Q3 2022 Sandy Spring Bancorp Inc Earnings Call
Do not necessarily indicate its future results.
Thank you Erin it's good to be on the line with you. This afternoon.
Set the stage for our discussion today.
It is important to acknowledge we are managing the company through an unprecedented environment evidenced by the magnitude and pace of fed action as well as the rate of inflation and the expectation of recession.
Despite this we remain focused on the long game, we are growing new and existing client relationships and investing in technologies and human capital that will fuel continued growth.
And we're also addressing the near term realities by keeping a keen eye on credit quality launching initiatives to drive core funding and managing operating costs.
We incurred an outsized provision expense this quarter, which was a result of our success in driving loan growth changes to the probability of recession and the reassessment of the accounting for unfunded commitment a majority of which is a one time adjustment.
With that let's take a look at our overall results and we will drill down on the details in a few moments.
Today, we reported net income of $33 6 million or <unk> 75 per diluted common share for the quarter ended September 30, compared to net income of $57 million or $1 20 per diluted common share for the third quarter of 2021, and $54 8 million or $1 21 per share for the second quarter.
<unk> 2022.
Core earnings were $35 7 million compared to $44 2 million for the linked quarter and $58 2 million for the prior year quarter.
The decline in core earnings is primarily the result of the provision for credit losses, given the substantial growth and the expected decline in mortgage banking income insurance commissions and bank card fees.
Looking at earnings through another lens.
Pre tax pre provision income for the quarter was $64 1 million.
A 6% increase after adjusting the linked quarter $76 2 million for the $16 $7 million gain on the sale of the insurance agency and $1 1 million in related M&A expenses.
This pre tax pre provision growth is primarily based on the additional net interest income driven by our larger balance sheet offset by the continuing pressure on our noninterest income sources as mortgage gains in wealth management revenues are impacted by the current economic and rate environment.
The provision for credit losses was a charge of $18 9 million compared to a credit of $8 2 million for the prior year quarter, and a charge of $3 million for the linked quarter.
The provision includes a provision for credit losses of $14 1 million for the funded loans.
And and adjustment of $4 8 million for unfunded loan commitments.
Shifting to the balance sheet total assets were $13 8 billion compared to $13 $3 billion in the linked quarter.
Compared to the prior year quarter total assets this quarter increased 6% and.
And excluding PPP balances total assets increased 10% year over year.
Total loans, excluding PPP increased 21% to $11 2 billion compared to $9 3 billion at September 32021.
Total commercial loans net of Pvp grew by $1 6 billion or 21% during the prior 12 months.
Gross new commercial loan production over the past 12 months was $4 6 billion of which $3 billion was funded.
And funded commercial loan production increased 43% to 760.
$2 million during the third quarter compared to $533 million for the same quarter of the prior year.
If you look at page 17 in the supplemental information. We released today you can see our loan composition and we also break down year over year and quarterly growth in these respective areas in our C&I lending continues to remain on a positive trend.
Excluding PPP, we grew all commercial portfolios led by the $1 3 billion or 35% growth in the investor owned commercial portfolio.
Year over year consumer loan portfolio decreased six 2%.
And at the end of the quarter, our commercial pipeline was $1 3 billion compared to $1 7 billion.
Linked quarter end.
As we shifted the deposit side of things, it's fair to say that deposit growth has been a challenge.
Deposits over the past 12 months decreased 2% and noninterest bearing deposits remained stable while interest bearing deposits declined 3%.
Given the pace of fed moves and the amount of liquidity, leaving the banking system.
Been difficult to gain traction on deposits.
However, we have several short and longer term efforts underway to address these realities.
We continue to offer some of the most competitive rates for this market and we have introduced targeted CD rate specials, and higher priced money market products linked to private client relationships.
We are incentivizing will actually enhanced our incentives for every salesperson to drive deposits from both our retail and commercial lines of business.
And looking into early 'twenty three we have plans to launch a sophisticated online account opening platform and that will expand the channels, we offer our clients and significantly reduce friction in the account opening process.
Given this challenging environment, we have recently relied on more expensive noncore funding and as a result, this will put pressure on the margin over the next few quarters.
The net interest margin for the current quarter.
At 353% was four basis points higher than the prior quarter.
But we ended the quarter with a margin in the low 300 <unk> is funding costs continued to increase at a greater pace than earning asset yields due to the impact of the two most recent fed increases on short term rates.
We anticipate our margin will be in the low 300 <unk> range for the next few quarters before it begins to expand again as.
As we do expect to spend to continue to increase short term rates, which will continue to drive up our funding costs.
