continue to invest in the people who will provide exceptional experiences and be true advocates for our clients and, the systems that will enable greater access for our clients in an efforts that will help build strong communities.

This aligns with our vision to make an impact and enrich the lives of our clients, shareholders and employees.

Despite a challenging rate environment and political environment, we will continue to take advantage of being a one-of-a-kind community bank that is thrived in one of the strongest regions in the country for century and half, while achieving the financial performance and returns to satisfy our shareholders and position us for a future of continued growth and success.

That concludes my general comments for today, and we will now move on to discuss your questions..

[Operator Instructions] And our first question comes from Catherine Mealor with KBW. Please go ahead with your question..

Thanks. Good afternoon. Can you just update us on your outlook for the margin? And especially the 12 bps of accretable yield that we saw this quarter, how do we thing that should be trending over 2019? Thanks..

Hey, Catherine. This is Phil. I think, very directly, I would suggest that the margin probably for foreseeable future settles in the 3.50 range. The backdrop to that would be our assumption or position on the general interest rate environment is going to be similar to what it is today.

We really backed off in our thought process about any more tightening by the Fed throughout -- actually all of 2019. And if anything, look towards whether or not probabilities as they predict might have a rate cut later in the year.

But from the standpoint of how we're forecasting margins for now and foreseeable future, we’re expecting the rate environment to be fairly consistent with where it is today with the flat curve as we move forward.

As it relates to the remaining amount of accretable yield that's left in fair value marks that are left from the WashingtonFirst transaction, this is backdrop again. In 2018, we probably had about 8.7, $8.8 million worth of positive effect to the margin, which I think from time-to-time we have estimated was worth about 12 basis points.

And looking forward as to what's projected into -- through this year that drops dramatically to around 1.5 million in terms of dollars absent of any anticipated payoffs or whatever that might accelerate. But even there, it might approach a level of about $2 million.

And so, for the year, that's probably not going to be terribly significant as it relates to any additional accretion to the margin number that I gave around 3.50..

Got it. So, the 3.50 and in that 3.50 guide, a lot of that's going to be that accretable yield coming-off, but as we think about funding cost, it feels like your scenario for that as is that the Fed stops, but then you're also balancing the deposit initiatives that Dan laid out.

So, do you feel like -- is it fair to say we may see another quarter or two of elevated deposit costs and then that kind of moderate as we get in the back half of the year or how should we think about that?.

I think that's exactly the way to look at it, absolutely, yes. And we probably still have some additional increase on the low yield side I think work their way through from where rates have gone; it offsets that to some degree.

But then, yes, I believe that you are right about deposit costs, again depending on how aggressive we think we need to be to fund that growth, what level off as we get through the year.

I mean, we really saw in this quarter that the deposit beta is still paying down to some degree with I think in the high 50 range in the third quarter; it leveled in this quarter around 40. And so, I think that if rates are going to continue to kind of moderate as we think they will, then it will eventually level out..

Great, okay.

And then, could you give us a little bit of color around the reserve build and additional provisioning you are putting against the WashingtonFirst credit that we need? And is this a trend that we should continue as we move into next year, perhaps driving higher provisions next year than we saw this year?.

So, in terms of what's happened through the quarter, first of all, the most significant aspect of the bump up in the provision was certainly just the sheer level of new loan production that took place in the quarter.

So, even though loan growth was about a $187 million on a net basis, we actually had new loans in the quarter over by about almost $320 million, and we also had some increases in existing loans and that increases to the tune of about 75.5, which are normal kind of year-end draws and things that occur at a lot of our lines of credit with our government contractors et cetera.

And then, in addition to that, we did have about $58 million worth of what we would look at as transfers from WashingtonFirst but we’re covered by fair value march before that renewed and then rolled into now our resolvable portfolio. So, that part of the equation is going to continue to occur.

And we don't really exhaust that until we get through ‘19 and into 2020. So, some aspects of that -- and that was going on by the way throughout the year as well. So, that kind of was already part of the existing provisioning that took place as we got to this point.

