Sandy Spring Bancorp Inc (SASR) 2020 Q2 法說會逐字稿

Good day and welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the Second Quarter of 2020. (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, sir.

Thank you and good afternoon, everyone. Thank you all for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the second quarter of 2020. 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.

As always, 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.

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.

Thank you, Aaron. Pleased to be on the line with you today to discuss our second quarter results and hope that you and your loved ones are healthy and doing well during this time.

And before we get into financial highlights, I think it's important to acknowledge that long before the global pandemic took center stage and our nation's economic outlook dramatically changed, we had our sight set on this second quarter of 2020. This was our first full quarter with Revere Bank and Rembert Pendleton Jackson, otherwise known as RPJ. When we set out to close and integrate both of these transactions this year, no one could have imagined the events of the last quarter.

However, I'm extremely pleased that we successfully closed these transactions when we did. Despite this tumultuous environment, we are already seeing the positive impact of our recent acquisitions and we remain on track to complete the full conversion of Revere systems next month as originally planned. We look forward to long-term earnings growth as the result of both investments, and we feel we are in a position of strength to weather the current environment.

During this quarter, we also continued to come through in a big way for our clients through the Paycheck Protection Program, or PPP. Through the PPP, we helped infuse over $1 billion into our local small businesses. And our COVID response has been seamless and effective as we have worked hard to protect the health and safety of our employees, clients and communities. We've continued to serve our clients through these uncertain times and our role as a community bank is more important now than ever. I will comment further on these things throughout my remarks and later break down some of the unique attributes of the quarter. However, now I'd like to talk through our financial highlights.

Today, we reported a $14.3 million net loss or $0.31 per share for the second quarter of 2020. This compares to net income of $28.3 million or $0.79 per diluted share for the second quarter of 2019 and $10 million or $0.28 per diluted share for the first quarter of 2020. These results were driven by two distinct events. First, our merger and acquisition expenses related to Revere Bank totaled $22.5 million. And second, our provision for credit losses due to, one, the negative change in the current quarter's economic forecast, this accounted for approximately $33.8 million of our $58.7 million provision for credit losses and the additional day 1 provision for credit losses associated with the acquisition of Revere, which totaled $17.5 million. While these areas had significant impact on our results, it's important to note that our pretax, preprovision and premerger expense income was a record $61.5 million. In a few moments, I'll walk through elements of our non-GAAP reconciliation and help you understand our core performance for this quarter.

Our total assets, deposit and loan growth was driven primarily by Revere and our participation in the PPP. Total assets grew to $13.3 billion compared to $8.4 billion at June 30, 2019. Deposit growth was 58% for the same period as noninterest-bearing deposits experienced growth of 70% and interest-bearing deposits grew 52%. In addition to deposit growth from both the Revere acquisition and PPP proceeds, we saw significant growth in new business households, which helped drive our deposit results.

Total loans also grew by 58% to $10.3 billion compared to $6.6 billion at June 30, 2019. Excluding PPP loans, total loans grew 42% to $9.3 billion at June 30, 2020. Commercial loans, excluding PPP loans, grew 58% or $2.7 billion while the remainder of the portfolio grew 2%.

The commercial loan pipeline in the near-term is strong and we anticipate good organic production to come from it. We've built a lot of goodwill from the PPP program, which is translating into production for us today. Year-over-year growth in the consumer portfolio was limited as low interest rates resulted in heavy mortgage loan refinance activity. We continue to sell the majority of new mortgage loan production to drive noninterest income.

On that topic, fee income increased 38% or $6.4 million from the prior quarter. Mortgage had a tremendous quarter, reporting an increase of $5.2 million in revenue from mortgage banking activities. We also saw a $2.1 million increase in wealth management income stemming from our first quarter acquisition of RPJ. This growth in fee income offset the $1.4 million decline in service and bank card fees compared to the prior year quarter. This decline was due to our temporary reduction of service fees, which we implemented to help our clients manage through the impact of COVID-19.

