Q3 2020 Sandy Spring Bancorp Inc Earnings Call
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I would now like to turn the conference over to Daniel Schrider, President and CEO. Please go ahead.
Thank you and good afternoon, everyone. Thanks for joining us today for our conference call to discuss Sandy spring Bancorps performance for the third quarter of 2020.
So they will also bring you up to date on our response to any impact from the COVID-19 pandemic.
This is Dan Schrider speaking and I'm joined here by my colleagues film Intuit, Chief Financial Officer, and Aaron Kessler General Counsel for Sandy Spring Bancorp.
These calls open to all investors analysts and the media and there's a live webcast of today's call and a replay will be available on our website later today.
Let me get started covering highlights from the quarter and taking your questions.
Aaron will give the customary safe Harbor statement.
Thank you Dan good afternoon, everyone.
Sandy Spring Bancorp will make forward looking statements in this webcast that are subject to risks and uncertainties.
These forward looking statements include statements of goals to pensions earnings and other expectations estimates of risks and future cost and benefits.
In terms of expected credit losses.
The market risk and statements of the ability to achieve financial and other goals. These forward looking still.
These forward looking statements are subject to significant uncertainties, because they are based upon or affected by managements estimates and projections of future interest rates market behavior, other economic conditions future laws or regulations in a variety of other matters, including the impact of the COVID-19, pandemic, which by their very nature are subject to.
Getting uncertainties because of these uncertainties Sandy spring Bancorps 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.
Thanks, Eric.
I used to be on the line with me today to discuss our third quarter results as you read in our press release. This morning, we.
We delivered record quarterly earnings of 44.6 million the year over year operating earnings increasing by 49%.
Our performance this quarter clearly demonstrates the value of our Revere bank transaction and our position of strength.
We're especially proud to have delivered these kind of results in the midst of such an uncertain economic and political environment and.
And our results validate the effectiveness of our business strategies and personalized approach to client service.
Our team also seamlessly completed the systems integration over here this quarter the fourth.
The former Revere clients now have full access to our people products and services and locations.
The acquisition now behind US we continue to focus on maximizing the value of the transaction and working alongside our clients to see them through these extraordinary times.
As I stated today reported.
Net income of 44.6 million or 94 cents per diluted share for the third quarter of 20 Twond the correct.
The current quarter's results compared to net income of 29.4 million or 82 cents per diluted share in the third quarter of 2019, and a loss of 14.3 million or 31 cents per diluted share for the second quarter 2020.
Our results. This quarter included 1.3 million for M&A related expenses compared to 22, and a half million in the second quarter and we anticipate these expenses to be minimal going forward.
The provision expense for the quarter was 7 million compared to 58.7 in the second quarter of this year.
This decrease can be attributed to changes in the economic forecast and the resiliency of our loan portfolios credit quality.
Later in our call we will talk through the supplemental information we issued this morning and film and to provide additional detail about our provision expense and allowance.
Focusing on our balance sheet, our total asset deposit and loan growth was driven primarily by the revere acquisition as well as our participation in the VPP Oh.
Total assets grew to 12.7 billion at September 32020, compared to 8.4 billion at September 30, a year ago.
Loans and deposits grew by 57 and 53% respectively.
The date of acquisition reveres loans and deposits were two and a half billion and 2.3 billion respectively.
Taking a closer look at our loan portfolio total loans grew to 10.3 billion at quarter end compared to 6.6 billion at September 30 of last year, excluding PPP loans total loans grew 41% to 9.3 billion at September 32012, compared to the prior year quarter.
Commercial loans, excluding PDP loans grew 55% or 2.6 billion, while the remainder of loans the loan portfolio grew at 2%.
The majority of commercial loan growth again, driven by our acquisition of Revera and consumer loans grew by 9% also due to the acquisition.
Deposit growth was 53% from September 32019, as non interest bearing deposits experienced growth of 66% and interest bearing deposits grew by 47%. Once again growth was driven primarily by the acquisition during the.
During the current quarter excess liquidity was used to reduce borrowings under the paycheck protection program liquidity facility by us.
By approximately 580 million.
We had a strong quarter in noninterest income delivering a 58% increase from the third quarter of the prior year to 29.4 million.
Increase is the result of the 220% increase in income from mortgage banking activities.
42% increase in wealth management income as a result of the acquisition of remembered Pendleton Jackson, otherwise known as Rpj, which occurred in the first quarter of this year.
On a year to date basis, noninterest income rose to 70.5 million or 35% over the prior year.
