Sandy Spring Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Good afternoon, everyone, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the First Quarter of 2021. All participants will be in a listen-only mode. .After today’s presentation, there will be an opportunity to ask questions. .For your information, today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Dan Schrider. Sir, please go ahead.

[Daniel Schrider:]

Thank you, and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy Spring Bancorp’s performance for the first quarter of 2021. Today, we will also bring you up-to-date on our response to an impact from COVID-19 pandemic. This is Dan Schrider speaking, and I’m joined here by my colleagues Phil Mantua, Chief Financial Officer; and Aaron Kaslow, General Counsel for Sandy Spring Bancorp.

[Aaron Kaslow:]

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.

[Daniel Schrider:]

Thanks, Aaron, and thank you all again for joining us today. Today, I will review our first quarter financials, and then Phil and I will walk you through the supplemental materials we issued earlier this morning. Overall, we are very pleased with our performance this quarter. There are many promising trends in our results, especially as it relates to the resiliency of our loan portfolio and our credit outlook. We continue to be in a great position to help our clients reopen and recover from this pandemic. And with vaccinations in our region on the rise, we look forward to welcoming more of our clients and our employees back to our offices in the weeks and months ahead. And I will provide more color on our return-to-work plans later in today’s call. For now, though, I will run through our first quarter financial highlights. Today, we reported net income of $75.5 million or $1.58 per diluted share for the first quarter of 2021. The current quarter’s results compare to net income of $10 million or $0.28 per diluted share for the first quarter of 2020 and net income of $56.7 million or $1.19 per diluted share for the fourth quarter of 2020.

[Philip Mantua:]

Thank you, Dan. Good afternoon, everyone. Pleasure to be here with you this afternoon. I’m going to pick up on Slide 6 of the supplemental deck where we have our traditional waterfall representation of the movement in our allowance, for the first quarter of 2021. It is broken into components that reflect the key drivers of the change during the quarter.

[Daniel Schrider:]

Thanks, Phil. Now before we move to take your questions, I would like to briefly cover just a few other updates. As I mentioned earlier, and noted in the release, we look forward to welcoming more of our employees and clients back to our offices. So far, we have been operating at a 25% capacity, but we will increase that percentage in the weeks and months ahead. We have, like so many others learned so much about working from home, staying flexible and using technology to do our jobs more efficiently and effectively. And we will apply these lessons as we move forward, but we will leave with the mindset that we are going to return to our offices. We believe that in person collaboration is what’s best for our relationships with our clients and our colleagues. And included in these return to work efforts, we will also begin to reopen our branch lobbies this summer. As it relates to our branch network, I’m pleased to report that in February, we expanded our presence in D.C. and opened our fourth branch in the city. This full-service branch is located in the vibrant retail and business community near the Washington Convention Center. We see a great deal of growth potential, especially as this region continues to recover from the pandemic. Last month, we also released our first Annual Corporate Responsibility Report. This report goes beyond our financial reporting to show how we support our clients, our employees, communities as well as the environment. And we are committed to transparency and are proud to share our progress with you. If you haven’t seen it, you can find the report at sandyspringbank.com and on our Investor Relations site. Our company continues to earn recognition that demonstrates we are a premier community bank, an employer of choice and a company with top talent. Most recently, Forbes named Sandy Spring Bank to its 2021 list of America’s 100 Best Banks. As I mentioned earlier today and in prior quarters, we truly have a unique position in our market and among our peer group. As a nearly $13 billion company, we have the size, scale and diversification of products to meet our clients’ banking mortgage, private banking, trust, wealth and insurance needs. Our employees live and work in the communities we serve and all decision-making is local. We all feel a sense of pride in ownership in taking care of our clients because they are our neighbors and our friends, and they are the community we exist in. We operate in a highly desirable market. Greater Washington region is home to the federal government and a massive government contracting presence. Amazon’s HQ2 and many other national and international companies are headquartered here. Small businesses thrive in this region, and we are surrounded by several top-tier universities and hospital systems. So as we look forward, we see endless opportunities to grow our company and build on our existing strength. So that concludes our general comments for today, and we will now move to your questions. So Jamie, you can have the first question. If you could identify your name and the company affiliation you’re with as you come on the line that will be really helpful.

[Operator:]

And our first question comes from Casey Whitman from Piper Sandler.

[Casey Whitman:]

Maybe, Phil, can you start off by just filling us in on your core margin outlook from here? I know the next few quarters are going to be probably with PPP forgiveness, but maybe you can fill us in on sort of what you’re thinking about the core margin ex PPP and accretion?

