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spk01: Good afternoon. Thank you for attending the Sandy Spring Bank Corp earnings conference call and webcast for the third quarter. My name is Matt and I'll be your moderator for the day'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 would 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 Schreider, president and CEO of Sandy Spring Bank Corp. Daniel, please go ahead.
spk06: Thank you, Matt, and good afternoon, everyone. Thank you all for joining us for a conference call to discuss Sandy Street Bank Force performance for the third quarter of 2022. This is Dan Schreider, 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 news media. There's a live webcast of today's 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, Aaron will give the customary safe harbor statement.
spk05: 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 of 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 management's estimates and projections of future interest rates, market behavior, other economic conditions, future laws and regulations, and a variety of other matters, including the impact of the COVID-19 pandemic, 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 company's past results of operations do not necessarily indicate its future results.
spk06: Thank you, Erin, and it's good to be on the line with you this afternoon. To 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. 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 low growth, changes to the probability of recession, and a 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 75 cents 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 of 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 substantial growth and the expected decline in mortgage banking income, insurance commissions, and bank card fees. Looking at earnings through another lens, A pre-tax pre-provision income for the quarter was $64.1 million, a 6% increase after adjusting the link 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 non-interest income sources as mortgage gains and 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 an 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 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 30, 2021. Total commercial loans net of PPP 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 funding commercial loan production increased 43% to $762 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. And 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 6.2%. And at the end of the quarter, our commercial pipeline was 1.3 billion compared to 1.7 billion at the linked quarter end. As we shift to 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 non-interest-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, it's 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 price money market products linked to private client relationships. We are incentivizing, well, actually enhanced our incentives for every salesperson to drive deposits from both our retail and commercial lines of business. And looking into early 23, we have plans to launch a sophisticated online account opening platform that will expand the channels we offer clients and significantly reduce friction in the account opening process. Given this challenging environment, we have recently relied on more expensive non-core 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 3.53% was four basis points higher than the prior quarter But we ended the quarter with a margin in the low 340s as funding costs continue 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 330s range for the next few quarters before it begins to expand again, as we do expect the Fed 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 TPP loans, the current quarter's net interest margin was 3.50% compared to 3.32% for the third quarter of 2021 and 3.45% for the second quarter of 2022. Non-interest income for the current quarter decreased by 31%, or $7.5 million, compared to the prior year quarter. This anticipated reduction is 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 commission income given the previous quarter's disposition of our insurance business. And finally, lower bank card income due to regulatory restrictions on fees as the Durbin Amendment became effective. Income from mortgage banking activity decreased $3.4 million compared to the prior year quarter and $83,000 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 30, 2022. We have successfully executed on our strategy to hold a larger percentage of mortgage production on the balance sheet and regrow this asset class. And we have achieved our current desired level for mortgage loans held in portfolio, which grew 4.7% compared to the week order. And we do not intend to further grow this asset class in the near future. We expect future 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's moderation in longer term rates. Wealth management income. decreased $231,000 or 2.5% compared to the linked quarter due to ongoing market volatility. Non-interest 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 and $1.4 million in other non-interest expense. I should note that the 2% increase in other non-interest expense compared to the prior year quarter is a result of a $1.2 million accrual towards the fully realized contingent earn out for RPJ. We acquired RPJ 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-based commencement 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 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 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. A level of non-performing loans to total loans held steady at 40 basis points for the current and linked quarter and decreased from 80 basis points at September 30, 2021. These levels of non-performing loans indicate 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 $900,000 for the second quarter of 2022. We did realize net recoveries of a half a 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, or 1.14% of outstanding loans, and 289% of non-performing loans. This compares to 113.7 million or 1.05% of outstanding loans and 261% of non-performing 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 30, 2021. 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 1415, a common equity Tier 1 risk-based capital ratio of 1018, a Tier 1 risk-based capital ratio also at 1018, and a Tier 1 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 one-time bonus of up to $1,000 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 Board ranked number 23 among all banking companies We're really pleased to be recognized for our best-in-class financial results, and I'm grateful to the 1,200 exceptional employees who made this possible. So, Matt, that concludes our general comments for today, and now we can move to your questions.
spk01: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
spk00: The first question is from the line of Katherine Mueller with KBW.
spk01: Your line is now open.
spk02: Thanks. Good afternoon.
spk06: Good afternoon, Katherine. Hey, Katherine.
spk02: So Danny, I think you said in your prepared remarks that the margin near term, did you say would be in the low 330 range?
spk06: 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 see some compression down into the low 330s before we see that rebound.
spk02: Okay, I just want to make sure I heard that right. And in that 330 estimate, you know, how are you thinking about deposit betas and maybe as an indication where were deposit costs at September quarter end, just to give us an indication of what we've seen for the full quarter, you know, impact this quarter?
