Sandy Spring Bancorp Inc (SASR) 2021 Q4 法說會逐字稿

Hello, and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the Fourth Quarter of 2020. My name is Lauren, and I will be coordinating your call today. (Operator Instructions)

I will now hand you over to your host, Daniel J. Schrider, President and CEO, to begin. Daniel, please go ahead.

Thank you, Lauren, and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2021. This is Dan Schrider speaking, and I'm joined here by my colleagues Phil Mantua, our 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 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 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. We're pleased to be on the line with you today to discuss our fourth quarter and our annual performance. 2021 was a record year for us, and our fourth quarter results puts us in a great position going into 2022. The margin remained strong. We achieved record commercial loan production. Our Wealth Group significantly grew assets under management, all while we continue to invest in our future.

While earnings for the quarter declined, there were several factors at play, which I'll explain in more detail during our call that demonstrate the longer-term growth on our horizon. And with that, I'll just jump into the details.

Today, we reported net income of $45.4 million or $0.99 per diluted common share for the quarter ended December 31, 2021. The current quarter compares to $56.7 million or $1.19 per diluted common share for the fourth quarter of 2020 and net income of $57 million or $1.20 per diluted common share for the third quarter of 2021. Core earnings for the fourth quarter were $47.8 million compared to $55.7 million for the prior year quarter and $52 million for the linked quarter. This decrease in core earnings is attributed to an expected decrease in noninterest income and an increase in noninterest expense, and we'll provide more details on this shortly.

The provision for credit losses was $1.6 million compared to a credit of $4.5 million for the fourth quarter of 2020 and a credit of $8.2 million for the linked quarter. It is important to note that this quarter's provision was driven by good news. Our record commercial loan production and not deteriorating loan quality. In fact, our credit quality and outlook continue to improve.

The majority of our loan production took place late in the quarter, so we'll see the benefits of that portfolio growth beginning with the first quarter of 2022. Shifting to the balance sheet. Total assets were $12.6 billion, a 2% decrease compared to $12.8 billion at the end of 2020 and $13 billion for the linked quarter. Excess liquidity from deposit growth and PPP loan forgiveness was used to reduce borrowings and fund the fourth quarter loan growth. Total loans declined by 4% to $10 billion at December 31, 2021, compared to $10.4 billion at December 31, 2020. Excluding PPP loans, total loans at December 31, 2021, grew 5% to $9.8 billion compared to $9.3 billion at December 31 of last year. As the commercial loan portfolio grew $681 million, while the residential mortgage loan portfolio declined $153 million.

The growth in the commercial portfolio excluding PPP loans occurred in all commercial portfolios led by the $507 million or 14% growth in the investor-owned commercial portfolio. The year-over-year decline in the mortgage portfolio resulted from customer refinancing activities and the continuing sale of the majority of new mortgage loan production. In the second half of 2021, we saw $2.1 billion in new gross loan production, including $1.5 billion of funded production. This more than offset $874 million in commercial loan runoff.

During the quarter, funded commercial loan production increased to $937 million or 115% compared to $435 million for the same quarter of the prior year. These are remarkable numbers, and we're extremely proud of what the team delivered for our company and our clients. Last quarter, I shared with you some of the actions we were taking to put excess liquidity to work and to accelerate commercial loan growth in the fourth quarter, including adding new talent, looking at larger credits, proactively approaching new and prospective clients and pursuing new opportunities in our market.

It's clear that those efforts delivered results. And again, we are in a great position for continued growth this year. We previously disclosed where we stand in PPP forgiveness. At the end of the year, we had outstanding PPP loans of $183.5 million, with remaining fees to be earned of $4.7 million, which we expect will be earned gradually over the course of the year. PPP revenue earned in the fourth quarter totaled $9.2 million compared to $11.4 million in the linked quarter. It is important to note that throughout 2020 and 2021, we had nearly 100 people dedicated to PPP.

With the vast majority of PPP forgiveness behind us, those resources have shifted back from helping clients through the PPP process to hitting the street and driving new and expanded business. This change is again evidenced in the record commercial loan production we achieved this quarter.

On the deposit side of things, year-over-year deposits increased 6%. This was driven by 14% growth in noninterest-bearing deposits and 2% growth in interest-bearing deposits and reflects the impact of the PPP program and growth in transaction relationships. Time deposits declined $367 million as we continue to manage our overall cost of funds. Noninterest income for the current quarter decreased by 30% or $9.7 million compared to the prior year quarter. We anticipated this reduction, and it can be attributed to the rising rate environment for fixed rate mortgages, which slowed refinance activity as well as our decision to sacrifice gain on sale as we shift to holding a larger percentage of our mortgage production on the balance sheet and regrowing this asset class.

