Good day, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the Third Quarter of 2020. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Daniel Schrider, President and CEO. Please go ahead..

Thank you, and good afternoon, everyone. Thanks for joining us today for our conference call to discuss Sandy Spring Bancorp's performance for the third quarter of 2020. Today, we'll also bring you up to date on our response to and the impact from the 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. Today's call is open to all investors, analysts and the media and there is a live webcast of today's call and a replay will be available on our website later today.

Before we get started covering highlights from the quarter and taking your questions, Aaron will give the customary Safe Harbor statement..

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 cost of 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..

Thanks Aaron. We're pleased to be on the line with you today to discuss our third quarter results. As you read in our press release this morning, we delivered record quarterly earnings of $44.6 million with year-over-year operating earnings increasing by 49%.

Our performance this quarter clearly demonstrates the value of our Revere Bank transaction and our position of strength.

We're especially proud to have delivered these kind of results in the midst of such an uncertain economic and political environment, and our results validate the effectiveness of our business strategies and personalized approach to client service. Our team also has seamlessly completed the systems integration of Revere this quarter.

The former Revere clients now have full access to our people, products and services and locations. With the acquisition now behind us, we'll continue to focus on maximizing the value of the transaction and working alongside our clients to see them through these extraordinary times.

As I stated, today, we've reported net income of $44.6 million or $0.94 per diluted share for the third quarter of 2020. The current quarter's results compared to net income of $29.4 million or $0.82 per diluted share for the third quarter of 2019 and a loss of $14.3 million or $0.31 per diluted share for the second quarter, 2020.

Our results this quarter included $1.3 million for M&A related expenses compared to $22.5 million in the second quarter, and we anticipate these expenses to be minimal going forward. The provision expense for the quarter was $7 million compared to $58.7 in the second quarter of this year.

This decrease can be attributed to changes in the economic forecast and the resiliency of our loan portfolios, credit quality. Later in our call, we will talk through the supplemental information we issued this morning and Phil Mantua will provide additional detail about our provision expense and allowance.

Focusing on our balance sheet, our total asset, deposit and loan growth was driven primarily by the Revere acquisition, as well as our participation in the PPP. Total assets grew to $12.7 billion at September 30, 2020 compared to $8.4 billion at September 30 a year ago. Loans and deposits grew by 57% and 53% respectively.

On the date of acquisition Revere's loans and deposits were $2.5 billion and $2.3 billion respectively. Taking a closer look at our loan portfolio total loans grew to $10.3 billion at quarter end compared to $6.6 billion at September 30 last year.

Excluding PPP loans, total loans grew 41% to $9.3 billion at September 30, 2020 compared to the prior year quarter. Commercial loans excluding PPP loans grew 55% or $2.6 billion, while the remainder of the loan portfolio grew at 2%.

The majority of commercial loan growth, again, driven by our acquisition of Revere and consumer loans grew by 9% also due to the acquisition. Deposit growth was 53% from September 30, 2019 as non-interest bearing deposits experienced growth of 66% and interest-bearing deposits grew by 47%.

Once again, the growth was driven primarily by the acquisition. During the current quarter, excess liquidity was used to reduce borrowings under the Paycheck Protection Program liquidity facility by approximately $580 million.

We had a strong quarter in non-interest income delivering a 58% increase from the third quarter of the prior year to $29.4 million.

This increase is the result of a 220% increase in income from mortgage banking activities and a 42% increase in wealth management income as a result of the acquisition of Rembert Pendleton Jackson otherwise known as RPJ which occurred in the first quarter of this year.

On a year-to-date basis, non-interest income rose to $70.5 million or 35% over the prior year. Income from mortgage banking activities increased $15 million as a result of strong refinancing activity and wealth management income increased $6.1 million as a result of the first quarter acquisition of RPJ.

These increases more than offset declines in deposit service fees, a reduction in BOLI income due to the absence of any mortality income that did occur in 2019 and lower other non-interest income. As mentioned, mortgage banking had another truly exceptional quarter, and we're grateful for the team's hard work and the results they delivered.

While refinancing activity was a significant contributor during the third quarter, purchase reduction in the quarter was a record at over $200 million, up 29% from the prior year quarter.