The net interest margin was 3.7% for the second quarter of 2020 compared to 3.54% for the second quarter of 2019, and 3.29% for the first quarter of 2020. Excluding the impact of the amortization of the fair value marks derived from acquisitions and the accelerated amortization of the purchase premium on FHLB advances, the current quarter's net interest margin would have been 3.19% compared to 3.54% for the second quarter of 2019 and 3.29% for the first quarter of 2020.

Noninterest expense grew 95% or $41.6 million from the prior year quarter. As previously stated, merger and acquisition expense accounted for $22.5 million of the growth in noninterest expense. This also included $5.9 million in prepayment penalties from the liquidation of acquired FHLB borrowings. Excluding the impact of these noncore expenses, the year-over-year growth rate would have been 27% as a result of the operational cost of Revere and RPJ acquisitions, increased compensation expense related to the high level of mortgage loan originations as well as annual employee merit increases.

We delivered an impressive improvement in our efficiency with a non-GAAP efficiency ratio of 43.85% for the current quarter as compared to 51.71% for the second quarter of 2019 and 54.76% for the first quarter of 2020. This is a result of 50% growth in non-GAAP revenue outpacing the non-GAAP noninterest expense growth of 27%.

On the loan side, the level of nonperforming loans to total loans increased to 77 basis points at June 30, 2020 compared to 58 basis points at June 30, 2019. At June 30, 2020, nonperforming loans totaled $79.9 million compared to $37.7 million at June 30, 2019 and $54 million at March 31, 2020. The year-over-year growth in nonperforming loans was driven by 3 major components: loans placed on nonaccrual status, acquired Revere nonaccrual loans and loans previously accounted for as purchased credit impaired loans that have been designated as nonaccrual loans as a result of the company's adoption of the accounting standard for expected credit losses at the beginning of the year. Loans placed on nonaccrual during the current quarter amounted to $27.3 million compared to $3.4 million for the prior year quarter and $2.4 million for the first quarter of 2020.

Acquired Revere nonaccrual loans were $11.3 million. Excluding the impact of the acquisition of Revere, the current quarter's growth in nonaccrual loans was primarily the result of the 3 large relationships. We recorded net recoveries of $400,000 for the second quarter of 2020 compared to net charge-offs of $700,000 and $0.5 million for the second quarter of 2019 and the first quarter of 2020, respectively. The allowance for credit losses was $163.5 million or 1.58% of outstanding loans and 205% of nonperforming loans at June 30, 2020 compared to $85.8 million -- or 84 -- I'm sorry, 0.84% of outstanding loans and 159% of nonperforming loans at March 31, 2020.

The acquisition of Revere's PCD loans resulted in an increase to the allowance of credit losses of $18.6 million, which did not affect the current quarter's provision expense. The remaining growth in the allowance was attributable to the provision for credit losses during the quarter.

Tangible common equity increased to $1 billion at June 30, 2020 Compared to $767 million at June 30, 2019 as a result of the equity issuance related to the Revere acquisition. The year-over-year change in tangible common equity also reflects the effects of the repurchase of $50 million of common stock, an increase in dividends beginning in the second quarter of 2019 and the increase in intangible assets and goodwill associated with the 2 acquisitions during the past 12 months.

At June 30, 2020, the company had a total risk-based capital ratio of 13.79%, a common equity Tier 1 risk-based capital ratio of 10.23%, and a Tier 1 risk-based capital ratio of 10.23%, and a Tier 1 leverage ratio of 8.35%.

Before we talk through the supplemental information we also issued this morning, I want to underscore the strength of our second quarter after the successful transaction we closed with Revere. To understand the performance based on non-GAAP operating earnings, I'm going to refer to the non-GAAP metrics tables contained in this morning's release, and it's the third page of the tabular data. If you begin with our $14.3 million net loss for the quarter and adjust for the following, the provision for credit losses net of tax of $43.8 million; adjust for merger-related expenses, net of tax of $16.7 million; and the PPLF funding expense net of tax of $368,000, and then subtract the benefit of both interest income and the net deferral of fees from our participation in PPP of $4.5 million, this results in a non-GAAP operating earnings of over $42 million compared to $29.5 million in the second quarter of 2019, and a non-GAAP operating EPS of $0.88, which is a 7.3% increase also compared to the second quarter of 2019.

