Q2 2022 Sandy Spring Bancorp Inc Earnings Call
Speaker 1: even the microeconomic environment, inflationary pressures, and expected interest rate actions by the Fed, management considered several economic surveys and research studies to determine the economist's perception of the near-term risk of recession. These sources included the Bloomberg survey, Wall Street Journal, Federal Reserve Research Reports, and Moody's Analytics Recession Index.
Speaker 1: So based on these studies, management incorporated a median probability of recession through a qualitative adjustment into its estimate of allowance for credit losses as of June 30.
Speaker 1: Shifting to the balance sheet total assets were 13.3 billion compared to 13 billion for the linked quarter. Compared to the prior year quarter assets increased 3% from 12.9 billion.
Speaker 1: Excluding PPP balances, total assets grew 10% year over year.
Speaker 1: Scale is important. As I mentioned in my opening remarks, this double digit growth and assets will help us as we continue to scale out. The next two slide is the precise ??
Speaker 1: During the previous 12 months, liquidity from PPP loan forgiveness was used to fund growth in the loan, as well as the investment securities portfolios.
Speaker 1: Total loans, excluding PPP, increased 17 percent to $10.8 billion compared to $9.2 billion at June 30, 2021. Excluding PPP, total commercial loans grew by $1.3 billion or 17 percent during the previous 12 months.
Speaker 1: During this period, the company generated $4.4 billion of gross new commercial loan production of which $3 billion was funded. So this production more than offset the $1.6 billion in non-PPP commercial loan runoff.
Speaker 1: In the second quarter, funded commercial loan production increased 60%, said $805 million compared to $503 million for the same quarter of the prior year in 545 million in the link quarter.
Speaker 1: If you look at page 17 in the supplemental information we released today, you can see our loan composition. We also break down year over year and quarterly growth in these respective portfolios.
Speaker 1: We've commented in prior quarters on our work to increase sea and eye lending and it's nice to see our momentum materialized.
Speaker 1: The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios, led by the $1.1 billion growth or 28% growth in the investor-owned commercial portfolio, and 230 million or 21% in the CNI portfolio. pension fund is not defined locally by the central branch of the to see an eye in portfolio.
Speaker 1: Year of a year, the consumer portfolio decreased 7%.
Speaker 1: At the end of the quarter, as I mentioned, our pipeline remained robust at 1.5 billion, which is comparable to the pipeline at the end of the linked quarter.
Speaker 1: So going into the latter half of the year, there will be a continued focus on transactions that meet profitability threshold and balance the commercial versus commercial real estate transactions.
Speaker 1: Looking at PPP, as of the end of the quarter, we had outstanding loans of only $23.5 million compared to $897 million in the prior year quarter.
Speaker 1: remaining fees to be earned are just in excess of 600,000.
Speaker 1: PPP interest, income, and fees earned in the second quarter totaled 1.3 million compared to 3.2 million in the linked quarter and 13.2 million in the prior year quarter.
Speaker 1: Our team's done a great job assisting our clients through the forgiveness process and we're pleased that PPP is almost completely behind us.
Speaker 1: On the deposit side of things, year-of-year deposits increased 1%, this was driven by 3% growth and non-interest bearing deposits and reflects growth in transaction relationships. Interest bearing deposits remain relatively unchanged with 6.8 billion.
Speaker 1: In general, our deposit strategy is to continue to hold a line on core deposit rates until we need greater growth or competitive pressure strife on more aggressive stance in response to the Fed rate movements.
Speaker 1: Today we've introduced some targeted rate specials in the area of CDs and higher price money market products linked to private client relationships.
Speaker 1: With the Fed increase next week, we believe it's likely we will start to react more directly to market rate changes in our broader offerings and promotion of additional core deposit products.
Speaker 1: We continue to model our future funding costs, applying a deposit beta assumption of 40 percent of market rate changes as they might occur.
Speaker 1: Noninterest income increased 34% or $9 million compared to the prior year quarter and this increase is the direct result of the $16.7 million gain from the sale of an insurance
Speaker 1: which I'll comment on in a little more detail later.
Speaker 1: Excluding this disposal gain, non-interesting income declined 29% compared to the prior year quarter.