Income from mortgage banking activities increased 15 million as a result of strong refinancing activity and wealth management income increased 6.1 million as a result of the first quarter acquisition of our PJ.
These increases more than offset declines in deposit service fees.
The reduction in BOLI income due to the absence of any mortality income that did occur as one team and lower not other noninterest income.
As mentioned mortgage banking had another truly exceptional quarter and we're grateful for the team's hard work and the results they delivered.
While refinancing activity was a significant contributor during the third quarter purchase production in the quarter was a record at over 200 million up 29 cents per cent from the prior year quarter.
While we do not expect mortgage demand remain at such a high level based on estimates from both Fannie Freddie and the mortgage Bankers Association, we will continue to make the most of our current environment.
Turning now to the net interest margin, we reported 3.24% for the third quarter compared to 3.51% for the same quarter of 2019 and 3.47% for the second quarter 20 Twond.
Excluding the impact of the amortization of fair value marks derived from acquisitions.
Current quarters net interest margin would have been 3.18% compared to 3.47 for the third quarter of 2019 and 3.19% for the second quarter of 2012.
We're pleased to see the stability in the core margin as we actively.
Balance the need for adequate liquidity with the effect of doing so on the margin.
To that end during the quarter, we chose to eliminate the negative carry related to maintaining an excess cash position again by repaying the PPL last month.
Non interest expense for the third quarter of 2020 increased 16 million, a 36% compared to the prior year quarter.
Increase was driven by the impact of the acquisition of Revere, and Rpj, which increased compensation costs facilities and operational costs and merger and acquisition expenses.
However, the non-GAAP efficiency ratio was 45 27 for the current quarter compared to 50.95% for the third quarter of 2000 1943, five in the second quarter of 2012.
Decrease in the efficiency ratio, which reflects an increase in efficiency and the third quarter of last year to the current year.
As a result of the 41 million gross.
Non-GAAP revenue, which outpaced the 13.6 million dollar growth and non-GAAP noninterest expense.
Looking ahead, we continue to manage its expenses to revenue metric, but then a targeted range of 48% to 50%.
While we continue to balance our efforts to both identify and implement opportunities for efficiency and also invest in the people and technologies needed for future growth and success.
Shifting to credit quality the level of nonperforming loans to total loans increased 72 basis points compared to 61 basis points at September 32019, it decreased from 77 basis points compared to the linked second quarter.
Nonperforming loans totaled $74.7 million compared to 40.1 million at September 30 last year and 79.9 million at June 32020.
The year over year growth nonperforming loans was driven by three major components.
Loans placed on nonaccrual status.
Acquired read here nonaccrual loans and leases previously accounted for as purchase credit impaired loans that have been designated as non accrual loans as a result of our adoption of the accounting standard for expected credit losses, which occurred at the began the year.
Loans placed on nonaccrual during the current quarter amounted to 900000 compared to $6 million for the prior year quarter and 27.3 for the second quarter of 2020, which included $11.3 million and Revere nonaccrual loans as of acquisition date.
The company recorded a net charge offs of only 200000 for the third quarter of 2020 as compared to net charge offs net charge offs of 600000 and net recoveries of 400000 for the third quarter of 2019 and second quarter of 2010 2020, respectively.
The allowance for credit losses was.
Wasn't $170.3 million or 1.65% of outstanding loans, and 228% of nonperforming loans compared to 163, and a half million or almost 1.58% of outstanding loans and 205% coverage of nonperforming loans at June 30.
Modest increase in the allowance from the linked quarter resulted from the contribution of the impact the updated projected future economic metrics and qualitative assessments of the loan portfolio.
Tangible common equity increased to 1 billion compared to $787.3 million at September 32019, as a result of the equity issued in the Revere acquisition.
As a percent of tangible assets tangible common equity declined to eight point 17.
From 9.74% at September 30, 29, the year over year change in tangible common equity also reflects the effects of the repurchase.
$50 million of common stock and the increase in intangible assets and goodwill associated with the two acquisitions that occurred during the past 12 months.
Excluding the effect of PDP loans on our balance sheet, the tangible asset to tangible equity ratio is well within our comfort zone at above 8%.
At September 32020, the company had a total risk based capital ratio of 14.0 to a top of common equity tier one base.
Ratio of 10, 45 tier one risk based capital ratio of 10, 45, and a tier one leverage ratio of 65.
Shifting now to the supplemental information that we also issued.
This morning.
Within the supplemental deck on slide two is a brief overview of the things we're doing to keep our employees our clients in our communities safe in the midst of a pandemic.