Despite the impact of merger-related expenses, including the day 1 provision expense and the impact of a deteriorating economic forecast on the provision expense, the underlying operating performance of our company has improved and was very solid. The underlying strength has further demonstrated when evaluating performance on a pretax, preprovision, premerger expense income basis. The company generated a pretax, preprovision, premerger expense ROA of 1.91% for the quarter ended June 30 and 1.81% for year-to-date 2020. Additionally, our pretax, preprovision, premerger expense return on average equity was 17.73% for the second quarter and 15.54% for year-to-date 2020. So I remain very pleased with the franchise we continue to build with the addition of RPJ and Revere.

And with that, I'd like to transition to the supplemental information that we issued this morning. I'll provide an update related to the current state and return-to-work strategy related to COVID-19, then review the current status of loan accommodations as well as an update on specific industry trends. And then my colleague, Phil Mantua, will pick it up from there and comment on the allowance for credit losses, our CECL methodology and assumption changes and wrap it up with our capital position.

So within the supplemental deck, as you can see from Slide 2, little has changed from our comments during the first quarter investor call. We continue with more than 85% of nonbranch personnel working remotely. Very impressed with the agility of our employees and the effectiveness of their work regardless of the location. We've continued to serve our clients through various channels, including our branches by appointment only. Our clients conduct the majority of their transactions through the drive-through, online, mobile banking or the phone. We remain focused on the health of our employees and clients and continue to follow all CDC guidelines. And we are taking a very deliberate approach to bringing employees back into branches in our office. We've reached out to our employees and clients to understand both their needs and concerns and our business continuity team has developed a comprehensive return to work strategy. We implemented our phase 1 in July, which caps the workforce at any given location at 25% of normal occupancy. And additional phases will be implemented as we're able. But realistically, it could take several months or quarters to fully implement.

Slide 4 provides information as of July 17, 2020, on our loan accommodations. As of July 17, total accommodations totaled $1.46 billion or 16% of our total loan portfolio less PPP outstandings. 60% of all accommodations were granted in April or May and totaled $2 billion at their highest level. We continue to be in close touch with our borrowers and at this point, we have discovered that approximately 62% do not require an additional accommodation beyond the initial 90 days, 23% are requesting additional 90 days and 15% continue to evaluate their needs. We're very encouraged by the initial response from our client base, but also understand that a setback in reopening businesses in our region could have a negative impact on this trend.

Slide 5 notes that as of July 17, we have advanced nearly $1.1 billion of PPP loans to over 5,100 clients. In total, we supported over 112,000 jobs in our region, advanced nearly $100 million to area nonprofit organizations and 23% of our PPP loans went to clients in low- to moderate-income neighborhoods.

Shifting to Slide 6. This provides a summary of the 5 industry segments we covered last quarter. Outstanding balances for each segment are as of 6/30, and the loans with payment accommodations data is as of 7/17. We continue to drill down into this client base as well as others to determine where there may be pockets of weakness. Overall, we continue to believe we're in the early innings of this. But we are encouraged by the mutual cooperation of the banker-client relationship as we work to understand the potential impact on many businesses in our portfolio.

Slide 7 details some of the specific portfolio management actions we've implemented to identify weakness. We take a proactive approach to working with our clients, and we are conducting ongoing relationship reviews. We also conduct daily and monthly portfolio monitoring of a number of possible COVID-related impacts, including utilization rates by industry, payment accommodations, delinquency trends and risk rating migration. And additionally, we monitor the -- for Beacon score migration, for both the mortgage and consumer portfolio and perform commercial real estate stress testing.

With that, I'll turn it over to Phil to talk through CECL and our capital position.

Thank you, Dan. Good afternoon, everyone.