Speaker 1: This anticipated reduction was driven by the rising rate environment and reduced refinance activity within mortgage banking.
Speaker 1: As a result, income from mortgage banking activities decreased 4.3 million compared to the prior year quarter and 815,000 compared to the length quarter.
Speaker 1: Other non-interest income decreased 3.4 million compared to the second quarter of 2021, and these decreases are more than offset by the sale of the insurance business.
Speaker 1: It should be noted that total mortgage loans grew 250 million during the quarter primarily in the conventional 1 to 4 family mortgage loan.
Speaker 1: We also continue to successfully execute on our strategy to hold a larger percentage of more of its production on the balance sheet to regrow this asset class.
Speaker 1: So compared to the linked quarter mortgage loans, held in portfolio grew by 15%.
Speaker 1: We expect future levels of mortgage gain revenue to be similar with the levels generated in each of the first two quarters of the year.
Speaker 1: That said around the $2.2 million per quarter mark.
Speaker 1: Well, then come as slightly down this quarter compared to the same quarter last year to market declines.
Speaker 1: Given the ongoing retraction, we expect wealth income to continue to decrease as we move into next quarter.
Speaker 1: As I mentioned previously, we completed the sale of our insurance business in the second quarter. We made a strategic decision to exit this business simply because it did not meet our profitability requirements.
Speaker 1: But through this transaction we've established a referral relationship with Hub International that will benefit our clients and our company.
Speaker 1: An interest margin finished a quarter at 3.49 compared to 3.63 for the second quarter of 2021 and 3.49 for the first quarter of 2022
Speaker 1: Excluding the impact of the amortization of fair value marks derived from acquisitions and interest in fees from PPP loans, the net interest margin would have been 3.45 compared to the net interest margin of 3.49 for the second quarter of 2021 and 3.41 for the lease of the second quarter.
Speaker 1: On a go-forward basis, we would expect the margin to remain fairly stable, consistent with the margin for the month of June in the mid-350 range.
Speaker 1: with the potential for some slight expansion depending on our success gathering core in-market deposits for our strategy versus utilizing other more wholesale deposits or borrowings needed to fund future growth.
Speaker 1: Non-interest expense for the quarter increased 2 million or 3 percent compared to the prior year quarter, which included 1.1 million in transaction costs associated with the sale of the insurance business. Other non-interest expense increased 1.4 million, driven by various other operating expenses.
Speaker 1: The non-GAAP efficiency ratio for the second quarter was 49.79 compared to 45.36 for the prior year quarter and 49.34 for the first quarter of 2022.
Speaker 1: Shifting for a moment to credit quality, all credit related metrics continue to remain strong.
Speaker 1: The level of non-performing loans was 40 basis points compared to 93 basis points at June 30, 2021, and 46 basis points at March 31, 2022.
Speaker 1: Lowest place on non-equivalvary in the current quarter amounted to $900,000 compared to $1.5 million and a half for the prior year quarter and another million and a half for the first quarter of 2022.
Speaker 1: The company realized an insignificant amount of net recoveries for the second quarter of 2022 compared to net charge of 2.2 million for the second quarter of 2021 and net charge of only 200,000 for the first quarter of 2022. The company realized an insignificant amount of net charge of only 200,000 for the first quarter of 2022.
Speaker 1: The allowance for credit losses ended the quarter at $113.7 million or 1.05 percent of outstanding loans and 261 percent of non-performers compared to $110.6 million or 1.09 percent of outstanding loans and 239 percent of non-performers at the end of the previous quarter.
Speaker 1: The increase in the allowance is driven by the growth and the long-port follow-up during the quarter and the result of management's consideration of the potential impact of recessionary pressures. The potential impact of recessionary pressures.
Speaker 1: Detangible common equity ratio decreased to 8.45% of tangible assets at June 30 compared to 9.28% as June 30 of last year.
Speaker 1: This decrease is a result of the $132.3 million repurchase of common shares during the prior 12 months and the $88.9 million increase in the accumulated other comprehensive loss in the investment portfolio.
Speaker 1: Due to the impact of the rising rate environment on the value of securities, coupled with the increase in intangible assets during the past year.
