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Sandy Spring Bancorp Inc  (NASDAQ:SASR)
Q1 2019 Earnings Conference Call
April 18, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for First Quarter 2019. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity ask questions. (Operator Instructions) Please note, this event is being recorded.

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

Please go ahead, sir.

Daniel J. Schrider -- President and Chief Executive Officer

Thank you, Cole, and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the first quarter of 2019. This is Dan Schrider speaking, and I'm joined here today with colleagues, Phil Mantua, Chief Financial Officer; and Ronald Kuykendall, General Counsel for Sandy Spring Bancorp.

Today's call is open to all investors, analysts and the media. There will be a live webcast of today's call, and a replay will be available on our website later today.

Before we get started covering highlights from the quarter and taking your questions, Ron will give the customary safe harbor statement.

Ronald E. Kuykendall -- Executive Vice President, General Counsel and Secretary

Thank you, Dan. Good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this conference call and webcast that are subject to risks and uncertainties. These forward looking statements include statements of goals, intentions, earnings and other expectations, estimates of risk 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.

Daniel J. Schrider -- President and Chief Executive Officer

Thank you, Ron. Our performance for the first quarter was very strong, and the results we delivered reflect meaningful contributions from across multiple business lines. Our bankers are doing a terrific job working together to win new clients and deepen existing relationships. Our support functions continue to develop new ways to enable success at the front line and to provide greater access for our clients.

This coordinated client-centered approach distinguishes us in a highly competitive market. As I've shared previously, our organization's culture is rooted in our commitment to our employees, our clients and communities. And it drives our strategies and how we do business.

For us, this means that how we engage with people, how we value people and how we conduct ourselves is equally as important as what we achieve. These are inseparable concepts for us. Our culture and our emphasis on people and relationships builds trust and leads to an openness to do more business with us. This will result in long term and sustainable success, and will continue to help us attract and retain both clients and employees.

As you all know, we operate in one of the most competitive banking environments within a very strong and stable economic region, and we continue to do so successfully in the midst of intense competition, the challenging rate environment, continued consolidation in financial services, new entrants to the market and a great deal of noise from our nation's capital. But this is nothing new for us. We're from here and it is where we thrive.

There are a couple of areas of success and continued focus worth noting from this quarter. Our integration of WashingtonFirst Bank in 2018 was executed without a hitch, strategically expanding our presence throughout the Greater Washington region. As we move through 2019, we are pleased with where we stand today as a result of the acquisition and we continue to be thrilled with the people who joined us from WashingtonFirst.

After experiencing some attrition from the acquired mortgage business in the third quarter of 2018, we have successfully rebuilt our mortgage sales team with high-quality bankers who embrace our approach to client relationships. As I mentioned last quarter, we have broadened our funding strategies to facilitate ongoing growth and optimize funding costs.

With the existing and pending consolidation in the market, we continue to recruit and welcome exceptional professionals to the Sandy Spring Bank family. The individuals who have joined our team know the market well and they share our vision for our culture. And we continue to invest in our people and our technologies that will help facilitate an even better client and employee experience, and ultimately making it easier to do business with us. This includes enhancements to salesforce.com and in the senior loan origination system as well as a new online account opening portable -- portal.

Now, let me transition and cover some of the highlights from our press release issued this morning. Net income for the first quarter of 2019 was $30.3 million, or $0.85 per diluted share, compared to net income of $21.7 million or $0.61 per diluted share for the first quarter of 2018, and net income of $25.6 million, or $0.72 per diluted share for the linked fourth quarter of 2018.

As stated in today's release, the first quarter of 2018 results did include the impact of $9 million of merger-related expenses. Excluding the after-tax impact of these expenses, the net interest -- the net income for the prior year quarter would have been approximately $0.79 per diluted share.

Comparing the balance sheet to the first quarter of 2018, total assets, loans, and deposits grew 5%, 8% and 11%, respectively, driving a 6% increase in net interest income over the same period. The net interest margin improved at 3.6% for the quarter, compared to 3.58% for the first quarter of 2018. Excluding the recovered interest income recognized in the current quarter, the net interest margin would have been 3.52%.

On a linked-quarter basis, loan growth was flat, which is not uncommon for the first quarter, especially after a very strong production at year-end 2018. The late fourth quarter 2018 loan production resulted in a significant provision expense in the fourth quarter without a corresponding lift in net interest income. However, in the current first quarter, we experienced the benefit of fourth quarter production in terms of interest income, but no provision expense since balances were relatively flat compared to year end.