spk03: Yeah, Kathryn, this is Phil, and you're right on it as it relates to it's more about where we ended the quarter. and the implications going forward from that point, with the assumption that the Fed's gonna continue to move rates ahead, than it is the overall average during the quarter. I think in your earlier note, you had the beta right around 2023. In reality, it's probably closer to our, during this quarter, probably was closer to overall that 40 range that we've stated before, and in some cases, in areas like our money market products, it's probably more like 50 or 55%. We 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 in our liquidity needs, we had to get more aggressive. And so those betas are gonna be elevated from where we would normally have projected them to be. So for an example, you know, the quarterly average rate on our money market group of deposits was 65 basis points, but that same rate at the end of September or for the month of September was 109. So I think that gives you some indication of, you know, just how we're progressing in terms of what it's costing us to fund within the deposit base, much less, even more so on the wholesale basis.
spk02: That makes sense. And then have it on CDs. Do you have the same kind of number on that?
spk03: Yeah. Yeah. Same type of thing, but probably not as significant just because it's the incremental element of the time deposits. But for the quarter, the time deposit average cost was 56 basis points. And by the end of the quarter in September, it was 83. Great.
spk02: Okay. So as you grow deposits, which I'm watching, maybe that's the next question, is just because deposits declined this quarter. And, Dan, you talked a lot in your prepared remarks about just the challenge of growing deposits right now. Where do you think, if you're able to grow deposits, where do you think the push comes from, mostly in this money market line or CDs, or where are you seeing maybe the best?
spk03: I mean, from the standpoint of what we're emphasizing relative to rates, Those are the two categories that we would expect the growth to come from. But I would also say that based on what we're trying to do 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 lending clients and the like. Okay. And by the way, I think we've had pretty good success of holding the line in terms of the DDA balances here. The only major category there, as you might expect, that's going to be down was really anything related to title company business affected by the mortgage environment.
spk02: Yes, for sure, for sure. And how about borrowings? What's your kind of strategy or plan with Appetite for adding borrowings on more from here?
spk03: Yeah, our general approach to anything wholesale is to utilize it as we need to, to backfill and match commensurate 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. You know, in terms of advances, they're mostly short term. Of course, the problem with that is that's unfortunately one of the 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'll be able to eliminate that position.
spk02: Great. Okay. And your loan to deposit ratio is now over 100 or right at 100. How do you think about that ratio and where's the kind of the upper end of that range where you would not be comfortable going.
spk03: Well, we normally, I think as we've talked before, are comfortable managing that in the 1 to 105 range, just knowing the nature of the market here and the general profile of customers alike. Our kind of pain point is 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 happen to be brokered or wholesale. Because the profile is dramatically different in my mind, depending on how the deposit base and those ratios are built.
spk02: And on the other side of the balance sheet, I'm just really digging in the margin, but it's just on loan yields. You know, maybe question one is you have really strong loan growth this quarter, so maybe on average where are you seeing new pricing come on? And then I know you've got a total loan portfolio that's more heavily weighted towards fixed rate, so how are you thinking about loan betas over the next couple of quarters?
spk06: Speak a little bit. to your question as it relates to the pipeline going forward compared to what we've done in the past, Catherine. We've obviously come out of a cycle where it's been largely fixed-rate production that we've seen over the last few quarters. 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 commercial pipeline is floating rate business. So when I say either prime-based or 30-day SOFR-based opportunities in front of us. So we've really shifted the focus to drive opportunities that are going to be more tied to what's happening with short-term rates as opposed to longer-term fixed rates. which should obviously help on at least kind of being closer to what we're paying on the funding side of the equation to fund that growth. Phil, I don't know if you have anything on that.
spk03: Yeah, I would say that the wide share of the current pricing, especially in the commercial portfolio in particular, has probably been into that mid to high 5% range, although I think we're imploring... know our folks to really be thinking about it in the more six and a half to seven percent range as we move forward here and we are seeing some migration in that direction uh in general uh and so i think that that's really where we're trying to get to okay great area i've taken a lot of questions um i've been like the only mid-atlantic analyst if there aren't any other analysts on that i may pop back in but i'll i'll just see if there's any other anyone else in the queue for now thanks so you catherine you can keep going
spk06: There's no one else? Okay. You can see the queue in front of us, and so you are the questioner at this point.
spk02: Everyone's been enjoying my one-on-one calls all day this week. Okay, so maybe we can move to the credit side. Just the ACL build was so big this quarter, and I know a lot of that was just from CECL and the macro change and the growth and obviously the unfunded commitment that you talked about. But just generally – I don't know, maybe just kind of talk about your outlook for where you think provisions may be next year. I know that's hard just given it's so uncertain, but this number felt like it was really big and just curious how you're kind of thinking the cadence of reserve bills may look over the next couple of quarters relative to that.
spk03: Yeah, Catherine, this is Phil again. It feels pretty big to us too, and although I think we also do have to recognize that you know, about five, almost six million of it was, you know, directly related to growth as well. So, you know, depending on if we're, you know, if we have a little bit, you know, a little bit less or mitigated growth, that aspect of that build would certainly add back as well. The other thing that's related to this, you know, more purely CECL oriented is, you know, 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're using as well. So, you know, we might see some of that kind of, you know, ebb away a little bit as it transitions into the more baseline forecast. And that might be, you know, one of the other places that it comes back a little bit. But, you know, in terms of you know, general levels of provision going forward, I mean, this quarter is outsized by probably at least five, six million dollars. Okay, great.
