Welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the Third Quarter of 2021. My name is Harry and I'll be your coordinator today. [Operator Instructions] I will now hand over to your host, Dan Schrider, President and CEO of Sandy Spring Bancorp, Inc. to begin. Mr. Schrider, please go ahead..

Thank you, Harry, and good afternoon, everyone. I really appreciate you joining us for our conference call to discuss Sandy Spring Bancorp's performance for the third quarter of 2021. And today, we'll also bring you up to date on our response to and 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. There will be a live webcast of today's call, and a replay will be available on our website later today.

But before we get started covering highlights from the quarter and then 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 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..

Thanks, Aaron, and thanks again to everyone for joining us to discuss our third quarter financials. Our earnings performance remained strong, and we delivered another solid quarter.

Fueled by exceptional deposit growth and a record level of commercial loan production, we continue to grow new and existing client relationships across our lines of business. In addition, our credit quality, margin and efficiency ratios are all in great position, and we continue to make great progress on PPP forgiveness.

We do have momentum going into the fourth quarter and a lot of good news to share with you today. So let's jump right into the highlights from the press release and the supplemental information. Today, we reported net income of $57 million or $1.20 per diluted common share for the quarter ended September 30, 2021.

The current quarter compares to $44.6 million or $0.94 per diluted common share for the third quarter of 2020 and net income of $57.3 million or $1.19 per diluted common share for the second quarter of this year.

Core operating earnings for the third quarter remained stable at $52 million compared to $52.1 million for the prior year quarter and 55.1% for the linked quarter. The provision for credit losses was a credit of $8.2 million compared to a $4.2 million credit for the second quarter of 2021.

And the credits this year primarily reflect the improved forecast for the unemployment rate, and this quarter's provision also included updated metrics for determining the allowance for credit losses. Shifting to the balance sheet.

Total assets were at $13 billion or a 3% increase compared to $12.7 billion at September 30, 2020, as cash and cash equivalents grew by $890 million, primarily from the forgiveness of PPP loans. To that end, PPP loans declined $602 million during the same period and further funded by consistent deposit growth over the last 12 months.

Excluding PPP, the loan portfolio remained at $9.3 billion compared to the third quarter of the prior year. While residential mortgage and consumer loan runoff totaled $327 million, it was offset by the year-over-year commercial loan growth of $316 million or 4%.

Year-over-year gross commercial production increased 102% or $416 million and totaled $823 million for the quarter, and funded production increased 127% or $298 million. On a linked-quarter basis, gross commercial production increased 4% or $32 million, and funded production increased 6% or $30 million. So all great results in the commercial space.

We're pleased with the sustained and expanded commercial production because we know that when times normalize, it will translate to the kind of growth that we're accustomed to.

While we continue to operate in the season of lower commercial line utilization, higher runoff and excess liquidity on our balance sheet, we're taking actions to accelerate commercial loan growth in the fourth quarter.

This includes adding new talent in our commercial line of business, looking at larger credits, proactively approaching new and prospective clients and pursuing new opportunities across our market. On the deposit side of things, year-over-year deposits increased 10%.

This was driven by 15% growth in noninterest-bearing deposits and 8% growth in interest-bearing deposits. This deposit growth is significant and a good indication of our ability to grow and deepen client relationships. Noninterest income decreased by 17% or $5 million compared to the prior year quarter.

The decline was a result of the 65% decline in income from mortgage banking activities, which we anticipated as refinances continued to slow.

Looking ahead, we expect our quarterly gain on sale to be roughly in the $4 million to $5 million range as we anticipate a more consistent rate environment and we moved to stabilize the runoff from our mortgage portfolio by retaining more of that future production on the balance sheet.

We achieved 21% growth in wealth management income compared to the prior year. Our 2020 acquisition of Rembert Pendleton Jackson continues to make a positive impact in our results as well as the performance in the financial markets and the expansion of the wealth management client base.

Other noninterest income also grew by 113% compared to the prior year quarter, primarily driven by credit-related fees and contractual vendor incentives. The net interest margin improved to 3.57% for the first 9 months of the year compared to 3.33% for the prior year.

Excluding the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.52 for the current year and 3.21 in 2020.

A significant aspect of success in the year-over-year improvement in the margin was our ability to manage the cost of our interest-bearing liabilities down by 52 basis points through disciplined deposit pricing and the reduction of more costly wholesale-based borrowings and subordinated debt.