Excluding the amortization of fair value marks derived from previous acquisitions and interest and fees from the PPP loans. The current quarter's net interest margin was 350% compared to 332% for the third quarter of 2021 and 345% for the second quarter of 2022.
Noninterest income for the current quarter decreased by 31% or $7 5 million compared to the prior year quarter.
This anticipated reduction as a result of several factors primarily the impact the economic environment is having on mortgage banking activities and wealth management income.
As well as a decline in the insurance and insurance Commission income given the previous quarters disposition of our insurance business and.
And finally, lower bank card income due to regulatory restrictions on fees as the Durbin Amendment became effective.
Income from mortgage banking activities decreased $3 4 million compared to the prior year quarter, and 83000 compared to the linked quarter.
It should be noted that total mortgage loans grew $355 million, primarily in conventional one to four family mortgage loans. During the 12 months ended September 32022, we have successfully executed on our strategy to hold a larger percentage of mortgage production on the balance sheet and re grow this asset class and we have achieved our.
Current desired level for mortgage loans held in portfolio.
Which grew four 7% compared to the linked quarter and we do not intend to further grow this asset class in the near future.
We expect future level levels of mortgage gain revenue to be about where they were this quarter at least for the next couple of quarters, and we might see that expand a bit as the spring season comes on and if there is moderation in longer term rates.
Wealth management income.
Decreased 231000, or two 5% compared to the linked quarter due to ongoing market volatility.
Noninterest expense for the current quarter increased $2 6 million or 4% compared to the prior year quarter.
And this was driven by a $1 $5 million increase in compensation expense.
$1 4 million and other noninterest expense.
I should note that the 2% increase in other non op.
Other noninterest expense compared to the prior year quarter.
As a result of a $1 $2 million accrual towards the fully realized contingent earn out for our P. J.
Acquired RPG in 2020 and over the past two years. The firm has demonstrated the ability to grow revenue and drive business.
We expect to continue to grow our expense base commensurate with our ongoing long term strategic objectives.
Including efforts to improve our digital delivery and data analysis capabilities.
Continuing to add necessary skills to our employee base and keep up with inflationary based employee costs.
On an annualized basis expense growth in the near term should be in the 4% to 5% range, although could get to higher single digit growth with greater success in hiring for the future.
The non-GAAP efficiency ratio for the third quarter of 2022.
<unk> was $48 18, compared to $46 67 for the prior year quarter and $49 79 for the second quarter of 2022.
Given our outlook on expenses and net revenues, we expect the efficiency ratio to hover around the 50% mark for the foreseeable future.
Shifting to credit quality in spite of the increase in the provision this quarter. Our overall credit quality continues to be strong and we see no inherent signs of weakness in the major sectors of the loan portfolio as.
As mentioned the increase in the provision was driven by growth and an assumed greater probability of recession versus any underlying change in current or projected credit based performance of the portfolio.
The level of nonperforming loans to total loans held steady at 40 basis points for both the current and linked quarter and decreased from 80 basis points at September 32021. These.
These levels of nonperforming loans indicates stable credit quality during a period of significant growth.
Loans placed on non accrual during the current quarter amounted to $4 2 million compared to $5 7 million for the prior year quarter and 900000 for the second quarter of 2022.
We did realize net recoveries of $5 million compared to net charge offs of $7 8 million for the third quarter of 2021 and insignificant recoveries for the second quarter of 2022.
The allowance for credit losses was $128 3 million over 114% of outstanding loans.
And 289% of nonperforming loans and this compares to $113 7 million or 1.0% to 5% of outstanding loans and 261% of nonperforming loans at the end of the previous quarter.
The tangible common equity ratio decreased to $7, 98% of tangible assets at September 30, compared to $9 10 at September 32021.
This decrease is a result of the $132 3 million repurchase of common shares during the previous 12 months and the $141 $9 million increase in the accumulated other comprehensive loss in the investment portfolio due to the impact of the rising rate environment and the value of securities coupled with the increase in tangible assets.
During the past year.
At September 30.
2022, the company had a total risk based capital ratio of $14 15, our common equity tier one risk based capital ratio of 10 <unk>.
Tier one risk based capital ratio also at 2018, and a tier one leverage ratio of 933.
And before we move to your questions. Just a couple of other updates I'd like to share in August the bank paid a special onetime bonus of up to $1000 per employee to all employees and like everyone. Our people have been feeling the effects of inflation. So we wanted to do something to show our appreciation and support.