While we do not expect mortgage demand to remain such a high level, based on estimates from both Fannie, Freddie and the Mortgage Bankers Association, we will continue to make the most of our current environment.

Turning now to the net interest margin, we reported 3.24% for the third quarter compared to 3.51% for the same quarter of 2019% and 3.47% for the second quarter 2020.

Excluding the impact of the amortization of fair value marks derived from acquisitions, the current quarter's net interest margin would have been 3.18% compared to 3.47% for the third quarter of 2019% and 3.19% for the second quarter of 2020.

We're pleased to see the stability in the core margin as we actively balance the need for adequate liquidity with the effect of doing so on margins and that end During the quarter we chose to eliminate the negative carry related to maintaining an excess cash position, again by repaying the PPLF funds.

Non-interest expense for the third quarter of 2020 increased $16 million or 36% compared to the prior year quarter. This increase was driven by the impact of the acquisition of Revere and RPJ which increased compensation costs, facilities and operational costs and merger and acquisition expenses.

However, the non-GAAP efficiency ratio was at 45.27% for the current quarter compared to 50.95% for the third quarter of 2019 and 43.85% for the second quarter of 2020.

The decrease in the efficiency ratio, which reflects an increase in efficiency from the third quarter of last year to the current year, was a result of $41 million growth in non-GAAP revenue, which outpaced the $13.6 million growth in non-GAAP, non-interest expense.

Looking ahead, we continue to manage this expense through revenue metric within a targeted range of 48% to 50% while we continue to balance our efforts to both identify and implement opportunities for efficiency, and also invest in the people and technologies needed for our future growth and success.

Shifting to credit quality, the level of non-performing loans to total loans increased 72 basis points compared to 61 basis points at September 30, 2019 a decrease from 77% basis points compared to the linked second quarter.

Non-performing loans totaled $74.7 million compared to $40.1 million at September 30 last year and $79.9 million at June 30, 2020.

The year-over-year growth in non-performing loans was driven by three major components; loans placed in non-accrual status, acquired Revere non-accrual loans and loans previously accounted for as purchased credit impaired loans that have been designated as non-accrual loans as a result of our adoption of the accounting standard for expected credit losses, which occurred at the beginning of the year.

Loans placed on non-accrual during the current quarter amounted $900,000 compared to $6 million for the prior year quarter and $27.3 million for the second quarter of 2020, which included $11.3 million in Revere non-accrual loans as of acquisition date.

The company recorded net charge-offs of only $200,000 for the third quarter of 2020, as compared to net charge-offs of $600,000 and net recoveries of $400,000 for the third quarter of 2019, and second quarter of 2020 respectively.

The allowance for credit losses was $170.3 million or 1.65% of outstanding loans and 228% of non-performing loans compared to $163.5 million or 1.58% of outstanding loans and 205% coverage of non-performing loans at June 30.

The modest increase and the allowance from the linked quarter resulted from the contribution of the impact of updated projected future economic metrics and qualitative assessments of the loan portfolio.

Tangible common equity increased to $1 billion compared to $787.3 million at September 30, 2019, as a result of the equity issued in the Revere acquisition. As a percent of tangible assets, tangible common equities declined to 8.17% from 9.74% at September 30 2019.

The year-over-year change in tangible common equity also reflects the effects of the repurchase of $50 million of common stock and the increase in intangible assets and goodwill associated with the two acquisitions that occurred during the past 12 months.

Excluding the effect of PPP loans on our balance sheet, the tangible asset to tangible equity ratio is well within our comfort zone at above 8.5%.

At September 30, 2020 the company had a total risk based capital ratio of 14.02%, a top comment equity Tier 1 based ratio of 10.45% -- a Tier 1 risk-based capital ratio of 10.45% and a Tier 1 leverage ratio of 8.65%. I going to shift now to the supplemental information that we also issued this morning.

Within the supplemental deck on Slide 2 is a brief overview of the things we're doing to keep our employees, our clients and our communities safe in the midst of the pandemic. I'm pleased to report that our team has adapted with ease over these past 7-months and really hasn't missed a beat.