[Philip Mantua:]

Yes, Casey, be glad to. So first of all, as it relates to the PPP forgiveness aspect of things, I think what you can expect here is that from a timing perspective, the large majority of the impact to our earnings as well as, therefore, the margin are going to really be in this next quarter here in the second quarter of the year, with that kind of continuing into the third quarter and trailing off more towards the fourth quarter. In the current quarter, the forgiveness aspect of what took place was probably worth about 4 basis points to the - four basis points of benefit to the core margin in addition to what’s going on with the ongoing fair value adjustments, which are beginning to decline, especially on the asset side. So all-in-all, what I would suggest is on a core basis, underneath all of that throughout the remainder of the year, that margin is probably going to be in the mid-3.40% range, not terribly different than I think what we basically reported here, 3.40%, 3.45%, 3.46%, somewhere in that range. And again, that is with the assumption that there are no significant changes in the overall level of market rates other than whatever fluctuations could occur on the tenure.

[Casey Whitman:]

Great. That is helpful. And while we are talking about PPP, Dan, I think you gave some numbers in your prepared remarks around deposit retention with that program. Can you repeat those numbers that you gave? I just missed them, sorry.

[Daniel Schrider:]

Yes, I sure can. I’m getting there.

[Casey Whitman:]

Sure. No problem.

[Daniel Schrider:]

I’m getting there as fast as I thought I would. So all-in-all, at the end of the quarter, we had about $1 billion in deposits related to PPP. What I commented on is in round one, about $610 million are on the books; and from round two, about $450 million. Of the remaining round one deposits that represents about a 55% retention rate of those deposits. But when you break it down a little further on the credits originations that exceeded $0.5 million initially that retention rate is closer to 70%. And obviously, all those round two were done in the quarter. So there’s no retention data on that.

[Philip Mantua:]

Yes. And Casey, just from a standpoint of trying to estimate where that goes from here, we are, for the most part, modeling that by the end of the year, we think we will still be retaining between 30% and 40% of the remaining deposits as we see them today based on what the numbers that Dan just suggested. So we have some expectation they will continue to run down, but we also believe that there will be some element of them that will continue to hold on to. And a lot of that, I believe we will know by virtue of when folks get forgiven and feel like they have - the money belongs to them, so to speak. And therefore, it will be interesting to see whether they deploy those funds or they continue to just kind of hang on to them and they stay in our deposit base.

[Casey Whitman:]

Understood. Thank you.

[Daniel Schrider:]

Thanks Casey.

[Philip Mantua:]

Thanks.

[Operator:]

Our next question comes from Steve Comery from G. Research. Please go ahead with your question.

[Steven Comery:]

Hey guys good afternoon. Wanted to actually maybe ask a little clarification on the core margin outlook, if we start there. During the quarter, it seems like you benefited from higher PPC, obviously. I was wondering what the impact of the higher payoffs was in the quarter? Was there any kind of prepayment element in the margin in this quarter? And if there was, kind of what’s going to make up the difference in the back half of the year?

[Philip Mantua:]

Yes, Steve, this is Phil. If there were any implications of any prepayment penalties or things that we might have accrued by having some of those earlier payoffs this quarter, they would to run through the non-interest income element of things as opposed to the net interest income or the margin. So there wouldn’t have been any implications from that standpoint related to that runoff. I would say, certainly, whatever yields that those loans ran off at would have had some detrimental impact to the overall level of the margin currently. And in giving that guidance, I would also tell you that even with the a prepayment that we made on the advances, which we would predominantly pick up probably five or six basis points effect to the margin. We still have some continuing pricing down on the asset side of the balance sheet. So my guidance is to really kind of give a truly stable margin position between now and then knowing the cause and effect on both sides, both in asset yields as well as what happens to deposits even with the pickup that we are going to enjoy from having paid down those advances.

[Steven Comery:]

Okay, okay. That is very good detail. And then maybe on the loan balances, I noticed that essentially all the commercial loan categories were up slightly, and all the consumer categories were down. Is there like a bifurcation in demand? Or is this a credit choice by the bank?

[Daniel Schrider:]

In terms of the runoff levels? Or the ending balances?

[Steven Comery:]

Pending balances?

[Philip Mantua:]

Yes. Steve, I think as it relates to the consumer portfolio, that is predominantly client behavior and choice. We are not really doing anything differently there, whether it is in the underlying approach to credit or the way that we are just promoting or offering those. And the majority of our consumer portfolio, as you probably can recall are home equity lines, which I think are just becoming less and less favorable to the consumer these days. So as it relates to that component of it, I don’t see anything being - anything out of the ordinary in that regard. I don’t know, Dan, if you have any comments on the commercial side, you want to offer?

[Daniel Schrider:]

Yes. What we desire standpoint, there has been no change in our appetite for any elements of our portfolio. First quarter, we spoke to some outsized runoff, which was really in a lot of ways, the result of success of our clients’ number of commercial real estate projects, which changed hands and sold. A lot of our small builders have been outpacing our expectations in terms of turning construction loans with the sale of properties. And in a couple of cases, we had some clients take advantage of the market conditions. And so nothing from a loss of client standpoint, more some of just - higher runoff, we typically would expect, have appetite to grow every aspect of our commercial portfolio.