So if I pick up on Slide #8, you can see we have our waterfall depiction of our allowance build for the second quarter. As you can see, there are 3 significant components to the build. The first 2 are directly related to our Revere Bank acquisition and the day 1 reserve requirements under CECL. The third is based on the change in our economic forecast.

Moving from left to right on the graph, the $18.6 million, which is a nonprovision-based addition, is the day 1 reserve on those acquired loans that have been identified as purchase credit deteriorated, which totaled $974 million as of the evaluation date. The next $17.5 million in the graph, which is a provision-based addition is the day 1 reserve against the remaining non-PCD loans in the Revere portfolio.

The third major component, which is based on the change in the economic forecast, which as we have previously discussed, is highly dependent on a number of key macroeconomic variables as outlined on the next slide, #9. Our CECL methodology uses a Moody's baseline forecast for the local MSA, and as for the second quarter with a version released by Moody's in mid-June. This baseline forecast integrates the effects of COVID-19, and as shown on Slide 10, in comparison to the forecast we used in the first quarter for trades and unemployment rate for our local market that increases during the remainder of 2020, peaks at 5.9% in the second quarter of '21, and then slowly recovers settling at a level of 4.7% by the end of 2022. In determining our reasonable and supportable forecast period, we continue to use a 1-year time horizon to reflect the ongoing uncertainty in the long-term outlook at this time. Because of the aforementioned uncertainty, similar to our bridge taken in the first quarter, we also chose to not take into consideration any potential mitigating factors based on what could be perceived as the positive outcome or impact of any of the government programs such as PPP, et cetera. We feel very comfortable with this overall conservative stance in the creation of our reserve.

On Slide 11, we provide some additional granularity related to the reserve build from a portfolio view, where, as you can see the most significant amount of reserve, both by dollar amount and percentage, is attributed to the commercial business portfolio, where the total reserve is $58.6 million or 2.64% of outstandings. We should note that the 2.64% of reserve reflected here includes PPP loans in the balance, although there is no reserve required on those loans. As illustrated in the footnote at the bottom of this slide, when adjusting the balance to exclude the PPP loans outstanding, the reserve on our commercial business segment would actually be 5.02% and our total reserve would be 1.76% of our total loans.

Finally, on Slide 12 is a trend of our pertinent 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. We continue to feel confident about our capital position. And we have also recently updated our capital stress tests, where we have constructed a baseline severe forecast scenario, utilizing the same Moody's baseline forecast incorporated in our CECL calculations and a more severe COVID-based economy in the severe case. Having done so, we continue to be confident that we have the capital to carry us through this ongoing situation.

Dan, I'll pass it back to you.

Thank you, Phil. Before we move into the question-and-answer period, there are just a few other updates I want to briefly cover with you.

I mentioned at the top of the call that everything is on track for the Revere conversion or what we refer to as Client Day One, which will take place next month as originally planned. Our cross-functional integration teams have done a phenomenal job working through this pandemic adapting to these unprecedented circumstances and continuing to press ahead. Our teams have also gained valued experience over the years and we're in a great position heading into this integration.

Since the day we announced our acquisition of Revere, we established consistent and transparent communications, and we got right to work, building relationships and trust on both sides of this deal. This has made for a seamless integration that has not been hindered by the COVID-19 disruptions. The key to a successful integration is to make sure your partner has a shared vision and a significant commitment to building a better bank, and we have that in Revere. I would also like to express my sincere appreciation to all of my colleagues for making us a Washington Post top workplace, which is truly a high honor because it's based on the feedback from our employees.

Last month, Forbes also named us as one of America's best in-state banks and the top bank in Maryland. We're all extremely proud that this is the second year in a row that we have received these recognitions from the Post and Forbes, especially given the current environment. We look forward to when we can put the pandemic and its far-reaching economic impact behind us, but for now, we remain focused on taking care of our employees and clients while also strategically moving our company forward by being a top workplace and the best bank in the Greater Washington region. And finally, to show our appreciation for our healthcare heroes in the Greater Washington area, the Sandy Spring Bank Foundation donated $600,000 to COVID-19 relief efforts at 12 local hospitals. As a community bank, these frontline healthcare workers and the people they're treating are our neighbors, friends, colleagues and clients. They represent all of us and we're standing with them as they work to safeguard the people and the communities that we love. This concludes our general comments for today, and we will now move to your questions.