We continue to operate in what we consider the Phase 1 of our return to work strategy with roughly 80% of our non-branch personnel working remotely. As I shared last quarter, Phase 1 limits our workforce to no more than 25% of normal capacity at any given location. We intend to continue to operate in this way, at least through the end of the year.

As for our branches clients are welcome to come into our offices by appointment and a broader range of transactions are possible now through our drive-through locations.

On Slide 3, you can see that total accommodations granted or what is also commonly referred to as deferrals initially exceeded $2 billion with $465 million receiving second payment accommodations. Loans with payment accommodations as of October 12, however totaled $500 million down to 5% of our total loan portfolio.

On Slide 4, you'll see that as of September 30, we have advanced over $1.1 billion of PPP loans to over 5400 clients. In total, we estimate we've supported over 112,000 jobs in our region, advanced nearly $100 million in area non-profit organizations and 23% of our PPP loans went to clients and low-to-moderate neighborhoods.

The online -- we're getting this process, we'll launch in early November and we are currently testing our applications and training our folks to prepare to start accepting those applications.

Slide 5 provides a summary of the five industry segments that we have covered the past two quarters; outstanding balances for each segment are as of September 30 and the loan and payment accommodations are as of October 12.

It's worth noting on this slide that while nearly half the hotel portfolio was in some type of accommodation, criticized loans only account for 70% of that portfolio.

I speak frequently about our personalized and proactive approach to serving our clients and this continues to be a critical part of how we're helping our clients navigate these unprecedented times. We're working closely with borrowers to understand what they're up against and the impact that it may have on our various portfolios.

As I shared last quarter, we are conducting ongoing relationship reviews, as well as daily and monthly portfolio monitoring of several possible COVID related impact. On Slide 6, we have identified a few of the things we monitor, including utilization rates by industry, payment accommodations, delinquency trends and risk rating migration.

We also monitor Beacon score migration of the mortgage and consumer portfolio, and we perform stress testing on critical segments of our CRE book. And now I'm going to turn it over to Phil so he can talk through both CECL and our capital position..

Thanks Dan. Good morning -- good afternoon everyone. Pleasure to be here with you this afternoon. Picking up on Slide 7 in the supplemental deck we have a waterfall representation of our allowance build for all of 2020.

This time broken into components that reflect the key drivers of the build in the first half of the year, followed by the drivers in the current quarter.

As you can see the change in the current quarter reserve is primarily driven by one significant component, that changed in our economic forecast, whereas the main factors and increase the reserve throughout the first half of 2020 were the direct result of our Revere Bank acquisition, the day one reserve requirements under the adoption of CECL and a change in the economic forecast.

As previously discussed, the increase that is based on the change in the forecast is highly dependent on a number of key macroeconomic variables as outlined on the next slide number eight. Our CECL methodology uses a Moody's baseline forecast for our local MSA, that for the third quarter was a version released by Moody's in mid-September.

This baseline forecast integrates the effects of COVID-19 and that portrays unemployment rate for our local market and in this case, peaks at 6.3% in the first quarter of 2021 and then steadily recovers, to a level of 4.5% by the end of 2022.

In determining our reasonable -- affordable -- forecast period we used a two-year timeframe horizon, this quarter, to reflect the more stability in the economic forecast that we've obtained for Moody's during both the second and the third quarter.

We also believe that in utilizing a two-year forecast at this point -- two-year forecast period that it better aligns CECL's models projections during the reversion period to be much closer to the actual current economic projections.

Similarly though to our approach taken in the last two quarters, we continue to not take into consideration any potential mitigating factors based on what could be perceived as the positive outcome or impact of any government programs such as PPP etcetera, and we feel -- when we continue to feel very comfortable with this overall conservative stance.

Moving to Slide 9, this provides some additional granularity related to the reserve build from a portfolio view where you can see the most significant amount of the reserve by both dollar amount and percentage, and that is attributed to the commercial business portfolio where the total reserve is $57.1 million or 2.57% of outstandings, slightly less than that in the prior quarter.

We should note that the 2.5% of reserve reflected here includes PPP loans in the balance, although there is no reserve required on those particular loans.

As illustrated in the footnote at the bottom of the slide, when adjusting the balance to exclude the PPP loans outstanding the reserve on our commercial business segment would be 4.91% and our total reserve would be 1.84% to total loans.

