Q4 2022 Sandy Spring Bancorp Inc Earnings Call
Okay.
Good afternoon. Thank you for attending the Sandy Spring Bancorp earnings conference call and webcast for the fourth quarter of 2022. My name is Matt and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to our host Daniel Schreiter, President and CEO .
Daniel Please go ahead.
Thank you, Matt and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy spring Bancorp's performance for the fourth quarter of 2022.
As Matt mentioned this is Dan as Roger speaking and I'm joined here by my colleagues, Phil Mantua, Chief Financial Officer, and Aaron Kaslow General Counsel and Chief administrative officer.
Today's call is open to all investors analysts and the media Theres a live webcast of todays call and a replay will be made available later on our website.
But before we get started covering highlights from the quarter and then taking your questions Aaron will give the customary safe Harbor statement here. Thanks.
Thank you Dan Good afternoon, everyone Sandy spring Bancorp will make forward looking statements in this webcast that are subject to risks and uncertainties. These forward looking statements include statements of goals intentions earnings and other expectations estimates of risks and future costs and benefits assessments is expected credit losses assessments of market.
Risk and statements of the ability to achieve financial and other goals. These forward looking statements are subject to significant uncertainties because they are based upon or affected by managements estimates and projections of future interest rates market behavior, other economic conditions future laws and regulations and a variety of other matters, which by their very nature are subject.
To significant uncertainties because of these uncertainties Sandy spring bancorp's actual future results may differ materially from those indicated in addition, the companys past results of operations do not necessarily indicate its future results.
Thank you Aaron and thank you all again for being on the line today to discuss our fourth quarter and annual performance.
As you read in our press release and I shared last quarter, we are managing through what continues to be pretty challenging operating environment.
Cleaning high inflation.
These rapid increases in interest rates, we've experienced any continual threat of recessionary pressures.
And while the economic forecasts as well as the probability of recession or driving the provision for credit losses, we are not seeing any trends that indicate that our credit quality is on the edge of deterioration.
And these are complex issues, but we have managed through challenging seasons before.
Continuing to balance the long term view, we have of our company and the immediate business needs. Our focus is centered on growing client relationships and driving core funding.
So with that let's shift to review the details of our financial performance.
Today, we reported net income of $34 million or <unk> 76 cents per diluted common share for the quarter ended December 31, 2022, compared to net income of $45 4 million or <unk> 99 per diluted common share for the fourth quarter of 2021, and $33 6 million or <unk> 75 per diluted common share for the <unk>.
Third quarter of 2022.
Core earnings were $35 3 million or <unk> 79 per diluted common share compared to $46 6 million or $1 two per diluted common share for the quarter ended December 31, 2021, and then $35 7 million or <unk> 80 per diluted common share for the quarter ended September 32022.
Yeah.
The decline in core earnings is primarily the result of the provision for credit losses, and the expected decline in fee income.
Looking at our earnings through another lens pre tax pre provision income was $56 6 million compared to $64 $1 million in the linked quarter and $61 7 million in the prior year quarter.
The provision for credit losses was a charge of $10 8 million compared to a charge of $1 6 million in the fourth quarter of 2021, and a charge of $18 9 million for the third quarter of 2022.
The quarterly provision expense contained a provision charge of $2 9 million, which was associated with unfunded loan commitments, excluding the provision for unfunded commitments revision reflects the declining economic forecast and the increasing probability of recession.
And to clarify we breakout the provision expense for funded and unfunded loan commitments for accounting purposes, but the primary drivers are the same.
And shifting to the balance sheet total assets grew 10% to $13 8 billion compared to $12 6 billion in the prior year quarter.
When you exclude PPP loans total assets increased 11% year over year.
Total loans, excluding PPP increased 16% to $11 4 billion at December 31, 2022, compared to $9 8 billion at December 31 of last year.
Total commercial loans net of PPP grew by $1 2 billion or 15% during the previous 12 months.
Gross commercial loan production over the past 12 months was $3 9 billion of which $2 5 billion was funded offsetting the $1 2 billion and non PPP commercial loan runoff.
Funded commercial loan production during the fourth quarter of 2022 was $341 7 million.
Commercial run off in the fourth quarter was 38% lower than the linked quarter and 45% lower than the prior year quarter.
The annualized run off rate in the fourth quarter was 10% compared to historical averages anywhere between 12 and 15%.
We expect runoff to settle in the 7% to 9% range for the next few quarters.
