Q2 2023 Sandy Spring Bancorp Inc Earnings Call
Hello, and welcome to the Sandy Spring Bancorp, Inc. Second quarter 2023 earnings Conference call and webcast. My name is Alex and I'll be close actually in the call today.
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And C E O.
Tried to to begin please go ahead.
Thank you good afternoon, everyone. Thank you for joining our call to discuss Sandy spring Bancorp's performance for the second quarter of 2023. This.
This is Dan Schreiter speaking and I'm joined here by my colleagues, Phil Mantua, Our Chief Financial Officer, and Aaron Kaslow General Counsel and Chief administrative officer.
Today's call is open to all investors analysts and the media and there was a live webcast of the call and a replay will be available on our website.
Later today.
Before we get started covering highlights from the quarter and taking your questions I'll ask Darren to give the customary safe Harbor statement.
Thank you Dana and good afternoon, everyone Sandy spring Bancorp will make forward looking statements in this webcast that are subject to risks and uncertainties.
Forward looking statements include statements of goals intentions earnings and other expectations estimates of risks and future costs and benefits assessments of expected credit losses assessments and market risk and statements of the ability to achieve financial and other goals. These forward looking statements are subject to significant uncertainties, because they are based upon or affected by.
Management's estimates and projections of future interest rates market behavior, other economic conditions future laws and regulations and a variety of other matters, 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 as we noted in our press release, we remained focused on growing core funding and expanding our client base after experiencing deposit run off earlier in the quarter.
<unk> stabilized and we're beginning to see some growth in certain deposit categories predominantly savings and time deposit products.
We look forward to capitalizing on the momentum we've achieved to continue to deepen these relationships and onboard these clients to become their primary bank.
We remain confident in our personalized approach the ease of doing business through a recently introduced digital channel and the value we bring to our clients and communities and we will continue to aggressively pursue new ways to expand our reach in the greater Washington region as we have for the past 155 years.
Today, we reported net income of $24 7 million or <unk> 55 per diluted common share for the quarter ended June 30, compared to net income of $51 3 million or $1 14 per diluted common share for the first quarter of 2023, and $54 8 million or $1 21 per diluted common share for the second quarter.
Of last year current quarter core earnings were $27 1 million or <unk> 60 per diluted common share compared to $52 3 million or $1 16 per diluted common share for the previous quarter and $44 2 million or <unk> 98 per diluted common share for the quarter ended June 30.
Of 2022.
The decline in net income and core earnings compared to the linked quarter was driven by lower net interest income coupled with higher provision for credit losses in noninterest expense.
That and the provision for credit losses for the current quarter was $5 1 million compared to a credit of 21 5 million for the first quarter of 2023, and a provision of $3 million for the second quarter 2022.
This quarter's provision was primarily the result of an individual reserve established on one large commercial real estate relationship.
Along with several charge off of non.
Cruel consumer loans.
The individual reserve as it related to multifamily construction loan that has converted to its lease up phase in this case the units have been slower to achieve targeted occupancy therefore trading some cash flow challenges for the borrower who is fully cooperating with the bank as we work through this.
Given the slow lease up phase and competitive market. Our assessment is that it was prudent to establish an individual reserve at this time, while we continue to work with our what.
But our review of the broader multifamily portfolio does not indicate any similar trend within other relationships.
Taking a look at the balance sheet total assets remained stable at $14 billion compared to $14 1 billion at March 31.
Total loans also remained stable at $11 4 billion at June 30, compared to March 31.
Total commercial real estate and business loans were level quarter over quarter, while residential mortgage loans grew 4% due to construction loans moving into the permanent residential portfolio.
Commercial loan production in the second quarter totaled $313 million, yielding $160 million in funded production. This compares to commercial loan production of $423 million, yielding a $156 million in funded production for the first quarter of the year.
Over the next couple of quarters, we do not expect funded loan production to exceed around $150 million essentially matching expected run off as we continue to focus on both deposit acquisition and retention activities as we see core deposit growth pick up we will increase our funded loan activity.