Finally, on Slide 10 is a trend of our capital ratios with some brief explanations regarding the treatment of certain items and their impact to the resulting ratios. Included in those comments is an adjusted tangible equity to tangible asset ratio to reflect the impact of PPP loans on the current measure.

We continue to feel confident about our capital position as all of our metrics improved as a result of the strength of our earnings in this quarter.

We've also recently updated our capital stress test where we've constructed a baseline and severe forecast set of scenarios, utilizing the same Moody's baseline forecast that's incorporated in our CECL calculations and a COVID-based S4 economy in a severe case.

Having done so, we continue to be confident that we have the capital to carry us through this ongoing situation. Dan, back to you..

Thanks Phil. Before we move to our question and answer period, just want to express my appreciation on behalf of our executive team to all of our colleagues. I'm sure you know, from your personal experience this global pandemic is challenges to all in a way we never imagined.

Our team has responded with grace and resilience and I want to commend the great work of our more than 1200 employees across, Maryland, Virginia and Washington DC. So, that concludes our comments for today and now we will move to our question and answer period.

Operator, if we can have the question, if you could identify who you are and the company you're with, that would be awesome..

Certainly. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Steve Comery with G.Research. Please go ahead..

Hey good afternoon..

Good afternoon Steve..

I was wondering if maybe we could get an update on accretion income, how much is remaining and kind of how you guys expect that to be realized.

And then sort of secondarily on that question, just thoughts on the NIM puts and takes going forward?.

Yes Steve, this is Phil. I think from a basis point perspective here, we're probably -- in this quarter I think the impact on the NIM was about 5 basis points. It's probably going to be more in the line of about 4 basis points going into the fourth quarter and then into early next year.

It probably calculates to be 3 basis points, and then it just trickles down from there through the end of 2021, so less and less significant impact as we continue to move through the rest of this year and into all -- and through 2021..

Okay.

And then on the NIM in general, excluding accretion kind of thoughts on the puts and takes on your ability to offset declining rates with deposits?.

Yes. So, I think that we have the quarter here that has a core including PPP right now, I think 3.24% as reported 3.18% otherwise and yet, I would tell you that we ended the quarter with a with a fair value adjusted NIM in the neighborhood about 3.30% to 3.35%.

So if we start from that point and work forward, we're anticipating we're not likely to see repayments of the PPP funding -- our PPP loans during the fourth quarter, so the fourth quarter will probably look fairly comparable to that in terms of NIM.

We're expecting the beginnings of the forgiveness period and paybacks on the PPPs to really take place in the first quarter, so that quarter will have some inflated looking margins obviously because of the prepayments that are related to the fees and then from that point on, I think that we're looking at a core margin that could be in that same 3.35% to 3.40% range throughout the rest of 2021..

Okay, thank you. And then on the PPP topic, I appreciate this, breaks out the sizes and numbers and just maybe like could you give some color on what mechanically needs to be done to see that forgiveness.

I mean you just talked about the timeline, but we needs to be done on your part and what needs to be done on the SBA's part?.

This is Dan. Steve SBA just needs to stop changing what they are expecting in the forgiveness process, and if that occurs then we are well on our way. We're testing our online portal and its underlying technology, we're going to use on that and then we will be ready to roll.

With the abbreviated requirements on this -- I guess the 50,000 and below that's a good percentage in terms of numbers for us of our over 5,000 we've got at least a couple of thousand that are in that under 50,000, so that's going to help expedite that group.

We would love to see traction on their forgiveness process, not as much from us, but the SBA's approval quite frankly, ahead of like another round of PPP just to know that it's going to work and our clients are going to have the expectation of forgiveness is actually going to play out.

But as I mentioned in my comments, we'll be ready come early November to open up that portal and move forward..

Okay, thank you very much. Maybe one more if I may.

I know the press release mentioned systems conversion with Revere; maybe just an update as to like what's kind of the plan now, like what's next what's left to do with the Revere integration?.

Well, as I mentioned integration while that client systems has happened, the branch activity that we plan to implement in terms of consolidations occurred, so that's still got to play out in our run rate on a go-forward basis. So, I think we're -- for the most part it's behind us.

