Sandy Spring Bancorp - Q3 2021

Transcript

Speaker 0

Welcome to the Sandy Spring Bancorp Incorporated Earnings Conference Call and Webcast for the Q3 of 2021. My name is Harry, and I'll be your coordinator today. I will now hand over to your host, Dan Schrider, President and CEO of Sandy Spring Bancorp, Inc. To begin. Mr.

Schrider, please go ahead.

Speaker 1

Thank you, Harry, and good afternoon, everyone. I really appreciate you joining us for our conference call to discuss Sandy Spring Bancorp's performance for the Q3 of 2021. Today, we'll also bring you up to date on our response to and impact from the COVID-nineteen pandemic. This is Dan Schrider speaking and I'm joined here by my colleagues Bill Mantua, Chief Financial Officer and Aaron Kaslow, 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. But before we get started covering highlights from the quarter And then taking your questions, Aaron will give the customary Safe Harbor statement.

Speaker 2

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 goals, intentions, earnings and other expectations, estimates of risks and future costs and benefits, assessments of expected credit 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, including the impact of the COVID-nineteen pandemic, 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

Speaker 1

Thanks, Aaron, and thanks again to everyone for joining us to discuss our Q3 financials. Our earnings performance remains strong and we delivered another solid quarter. Fueled by exceptional deposit growth and a record level of commercial loan production, we continue to grow new and existing client relationships across our lines of business. In addition, our credit quality, margin and efficiency So let's jump right into the highlights from the press release and the supplemental information. Today, we reported net income of 57,000,000 or $1.20 per diluted common share for the quarter ended September 30, 2021.

The current quarter compares $44,600,000 or $0.94 per diluted common share for the Q3 of 2020 and net income of $57,300,000 or $1.19 per diluted common share for the Q2 of this year. Core operating earnings for the 3rd quarter remained stable at $52,000,000 compared to 52,100,000 for the prior year quarter and $55,100,000 for the linked quarter. The provision for credit losses was a credit of $200,000 compared to a $4,200,000 credit for the Q2 of 2021. And the credits this year primarily reflect the improved forecast for the unemployment rate. And this quarter's provision also included updated metrics for determining the allowance for credit losses.

Shifting to the balance sheet, total assets We're at $13,000,000,000 or 3% increase compared to $12,700,000,000 at September 30, 2020, as cash and cash And further funded by consistent deposit growth over the last 12 months. Excluding PPP, the loan portfolio remained At $9,300,000,000 compared to the Q3 of the prior year. While residential mortgage and consumer loan runoff totaled 327,000,000 was offset by the year over year commercial loan growth of $316,000,000 or 4%. Year over year gross commercial production increased 102 percent or $416,000,000 and totaled $823,000,000 for the quarter And funded production increased 127 percent or $298,000,000 On a linked quarter basis, gross commercial production increased 4% or $32,000,000 and funded production increased 6% or $30,000,000 So all great results in the commercial space. We're pleased with the sustained and expanded commercial production because we know that when times normalize, it will translate to the kind of growth that we're accustomed to.

While we continue to operate in the season of lower commercial line utilization, higher runoff and excess liquidity on our We're taking actions to accelerate commercial loan growth in the Q4. This includes adding new talent in our commercial line of business, looking at larger credits, proactively approaching new and prospective clients and pursuing new opportunities across our market. On the deposit side of things, year over year deposits increased 10%. This was driven by 15% growth in non interest bearing deposits And 8% growth in interest bearing deposits. This deposit growth is significant and a good indication of our ability to grow and deepen client relationships.

Non interest income decreased by 17% or $5,000,000 compared to the prior year quarter. The decline was a result of the 65% decline in income from mortgage banking activities, which we anticipated as refinances continue to slow. Looking ahead, we expect our quarterly gain on sale to be roughly in the $4,000,000 to $5,000,000 range as we anticipate a more consistent rate environment And we moved to stabilize the runoff from our mortgage portfolio by retaining more of that future production on the balance sheet. We achieved 21% growth in wealth management income compared to the prior year. Our 2020 acquisition of Rembert Pendleton Jackson Continues to make a positive impact in our results as well as the performance in the financial markets and the expansion of the Wealth Management client base.