Pages 22 through 24 of our supplemental deck provide more detail on the composition of our loan portfolios. The granularity on our commercial real estate portfolio and specific commercial real estate composition in the urban markets of DC and Baltimore.
We recently completed an analysis and re underwriting of our office portfolio, which affirmed the underlying quality and accuracy of risk ratings and overall strength and performance continues to be strong.
We also have routine routinely perform stress tests on portfolio segments and external loan were used to obtain an outside evaluation of our underwriting and risk rating systems.
We remain close to our clients in all segments and continually assess the performance of our portfolios.
Recent stress tests confirm that under several moderate and severe stress scenarios loss expectations were very reasonable and capital remains strong.
Shifting to deposits total deposits decreased $117 $1 million or 1% to $11 billion at June 30, compared to $11 1 billion at March 31.
During this period of total noninterest bearing deposits declined $148 8 million or 5% primarily in commercial checking accounts, while the level of interest bearing deposits remained steady.
During the current quarter savings accounts and time deposits grew 41% and 6% respectively. While money market accounts declined by 9% quarterly deposit outflow was mostly observed early in the quarter and stabilized during the months of May and June .
Core deposits represented 88% of total deposits at the end of the current and previous quarter, reflecting the stability of the core deposit base.
Broker deposits represented 11, 8% of total deposits and we expect to continue at this level on a going forward basis.
Total uninsured deposits at June 30 were approximately 30% of total deposits.
We also offer clients reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that exceed 250000 during.
During the current quarter, we experienced a net increase of $230 million and reciprocal deposit accounts.
Slide 17 of the supplemental deck provides more color on our commercial deposit portfolio, which represents 59% of our core deposit base.
The majority of which is in the combination of noninterest bearing and money market accounts.
With an average length of relationship of nine years, the portfolio has welders diversified with no concentration in a single industry or single client.
Likewise on slide 19 of the supplemental deck you can see the breakdown of our retail deposit book, which is more diversified and composition among DDA money markets and time deposits with an average length of 12 years. The retail deposit portfolio is also well diversified with no significant concentration.
Despite the significant decline in noninterest bearing deposit accounts year to date. The category does still remained strong at 28% of our total deposit base.
At June 30 contingent liquidity, which consists of available <unk> borrowings available funds from the Federal Reserve Bank discount window and the bank term funding program as well as Unpledged securities and excess cash totaled $4 4 billion or 132% of uninsured deposits. In addition, the company.
So had $1 billion in available fed funds, which provided a total coverage of 163% of uninsured deposits.
Noninterest income increased by 8% or $1 2 million compared to the linked quarter and declined by 51% or $18 1 million compared to the prior year quarter to.
The quarter over quarter increase was mainly driven by higher income from mortgage banking activities fully income and service charges on deposit accounts.
Year over year decrease in noninterest income was primarily a result of the sale of the company's insurance segment during the second quarter of 2022, and the associated $16 $7 million gain.
Excluding this onetime gain noninterest income declined by 7% or $1 $4 million year over year due to lower insurance Commission income as a result of the sale and lower bank card fee income due to regulatory restrictions that went into effect in the second half of 2022.
Income from mortgage banking activities increased 600000 compared to the linked quarter and total mortgage loans grew $57 million.
Future levels of mortgage gain revenue is expected to be in the $1 2 million and a half in both the third and fourth quarters.
Wealth income stayed relatively unchanged at $9 million.
And assets under management at quarter end totaled $5 7 billion, representing a four 8% increase since March 31 of 2023.
For the second quarter of 2023, our net interest margin was 273% compared to $2, 99% for the first quarter of 2023 and 349% for the second quarter of 2022. There is no question that our margin has been impacted by the series of rate increases that have occurred over the preceding 12 months.
The fierce deposit competition in the market clients moving funds into interest bearing accounts and the construct of our balance sheet with significant portion in fixed rate assets.
Compared to the linked quarter the rate paid on interest bearing liabilities rose rose 44 basis points, while the yield on interest bearing assets increased 12 basis points, resulting in the quarterly margin compression of 26 basis points.
