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Sandy Spring Bancorp Inc (SASR -0.45%)
Q4Â 2019 Earnings Call
Jan 23, 2020, 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 Fourth Quarter 2019. [Operator Instructions]
I would now like to turn the conference over to Daniel Schrider. Please go ahead.
Daniel J. Schrider -- President and Chief Executive Officer
Thank you and good afternoon everyone and thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2019. This is Dan Schrider speaking and I'm joined here by my colleagues, Phil Mantua, our Chief Financial Officer and Aaron Kaslow, General Counsel for Sandy Spring Bancorp.
Today's call is open to all investors, analysts and the media and there is a live webcast of today's call as well as a replay that will be 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 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
Thanks, thanks, Aaron. It's a pleasure to be on the line with you today to talk about the great quarterly and year-end results that we announced this morning. And before I get into financials, I want to briefly take a step back and highlight some of our focus areas and other factors that contributed to our performance this year.
As a more than 150-year-old organization, we are committed to ensuring our long-term success for generations to come and this was a big focus for us in 2019. As I've shared before, one of our corporate objectives is to grow through strategic bank and non-bank acquisitions. We made two important acquisition announcements in 2019, setting us up to become a $12 billion company in 2020. We have long been preparing to cross the $10 billion threshold, and we are pleased that will move through this benchmark in such a significant way.
Our Revere Bank acquisition announcement also pave the way for a subordinated debt offering, which we plan for and have the opportunity to complete at an advantageous time. And while we are executing on these acquisition strategies to help ensure our long-term trajectory, we continue to successfully grow our business and respond to some of the more immediate opportunities and challenges throughout the year.
For example, we expected a rising rate environment as most did, but the Fed abruptly change course. So we too adjusted our strategies and continued to succeed. 2019 also proved to be a fiercely competitive year in the deposit market, but we remained a strong and consistent deposit gatherer.
Part of our success this year can be attributed to our focus on hiring talented professionals and growing our revenue producing staff. In total, we brought on board 42 new employees across commercial banking, mortgage, insurance, wealth and personal and business banking. And you can clearly see the impact of this increased capacity throughout our financial results.
And so with that, I'd like to share with you the details of our performance. I'm pleased to report today that we delivered record annual earnings in 2019 and a strong performance in the fourth quarter. Net income for the fourth quarter of 2019 was $28.5 million or $0.80 per diluted share compared to net income of $25.6 million or $0.72 per diluted share for the fourth quarter of 2018 and net income of $29.4 million or $0.82 per diluted share for the third quarter of 2019.
Net earnings for 2019 totaled $116.4 million or $3.25 per diluted share compared to $100.9 million or $2.82 per diluted share for all of 2018. This was a critical year for us, marking the first full-year following the integration of WashingtonFirst Bank. Our results for the year speak to the success of that acquisition. And our performance also sets us up for another wave of strategic expansion through these acquisitions, Revere Bank and Rembert Pendleton Jackson, otherwise known as RPJ, a registered investment advisor that's headquartered in Falls Church, Virginia. Later in the call, I'll provide an update on those acquisitions and the integration work that is currently under way.
Total deposits grew 9% compared to the end of 2018. Our deposit growth, reduced our loan to deposit ratio to 104% compared to 111% at the end of 2018. And as you might recall, this time last year I shared with you some of the initiatives under way that would enhance our deposit gathering and drive new deposit relationships. Now, one year later, we achieved an 8% increase in non-interest bearing deposits, a 13% increase in core interest-bearing deposits and a 38% reduction in wholesale deposits.
Our success in growing deposits is a testament to our people, our coordinated approach and the fact that we can accomplish what we set out to do. I'm extremely proud of our team, and I would like to take this moment to acknowledge our talented people.
As it relates to our deposit composition on a year-over-year basis, non-interest bearing deposits accounted for roughly 29% of the total deposits in both 2019 and 2018, again speaking to our consistent ability to grow core deposits. At year-end we saw a balanced growth across personal and commercial checking, title companies and small business, and of note, small business checking is the largest account in the DDA portfolio with $713 million at the end of the fourth quarter.
Total loans in 2019 increased 2% compared to 2018, which was far less than we expected heading into the year. This was due to the combination of the interest rate environment and competitive pricing in the residential mortgage lending. During this period, the company experienced 7% growth in total commercial loans, as investor real estate loans and owner-occupied real estate loans grew by 11% and 7% respectively.