Other non interest income also grew by 113% compared to the prior year quarter, primarily driven by credit related fees and contractual vendor incentives. The net interest margin improved to 3.57% for the 1st 9 months of the year compared to 3.33% for the prior year. Excluding the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.52% for the current year And 3.21 in 2020. A significant aspect of success in the year over year improvement in the margin Our ability to manage the cost of our interest bearing liabilities down by 52 basis points through disciplined deposit pricing And the reduction of more costly wholesale based borrowings and subordinated debt. Our ability to grow average non interest bearing deposits by 18 over the prior year also contributed to the margin improvement.

Non interest expenses increased $2,200,000 or 4% compared to the Q3 of 2020. While the increase was primarily driven by rising compensation costs And professional fees, it was partially offset by the lack of M and A expenses during the current quarter and a significant reduction in FDIC insurance. This decline in FDIC insurance expense reflects reduced risk factors and the regulatory agencies assessment of the company. Salary and benefits increased $2,600,000 as a result of staffing increases and the $1,200,000 increase in professional fees is primarily due to the consulting fees associated with our various technology investments. The non GAAP efficiency ratio for the Q3 of 2021 was 46.67 compared to 45.36 for the Q2 of 2021.

The change in non GAAP efficiency ratio reflects the decrease in non interest income from mortgage banking activities and the increase in personnel costs Professional fees that we experienced during the quarter. Shifting to credit quality. The positive trend in the level of non performing loans continued in this quarter at 80 basis points compared to 93 basis points in the linked quarter. Non performing loans totaled $78,200,000 compared to $94,300,000 in the linked quarter. Loans placed on non accrual during the quarter amounted to 5 point $7,000,000 compared to $900,000 for the prior year quarter and $1,500,000 for the linked quarter.

Non accrual loans declined from the prior quarter due primarily To the partial payoffs and eventual charge offs of a few large borrowings in the hospitality sector with an aggregate balance of 32,900,000 It's important to note that these borrowings are contained to 2 relationships within the hotel portfolio that I have commented on in prior quarters. Charge off amounts of these credits did not exceed their associated individual reserves, so it did not result in any additional impact on the current quarter's provision for credit losses. Loans greater than 90 days or more increased from the prior quarter as a result of maturities of existing portfolio loans that were in the process of being extended. Loans amounting to $22,200,000 were subsequently settled after September 30, 2021 and are no longer The company recorded net charge offs of $7,800,000 for the Q3 compared to net charge offs of $200,000 for the Q3 of $20,200,000 for the linked quarter. Again, this increase was primarily the result of the previously mentioned charge offs of non accrual loans.

The allowance for credit losses was at $107,900,000 or 111 percent of outstanding loans and 1 point 1% of outstanding loans and 138 percent of non performing loans compared to 124,000,000 Or 1.23 percent of outstanding loans and 131 percent of non performing loans at the linked quarter. Excluding PPP loans, the allowance for credit losses as a percentage of total loans outstanding was 1.17% compared to 1.34% at the linked Overall, our credit quality trends continue to be positive and as you'll see in our supplemental materials, nearly all loan accommodations have returned to making payments. Tangible common equity increased to $1,100,000,000 or 9.1 percent of tangible assets at September 30 compared to $1,000,000,000 or 8.31 percent at September 30, 2020 as a result of accumulated earnings over the preceding 12 months. Excluding the impact of the PPP program from tangible assets at September 30, the tangible common equity ratio would be 9.44 percent. At September 30, 2021, the company had a total risk based capital ratio of 15.3%, A common equity Tier 1 risk based capital ratio of 12.5 percent Tier 1 risk based ratio at the same 12.5% and a Tier 1 leverage ratio of 9 0.2%.

Given our strong capital position and growth during the past year, the company activated its approved stock repurchase program and repurchased Over 1,200,000 shares of its common stock at an average price at $43.04 per share. So with that, we'll now turn to the supplemental information we also issued this morning. You move to Slide 2, you'll see that the loans with payment accommodations as of September 30 totaled 14,000,000 resulting in well less than 1% of our loan portfolio remaining in some form of accommodation. This is great news and an indication of the recovery that's going on not only within the portfolio but in the local economy. On Slide 3, we have detailed specific industry information, Outstanding balances for each segment and the loan and payment accommodations are as of September 30.

