Sandy Spring Bancorp Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 7 speakers on the call.

Operator

Good afternoon. Thank you for attending the Sandy Spring Bancorp Earnings Conference Call and Webcast for the Q4 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. I would now like to pass the conference over to our host, Daniel Schrider, President and CEO.

Operator

Daniel, please go ahead.

Speaker 1

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 Q4 of 2022. As Matt mentioned, this is Dan Schrider speaking, and I'm joined here by my colleagues, Bill Mantua, Tula, Chief Financial Officer and Aaron Kaslow, 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.

Speaker 1

Aaron?

Speaker 2

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

Speaker 1

and statements of the ability

Speaker 2

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 these future results.

Speaker 1

Thank you, Aaron, and thank you all again for being on the line today to discuss our 4th quarter and annual performance. As you read in our press release and I shared last quarter, we're managing through what continues to be pretty challenging operating environment, including high inflation, these rapid increases in interest rates we've experienced and 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 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.

Speaker 1

Today, we reported net income of $34,000,000 or $0.76 per diluted common share for the quarter ended December 31, 2022, compared to net income of $45,400,000 or $0.99 per diluted common share for the Q4 of 2021 and $33,600,000 or $0.75 per diluted common share for the Q3 of 2022. Core earnings were $35,300,000 or $0.79 per diluted common share compared to $46,600,000 or $1.02 per diluted common share for quarter ended December 31, 2021, and then $35,700,000 or $0.80 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 Looking at our earnings through another lens, pretax pre provision income was $56,600,000 compared to 64 $100,000 in the linked quarter $61,700,000 in the prior year quarter. The provision for credit losses was a charge of $10,800,000 compared a charge of $1,600,000 in the Q4 of 2021 and a charge of $18,900,000 for the Q3 of 2022. The quarterly provision expense contained a provision charge of $2,900,000 which was associated with unfunded loan commitments.

Speaker 1

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 business 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 $13,800,000 compared to $12,600,000,000 in the prior year quarter. When you exclude PPP loans, total assets increased 11% year over year. Total loans, excluding PPP, increased 16% to $11,400,000,000 at December 31, 2022, compared to $9,800,000,000 at December 31 last year.

Speaker 1

Total commercial loans net of PPP grew by $1,200,000,000 or 15% during the previous 12 months. Gross commercial loan production over the past 12 months was $3,900,000,000 of which $2,500,000,000 was funded, offsetting the $1,200,000,000 in non PPP commercial loan runoff. Funded commercial loan production during the Q4 of 2022 was 341,700,000 Commercial runoff in the 4th quarter was 38% lower than the linked quarter and 45% lower than the prior year quarter. The annualized runoff rate in the 4th quarter was 10% compared to historical average of anywhere between 12% 15%. We expect runoff to settle in the 7% to 9% range for the next few quarters.

Speaker 1

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 Hard to diversify our lending concentration by attracting more C and I relationships and focusing all client facing teams on core funding initiatives. If you look at Page 17 in the supplemental deck, you can see that this approach is already starting to take effect as our C and I growth has outpaced our CRE growth for the first time in many quarters. As we look forward into 2023, we expect the commercial real Portfolio to be flat or even slightly down for the quarter. C and I and owner occupied are shaping up to be slower in the Q1, but expect around 2% to 3% growth per quarter starting in the Q2 of the year.

Speaker 1

The mortgage construction portfolio will continue to fall as production is significantly slow, Our construction conversion should drive growth in the permanent portfolio, which again will likely to grow 2% to 3% per quarter. Recognizing that macroeconomic changes could impact our results at this stage, we expect our overall loan growth for the year to be in the mid single digits and more weighted in the second through fourth quarter. At the end of the quarter, our commercial pipeline was at $944,000,000 compared to $1,300,000,000 in the linked quarter, representing 32% reduction. And this is indicative of both the change in demand and our shifting focus to do more C and 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.