Speaker 1: The company had a total risk-based capital ratio of 16.07, common equity tier 1 risk-based capital ratio of 11.58, tier 1 risk-based capital ratio of, again, 11.58, and a tier 1 leverage ratio of 9.53.
Speaker 1: Before we move to take your questions or a few other updates, I'd like to briefly share. In the second quarter, Aaron Caslow was promoted to Chief Administrative Officer. Aaron continues to serve the company as General Counsel, but now has expanded duties that include human resources, for areas of operations and information services.
Speaker 1: His expertise will continue to help us grow into a larger, more complex organization serving the greater Washington region.
Speaker 1: And lastly, our company continues to earn top industry in workplace recognition. We were once again certified as a great place to work, named the top workplace by the Washington Post, and Forbes ranks Sandy Spring Bank, the number one bank in Maryland for the fourth consecutive year.
Speaker 1: These recognitions are important to our company, especially in the context of our solid financial performance.
Speaker 1: It's important that we deliver results while also providing a remarkable client and employee experience.
Speaker 1: So that concludes our general comments and now Matt we can move to questions.
Speaker 2: Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
Speaker 2: We will pause here briefly as questions are registered.
Speaker 2: The first question is from the line of Catherine Mueller with KBW. The line is now open.
Speaker 3: Thanks. Good afternoon, everyone.
Speaker 4: Good afternoon, Catherine. Hi, Catherine.
Speaker 3: I wanted to start on the lung growth, which has just been so great the past couple quarters. Just want to think you could just give a little bit of color around what's driving in, is this more line utilization? Is it new projects and just kind of paint a picture of what's driving the growth? And then also what your outlook is for growth to the back half of the year.
Speaker 1: Yeah, Catherine, this is Dan. Thanks for the question. I think with regard to... I probably... kinda
Speaker 1: say the primary driver of our successful long-growth is having moved through DPP.
Speaker 1: and having, you know, our larger broader team that came as a result of our acquisition or a beer, you know, fully engaged with hitting the street and driving, you know, driving new business. The growth is not driven by increased inline utilization. We're not seeing that move yet. Um, um,
Speaker 1: And also impacted by some, you know, local disruption or lack of activity from some local players in the market while they might be focused on dealing with some other issues. So we're just seeing a great number of opportunities that continue to come our way based on, you know, our ability to serve clients and the reputation that we've generated.
Speaker 1: As I mentioned in my comments, in the last couple quarters, we've kind of had great production, but at the end of the quarter, we continued to maintain a really solid pipeline.
Speaker 1: going into the future quarter. And that has held true here at the end of the second quarter and into the third. And that's probably, you know, what's about as far out as you can kind of see on the horizon. I can see that, you know, exactly the Blessing I can tell. you
Speaker 1: But there's nothing that indicates apart from the impact that race might have on demand. And then ultimately, if there's any type of recessionary activity that drives demand, there's no signals of that yet. But so I would say, third quarter continues to look really solid in terms of opportunity. Are we going to maintain this level of quarter over quarter production? I think we went into the year kind of.
Speaker 1: Our outlook was in that 8% to 10% growth. And even doing that would be healthy. But in the current environment where we are competitively, probably doesn't hold up at the same level. And quite frankly, it will be driven by our ability to drive funding behind it as well.
Speaker 1: I don't know if that answers your question, but that's what's driving it. And it's activity. You know, I want to reiterate the comment I made in the...
Speaker 1: In my comments, you know our success on the CNI side, we still want to see that
Speaker 1: start outpacing growth in the CRE book as we move forward. And our pipeline going into third quarter is really well balanced with CNI opportunities versus CRE. And that's important for us as well.
Speaker 3: And your comment kind of probably to my second question is on funding. It was great to see the deposit growth this quarter too. How do you think about deposit growth? And I imagine your beta will pick up significant or next quarter as it probably will for a lot of your peers.
Speaker 3: Certainly we've seen some high deposits rates for some of your competitors in your market. So how are you thinking about deposit growth and then also deposit cost of moving at the back half of the year?
Speaker 4: Yeah, Catherine, this is Phil. I think as it relates to growth, we would want, this ties back to your prior question as Dan alluded to as well, we need to be in a position from this point forward to really match.
