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spk00: Hello, and welcome to the Sandy Spring Bank Hope Inc. Second Quarter 2023 Earnings Conference Call and Webcast. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. I'll now hand it over to your host, President and CEO, Daniel Schreider, to begin. Please go ahead.
spk02: 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 is Dan Schreider speaking, and I'm joined here by my colleagues Phil Mantua, our Chief Financial Officer, and Aaron Caslow, General Counsel and Chief Administrative Officer. Today's call is open to all investors, analysts, and the media, and there's 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 Aaron to give the customary safe harbor statement.
spk01: 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.
spk02: Thank you, Aaron. As we noted in our press release, we remain focused on growing core funding and expanding our client base. After experiencing deposit runoff earlier in the quarter, deposits 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 community. And we'll continue to aggressively pursue new ways to expand our reach in the greater Washington region as we have for the past 155 years. The data reported net income of 24.7 million or 55 cents 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 60 cents 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 98 cents per diluted common share for the quarter ended June 30 of 2022. The decline in net income and core earnings compared to the link quarter was driven by lower net interest income coupled with higher provision for credit losses and non-interest expense. To that end, 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 of 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-offs of non-accrual consumer loans. The individual reserve is related to a multifamily construction loan that is converted to a lease-up phase. In this case, the units have been slower to achieve targeted occupancy, therefore creating 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 borrowers. 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 remain stable at 14 billion compared to 14.1 billion at march 31st total loans also remain stable at 11.4 billion at june 30 compared to march 31st 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 $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 runoff, 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 D.C. 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 routinely perform stress tests on portfolio segments and external loan reviews 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. A recent stress test confirmed that under several moderate and severe stress scenarios, lost expectations were very reasonable and capital remained strong. Shifting to deposits, total deposits decreased 117.1 million or 1% to 11 billion in June 30 compared to 11.1 billion at March 31st. During this period, total non-interest 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 $250,000. During the current quarter, we experienced a net increase of $230 million in 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 a combination of non-interest bearing and money market accounts. With an average length of relationship of nine years, the portfolio is well 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 in composition among DDAs, money markets, and time deposits. With an average length of 12 years, the retail deposit portfolio was also well diversified with no significant concentrations. Despite the significant decline in non-interest-bearing deposit accounts year-to-date, the category does still remain strong at 28% of our total deposit base. At June 30, contingent liquidity, which consists of available FHLV borrowings, available funds through the Federal Reserve Bank's 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 also had $1 billion in available Fed funds, which provided total coverage of 163% of uninsured deposits. Non-interest 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. The quarter-over-quarter increase was mainly driven by higher income from mortgage banking activities, bully income, and service charges on deposit accounts. The year-over-year decrease in non-interest 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 one-time gain, non-interest income declined by 7% or $1.4 million year-over-year due to lower insurance commission income as a result of 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 $600,000 compared to the linked quarter and total mortgage loans grew $57 million. Future levels of mortgage gain revenue is expected to be in the million to the 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 4.8% increase since March 31 of 2023. For the second quarter of 2023, our net interest margin was 2.73% compared to 2.99% for the first quarter of 2023 and 3.49% for the second quarter of 2022. There's 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 a significant portion in fixed-rate assets. Compared to the linked quarter, the rate paid on interest-bearing liabilities 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 two 25 basis point increments between now and the end of the year, we see our margin continue to compress into the low 260s 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. Non-interest 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 initiative implemented by management during the year. As we shared last quarter, to offset overall 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. The termination is slated to occur mid-third quarter, and there will be a non-recurring expense associated with this action. We do plan to disclose this amount once it is determined. The non-GAAP efficiency ratio was 60.68% 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 non-interest expense as we continue to invest in the future. Shifting to credit quality, overall credit quality remains stable as the level of nonperforming loans to total loans was 44 basis points compared to 41 basis points. These levels of nonperforming loans compared to 40 basis points for the prior year quarter and continue to indicate stable credit quality during this period of economic uncertainty. At June 30, 2023, nonperforming loans totaled $49.5 million. compared to $47.2 million at March 31st and $43.5 million at June 30th, 2022. Total net charge-offs for the current quarter amounted to $1.8 million compared to $300,000 in 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-accrual loans. The allowance for credit losses was 120.3 million or 1.06% of outstanding loans and 243% of non-performing loans compared to 117.6 million or 1.03% of outstanding loans and a coverage of non-performers at 249% at the end of the prior quarter. At June 30, 2023, the company had a total risk-based capital ratio of 14.66%, A common equity Tier 1 risk-based capital ratio of 10.69, a Tier 1 risk-based capital ratio also at 10.69, and a Tier 1 leverage ratio of 9.42. 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 to full banking relationships. As we are successful in growing core funding, create capacity to be more active in loan generation. We'll continue to manage costs while completing important investments in the technology area necessary for our future. And lastly, take advantage of the excellent reputation we've built over the decades to grow client relationships, continue to expand assets under management in 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.