For our people and finally bank director recently issued the 2022 Bank ranking study. This report ranks the financial performance of the 300 largest publicly traded banks in the country and Sandy Spring Bank core ranked number 23, among all banking companies.
Really pleased to be recognized for our best in class financial results and I'm grateful to.
To the 200 exceptional employees, who make this possible.
So Matt that concludes our general comments for today and now we can move.
To your questions.
Yes.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
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The first question is from the line of Catherine Mealor with <unk>. Your line is now open.
Thanks, Good afternoon.
Good afternoon, Catherine Hi, Catherine.
Yes, Dan.
I think you said in your prepared remarks that said margin near term would you say would be in the 330 range.
Yes.
As we forecast out what we think the fed projected to do.
Before our earning asset yields kind of catch up to where the cost of funds are going I think in the next few quarters, we're going to we're going to see some compression down into the low 300 <unk>.
Before we see that rebound.
Okay, just wanted to clarify that.
Alright, and then that $3 30.
Sumit.
How are you thinking about deposit data maybe.
And the question, where where deposit cost.
At September quarter end, just to give a firm vacation have always full for the full quarter.
This quarter.
Yes, Catherine this is Phil.
Phil and you are right on it as it relates to <unk>.
It's more about where we ended the quarter.
And the implications going forward from that point.
With the assumption that the fed is going to continue to.
To move move rates ahead than it is the overall average during the quarter I think in your earlier note you had the beta right around 20.
23 <unk>.
In reality, it's probably closer to our.
During this quarter it probably was closer to overall that 40.
40 range that we've stated before and in some cases.
In areas like our money market products is probably more like 50 or 55%.
Lagged as long as we could.
In order to try to preserve the margin to date.
But with the speed and size of what the fed did here more recently and our liquidity needs.
We had to get more aggressive in silos, those betas are going to be elevated.
From where we would normally have.
At projected them.
<unk>. So for example.
Yes.
<unk> average rate.
On on our on our money market.
Group of deposits was 65 basis points, but that same rate at the end of September of for the month of September was 109. So I think that gives you some indication of just how we're progressing in terms of what it's costing us too.
The fund with within the within the deposit base much less.
Even more so on the wholesale basis.
That makes sense and then have it on CD.
Is it keeps the same turnover on that yeah yeah.
Same type of thing, but probably not as significant just because.
It's the incremental element of time deposits, but for the quarter at a time deposit average cost was 56 basis points.
And by the end of the quarter in September It was 83.
Great.
So as you grow deposits.
Washington.
The next question is just the call deposit declined this quarter and Dan you talked a lot in your prepared remarks about just the challenge of growing deposits right now or where do you think.
We're able to grow deposits, where do you think this comment than a.
Question comes from Mr. Robert money market line of Cds.
Maybe the message.
I mean from a funding standpoint of what we're emphasizing relative to rate.
Those are the two categories that we would expect that.
Growth to come from but I would also say that based on what we're trying to do brought more broadly in the efforts of our frontline folks.
We really would like to see and hope to see some additional growth in the DDA area as well, especially from the commercial side of the house relative to to lending clients and alike.
Okay.
We've had pretty good.
And by the way I think we had pretty good success of holding the line in terms of the DDA balances here.
Major category there as you might expect it's going to be down was really anything related to title company business affected by it.
Mortgage environment.
Yes for sure for sure.
And that's with borrowings with.
Your kind of strategy or plan with appetite for Ang borrowings on margin from here.
Yes, our general approach to anything wholesale is.
To utilize it as we need to backfill and match.
A measure of growth on the other side of the balance sheet and that's essentially what we've been doing here throughout the quarter.
We're at $840 million at quarter end.
In terms of advances there are mostly short term of course the problem with that is that.
Unfortunately, one of them kind of the most more expensive part of the curve today, but we are doing so with the anticipation that over time, the deposit piece will catch up and we will be able to eliminate.
Eliminate that position.
Great.
Okay.
Linda deposit ratio is now over 100 or you might ask how do you think about that ratio in Europe .
Yeah.
Our end of that range or you would not be comfortable going.
Well, we normally I think as we've talked before our comfortable managing that in the one to 105 range.
Just knowing the nature of the market here.
And the general profile of customers alike.
Our our kind of pain point is where when it gets more towards the 110 level.
And then it also depends on just how.
That ratio is constructed relative to how much of the deposit base is true core versus how much in those ranges would have happened to be brokered or wholesale because there.
The profile is dramatically different in my mind, depending on how that deposit base on those ratios are felt.
And then on the rest of the balance sheet I'm, just really dig into the margin.