[Steven Comery:]

Okay, okay. Very good. Maybe one more for me. Period end non-interest balances showed a lot more of an increase than like the average balance should. Was there anything unusual going on there?

[Philip Mantua:]

Probably just the timing of the funding of PPP loans that were probably more heavily weighted towards the end of the quarter than during the quarter since we went from the timing when we reopen the portal, et cetera.

[Steven Comery:]

Okay. Yes, that is what I figured. Okay, thanks guys.

[Philip Mantua:]

You bet.

[Operator:]

Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

[Catherine Mealor:]

Thanks good afternoon. I just wanted to ask just on the provision you gave a lot of great kind of color on what drove the large reserve release this quarter, Phil. And maybe just a follow-up to all of that is, do you feel like this is most of the reduction in the reserve release just from the better economic baseline and from here, you kind of more keep than there this level in charge offs or do you see the ability to bring the reserve down even further from here?

[Philip Mantua:]

Yes, Catherine. So I think the first answer is that this is probably within a quarter, the largest amount of release we might see. But I would also say that, again, and hopefully, this is the case, we don’t really experience any significant charge-off - through losses and charge-offs as we go forward, it will continue to mute the amount of provisioning and potentially create further releases and therefore, provision credits in subsequent quarters. So that is a possibility. But I don’t know that I would suggest to you that they would be nearly as large as the one that we just took, which means that there is still further room for the overall level of reserves to loans to decline over some period of time here going forward.

[Catherine Mealor:]

Great. And then on the expense side, the expenses came down a little bit more than I had expected. Is this a good run rate to grow from or how do you - what is your outlook towards the expenses this year?

[Philip Mantua:]

Yes. I think that the decline in the expense rate here in the first quarter will not continue going forward. I think we will start to grow here in the next quarter and beyond. In some advance prepared comments here, he made some mention of things that we are starting to invest in from a technology and people standpoint. And I think that, that is going to start manifesting itself in the expense line and the run rate as we go in through the second quarter and through the rest of the year. So I think absent of the netting of the prepayment penalties and the offset against the liability for unfunded commitments, we probably had a base of expense this quarter of around 60. I would expect that to go north of that into the next quarter and beyond. You could see our expense base grow in the low single-digits here, low to middle single-digits through the rest of the year.

[Catherine Mealor:]

Okay. Great. And then one last question just on M&A that we have seen some deals announced. Any kind of updated your thoughts on what pending and M&A activity this year? Thanks.

[Daniel Schrider:]

Yes. Thanks, Catherine. It continues to be an element of our view forward from a growth standpoint, and we will continue to have those types of discussions. Nothing imminent to certainly report and probably nothing different than my comments from the prior quarter, and that is, you know at this point, we have focused on continuing to emerge from the pandemic and a strong focus on organic growth. But M&A will be a part of our story going forward, both bank and non-bank.

[Catherine Mealor:]

Great, helpful. Great quarter. Thanks

[Philip Mantua:]

Thank you.

[Daniel Schrider:]

Thanks Catherine.

[Operator:]

Our next question comes from Eric Zwick from Boenning and Scattergood. Please go ahead with your question.

[Erik Zwick:]

Good afternoon guys. First one for me, apologies if I missed it earlier. Just curious with regard to the PPP loans in the 2020 originations, what is the remaining amount of unamortized fees from those?

[Philip Mantua:]

That is a good question, Eric. I’m not sure I have that specific number at my disposal. But I can certainly follow-up with you on that. I don’t know that it really has been identified.

[Erik Zwick:]

That is okay. And then looking at Slide 5, it looks like it is about 19 million or so for those 2021 originations. Is that right?

[Philip Mantua:]

Well, that is probably related mainly to round two. And in that case, those fees, I believe, are higher than on a loan-by-loan basis than those of round one. But yes, I think that is a correct number.

[Erik Zwick:]

Okay. That is good. And then you talked about the outlook for mortgage revenue to likely decline throughout the year for this kind of several factors you mentioned. I guess I’m curious about the cost side of that. As you view that business, how you manage it is variable versus fixed? And what is kind of the longer-term efficiency ratio of your mortgage operations?

[Daniel Schrider:]

Yes. Eric, Dan. Our outlook, as I mentioned, for the reasons stated is that it is going to come off. We are it is largely a variable piece of our business from an expense based standpoint. And so we have the ability to modify the spigot there in terms of what we have invested in mortgage I say that at the same time that we have got a very efficient and highly productive shop that we still will look to grab our fair share of the market as - even as the market diminishes. So Phil is pulling out data with regard to your question about the efficiency of that business.