spk00: Thank you. As a reminder, if you'd like to ask a question, you can press star by one on your telephone keypad. If you'd like to remove your question, you may press star five by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Catherine Miller of KBW. Catherine, your line is now open. Please go ahead.
spk07: Thank you. Good afternoon.
spk02: Good afternoon, Katherine.
spk07: I just wanted to start with the margin. Understand the pressure down to the low 260s if we get two more Fed hikes that you mentioned, Dan. Just kind of curious how you're thinking about the components of that. And maybe just starting on the deposit side, if you could just give us some background or some color around where you're seeing incremental new deposit costs today, you know,
spk03: maybe by product type would kind of be helpful um and then also within that guidance how you think about the non-interest bearing mix shift by the end of the year okay good afternoon catherine this is phil uh if i can talk about the various elements yeah how are you uh i can talk about the various elements of um of how how we're pricing these uh out looking forward so um 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 introduce a high-yield savings account that today will carry about a 4.5% rate with that, in which we've already generated growth in that category of over $300 billion throughout the last quarter, and we would continue to see that piece of the deposit base continue 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 gotten even more aggressive on the introductory rates and all of the rates across the varying tiers. The new retail and business premier rate, intro rate, is now at four and 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 brokered CDs. All of the growth in the time deposits as reported was in the core area. We're out now with a eight-month special at 5.5%. a 14-month special at 5% and a variety of other traditional maturities that are in the 4% to 4.5% 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 runoff. out of the core DDA component, much of which we believe has run into the ICS portion of the portfolio. The ICS element of that on average between the checking account offering and the money market account is averaging about 2.8%. So any further migration there is going to be worth 280 basis points of incremental costs. And then as far as 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.
spk07: Great. It's all really helpful. And so then as we think about the other side of the balance sheet on loan yields, I know your loan betas have been slower just given the fixed rate component of your portfolio. And I know growth is slow, so it's hard to churn through the portfolio. But as you look forward to the next couple of quarters, is there... a group of loans that you see repricing, you know, in a certain quarter where you might see more lift, that just kind of helps either stabilize the margin or just kind of put an end to the bleed down just from the asset side of things.
spk03: Yeah, I don't know that there's any real, you know, kind of groups or categories, you know, that would would from a timing standpoint kind of change the way that the loan portfolio is repricing? I mean, anything that's produced into the commercial portfolio today based on just recent pricing is gonna probably have a high seven to eight to eight and a half percent type of rate associated with it. And anything in the mortgage portfolio which has been growing has probably been topping out in the seven and a half percent range as well. So anything in that regard would certainly help, but I think it's really kind of more of the same, Katherine, as it relates to any additional contribution towards, you know, the beta on the loan side really being much more than it has been here in recent quarters.