While income from mortgage banking activities declined 75% compared to the prior year quarter, this was still a strong quarter for our mortgage line of business, and we saw an uptick in outstanding balances in that portfolio for the first time in 5 quarters. Looking forward, we anticipate that quarterly mortgage gain on sale results will be comparable to those achieved in the fourth quarter as we continue to drive a larger percentage of our production toward the rebuild of that portfolio.

Our wealth management income increased $6.3 million compared to 2020 as year-over-year assets under management grew $927 million, and that client base continued to expand. Across the board, our wealth group, which includes Rembert Pendleton Jackson, Sandy Spring Trust and West Financial Services has performed exceptionally well and delivered significant results for our company.

On the margin side, the net interest margin was 3.51% compared to 3.38% for the same quarter of 2020 and 3.52% for the linked quarter. Excluding the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.52% compared to 3.31% for the fourth quarter of 2020 and 3.49% for the linked quarter.

We are pleased with the overall stability of the margin as the fourth quarter margin without the benefit of PPP-related income would have been $330 million. On a linked-quarter basis, this was a 5 basis point decline as excess liquidity continued to build early in the quarter. This trend should reverse as we enter 2022, as our strong loan growth during the quarter has significantly reduced our overnight cash position by the end of the quarter. Noninterest expense increased $4.5 million or 7% compared to the prior year quarter. This was primarily due to the increased compensation costs that come with delivering record commercial loan production as well as operational and staffing costs and expenses related to the implementation of our strategic initiatives. Salary and benefit expense increased $5.5 million compared to the fourth quarter of 2020 and $3 million for the linked quarter.

The non-GAAP efficiency ratio for the fourth quarter was 50.17% compared to 45.09% for the prior year quarter and 46.67% for the linked quarter. As we've commented in prior quarters, we feel that over time, our non-GAAP efficiency ratio will settle in that 50% to 51% range as we continue to invest in the future. Shifting to credit quality. The positive trend in the level of nonperforming loans continued this quarter at 49 basis points compared to 111 basis points at December 31, 2020 and 80 basis points for the linked quarter.

To put this further into context, the current level of nonperforming loans as a percentage of total loans is the lowest it has been since the second quarter of 2018 when it was at 46 basis points. Loans placed on nonaccrual during the current quarter totaled $0.5 million compared to $54.7 million for the prior year quarter and $5.7 million for the linked quarter of 2021.

This decline can be attributed to the improved economic environment. Loans greater than 90 days or more past due decreased from the prior quarter as a result of the renewal of existing performing portfolio loans that were in the process of being renewed at the end of the prior quarter. Net charge-offs for the fourth quarter were $400,000 compared to net charge-offs of $500,000 for the fourth quarter of 2020 and net charge-offs of $7.8 million for the linked quarter.

The allowance for credit losses was at $109.1 million or 1.1% of outstanding loans and 224% of nonperforming loans compared to $107.9 million or 1.11% of outstanding loans and 138% of nonperformers at the end of the prior quarter. Excluding PPP loans, the allowance for credit losses to outstanding loans was 1.12% at year-end. The tangible common equity ratio increased to 9.21% of tangible assets compared to 8.61% at December 31, 2020. Excluding the impact of the PPP program from tangible assets, tangible common equity ratio would be 9.35%. The company had a total risk-based capital ratio of 14.55%, a common equity Tier 1 risk-based capital ratio of 11.88%, a Tier 1 risk-based capital ratio of 12.50%, and a Tier 1 leverage ratio of 9.26%.

And during the quarter, the company repurchased 1,88,172 shares of its common stock at an average price of $48.66 per share and this completed the authorized repurchase of 2,350,000 shares under the current repurchase authorization.

With that, we'll now turn to the supplemental information we also issued this morning. On Slide 2, we have detailed specific industry information as we have in the past, outstanding balances for each segment are as of December 31, 2021. And as you will see, we have no current payment accommodations in those asset classes.

And Phil will now talk you through CECL and our capital position.

Thank you, Dan, and good afternoon, everyone. Picking up on Slide 3, we have a waterfall representation of the movement of our allowance for the fourth quarter of 2021. Broken into the components that reflect the key drivers of the change during the quarter. Change over the course of the current quarter, which resulted in a provision expense for the first time since the third quarter of 2020 was primarily driven by the growth in the loan portfolio by the end of the quarter and the associated impact to our qualitative factors. Continuing improvement in the forecasted economic factors provided the major offset.