Total commercial loan production was a record $1.5 billion in gross production for the year, and mortgage production totaled over $1.1 billion for the year. And both ended with strong momentum throughout the fourth quarter. Despite great success in overall loan production, loan growth was only $134 million due to the impact of mortgage and consumer loan refinance activity, and importantly a strategic decision we made to sell the majority of new mortgage loan production to generate gains.
And our non-interest income results were remarkable with an increase of 37% to $19.2 million for the fourth quarter of 2019 compared to $14 million for the fourth quarter of 2018. This impressive increase was largely fueled by a 269% increase in income from mortgage banking activities during this period as well as a 17% wealth management income increase and a 58% increase in fees from customer level commercial loan swaps.
In the fourth quarter, we also successfully issued $175 million in subordinated debt. Our intent to pursue this offering was disclosed in conjunction with our Revere Bank announcement. Given the favorable market conditions, we made the decision to move forward in late October and this effort helped secure a long-term funding source at a very attractive cost and will help fuel our future growth. To that end, our subordinated debt offering provides some insight into some of the interest margin compression that we experienced this quarter.
Our net interest margin for the quarter was 3.38% compared to 3.51% for the linked quarter. Excluding subordinated debt, it would have been 3.43%. We also saw compression on the asset side with the yield on total loans and the investment portfolio both decreasing by 16 basis points for the linked quarter. Looking ahead, we expect the first quarter to be fairly similar in the mid 3.30% range for margin.
One of the big shifts, as we noted earlier was our ability to get away from broker deposits. The overall cost of interest bearing deposits went down 15 basis points from the third to fourth quarter, which was being driven by a reduction in the average cost of money market savings by 26 basis points and time deposits by 7 basis points.
Our credit quality remains strong and we continue to be disciplined in our portfolio management practices. We believe that we will see stability as we move further into 2020. Non-performing loans at year-end 2019 totaled $41.3 million compared to $36 million at year-end 2018 and $40.1 million on a linked quarter basis.
Non-interest expenses, decreased to $179 million [Phonetic] in 2019 compared to $179.8 million for the prior year. As previously noted, 2018 included $11.8 million in merger-related expenses compared to $1.3 million in 2019. Excluding those merger expenses, non-interest expenses rose 6%, driven primarily by higher compensation and benefit costs, but was also offset by the decrease in FDIC insurance during the year. So as a result, the non-GAAP efficiency ratio was 51.52% for 2019 compared to 50.87% for 2018.
The company had total risk-based capital ratio of 14.85%, a common equity tier 1 risk-based ratio of 11.06%, tier 1 risk-based capital ratio of 11.21% and a tier 1 leverage ratio of 9.70%.
During the quarter, the company also repurchased over 668,000 shares of common stock at an average price of $36.34 per share as part of our existing capital management and share repurchase program.
And as you know, the implementation of CECL, is one change that will impact the industry as a whole in 2020. And I'd like to turn it over to Phil to provide a little further explanation as to what we expect from this implementation. Phil?
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Thank you, Dan. Good afternoon, everyone. As we disclosed in our press release today, exclusive of the reclassification of amounts related to the acquired credit impaired loans, the estimated impact to our retained earnings in this transition date is expected to be approximately $2 million. This calculated day one estimate is the result of our team finalizing our overall methodology after many, many months of intense discussions, stress testing and validation by both our external audit firm and our independent third party.
Within our methodology, we are using seven different loan portfolio segments to produce the -- to produce this estimate and then performing the calculations are actually a few of the individual segment whose required reserve decreased from the prior period levels.
As we look forward, our initial or current expectations for quarterly provision expense is that there will be basically no significant difference under the -- under CECL in comparison to provisions that we reported using the former methodology. Having said that, we must recognize that in any given future reporting period there are a number of key assumptions, that could significantly impact the provision expense and the estimate including, one, our economic forecast, in particular, the impact of any change in the unemployment rate. Two, changes in our prepayment or curtailment rates under various interest rate scenarios. And finally three, changes in the overall portfolio, size and mix.
Now, I'll certainly be happy to take any of your more detailed questions on this topic at the conclusion of our prepared remarks.
And with that Dan, I'll turn it back over to you.