spk07: Okay. Makes sense. Hopefully you're going to have a different story for me, but I understand it. Yeah. So that's the margin. Maybe one question on just borrowings. I noticed that you pulled a little bit of the bank term funding program. It looks like you swapped the FHLB into that. Just kind of curious how you're thinking about the borrowing side and if you think that that strategy will continue into the back half of the year.
spk03: Yeah, the pull down 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-month period, minimize the pledging implications given the way that those are required on that particular product, and then just run down the other capacity in Fed funds and in some of the home loan borrowings that had rates that were in excess of what we were able to use the Fed program for. Not really much else to it than that. We did that actually early in the quarter. So we've 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 480 to 490 range. But I don't know that we're planning to see a whole lot of change in the borrowing section. You know, at the end of a quarter, we could have a Fed Funds position you might see, you know, on the balance sheet at a point in time. But otherwise, I don't think it's going to change a whole lot.
spk07: Okay. Makes sense. All right, great. Thanks for taking my questions. I appreciate it.
spk02: Sure. Thanks, Justin.
spk00: Thank you. Our next question comes from Casey Wichman of Piper Sandler. Your line is now open. Please go ahead.
spk06: Hey, good afternoon.
spk01: Hi, Casey. Hey, Casey.
spk06: Hey. Maybe just starting with the expenses. So the guide you guys gave for the fourth quarter would imply they're coming down pretty nicely from the second quarter. Is that mostly in the salaries line? Are there other areas we should consider? And sort of where are those all coming from?
spk03: Yeah, Casey, this is Phil. Salaries certainly is a part of the equation given that 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 realization to 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 that's the first element of it. There's also some costs in there. Dave Kuntz, In this quarter in into the third quarter related to some consulting and professional fees that go hand in hand with some of our technology. Dave Kuntz, Investments that should slow towards the fourth quarter so that's a that's a both of those things are significant parts to the to the guide there as it relates to trying to get it to come through. the third quarter into the fourth quarter and land in that $64 million range that we were really referencing to a degree last quarter as well.
spk06: Okay. Great. And maybe just one more back to that margin. I guess can you just dumb down? I think you said the margin hopefully will bottom out in the next couple quarters in the 260 range. 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 bigger question.
spk03: I think we actually, yeah, yeah. 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 Dave Kuntz, into the margin, we really need we're going to need some rate cuts at some point in right now. Dave Kuntz, In addition to the 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 then.
spk06: 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 sheet growth expected, or is that not something really in consideration?
spk02: It's something that's always on the table, Casey. There are no plans at this point to be active. That could change, but I wouldn't expect it in the next quarter.
spk06: Got it. All right, thanks for taking my questions.
spk04: Sure.
spk00: Thank you. Our next question comes from Russell Gunter of Stevens. Russell, your line is now open. Please go ahead.
spk04: Hey, good afternoon, guys. Hi, Russell. Hi, Russell. I wanted to follow up on the – hey, guys. On the loan growth outlook, I hear you on the 150 kind of match, so we kind of break even there. what's a good bogey for us to think about when as to when we could see you know net positive growth is it a loan to deposit ratio target or you know non-ib mix stabilizing in a certain range just how are you guys thinking about when you're comfortable uh demonstrating that growth again yeah russell this is dan i think we've been you know as we went through the
spk02: 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 in the back half of the quarter and achieve some growth, then I think we would become more comfortable in getting active. I don't think we are in the short run looking at Dave Kuntz, moderating our loan to deposit ratio um you know it in ideal situation that would be the case, but I think it's going to be more important for us to be. Dave Kuntz, Active as soon as we can in lending keep that you know that might that might stay about where it is as long as we can get the funding moving in the right direction. Dave Kuntz, yeah there is a there's obviously a relationship between. certain lending activity in the CNI space and the accompanying funding that goes along with it. So we want to make sure we get back in that business as soon as we can.
spk04: Okay. Thanks, Dan. And then just an ability to retain the talent from a commercial lending perspective, given the funding pressure. Are you guys able to hold on to the folks you want? Are you seeing... competitors kind of target your guys more than, than is typical, just any update you could share.