Our next slide shows the full year transition of our allowance for credit losses, which has been dominated by improved economic forecast factors resulting in a reserve release of $56.3 million over the course of 2021. Slide 5 is the comparison of our current and more recent economic forecast variables. Our CECL methodology continues to use the Moody's baseline forecast for the fourth quarter was a version released by Moody's on December 17. This baseline forecast integrates the effects of COVID-19 and portrays an unemployment rate for our local market that has essentially, already peaked, and ultimately recovers to a level of 2.81% in the fourth quarter of 2023.

On Slide 6 is our key macroeconomic variables. For the current quarter, all of these variables have been applied in a consistent manner to those same factors as used in prior quarters. On Slide 7, we provide some additional granularity related to our reserve from a portfolio view, where you can see a significant number of categories of commercial loans show an increase in reserves based on the strong loan growth during the quarter. We should note that the 1.56% of reserve reflected for the commercial business loans includes PPP loans in the balance, although there is no reserve required on those loans. And as illustrated on the footnote at the bottom of the slide, when adjusting the balance to include PPP loans exclude PPP loans outstanding, the reserve on our commercial business segment would be 1.78% and our total loan reserve would be 1.12% of our total loans.

And finally, on Slide 8 is the trend of our capital ratios with some brief explanations regarding the treatment of certain items and their impact on 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. As noted at the bottom of the slide, we completed our authorized share repurchase program during the quarter, and the metrics displayed reflect the impact. We continue to feel confident about our capital position as all regulatory ratios continue to be in excess of well-capitalized requirements. And we have also recently updated our capital stress test where we have constructed a baseline in severe forecast scenarios, utilizing the same Moody's baseline forecast that's incorporated in our CECL calculations and a COVID-based S4 economy in the most severe case.

And with that, Dan, I'll turn it back over to you.

Thanks, Phil. Before we conclude our prepared remarks, I'd like to briefly share a few other comments with you about our performance beyond financials. As we look back on the year, we have a lot to be proud of, most notably our people. Thanks to our employees, we once again earned several local and national recognitions. For the third year in a row, Forbes named Sandy Spring Bank, 1 of America's best in-state banks and the #1 bank in Maryland. The Washington Post and the Baltimore Sun also named us the Top Workplace for the third consecutive year. And for the second consecutive year, American Banker named us one of the best banks to work for. These have continued to be difficult times, but we're so grateful for our employees. Today, we employ more than 1,200 folks.

And as we continue to grow, we remain focused on fostering a culture that prioritizes people and doing what is best for our clients and community. To that end, last quarter, I shared with you we made a decision to require all employees to be vaccinated against COVID-19 by November 1, 2021. We made this decision early last fall because we felt it was necessary to ensure a safe workplace for our colleagues, clients and community. This policy went into effect as planned and the implementation was extremely smooth. And we continue to be pleased with this decision. We got in front of the latest variant. We have continued to operate our business with confidence and without significant disruptions. We are offering employees flexibility as needed, but our vaccine policy was a necessary and good decision, both for the health and well-being of our employees and our business. This was a solid year and a great quarter.

Our momentum in commercial loan production and growth in wealth assets are a testament to our success in the marketplace and the trust our clients have in us. We strive to take the long-term view in all that we do. So we're pleased to be in a position where we can invest in talent, technology and the future of our company. And this concludes our general comments for today, and now we'll move to your questions.

Operator, if we can have the first question, that would be great.

(Operator Instructions) Our first question comes from the line of Casey Whitman from Piper Sandler.

I thought we'd start maybe just with a really good loan growth this quarter. What's the reasonable expectation for commercial growth and the overall growth this year? I assume it wouldn't be quite the same pace as you're putting on this quarter going forward?

No, I think -- yes, good question, Casey. I think this quarter had a lot of things at play. As I mentioned, just folks getting back aggressively calling on existing clients and new opportunities, coupled with the fact that many in the -- particularly in the commercial real estate area are trying to get ahead of anticipated rate increases before 2022. So our outlook in the commercial space is 8% to 10% growth in those categories and overall loan growth probably in the mid- to upper single digits.

Okay. I think you had mentioned possibly pursuing some loan purchases last quarter, but did you have any of that impacting the growth this quarter?

We did not. We actually did not have any acquired or purchase participations in the quarter.

Okay. And how about the new loan yields on the loans coming on? How the -- how do those compare with the loan yields on the rest of the portfolio?