And then moving to Slides 45, Again, breaking out where we stand on forgiveness for rounds 1 and 2 of the program, we've also included this quarter the remaining fees to be earned so that you can see what is Thank you for the balance of the program. As of October 4, 97% of all Round 1 loans have applied for forgiveness and 99.5% of applicants submitted to the SBA have received full forgiveness. And as detailed on Slide 5, 65 percent of round 2 loans have applied for forgiveness and 100% of those applications submitted have received for forgiveness. So we're making really good progress and we expect to be substantially complete on both rounds of forgiveness by the end of the year. So with that,

Speaker 2

I'll turn it over

Speaker 1

to Phil Mantua, who'll walk through our CECL slides and capital position.

Speaker 3

Thank you, Dan. Good afternoon, everyone. I'm going to pick up on Slide 6, where we have a waterfall representation of the movement in our allowance for the Q3 of 2021. We're going into components that reflect the key drivers of the change during the quarter. The change over the course of the current quarter was primarily driven by 3 main factors: The reduction in the projected near term level of the unemployment rate, a change in individual reserves and the update to our model inputs, which is part of our periodic review process.

On Slide 7 is a comparison of our current and more recent economic forecast variables. Our CECL methodology continues to use the Moody's baseline forecast that for the Q3 was a version released by Moody's on September 20. This baseline forecast integrates the effect of COVID-nineteen and portrays an unemployment rate for our local market that has essentially already peaked and ultimately recovers to a level of 3% in the Q3 of 2023. Additionally, the projected levels of year over year growth in business bankruptcies and the change And the home price index as presented contributed to the provision credit for the quarter. Our key macroeconomic variables are further outlined on the next Slide number 8.

And for the Q1, all of these variables have been applied in a consistent manner to those same factors as used in the prior quarters. Slide 9 provides some additional granularity related to our reserve from a portfolio view where you can see that all major categories of commercial loans With the exception of AD and C, we reflect the continuing trend of reserve release. We should note that the 1.45% Reserve reflected here for commercial business loans includes PPP loans and the balance, although as we know there is no reserve required on those loans. And as illustrated in the footnote at the bottom of the slide, when adjusting the balance to exclude PPP loans outstanding, the reserve on our commercial business segment would be 2 point 0 4 percent and our total reserve would be 1.17 percent of total loans. Finally, on Slide 10 is the trend of our capital ratios with some brief explanations regarding the treatment of certain items and their impact to the resultant ratios.

Included in those comments is the adjusted tangible equity tangible asset ratio to reflect the impact of PPP loans on the current measure. We've also recently updated our capital stress tests. We've constructed a baseline severe forecast scenario utilizing the same Moody's baseline forecast into our CECL calculations and the COVID based thus far economy in the severe case. Having said that, we continue to feel confident about our capital position And therefore during the quarter, we redeemed $56,000,000 of outstanding subordinated debt, $25,000,000 of which was acquired in the Washington First transaction and the other $31,000,000 obtained in the Revere acquisition. And as Dan mentioned earlier in some of his earlier comments, we activated our share repurchase program during the quarter and we expect to complete the buyback of the total Rise the amount of shares before year end.

Dan, back to you.

Speaker 1

Thank you, Phil. Before we move To your questions, I want to let everybody know our return to office plans continue to move forward effective November 1 In person operations across all our offices will expand to pre pandemic levels. We've also required that all employees be fully vaccinated by that time November 1 so that we can do our part to ensure a safety and healthy workplace for our colleagues, clients and the communities that we serve. So with that, I will conclude our general comments for today and we'll now move to your questions. So Harry, you can take it away.

Speaker 0

Thank you, Dan. Our first question comes from Casey Whitman from Piper Sandler. Casey, your line will be open now if you would like to proceed with your question.

Speaker 4

Good afternoon.

Speaker 1

Hi, Casey. Hi, Casey.