With our current expectation that the fed will increase the fed funds rate by 225 basis point increments between now and the end of the year, we see our margin continued to compress into the low $2 <unk> for the next two quarters based on what we believe we will need to do to offer deposit rates in our markets in order to remain competitive.
Noninterest expense for the current quarter increased $2 8 million or 4% compared to the first quarter of 2023, and $4 1 million or 6% compared to the prior year quarter.
The current quarter's increase was mainly driven by a $1 9 million of severance related expenses associated with staffing adjustments that were part of a broader cost control initiatives implemented by management.
During the year as we shared last quarter to offset over all profitability pressures, we halted plans to add staff and we conducted a staffing assessment to ensure we are aligned with business volumes and market demands.
With these actions and a continued focus on managing discretionary spending we look to manage operating expenses in the $64 million per quarter range by the fourth quarter of the year.
I previously mentioned the termination of our previously frozen defined benefit plan termination is slated to occur mid third quarter and there'll be a nonrecurring expense associated with this action, we do plan to disclose this amount once it is determined.
The non-GAAP efficiency ratio was 66, 8% for the second quarter of 2023 compared to $56, 87% for the first quarter of 2023 and $49, 79% for the prior year quarter, both GAAP and non-GAAP have been negatively impacted by the decline in net revenue and growth in.
Noninterest expense as we continue to invest in the future.
Shifting to credit quality overall credit quality remained stable at the level of nonperforming loans to total loans was 44 basis points compared to 41 basis points. These.
These levels of nonperforming loans compared to 40 basis points for the prior year quarter and continued to indicate stable credit quality. During this period of economic uncertainty.
At June 32023, nonperforming loans totaled $49 5 million compared to $47 2 million at March 31, and $43 5 million at June 32022.
Total net charge offs for the current quarter amounted to $1 8 million compared to 300000 net recoveries for the first quarter of 2023 and insignificant net charge offs for the second quarter of the prior year.
The current quarter's net charge offs occurred within the consumer loan portfolio due to the elimination of several non non accrual loans.
The allowance for credit losses was $123 million or 1.0% to 6% of outstanding loans, and 243% of nonperforming loans compared to $117 6 million or 1.0% to 3% of outstanding loans and the coverage of non performers at 249% at the end of the prior quarter.
<unk>.
At June 32023, the company had a total risk based capital ratio of 14 66.
Common equity tier one risk based capital ratio of $10 69, a tier one risk based capital ratio also at $10 six 9% and a tier one leverage ratio of nine 4% to all of these ratios remain well in excess of the mandated minimum regulatory requirements.
As I wrap up my comments today I want to reiterate our focus in this current environment.
First drive core funding through all lines of business and our digital channels and then converting these new clients a full banking shifts.
As we just discussed will and growing core funding create capacity to be more active in loan generation.
We will continue to manage costs, while completing important investments in the technology area necessary for our future and.
And lastly take advantage of the excellent reputation we build over the decades to grow client relationships continue to expand assets under management, and our wealth businesses and evolve our delivery channels to make it easy to do business with.
This concludes my comments and operator now we can move to take questions.
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Our first question for today comes from Catherine Mealor <unk>.
Your line is now open. Please go ahead.
Thank you good afternoon.
Good afternoon.
I just wanted to start with the margin.
Dan.
Richard onto the last 60.
If we get two more.
Fed hikes that you mention.
Dan just curious how youre thinking about the components of that and maybe just starting on the deposit side.
Could you just give us some background or some color around where you're seeing incremental deposit costs today.
Maybe by product type was that would be helpful.
And then also within that guidance, how you think about the net interest bearing mix shift.
The end of the year.
Yes.
Hey, good afternoon, Catherine this is Phil.
If I can talk about the.
The various elements, yes, how are you.
I can talk about the various elements.
How we're pricing out looking forward so.
If you want to kind of walk down through the product line.
One of the biggest things that we've done here of recent time and Dan alluded to it was introduced a high yield savings account.
