Good day, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for Third Quarter 2019. [Operator Instructions]. Please note this event is being recorded. 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 our conference call to discuss Sandy Spring Bancorp's performance for the third quarter of 2019. This is Dan Schrider speaking, and I'm joined today here by my colleagues Phil Mantua, our Chief Financial Officer; and Aaron Kaslow, General Counsel for Sandy Spring Bancorp.

As usual, today's call is open to all investors, analysts and the media, and there will be a live 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, Aaron will give the customary safe harbor statement..

Thank you, Dan. Good afternoon, everyone. 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 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, 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, Aaron. I am pleased to report today that we delivered a strong financial performance in 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 is solid, and we're going to use this momentum to springboard through 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 in a great position as we prepare to begin integrating Revere into Sandy Spring. Our continued success is evidence that our highly personalized approach to client service works.

As we grow, we remain deeply committed to delivering the personal service our customers have come to know and being a true advocate for our clients. There are a few areas I want to highlight from the press release we issued this morning.

Net income for the third quarter of 2019 was $29.4 million or $0.82 per diluted share compared to net income of $29.2 million also $0.82 per diluted share for the third quarter of 2018 and net income of $28.3 million or $0.79 per diluted share for the second quarter of 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 reduce 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 of our teams in both retail and commercial banking. Our net interest margin was at 3.51% for the third quarter of 2019 compared to 3.71% for the third quarter of 2018 and 3.54% for the linked second quarter.

The prior year's quarterly margin included a $2 million recovery, so it would have otherwise been 3.6%. Quarter-to-quarter, we've also seen a significant reduction in interest costs. This was driven by substantial in-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 are working with there 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 nonrun rate items.

This includes higher compensation cost associated with hiring bonuses and seasonal incentive-based sales programs, onetime marketing expenses and the beginning of some M&A expense as well as the cost of consolidating a couple of our office locations versus the last items related to the WashingtonFirst acquisition.

However, these items were significantly offset by a reduction in FDIC insurance expenses. The non-GAAP efficiency ratio came in at 5 -- 50.95% for the third quarter compared to 49.27% for the same quarter of the prior year.

Company had total risk-based capital ratio of 12.70%, a common equity Tier 1 risk-based ratio of 11.37%, a Tier 1 risk-based capital ratio of 11.52% and a Tier 1 leverage ratio of 9.96%. Overall, our capital position remains in good shape to fuel continued growth. I'd like to now update you on a couple of other initiatives and news at Sandy Spring.

As previously mentioned, last month, we announced our intent to acquire Revere Bank. Revere is a strategic in-market acquisition that will deepen our presence in our core market and push us through the $10 billion 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, offering sophisticated products and services, delivering in a very personal way and focused on helping our clients and communities achieve success.

As we prepare to begin the integration, we are focused on ensuring a seamless transition for our clients and employees alike. With Revere Bank's co-CEOs, Ken Cook and Drew Flott, joining Sandy Spring in executive roles, we are confident that we will achieve just that.

In other leadership news, we also recently welcomed a new General Counsel and Executive Vice President to the company, Aaron Kaslow. 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 a career specifically in commercial banking. 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, we 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 it's evidenced that we are 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.

So this concludes my general comments for today, and we'll now move to your questions..

[Operator Instructions]. Our first question comes from Casey Whitman with Sandler O'Neill..

Just wanted to start with the expenses. First, I think you just mentioned a bunch of, kind of, more onetime items that have impacted this quarter between bonuses, marketing, maybe some consolidation of back office.

Can you be, I guess, more specific as to actually what those numbers were in 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, what you want to call it, related to the FDIC insurance, it was about -- a net differential of about $1 million that are all really, in our eyes, kind of, onetime or seasonal type of expenses here in this particular quarter.

So if you take that and move that back out, we were effectively flat to the prior quarter when you net everything in each direction..

Okay. Got it.

So you're saying those expenses are all around $2 million versus the $1.2 million FDIC insurance?.

That's correct. Yes..

Okay. Okay..

That's exactly right. $2.2 million versus $1.2 million, and you net out to about $1 million 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 do you have any idea what that amount might be? Or should we not consider that in?.