Pleased to report that our team has adapted to these over these past seven months and really have the b we can.
We continue to operate and what we consider to be phase one of our return to work strategy with roughly 80% of our non branch personnel working remotely.
As I shared last quarter phase one limits, our workforce to no more than 25% of normal capacity at any given location.
We intend to continue to operate in this way at least through the end of the year.
That's where our branches clients are welcome to come into our offices by appointment.
In a broader range of transactions are possible now through our drive thru locations.
On slide three you can see that total accommodations granted or what is also commonly referred to as deferrals initially exceeded 2 billion.
$465 million, receiving second payment accommodations.
Loans with payment accommodations as of October 12, However, total 500 million down to 5% of our total loan portfolio.
On slide four you will see that as of September 30, we've advanced a $1.1 billion of CDP loans to over 5400 clients.
In total we estimate we supported over 112000 jobs in our region advance nearly a 100 million to vary a nonprofit organizations and 23% of our PPP loans will decline to low to moderate income neighborhoods.
The online for getting this process will launch in early November and we're currently testing our applications and training our folks to prepare to start accepting those applications.
Slide five provides a summary of the five industry segments that we have covered the past two quarters.
Standing balances for each segment or as of September 30, and the loan and payment accommodations are as of October 12, that's why.
It's worth noting on this slide that while in air nearly half the hotel portfolio is in some type of accommodation criticized loans only account for 7% of that portfolio.
I speak frequently about our personalized and proactive approach to serving our clients and this continues to be a critical part of how we are helping our clients navigate these unprecedented times, we're working closely with borrowers to understand what they're up against any impact it may have on our various portfolios.
As I shared last quarter, we are conducting ongoing relationship reviews, as well as daily and monthly portfolio monitoring of several power.
Several possible coded related is that.
On slide six we have identified a few of the things, we monitored including utilization rates by industry payment accommodations delinquency trends and risk rating migration.
We also monitor beacon score migration of the mortgage and consumer portfolio and we perform stress testing on critical segments of our CRT book.
And now I'm going to turn it over to Phil So he can talk through both seasonal and our capital position.
Thanks, Dan Good morning, and good afternoon, everyone.
Pleasure to be here with you this afternoon.
Picking up on slide seven in the supplemental back we have a waterfall representation of our allowance build for all of 2020.
This time broken into components that reflect the key drivers of the build in the first half of the year followed by the drivers in the current quarter as you can see the change in the current quarter reserve is primarily driven by one significant component the change in our economic forecast, whereas the main factors and increase the reserves throughout the first half of 2012.
Are the direct result of our Premier Bank acquisition, a day, one reserve requirements under the adoption of sea salt and the change in the economic forecast.
As previously discussed the increase that is based on the change in the forecast is highly dependent on a number of key macroeconomic variables as outlined on next slide number eight.
I see so methodology uses a moody's baseline forecast for our local I must say that for the third quarter was a version released by Moody's in mid September.
This baseline forecast integrates the effects of COVID-19, and that portrays an employee unemployment rate for our local market.
Capex peaks at 6.3% in the first quarter of 21, and then steadily recovers and level of five four excuse me, 4.5% by the end of 2022.
In determining our reasonableness affordable forecast period, we used a two year timeframe horizon this quarter to reflect a more stability and the economic forecasts that we've obtained from Moodys during both the second and the third quarter.
We also believe that in utilizing the two year forecast at this point to your.
To your forecast period that it better aligns cecil's models projections during the reversion period to be much closer to the actual current economic projections.
Suddenly that into our approach taken in the last two quarters, we continue to not take into consideration any potential mitigating factors based on what can be perceived as the Pos positive outcome or impact of any government programs, such as PPP et cetera.
And we feel when we continue to feel very comfortable with this overall conservative stance.
Moving to slide nine this provides some additional granularity related to the reserve build from a portfolio review, where you can see the most significant amount of the reserve by both dollar amount and percentage and that is attributed to the commercial business portfolio, where the total reserve was 57.1 million or 2.57.
10% of Outstandings slightly less than that in the prior quarter we.
We should note that the 2.5% reserve reflected here includes PPP loans on the balance although there is no reserve required on those particular lines.
As illustrated in the footnote at the bottom of the slide when adjusting the balance to exclude the Pvp loans outstanding the reserve on our commercial business segment would be 4.91% and our total reserve would be 1.84% to total loans.