Daniel J. Schrider -- President and Chief Executive Officer
Thank you, Phil. As we look further into 2020, we are in a great position for continued success and growth. Thanks in large part to the strong results we put forth in the fourth quarter and throughout 2019. As we often share, our people are dedicated and focused and committed to be lifelong advocates for our clients and seeing them succeed at every stage of life. This distinguishes us in a highly competitive market in the industry.
We look forward to welcoming some new folks to the Sandy Spring Bank family in 2020 from Revere Bank and RPJ. Our integration work with Revere Bank is well under way and we have seen exceptional partnership and collaboration on both sides of the deal. We are on track to close this transaction early in the second quarter and our client day one, will take place in the third quarter.
As we've discussed there is strong alignment between Sandy Spring and Revere on a number of fronts. We are both committed to providing remarkable experiences for our clients, building lasting relationships and helping individuals and businesses reach their financial goals. And like us, Revere is from the communities we serve and dedicated to this region.
There is also exceptional geographic alignment throughout our core market, as well as some overlap in the Sandy Spring Bank and Revere Bank locations. We continue to carefully consider client access and cost savings as we evaluate our physical locations and possible consolidations or closures.
In the fourth quarter, we also announced the non-bank acquisition of RPJ. RPJ has a strong culture that aligns with our core values and is focused on client service. Upon closing this transaction in the first quarter, Sandy Springs wealth management arms will have a combined $4.5 billion in assets under management. RPJ will continue to operate under their current name, and Charles Rembert will lead the Company as President. The firm's senior leadership and investment advisors will also continue to serve their clients directly. As we work to close both of these acquisitions, we look forward to becoming a $12-billion company, deepening our presence in our core market and expanding our capacity to serve our clients.
As we announced last month. We also welcomed a new Treasurer and Division Executive Mark DuHamel. Mark brings more than 30 years of banking experience, and he will be the tremendous asset, as we continue to grow and provide competitive and sophisticated financial solutions. Once again, our employees were busy throughout the year volunteering more than 12,500 hours to help build strong communities and serve our neighbors in need.
We were recognized by the Washington Business Journal for our efforts, ranking among the Top 10 mid-sized companies for both community service hours and giving. We were also recognized last month as a Top Workplace by The Baltimore Sun. We won another top workplace accolade earlier in the year from the Washington Post. So it's really special to be recognized, once again in this way.
First of all, though we earn these recognitions based on the feedback of our employees. As we continue to grow, we are all committed to staying true to who we are, and the unique culture that we've created together. To be named a top workplace, certainly validates that we're on the right track. However, it also inspires us to stay focused on what really matters; that's people and relationships.
As I mentioned earlier, very proud of our employees. We accomplished a great deal together in 2019 and we are in a position of strength in 2020, thanks to their hard work and dedication. I'm excited about all that's in store for us this year, including welcoming new employees and clients from both Revere and RPJ, and upholding the tradition of true community banking.
That 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 Catherine Mealor with KBW. Please go ahead.
Catherine Mealor -- KBW -- Analyst
Thanks, good afternoon.
Daniel J. Schrider -- President and Chief Executive Officer
Good afternoon, Catherine.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Hi Catherine.
Catherine Mealor -- KBW -- Analyst
Going to first start on the margin, and Dan appreciated your guidance for the first quarter to be in the mid 3.30% range. But as we move forward into second quarter and we layer on Revere, can you give us any guidance or remind us how you expect to Revere to impact the margin once the -- once that deal closes.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Hey, Catherine, this is Phil. We would -- we would anticipate that Revere's margin, which has traditionally been higher than ours, would have an incremental positive impact to the margin from, as Dan mentioned, what we think the first quarter is going to look like, now that we've layered in the cost of the sub debt to be around 335 [Phonetic]. I would expect when we put the two companies together, that should probably pop back up into the maybe mid-340 [Phonetic] range now, but I don't know yet in terms of giving you that bit of an estimate is just exactly, what will the purchase accounting implications be as we do those calculations under a bit of a different interest rate environment now than when we did them initially when we announced the transaction.
Catherine Mealor -- KBW -- Analyst
Fair enough. That makes sense. Okay, great. And then also, can you talk us to -- talk a little bit about the buyback activity, we saw pick-up this quarter and your expectations for how active you will be in 2020?