Our ability to grow average noninterest-bearing deposits by 18% over the prior year also contributed to the margin improvement. Noninterest expenses increased $2.2 million or 4% compared to the third quarter of 2020.

While the increase was primarily driven by rising compensation costs and professional fees, it was partially offset by the lack of M&A expenses during the current quarter and a significant reduction in FDIC insurance. This decline in FDIC insurance expense reflects reduced risk factors in the regulatory agency's assessment of the company.

Salary and benefits increased $2.6 million as a result of staffing increases. And the $1.2 million increase in professional fees is primarily due to the consulting fees associated with our various technology investments. The non-GAAP efficiency ratio for the third quarter of 2021 was 46.67% compared to 45.36% for the second quarter of 2021.

The change in non-GAAP efficiency ratio reflects a decrease in noninterest income from mortgage banking activities and the increase in personnel costs and professional fees that we experienced during the quarter. Shifting to credit quality.

The positive trend in the level of nonperforming loans continued in this quarter at 80 basis points compared to 93 basis points in the linked quarter. Nonperforming loans totaled $78.2 million compared to $94.3 million in the linked quarter.

Loans placed on nonaccrual during the quarter amounted to $5.7 million compared to $900,000 for the prior year quarter and $1.5 million for the linked quarter.

Nonaccrual loans declined from the prior quarter due primarily to the partial payoffs and eventual charge-offs of a few large borrowings in the hospitality sector with an aggregate balance of $32.9 million.

It's important to note that these borrowings are contained to 2 relationships within the hotel portfolio that I have commented on in prior quarters. Charge-off amounts of these credits did not exceed their associated individual reserves, so it did not result in any additional impact on the current quarter's provision for credit losses.

Loans greater than 90 days or more increased from the prior quarter as a result of maturities of existing portfolio loans that were in the process of being extended. Loans amounting to $22.2 million were subsequently settled after September 30, 2021, are no longer and are no longer past due.

The company recorded net charge-offs of $7.8 million for the third quarter compared to net charge-offs of $200,000 for the third quarter of 2020 and $2.2 million for the linked quarter. Again, this increase was primarily a result of the previously mentioned charge-offs of nonaccrual loans.

The allowance for credit losses was at $107.9 million or 111% of outstanding loans and 138 -- 1.11% of outstanding loans and 138% of nonperforming loans compared to $124 million or 1.23% of outstanding loans and 131% of nonperforming loans at the linked quarter.

Excluding PPP loans, the allowance for credit losses as a percentage of total loans outstanding was 1.17% compared to 1.34% at the linked quarter. Overall, our credit quality trends continue to be positive. And as you'll see in our supplemental materials, nearly all loan accommodations have returned to making payments.

Tangible common equity increased to $1.1 billion or 9.1% of tangible assets at September 30 compared to $1 billion or 8.31% at September 30, 2020, as a result of accumulated earnings over the preceding 12 months. Excluding the impact of the PPP program from tangible assets at September 30, the tangible common equity ratio would be 9.44%.

At September 30, 2021, the company had a total risk-based capital ratio of 15.3%, a common equity Tier 1 risk-based capital ratio of 12.5%, a Tier 1 risk-based ratio at the same 12.5% and a Tier 1 leverage ratio of 9.2%.

Given our strong capital position and growth during the past year, the company activated its approved stock repurchase program and repurchased over 1.2 million shares of its common stock at an average price of $43.04 per share. So with that, we'll now turn to the supplemental information we also issued this morning.

If you move to Slide 2, you'll see that the loans with payment accommodations as of September 30 totaled $14 million, resulting in well less than 1% of our loan portfolio remaining in some form of accommodation. This is great news and an indication of the recovery that's going on, not only within the portfolio, but in the local economy.

On Slide 3, we have detailed specific industry information, Outstanding balances for each segment and the loan and payment accommodations are as of September 30. And then moving to Slides 4 and 5. Again, breaking out where we stand on forgiveness for rounds 1 and 2 of the program.

We've also included this quarter the remaining fees to be earned so that you can see what is expected for the balance of the program. As of October 4, 97% of all round 1 loans have applied for forgiveness, and 99.5% of applicants submitted to the SBA have received full forgiveness.

And as detailed on Slide 5, 65% of round 2 loans have applied for forgiveness and 100% of those applications submitted have received full forgiveness. So we're making really good progress, and we expect to be substantially complete on both rounds of forgiveness by the end of the year.

So with that, I'll turn it over to Phil Mantua, and he'll walk through our CECL slides and capital position..

the reduction in the projected near-term level of the unemployment rate; a change in individual reserves; and the update to our model inputs, which is part of our periodic review process. On Slide 7 is a comparison of our current and more recent economic forecast variables.