(Operator Instructions) Today's first question comes from Stuart Lotz with KBW.

Really appreciate the detail on the allowance in the deck and really the -- your updated commentary on deferrals. Dan, I was wondering what's the schedule of deferrals looking like as we get in the back half of this month? You anticipate a further reduction into August or is this the current level right now, kind of what we can expect for at least another few months, I think, 60% total deferrals. Is that correct?

Yes. You're talking about the current level of about $1.4 billion in deferrals. I think that we're...

Yes.

Yes. We -- with most of those being granted in April and May, we still have a decent population of deferrals to work through that will be coming due the remainder of July into the early part of August. So my status update as to the number that have anticipated and many have returned to making their normal payments, we still have more to work through that could potentially reduce the number of outstanding dollars that are in the deferral category. So I think we'll have more updates as we go along. But early returns, we think, are pretty good number.

Okay. Sorry, were the majority of your first round of deferrals, were they 60-day or 90-day? Or is it...

They were 90-day.

They were 90-day. Okay. Awesome.

And I guess, Phil, turning to the margin, a lot of accretion this quarter. Do you have a dollar amount? I mean, I can get back into that, but just curious what your -- if you guys had a particular dollar amount that came through this quarter?

I don't know that I have the dollar amount in front of me specifically there, Stuart. But I think it's about 20 -- it's a total of 28 basis points that are related to the overall fair value marks, and 20 of that is all involved, just specifically with what we did on the Home Loan Bank advances. So if you're going to look in to calculate a kind of a go-forward type situation, what I would suggest is we had a 3.19% here, kind of core in this quarter. I think going forward in the next quarter, the ongoing -- initial ongoing marks will probably be worth about 5 or 6 basis points. So that's probably the best way for you to get to where you want to go, I believe, is to understand what it looks like going forward. And then it starts to trail down subsequent quarters by maybe 1 basis point or so each quarter as we look out into the rest of the year. So I mean, my overall general guidance for margin, so to speak, absolute -- well, including the amount being contributed by PPP loans, which is diluting it to some degree is probably in that 3.15% to 3.20% range, so a few basis points off of where we are right now. And so I would go -- I will look at it in that regard.

And how are you modeling PPP fees? I mean, some of your peers are kind of using like a level yield method. Are you still kind of waiting on guidance regarding forgiveness before you provide any guidance there?

We certainly are amortizing it over the life of the loan, similar to what we would do with any other related fee or related cost. And so I think that what we're expecting is the forgiveness period to start in the fourth quarter, which at that point will bring -- depending on the percentage that obviously gets forgiven initially, a good portion of that back into that quarter and then the margin in the fourth quarter and probably into the first quarter of next year are going to look dramatically different than what I just talked about. I think our initial estimate was probably that we would look for forgiveness to be somewhere in the 80% range of our total outstanding PPP loans, which I think at the end of the quarter was roughly $1 billion in change.

And our next question comes from Steven Comery with G. Research.

I wanted to ask about expenses. So I know you mentioned in the prepared remarks that there was some sort of uptick in salaries related to mortgage incentive pay. I'm just kind of wondering if you could talk about maybe the magnitude of that and sort of how we should think of the run rate going forward, assuming mortgage isn't quite as big as it was this quarter?

Yes, and let me comment on expenses, I would say, in general here first. I mean, obviously, the large increase overall is obviously related to putting the current existing Revere expense base in place. And so that's one element of it. The second element, just in terms of compensation expenses, this is our normal merit increase period. So we would have increased our overall salary levels from what would have been legacy Sandy Spring by somewhere between 3%, 3.5% as a rough estimate. So those are the two things at play there. As it relates to the mortgage side, there were certainly higher levels of certain elements of commission comp that would be a part of the equation there, a lot of which though is probably going to be kind of netted through to some of the overall gain because the majority of those commission costs were related to loans that we actually sold. And if anything, some of those -- some of the other costs on the surface were also probably then deferred as it relates to those balances that we did book. But just to answer your question, the commission compensation quarter-over-quarter was about $1.2 million higher, just in gross amount paid for that line item.