I think focus right now operationally is what is unrelated to Revere but related to now this combined entity is what does post COVID world look like for us from a future occupancy standpoint and how we're how we're going to refill, re-stack our properties and look for opportunities from an efficiency standpoint when we transition back to the office.

But, as far as the integration of Revere that's really behind us..

Okay, thank you. Thank you very much for taking my question..

Sure..

And our next question will come from Casey Whitman with Piper Sandler. Please go ahead..

Hey good afternoon..

Hi Casey..

Hi. Maybe just continuing with Steve's line of questioning about the expenses.

Put another way, are there more Revere expense cost saves to come out next year or sort of how far along are you in just getting the full cost saves from the merger?.

Yes, Casey this is Phil. I think we're pretty far along.

There are probably a handful of items, probably on the, let's say, on the system side just to be netted through that are carryover over from multiple systems and redundancies there, but I would say that once we're through the fourth quarter, our true run rate based on the combined company should really manifest itself from January on into 2021.

I mean in this current quarter, it's just in terms of levels of expense.

There were a couple of kind of more one-off types of costs that we took during the quarter, we had a couple of bonus type payouts or incentive payouts that were related to doing things for our front-line employees as well as some other things that happened during the quarter -- extraordinary efforts.

We also had about a $600,000 write-off that was related to some branch closure of the activity or consolidation that we did on our own here as well.

And so, those items in this quarter were close to a couple of million dollars in total, and then we had some elevated costs in marketing and some computer service -- accounting service fees that were probably another $1 million.

So, if we're trying to kind of normalize what happened here in the quarter those are probably a couple of things that were in there they probably weren't anticipated -- you all wouldn't have been able to anticipate..

Got it.

So, it sounds like the run rate might be a couple of million less than what we saw this quarter, going forward?.

Yes, it's probably somewhere in that ballpark. Yes..

Got it, got it. Helpful. And Phil, sorry, I heard you mention going from 3.18% to margin 3.33% to 3.35% range.

Just how did you get there to that 3.35% range?.

Well again, that was where we were at the month of September which I think probably has even the greater implications of the repayment we made on the PPPLF funds would be the first full month that we probably saw the first full month that we probably saw the full impact of that which had a pretty significant negative carry with they being 35 basis points on one side and being only 5 basis points of excess cash on the other, and so I think that that's -- excuse me -- that's what manifests itself into where we ended the quarter, not so much where we were for the average of the entire quarter..

Understood, thank you for clarifying..

Sure. And by the way, we continue to work down as much as possible, what's happening on the cost of fund side here as we continue to completely integrate the Revere client base with ours and look to try to bring that down as much as there as possible, which I think we've done a really good job with -- we got out ahead of it.

I think there's just some other kind of miscellaneous based exception pricing and things that we continue to work through, but right today as we sit I don't know that we have anything on our liability side within the market that's going to -- in terms of transaction accounts, it's paying anything more than 20 basis points..

Got it. Thank you. I'll just ask one more and let somebody else jump on. But, as we look at the slide with criticized loans at quarter end I can see that those moving up particularly in hotels. So I guess, maybe you could start with just a little bit additional color on the movement in hotels.

And then also, were there other movements to criticize that sort of at-risk categories that you guys have broken out or is this kind of the bulk of the criticized balances?.

That is the bulk of criticized balances Casey.

So, if you look at -- if you look at hotels, just as an example and that's obviously an area that as are all the others receiving a lot of focus for us on a credit by credit basis, the number of loans that are currently within some form of accommodation, which is just about 45% of the portfolio, we've gone a credit by credit and that process is only driven as you mentioned, $30 million into the criticized category and that's as of September 30.

We'll continue to work through that, receive STAR Reports on all of these entities to make sure we understand the latest in terms of occupancy. It's also based on our conversations with borrowers as to their view of their viability and severity of how cold it is impacting.

If you think about a little bit more granular information on that hotel portfolio, the majority of our book over 80% of our book is in limited service hotels, which is the one area that seems to be performing on from a macro standpoint a little better than the full service hotels, and that is the majority of what we have in our book with national flag type of brands in and around the Washington area, so that's clearly.