spk02: Yeah. Um, you know, probably not seeing targeting any more than what we typically would, you know, we've got a great reputation and, and, uh, and, and some really good talent part of some of the staffing adjustment we did last quarter that I referred to, uh, was trying to, you know, right-side certain aspects of our front line 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, you know, at this point, our teams have done a great job taking care of clients, managing production at a level we think is reasonable with funding, and also shifting a lot of their efforts and emphasis toward deposit gathering. you know, adapted our, you know, incentive opportunities around that to try to preserve the opportunity to earn in a reasonable comparison to what had been predominantly, you know, loan-oriented incentive type of program. So I think we're in pretty good shape in terms of the retention of talent.
spk04: Thanks, Dan. I appreciate the color. And then just last one, switching gears a bit, I think I heard you say you're Tad Piper- took a look at the office portfolio again inter quarter re under wrote that. Tad Piper- Any any kind of color you could provide on the details of that exercise, whether it's observed, you know declines in value or just any an incremental details.
spk02: Tad Piper- yeah you know it's say, all in all, you know things have held up both from a cash flow standpoint evaluation. It was a focus of our most recent stress test, which accompanied the office portfolio, which also held up really well under a variety of different stress scenarios. We're not seeing leading indicators on office that would create concern. As I've indicated, historically our office exposure tends to be smaller unit professional properties as opposed to the large floor plates that, you know, where one or two tenants leave creates a significant amount of stress. So, so far it's performed well. Right now, average current debt service covered ratio on the portfolio is 154. Weighted average loan to value on the portfolio is in the low 50s. So it's, I think we're a pretty good, you know, We'll continue to watch it as we will every asset class in the Cree book.
spk04: Very good. Thanks, Dan. I appreciate it. Thanks, Russell.
spk00: Thank you. As a reminder, if you'd like to ask a question, you can press star followed by 1 on your telephone keypad. Our next question comes from Matt Manuel Navas from DA Davidson. Your line is now open. Please go ahead.
spk05: Hey, good afternoon. If we hit a point where MIM is rebuilding, I guess we're in an environment where we've had a couple cuts, can the pace still be 5 to 10 basis points per quarter improvement?
spk03: Yeah, I don't know that, yeah, 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 five to 10 is, I believe, the numbers we've used in prior conversations along this point. So yeah, I don't know that I see it any differently today than what we've said in the past. I think what's just different is our starting point, obviously, for where we have come to land here recently more so than anything else.
spk05: Got it. And on the large CRE that charge off, or the provision for the large CRE loan, what's roughly the size of that loan?
spk02: It's in the low $20 million range.
spk05: Got it. And it seems that if we get some of the deposit growth here, it seems like you're a little bit more interested in some loan growth. What's kind of changed there? You just kind of realized you might be in a higher rate environment for longer and it's hard to keep loan growth turned off or did anything else really change or just you're happy with, you're seeing some stabilization in deposit trends?
spk02: Yeah, I think it's related to stabilization on the deposit front. I mean, I think the 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 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. So one of those levers would be to be active in the lending business when funding allows us to do so.
spk05: And I mean, as you get closer to 60, that's almost the marginal rate of new assets. It almost makes more sense to grow at that point, right?
spk02: I'm not sure I'm tracking with that, Manuel. Can you repeat that?
spk05: Your new loan yields are around 7.5%, 8%. Oh, yeah, yeah.
spk02: Yes, I would agree with your statement. I think I didn't pick up the whole sentence at first.
spk05: Okay, no problem. I'll step back and take you. I appreciate the comments. Thanks, Manuel.
spk00: Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on the telephone keypad. Okay, at this time we currently have no further questions, so I'll hand back to Mr. Schreider for any further remarks.
spk02: Okay, thank you all for joining today's call and for your questions if you have obviously additional questions that we weren't able to address today please reach out to either phil or myself and thank you for your time have a great afternoon thank you for joining today's call you may now disconnect your lines
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