On loan yields.
Maybe a question one is it really strong loan growth this quarter. So maybe on average where are you seeing new pricing come on.
Dan I know you've got.
Total loan portfolio that is more heavily weighted towards fixed rate. So how are you thinking about.
Our own data over the next couple of quarters.
I think it speaks a little bit.
To your question as it relates to kind of the pipeline going forward compared to what we've done going in.
In the past Catherine obviously come out of a cycle where.
It's been largely largely fixed rate production that we've seen over the last few quarters as.
As we look forward into the fourth quarter, we've seen a pretty material change based upon.
The focus that we've had.
Our frontline take probably 80% of that $1 3 billion dollar.
Our commercial pipeline is floating rate business, so when I say, either prime based or 30 days so far based.
Opportunities in front of us.
We've really shifted the focus to drive opportunities that are there going to be more tied to what's happening with short term rates as opposed to longer term.
Longer term fixed rates.
Which should obviously help on.
At least the kind of being closer to what we're paying on the funding side of the equation.
Fund that growth.
Phil if you have anything on that yes, I would say that.
The lion's share of the of the current pricing.
Especially in the commercial portfolio in particular has probably been in.
And to that mid to high 5% range, Although I think we are imploring.
Our folks to really be thinking about it in a more six 5% to 7% range as we move forward here and we are seeing some migration in that direction.
In general.
So I think that that's really where we're trying to get to.
Okay.
Great.
Last question.
And then like the only mid Atlantic analysts if there are any other analysts donlin I may call. Thank you Antonella I'll, just give you to be there.
For now thanks.
Katherine you can keep going.
Thank you.
I'd say the Q in front of us and so you are the questions or at this point.
And then everyone's enjoying my one on one calls.
Thanks, Chris.
Thank you so much.
Maybe we can move to the.
To the credit side as the ACL build with still take this quarter than a lot of that with shift from diesel and the macro change in the growth and obviously Anthony commitment. Thank you talked about.
Yes generally.
Maybe just kind of talk about your outlook for where you think provisions may be next quarter next year I know that's hard just given it's so uncertain, but in this number felt like it was really big and just curious how youre kind of thinking the cadence there Phil.
They may look over the next couple of quarters relative to that.
Yes, Catherine this is Phil again.
It feels pretty big to us too.
And although.
I think we also do have to recognize that.
About five.
Almost $6 million of it was directly related to growth as well so.
Depending on if we are.
If we have a little bit.
Lesser mitigated growth that aspect of that build would certainly add back as well the other thing thats related.
More purely seasonal.
And it is we have these qualitative factors in here now that are related to the probability of recession and at some point as you approach the recession.
You, probably no longer need to have that qualitative factor because it then becomes embedded so to speak in the baseline forecast economic forecast that you are using as well. So you might we might see some of that kind of.
Ebb away a little bit as it transitions into the more baseline forecast.
And that might be one of the other places that it comes back a little bit.
But in terms of.
<unk> correct.
Lessons general levels of provisioning going forward.
I mean this quarter is outsized by probably at least $506 million.
Okay great.
And just generally.
You're seeing that you're pulling back on are more concerned about from a credit perspective in your market.
We've heard of some pullback on construction.
It's been a little bit next year.
Yes.
Probably focus as much on the.
The nature of the underlying opportunity from how it's priced structure or pricing.
So a lot more emphasis on the C&I and floating rate opportunities and then we.
It's no secret that were a little elevated compared to our peer group.
On credit exposure, but that is that is largely what the greater Washington market.
And that's consistent with kind of what this market how it's built.
But not real interested in throwing longer term.
Fixed rates and continuing to grow that that concentration. So we're project managing some.
So portfolios within commercial real estate.
Not at least not see them expand significantly.
As we as we look at.
We go through our process of portfolio reviews stress testing.
Analytics around market trends within real estate.
We're not seeing we're not seeing signs we are seeing movements in cap rates, which will obviously.
Drive.
Pricing evaluations in a different direction, but nothing thats given us cause for concern apart from just making sure of what we're putting on the books makes sense from a from a pricing and concentration standpoint.
Gross Keith what's your.
Since that I'm, assuming growth will slow from the level. We saw this quarter what are you what.
The appropriate growth rate to think about for next year.
Yes, great question.
Q4 is always a wildcard because.
Right now from our pipeline of new opportunities, we would not expect to see the same level of growth that we just saw in the third quarter, but there is always year end kind of window dressing going on within your commercial client base. So you might see things pop at the very end of the year, our expectation going into 'twenty three continues to be in that.