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Yeah, Catherine, this is Phil again. I would tell you that based on what we've anticipated doing the activity we have had to date, which actually bled over a little bit into early January is about halfway through the amount that we are targeting to buy back, which is roughly in total about $50 million worth of our shares. And a lot of that was driven by absorbing the amount of additional sub debt that we decided to issue, given the favorable pricing that was available to us at the time, when we did that in November, as a means for trying to offset some of the dilution to earnings per share by executing on that transaction.
Catherine Mealor -- KBW -- Analyst
Got it. Okay, helpful. And then maybe one last thought or one last question, can you talk little bit about your expectations for fee income growth? You had a really solid fee income growth this year, and a maybe a more stable rate environment. How are you thinking about that this year? Thanks.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Yeah, I think if -- Catherine, it's Phil again. I think if we come off this fourth quarter and then kind of, level set what we think is going to happen going forward, first of all, this quarter in the wealth space had a couple of fairly significant one-time postmortem-related fees, probably to the tune of about $800,000, that we've certainly wouldn't expect that to continue on a consistent basis. So I think that's one of the first things to think about. We would also probably think that the mortgage gains that would be generated moving forward, but probably add back a little bit as well. We are in the $4.2 million range here in the fourth quarter. We were probably just on a more consistent quarter-over-quarter basis estimate, that could be a little more in the $3 million to $3.1 million range. And so, you would see, certainly in the first quarter, a little bit of a pull back from the significant size of what we had in the fourth quarter.
At the same time, the first quarter is usually a strong insurance quarter for us with some contingent income that we -- that we picked up. And I would also suggest that the activity that we've created in terms of our ability to do back-to-back type of swap agreements with clients will continue into 2020. We generated about $2 million overall in that program. This year we would expect that to continue to be the case, and maybe even increase as we go through the year.
Catherine Mealor -- KBW -- Analyst
Okay, great. Thanks for all the color. Congrats on a great quarter.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead.
Erik Zwick -- Boenning & Scattergood -- Analyst
Hey, good afternoon, everyone.
Daniel J. Schrider -- President and Chief Executive Officer
Good afternoon.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Hi, Erik.
Erik Zwick -- Boenning & Scattergood -- Analyst
Maybe if I can start with the loans and you kind of mentioned in your comments that the net growth didn't play out maybe to your expectations in 2019. As we think about 2020, I'm curious what your thoughts there are? Do you plan to kind of continue to remix the portfolio? It was more commercial loans, and continuing to sell most of the residential production? Just kind of curious, kind of your outlook there?
Daniel J. Schrider -- President and Chief Executive Officer
Thanks, Erik. This is Dan. I think -- I think what we've experienced in 2019 and I think we will continue the strategy as it relates to how we approach the mortgage business, and that is driven by both tremendous success the team has had in increasing the amount of volume through purchase money mortgages, which typically we would move off balance sheet, so that tends to attempt to hold up even as rates change and refinances slow.
So, we will continue to see a slight decrease in overall mortgage portfolio as we expect the refinance activity to continue and our strategy around selling. At the same time, we both on an organic basis and in combination with how we are looking at the Revere merger, expect to see nice increases in the commercial space, really across all portfolios. So all in all, we would expect mid-to-upper single-digit loan growth, that's net of what we expect to happen in the mortgage side of the business.
Erik Zwick -- Boenning & Scattergood -- Analyst
Great. And that mid-to-upper single-digit, that's excluding Revere? That's kind of on an organic basis?
Daniel J. Schrider -- President and Chief Executive Officer
That is on an organic basis. And I would say, with Revere realizing that it's a transition year and our client day one isn't [Phonetic] until the third quarter, I would say that that's probably pretty accurate on a combined basis as well.
Erik Zwick -- Boenning & Scattergood -- Analyst
Great. Thanks for the color there. And then maybe, looking at the other side of the balance sheet. The deposits had a great year in 2019, kind of given that the new strategies that you have in place. Would you expect that to continue and potentially see that match loan growth on an organic basis?
Daniel J. Schrider -- President and Chief Executive Officer
I think that's safe -- that's a safe assumption with the continued heavier growth rate in the non-interest bearing transaction side of the business. But yeah, I would say that kind of mapping those two growth rates hand in hand is the way we would look at it.
Erik Zwick -- Boenning & Scattergood -- Analyst
Got it. And then just one last one for me. Could you able to update us on your efforts to kind of enhance the client experience and the channel optimization? And if there's any specific initiatives that you've got planned for 2020?