Our CECL methodology continues to use the Moody's baseline forecast that for the third quarter was a version released by Moody's on September 20.

This baseline forecast integrates the effect of COVID-19 and portrays an unemployment rate for our local market that has essentially already peaked and ultimately recovers to a level of 3% in the third quarter of 2023.

Additionally, the projected levels of year-over-year growth in business bankruptcies and the change in the home price index as presented contributed to the provision credit for the quarter. Our key macroeconomic variables are further outlined on the next Slide #8.

And for the third quarter, all of these variables have been applied in a consistent manner to those same factors as used in the prior quarters.

Slide 9 provides some additional granularity related to our reserve from a portfolio view, where you can see that all major categories of commercial loans, with the exception of AD&C, reflect the continuing trend of reserve release.

We should note that the 1.45% of reserve reflected here for commercial business loans includes PPP loans in the balance, although as we know there is no reserve required on those loans.

And as illustrated in the footnote at the bottom of the slide, when adjusting the balance to exclude PPP loans outstanding, the reserve on our commercial business segment would be 2.04%. And our total reserve would be 1.17% of total loans.

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

We've also recently updated our capital stress tests. We constructed a baseline severe forecast scenario, utilizing the same Moody's baseline forecast incorporated into our CECL calculation, and the COVID base that's for economy in the severe case. Having said that, we continue to feel confident about our capital position.

And therefore, during the quarter, we redeemed $56 million of outstanding subordinated debt, $25 million of which was acquired in the Washington First transaction and the other $31 million obtained in the Revere acquisition.

And as Dan mentioned earlier in some of his earlier comments, we activated our share repurchase program during the quarter, and we expect to complete the buyback of the total authorized amount of shares before year-end. Dan, back to you..

Thank you, Phil. Before we move to your questions, I want to let everybody know our return to office plans continue to move forward, effective November 1. In-person operations across all our offices will expand to prepandemic levels.

We've also required that all employees be fully vaccinated by that time, November 1, so that we can do our part to ensure safety and healthy workplace for our colleagues, clients and the communities that we serve. So with that, I will conclude our general comments for today, and we'll now move to your questions. So Harry, you can take it away..

Our first question comes from Casey Whitman from Piper Sandler..

Dan, you mentioned potentially adding new talent. You've talked previously about some of the technology investments and other initiatives. So maybe help us sort of think about what a reasonable expectation for expense growth in 2022 is going to be. Or perhaps easier just to update us on your efficiency ratio target..

Yes, Casey, this is Phil. I think we talked -- last we talked about this in terms of looking year-over-year in terms of core expense base, that we would probably be anticipating roughly about a 4% overall increase in '22 over '21.

And that, again, takes into consideration of things that you're just asking about and also some of the things that occurred during the course of time this year related to Home Loan Bank advanced prepayment fees and things that we don't believe will reoccur again next year..

Another question here for you, Phil, but maybe do you want to update us on your kind of core margin outlook? I'm sure this quarter, there's more liquidity that impacted that core margin than maybe you were anticipating.

But how are you thinking about the core margin over the next several quarters?.

Yes. I'd be glad to talk about that too as well, Casey. So I think when you strip away as we did in the commentary here, first of all, on the fair value marks and then though, add to that the impact of what we got back this quarter for PPP forgiveness, that, that core margin here in the third quarter was probably in the mid-3.30% range.

And I would anticipate that, that core would stay that way in the fourth quarter, although the reported margin next quarter will probably be not be comparable because of our expectations for finishing the forgiveness part of the PPP plan or program.

And then I would think as we move into next year and as we work towards trying to redeploy some of the excess liquidity, we're anticipating trying to keep that margin in that kind of low to mid-3.30% range throughout the course of next year as well..

Okay. Understood.

And what is your expectation for the timing of the latest round of PPP forgiveness? Do you think that will go through mid-2022? Or do you think we'll be kind of through that earlier?.

Yes. Our expectation is to be substantially complete this year, but we might have some fall over into the first quarter just by virtue of we can't control exactly what our clients do. But we're working hard to have it substantially behind us so that we can go into '22 clean from a margin perspective..

Our next question comes from Erik Zwick from Boenning and Scattergood..

First, I wanted to follow up a little bit on Casey's question about the loan and adding new commercial talent and looking at larger credits, maybe in terms of not so much the growth rate, but in terms of the mix over the past year or so, the mix of commercial loans.