Yes, Casey, this is Phil. it's a mix -- certainly a mixed bag of average yield based on the different overall portfolios. But by and large, the average of all production that was generated in over the quarter and in more in particular, the bulk of which was generated in December were probably in the low $4 to $4.20 range. And that's actually fairly comparable to other things that have been booked in previous quarters. So it doesn't appear as if we stack price the whole lot of yield in order to garner the amount of production during the period.

Great. And maybe this is a broad question, but can you address how you're feeling positioned for rate hikes? I think your ALCO model suggests that you're asset sensitive. But can you walk us through sort of the push and pulls going on there? And what kind of deposit beta you're assuming the cycle?

Sure. Yes. So you're correct that from the standpoint of published kind of interest rate risk information, we would portray how and will continue to portray as being what I would characterize as slightly asset sensitive. And I think that, that continues as we look forward. One of the things that we were obviously able to do here at the end of the quarter was absorb a significant amount of the liquidity that we had on the balance sheet through the last -- second half of the year. And certainly, that went into the loan portfolio predominantly. And so that changes the reported profile a little bit. But I would say that with that outsized liquidity was also a little bit more of a exaggerated asset, asset sensitivity position. But having said all that, we will certainly -- in terms of looking at the margin, we will certainly benefit from if the Fed chooses to do the 3 rate hikes throughout the year. It won't be significant in terms of -- just because of the timing that may take place in terms of the incremental amounts to the margin. But nevertheless, we will certainly benefit. And that includes a kind of deposit betas to that aspect of your question that would indicate that if we thought we needed to, we would probably run some of those money market and other more rate sensitive items at a 40% beta. Now we don't believe that will be necessary, especially given where we're starting this rate cycles related to the buildup and the nature of our deposit base. I mean we're still operating at about a 93% loan-to-deposit ratio. And as you probably remember, that's traditionally low for us. And so I feel like we're entering this cycle in a pretty good position so that we don't have to necessarily get out in front of some of the rate offerings that we may have had to do the last time we had such an upturn in rates.

Our next question comes from the line of Brody Preston from Stephens Inc.

I guess I wanted to ask some of the securities book. Looking at it, you put a little bit more liquidity to work this quarter. So I wanted to gauge one, what's the appetite going forward? And then quickly, if you happen to have the duration of the portfolio. And what percent of it is floating rate handy, it would be helpful.

Yes. Brady, this is Phil. We really did not add to the investment portfolio position. During the quarter, we chose, I think, as we discussed on our previous quarter call, that we prefer to kind of keep our powder dry there in the event that we got the kind of loan growth that we ultimately did here in the quarter to absorb the -- So at the time, probably about $1 billion in the next -- overall overnight position with the Fed. And we don't really see that the necessity to add to the portfolio here going forward as well. We did make some under the -- kind of under the hood adjustments that are related to your question around the duration of the portfolio, but by and large, I think we're just going to continue to replace cash flow runoffs with like kind of instruments, which are mostly mortgage-backed CMO type products that will just continue to give off a consistent amount of cash flow into the future. The overall duration of the portfolio is about 52 months, and it's been that way for now for a couple of quarters.

As far as the floating rate piece of it--

And the absolute what percentage?

Yes. Yes, the floating rate piece is pretty small. I'm going to just off the top of my head, say, it's probably less than 10% of the portfolio.

Got it. Got it. And then just on the -- just maybe switching to capital, just M&A. I just wanted to know if you could update us in terms of how you're thinking about M&A going forward in terms of bolt-on fee or whole bank M&A?

Yes, Brody, Dan here. Our success in the wealth space and particularly with the acquisitions of RIAs has us continue to be interested in growing both organically and through partners and particularly in that wealth space. We think we have scale and it's working well. And so we continue to be high on that business, and continue to look for good opportunities in the bank side of things. We think continuing to grow again organically and through select partnerships in the banking space is really important. I don't have anything on the racket to comment on at this point, but we continue to build those relationships.

Okay. And on the loan mix, I'm sorry if I missed this, but do you happen to have what percent of the loan portfolio is floating rate?

Yes, Brody, I have that information on the overall total loan portfolio, about 24% of total loans is floating rate. That percentage in the commercial portfolio is certainly higher than that. But in terms of the overall portfolio, about 24% and about half of those that are floating have floors on them as well. And a large majority of the loans that have the floors are at the floors at this time. So certainly, as rates pop back up and most of those floors, I think, are probably on average around 4%. There's probably, what, the 75 basis points of repricing will have to take place before we see any additional benefit from rates rising on those -- that portion of the portfolio.

Got it. And then the last one from me was just some of the tick up that we saw in the salaries and benefits line item. Would you expect that to further increase in the first quarter? Or how should we be thinking about that specific line item from the first quarter throughout 2022?