Okay. Very good. So I mean, I guess, like the final piece was just sort of like, is this like a good place to look at the run rate going forward? Or I guess also, the other piece, too, is like how are you thinking about the Revere cost save realization? Is like the schedule of that any different that circumstances are different?

I don't know that any circumstances as to how we looked at those initial cost saves. Are there any differences in that outlook? I mean, we'll clearly start to benefits, so to speak, into the third and fourth quarter of this year towards a more normalized combined run rate, probably at the first part of '21. I mean the efficiency ratio this quarter was extremely low by anybody's standards and certainly by ours at 43%. There's probably about 6% on that ratio related to PPP net revenues. So I would immediately more normalize that even in the quarter without PPP at around 48%. But then that would be before any potential cost saves going forward net of the onetime stuff, we would have to incur to close certain branches and close out other contracts. So I would guide in terms of efficiency ratio on a more pure run rate basis in the high 40s to the 50% range as we look out through the end of the year and then really to the degree of what it looks like into '21. That's where I would target it for where we'd like it to be.

Okay. Okay, very good. That's helpful. Maybe one more for me. There was also another piece of the prepared comments talking about nonperformers being contributed to by 3 large relationships. Maybe just any color there. Was there any commonality across the 3 or are they all relatively idiosyncratic? And is there anything you're looking for in the rest of the book just based on the performance there?

Yes. These -- good questions, Steve. These are credits that have been in a process of working with the client for some time that are not necessarily COVID-related impacts and nothing like from a similar standpoint in terms of a specific portfolio that is coming from. So it's kind of normal course stuff.

And our next question comes from Brody Preston with Stephens, Inc.

So I just wanted to start out -- one of the, I guess, the hot topics ever since CCAR went down for the big banks, was what the Fed sort of said about 3Q dividend payouts not being able to exceed average of trailing 4-quarter net income. And so I just wanted to ask you guys, has there been any similar, I guess, conversations with the Fed for the smaller banks? And I guess, how are you thinking about the dividend in light of that moving forward?

Yes, Brody, this is Dan. There has not been any specific conversations that have kind of come down into the community bank space around specifically around dividend or expectation there. We'll continue to evaluate, like we always do, kind of looking back on a quarter-by-quarter basis at earnings, capital levels from a broader capital management standpoint, we do feel when you -- much like we've done in our prepared remarks, we do feel that with the current core earnings of the organization that we feel that, that supports our current level of dividend, and we'll be addressing the decision around this most recent quarter here shortly. But short answer to your question, there really hasn't been any comment or anticipated pressure on that point.

All right. Great. Just one last one on this topic. If there were to be any kind of discussions around that, do you guys have any sort of unlocked security gains that you could use to maybe boost GAAP earnings on a go-forward basis?

I mean Brody, this is Phil. I mean, I do believe we've got some unrealized gain in the overall portfolio. We don't normally look at it kind of that way in terms of using one-off type of items. We try to really kind of call those out and set them aside as to what they are. I mean, clearly, we could do that from a cash flow standpoint or wherever you want to call it relative to upstreaming from the bank to the holding company to pay them. But I don't think that we would use one to try to impact the decision on what we would do with the dividend is probably the best way I would kind of get at it.

All right. Great. And then on the -- from the slides, I noticed the big increase in provision due to macro factors. But the peak unemployment that's being used by Moody's for your geography didn't tick up too much, but the peak got pushed out by a year. And so is it fair to say that with these sort of macro models and CECL that the duration almost matters a little bit more than the peak does?