Speaker 5

Hello. Dan, you mentioned potentially adding new talent. You talked Previously about some of the technology investments and other initiatives. So maybe help us sort of think about what a reasonable For expense growth in 2022 is going to be or perhaps easier just to update us on your efficiency ratio target? Thanks.

Speaker 3

Yes, Casey, this is Phil. I think we talked when last we talked about this in terms of looking year over year In terms of core expense base, we would probably be anticipating roughly about a 4% Overall increase in 2022 over 2021. And that again takes into consideration the things that you're just asking about And also some of the things that occurred during the course of time this year related to Home Loan Bank advanced prepayment fees and things that we don't

Speaker 5

Another question maybe for you, Phil, but maybe do you want to update us on your kind of core margin outlook? I'm sure this quarter, there's more liquidity that That core margin that maybe you were anticipating, but how are you thinking about the core margin over the next several quarters?

Speaker 3

Yes, I'd be glad to talk about that too as well Casey. So I think when you strip away as we did in the commentary here, First of all, I'll need fair value marks. And then though, add to that, the impact of what we got back this quarter for PPP forgiveness, That core margin here in the 3rd quarter was probably in the mid-three 30 range. And I would anticipate that that core would stay that way In the Q4, although the reported margin next quarter will probably something comparable because of our expectations for finishing The forgiveness part of the PPP plan or program. And then I would think as we move into next year And as we work towards trying to redeploy some of the excess liquidity, we're anticipating trying to keep that margin in that kind of Low to mid-three thirty range throughout the course of next year as well.

Speaker 5

Okay, understood. And what is your expectation for the Timing of the latest round of PEP forgiveness, do you think that will go through mid-twenty 22 or do you think it will be kind of finished through that earlier?

Speaker 1

Yes. Our expectation is to be substantially complete this year, but we might have some fall over into the Q1 just by virtue of Can't control exactly what our clients do, but we're working hard to have it substantially behind us, so that we can go into 2022 Clean from a margin perspective.

Speaker 5

Understood. Thank you.

Speaker 3

Thanks, Heath. You're welcome.

Speaker 0

Thank you, Casey. Our next question comes from Eric Zwick from Boenning and Scattergood. Eric, your line is now open if you'd like to proceed with your question.

Speaker 6

Thank you. Good afternoon, guys.

Speaker 1

Good afternoon, Eric. Hey, Eric.

Speaker 6

First, I wanted to follow-up a little bit on Casey's question about the loans and adding new commercial talent and Looking at larger credits, maybe in terms of not so much the growth rate, but in terms of the mix, I mean over the past year or so, the mix of commercial loans, Absent the runoff of PPP has gotten larger, residential mortgage has gotten smaller. Would you expect that kind of remixing To continue or are you happy with the current mix of the portfolio?

Speaker 1

Yes. Eric, Dan, Part of my comments earlier, particularly related to the mortgage business is we are going to look to try to stabilize that mortgage portfolio and eliminate the runoff that we've been seeing and perhaps might even see a little bit of growth in it By virtue of just putting more on portfolio, in terms of future production, we've already begun that process In terms of putting more portfolio on. On the when we're looking for new talent and growing the commercial production, I mean we're doing that with the intent of being able to enhance our C and I and connected owner occupied real estate lending In the middle market space, the GovCon space, and so those are really where The specific efforts are in trying to grow that. Now CRE obviously is a significant part of what we do and we're very good at So it's going to take some time for C and I to take on a bigger role overall from a mix standpoint, but that's where we're focused. Yes.

Speaker 3

And Eric, I might follow-up to Dan's comments related to Talend on the mortgage side. I mean, we've been Pretty successful here in recent times, very recent times of pulling together a handful of individuals From some of the other larger organizations like Truist, etcetera, as we continue to want to build that out. And we're also looking to Dan's point about building the portfolio as that being one of the means for kind of sopping up this excess liquidity here By trying to produce more in that area and putting it directly in the portfolio.

Speaker 6

That's great color. Turning to the charge offs in the quarter. Just curious, what prompted the decision to record the charge offs now? And How did you determine the size of the marks you took and are those two relationships still with the bank at this point?

Speaker 1

No, we've been obviously working to resolve these credits for a number of quarters As we've mentioned, our initial set aside of specific reserves are based on our the process we go through with the methodology To establish reserve in assessing value and liquidation costs and the like, and we were in those cases, in both cases, They were resolved through node sales.