Most importantly, our lending pipelines are very strong and we continue to expect annual loan growth in the high single-digit range. Credit quality remains very strong across all portfolios with no broad trends in the portfolio or market that are creating concern. Modest increases in non-performing loans are peppered in multiple portfolios and do not represent any significant trend.

Watchlist trends remain very stable. All segments of our portfolios are performing well, and our reserve coverage of non-performing loans remains very strong at 132%. Given our newly expanded market and the momentum in our lending activity, we continue to have a coordinated bankwide focus on deposit growth and we're seeing results. On a linked-quarter basis, ending deposits were up 5%, providing the ability to reduce FHLB advances and resulting in a loan-to-deposit ratio of 106% at quarter end.

We will continue to price deposits on specific interest-bearing products at or near the top of the market as we see necessary, and our sales teams will also continue their focus on driving core transaction accounts as we win new relationships. Last year -- last quarter, I commented on the many initiatives under way to enhance our deposit gathering success, including incentive plan realignment, pricing strategies, talent acquisition and better account opening access for clients.

These efforts continue today and we remain keenly focused on turning rate seekers into full banking relationships. Non-interest income was $17 million, and increased 6% compared to the first quarter of 2018, after adjusting for BOLI mortality proceeds and security gains, and up over 16% on a linked-quarter basis after adjusting for just BOLI mortality proceeds. Mortgage gains increased significantly compared to the linked fourth quarter, the result of an improvement in overall production, greater focus on salable production, the benefit of increasing our origination staff and the seasonal lift from the spring market.

Insurance agency commissions grew 4% when compared to the first quarter of 2018, and bounced back on the linked-quarter basis. In an effort to grow revenue, we continue to focus our efforts on hiring new producers, identifying strategic partners and driving revenue from existing bank clients.

Wealth management revenue continues to be strong despite market conditions, with revenue up 3.5% for the first quarter when compared to the same quarter in 2018. Assets under management totaled $3.1 billion at quarter end compared to $2.9 billion at year-end 2018, and our wealth management business is staffed with accomplished professionals and poised for continued growth and success.

Expenses are well managed, while we continue to invest in the talented people and the new technology will drive future performance. As we previously reported, we made several enhancements to our employee benefit programs throughout 2018, including a companywide performance-based incentive program, increasing our minimum wage and an above-average merit increase across the board.

And beginning in 2019, we enhanced our 401(k) match to assist our employees with long-term retirement planning. All of these enhancements have been implemented for the entire first quarter, fully affecting our expense base. The non-GAAP efficiency ratio remains very strong at 51.44% for this first quarter compared to 51.78% for the linked fourth quarter of 2018.

Our capital base continues to grow and positioned very strong to support continued loan growth and with total risk-based capital ratio of 12.54%, the total -- Tier 1 risk-based capital ratio of 11.35%, a Tier 1 leverage ratio of 9.61%, and a tangible common equity to tangible asset ratio of 9.39%. We are extremely pleased with what we have accomplished in the first quarter and the strong results that we delivered.

Our solid performance across the board reflects the coordinated approach that we take to serving our clients. Our teams work effectively across disciplines and geographic locations to address our clients complete financial picture while delivering consistent results for our company.

We will continue to invest in the people, who will be true advocates for our clients and uphold our culture, and systems that will enable greater access for clients in an effort that will help strengthen our local communities. This aligns with who we are as a company and will help us drive purposeful and sustainable growth for our clients, shareholders and employees.

This concludes my general comments for today. And we will now move to your questions.

Operator, we will now take the first question. We'd appreciate it, if you would state your name and company affiliation as you come on, so we know with whom we're speaking.

Questions and Answers:

Operator

We will now begin the question-and-answer session (Operator Instructions) And our first question today comes from Catherine Mealor with KBW. Please go ahead with your question.

Catherine Mealor -- Keefe, Bruyette, & Woods -- Analyst

Thanks. Good afternoon.

Daniel J. Schrider -- President and Chief Executive Officer

Good afternoon, Catherine.

Philip J. Mantua -- CFO

Hi, Catherine.

Catherine Mealor -- Keefe, Bruyette, & Woods -- Analyst

Hi. Wanted to start with the margin and just see if -- so you could update us on your outlook for the margin given that we're now looking at a flat rate for this year? Thanks.