Absent the runoff, the PPP has gotten larger, residential mortgage has gotten smaller.

Would you expect that kind of remixing to continue? Or are you happy with the current mix of the portfolio?.

Yes. Erik, Dan. Part of my comments earlier, particularly related to the mortgage business, is we are going to look to try to stabilize that mortgage portfolio and eliminate the runoff that we've been seeing and perhaps might even see a little bit of growth in it. by virtue of just putting more on portfolio in terms of future production.

We've already begun that process in terms of putting more portfolio on. When we're looking for new talent and growing the commercial production, I mean, we're doing that with the intent of being able to enhance our C&I and connected owner-occupied real estate lending in the middle market space, the gov con space.

And so those are really where the specific efforts are in trying to grow that. Now CRE, obviously, is a significant part of what we do, and we're very good at it. So it's going to take some time for C&I to take on a bigger role overall from a mix standpoint, but that's where we're focused..

Yes. And Erik, I might follow up to Dan's comments related to talent on the mortgage side. I mean we've been pretty successful here in recent times, some very recent times of pulling together a handful of individuals from some of the other large organizations, like Truist, et cetera, as we continue to want to build that out.

And we're also looking -- to Dan's point about building the portfolio, is that being one of the means for kind of sopping up this excess liquidity here by trying to produce more in that area and putting it directly in the portfolio..

That's great color. Turning to the charge-offs in the quarter.

Just curious, what prompted the decision to record the charge-offs now? And how did you determine the size of the marks you took? And then, are those 2 relationships still with the bank at this point?.

No. The -- we've been obviously working to resolve these credits for a number of quarters, as we've mentioned. Our initial set aside of specific reserves were based on our -- the process we go through or the methodology to establish a reserve and assessing value and liquidation cost and the like.

And we were, in those cases -- in both cases, they were resolved through during those sales..

Got it. And Phil, do you happen to have the dollar amount -- go ahead..

I'm sorry. They're no longer clients, to further answer your question..

Understood.

Phil, do you have the dollar amount of purchase accounting accretion that was recorded in 3Q?.

I don't necessarily have the dollar amount per se, but it's getting to be pretty much -- getting to be more and more insignificant as we move ahead here. And I think my guidance, as it relates to margin next year is, not only will it be core, but it will probably be as reported as well.

Because I think we're pretty well exhausting what's left to that accretive nature..

Okay. That sounds consistent with what I've got in my model. And then just last one is, in the press release, you mentioned in the noninterest income I guess on the year-over-year comparison, higher activity-based contractual vendor incentives.

Can you just provide a little more color in terms of exactly what that's related to? And whether -- does that hit every quarter? Is there like kind of an annual? How does that flow through?.

That's probably more on a one-off basis, Erik, as it relates to different types of incentive programs we have with various vendors for hitting certain thresholds or targets..

Got you. So likely, the next time we might see it would be in 3Q again next year. Or are there multiple targets here? There like....

That's probably the most likely scenario, yes. Yes..

[Operator Instructions] And our next question comes from Catherine Mealor from KBW..

But -- so wanted to start with growth. And just -- I missed -- I came about 5 minutes late to the call, so you already gave a growth guidance, I apologize for missing it.

But how are you thinking about growth moving into next year? What a good loan growth target is? And then maybe within that conversation on securities, are you feeling more open to putting kind of more of the excess liquidity into securities as well in the next couple of quarters, just given that we're in a better rate environment?.

Yes. Catherine, Dan. We did not cover that earlier. A couple of different things that in response to your question to think about loan growth is a little more challenging just by virtue of the current liquidity situation that we're sitting with in terms of netting out the asset growth.

But on the loan growth side of things, we're looking at the type of production that we are driving in the last few quarters, just shy of $800 million -- $822 million of commercial production this quarter. If we see any return to normal in terms of runoff, then we -- then commercial loan growth in that 8% to 10% should be a reality.

And that's all the while trying to redeploy some of this liquidity in some strategies. And I don't know if you heard Phil talk about the mortgage business, but finding some ways to put more on portfolio than we customarily by virtue of selling.

So trying to drive some -- and here in the next couple of quarters, a little more utilization of that excess liquidity. So I would say on the commercial space, 8% to 10% we're looking at and on a go-forward basis.

And then stabilizing that mortgage runoff -- stabilizing that portfolio and then modest low- to mid-single-digit growth in the consumer space..

And Catherine, as it relates to the investment portfolio, we currently don't really have any specific plans for increasing it relative to the size of the overall balance sheet.