Speaker 6

Got it. Thanks. And Phil, do you happen to have the dollar amount? Go ahead.

Speaker 1

I'm sorry. There are no longer clients to further answer your question.

Speaker 6

Understood. Thanks, Dan. Phil, do you have the dollar amount of purchase accounting accretion that was recorded in 3Q?

Speaker 3

I don't necessarily have the dollar amount per se, but it's getting to be pretty much Getting to be more and more insignificant as we move ahead here. And I think my guidance as it relates to margin next year is Not only will it be core, but it will probably be as reported as well because I think we're pretty well exhausting what's left to that accretive nature.

Speaker 6

Okay. That sounds consistent with what I've got in my model. So thanks for that. And then just last one is in the press release you mentioned in the non interest income, I guess on the year over year comparison, higher activity based contractual vendor incentives. Can you just provide a little more color in terms of exactly what that's related to and whether does that hit Every quarter, is there kind of an annual?

How does that flow through?

Speaker 3

That's probably more on a one off basis, Eric, it relates to different types of incentive programs we have with various vendors for hitting certain thresholds or targets.

Speaker 6

Got you. So likely the next time we might see it would be in 3Q again next year or are there multiple

Speaker 3

That's probably the most likely scenario, yes.

Speaker 6

Okay, perfect. Thanks for taking my questions today, guys.

Speaker 1

Thank you,

Speaker 0

Eric. Thank you, And our next question comes from Catherine Meal from KBW. Catherine, your line is now open if you'd like to proceed with your question.

Speaker 4

Thanks. Good afternoon.

Speaker 1

Good afternoon. How about the embrace, Catherine?

Speaker 4

I don't want to jinx up, but tonight's going to be hopefully fun. But So I wanted to start with growth. And just I missed I came about 5 minutes late to the call. So if you already gave a growth Guidance, I apologize for missing it. But how are you thinking about growth moving into next year, what a good loan growth target is?

And then maybe within that conversation On securities, are you feeling more open to putting kind of more of the excess liquidity into Securities as well in the next couple of quarters just given that we're in a better rate environment.

Speaker 1

Yes, Catherine, Dan. We did not cover that earlier. A couple of different things In response to your question specifically about loan growth, it's a little more challenging just by virtue of the current liquidity Situation that we're sitting with in terms of netting out asset growth. But on the loan growth side of things, We're looking at the type of production that we are driving in the last few quarters, Just shy of $800,000,000 $822,000,000 of commercial production this quarter. If we see any return to normal in terms of runoff, then commercial loan growth in that 8% to 10% should be A reality.

And that's all the while trying to redeploy some of this liquidity in Some strategies and I don't know if you heard Phil talk about the mortgage business, but finding some ways to put more on portfolio than we With customarily by virtue of selling, so trying to drive some in here in the next couple of quarters, a little more utilization of that excess liquidity. So I would say on the commercial space, 8% to 10% we're looking at and on a go forward basis and then Stabilizing that mortgage runoff, stabilizing that portfolio and then modest low to mid single digit growth in the consumer space.

Speaker 3

And Catherine, as it relates to the investment portfolio, we currently don't really have any specific plans for It relative to the size of the overall balance sheet. We did during the current quarter do some repositioning More specifically for interest rate risk management purposes and shortening up on the duration of some of The asset backed, mortgage backed type components of the portfolio, but I think to Dan's comments, we certainly would look to Redeploy in the mortgage and other elements of the loan portfolio first before we would think about or consider And in the size of the investment portfolio. Okay.

Speaker 4

That's great. Better for the margin anyway, right? Yes. Okay. That's all I got.

Thank you so much.

Speaker 1

Thanks, Catherine. Yes. You're welcome.

Speaker 3

Thank you.

Speaker 0

Our next question is from Brody Preston from Stephens Incorporated. Brody, your line is now open if you would like to proceed.

Speaker 7

Good afternoon everyone.

Speaker 1

Hi, Brody. Hi, Brody.