8% to 10% kind of loan growth expectation.
High single digits, we think would be reasonable.
Our appetite or ability to fund and what we.
Would foresee in the economic environment, one of the things that's a little bit unique at least it seems this way to us.
We've.
The teams coupled with coming out of the pandemic, having done revere in the middle of it came out of the kind of came out of the pandemic with a great deal of momentum.
And.
<unk> developed a reputation as kind of the go to bank in the market here locally.
And so I <unk>.
That momentum to some extent will continue we continue to see existing clients want to grow in new clients when it come here and so the last thing we want to do is.
As turn that off and so our greatest challenge right now is just making sure we can fund it with core sources of funding.
And that's probably the one thing that could put a governor on on growth, but that 8% to 10% number seems to be reasonable outlook right now.
Great.
And any update on buyback appetite, we're not good this quarter, but.
And your stock is down today any thoughts on.
And reengage in the buyback.
We don't have.
We don't have plans at this moment, but something always under consideration and after looking at the market right now with maybe we should be active this afternoon.
Yes.
Yes.
The capital piece.
And do you look at.
Kind of your growth in capital levels as the governor for that.
Yes.
We added more active or not.
Yes, I think I think going into what could be.
Little bit of uncertainty from an economic standpoint.
I think we would probably hold the line there maintain our capital levels, let that let that continue to grow as we move through what might be a recessionary period.
And my last question is just on M&A any updated thoughts on.
The potential for deals that Youre looking at M&A markets felt quiet over the past couple of months just any updated thoughts there.
Yes.
<unk> to be.
We're coming up on or 253 years from our last.
At least bank opportunity. So we continue to build.
Build those relationships and.
And it's certainly something we expect to be part of our strategy going forward as well as.
Would love to find another one or two.
<unk> to fold into our wealth practice as well so we're working diligently on both of those fronts, but don't really have anything more to report at this time.
Okay.
Great. Thanks for the the one on one and I'm sorry, what was the <unk> WCS.
Hopefully, we'll have more analysts on next quarter.
Thank you.
Catherine.
Sure.
Thank you for your question.
Next question is from the line of manual novice with D. A Davidson your line is now open.
Okay.
Good afternoon menu.
Manual please check to see if you're on mute.
Hey, sorry, guys.
I was on mute.
There was more within one analyst here.
So that's very.
Welcome to the mortality.
Yes.
Yeah.
Does the NIM forecast that you're talking about with the next couple of quarters at $3 30 are kind of heading towards $3 30 is that kind of a timeframe that's going to take to replace the wholesale funding to deposit funding just kind of thinking about.
From about on that piece.
Yes.
A key part of it may well this is Phil.
That's a key part of it as well as <unk>.
<unk> within that couple of quarter period, the fed gets done with what theyre going to do and things can kind of subtle from bureau from having to.
Right.
Keep up with continued upward movements in overall rate. So I think it's I think it's those things that we are looking at here as we project out into the first half of next year and looking at what the implications would be.
With the money market fund.
Money market rate kind of being higher at the end of September .
Was that just to prevent attrition are you actually seeing some new flows because you raised rates.
We're probably looking to.
To both counter any possible.
Attrition as well as.
Just just putting.
Legitimately.
<unk> right out there to attract.
New relationships, we had normally used that money market.
Vehicle for doing that and giving our our folks over time and opportunity to expand the relationship. Once we we kind of use that as the hook.
Actual.
Six month guarantee rate that we're offering right now is two 5%, so we're leading with that and having all the other tiers.
Behind it.
Follow suit, but not to that not to that exact degree, but that is our our traditional product.
Okay.
Any early indications of success or wait until next quarter.
I think that we are.
We're certainly starting to hold our own in that respect.
<unk> had decent traction on the CD side as well.
It's just that the.
A number of which we need to be able to to.
To offset and funding the growth we had on the loan side.
Just that much bigger so there is some traction kind of under the underneath the surface there, but it just needs to be needs to be more just needs to be greater.
Got it got it.
Yes.
Okay I appreciate that thank you guys.
Thanks Neil.
Thank you for your question. There are currently no further questions registered so as a reminder, it is star one on your telephone will keep it.
There are no additional questions waiting at this time, so I'll pass the conference back to the management team for any closing remarks.
Thanks, Matt and thanks again, everyone for joining our call. This afternoon appreciate your questions.
And your time and we hope that you have a wonderful afternoon.
<unk> our call.
That concludes.
The conference call. Thank you for your participation you may now disconnect your lines.
Yes.