Philip J. Mantua -- CFO

Yeah. No problem. So, we're in the same camp as you just suggested, where we believe the overall rate environment will stay fairly flat and kind of stagnant across the yield curve here, with the slight inversion there in a, kind of, short to intermediate area. So the reported margin here after backing off the interest recovery is stated in the release was 3.52%. There was still some accretable yield adjustments in that. We probably estimate that was probably of about 6 basis points, but that's going to continue to diminish as we've talked before throughout the year.

I think there's only roughly about $2 million worth of adjustment for fair value marks that should come through the margin going forward for all of '19, including the part of it that came through this quarter. So all in, I would suggest that the reported margin should stay in that low 3.50% range. We do have it expanding throughout the year, a couple basis points, maybe a basis point or two per quarter. And so it might get into the kind of mid 3.50% range by the time we end 2019.

Catherine Mealor -- Keefe, Bruyette, & Woods -- Analyst

As you look at that outlook, what changes on the liability side of the balance sheet you are expecting? Do you expect that FHLB will continue to come down like we saw this quarter?

Philip J. Mantua -- CFO

It will, as long as the pricing differential, rate differential between that and what we can do in the broker CD market, continues to hold up. We didn't actually in this last quarter add much of anything to the brokered portfolio because overall, core growth in deposits was so good. I think we added maybe $6 million in brokered. Everything else in that $300 million, some odd million dollars and end point deposits came from in-market sources.

A good portion of it came from the Premier Money Market that we've been continuing to run. Overall market -- Premier Money Market account grew about $110 million. $70 million of that was in the promotional 2.10% range. We ran a pretty strong CD promotion for a month, where we had a 3% CD. And we gathered $70 million into that in a 30-day period. We then discontinued at that level.

Probably today, our other specials are probably averaging around 2.45% or so. We'll continue to do that. And then we had some nice run-up at the end of the quarter in the DDA area. So, as long as we get that kind of performance in terms of market deposits, we probably won't need to be adding through the advance position hardly at all.

Catherine Mealor -- Keefe, Bruyette, & Woods -- Analyst

Really helpful. Thank you.

Philip J. Mantua -- CFO

Sure.

Daniel J. Schrider -- President and Chief Executive Officer

Thanks, Catherine.

Operator

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

Casey Whitman -- Sandler O'Neill -- Analyst

Good afternoon.

Daniel J. Schrider -- President and Chief Executive Officer

Hi, Casey.

Philip J. Mantua -- CFO

Hi, Casey.

Casey Whitman -- Sandler O'Neill -- Analyst

You talked about the rebuild of your mortgage team in your prepared remarks. So, can you give us an idea of where you are in that process? Can we expect continued hires in that area and revenues to continue to grow? Or do you think the $3 million or so of quarterly revenues in mortgages is a pretty good base?

Philip J. Mantua -- CFO

Casey, this is so -- go ahead, Dan. I'm sorry.

Daniel J. Schrider -- President and Chief Executive Officer

No, go ahead, Phil.

Philip J. Mantua -- CFO

Let me answer the last part of that question related to the expectation on the gains. I think there's no question in this quarter that $2.9 million or whatever was benefited by some mark-to-market adjustments relative to increases in applications for refinancing based on what happened to the overall end of yield curve and rates.

So, I would give you some direction on that, that number per quarter going forward probably comes off about maybe as much as $1 million just to use it as a run rate and probably using $1.6 million to $1.8 million area, even though -- and I think Dan's going to comment on the personnel side here in a minute, our continued look for folks who are adept at being able to generate gain on sale type of activities in that area.

Daniel J. Schrider -- President and Chief Executive Officer

Yeah. Casey, I think the -- in terms of the rebuild back to, kind of, prior sales force, we're probably there. But I think the other thing that we're continuing to do is look for folks that will be interested in joining our organization and continue to expand our geographic coverage of the market we're in.

So, a lot of the folks that we've been able to attract and bring on have allowed us to move more broadly in the market and specifically, in an important market for us, which is Prince George's County, where we are looking to continue to invest in not just mortgage, but in commercial and small business banking as well.

So, we'll continue to grow out our mortgage sales group. Really happy with the folks that we've been able to attract and bring on, and kind of get our gain on sale numbers back to where we think is sustainable going forward.

Casey Whitman -- Sandler O'Neill -- Analyst

That is helpful. And then sounded like the lack of loan growth this quarter was pretty seasonal, just from your prepared remarks. So, can we still assume 8% to 10% loan growth or so for the year? Or has your outlook for growth changed at all?

