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Sandy Spring Bancorp Inc (NASDAQ:SASR)
Q3 2019 Earnings Call
Oct 17, 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 Third Quarter 2019. [Operator Instructions]

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

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

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 here today 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. 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.

Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary

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 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, other economic conditions, future laws and regulation, 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 of Bancorp and Bank

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 are 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 kind of come to know and being a true advocate for our clients. There are 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 non-interest 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 our teams in both retail and commercial bank.

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 we would have otherwise been 3.6%. Quarter-to-quarter, we've also seen a significant reduction in interest costs. This was driven by substantial end-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.

Non-performing 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 these consumer borrowers to get them current and we feel very confident about resolution.

We had a truly remarkable quarter generating non-interest 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 non-interest expenses in the third quarter, which can be attributed to several non-run rate items. This includes higher compensation costs associated with hiring bonuses and seasonal incentive-based sales programs, one-time marketing expenses, and the beginning of some M&A expense, as well as the cost of consolidating a couple of our office locations, which is our 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 50.95% for the third quarter compared to 49.27% for the same quarter of the prior year. The 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 end-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 delivered 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 will -- we are confident that we will achieve just that.

In other leadership news, we also recently welcomed the 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 evident 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 will now move to your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Casey Whitman with Sandler O'Neill. Please go ahead.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Good afternoon.

Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary

Good afternoon, Casey.

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

Hi, Casey.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Hi. Just wanted to start with the expenses. You know, first I think you just mentioned a bunch of, kind of, more one-time items that has 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 this quarter impacting the expenses?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, 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, if you want to call it, related to the FDIC insurance, there was about a net differential of about $1 million, that are all really in our eyes, kind of one-time 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.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay, got it. So you're saying, those expenses all were around $2 million versus the $1.2 million FDIC insurance.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

That's correct. Yeah.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

That's exactly right. $2 million versus $1.2 million, you net out to about a $1 million difference.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

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?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah. We certainly believe we could. I'm not sure that we know for sure that we will. I don't believe if we do, it will 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 to have half of what that looked like this quarter in the fourth quarter, if we get it at all.

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay, great. Thank you. And then let me just ask you about the margin. You did a very nice job of holding it this quarter. I guess, what -- still what's your outlook there just over the next few quarters with potentially more rate cuts and before we get Revere in there?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah. I would think that we'll probably trend down little bit into the high 3.40% range in the next quarter or so. I mean, 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'll be another cut here shortly. So I would think overall margin levels in the mid-3.40%s for the fourth quarter and then into the first part of next year prior to the acquisition.

Operator

Our next question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Thanks, good afternoon.

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

Good afternoon, Catherine.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Hi, Catherine.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

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 toward the $10 billion cost?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, Catherine, this is Phil. Absent, again, of what we know will happen when we combine the two companies toward the end of the first quarter, just, it's kind of legacy Sandy Spring, I would -- we would look 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.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Okay, great. Perfect. And then on the growth outlook, can you tell us a little bit about how you're thinking about growth and how much of the strategy to sell residential mortgages you think will continue into next year?

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

And Catherine, Dan. I think that was --- that decision was driven by a couple of things. One is, to become much more effective in driving mortgage production from new sales, home sales, as well as refinances. And so we've moved the percentage of our production from our realtor connections and centers of influence on the sales 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 -- 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 opportunity 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, I mean we hope to continue to drive the type of gain on sale numbers, but that's -- there is obviously a rate phenomenon associated with that. So as long as 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 kind of 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 are 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 gains. 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.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Got it. Okay. So you've seen that guidance for loan growth for next year maybe on an organic basis, outside of Revere kind of mid-to-high single-digit, how are you thinking about that?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, I think that's fair based upon what we've seen thus far in 2019 and the production momentum that we're seeing now.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Okay. All right. Great. And then one last if I could? Any thoughts on CECL? And what's your -- the one-time increase to the reserve will be in 1Q '20?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

That was an open-ended question Catherine. This is Phil.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

There are a lot of things you could talk about there.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

No comment in any way shape or form.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Yes. Opinion's all of it. [Speech Overlap]

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

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. But we're not still at a point where we're comfortable kind of giving an idea as to what that number is going to necessarily look like.

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Okay. No worries there. All right, thank you so much.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Thanks, Cath.

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

Thank you.

Operator

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

Steven Comery -- G. Research LLC -- Analyst

Hi guys, good afternoon.

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

Hi, Steve.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Hi, Steve.

Steven Comery -- G. Research LLC -- Analyst

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 of that you attribute to sort of the seasonal effects you guys usually have, and how much you would expect that to try [Phonetic] going forward?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

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. 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 non-interest 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.

Steven Comery -- G. Research LLC -- Analyst

Okay, very good. That's all I had. Thank you.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Thanks, Steve.

Operator

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

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

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

Operator

[Operator Closing Comments]

Duration: 19 minutes

Call participants:

Daniel J. Schrider -- President and Chief Executive Officer of Bancorp and Bank

Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Casey Whitman -- Sandler O'Neill + Partners, L.P. -- Analyst

Catherine Mealor -- Keefe Bruyette and Woods -- Analyst

Steven Comery -- G. Research LLC -- Analyst

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