Finally on slide 10 is a trend of our prudent capital ratios with some brief explanations regarding the treatment of certain items and their impact as a result, the ratios including in those included in those comments as an adjusted tangible equity to tangible asset ratio to reflect the impact of PPP loans on the current measure.
We continue to feel confident about our capital position is all of our metrics improved as a result of the strength of our earnings in this quarter we have.
We've also recently updated our capital stress test, where inquiries construct constructed a baseline in severe.
Forecasts set of scenarios utilizing the same Moody's baseline forecast that's incorporated in our Cecil calculations and accommodate based as for economy and the severe case I mean.
Having done so we continue to be confident that we have the capital to carry us through this ongoing situation.
Dan back to you thanks, Phil.
Before we move to our question and answer period, just want to express my.
Appreciation on behalf of our executive team to all of our colleagues I'm sure you know from your personal experiences global pandemic is challenges all the ways, we never imagined.
Our team has responded with great some resilience and I want to commend the great work of our more than 1200 employees across Maryland, Virginia, and Washington DC.
That concludes our comments for today and now we will move to our question and answer period.
We can have the question if you can identify a.
Who you are and the company or with that would be awesome.
Certainly and we will now begin the question and answer session to ask a question you May Press Star then one on your question.
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And our first question today will come from Steve commentary with GE Research. Please go ahead.
Hey, good afternoon.
Hi, Steve.
I was wondering if maybe we could get an update on on accretion income how much is remaining and kind of how you guys expect that to be realized and then sort of secondarily on that question.
Thoughts on the NIM puts and takes going forward.
Yes, Steve this is Phil.
I think from a basis point perspective here.
We're probably in this quarter I think the impact on the NIM was about five basis points, it's probably going to be more in the in the line of about four basis points going into the fourth quarter.
And then into early next year, probably calculates to be three and then it just trickles down from there through the end of 2021 so.
Less and less significant impact as we continue to move through.
The rest of this year and into all and through 2021.
Okay, and then and then on the NIM in general.
Excluding accretion kind of thoughts the puts and takes the ability to solve.
Offset declining rates with deposits.
So I think that.
No we have the quarter here that has as a core including PPP right now I think 324 as reported three.
318, otherwise and.
And yet I would tell you that we ended the quarter with a with a fair.
With a fair value adjusted NIM in the in the neighborhood about 330 to 335, so we.
We start from that point and work forward.
We're anticipating we're not likely to see repayments of the PPP funding our PPP loans during the fourth quarter. So the fourth quarter will probably look fairly comparable to that in terms of NIM.
We're expecting the beginnings of the the forgiveness period and payback so on the Ppps to really take place in the first quarter. So that quarter will have some inflated looking margins obviously because of the the prepayments that are related to the fees and then from that point on.
I think that we're looking at a core margin that could be in that same 335 to 340 range throughout the rest of 21.
Okay. Thank you and then on the PPP topic.
I appreciate that breaks out.
This is a numbers and.
Oh, just just maybe like a.
Could you give some color on what mechanically needs to be done to see that forgiveness. I mean, you just talked about the timeline, but when needs to be done on your part and what needs to be done yes. Its part.
Yeah. This is Dan the SB eight just needs to stop changing what they are expecting in the forgive him.
[laughter] and.
If that occurs then we're well underway we're testing.
Our online portal and its underlying technology, we're going to use on that and and then we will be will be ready ready to roll with the abbreviated.
Requirements on the I guess is the 50000 below.
That's a that's a good percentage for our in terms of numbers for us of our over 5000, we've got at least a couple of thousand that are in that under under 50000. So that's going to help expedite that group.
We would love to see traction on their forgiveness process not not as much from us, but you know from from the FDA approval.
Quite frankly ahead of like another round of TPP just to know that it's going to work and our clients are going to have.
The expectation of forgiveness is actually going to play out so.
But as I mentioned in my comments will will be ready you know come.
Come early November to open up that Portland.
Okay. Thank you very much and maybe one more on.
If I may I know the press release mentioned a systems conversion with Revere, maybe just an update as to like what's kind of the plan now like what's next what's less to do with the Revere integration.
Well you know as I mentioned, the integration well that client systems has happened.
The branch activity that we plan to implement in terms of concern.
Consolidations occurred. So that's you know that's still got to play out in our run rate on a go forward basis.
So I think we're for the most part is for its bit behind us.
I think.
Focus right now operationally is what this what is unrelated to read.
What this what is unrelated to revere, but related to now this combined entity is what is post koby world look like for us.
From a from a future occupancy standpoint, how we're how we're going to refill reach.