Today, we will carry about a four 5%.
With that in which we've already generated growth in that in that category of over $300 million throughout the last quarter and we would continue to see that piece of the deposit base continued to grow in the money market space, where I think we've had some of our greatest challenges in terms of.
Retained balances.
We've now got an even more aggressive on.
The introductory rates and all of the rates across the various tiers.
The new retail and business Premier rate interest rate is now at four in a quarter.
And that had been three and a half for the majority of the last quarter and into the early part of.
This quarter as well.
And then on the time deposit.
Area, which we've also had a fair amount of success in terms of overall growth because in fact this period. There was no growth in brokerage Cds all of the growth in the time deposits as reported was in core within the core area.
Now with eight months special at five 5% or 14 months special at 5% and a variety of other traditional.
The maturities.
That are in the four to four 5% range. So we've clearly upped our game in all of those particular areas.
As it relates to the DDA element of things.
We've continued to see run off out of the core DDA component much of which we believe has run into the Ics.
So into the portfolio.
The Ics element of that on on average between the checking account offering in the money market account is averaging about 228%.
So any further migration there is going to be worth 280 basis points.
Incremental incremental cost.
And then.
<unk> borrowings are concerned right now things are fairly stable in terms of our necessity to rely on things in that area, we've been able to reposition some fed funds and some home loan bank advances.
Here and we would look for similar stability related to the cost in that area, albeit subject to whatever impact might come from a couple of.
Fed rate increases.
Great.
Helpful.
And so then is it.
You think about the other side of the balance sheet on loan yields.
One betas have been slower just given the fixed rate component of your portfolio.
And so it's hard to churn through the portfolio, but is there.
Hey, as you look forward over the next couple of quarters is there.
A group of loans that you see repricing.
In a certain quarter, where you might see more or less that just kind of help stabilize the margin or just kind of put it into the.
The bleed down just from the asset side. Thanks.
Yes, I don't know that Theres any real.
Kind of groups or categories.
Sure.
From a timing standpoint kind of changed the way that the loan portfolio is re pricing I mean anything that's produced into the commercial portfolio today based on recent pricing is going to probably have a high seven to eight to eight 5% type of rate associated.
Whether there's anything in the mortgage portfolio, which has been growing.
It's probably been topping out in the seven 5% range as well so anything in that regard, which certainly helped but I think it's really kind of more of the same kathryn as it relates to any additional contribution.
Towards the beta on the loan side really being much more than it had been.
Here in recent quarters.
Okay makes sense.
Hopefully youre going to have a different story for me today.
Understand it.
Yes.
And so that's the that's the margin so maybe one question just borrowings.
It is that you pulled a little bit of the bank term funding program and it looks like your swaps I think youll begin to that just kind of curious how youre thinking about the borrowing side and you're speaking to me. If you think that that strategy will continue into the back half of the year.
Yes, it does that pulled out on the on the Federal Reserve program was purely on the economics and the benefits of the way that it's offered.
Gave us an opportunity to lock that particular rate in over that 12 months period minimize the pledging implications given the way that those are required on that particular product and then just run down the other.
Their capacity in fed funds and in some of the <unk>.
Some of the home loan borrowings that had.
<unk>.
In excess of what we were able to use the deferred program for not really much else to it than that.
We did that actually early in the quarter. So we still got a fair amount of runway on that aspect of it we could pull down more based on available collateral.
It would clearly be more expensive today than what we brought it down at in the $4 80 to $4 90 range.
But I don't know that were planning to see a whole lot of change in that and the borrowing section.
At the end of a quarter, we could have a fed funds position you might see.
On the balance sheet at a point in time, but otherwise I don't think its going to change a whole lot.
Makes sense alright, great. Thanks for taking my questions I appreciate it.
Sure.
Thank you.
Our next question comes from Casey Whitman of Piper Sandler.
Your line is now open. Please go ahead.
Hey, good afternoon.
Hi, Casey.
Okay.
Maybe just starting with the expenses. So the guide you guys gave for the fourth quarter would imply that coming down pretty nicely.