Daniel J. Schrider -- President and Chief Executive Officer

Yeah, Casey, it's Dan. Yes, I think that we do see a good bit of seasonality in this first quarter, particularly given what was a really record, very end of 2018 in terms of production. So, there was a great deal done at that point. Pipelines look good going forward.

So, that high single-digit number is still, we think, attainable and how we are looking at the remainder of the year. The only caveat to that is, is if we -- is in the mortgage business, depending upon the nature of what we originate.

If we originate more gain as opposed to some portfolio growth that we've customarily seen, then I think it's still high single-digit, but maybe not pushing the double-digit, but that's all dependent upon what's available on the mortgage side.

Casey Whitman -- Sandler O'Neill -- Analyst

And curious, is there an impact just from the government shutdown in the first quarter?

Daniel J. Schrider -- President and Chief Executive Officer

We don't believe -- we didn't see it from a loan demand standpoint. I mean, I think there's probably some -- as always, when we've gone through government-related either shutdowns or threatening shutdowns, some pent-up demand that might -- investment that might postponed a bit. We didn't really feel that, see that in the first quarter.

Casey Whitman -- Sandler O'Neill -- Analyst

All right. Thank you for taking my questions.

Daniel J. Schrider -- President and Chief Executive Officer

Sure. Thanks, Casey.

Operator

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

Austin Nicholas -- Stephens Inc. -- Analyst

Hey, guys. Good afternoon.

Daniel J. Schrider -- President and Chief Executive Officer

Hi, Austin.

Philip J. Mantua -- CFO

Hi, Austin.

Austin Nicholas -- Stephens Inc. -- Analyst

Appreciate the comments on deposit. Maybe just on the, kind of, end-of-quarter DDA that you saw flow into bank. Can you maybe give us a little more color on what drove that? And if there was any seasonal at all or if there was any large accounts driving that inflow?

Philip J. Mantua -- CFO

Yeah, Austin. This is Phil. I mean it's a pretty -- I think the answer is pretty straightforward. We have a significant title company business in that part of the balance sheet and almost all of it was related to what was going on in that particular business line at the end of the quarter.

And again, that's not unusual in any quarter, but that is really the thing that drove that increase because if you look at the averages relatively to it, there wasn't a whole lot of growth in DDA during the quarter. It was all really driven at the end and it was almost exclusively title business.

Austin Nicholas -- Stephens Inc. -- Analyst

Got it. Okay. And then maybe just on the security side of the earning asset base. Any changes in how you're thinking about that book and kind of what you're investing in versus what's rolling off?

Philip J. Mantua -- CFO

No, I don't think there's any real fundamental change in the strategy there. I think our challenge there is determining just what kind of position to hold in terms of the security portfolio relative to the size of the balance sheet, trying to balance out some liquidity needs, whether it's for pledging or just other liquidity purposes. I mean our overall objective there has been for a while to kind of keep the investment portfolio 12%, 15% of assets. And -- but I don't necessarily see a whole lot of strategic change within it at this point either.

Austin Nicholas -- Stephens Inc. -- Analyst

Okay. And then maybe just one last one on the expense base. I think the expense number came in a little higher than maybe I was looking for, and I know you kind of mentioned some hires, I guess. As we look out through the remainder of the year, is that kind of $44 million a good base to build from? Or is there any changes in, kind of, your level of hiring or any one-time items that you'd point out in the expense base that maybe weren't --

Philip J. Mantua -- CFO

Yeah, Austin. This is -- yeah, this is Phil again. I mean there is certainly some one-time stuff in both directions related to both last quarter and this quarter. But by and large, I think the answer to your question is to kind of assume a similar overall level of expenses quarter-to-quarter. They'll fluctuate a little bit from time-to-time on some seasonal things that might be related to payroll taxes and stuff like that.

But generally speaking, I would suggest that's a -- that's reasonable to work with. I mean, I think our view for overall expense growth for '19 over '18, excluding, of course, the M&A costs last year is probably in the 4%, 4.5% range. And I think that, that level, around $44 million probably can kind of get you there.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. Okay. Great. Well, thanks for taking my questions, guys.

Philip J. Mantua -- CFO

You're welcome.

Daniel J. Schrider -- President and Chief Executive Officer

Thanks, Austin.

Operator

(Operator Instructions) Our next question comes from Steven Comery with G. Research. Please go ahead with your question.

