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spk01: Good afternoon. Thank you for attending the Sandy Spring Bank Court 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 Schreider, President and CEO. Daniel, please go ahead.
spk07: 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 Schreider speaking, and I'm joined here by my colleagues, Phil Mantua, Chief Financial Officer, and Aaron Caslow, General Counsel and Chief Administrative Officer. Today's call is open to all investors, analysts, and the media. There's a live webcast of today's 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. Aaron?
spk06: 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 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.
spk07: 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're managing through what continues to be a pretty challenging operating environment, including high inflation, these rapid increases in interest rates we've experienced in a continual threat of recessionary pressures. And while the economic forecasts, as well as the probability of recession, are driving the provision for credit losses, we are not seeing any trends that indicate that our credit quality is on the edge of deterioration. 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 $0.76 per diluted common share, for the quarter ended December 31, 2022, compared to net income of $45.4 million, or $0.99 per diluted common share, for the fourth quarter of 2021. and 33.6 million or 75 cents per diluted common share for the third quarter of 2022. Core earnings were 35.3 million or 79 cents per diluted common share compared to 46.6 million or $2 per diluted common share for the quarter ended December 31, 2021, and then 35.7 million or 80 cents per diluted common share for the quarter ended September 30, 2022. 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 length order 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, the provision reflects the declining economic forecast and the increasing probability of recession. And to clarify, we break out the provisional expense for funded and unfunded loan commitments for accounting purposes, but the primary drivers are the same. 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 in non-PPP commercial loan runoff. Funded commercial loan production during the fourth quarter of 2022 was $341.7 million. Commercial runoff in the fourth quarter was 38% lower than the linked quarter and 45% lower than the prior year quarter. The annualized runoff rate in the fourth quarter was 10% compared to a historical average of 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 diversify our lending concentration by attracting 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 CNI 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. CNI and owner-occupied are shaping up to be slower in the first quarter, but expect around 2% to 3% growth per quarter starting in the second quarter of the year. The mortgage construction portfolio will continue to fall as production is significantly slowed, but construction conversions should drive growth in the permanent portfolio, which again, will likely to grow two 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 late quarter, representing a 32% reduction. And this is 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 non-interest-bearing deposits. Additionally, borrowings increased by $928 million during the period. Excluding broker deposits, total deposits decreased 4% in the fourth quarter. The combination of higher interest rates and seasonal runoff drove non-interest-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, the net interest margin was 3.26% compared to 3.51% for the fourth quarter of 2021 and 3.53% 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 the 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 have been 3.26% compared to the net interest margin of 3.31% for the fourth quarter of 2021 and 3.5% 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 $315 range and then start to rebound under the assumption that the Fed will complete its tightening cycle by the end of the first quarter. Non-interest 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 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 $800,000 compared to the linked quarter. The decline is a result of the rising interest rate environment, which continues to dampen mortgage origination and refinancing activity. In light of current origination levels, we did execute a reduction in staff in 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 31st, 2022. We expect near-term mortgage gain revenues to settle into a range between $1 million to $1.5 million per quarter. Due to ongoing market volatility, wealth management income decreased $390,000 compared to the linked quarter and $1.1 million compared to the prior year quarter. However, assets under management finished strong at $5.26 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. But if the market does not take a step back, we anticipate 2% growth per quarter. Non-interest expense for the current quarter decreased 1.8 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 in occupancy expense, and a half a million in other non-interest expense. These decreases were partially offset by increases in various other categories of operating expenses. We looked to manage growth in 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 costs that re-engaged early in the year and increases to the run rate related to some of our technology initiatives. We then looked to manage quarter-over-quarter growth by targeting a non-GAAP efficiency ratio within the range of 51% to 52%. and continuing to evaluate our expense levels commensurate with revenue trends. The non-GAAP efficiency ratio was 51.46 percent compared to 50.17 for the prior year quarter and 48.18 for the third quarter of 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 or projected credit-based performance in the portfolio. The level of non-performing loans to total loans improved at 35 basis points compared to 40 basis points at the linked quarter and 49 basis points at December 31 of 2021. These levels indicate stable credit quality during a time of significant loan growth and economic uncertainty. Loans placed on non-accrual amounted to $5.5 million compared to $500,000 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 $100,000 for the fourth quarter of 2022 compared to net charge-offs of $400,000 for the fourth quarter of 2021 and $500,000 in recoveries for the linked quarter. The allowance for credit losses was $136.2 million or 1.2% of outstanding loans and 346% of non-performing loans compared to $128.3 million or 1.14% of outstanding loans and 289% of non-performing loans at the end of the previous quarter. Compared to the end of 2021, the allowance for credit losses was $109.1 million or 1.1% of outstanding loans and coverage of 224% of non-performing loans. The tangible common equity ratio decreased to 8.18 of tangible assets at December 31 compared to 9.21% at December 31 of 2021. A decrease as 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 in tangible assets during the past year. At December 31, the company had a total risk-based capital ratio of 1420, a common equity tier one risk-based capital ratio of 1023, a tier one risk-based capital ratio of 1023, and a tier one leverage ratio of 9.33. 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 join our board of directors. Ken has dedicated his 40-year career to helping clients in the greater Baltimore and Washington regions. I'm really grateful that he will continue to help lead our company as a director. 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.