Daniel J. Schrider -- President and Chief Executive Officer
Yeah, great question. There is always a variety of things that we are adjusting to what we're learning from clients in terms of what would make their experience more -- more effective. I would say that one of the biggest -- there's really two technology related initiatives that will be in full swing in 2020. Probably the most significant is not a client-facing technology, but a client delivery technology. And that is, implementation of nCino Loan Origination, which will -- which will cover all categories of commercial as well as consumer lending. So it's -- there is a real opportunity for us there to improve our responsiveness, create more capacity for greater responsiveness to clients, and make that process just much smoother. And that nCino is a technology that lays really on top of our existing sales force CRM system.
And then the second is a client-facing technology, which is an enhanced online account opening platform for us. It -- the underlying technology is called GRO, G-R-O and that will also be rolled out here in the first quarter, just to provide. The focus, whether it's converting branches to universal bankers, and a much -- employees that are able to serve clients in a much broader way than a traditional seller or whether it's online offerings or digital promotion, it's really about providing greater access to our clients in the way in which they want to do business with us. So I think both nCino and GRO are key -- key investments for us.
Erik Zwick -- Boenning & Scattergood -- Analyst
Great. I appreciate the commentary there. Thanks for taking my questions.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Thanks, Erik.
Operator
[Operator Instructions] Our next question comes from Steve Comery with G Research. Please go ahead.
Steve Comery -- G Research -- Analyst
Hey guys, good afternoon.
Daniel J. Schrider -- President and Chief Executive Officer
Hi Steve.
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Hey, Steve.
Steve Comery -- G Research -- Analyst
Just wanted to ask about the efficiency ratio. I mean it ticked up a little bit in Q4, obviously with slightly lower NII though, maybe if you guys have any sort of general thoughts there ex the merger costs for 2020?
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Yes Steve, this is Phil. From a stand-alone Sandy Spring perspective here prior to when we combined the two companies with Revere, we would expect especially in this quarter that we would stay in that 51%, 52% range, which are prescribed, kind of target here of late has been to try to keep it under 52%. Ex of the merger expenses as you suggest, on a going forward basis just based on the sheer leverage that we were going to accomplish with the additional balance sheet bulk etc. from Revere, we could see that number dip below 50% at some point throughout the year, just based on our ability to leverage the infrastructure that we already have in place.
Steve Comery -- G Research -- Analyst
Okay. And would that likely be a Q3 event or Q4 event? How would you -- or just the NDA...
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Yeah, it's probably the latter part of the year, most likely, probably as late as Q4 given that most of the system conversion work that we need to do. And therefore the people that we're going to need to retain to make sure we get through all of that is not going to happen until some point in the third quarter. So I would anticipate that we would -- if we're going to get to those levels, it probably be in the latter part of the year.
Steve Comery -- G Research -- Analyst
Okay, makes sense. And then, one other thing on RPJ. I appreciate the commentary on sort of the combined AUM being about $4.5 billion after the close. Anything you can kind of tell us about sort of like what sort of fees, wealth -- what the wealth management fees would look like after close there?
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Yeah. Steve, this is Phil again. Although we didn't really report out anything specific related to -- other than the assets under management that would be acquired related to RPJ, we would probably initially estimate that on a quarterly basis, we're probably going to have them contribute maybe about $1.3 million [Phonetic] or so in fee-based revenues, in terms of how we're going to look at that moving forward. It may not be quite that in this first quarter given the timing of the close, etc. But in general, that's probably -- what we're probably going to look at. I mean overall for the year, first year out, probably gets us somewhere just shy of about $8 million in total. Total revenue being generated by that arm of the wealth business.
Steve Comery -- G Research -- Analyst
Okay. Very good. Thank you.
Operator
This concludes 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, and thanks everyone for participating today and for your questions. We always welcome your feedback on these calls, so please email your comments to [email protected]. Again, thanks for your participation and have a great afternoon.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Daniel J. Schrider -- President and Chief Executive Officer
Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary
Philip J. Mantua -- Executive Vice President and Chief Financial Officer
Catherine Mealor -- KBW -- Analyst
Erik Zwick -- Boenning & Scattergood -- Analyst
Steve Comery -- G Research -- Analyst