Steven Comery -- G. Research, LLC -- Analyst

Hey, guys. I was just wondering if you could kind of help me on balance sheet growth for a second. So, loans, as you mentioned, basically flat on a period-end basis. But looking at sort of the average numbers, it looks like there was a big delta in C&I, like the difference between the average and the period end. I was wondering if there was anything kind of specific going on there.

Daniel J. Schrider -- President and Chief Executive Officer

Steven, this is Dan. The -- I think it's both a function of focus really throughout 2018 and even as we move through the first quarter of where we put some resources around driving C&I growth. So, it's not a function of a specific credit or large individual credit, really more kind of blocking and tackling on the C&I side.

And if you break up our production, even in the first quarter, which doesn't necessarily go to your question on average, but our largest area of production in the first quarter, despite being flat period end to period end was in the C&I area. So, we're seeing some success there from our sales force and would expect to see that going forward.

Steven Comery -- G. Research, LLC -- Analyst

Okay. So, it wasn't paydowns or anything pushing that number at quarter end. It was just sort of difference in focus and seasonality.

Daniel J. Schrider -- President and Chief Executive Officer

That's correct.

Steven Comery -- G. Research, LLC -- Analyst

Okay. All right. Thanks for that. And then on the loan yields, looks like they're up pretty substantially on a linked-quarter basis. I was just wondering, how much of that is attributable to sort of the acquired book, acquired impaired, purchase accounting and how much of it is sort of a makeshift and roll-on, roll-off?

Philip J. Mantua -- CFO

Steven, this is Phil. I think that -- well, the one biggest thing that came through that loan yields, of course, was the reported $1.8 million in interest recovery. So, you'd have to pull that away to get down below some of the other more core yields. I think I mentioned before about 6 basis points of fair value marks. So, I think the majority of that is really on the asset side. I don't think there's a whole lot left on the deposit side because the way we ran those off being shorter in duration.

But in the commercial portfolio during the first quarter, our average spread across all the different portfolios for production was low 3% to almost 4% in certain periods and that compared to a range in the fourth quarter last year, there was more like 2.40% to 2.80%. So, I think we just -- we also just got some more substantial yields based on what we did book even though the volumes were lower than in prior quarters.

Steven Comery -- G. Research, LLC -- Analyst

Okay. Yeah, that's what I was thinking. Okay, that's definitely very helpful. And then just finally for me on the provisioning, release provision this quarter. Is that sort of just attributable to loans not increasing on a period end basis? And kind of maybe how are you guys thinking about provisioning for the rest of 2019?

Philip J. Mantua -- CFO

Yes. Steven, this is Phil again. I think we've talked for a while now that provisioning levels really are predominantly driven by levels of loan growth in a given period. I mean there -- we might have made -- I think we've made an adjustment or two to a couple of soft factors here as we entered the beginning of the year in that regard that probably took it all the way to being a slight credit. But I think in the way we view it going forward, given as Dan has suggested in answering the other question about loan growth from this point forward, that provisioning is probably at least $2 million or more -- little more per quarter, if you take that kind of loan growth into account and -- as we move ahead.

Steven Comery -- G. Research, LLC -- Analyst

Okay. And that's with the so-called high single-digit loan growth?

Philip J. Mantua -- CFO

Yes, yes. By reference, yes, that's exactly what I'm saying.

Steven Comery -- G. Research, LLC -- Analyst

Okay. That's very helpful. Thanks, guys.

Philip J. Mantua -- CFO

Sure.

Daniel J. Schrider -- President and Chief Executive Officer

Thank you, Steve.

Operator

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

Daniel J. Schrider -- President and Chief Executive Officer

Thank you, Cole, and thanks to everyone for participating with us this afternoon. We would really appreciate receiving your feedback to help us evaluate the effectiveness of our call. So, you can email your comments to ir@sandyspringbank.com. Thanks again and have a great afternoon.

Operator

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

Duration: 29 minutes

Call participants:

Daniel J. Schrider -- President and Chief Executive Officer

Ronald E. Kuykendall -- Executive Vice President, General Counsel and Secretary

Catherine Mealor -- Keefe, Bruyette, & Woods -- Analyst

Philip J. Mantua -- Chief Financial Officer

Casey Whitman -- Sandler O'Neill -- Analyst

Austin Nicholas -- Stephens Inc. -- Analyst

Steven Comery -- G. Research, LLC -- Analyst

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