Speaker 7

I guess I just wanted to stick on the growth. I know you talked a lot about it, but I actually thought this quarter was pretty solid for you all on an ex PPP basis, particularly on the C and I side. And so I guess I just wanted to ask, is there anything specific that drove the strength in the core commercial business portfolio? Was it higher line utilization? I know that those are still pretty low, but what kind of drove the strength that you saw there?

Speaker 1

Yes, Brody, this is Dan. We our line utilizations are hovering right where they've been the last 3 or 4 quarters. So we're not seeing anything material happening there. I have to credit the success with the hustle of our bankers that are Out on the street, developing new relationships. And while it is strong, I will tell you that With the degree of production level of production that we are putting out, the runoff That we've experienced that's a headwind against that is atypical and it's curbing what could be Really great growth in the commercial portfolio.

So and those are not that's not losing clients, that's Clients that are having successful outcomes whether the sale of a business or the sale of a large commercial real estate. So Yes. The other good sign around the production this quarter is about 25% of that is in our builder related business. And as you might know, not very much of those dollars go out the door day 1. And so we have over the course of the 3 quarters built a nice Kind of deposit on the future so to speak in terms of future fundings in that particular book.

So But I think the result is our efforts of getting out while at the same time some of our competitors May still be a little more inwardly focused and we're winning more than our fair share of opportunities in the marketplace.

Speaker 7

Got it. Then just as it relates to fees, do you all happen to have what the assets Under management was for this quarter.

Speaker 1

Yes, I'll grab that for you. Just give me A second if you have another question.

Speaker 6

Actually, well, Dan, maybe

Speaker 3

Actually, well, very well, David, I'm looking at that. Let me follow back up on part of Eric's question earlier, which was the fair value mark impact To the earnings for the quarter, actually in the body of the press release and the income statement review, it's mentioned that there's about $800,000 Net overall fair value amortization that was included in the quarter relative to net interest income in the margin, just to clarify. Go ahead, Brady, if you have something else. Yes.

Speaker 7

Yes. I want to just maybe one for you, Phil. Is there Just on the liability side, are there any more I guess within the CD book, are there any more kind of Natural maturities that are kind of rolling off here in the Q4 and the Q1 of next year. And if there are, do you happen to know what the rates On those CV look like?

Speaker 3

I don't know exactly know the specific rate of what's going to roll off, but We continue to have portions of that CD portfolio at certainly at the higher rate levels Continue to work their way down. And in terms of let's maybe look at it in terms of the impact on that As we go through from this year to next, it could be probably worth another 10 basis points to 12 basis points on the cost of the time deposits themselves, just looking at it as we projected into next So there's still some additional room for that to run down and to have some impact to the overall cost of money into the margin. But that portfolio is getting smaller and smaller and as we speak.

Speaker 1

Got it. Okay. Brody, AUM in the Q3 through our 3 wealth groups ended up at 5.8 $1,000,000,000 at the end of the quarter.

Speaker 7

Okay, great. Thank you very much. And then My last couple of questions just relate to capital. I saw at the bottom of The slide deck on the capital position, the notes you got about a little over 1,000,000 shares left under the current authorization to be repurchased. Want to make a sense for appetite here at the current price, just given it's moved up A bit from the 4,304 you're buying back this quarter.

Speaker 3

Yes. I think we certainly will continue to evaluate as we trade Hopefully, trade forward here just to what degree in terms of price that we want to entertain. But I think By and large here, I think our general thought process is to stay committed to buying everything That is at least authorized at this point through the end of the year And to do so accordingly. So I think the other element of it will be at the other end of that will be to look to reengage Another authorized plan just so that we always have something out there in force, which will ultimately give us as much flexibility as we We can have in that regard.

Speaker 1

Got it. All right.

Speaker 7

Thank you very much for taking my questions.

Speaker 1

Sure. Thanks, Brody.

Speaker 0

Thank you, Brody. And we currently have no further questions. So I'd like to hand back to our speakers.

Speaker 1

Okay. Thank you, Harry. Thanks everyone for joining us today. If there are no other questions, that will conclude our call and we really appreciate you taking the time to participate. Have a great afternoon.

Speaker 0

Thank you to everyone who has joined us. This concludes today's call, and you may now disconnect your lines.