Refill restack, our properties and look for opportunities from an efficiency standpoint.
When we when we transfer transition back to the office.
But as far as the as far as the integration of Revere.
That's that's really behind us.
Okay. Thank you. Thank you very much for taking my question.
And our next question will come from Casey Whitman with Piper Jaffray. Please go ahead.
Hi, good afternoon.
Hi, Casey.
Hi, Matt.
Maybe just continuing to see his line of questioning about the expenses.
Put another way are.
Are there more of beer expense cost saves to come out next year or so how far along are you in getting.
Getting the full cost savings from the merger.
Yeah. Casey this is Phil I think we're pretty far along there probably.
A handful of items.
Items, probably on the let's say on the system side, just to be netted through that or.
That are carried.
Carry over from from a pulp from multiple systems and redundancies there but.
But I would I would say that you know.
Once we're through the fourth quarter.
Our true run rate based on the combined companies should really manifest itself from from January on into 21.
I mean in this current quarter.
Just said in terms of levels of expense there were a couple of kind of more one off types of costs that we took during the quarter. We had a couple of bonus type payouts or incentive payouts that were related to doing things for our frontline employees as well as some other things that I'm happy.
And during the during the quarter extraordinary efforts, we also had a.
About a $600000 write off that was related to some.
Some branch closure activity or consolidation that we did on our own here.
As well and.
And so that those items in this quarter were close to a couple of million dollars and total.
And then we had some elevated costs and in marketing and some cute computer service accounting service fees. It for probably another million dollar. So I don't know if we're trying to you know.
Kind of normalize what happened here in the quarter those are probably a couple of things that that were in there they probably weren't anticipated.
You all wouldn't been EBITDA anticipate.
Got it so it sounds like the run rate might be you know a couple of million less than what we saw this quarter going forward.
Probably yes, probably somewhere in that ballpark.
Yep.
Got it helpful and Phil Sorry, I heard you mention going from 318 to margin in a 333 35 range and just how do you how do you get there typically 35 range.
Well again that was where we were at the in the month of September.
Which I think probably has even greater implications of the.
The the repayment we made on the PPL out funds would be.
It would be the first full month that we probably saw the full impact of that which had a pretty significant negative carry.
No with with it being 35 basis points on one side and be in only five basis points of excess cash on the other.
And so I think that's excuse me, that's what manifests itself into.
Where we ended up ended the quarter not so much where we were for the average of the entire quarter.
Understood. Thank you. Thank you for clarifying sure and by the way we continue to work at work down as much as possible what's happening on the cost of fund side here.
You know as we continue to completely integrate the revere client base with ours.
And look to try to try to try to bring that down as well.
As much as there as possible, which I think we've done a really good job with we got out ahead of it I think there's just some other.
Kind of miscellaneous based exception pricing and things that.
We continue to work through.
But right right today, as we said I don't know that we have anything on our liability side.
Within the markets.
In terms of transaction accounts is paying anything more 20 basis points.
Got it. Thank you I'll, just ask one more and let somebody else jump on but as you look at the slide with criticized loans at quarter end.
See that those moving out, particularly in hotels, so I guess, maybe to start with just a little bit more color on the movement in hotels, and then also work where there other movements to criticize it not.
At this category, that's broken out or is this kind of the ball criticized balances.
That is that is the bulk of criticized balances.
Casey the.
We'll be up here.
So if you look at.
Yeah. So look the hotels just as an example, and that's obviously an area that.
As as are all the others.
Receiving.
A lot of a lot of focus for us.
On a credit by credit basis.
The.
The number of loans that are currently within some form of accommodation, which is just about 45% of the portfolio.
We've gone we've got credit by credit and that that process is only driven as.
As you mentioned 30 million into the criticized category and that's that.
That's as of.
As of September 30.
We'll continue to work through that.
Receive star reports on all of those entities to make sure we understand the latest in terms of occupancy those are based on our conversations with borrowers as to their.
Their view of their viability and severity of of how.
How cold it is impacting if you think about that little bit more granular information on that hotel portfolio.
The majority of our book over 80% of our book is in limited service hotels.
Which is the one area that seems to be performing on that from a macro standpoint, a little better than than the full service hotels and that is the majority of what we have in our vocal with national flag type of brands and into.
In and around the Washington area. So that's that's clearly.
It's really difficult.
To assess how thats going to migrate going forward. So sitting here today, it looks really resilient.
Really happy and satisfied with.
Where where our methodology is driving our reserve coverage.