Commercial real estate as you know has been an important business line for the bank representing deep relationships with the region's best builders developers and investors and while we'll continue to serve this important client segment. We're also working hard to derive diversify our lending concentration.
Tracking more C&I relationships and focusing all client facing teams on core funding initiatives.
If you look at page 17 in the supplemental deck you can see that this approach is already starting to take effect as our C&I growth has outpaced our CRE growth for the first time in many quarters.
As we look forward into 2023, we expect the commercial real estate portfolio to be flat or even slightly down for the quarter.
C&I and owner occupied are shaping up to be a slower in the first quarter, but expect around 2% to 3% growth per quarter, starting in the second quarter of the year the.
The mortgage construction portfolio will continue to fall as production has significantly slowed but construction conversion should drive growth in the permanent portfolio, which again will likely to grow 2% to 3% per quarter.
Recognizing that macroeconomic changes could impact our results at this stage, we expect our overall loan growth for the year to be in the mid single digits and more weighted in the second through fourth quarter.
At the end of the quarter, our commercial pipeline was at $944 million compared to $1 3 billion, the linked quarter, representing 32% reduction necessary indicative of both the change in demand and our shifting focus to do more C&I lending.
And shifting over to the deposit portfolio deposits grew 3% during the preceding 12 months as interest bearing deposits grew 6% offset by a 3% decline in noninterest bearing deposits.
Additionally, borrowings increased by $928 million during the period.
Excluding broker deposits total deposits decreased 4% in the fourth quarter.
Combination of higher interest rates and seasonal runoff drove noninterest bearing deposits to be lower during the fourth quarter, but we expect to see some recovery in the latter half of this first quarter.
DDA balances are also experiencing pressure due to lower title company deposits, which totaled $437 million in the fourth quarter of 2021, but fell to $227 million at the end of 2022.
Core money market and time deposits performed well during the quarter with core money market accounts growing $91 million or 3% and core time deposits growing $199 million or just slightly under 18%.
We are clearly relying on more wholesale funding sources, while we navigate this challenging rate environment.
As I shared last quarter, we have several near and long term efforts underway to respond to these challenges.
We continue to offer some of the most competitive rates in the market every salesperson is being incentivized to drive deposit relationships with both retail and commercial clients.
And earlier this week, we launched a more sophisticated online account opening platform that will expand client channels make the account opening process faster easier and more convenient for our clients.
Moving to the margin and interest margin was $3, two 6% compared to $3 five 1% for the fourth quarter of 2021, and three 5%, 3% for the third quarter of 2022.
The decrease in the net interest margin for the current quarter compared to the fourth quarter of the prior year and previous quarter was a result of the increase in the rates paid on interest bearing liabilities outpacing the increase in the yield on earning assets.
The overall rate and yield increases were driven by multiple fed rate increases that occurred over the preceding 12 months.
Excluding the impact of the amortization of the fair value marks derived from acquisitions and interest and fees from PPP loans. The net interest margin would've been three 6% compared to the net interest margin of 331% for the fourth quarter of 2021, and three 5% for the linked quarter.
On a go forward basis, we anticipate that the margin will further decline in the first quarter into the 310 to $3 15 range and then start to rebound under the assumption that the fed will complete its tightening cycle by the end of the first quarter.
Noninterest income decreased by 37% or $8 2 million compared to the prior year quarter.
The reduction is a result of several factors primarily the impact of the economic environment is having on mortgage banking activities and wealth management income.
Obviously the decline in insurance commissions, given the fact that we disposed of our insurance business in the second quarter of 2022, and then lower bank card income due to regulatory restrictions on fees since we became subject to the Durbin Amendment.
Income from mortgage banking activities decreased $2 8 million compared to the prior year quarter, and 800000 compared to the linked quarter.
The declined as a result of the rising interest rate environment, which continues to dampen mortgage origination and refinancing activity in.
In light of current origination levels, we did execute a reduction in staff and our mortgage division in the fourth quarter and we will continue to evaluate that going forward.
However, total mortgage loans grew $377 $5 million during the 12 months ended December 31 2022.
We expect near term mortgage gain revenues to settle into a range between 1 million 2 million and a half per quarter.
Due to ongoing market volatility wealth management income decreased 390000, compared to the linked quarter and $1 1 million compared to the prior year quarter.
Assets under management finished strong at $5 to 6 billion compared to $4 97 billion at the linked quarter.