Speaker 4: deposit growth with expected loan growth. And so we're, as I think we mentioned in the opening comments, going to, you know, most likely get more aggressive in that regard in terms of pricing to the market or establishing what we want in that regard so that we can...
Speaker 4: We can be as effective as possible with core in-market deposits as opposed to
Speaker 4: to any other form of wholesale, although that may be required as well. That will then drive the way we'll price and therefore the way that the betas will come out. As we mentioned again, we continue to model as if the 40
Speaker 4: 40% beta still applies, but there may be situations and specific points where that beta will get higher. And I think you're right. That's going to be the case.
Speaker 4: with competitors as well once the Fed makes their next move in the coming week.
Speaker 3: Have what your department costs for as of June or is it?
Speaker 3: Have you started to see that move yet or is that really more of a third quarter? We have, yeah I do.
Speaker 4: I can tell you what that is. We have seen it move because one of the things that we did mention that we have been doing. We have seen it move because one of the things that we did mention that we have been doing.
Speaker 4: to kind of protect the full book, but also deal with...
Speaker 5: the
Speaker 6: athyph seed
Speaker 7: The.
Speaker 4: requests of certain clients is to do a bit of a fair bit of exception based pricing
Speaker 4: So that we can continue to hold certain levels of deposits within particular relationships and yet not be out there re-pricing everything else that's behind it. Our total interest rate and deposit cost in June was about 29 basis points.
Speaker 4: And so that's not still not terribly high, but that has certainly moved from where it was earlier earlier in the year. In a statement.
Speaker 3: Yeah, but certainly not as high as I would have imagined. That's great. kind of
Speaker 4: No, not, I would say not a person to others.
Speaker 8: Yeah.
Speaker 3: Yes, for sure.
Speaker 3: Okay, interface is ready!
Speaker 3: And you gave the guidance just for the bottom line margin to be relatively flat, so that makes sense. And so how about, let me move to expenses. Any view on expense growth in the back half of the year just in light of the inflationary pressures? Stay there for the next couple weeks.
Speaker 4: The biggest thing, and I think we touched upon this last quarter, as we talked about expenses, the biggest thing that will be two things that will drive any difference in the expense levels. And we've been continuing to forecast this and plan is for us to have greater success in attracting new employees into the company. We're running at a fairly high vacancy rate for our normal experience here. And, um...
Speaker 4: As we are more successful in replenishing and or adding to our employee base, that would be one of the things that would potentially drive some additional salary benefit costs, which we would welcome because we're looking to add those folks to the roster here. And then the other thing is the continuation of spend on a current basis that goes along with our strategic initiatives in the digital and data world.
Speaker 4: But even having said that, I don't know that you're going to see a significant amount of quarter over quarter growth. I think I said before, you know, we might year over year look by the end of the year between 4 and 5% of overall expense growth. It's probably not going to be quite that now because we just haven't had to spend in the first couple quarters. But I think, you know, if we're successful bringing the types of folks on that we wanted to, then that will pick back up.
Speaker 3: Great, that's all I got. Thanks so much. Thank you for your time. drummer!? You can grab them in a great way.
Speaker 4: Thanks guys. Thank you.
Speaker 2: Thank you for your question. The next question is from the line of Russell Gunfer with DA Davidson. Your line is now open.
Speaker 9: Hey, good afternoon guys.
Speaker 4: Russell a raffle.
Speaker 2: Could I just switch back to the deposit data conversation for a second and just try to better understand that 40% number you guys are talking about. So is that a near-term expectation or are you thinking about that as more through the cycle as we get the remaining fed hikes and those are fully digested.
Speaker 4: Yes, I'd probably look at it as both.
Speaker 4: I think the thing that...
Speaker 4: could change that from just essentially looking at as every time the Fed moves, we're gonna move in that kind of an incremental move ourselves would be that if we have to, in terms of other competitive pressure, try to catch up on rate that we've been able so far to not have to price to, relative to where general market rates might be at that time. Because we've been able to lag.
Speaker 4: As you know here from the result, not really even having any significant beta to the first 100 and some odd basis points of Fed move through the first half of the year. So the question will be as rates from here move forward, is there any element of those rate changes that have already occurred that we might have to catch up with and that would ultimately make the actual beta greater than the way we're looking at it at 40 percent.