Quarter is that.
Mostly in the salaries line or the other areas.
Consider and sort of where we are that's all coming from.
Yeah Casey this fell.
Salaries, certainly is a part of the equation given that the.
The severance moves that we made during this quarter were pretty much in the middle to the back half of the quarter.
So not a lot of realisation see that yet, but certainly will be in the third quarter completely as well as as we move through the end of the year.
And the other related costs that were part of that so.
So that's the first element of it there is also some some costs in.
In this quarter and into the third quarter related to some consulting and professional fees that go hand in hand, with some of our technology investments that should slow towards the fourth quarter. So that's the that's both of those things are significant parts to the to the guide.
There as it relates to trying to get it to come through third quarter into the fourth quarter in land in that $64 million range that we were really referencing to a degree last quarter as well.
Okay.
Great and maybe just one more back to that margin.
I guess can you dumb down like do you think.
I think you said that the margin hopefully will bottom out in the next couple of quarters and the $2 60 range, but do you think we could see some lift.
Through 2024 from a fed pause or do we need rates to go down for that.
Just picking up I think we actually yes, yes, I think I think we need rates to go down in order for us to really get any legitimate lift I mean, it could be a basis point or two here or there when things kind of level out.
But I think for us to get a true lift into the margin, we really needs, we're going to need some rate cuts at some point in right now.
In addition to as a prediction of the two rate increases in our current forecast, we don't see a rate cut at this point until potentially the second half of next year, hopefully we're wrong about that piece.
And that comes a little sooner, but that's the way we're viewing it for the time Vin.
Okay.
Understood.
Last question from me just thinking about capital here are buybacks on the table, just given where your stock is and without balance.
Balance sheet growth expected or is that not something.
We are willing considerations.
It's something that's always on the table.
Casey.
Plans at this point to be to be active that could change.
I wouldn't expect it in the next quarter.
Got it alright, thanks for taking my questions.
Sure.
Thank you next.
Our next question comes from Russell Gunther of Stephens.
Your line is now open. Please go ahead.
Hey, good afternoon guys.
Hi, Russell Hunter I wanted to follow up on the Hey, guys on the.
Loan growth outlook I hear you on the $1 50 kind of match.
So we kind of breakeven there what's a good bogey for us to think about when as to when we could see.
Net positive growth.
Loan to deposit ratio target or.
Non IV mix stabilizing in a certain range just how are you guys thinking about when youre comfortable.
Demonstrating that growth again.
Yes. This is Dan I think we've been as we went through the <unk>.
Kind of all the activity of the first quarter and seeing the pressure on the funding side really been focused on getting that stable, which as I've mentioned, we feel like we've hit that stable point.
And if we can continue to achieve some momentum as we saw that.
Back half of the quarter and achieve some growth and I think we would be.
<unk> become more comfortable in getting active I don't think we are in the short run looking at moderating our loan to deposit ratio.
Ideal situations that would be the case, but I think it's going to be more important for us to be act.
Active as soon as we can in lending keep that that might that might stay about where it is.
As long as we can get the funding moving in the right direction.
Yes, there is a.
There's obviously a relationship between.
Certain lending activity in the C&I space and the accompanying funding that goes along with it. So we want to make sure we get back in that business.
Okay.
Thanks, Dan and then just on the ability to retain the talent from a commercial lending perspective, given the funding pressure are you guys able to hold on to that the folks you want or are you seeing.
Competitors kind of target you guys more than than its typical just any update you could share.
Sure.
Yes.
Probably not seeing targeting anymore than what we typically would we got a great reputation in.
And some really good talent part of some of the staffing adjustments, we did last quarter that I referred to.
I was trying to.
Right size certain aspects of of our frontline around the lending business that would be in line with what our appetite was going to be as well as the nature of what we want to book in the portfolio. So I think at this point our teams have done a great job taking care of clients managing <unk>.
Managing production at a level, we think is reasonable with funding.
And also shifting a lot of their efforts and emphasis toward deposit gathering and we've.
Adapted our.