Speaker 1

Additionally, borrowings increased by $928,000,000 during the period. Excluding broker deposits, total deposits decreased 4% in the 4th quarter. The combination of higher interest rates and seasonal runoff drove non interest bearing deposits to be lower during the Q4, but we expect to see some recovery in the latter half of this Q1. DDA balances are also experiencing pressure due to lower title company deposits, which totaled $437,000,000 in the Q4 of 2021, but fell to $227,000,000 at the end of 2022. Core money market and time deposits performed well during the quarter, with core money market accounts growing $91,000,000 or 3% and core time deposits growing $199,000,000 or just slightly under 18%.

Speaker 1

We are clearly relying on more wholesale funding source as well 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.

Speaker 1

Moving to the margin. The net interest margin was 3.26% compared to 3.51% for the Q4 of 2021 and 3.53% for the Q3 of 2022. The decrease in the net interest margin for the current quarter compared to the Q4 of the prior year previous quarter was a result of 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 Q4 of 2021 and 3.5% for the linked quarter.

Speaker 1

On a go forward basis, we anticipate that the margin will further decline in the first quarter into the 3.10% to 3.15% range and then start to rebound under the assumption that the Fed will complete its tightening cycle by the end of the Q1. Non interest income decreased by 37 percent or $8,200,000 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 Given the fact that we disposed of our insurance business in the Q2 of 2022 and then lower bank card income due to regulatory on fees since we became subject to the Durbin amendment. Income from mortgage banking activities decreased $2,800,000 compared to prior year quarter and $800,000 compared to the linked quarter.

Speaker 1

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 Q4 and we will continue to evaluate that going forward. However, total mortgage loans grew $377,500,000 during the 12 months ended December 31, 2022. We expect near term mortgage gain revenues to settle into a range between $1,000,000 to 1,500,000 quarter. Due to ongoing market volatility, Wealth Management income decreased $390,000 compared to the linked quarter and $1,100,000 compared to the prior year quarter.

Speaker 1

However, assets under management finished strong at $5,260,000,000 compared to 4,970,000,000 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 point $8,000,000 or 3% compared to the prior year quarter, driven primarily by the decreases of $2,100,000 in compensation and benefits expense, $1,000,000 in occupancy expense and $500,000 in other non interest expense.

Speaker 1

These decreases were partially offset by increases in various other categories of operating expenses. We look to manage growth and operating expenses in the 5% to 6% range off of 4th quarter levels With an immediate bump in the Q1 of 2023 due to certain compensation related costs that we engaged early in the year and increases to the run rate related to some of our technology initiatives. We then look to manage quarter over quarter growth by targeting a non GAAP efficiency ratio within 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% compared to 50.17% for the prior year quarter and $48.18 for the Q3 of 2022. Moving to credit quality.

Speaker 1

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 to 35 basis points compared to 40 basis points at the linked quarter and 49 basis points at December 31, 2021. These levels indicate stable credit quality during a time of significant loan growth and economic uncertainty. Loans placed on non accrual amounted to $5,500,000 compared to $500,000 for the prior year quarter and $4,200,000 for the Q3 of 2022.

Speaker 1

Within our NPA portfolio, we had no office or multifamily assets. We realized net recoveries $100,000 for the Q4 of 2022 compared to net charge offs of $400,000 for the Q4 of 2021 and $500,000 in recoveries for the linked quarter. The allowance for credit losses was $136,200,000 or 1 point 2% of outstanding loans and 3 46 percent of non performing loans compared to 128 point $3,000,000 or 1.14 percent of outstanding loans and 2 89 percent of non performing loans at the end of the previous quarter. Compared to the end of 2021, the allowance for credit losses was $109,100,000 or 1.1 percent of outstanding loans and coverage of 2 24 percent 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, 2021.

Speaker 1

The decrease is a result of the $25,000,000 repurchase of common shares during the previous 12 months and the $123,000,000 increase and 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 14.20, a common equity Tier 1 risk based capital ratio of 10.23 Tier 1 risk based capital ratio of 10.23 to Tier 1 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, He's 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.