But I think we know there's still a long way to go for every bank as we work through the cycle and stay close to our clients to see exactly how migration is going to work through the risk rating system and ultimately what's going to be driven.
Regularly as we.
Worked with these clients, which is the significant portion of our current outstanding deferrals or accommodation as to whether there is going to be required.
Request for for around three and.
And telling you more than you asked but if we if we as we.
Consider those types of requests were also going to consider whether whether we continue to recognize.
The interest income from those assets or whether they move into a different classification as an asset regardless of what the accounting allows you to do.
But as we sit here today feel really good about where the portfolio stands but I think the most important thing is that we continue to stay on top of it and staying.
And stay in front of our clients and and then.
And then the risk rate than as accurately as we can.
Thank you Dan for all that color I appreciate it.
And our next question will come from Stuart lots with KBW. Please go ahead.
Hey, guys good afternoon.
Hi, Stuart Stuart.
Dan.
Go back to just the modifications for second.
I appreciate all the detail around ground to deferrals.
Can you just give a little more color.
Are those like how how are those relationships like how are you.
Are those deferrals on a month to month basis or did you did you grant another I guess three months through the end of the year just under the you know the rules of the Cures Act yeah.
For the most part they were 90 day second deferrals fell into that the 90 day.
Term.
So.
Throughout the month of November early December is when were going to see that the bulk of those.
A mature.
Fortunately.
Good percentage of of what we granted initially has rolled off and folks have returned to payments.
And we'll continue to see that number go down, but that's that's kind of the next window of time, that's really important in that second deferral.
Got it.
And that if we if we strip or if we dig into kind of your higher risk categories series C. R E retail remains.
One of your largest category from a risk standpoint.
Can you give any color on trends, there and what you're seeing in this portfolio.
Any potential risk.
Going forward.
Yes, the much like I discussed on hotels, I mean, we've been in front of.
You know our clients throughout this.
Particularly these three five Crs segment.
And.
The strength going in is what gives us a high degree of confidence or what I mean, I mean by that is.
If you look at our retail portfolio and is significant as you mentioned, we went in with a regional weighted average LTV at origination of 56% that's original appraisal.
Current balance if we take current into July.
And those properties.
Properties, and then apply a current market cap rate.
Your weighted average LTV and retail clients a couple percent to 58% and then you look at kind of the current debt service coverage and this would be predominantly from 2019 numbers would be.
You know on a weighted average basis, just above 1.8 times. So we got a lot of flexibility and as we've talked to our clients and retail which for us is predominantly what.
What we refer to as neighborhood centers.
With a variety of it might be a pad site with a couple of restaurant and service business is anchored by a grocer.
They have had those borrowers have had to work with their tenants and providing their own form of deferral or rent abatement and but at the same time for the most part they're able to.
To continue to cover and we don't have you know a significant portion in.
In our retail book relative to two others, well actually if you look at that on page five of our supplemental deck.
Not real significant dollars in and loan accommodations within retail multifamily or for office.
And so we feel pretty good about the performance of that book thus far.
Appreciate all the color.
Okay, maybe just turning to the log pipeline.
And this quarter, obviously and appeared balances were down how much of that was kind of planned runoff or or pay downs from revere and I'm just curious what your how the pipeline looks as we go into the into fourth quarter, Yes, I mean customarily as you know.
Stuart fourth quarter is going to be one of the more significant production quarters.
If at this point not likely to measure up the way it normally would it might be enough.
Be enough to overcome some expectation of a run off.
Right surprise us a little bit towards the end of December which oftentimes it does but it's.
It's not it's not it's not what it has historically been going into the fourth quarter.
And that's understandable, we got we've got.
We've got a lot of.
A lot of folks are spending their time handholding clients working through PPP forgiveness and doing portfolio management tasks. So.
I would I would say I would see it pretty flat portfolio moving through.
Moving through the fourth quarter.
As is at the same time.
Yeah.
Anecdotally I mean, we've had over the last few weeks of loan committees have been full of this.
Full of discussions around new opportunities and what we discovered as we move through the pandemic and with our success in PPP. There's there's a number of opportunities. We think that once we begin to emerge from this cycle will.
We'll take advantage by virtue of being not only just the capacity we bring but also our success in serving our clients through PPP, which has been noticed in the local market.
But for fourth quarter, it's looking pretty flat.
Okay, and then tying that into your margin, where where do you like whereas new production coming on and how does that compare to both the legacy Sandy spring loan yields as well as just kind of review or run off yes.