spk02: And just generally, anything that you're seeing that you're pulling back on or more concerned about from a credit perspective in your market? We've heard of some pulling back on construction, you know, but that's been a little bit mixed.
spk06: Yeah, we probably focused as much on the nature of the underlying opportunity from how it's priced, the structure of pricing, So a lot more emphasis on the CNI and floating rate opportunities. And then, you know, it's no secret that we're a little elevated compared to our peer group on Cree exposure, but that is largely what the greater Washington market, you know, that's consistent with kind of what this market, how it's built, but not real interested in throwing longer-term you know, fixed rates and continuing to grow that concentration. So we're probably managing some sub-portfolios within commercial real estate to at least not see them expand significantly. But as we, you know, as we look at, as we go through our process of portfolio reviews, you know, stress testing, analytics around market trends within real estate, We're not seeing signs. We are seeing movements in cap rates, which will obviously drive pricing or valuations in a different direction, but nothing that's given us cause for concern apart from just making sure what we're putting on the books makes sense from a pricing and concentration standpoint.
spk02: And on growth, what's your... I'm assuming growth will flow from the level we saw this quarter. What's an appropriate growth rate to think about for next year?
spk06: Yeah, that's a great question. Q4 is always a wild card because right now, from a 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 23 continues to be in that eight to 10% kind of loan growth expectation. High single digits we think would be reasonable of our appetite, our ability to fund, and what we would foresee in the economic environment You know, one of the things that's a little bit unique, at least it seems this way to us, is we've, the teams, you know, coupled with, you know, 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 really have developed a reputation as kind of the go-to bank in the market here locally. And so I think that momentum you know, to some extent we'll continue, we continue to see existing clients want to grow and new clients want to come here. And so, you know, the last thing we want to do is 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, you know, the one thing that could put a governor on growth. But that 8% to 10% number seems to be a reasonable outlook right now.
spk02: Any update on buyback appetite? You weren't active this quarter, but your stock is down today. Any thoughts on reengaging on the buyback?
spk06: We don't have plans at this moment, but something always under consideration. After looking at the market right now, maybe we should be active this afternoon.
spk02: The capital piece, and you look at kind of your growth and capital levels as the governor for that. More of if you'll be active or not.
spk06: Yeah, and I think going into what could be a little bit of uncertainty from an economic standpoint, I think we'd probably hold the line there, maintain our capital levels, let that continue to grow as we move through what might be a recessionary period.
spk02: And the last question is just on M&A. Any updated thoughts on the potential for deals that you're looking at? M&A markets felt quiet over the past couple of months. Just any updated thoughts there?
spk06: Yeah, continue to be, you know, we're coming up on, what, two and a half, three years from our last released bank opportunity. So we continue to build those relationships. And, you know, 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 RIAs 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.
spk02: All right, great. Well, thanks for the one-on-one. And sorry it was the KBW show this afternoon, but hopefully we'll have more analysts on next quarter. Thank you. Thank you, Catherine.
spk03: See you, Catherine.
spk01: Thank you for your question. The next question is from the line of Manuel Navas with DA Davidson. Your line is now open.
spk07: Good afternoon, Manuel. Manuel, please check to see if you're on mute.
spk04: Hey, hey, sorry guys. I was on mute. There was more than one analyst here. Hey, so the NIM forecast that you're talking about with the next couple quarters at 3.30 or kind of heading towards 3.30, is that kind of the timeframe that's going to take to replace the wholesale funding to deposit funding? Just kind of thinking about it on that piece.
spk03: Yeah, that's a key part of it. Manuel, this is Phil. That's a key part of it as well as hoping within that couple quarter period that the Fed gets done with what they're going to do and things can kind of settle from having to keep up with continued upward movements in overall rates. So 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. Yep.
spk04: With the money market fund, money market rate kind of being higher at the end of September, was that just to prevent attrition, or are you actually seeing some new flows because you raised rates?
spk03: We're probably looking to both counter any possible attrition as well as just putting a legitimately attractive rate out there to attract new relationships. We've normally used that money market vehicle for doing that and giving our folks over time an opportunity to expand the relationship once we kind of use that as the hook. I mean, the actual six-month guarantee rate that we're offering right now is 2.5%. or leading with that and having all the other tiers behind it follow suit, but not to that exact degree. But that is our traditional hook product.
spk04: Any early indications of success or wait till next quarter?
spk03: I think that we're certainly starting to hold our own in that respect. We have had decent traction on the CD side as well. It's just that the numbers of which we need to be able to offset and fund the growth we had on the loan side is just that much bigger. So there is some traction kind of underneath the surface there, but it just needs to be more. It just needs to be greater.
spk04: Got it. Got it. Okay. I appreciate this. Thank you, guys. Thanks, man.
spk00: Yep.
spk01: Thank you for your question. There are currently no further questions registered. So as a reminder, it is star one on your telephone keypad. There are no additional questions waiting at this time, so I'll pass the conference back to the management team for any closing remarks.
spk06: 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. That will conclude our call.
spk01: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.
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