Speaker 2: Okay, no, that's very helpful. Thank you for the clarification. And then just sticking with the margin on the securities portfolio, just an update in terms of what the sort of monthly cash flows are, where you're reinvesting, what type of yields you're getting. This 60 day period about how this Hardy Governor, 417 days for the recap and the Mewingo scale what up to zero?
Speaker 4: Yeah, in that regard.
Speaker 4: about what we have in terms of the monthly cash flows. We have added to the portfolio here throughout the last quarter, so it's predominantly been in cash flowing type of fun.
Speaker 4: of product, again mostly kind of mortgage back type of
Speaker 4: type of security uh... you know we finally are starting to see some acquisition into the portfolio with rehandles on them as opposed to the you know sub two and two and a half in the past uh... so that's really kind of where uh... where we are in terms of what's been with been added to the portfolio we're not again really looking to grow it relative to everything else
Speaker 4: just kind of replenishing the cash flows as they come forward and move ahead.
Speaker 2: Okay. Very helpful. And then just a follow up on the loan growth expectations. I hear you on the near term. So this is a little more bigger picture. But do you guys feel like the market that you're in, the people that you have, this high single digit type of result, that 8 to 10 percent in commercial is sustainable even with some of the macro headwinds that are out there that may be more sustainable? Okay.
Speaker 1: Materialize more 2023. Russell is then short answer VES. I think that what we built here in terms of the... I think that what we built here in terms of the...
Speaker 1: the quality and depth of the team, coupled with...
Speaker 1: the market we're in and our position in that market.
Speaker 1: We've got scale, we've got capacity to work with clients from small business to middle market. And it found that we're become the go-to local bank for business that those growth rates that looks are sustainable. And that looks are sustainable.
Speaker 2: Okay, that's very helpful. Last one for me and given that commentary on the organic growth outlook, you mentioned the funding challenge to keep pace. So just your thoughts in terms of... So just your thoughts in terms of...
Speaker 2: utilizing M&A to help you fund that. Is that a near term objective or given, again, some of the macro headwinds is that on pause until there's better visibility. Is that on pause until there's better visibility?
Speaker 2: Your thoughts there would be great. And then that's it for me. Thank you.
Speaker 1: Yeah, good question, Russell. I think that we've always been, well, we've been very organically focused and we'll always continue to be coupled with that is being an opportunistic acquireer in the banking space and also with the disposal of the insurance business also in the FESIDE. So, not taking a pause.
Speaker 1: from our activity of building relationships. And we do, when we look at targets and build those relationships, solid to court-aposit bases are really important in that discussion. So...
Speaker 1: We would not hesitate to move forward if the right opportunity came along. The right opportunity came along.
Speaker 2: Great, very good. Thank you guys.
Speaker 4: Hey, Ron, so real quick, follow up to a little more detail on your question about the investment for fall. And we've probably got about $100 million cash flows left throughout the course of the remaining course of 2022. And then we've got a couple hundred million dollars a year over the course of the next couple years of projected cash flows in the portfolio. And as I mentioned before, a little more confirmation. Yeah, the buys that we had in the last month, we're going to be able to get a little more cash flow. So, we're going to be able to get a little more cash flow.
Speaker 4: Overall kind of average yield for the things that we picked up during that period was a little little around somewhere between 310 to 320.
Speaker 4: with roll off rates in the 190 range.
Speaker 10: Thank you for your question. There currently no further questions registered. So as a reminder, it is Star One on your telephone keypad.
Speaker 10: The next question is from the line of Mark Hughes with Lafayette Investments. Your line is now open.
Speaker 11: Good afternoon.
Speaker 4: I'm Mark. Hey Mark.
Speaker 4: Hi. Question for you. With non-performers now...
Speaker 12: back basically to pre-COVID levels and adjusting for the loan growth, it actually looks to me like it's a better situation. Could you just talk a little bit about how you manage to?
Speaker 12: get those non-performers down from the level they were a year, year and a half ago to the current levels.
Speaker 1: I think the...