spk01: Absolutely. 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 1. 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. The first question is from the line of Casey Whitman with Piper Sandler. Your line is now open.
spk03: Hey, good afternoon.
spk01: Hi, Casey.
spk06: Hey, Casey.
spk03: Hi. Maybe we'll start with the margin and the guide you sort of 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 a 310 to 315 range? And then I guess my follow-up would be just sort of against the loan growth guide you gave, what sort of assumptions should we make on the deposit side, I guess the core deposits for growth?
spk05: 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 their upward march here, that we could probably see 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 the core DDA and other interest-bearing categories as opposed to the continual need to fund either through wholesale or broker deposits or some form of similar borrowing. Because if that continues to occur, then that expansion in the margin most likely doesn't happen just based on the differential in those rates.
spk03: Okay. Got it. And then, sorry if I missed this, Phil, but just the other fees, what's in that number and what was the dragging that down this quarter? It looked pretty low.
spk05: Yeah, quarter over quarter, it was mostly the absence of swap fee income and prepayment penalties that we were able to generate in the third quarter that did not replicate themselves in the fourth quarter.
spk03: Okay. Okay, and the last question I'd ask, you touched a bit on office just in your prepared remarks. Do you happen to have your total office exposure? I do. And maybe with that, can you just talk broadly about some of the larger loans 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?
spk08: Yeah. Right now, our total...
spk07: Total office exposure, if you think about our investment real estate, probably led by retail and about half of that amount at about $1.7 billion. And office is about $840 million in terms of outstandings. That's up against the total CRE 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 turn over. And then within that context as well are some data center assets that we originated over the past few years that have been very strong performers. At origination, These properties have weighted average loan-to-values in the low 60s and then coverages in the mid-150s.
spk08: So we've never been a big urban player, and we've never been a large office player.
spk07: If you kind of think about some of this, like Tyson's Corner, downtown office, large floorplates, It just hasn't been our sweet spot. And then very little out of the ground. Most has been refinance activity from assets that have 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 look. You know, look hard at that. Actually, every asset class within the CREE portfolio. But office is one that we have not seen significant growth in. And, you know, just given particularly the last three years, given, you know, the uncertainty around change of behavior in the post-COVID world.
spk03: And I think you said this, but you've seen no downgrades yet in that portfolio too, the office?
spk08: That's correct. Yep.
spk03: Okay, I'll let someone else jump on. Thank you.
spk05: Thanks, Casey. All right, Casey. Thank you.
spk01: Thank you for your question. The next question is from the line of Katherine Kneeler with KBW. Your line is now open.
spk02: Thanks. Good afternoon.
spk05: Hi, Katherine. Hey, Katherine.
spk02: Just one follow-up on the margin, just back to Casey's question on the loan. I mean, excuse me, deposit pricing. Where were deposit costs maybe towards quarter end or where you're seeing them come, you know, as we kind of look into, turn it back into that 310 to 315 margin to see where deposit costs might be as early as next quarter?
spk05: Yeah, Kathryn, in the, at the end of December, our overall cost of interest bearing liabilities was about 210 um and uh overall interest bearing deposits was in the uh was around 183. okay great thank you this would fit with 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 it would be fair to
spk02: characterize like, how do you think about kind of over the cycle, potential data for you? Because as I look at where you are, you know, cycle to date, you're at around 40% cumulatively. And that's where you know, a lot of companies might be saying that their cumulative cycle betas will be maybe over the next of the next couple of quarters. But, you know, is there a case to be made that for you, you know, your cycle beta will still be higher, but not significantly higher and your pace of change should start to moderate as we go to the next couple of quarters, just especially given your outlook for growth to be slowing in the next.