Yes, great question. I would certainly not expect it to increase from where it is. And in fact, I would expect some of that to come back to us. We increased incentive compensation quarter-over-quarter here probably by approximately $2 million that was mostly necessitated by the need to cover the amount of incentives that were related to the outsized amount and production towards the end of the quarter. That's not going to necessarily need to be repeated on a quarter-over-quarter basis. And so I would think that some of that's going to come back to us. And then in the broader area of expense, we also had a couple of onetime related expenses, one in the benefit area related to some pension settlement charges that we are required to take due to the accounting on that, and some other expenses related to disposition of some of the branches we closed earlier in the year that are both were in total about $1 million. So if I were going to kind of say what to look at from a quarterly standpoint on expenses, I would say that, that run rate is probably somewhere between what it was in the third quarter and what it was in the fourth quarter in that $64 million to $65 million a quarter range.

Our next question comes from the line of Catherine Mealor from Keefe, Bruyette & Woods.

Just as a follow-up to the expense question. So if we take a more normalized run rate of this quarter at 64% to 65%, as you look forward to 2022, do you still think -- I think last quarter, you said that the expense growth rate should be somewhere around 4%. Do you still think that's a good expense growth rate for next year? Or are there other investments or kind of inflationary pressures that could push that growth rate up a little bit?

Yes, Catherine, Phil again. I do still believe that on a, that I'll call it, a little bit of a normalized basis year-over-year when you pull out especially the things that were related to our home loan bank prepayment fees and things like that that occurred during '21. But yes, that 4% range is probably still a reasonable way to look at the overall level of expenses year-over-year.

Okay. Great. And then any thoughts on buyback. You finished your most recent authorization, but your stock is a lot higher valuation today. So how are you thinking about buybacks and capital allocation this year?

Yes, Catherine, Dan. We currently, as you know, used up the authorization. We likely, like to have 1 in place at all times just to have that tool available to us, but there are no immediate plans to be active on repurchases at this point.

Okay. Great. And then my last question on credit. Credit improved so much and the ACL ratio obviously has continued to come down. But there was a little bit less of a reserve release this quarter than we've seen in the past. So is it fair to say that this is -- we're kind of evening out. And from here, there is a limited, I guess, reserve reversals? Or would you expect that ratio to continue to move down?

Catherine, this is Phil, again. I think we're probably leveling off here to directly -- more directly answer your -- most directly answer your question. I think the reserve and the provision that goes with it, move as growth moves at this point. And we said this before, and that's just absent of any outsized or unusual charge-off activity that we're not anticipating as we move forward from this point. So yes, I would say that where we're at in that 110 to 112 level of total loans is probably something to look forward towards.

(Operator Instructions) Our next question comes from the line of Eric Zwick from Boenning and Scattergood.

First one from me, just thinking about the net interest margin a little bit, and I appreciate the commentary on the asset sensitivity. If we just look at the core in the fourth quarter at that 3.3% level, just kind of curious, a lot of that strong loan production in the fourth quarter wasn't fully in the run rate at that point. As we look forward over into 1Q and maybe a little bit into 2Q, how do you see the trajectory of that core margin from this point?

Yes, Eric, this is Phil. I think you're going to see it expand from where we finished out the fourth quarter, I think you could see it ahead towards 340 in that range just based on the projected benefit from what happened through this quarter. And so I think that, that's where it is. And again, that's core. We still have a little bit of PPP, as Dan mentioned, left there. So you're going to get some bump up in that probably the first and maybe second quarter related to that. But from a pure core standpoint, I do think that it could easily expand into that range here as we move forward.

That's helpful. And then just thinking about the noninterest income and especially in light of the decision to retain more of the residential mortgage production on the balance sheet at this point. I look back over the past couple of years and obviously had very strong years in 2020 and '21 for mortgage banking. I guess as we think about '22, do we start moving back to something more like that 2019 level? And I guess, kind of bigger picture with noninterest income, is that 4Q level a decent run rate going forward, obviously getting some benefit from larger wealth management, but mortgage banking is certainly a bit of a headwind at this point relative to the last couple of years.

Yes, Eric, this is Dan. I would look at from a mortgage banking standpoint, kind of model after what we experienced in the fourth quarter. And that will give us the opportunity to balance both gain revenue and rebuild that portfolio a bit. That's probably a good way to look at it.

We currently have no further questions. I'll now hand back over to the management team for any closing remarks.

All right. Thank you, Lauren, and thanks, everyone, for taking the time to participate this afternoon, and we hope that you have a great one. That concludes our call.

This concludes today's call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your lines.