Right now it's really difficult to assess how that's going to migrate going forward. So, sitting here today, it looks really resilient, really happy and satisfied with where our methodology is driving our reserve coverage.

But I think there is still a long way to go for every bank as we work through the cycle and stay close to our clients to see exactly how migration is going to work through the risk rating system, and ultimately what's going to be driven, particularly as we work with these clients, which is the significant portion of our current outstanding deferrals or accommodations as to whether there is going to be a request for a round three, and I'm telling you more than you asked, but if we -- as we consider those types of requests, we're also going to consider whether we continue to recognize the interest income from those assets or whether they move into a different classification as an asset, regardless of what the accounting allows you to do.

But, as we sit here today, we feel really good about where the portfolio stands, but I think the most important thing is that we continue to stay on top of it and stay in front of our clients and then risk rate them as accurately as we can..

Thank you, Dan, for all that color. We appreciate it..

And our next question will come from Stuart Lotz with KBW. Please go ahead..

Hey guys good afternoon..

Hi Stuart..

Dan, if we could go back to just the modifications for a second. I appreciate all the detail around round two deferrals. Can you just give a little more color -- like how are those relationships -- like how are you.

Like are those deferrals on a month-month basis or did you grant another I guess three months through the end of the year, just under the rules of the CARES Act?.

Yes, for the most part, they were 90-day; second deferrals fell under the 90-day term. Throughout the month of November, early December is when we're going to see the bulk of those mature.

But unfortunately a good percentage of what we granted initially gets rolled off and folks have returned to payments and they were continuing to see that number roll down but that's kind of the next window of time; it's really important in that second deferral..

Got it.

And then if we can -- or if we dig into kind of your higher-risk categories CRE retail remains kind of your largest category, from a risk standpoint, can you give any color around trends there and what you're seeing in this portfolio and any potential risk going forward?.

Yes. Much like I discussed on hotels -- I mean we've been in front of our clients throughout this -- particularly these five CRE segments, and the strength going in is what gives us a high degree of confidence.

So, what I mean by that is if you look at our retail portfolio and it is significant as you mentioned, we went in with a regional weighted average LTV at origination of 56% that's original appraisal, current balance.

If we take current NOI in those properties and then apply a current market cap rate, your weighted average LTV in retail client is a couple of percent to 58% and then if you look at kind of the current debt service coverage, and this would be predominantly from 2019 numbers -- would be on a weighted average basis just above 1.8 times.

So, we got a lot of flexibility, and as we've talked to our clients in retail, which for us is predominantly what we refer to as neighborhood centers with a variety of -- it might be a pad site with a couple of restaurant, service businesses anchored by a grocer.

They have had -- those borrowers have had to work with their tenants and providing their own form of deferral or renovate, but at the same time, for the most part, they are able to continue to cover and we don't have a significant portion in our retail book relative to others as well.

Actually, if you look at that on page five of our supplemental deck, not real significant dollars in loan accommodations within retail multifamily or our office, and so we feel pretty good about the performance of that book thus far..

Appreciate all the color. Maybe just turning to the loan pipeline in this quarter, obviously it appeared balances were down.

How much of that was kind of planned run off or pay-downs, from Revere, and I'm just curious what your -- how the pipeline looks as we go in the fourth quarter?.

Yes, I mean customarily as you know Stuart fourth quarters tend to be one of the more significant production quarters, if at this point, not likely to measure up the way it normally would.

It might be enough to overcome some expectation of run-off might surprise us a little bit towards the end of December, which oftentimes it does, but it's not what it has historically been going into the fourth quarter and that's understandable.

We got --we've got a lot of folks spending their time handholding clients working through PPP forgiveness and doing portfolio management tasks. So, I would see a pretty flat portfolio moving through the fourth quarter.

At the same time anecdotally, I mean, we've had our last few weeks of loan committees have been full of discussions around new opportunities and what we discovered as we move through the pandemic and with our success in PPP there's a number of opportunities we think that once we begin to emerge from this cycle, we'll take advantage of by virtue of being not only just the capacity we bring, but also our success in serving our clients through PPP, which has been noticed in the local market.

But for fourth quarter it's looking pretty flat..