So, the majority of that heightened provision was really as much about the sheer level of loan growth as it was anything else that was different from any other quarter..

Okay, that makes sense. Great, thank you for the color..

And our next question comes from Austin Nicholas with Stephens. Please go ahead with your question..

Maybe just hitting back on the margin one more time.

The 3.50 range that you mentioned, Phil, was that the core margin, which I think was at 3.45 this quarter? Are you expecting that to increase or is that 3.50 the kind of reported margin with your expectation for accretion?.

That's the reported margin. That's the way I would look at the reported margin as we look forward..

Got it, understood. Okay, that's helpful. And then, maybe just back to the expense outlook.

Any comments on how that should trend, given some of the numbers that left in the mortgage banking team and then maybe some of the rehiring you're doing?.

Yes. Austin, this is Phil again. I would put out there that our expectation for overall year-over-year expense growth is probably around 3%. And that would be inclusive of anything and everything we’ve talked about in that area or anywhere else.

I mean, this quarter, they were, I think probably on the face of the press release, in the table there was a pretty good bump in professional fees that occurred during the quarter. The majority of that were things that are timing, we had loan review that occurs in the fourth quarter of every year that had significant dollar amount to.

There are few other things that happened. We had some attorney fees that were a little bit higher than they were the quarter before. Those two together were probably half that number.

And so, just in terms of looking at what we incurred this quarter, the majority of that increase just in that one line, it wasn’t the most prominent thing is, I wouldn’t say is recurring quarter-to-quarter. There's some seasonality of course with loan review piece, but the rest of it is just stuff that happens from time to time.

And I would come back around to saying, like I did that 3% is a good way to look at overall expense growth for the year..

Got it. That's helpful.

And then, maybe just on balance sheet growth, are you still comfortable with that 8% to 10% loan growth rate as we look to ‘19?.

Yes. That's the way we're looking at it right now. That momentum and what we experienced through 2018, we would expect to continue. That's the outlook. And I think a good bit of that is just -- the good news is, the pace in which our -- the work from the new folks from the integration of Washington First were able to perform.

When we originally were thinking about 2018, there may be a little bit of a conversion lag, so to speak. And they hit the ground running and have been very effective along with our existing legacy team in producing.

So, that number looks like it's sustainable, which obviously to my earlier comments puts a lot more pressure on the deposit gathering front..

Right, makes sense. And then, maybe just one quick last one.

Given the government shutdown, and I think you mentioned some government contracting business within the book, any comments on concern there or anything you're doing to help those clients out from maybe extending lines of credit or any change in behavior you’re seeing from those customers will be helpful..

There are a couple of different approaches I’ll comment. One is, in our retail or consumer, as you might imagine, we have a good number of our clients that are government employees.

And so, like others in the marketplace, we jumped on that as we have in previous times when this type of things gone on where we made adjustments to payment schedules and put some products out there to help folks through this gap of time. And so, we’ve been very proactive in that from the consumer standpoint.

On the commercial side, within our GC book, those are probably more handled on the case by case basis. Our clients in that space have not demonstrated as much concern as you might imagine. And I think the other thing that probably has a greater potential impact is the employees of those government contractors.

And again, while some of those may not be clients, we’ve done outreach to your GC clients to see if there's things we might be able to help. But most of our government contracts clients are well-healed and would be able to weather this shutdown..

[Operator Instructions] And the next question comes from Steven Comery with G.research. Please go ahead with your question..

I just wanted to ask about kind of the seasonality associated with the DDA you guys called out.

I mean, when do you expect to kind of get those deposits back? Is that like a Q1 event or is it kind of kind of filter in throughout the year?.

Steve, this is Phil. What’s happened traditionally is that they trickle back in through and during the first quarter and it’s kind of a gradual build back toward the end of the quarter. And then, I think if we went back and -- we went back and looked at this on a year-over-year basis, that’s kind of the way that it normally performs.