Speaker 1

I'm really grateful that Heath will continue to help lead our company as a Director. And we are actively interviewing for a new executive to lead commercial banking and we look forward to making announcement here in the near future. So this concludes our general comments for today. And now, Matt, we can move to your questions. Absolutely.

Operator

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.

Speaker 3

Hey, good afternoon.

Speaker 1

Hi, Casey. Hi, Casey.

Speaker 3

Hi. Maybe we'll start With the margin in the guide you sort of just gave, I guess if the Fed pauses, do you have an idea of how much that margin could rebound From the Q1 level, which I think you gave the 3.10 to 3.15 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.

Speaker 4

Casey, this is Phil. I would suggest to you that beyond that Q1 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 5 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.

Speaker 3

Okay. Got it. And then sorry if I missed this, Phil, but just the other fees, what's in that number and what was dragging that down this quarter? It looked Pretty low.

Speaker 4

Yes, quarter over quarter, it was mostly the absence of Swap fee income and prepayment penalties that we were able to generate in the 3rd quarter that did not

Speaker 3

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? And maybe with that, can you just talk broadly about And 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?

Speaker 1

Yes. Right now, Our total office exposure, if you think about our investment real estate, probably led by retail and about half of that amount at about 1,700,000,000 And office is about $840,000,000 in terms of outstandings. That's up against The total CRE portfolio of about $4,700,000,000 The office for us As always and continues to be kind of suburban office, professional office space as opposed to large floor plates. So talking about medical office, Office buildings that have smaller units that are easier to turnover. And then within that context as well are some data center assets that we originated over the past few years that have Very strong performers.

Speaker 1

At origination, these properties have weighted average loan to values in the low 60s And then coverages in the mid-150s. So we've never been a Big urban player and we've never been a large office player. If You kind of think about some of this like Tysons Corner, downtown office, large floor plates, it 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.

Speaker 1

So we continue To look hard at that actually every asset class within the CREEP portfolio, but office is one that We have not seen significant growth in and just given particularly the last 3 years, given the Uncertainty around change of behavior in the post COVID world.

Speaker 5

And I

Speaker 3

think you said this, but you've seen no downgrades Yes, in that portfolio too, the office?

Speaker 1

That's correct. Yes.

Speaker 3

Okay. Okay. I'll let them all jump on. Thank you.

Speaker 4

Thanks, Casey. Hi, Casey. Thank you.

Operator

Thank you for your question. The next question is from the line of Catherine Mealor with KBW, your line is now open.

Speaker 6

Thanks. Good afternoon.

Speaker 4

Hi, Catherine. Hey, Catherine.

Speaker 6

Just one follow-up on the margin. Just back to Casey's question on loan price I mean, excuse me, deposit pricing. Where were deposit costs maybe Towards quarter end or where you're seeing them come as we kind of look into turn it back into that 3.10 to 3 15 margin is where deposit costs might be as early as next quarter.

Speaker 4

Yes. Catherine, at the end of December, Our overall cost of interest bearing liabilities was about $2.10 and Overall, interest bearing deposits was in the was around 183.

Speaker 6

Okay, Great. And again, this would fit with your commentary that you think you might get net expansion in the back half of the year just Depending on how deposit balances go. But would it be fair to characterize like how do you think about kind of over the cycle Potential beta for you because as I look at where you are cycle to date you're at around call it 40% cumulatively and that's where a lot of companies might be saying that their cumulative cycle betas will be maybe over the next couple of quarters. But Is there a case to be made that for you, 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 just be slowing in the next

Speaker 4

Yes, Casey, I think that's a reasonable way to look at it. I mean, we've really all along said that our Model beta and our expectation on beta was around that 40%. So having it kind of average out there is not terribly surprising And would most likely continue with 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 were probably averaging this quarter a little higher than that. But I think over time in the past, we've been proven capable of having the beta in the other direction And move fairly quickly to allow us to take advantage of when rates Either stabilize or ultimately drop back in the other direction.