Okay.

And then tying that into your margin, where -- like where is new production coming on and how does that compare to both the legacy Sandy Spring loan yields as well as kind of Revere run off, just curious?.

Yes Stuart, this is Phil. Throughout this last quarter, kind of on an average basis in the commercial book, it is probably not terribly different than on average what it's been in the rolling 12, which is around 4.50% to 4.60%.

Again just average across all the varying elements of the commercial portfolio, and I think that, that's probably comparable to what we have done in the past.

I'm not sure quite sure how well it compares to what the Revere pricing would have been, although I think in general we view their pricing to be better or higher than ours, just in evaluating their portfolios in comparison to ours..

Got it, thanks.

And then sorry -- just maybe one more; obviously mortgage continues to be home run for both you all and a number of your mid-Atlantic peers, just curious how the pipeline is going into the fourth quarter and then your expectations for that line of business next year?.

Yes. Stuart Dan. Obviously third quarter really strong, continue to pump here going into the fourth, but you typically see some fall-off towards the end of the year in activity.

Our outlook going into 2021, it really mirrors what we're hearing from kind of industry prognosticators like Fannie, Freddie, and the mortgage banking association which between the three of them are estimating a fall off of anywhere from 30% to 35% in terms of refinance activity, and so that kind of tempers our thoughts about what gain on sale activity should look like next year.

We're certainly going to do our best to take advantage of what's in the market, and we've been growing share over the course of 2020, but it looks like yes, the expectations are for that to fall off and moderate it..

All right.

And were there any one-time kind of fair value adjustments in the fee number this quarter or is that entirely from a production and gain on sale?.

Nothing, I'm aware of Stuart. I think the result is just purely based on the production and the level of the gains..

Great. All right. That does it for me. Thanks for taking my questions guys..

Thanks Stuart..

And our next question will come from Brody Preston with Stephens Inc. Please go ahead..

Good afternoon everyone..

Hi Brody..

Maybe just to follow-up real quick on Stuart's question, understand the forecast from the MBA for reduced volumes next year, but just wanted to get a sense for, in the fourth quarter how gain on sale margins are trending relative to the third quarter?.

I mean, I don't know off the top of my head, where they are today relative to the quarter. I think they're probably fairly -- probably still fairly similar to what we enjoy during the quarter which was about 210 basis points.

So, I mean what's interesting is, as rates generally, especially in the long end if kind of dropped and stayed where they were, they were still a fair amount of spread involved there as to what could happen to actual mortgage rates.

So, some of those rates that -- and I know we've tried to hold up some of our rates to just be able to manage some of the -- just sheer volumes there, but there is some possibility that some of those rates come down and that fuels other levels of refinancing.

I think during the quarter for us about 60% of everything that we produced was a refinance -- you might think it would be higher than that, but I think we've also had some fair success with just folks just purchase money type of lending here and so, I don't know that we would -- again getting back to your actual question, I'm not sure we would see a whole lot of difference in that overall margin in the near term.

As we move out beyond the quarter, it probably changes. I will also, just say, just from the sheer level of mortgage gain we probably would characterize the third quarter as probably being a peak period for the amount of gain that we booked here in this quarter.

So, from an expectation standpoint, I think we would view us coming off of that number relative to the next quarter and actually just found some information here; our current mortgage pipeline is somewhere in the $550 million to $560 million level which is considered to close over the next 90 days.

So, there is still pretty significant pipeline out there..

Okay, great. Maybe just to go back Casey was asking a little bit on the expenses and I guess I just wanted to look at it, you all were running at it like, 45-ish 46-ish pre-Revere and I think they were running out a little over 11 and change.

So when you sort of layer in the 45% cost base there, you get to like 51.5% to 52.5% sort of a core expense run rate and I understand that RPJ has been folded in as well and then you've had obviously record mortgage quarters for the last two quarters.

And so, I guess I wanted to get a sense for how much RPJ has added to the expense run rate and how much mortgage is sort of artificially inflating expenses currently?.

Sure. When you take a look at the details here that you're asking about, I mean, year-to-date and this would be eight months, not nine because RPJ closed in February. The overall level of expenses there is roughly $4 million just for that particular enterprise so, there's that element of it.