So, that would be our expectation; that’s the way we plan for..

Okay, fair enough. And then, just want to ask you about the non-interest expense. Salaries kind of took a step down in the fourth quarter. I wasn’t really anticipating that.

Was there something -- was something specific going on there, and kind of where do you think the run rate goes in Q1?.

Yes. There is nothing really extraordinary there. Some of that’s just kind of year-end true-up on incentive accruals and things like that that we normally do. But other than that, I don’t think anything terribly extraordinary in there.

I mean, as you look forward, one thing that happens to us after the first of the year is some of the things related to payroll taxes and things get elevated just because things kick back into security et cetera.

And then, we do all of our annual performance reviews towards the tail end of the first quarter and hit the run rate in the beginning of the second quarter. So, that's when we see some differences in some of those levels. But, that's really about it..

And then, during the prepared remarks, I believe I heard $1.8 million of merger expenses. I was just kind of wondering what line item did those come in..

No. That -- I was reflecting back on the fourth quarter of 2017 results….

Okay. Yes. My bad. I misunderstood that. Okay.

And then, just finally for me, I was wondering if you guys could kind of talk about your efficiency ratio, expectations, either for the quarter and the year going forward?.

Yes. Steve, this is Phil. I would look towards us kind of manage that in that 50% range, 50% 51ishs probably, given what I suggested earlier about overall expense growth, where it would be. We’ve talked about this before and probably more likely than not.

That number is much dependent on our ability to grow the revenue side of the things as it is really manage the expense piece of it. Although there is always room for things you can do there on a discretionary basis. But that's kind of where we would like it to be, given the nature of the way that we’re delivering to the market at this point..

And our next question comes from Casey Whitman with Sandler O'Neill. Please go ahead with your question..

In your prepared remarks I think you mentioned some onetime fiduciary fees in the fourth quarter.

Can you be more specific as to what those were or how much?.

Yes. Casey, this is Phil. And these are, I guess, what you call, postmortem fees or whatever that are related to what happens when we have to settle out a trust or whenever, it may come in all at that one point. I think during the quarter, it was around $300,000. I think it’s what got collected in the fourth quarter.

And so, we recognize that's the significant piece of the increase quarter-over-quarter because of what happened through the downturn from the standpoint -- in the equity markets and how that impacted the evaluation of the assets under management, which of course drives the fee revenue.

To that end, just a little bit of color that the combined efforts of the trust and our subsidiary at West actually grew or saw had net sales type activity in terms of assets under management offsetting that to the tune of about $71 million and $72 million. So, I mean, there is currently good momentum in terms of what we're delivering in that area.

Just the environmental aspect of the market downturn what really kind of was the headwind in that regard..

And then, when you look the insurance piece, so those were down a little more than I would have thought this quarter.

But just can you remind us what this seasonality looks like probably in 2019 for insurance? And also maybe give us a sense for what your outlook is for revenues for the year in ‘19?.

We typically have seasonality related to contingent income that affects both the first quarter and the third quarter and the insurance business. And those are -- some of that's the property and casualty business and then the physicians liability which line up at different points in the year.

So, you would expect to see somewhat of a rebound in the first quarter due to some of that contingent income. And from an overall standpoint, we’re looking at mid-single-digit revenue growth expectation in that business. And that’s absent success in bringing in some producers, absent absolutely success in bringing other strategic partners..

Got it. And then one final question with just the tax rate, little higher than last quarter.

What's your outlook for next year?.

I think on a kind of an effective tax rate, I would probably use around 24%..

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

Thank you. And thanks to everyone for participating with us this afternoon. In addition, we'd love to receive any feedback to help us evaluate the effectiveness of our call. And obviously we're available to you if you have other questions that would be helpful as we close out this call.

So, you can give us a buzz, or you can email your comments at ir@sandyspringbank.com. Have a wonderful afternoon..

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