We did, during the current quarter, do some repositioning more specifically for interest rate risk management purposes and shortening up on the duration of some of the asset-backed, mortgage-backed-type components of the portfolio.

But I think to Dan's comments, we certainly would look to redeploy into mortgage -- in the mortgage and other elements of the loan portfolio first before we would think about or consider expanding the size of the investment portfolio..

Okay. That's great.

It's there for the margin anyway, right?.

Yes..

[Operator Instructions] Our next question is from Brody Preston from Stephens Inc..

I guess I just wanted to stick on the growth. I know you talked a lot about it, but I actually thought this quarter was pretty solid for you all on an ex PPP basis, particularly on the C&I side.

And so I guess I just wanted to ask, is there anything specific that drove the strength in the core commercial business portfolio with their higher line utilization.

I know that those are still pretty low, but what kind of drove the strength that you saw there?.

Yes, Brody, this is Dan. We -- our line utilizations are hovering right where they've been the last 3 or 4 quarters. So we're not seeing anything material happening there. I have to credit the success with the hustle of our bankers that are out on the street developing new relationships.

And while it is strong, I will tell you that with the degree of production, the level production that we are putting out, it -- the runoff that we've experienced, that's a headwind against that, is atypical. And it's curbing what could be a really great growth in the commercial portfolio. So -- and those are not -- that's not losing clients.

That's clients that are having successful outcomes, whether the sale of a business or the sale of a large commercial real estate. So the other good sign around the production this quarter is about 25% of that is in our builder-related business. And as you might know, not very much of those dollars go out the door day 1.

And so we have, over the course of the 3 quarters, built a nice kind of deposit on the future, so to speak, in terms of future fundings in that particular book. So -- but I think the result is our efforts are getting out, while at the same time, some of our competitors may still be a little more inwardly focused.

And we're winning more than our fair share of opportunities in the marketplace..

Got it.

Then just as it relates to fees, do you all happen to have what the assets under management was for this quarter?.

Yes. I'll grab that for you. Just give me a second. If you have another question..

Actually, while Dan -- actually, while, Brody, while Dan is looking at that, let me follow back up on part of Erik's question earlier, which was the fair value mark impact to the earnings for the quarter.

Actually, in the body of the press release and the income statement review, it's mentioned that there's about $800,000 of net overall fair value amortization that was included in the quarter relative to net interest income and the margin. Just to clarify. Yes, Brody, if you have something else though..

Yes. Yes. I wanted just -- maybe one for you, Phil.

Is there -- just on the liability side, are there any more -- I guess, within the CD book, are there any more kind of natural maturities that are kind of rolling off here in the fourth quarter and the first quarter of next year? And if there are, do you happen to know what the rates on those CDs look like?.

I don't know -- exactly know the specific rate of what's going to roll off, but we continue to have portions of that CD portfolio at -- that's certainly at the higher rate levels, continue to work their way down. And in terms of -- let's maybe look at it in terms of the impact on that as we go through from this year to next.

It could be probably worth another 10 to 12 basis points on the cost of the time deposits themselves just looking at it as we project it into next year. So there's still some additional room for that to run down and to have some impact to the overall cost of money and to the margin. But that portfolio is getting smaller and smaller as we speak. So....

Got it. Okay..

And Brody, AUM in the second quarter through our 3 wealth groups ended up at $5.8 billion at the end of the quarter..

Okay. Great. And then my last couple of questions just relate to the capital. I saw at the bottom of the slide deck on the capital position that notes you got about a little over 1 million shares left under the current authorization to be repurchased.

Just wanted to get a sense for appetite here at the current price, just given it's moved up a bit from the $43.04 you were buying back this quarter?.

Yes, I think we certainly will continue to evaluate as we trade and hopefully trade forward here just to what degree in terms of price that we want to entertain.

But I think by and large here, I think our general thought process is to stay committed to buying everything that is at least authorized at this point through to the end of the year, and to do so accordingly.

So I think the other element of it will be -- the other end of that will be to look to reengage another authorized plan just so that we always have something out there in force, which will ultimately give us as much flexibility as we possibly can have in that regard..

And we currently have no further questions. So I'd like to hand back to our speakers.

Okay. Thank you, Harry. Thanks, everyone, for joining us today. If there are no other questions, that will conclude our call, and we really appreciate you taking the time to participate. Have a great afternoon..

Thank you to everyone who has joined us. This concludes today's call, and you may now disconnect your lines..