I don't necessarily right off top of my head, have the incremental amount that's due to what's going on in mortgage, but it's clearly something north of what we had anticipated when we put the two companies together.

I mean really, at the end of the day I think as Dan mentioned in his opening comments from an efficiency standpoint, we look to run the company between 48% and 50% current levels of revenue now that probably puts quarterly expenses in the high $50 million to $60 million per quarter range, it's probably the best way to kind of estimate it at this point with all the things we just talked about..

Okay, that's great.

And so, I guess the RPJ at $4 million over the last eight months or so I guess maybe just call that $6 million all-in for the year, is that a good normalized annual number to utilize?.

Yes, I would think so. Yes..

Okay, great. Well, that's all I have. Thank you very much..

Sure..

[Operator Instructions] And our next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead..

Good afternoon, guys..

Hey Erik..

Most of my questions have been answered, just a couple here last, I guess, one for the hotel portfolio.

Do you have the weighted average LTVs and debt service coverage, similar to what you gave for the retail portfolio?.

I do, and in very similar fashion, and that is originally at using the original appraised value in the current balance weighted average LTV will be at 62% taking 2019 NOI and current market cap rate, it drives that up to 67% and then again, not, this is not COVID affected in 2020, but from a 2019 assessment, a weighted average coverage of 240 [ph] on that portfolio.

We've got -- that book is like I said, in and around the Greater Washington market with just a very few number of properties that would fall down into eastern part of our state along the ocean.

Most of these are all limited service Marriott Holiday Inn, Ramada, that type of -- Hilton, those types of properties are brands underneath those umbrellas limited service business travel and some folks that might travel and use those facilities coming into the DC market. So, clearly impacted by COVID, still there is a lot.

If you look at kind of from a macro standpoint those do tend to be the types of properties that are seeing a little better occupancy rate than the full service hotels, and our conversations with those clients again, are not driving a significant number of relationships down our risk rating spectrum, particularly into the criticized category, but we're staying real close to it, but we are starting off from a position of strength within that book..

Thanks for that color there. And I agree, kind of starting from a position of strength and then you mentioned on the next Slide 6 that you continue to perform stress tests on those CRE portfolios that are kind of considered at risk today.

I guess as you run those exercises, what are they revealing to you in terms of I guess kind of magnitude of potential losses or what would have to happen in the economy for it to play out for you to start realizing any material losses there?.

I think what we needed to happen in the portfolio -- I mean in the economy tough to make that connection and prediction at this point.

The way we we've approached it from a stress testing standpoint is going back in time, in particular, looking at the performance of certain elements during the great recession and the loss experience that we had in terms of magnitude, realizing we didn't have it in those specific segments of the portfolio but applying some of those loss rate that we did experience and stressing that against capital and what type of net charge-offs that might drive and that's what gives us a comfort level right now with the way our CECL methodology is driving the reserve, and also considering our overall capital levels at even under a severe scenario, we'd be okay.

But, we'll continue to evaluate that and I think the methodology will drive provision expense in the direction it needs to be, should things change in the economic forecast..

That's helpful, and then just last one on capital and kind of hit on it there, capital is fairly strong you've got built up reserves over the past few quarters there. As you think about deploying capital going forward, and you've got a fairly healthy multiple on the stock compared to number of banks [indiscernible] tangible book value.

Just how do you think about capital use for growth versus acquisition and even buyback today, given that even though you've got a fairly healthy multiple you're still trading below where you would have historically priced tangible book value..

Yes. Erik, we certainly think we are a great buy relative to where we're trading in our performance. But I think all those things would normally be considerations.

But right now, I think there needs to be more clarity as we work through this economic environment before we would enter back into share buybacks, even though it certainly makes a lot of sense, in terms of just the level in which we're trading..

Thanks for taking my questions today..

Thank you..

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Schrider for any closing remark..

Great. Thanks again everyone for participating in today's call and for your questions and I hope they've been helpful, and we always welcome your feedback on the effectiveness of our calls; so please reach out directly or email your comments to ir@sandyspringbank.com. So thanks again, stay safe, and have a great afternoon..

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. And at this time, you may now disconnect your lines..