Yes, just curious.
Yes. This is Phil.
Throughout this last quarter kind of on an average basis in the commercial book.
It is probably not terribly different than on average what it's been in the rolling 12, which is around four and a half to 460.
Yeah again, just average across all the various elements of the commercial portfolio and I think the.
I think that Thats, probably probably.
Comparable to what we have done in the past.
I'm not sure quite sure how much it compare well it compares to what the.
Revere pricing would have been although I think in general we view their their their pricing to be better or higher than ours. When you know just in evaluating their portfolios in comparison to ours.
Got it.
Thanks, and sorry, just maybe one more.
Mortgage continues to be Hum rock for both you all and I've never here.
Your mid Atlantic peers, just curious how the pipeline.
Is going into the fourth quarter and then your expectations for that line of business next year.
Yes, Stuart Dan.
Obviously third quarter really strong continue to pump here going into the fourth but you typically see some fall off towards the end of the year in activity.
Our outlook going into 2021, it really mirrors, what what we're hearing from you know kind of industry Prognosticators like Fannie Freddie and the mortgage banking Association, which.
Between the three of them are are estimating a falloff of anywhere from 30% to 35% in terms of refinance activity.
And and so you know that that's kinda tempers, our our thoughts about what gain on sale activity should look like next year.
Okay that makes sense.
That made that I mean, we're certainly going to do our best to take advantage of whats in the market and we've been growing share over the course of 2020, but it looks like expectations are for that the fall off in modern.
Alright and out there.
Were there any onetime kind of fair value adjustments and the pin number this quarter or was that entirely from.
From a production gain on sale.
Yeah.
That night.
None that I'm aware of store and I think thats off just purely based on on the production than that and the level of the <unk>.
The level of the gains.
Great all right that does it for me thanks for taking my questions guys sure.
Sure. Thanks.
And our next question will come from Great Britain with Stephens Inc. Please go ahead.
Good afternoon, everyone.
Gary Newberry.
And maybe just a follow up real quick on Stuarts question understand the forecasts from the M.B.A. for for reduced volume.
Volume next year, but just wanted to get a sense for.
Fourth quarter, how gain on sale margins are trending relative to a third quarter.
I mean I don't know.
Top my head, where they are today relative to the quarter.
I think that.
I think they're probably fairly spend I, probably still fairly similar to what we what we enjoyed during the quarter.
Yes, which was about 210 basis points so.
I mean, what's interesting is you know as.
As rates generally, especially on the long end if.
Kind of kind of drop in stayed where they were they were still a fair amount of of.
Of up spread involved there as to what could happen to actual mortgage rates. So.
Some of those rates that and.
And I know, we have tried to hold up.
Some of our rates to just be able to manage some of that just sheer volumes there, but there is some possibility that some of those rates come down and and that fuels.
Other levels of refinancing I think during the quarter for us about 60% of everything that we produced was a refinance.
Might think it would be higher than that but I think we've also had some fair success with just.
Just you know.
Folks just just purchase money type of lending here and.
So I don't I don't know that we would get.
And getting back to your actual question I'm not sure we would see a whole lot of difference in that overall margin in the in the near term.
As we move out beyond the quarter, but probably changes.
I will also just say just from the sheer level of mortgage gain we probably would.
Good.
Characterized the third quarter is probably being a peak period for the amount of gain that we we booked here in this quarter. So.
From an expectation standpoint, I think we would view us coming off of that that number relative to.
Relative to.
You know to to the to the next quarter.
And actually just found some information here at our current mortgage pipeline.
It is somewhere in the five to 550 to 560 million dollar level, which is good.
Consider to close over the next 90 days. So there is still pretty significant pipeline out there.
Okay great.
Maybe just to go back Casey was asking a little bit on the expenses and I guess I just want to look at it.
Oh, we're running at like 40, Fiveish 46 ish.
The pre written here and I think they are running out like a little a little over 11 and team. So when I when you sort of layer in a 45% cost saves that you get to like the one and a half to two and a half sort of a core expense run rate and I under.
And I understand our PVA is.
Folded in as well.
The record mortgage quarters for the last two quarters. So I guess I wanted to get a sense for.
How much Rpj has added to the expense run rate and how much mortgages sort of artificially inflating expenses currently.
Sure.
Take a look at the.
The details here that you're.
You're asking about.
I mean year to date and this would be.
Eight months not nine because rpj closed in February.
The overall level of expenses, there is roughly $4 million.
Just for that particular enterprise, so there's that that element of it.