Despite a challenging market our teams continue to win and drive new relationships.
And looking ahead, we see wealth revenue significantly influenced by fluctuations in equities and bonds or if the market does not take a step back we anticipate 2% growth per quarter.
Noninterest expense for the current quarter decreased one eight.
$8 million or 3% compared to the prior year quarter, driven primarily by the decreases of $2 $1 million in compensation and benefits expense $1 million and occupancy expense and a half a million in other noninterest expense. These decreases were partially offset by increases in various other categories of operating expenses.
We look to manage growth and operating expenses in the 5% to 6% range off of fourth quarter levels with an immediate bump in the first quarter of 2023 due to certain compensation related cost that we engage early in the year and increases to the run rate related to some of our technology initiatives.
We then look to manage quarter over quarter growth by targeting a non-GAAP efficiency ratio within a range of 51% to 52% and continuing to evaluate our expense levels commensurate with revenue trends.
The non-GAAP efficiency ratio was five two I am sorry, 50, 146% compared to $50 17 for the prior year quarter and $48 18 for the third quarter 2022.
Moving to credit quality as I noted in my opening remarks, we do not see anything in our metrics that indicates our credit quality will begin to deteriorate.
Again, the provision charge is being driven by the economic forecast and not based on any change in current and projected credit based performance in the portfolio.
The level of nonperforming loans to total loans improved to 35 basis points compared to 40 basis points at the linked quarter and 49 basis points at December 31 of 2021.
These levels indicates stable credit quality during a time of significant loan growth and economic uncertainty.
Loans placed on nonaccrual amounted to $5 5 million compared to 500000 for the prior year quarter and $4 2 million for the third quarter of 2022 within our NPA portfolio, we had no office or multifamily assets.
We realized net recoveries of 100000 for the fourth quarter of 2022 compared to net charge offs of 400000 for the fourth quarter of 2021, and 500000 recoveries for the linked quarter.
The allowance for credit losses.
It was $136 2 million or one 2% of outstanding loans, and 346% of nonperforming loans compared to $128 3 million or one 4% of outstanding loans and.
289% of nonperforming loans at the end of the previous quarter.
Compared to the end of 2021, the allowance for credit losses was $109 1 million or one 1% of outstanding loans and coverage of 224% of nonperforming loans.
The tangible common equity ratio decreased to $88 18.
Tangible assets at December 31, compared to $9 two 1% at December 31 of 2021.
The decrease is a result of the $25 million repurchase of common shares during the previous 12 months and the $123 million increase in the accumulated other comprehensive loss in the investment portfolio that resulted from the rising rate environment and the increase intangible assets during the past year.
At December 31, the company had a total risk base.
Capital ratio of $14 20, a common equity tier one risk based capital ratio of $10 23 a.
Tier one risk based capital ratio of 10, 23% a tier one leverage ratio of 933.
And before we move to your questions quickly recap leadership announcement, we rolled out this quarter, our president of commercial banking and executive Vice President Ken Cook is going to retire from Sandy Spring Bank at the end of February and then thereafter joined our board of directors.
<unk> has dedicated his 40 year career in helping clients in the greater Baltimore, and Washington regions really grateful that he will continue to help lead our company as a director and we are actively interviewing for a new executive to lead commercial banking and we look forward to making announcements here in the near future.
So this concludes our general comments for today and now Matt we can move to your questions.
Okay.
Absolutely.
I'd 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 against the ask a question Press Star one as a reminder, if youre using a speaker phone. Please remember to pick up your handset before asking your question.
I'll pause here briefly as questions are registered.
The first question is from the line of Casey Whitman with Piper Sandler Your line is now open.
Hey, good afternoon.
Hey, Casey.
Maybe we'll start with the margin in the guide you gave I guess, if the fed pauses do you have an idea of how much that margin could rebound from the first quarter level, which I think you gave.
The 310 to $3 15 range.
And then I guess my follow up would be just sort of.
Against the loan growth guide you gave like what sort of assumptions should we make on the deposit side I guess the core deposits.
Progress.
Yeah Casey this is Phil.
I would suggest to you that.
Beyond that first quarter guide on the margin if in fact the fed.
Does at least pause or stop.
They're they're upward March here.
That we could probably see the.
The margin come back anywhere from five to 10 basis points a quarter from that point through the rest of the year now the caveat on that is that we get the kind of deposit growth that we're really looking for.