Incentive opportunities around that.
Try to preserve the opportunity.
To earn a reasonable comparison to what had been predominantly loan oriented.
Is that a type of program. So I think we are.
In pretty good shape.
In terms of the retention of talent.
Thanks, Dan I appreciate the color and then just last one switching gears a bit I think I heard you say.
Took a look at the office portfolio again intra quarter, we under wrote that.
Any kind of color you could.
Provide on the details of that exercise whether it's observed.
Declines in value or just any incremental detail.
Yes.
Say all in all.
Things have.
Held up both from a cash flow standpoint.
<unk>.
It was a focus of our most recent stress test, which and company the office portfolio, which also.
<unk> held up really well under a variety of different stress scenarios.
We're not seeing.
Leading indicators on office that would create.
Create concern.
And as I've indicated historically R.
Or kind of office exposure tends to be smaller unit professional properties as opposed to the large floor plates.
One or two tenants leave creates a significant amount of strips so.
So far.
Performed well right now average current debt service coverage ratio on the portfolio was $1 54.
Weighted average.
Loan to value on the portfolio is in the low fifties. So it's.
<unk>.
I think were pretty good.
Pretty good shape, we will continue to watch it as we will every every asset.
That class.
Okay.
Very good thanks, Dan I appreciate it.
Yes.
Thanks Russell.
Thank you.
If you'd like to ask a question E compressor fleet.
One on your telephone keypad.
Our next question comes from Manuel <unk> from D. A Davidson your.
Your line is now open. Please go ahead.
Hey, good afternoon.
Yes.
We hit a point where.
NIM is rebuilding.
Yes, we're in an environment, where we've had a couple of cuts.
Sure.
And the pace still be five to 10 basis points per quarter improvement.
Yes, I don't know that Manuel this is Phil I don't know that we are.
Thinking about that any differently than we have before and I know that the 5% I believe the numbers we've used.
In prior conversations on all mix along this point so yes.
See it I don't know that I see it any differently today than what we've said in the.
In the past I think what's different is our starting point.
Obviously for where we have come to land here recently more so than anything else.
Got it.
Okay.
On the large CRE that charge offs.
Or the provision for the large CRE loan, what's roughly the size of that loan.
Okay.
It's in the low $20 million range.
Got it got it.
And.
It seems that.
If we get some of the deposit growth here.
It seems like a little bit more interested in some loan growth is what's kind of changed there or you're just kind of realized.
At a higher rate environment for longer and it's hard to keep loan growth turned off for.
Is there anything else really change or just you are happy with you've seen some stabilization in deposit trends.
Yes, I think it's I think it's related to stabilization on the deposit front I mean, I think the lag.
Last time, we were talking it was on the back end of.
Some bank failures, and obviously concern across the industry as to what the funding situation would be and so while we're paying heavily for the deposit growth we're getting.
We don't we still want to be active in the market and as you can tell from the conversation today, there's not a ton of levers we have.
Until we see the fed move in a direction that would be helpful to us one of those levers would be the active be active.
In the lending business.
Funding allows us to do so.
And I mean, as you get closer to 16.
Almost a marginal rate.
Of new assets.
Yes.
It makes more sense to grow at that point right.
I'm not sure I'm tracking with with that.
Well can you repeat that.
Yes.
If your yields are new loan yields around 758%.
Most of Europe .
Yes, I would agree with I would agree with your statement.
I didn't pick up the whole sense at first.
Okay No problem no problem.
Step.
I can say to you I appreciate the comments.
Thanks Manuel.
As a reminder, if you'd like to ask a question you have compressed slightly.
One on the telephone keypad.
Okay. At this time, we currently have a nice to have the questions. So I'll hand back to Mr tried to for any further remarks.
Okay. Thank you all for joining today's call and for your questions. If you have obviously additional questions that we werent able to address today, please reach out to either fill or myself.
And thank you for your time and have a great afternoon.
Thank you for joining today's call you may now disconnect your lines.
Bill or myself.
Thank you for your time and have a great afternoon.
Yeah.