Yes. We certainly believe we could. I am not sure that we know for sure that we will. I don't believe if we do, it'll be as large as the credit we got in this quarter just based on what might remain. So as an estimate, we might get maybe about half of what that looked like this quarter in the fourth quarter if we get it at all..

Okay. Great. And then let me just ask you 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 in there?.

Yes. I would think that we'll probably trend down a little bit into the high 3.40% range in the next quarter or so. We're going to see the bigger impact of the September cut obviously coming through in future periods as well as an expectation that there will be another cut here shortly.

So I would think overall margin levels in the mid-3.40s for the fourth quarter and then into first part of next year prior to the acquisition..

Our next question comes from Catherine Mealor with KBW..

Maybe, one follow-up to Casey's expense question.

How are you thinking about expense growth as we move into next year and you're building up towards the $10 billion cross?.

Yes. Catherine, this is Phil. Absent, again, of what we know will happen when we combine the two companies towards end of the first quarter, just kind of legacy Sandy Spring, I would -- we would love to probably grow expenses just naturally 4% to 5% on an annualized basis.

I don't know that we really see a significant amount of additional buildup relative to crossing $10 billion. I think we've talked about this for a while that 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 just that..

Okay. Great. Perfect.

And then on the growth outlook, can you talk to us a little bit about how you're thinking about growth? And how much of the strategy to sell residential mortgage, as you think, will continue into next year?.

Catherine, Dan. I think that was -- that decision was driven by a couple of things. One is to become much more effective and driving mortgage production from new sales, home sales as well as refinances.

And so we've moved that percentage of our production from a realtor connections and centers of influence 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 achieved great success in driving the type of production we want.

That all occurred at the same time that the competitive rates on the construction perm business and the terms being offered by some key competitors just made that a less attractive business for us. So I think as that business returns, I think this is not a forever phenomenon in terms of the competitive market around the construction perm.

We'll hopefully see production come back, which would be portfolio production and while at the same time, maximizing our opportunities to sell. So that clearly has had an impact on net loan growth over the course of the year.

As we continue in this current rate environment, we hope to continue to drive the type of gain on sale numbers, but that's -- there is a -- obviously, a rate phenomenon associated with that. So as long 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 behind the scenes, in the current quarter, we had $450 million to $500 million in commercial loan production. We had another north of $400 million in mortgage production. So we're cranking out north of $850 million in overall production with -- between those two books.

It's just so much of it went off balance sheet to drive gain. So we like the momentum in terms of production, and we would expect that to affect the loan growth on a go-forward basis in a positive way..

Got it. Okay.

So as you think about guidance for loan growth for next year, it'd be on an organic basis outside of Revere kind of mid- to high single digit? How are you thinking about that?.

Yes. I think that's fair based upon what we've seen thus far in 2019 in the production momentum that we are seeing now..

Okay. All right. Great. And then one last, if I could.

Any thoughts on CECL? And what's the onetime increase to the reserve will be in 1Q '20?.

That was an open-ended question, Catherine. .

So a lot of things you could talk about there..

No comment in any way, shape or form..

Yes. Opinions, all of it. As it might go..

We're still working our way through getting ourselves prepared for what that might look like at the -- in the first quarter of next year. We're not still at a point where we are comfortable kind of giving an idea as to what that number is going to necessarily look like..

[Operator Instructions]. The next question is from Steve Comery with G. Research..

I just wanted to ask you about the deposits, really strong growth, again, like in the second quarter.

I was just wondering kind of how much that you attribute to sort of the seasonal effects you guys usually have? And how much you'd expect that to betray going forward?.

Yes. Steve, this is Phil. I'm not sure that I would, in this particular quarter, look at that growth as being seasonal pretty much at all. I think it's a continuation of the momentum we have established in the market, even as we've moderated some of our pricing to protect the margin.

And when you really, kind of, peel back what happened there, that deposit growth is actually even stronger because we paid down over $100 million of brokered CDs and allowed another $15 million to $20 million in public funds to run off.

So the real organic market-driven growth is quite a bit more, and it continues to be in all portions of the deposit base, everywhere from commercial checking and 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 and efforts on gathering deposits..

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

Thank you, and thanks to everyone for joining today's call. We really appreciate you participating. And we welcome your feedback, so you can always e-mail that to us at ir@sandyspringbank.com. So thanks again, and have a great afternoon..

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