In terms of core DDA and other interest bearing categories as opposed to the continual need to to fund either through wholesale or brokered deposits or some form of similar borrowing because if that continues to occur then that expansion in the margin most likely doesn't happen.
And just based on the differential in those rates.
Okay.
Got it and then sorry, if I missed this but just the other fees.
What's in that number and what was dragging that down this quarter.
Pretty low quarter over quarter it was mostly.
In the absence of.
Swap fee income and prepayment penalties that we that we were able to generate in the third quarter that did not replicate themselves in the fourth quarter.
Okay.
Okay, and then last question I'd ask you touched a bit on office just in your prepared remarks do you have do you happen to have your total office exposure.
Okay.
Thank you.
And maybe with that can you just talk broadly about.
Some of the larger I've learned you might have in that book and sort of how you're positioned suburban versus metro office, and just how you're viewing that asset class.
Yes.
Okay.
Yes.
Right now.
Our total.
Our total office exposure.
You think about our investment real estate, probably led by by retail and about half of that amount.
At about <unk>.
$1 seven and office is about $840 million in terms of Outstandings.
That's up against the total <unk> portfolio of about $4 7 billion.
The office for US has always and continues to be kind of suburban office professional office space as opposed to large floor plates, so talking about medical office.
Office buildings that have.
Smaller units that are easier to turnover.
And then and then within that context, as well or some data center assets that we originated over the past few years.
Have been.
Very strong performers at origination of these properties.
Have weighted average loan to values in the low Sixty's and then coverages.
In the mid $1 <unk>.
So we have never been.
Big Urban player and we've never been a large office player.
If you kind of think about some of this like Tysons corner downtown office large floor plates.
It hasn't been our are our sweet spot and then and then very little out of the ground. Most has been refinance activity from assets that had been under investor ownership for a number of years, which is what's driven that.
Combination of loan to value and strong cash flow coverages. So we continue to.
To look at.
Look hard at that actually every asset class within the <unk> portfolio.
But office office is one that we have not seen significant growth in and just given particularly the last three years given yes.
Uncertainty around change of behavior in the post Covid world.
And I think you said this but <unk> seen no downgrades in that portfolio too.
That's correct yes.
Okay.
I'll, let someone else jump on thank you.
Thanks case high case, thank you.
Thank you for your.
Question.
The next question is from the line of Catherine Mealor with <unk>. Your line is now open.
Thanks, Good afternoon.
Hi, Catharine Hey, Catharine.
Just one follow up on the margin just back to Casey's question on online.
I mean, excuse me deposit pricing.
Where where deposit costs, maybe towards quarter end or what are your Sam.
Free cash looking to turn it back into that 310 to three.
<unk> margin, if the word deposit cost might be as early as next quarter.
Yeah.
Catherine.
At the end of December .
Our overall cost of interest bearing liabilities of about 210.
And.
Overall interest bearing deposits was in the was around 183.
Okay great.
Thank you Chris.
So it was your commentary that you think you might get an expansion in the back half of the year, just depending on how deposit balances go but.
Or would it be fair to.
Characterize like how do you think about that over the cycle essential data for you because if I look at where you are.
Cycle to date, you're at around 40% cumulatively, and that's where a lot of companies might be saying that their cumulative cycle betas wont be maybe over the next to the next couple of quarters, but.
Is there a case to be made that for you.
Cycled beta will still be higher but not significantly higher than your pace of change should start to moderate as we go through the next couple of quarters.
Especially given your outlook for growth.
Filing in the next.
Yeah.
Yes, Casey I think I think that's a reasonable way to look at it I mean, we've really all along said that are.
Model beta and our expectation on beta was around that 40%. So having it kind of average out there is not terribly surprising.
And would most likely continue with but probably a little bit higher even with the last 25 to 25, I guess 50 basis points at the fed we think has in mind here for the for the remainder of this quarter.
So we would probably average in this quarter, a little higher than that but.
Yes, I think over time in the past that we've been proven capable of having the beta in the other direction move fairly fairly quickly.
Allow us to.
To take advantage of when rates, either stabilize or ultimately drop back in the other direction.
And what's your view on how active you'll be in pulling out I think there'll be borrowings.
It's really a question of.
Relative pricing between home loan bank borrowings and other forms of brokered when necessary.
We won't we won't really lock into one form over the other and I think that's what's reflective in fact in the fourth quarter here, where we were rarely trade. It out of a couple hundred million dollars of advances for some about the same amount maybe a little bit less.