[Philip Mantua:]

Yes. Eric, I think that, that from the internal calculations that we make there, the efficiency ratio on that business is in the mid-20% range, if I’m not mistaken, and is usually managed consistently in that range. So I mean, clearly, in relation to the rest of the bank, it is a highly efficient component of our business.

[Erik Zwick:]

Okay. Great thanks for the color there. And I guess last one for me is a bit of a follow-up on Catherine’s question I believe about the reserve. We have heard a number of banks indicate that potentially timing is obviously hard to predict. But once we get back to a more stable economic outlook and once the deferrals are resolved, that the longer-term reserve levels could converge back to kind of what the day 1 CECL adoption levels were. And I guess looking at Slide 9, let’s call it, 90 basis points or so for you, is that appropriate for Sandy Spring over the longer term or how do you think about the kind of natural level of the reserve overtime?

[Philip Mantua:]

Yes, Eric, I think the 90 basis points is probably a bit lean. Although I have seen and certainly heard that, that is the sentiment in a lot of cases that a lot of the reserve levels could go back to - reserves could go back to those pre-COVID levels. I don’t know, I would have a hard time seeing or potentially get below one, but it is yet to be seen how this plays out. But I understand the sentiment that is out there on that.

[Erik Zwick:]

I appreciate the color there. Thanks for taking my questions today.

[Daniel Schrider:]

Thanks Erik.

[Philip Mantua:]

You are welcome.

[Operator:]

Our next question comes from Brody Preston from Stephens. Please go ahead with your question.

[Broderick Preston:]

Good afternoon everyone. Just wanted to follow-up on PPP. So it is about, call it, 1.3 billion in outstanding is currently correct?

[Daniel Schrider:]

Yes.

[Philip Mantua:]

Yes.

[Daniel Schrider:]

Net of what has been given. Yes.

[Broderick Preston:]

Okay. And do you have to know what the average balance is for 1Q were?

[Philip Mantua:]

Yes. Hang on one second, I will tell you if that is - and by the way, Eric, the answer to Eric’s earlier question of remaining deferred fees is about a little less than 27 million. Let me see if I can find for you the average here real quick. Hang on a second. Yes. Average PPP balance this quarter was about (Ph) billion.

[Broderick Preston:]

Thank you for that. And so I did want to clarify. So it was about 10 basis points of accrued yield this quarter, correct?

[Philip Mantua:]

For…

[Broderick Preston:]

The switch in the PAA. Yes, the purchase loans?

[Philip Mantua:]

Yes, I’m sorry. Hang on a second. I will find that. It sounds about right, but let me confirm that for you.

[Broderick Preston:]

Yes. I just wanted to confirm that what you had put in the release was just the margin was just ex PAA, it wasn’t inclusive of the PPP?

[Philip Mantua:]

That is correct. Yes, that is about nine basis points. That is correct. Yes.

[Broderick Preston:]

Okay. Alright. And then I wanted to ask on the C&I balances right, so just kind of excluding PPP, the balances were actually down about 8% in the linked quarter, but that was after they were up 5% in the previous quarter. So I just wanted to better understand what was driving that variability?

[Daniel Schrider:]

We had a couple of things at play, but the largest were a couple of business sales that impacted that portfolio. Our utilization on lines is held pretty constant through the whole pandemic, including through the first quarter. We had a couple of large credits move out through the successful sale of those businesses as probably the most significant kind of larger hits in that book.

[Broderick Preston:]

Understood. Okay. And then on the expenses, I just wanted to follow-up on the other expense line item. Kind of setting aside the FHLB prepayment penalty, there is some variability there from 4Q to 1Q. So just - is the five million rate sort of the right run rate to use on that other expense line item moving forward in addition to any growth?

[Philip Mantua:]

Let me take a look at that for you real quick. It is probably a little bit more in the $6 million range then five million because there is an additional offset to what we set aside for unfunded commitments last quarter that we reversed backed out in this quarter. So I would add that back and get you close to the six million before growth. Yes.

[Broderick Preston:]

Okay. And then I just did want to ask what percent of your loan portfolio is floating rate at this point?

[Philip Mantua:]

I think the overall portfolio is probably in the 25% to 30% range.

[Broderick Preston:]

Alright, great. Thank you all for taking my questions. I really appreciate it.

[Daniel Schrider:]

Thank you Broderick.

[Operator:]

And ladies and gentlemen, at this time, showing no questions, I would like to turn the floor back over to the management team for any closing remarks.

[Daniel Schrider:]

Thank you, Jamie, and thank you, everyone, for their participation today. We always welcome your feedback on these calls, so please e-mail your comments to [e-mail]. And I hope you all have a terrific afternoon.

[Operator:]

And ladies and gentlemen, with that, we will conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.