I don't necessarily write it off top my head have the incremental amount that's due to what's going on in mortgage have it. It's clearly something north of what we had anticipated when we put the two companies together. So I mean really at the end of the day.
I think as Dan mentioned in his opening comments from an.
From an efficiency standpoint, we look to run the company between 48 and 50%.
Current low current levels of revenue now that probably puts quarterly expenses in that high $50 million to $60 million per quarter range, It's probably the best way to kind of estimated at this point with all the things we just talked about.
Okay, that's great and so you.
The Rpj 4 million over the last.
So so I guess, maybe just call that 6 million all in for the year.
Good normalized annual number to you.
Utilized.
Yes, I would think so yes.
Yep.
Okay great.
Well, that's all I had thank you very much. Thank you.
And once again, if you would like to ask a question Chris burden.
And our next question will come from Eric quick with spending and Scott. Please go ahead.
Please go ahead.
Good afternoon guys.
Fair.
Most of my questions have been answered just a couple.
I guess one.
For the hotel portfolio do you have the weighted average ltvs and debt service coverage similar to what you gave for the retail portfolio.
I do.
And very similar fashion and that is originally it at that.
Using the original appraised value in the current balance weighted average LTV, we'd be at 62%.
Taking 2019 in Hawaii and current market cap rate.
Drives that up to 67% and then.
Again.
Not this is not co that affected it.
2020, but from a 2019.
Estimate.
Weighted average coverage of up to 40.
On that portfolio.
We've got that book is like.
Like I said in and around the greater Washington market with just a.
Few number of.
Properties that would fall down into the the Easter.
Eastern part of our state along the Ocean. Most of these are all limited service you know Mary.
Marriott Holiday Inn Ramada that type of Hilton this those types of properties or brands on leases umbrellas.
Limited service business travel and some folks that might travel and use those facilities coming into the DC market. So clearly impacted by code. So there's there's a lot.
Well, if you look at kind of from a macro standpoint, those do tend to be the types of properties that are seeing a little better occupancy rate in the full service hotels in our conversations with those clients.
Again are not driving a significant number.
Number of relationships down or risk rating spectrum, particularly into the criticized category, but we're saying stay in real close to it but we are starting off from a position of strength within that book.
Thanks for that.
Are there and I agree you kind of starting from a position of strength.
On the next slide.
For the stress tests on those.
Portfolios.
That are kind of considered at risk.
You run those exercises what are they revealing to you.
So I guess kind of magnitude of potential losses, or what would have to happen in the <unk>.
And the economy for it to play out for you to start realizing any material losses.
I think the what would need to happen in the portfolio I mean in the economy.
Tough tough to make that connection and prediction at this point the way we've the way we've approached it from a stress testing standpoint is going back in time, and particularly looking at the performance of certain elements.
During the great recession.
And the loss experience that we had and.
In terms of magnitude realizing we didn't have it in those specific segments of the portfolio, but applying some of those loss rate that we did experience.
And stressing that against capital and and you know what what type of.
Charge offs that might drive and that's what gives us.
What level right now with the way our seasonal methodology is driving the reserve and and also.
During our overall capital levels that even under a severe scenario, we'd be we'd be Ok.
But we will continue to evaluate that and I think the I think the methodology will will drive provision expense in the direction that needs to be should things change you know in the economic forecast.
That's helpful. And then just last one on capital and.
Kind of hit on it.
Capitalism fairly strong you've got built up reserves over the past few quarters.
Okay.
About deploying capital going forward.
Got to fairly.
Probably help on the stock.
Bank stocks trading below tangible book value just talked about.
Capital for growth versus acquisition buyback.
Buyback today, given that even though.
You've got a fairly healthy multiple you're still trading below where you would have historically.
Yeah.
Eric We certainly think we are a great five relative to to where we're trading in our performance, but I think.
All those things would normally be considerations, but right now it's I think there needs to be more clarity as we work through this economic environment before we would enter back into share buybacks, even though it certainly makes a lot of sense you know in terms of just that.
The level of which were trade.
Thanks for taking my questions today.
Thank you.
And this concludes our question and answer session I would like to turn the conference back over to Mr. Schrider for any closing remarks.
Great. Thanks, Thanks again, everyone for participating.
Participating in todays call and for your questions hope they've been helpful and we always welcome your feedback on on the effectiveness of our call. So please reach out or.
Directly or E mail your comments to IR at Sandy Spring Bank Dot com. So thanks, again stay safe and have a great afternoon.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. At this time you may now disconnect your line.
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