Lastly in the brokered broker.
Brokered CD markets. So we really kind of look at those things very similarly in terms of how.
How we use them.
And we really just kind of trade one against the other route on relative price and.
In value and we've I think we've said it before we've tried over the course of the cycle to keep all of those relatively short.
So for example, we have a fair a fair amount of of maturity in both of those areas here in the first quarter and we will replace them. According to that same same general pricing concept.
And how about on loan pricing.
Yeah, where new loan yields coming on.
Your loan portfolio is not as highly variable rate, which is partly what's happening care margin now, but that kind of your U S.
It'll be just kind of a slow grind higher over the next couple of years for sure.
Longer term loan portfolio continues to reprice and churn through so.
How do you kind of look at it.
The pace of off line in your own crystals over the next couple of quarters.
Yeah, well I think that.
That's also embedded in that guidance relative to forward looking margin is that we will continue to to get some upward upward.
Contribution from.
From loan yields throughout the year.
Throughout that period.
I mean, just for pricing within the last <unk>.
Quarter, albeit the levels of production.
And booked loans was slower than customary for us I mean, we.
In the commercial area alone we ranged on average.
From the high $5 to $85 90 range up into and some cases over 7% seven 5% on on various categories of new production and so that should continue.
Continue to accrue to our benefit as we as we move into the latter part of the year.
Great Alright, Thank you I'll hop out of the queue.
Okay.
Thanks Scott.
Thank you for your question.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
The next question is from the line of Emmanuel now this from D. A Davidson your line is now open.
Hey, good afternoon.
The noninterest bearing deposit.
They have come down a little bit how how far could that.
Drop over the next couple of quarters.
Well that's.
Really good question.
I mean, one aspect of whats happened. There is we're certainly related to title company type of deposit balances, which.
Probably can't go a whole lot lower than where they are today and I. Thank you.
That respect, we've probably we probably have bottomed out.
But within the other categories.
And our related to small business and just broader commercial type of.
Deposits.
I'm not really sure I could give you.
The definitive type of answer.
Just just not knowing exactly kind of what.
What that pattern is related to.
Other than the stuff that we have normally at year end. So I mean, we were asked to have it continue to come down and through the first part of this quarter traditionally and then have it rebound towards the end of the quarter.
So we will probably trough during the quarter and you really won't see it because it will ultimately report on the end of the quarter, where it'll probably bounce back up.
Alright, great.
Okay. Okay.
That's helpful.
Okay.
So that's kind of like working capital needs and kind of normal trends and it's just a little bit larger move this quarter than prior quarters.
Yes, I would say so this quarter.
The kind of rundown on demand deposits.
Core demand deposit started earlier in the quarter than normal.
And it happened more throughout the quarter then just at the end of the quarter, which is the traditional.
And our drawdown activity with our with our commercial client base.
Oh, you mean obvious difference.
I was going to say the average obvious difference this year and that trend is.
They are available.
Intermediation that would occur within our book of DDA deposits moving into interest bearing given given the availability of actually earning something on your money this year relative to prior periods so that debt.
And hopefully that's also.
Trough that we'll see.
And as well and see that DDA balances start to start to build back.
In fact.
The detailed tidbit, but in the in the Premier money market.
Account through the quarter embedded in a $123 million increase just in that product line was $109 million of commercial based balance increase.
To Dan's point about the potential of disintermediation.
Okay.
That's good.
Interesting here.
As you've paid out in the market over the last.
Quarter and a half.
How have you seen deposit competition shift.
I think the last.
Over that timeframe that you've talked about I think it's still this is a highly competitive market. We've continued have been and continue to be near or at the top of the market and our various specials that we've offered on both guaranteed rate as well as some select time deposits. So I wouldn't say, there's been a material change competitively.
In that window of time still very competitive.
And as we've gone through obviously, the last week and a half of earnings season. It seems like that trend continues a pressure on the funding side.
And we're seeing it in pricing.
Yes, I don't think the mix of competitors has changed to any large sticker either I think it's.
Still gen.
Generally the usual the usual suspects in this market.
Thank you for the color.
Sure.
Thank you for your question.
There are no additional questions waiting at this time, so I'll pass the conference back to Daniel Schrader for any closing remarks.
Thank you, Matt and Thanks, Catherine case Emmanuel for your questions and for everyone else, who joined today's call.
With no other questions. Our call is now concluded and we hope that you have a wonderful afternoon.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.