Speaker 1: We had throughout that course of that time mark, I think it's a combination of not having significant additions while also resolving a handful of more sizable relationships that had been in a non-performing category throughout the pandemic. So nothing...
Speaker 1: You know, I think, and the only thing that might have been...
Speaker 1: a little bit unique during the pandemic, we did dispose of or through the sale of a couple of notes related to the hospitality industry in that process, which I say unique is not unique for banking, but a little bit unique for us. Everything else we've done has just been a normal workout of relationships but I think from a broader big picture. Um,
Speaker 1: We clearly spend a great deal of time in the area of portfolio reviews, stress testing, re-underwriting, adjusting cap rates, stressing interest rates on a good bit of our portfolio, particularly in the income producing real estate area.
Speaker 1: And things continue to look really strong as we are all anticipating what this inflationary rate environment and potential recession activity might drive. So far good and we'll continue to work the portfolio really hard as we have been.
Speaker 12: Well, nicely done. There's been a couple questions sort of around this point, but with the fed raising rates so.
Speaker 12: and bigger increments that it has done in the recent past.
Speaker 12: How do you all deal with your...
Speaker 12: What you're paying on deposits, it just seems like in recent years the growth in interest rates has been incremental. Now we're jumping 50, 75, maybe even 100 basis points. Do you get pushback from your depositors on, you know, they could, most of your people know that you can get 3 percent on a Treasury bill today. What are you hearing from them about how?
Speaker 13: Get off him.
Speaker 12: Are they putting the pressure on you to raise your rates even more quickly than you have been doing?
Speaker 4: Hey, Mark, this is still, excuse me. I think our experience so far is, yeah, we've probably heard from some cross section of clients in that regard and...
Speaker 4: We've chosen, and I'd say successfully, so to deal with them on a kind of one-by-one basis, what we would refer to as exception price, those individual relationships as they come forward. But to your core question, it is clearly harder in my view.
Speaker 4: to deal with the said changes when they come in such large chunks as they have now and will continue to as we anticipate what's going to happen next week and maybe even to a large degree in the following month or the next meeting. Because then I think it drives us greater expectations for...
Speaker 4: you know, for what we would need to do to kind of keep pace. So it does make it harder and it certainly, you know, has us think about it in a little bit different way. Now having said all that, today most of our competitors have done, I think, as we have, you know.
Speaker 4: without other circumstance, which is to try to lag this as long as possible because I think we're all starting from a different point from an overall liquidity standpoint than maybe most of us were in other rate cycles.
Speaker 12: Well, I wish you luck. It can't be easy to hold the line as well as you have done so far.
Speaker 12: Thanks, that's all I had for you.
Speaker 4: Thanks, Mark.
Speaker 10: Thank you for your question. The next question is a follow up from Russell Gunfer. Your line is now open.
Hey guys, thanks for letting me jump back in. Just a modeling question, if you could any clarity around how we should think about the fee and expense impact from the sale of insurance going forward. Is that, is there a zero revenue attached with that going forward? And then any associated expenses that may come out of the PNL or that would not reflect it in this quarter, just kind of think about the run rate. Thanks.
Yeah, Ross, this is still so...
I don't know.
If we look back at 21 as an indication of what the insurance agency
provided to us. It was about top line revenue. It was around 7 million expenses related to it. We're a little under six.
And so, you know, on an after-tax basis, the bottom line contribution was less than a million dollars. And so you could probably take those to what would be left into the last two quarters of the year and remove them from your model. There may, there will be as expected with the relationship with hub, some referred revenue, but I wouldn't take a lot of.
time to try to factor that in. I would run it like you're suggesting, just eliminate those two line items or eliminate those amounts out of those line items and move forward.
Okay, very good. Thanks, guys.
Thank you. You're welcome.
Thank you for your question.
There are no additional questions waiting at this time, so I will pass the conference back to Dan Schreider for any closing remarks.
Thank you. Thanks, Catherine, Mark and Russell for your engagement this afternoon. And thank everyone else for joining the call. That concludes our call. I hope you have a great afternoon.
That concludes the Sandy Spring Bank Court Earnings Conference call and webcast for the second quarter of 2022. Thank you for your participation. You may now disconnect your lines.