Speaker 6

And what's your view on How active you'll be in pulling up, I think there'll be borrowings?

Speaker 4

It's really a question of Relative pricing between Home Loan Bank borrowings and other forms of brokerage when necessary, We won't really lock into one form over the other. And I think that's what's reflected in fact In the Q4 here where we really traded out of a couple of 100,000,000 of advances for some about the same amount, Maybe a little bit less in the brokered CD markets. So we really kind of look at those things So 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 we've I think we've said it before, we've tried over the course of the cycle to keep All of those relatively short. And so for example, we have a fair amount Of maturity in both of those areas here in the Q1 and we will replace them according to that same general pricing concept.

Speaker 6

And how about on loan pricing? Where are new loan yields coming on? And And 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 will be just kind of a slow grind high over the next couple of years as your longer term loan portfolio continues to reprice and churn through. So How you kind of look at maybe the pace of loan yield increases over the next couple of quarters?

Speaker 4

Yes. Well, I think that's also embedded in that guidance relative to forward looking margin is that we will continue To get some upward contribution from loan yields Throughout that period. Just for pricing within the last quarter, albeit the levels of production And booked loans was slower than customary for us. I mean, we in the commercial area alone, we ranged on average From the high 5.80%, 5.90% range up into, in some cases, over 7%, 7 point Percent on various categories in new production. And so that should continue to accrue to our benefit

Speaker 2

as we move

Speaker 4

into the latter part of the year.

Speaker 6

Great. All right. Thanks. I'll pop out of the queue.

Speaker 4

Thanks, guys. Thanks.

Operator

Thank you for your question. There are currently no further questions registered. The next question is from the line of Manuel Nieves from D. A. Davidson.

Operator

Your line is now open.

Speaker 5

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?

Speaker 4

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 Related to small business and just broader commercial type of deposits, I'm not really sure I could give You know, the definitive type of answer, just not knowing exactly kind of What that pattern is related to other than the stuff that we have normally at year end. So I mean, we're apt to have it continue to come down through the 1st part of this quarter traditionally and then have it rebound towards the end of the quarter.

Speaker 4

So we will probably trough during the quarter and you really won't see it because it will ultimately report on the end of the quarter where it will probably bounce back up.

Speaker 5

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?

Speaker 4

Yes, I would say so. This quarter, the Kind of rundown on demand deposits

Speaker 1

on the

Speaker 4

core demand deposits started earlier in the quarter than normal. I mean, 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.

Speaker 1

Why you I mean, obvious difference I was going to say the obvious difference this year in that trend is the availability this intermediation that would occur within our book of DDA deposits moving into interest bearing given the availability of Actually earning something on your money this year relative to prior periods. So that and hopefully that's also a trough that we'll see And as well and see that DDA balances start to build back.

Speaker 4

Yes. And in fact, it's just a Detailed tidbit, but in the premier money market account through the quarter embedded in a 123,000,000 Our increase just in that product line was $109,000,000 of commercial based balance increase To Dan's point about the potential of disintermediation.

Speaker 5

Okay. That's good. That's interesting to hear. As you've bid out of the market over the last Quarter and a half. How have you seen deposit competition shift?

Speaker 1

I think the last over that timeframe that you've Talked about, I think it's still this is a highly competitive market. We've continued have been and continue to be near or at the top of the market 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.

Speaker 4

Yes. I don't think that the mix of competitors has Change to any large degree either. I think it's still generally the usual suspects in this market.

Speaker 5

Thank you for the color.

Speaker 1

Sure.

Operator

Thank you for your question. There are no additional questions waiting at this time. So I'll pass the conference back to Daniel Schrider for any closing remarks.

Speaker 1

Thank you, Matt. And thanks, Catherine, Casey, Emmanuel for your questions and for everyone else who joined today's call. With no other questions, our call is now concluded and we hope that

Speaker 2

you have a wonderful afternoon.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Sandy Spring Bancorp Q4 2022
00:00 / 00:00