spk05: Yeah, Casey, I think that's a reasonable way to look at it. I mean, we've really all along said that our, you know, modeled 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, but probably a little bit higher even with the last 25, I guess, 50 basis points that the Fed, we think, has in mind here for the remainder of this quarter. So we would probably average in this quarter a little higher than that, but I think over time in the past, we've been proven capable having the beta in the other direction move fairly quickly to allow us to take advantage of when rates either stabilize or ultimately drop back in the other direction.
spk02: And what's your view on how active you'll be in pulling that? I think there'll be borrowings.
spk05: It's really a question of you know, relative pricing between home loan bank borrowings and other forms of brokered when necessary. We won't really lock into one form over the other. And I think that was reflected, in fact, in the fourth quarter here where we really traded out of a couple hundred million of advances for about the same amount, maybe a little bit less in the brokered CD markets. So we really kind of look at those things very similarly in terms of how we use them. And we really just kind of trade one against the other on relative price and value. And I think we've said it before, we've tried over the course of the cycle to keep all of those relatively short. And so for example, we have a fair amount
spk02: of um of maturity in both of those areas here in the first quarter and we will replace them you know according to you know that same same general pricing concept and how about on loan pricing um where are new loan yields coming on and your your loan portfolio is not as highly variable rate which is partly what's happening to your margin now but i kind of view you as it'll be just kind of a slow grind high over the next couple of years as you're longer-term loan portfolio continues to reprice and churn through. So how do you kind of look at maybe the pace of loan yield increases over the next couple quarters?
spk05: Yeah, well, I think that's also embedded in that guidance relative to forward-looking margin is that we'll continue to get, you know, some upward contribution from loan yields throughout the throughout that period. Just for pricing within the last quarter, albeit the levels of production and booked loans was slower than customary for us. In the commercial area alone, we ranged on average from the high 580, 590 range up into, in some cases, over seven, seven and a half percent on various categories of new production. continue to accrue our benefit as we move into the latter part of the year.
spk02: Great. All right. Thanks. I'll pop out of the queue.
spk07: Thanks, guys. Thanks.
spk01: Thank you for your question. There are currently no further questions registered, so as a reminder, it is star 1 on your telephone keypad. The next question is from the line of Manuel Navas from D.A. Davidson. Your line is now open.
spk04: Hey, good afternoon. The non-interest-bearing deposits have come down a little bit. How far could that drop over the next couple of quarters?
spk05: Well, that's a really good question. I mean, one aspect of what's happened there is 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 think in that respect, we probably have bottomed out. But within the other categories that are related to small business and just broader commercial type of deposits, I'm not really sure I could give you a definitive type of answer. just not knowing exactly what that pattern is related to, other than the stuff that we have normally at year end. We're apt to have it continue to come down through the first part of this quarter, traditionally, and then have it rebound towards the end of the quarter. We'll 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.
spk04: Okay, that's helpful. So that's kind of like working capital needs and kind of normal trends and it's just a little bit larger, the move this quarter than in prior quarters?
spk05: Yeah, I would say so. This quarter, The kind of rundown on demand deposits, on the core demand deposits, started earlier in the quarter than normal. And it happened more throughout the quarter than just at the end of the quarter, which is the traditional drawdown activity with our commercial client base.
spk07: I was going to say the obvious difference this year in that trend is... you know, the availability, this intermediation that would occur within our book of DDA deposits moving into interest-bearing given, you know, given the availability of actually earning something on your money this year relative to prior periods. So that, and hopefully that's also, you know, a trough that we'll see end as well and see that DDA balances start to build back.
spk05: Yeah, and in fact, just a detailed tidbit, but 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.
spk04: That's good. That's interesting to hear. As you've been out in the market over the last quarter and a half, how have you seen deposit competition shift?
spk07: I think over that time frame that you've talked about, I think it's still, this is a highly competitive market. We have been and continue to be. near or at the top of the market in 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 of pressure on the funding side. And we're seeing it in pricing.
spk05: Yeah, I don't think the mix of competitors has changed to any large degree either. I think it's still, you know, generally the usual suspects in this market.
spk04: Thank you for the call. Sure.
spk01: Thank you for your question. There are no additional questions waiting at this time, so I'll pass the conference back to Daniel Schroeder for any closing remarks.
spk07: Thank you, Matt, and thanks, Catherine, Casey, Emanuel, 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.
spk01: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.
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