I think it actually is maybe the more -- the more pertinent thing is the timing of when the peak occurs, and when it happens, as it did this time further out into that kind of last -- or close to the last few quarters of when we have our reasonable time period, it has a bigger impact. It picks it up and then runs it out from there. So I think the timing of when that peak occurs is probably a bigger factor than some of the other elements of it. Again, depending on when you -- how far out you go with your forecast period as well. And we've, as I mentioned in the comments, in a more normal environment, we would normally run it for a 2-year period. But given where we're at now and not knowing what else -- how else to evaluate it, we've cut that back to 1 year.

All right. All right. And then I guess on the sticking with the reserve, the 5% C&I reserve is pretty hefty. And so I guess I just wanted to better understand the moving parts there was like I noticed the bankruptcy component of the macro model, bankruptcies increased significantly, I guess, from 1Q to 2Q. Is that what's driving that? Or just -- 5% is a pretty large reserve on the C&I portfolio. So just want some more detail there.

Yes. Well, I think what's in that category are a lot of the loans that ended up in the PCD portion of the Revere portfolio, which were driven by a lot of things relative to deferrals, et cetera, in evaluating what that portfolio is going to get called out at. So I believe that a pretty significant piece of that. In fact, the dollar amount there is a good majority of that $18.6 million that was in that day 1 PCD reserve, I believe, is in that commercial business category because it was a fair amount by either industry and therefore, those that were -- a lot of them that were deferred that ended up in that PCD portfolio that have those reserves against them.

Okay. Great. And then one last one for me. What was the -- I'm sorry, if I missed it, but what was the impact of PPP on the margin again? Did you say 3 basis points?

Yes. I think it's probably a little bit more than that, depending on how you want to calculate the impact relative to the moving pieces because right now, on our balance sheet, we start with the amount of loans -- the PPP loans outstanding. We then know that the majority of those funds are still sitting in our deposit base, we're not really convinced that a lot of them have been drawn down yet just based on movements in our various deposit categories. We also, though, then went ahead and tapped into the PPLF to the tune of about $845 million of that $1 billion in PPP loans, and then have really been sitting on that cash over on the asset side again, just in funds sitting at basically Fed effective 5 or so basis points. So when you add all that kind of data, that aspect of it all being PPP-related, the impact of the margin is probably greater than just a couple of basis points. It could -- it probably is more like 10 basis points or beyond at the end of the day.

Okay. I guess, you give the average balance on the PPP loans for the quarter. I guess, what was the income that you, I guess, sort of accrued for this quarter related to PPP?

The overall net effect we have related to the incomes less the amount of the expense in PPLF, pretax was about $5.5 million.

(Operator Instructions) Today's next question comes from Erik Zwick with Boenning and Scattergood.

If I could start, just a quick question on Slide 4 of the supplementary materials. That second bullet point, it says the combinations granted, exceeded $2 billion. Was that the peak volume of loans that had a combination before some started to expire? Or is that referring to something else over the...

No, that is exactly correct. That is what it's referring to.

Got you. Okay. Great. And then just maybe a bit of a follow-up on Brody's question from earlier. Looking at Slide 10, if those projections from Moody's were not to change a whole lot over the next coming quarters, and seem to be fairly accurate. At this point, in the CECL model, you should have reserved for the loss content in your current portfolio. As we go forward and even if you start to realize losses, what -- does that imply that the loan loss provision should move lower in future quarters because you're actually -- even though you're actually taking the losses, the outlook hasn't changed or are there other things to take into consideration, either are there kind of Q factors or migration -- risk migration in the portfolio? Just kind of curious about your thoughts there of the trajectory of the provision.

Yes, Erik, this is Phil. I think you -- I think it's most -- so first of all, if the type of unemployment rate projections are kind of retained at the current level, and we do not see a significant amount of actual losses, then the provisions will definitely -- most definitely come down from the levels that we've booked here in the first couple of quarters of the year. It's really when those changes go in either direction as to where -- when it really materially moves the amount of either incremental or less amount of provisions from where you are at a point in time. So obviously, though, if we have some actual charge-offs, then that will get factored into the overall requirement for total reserve based on whatever that unemployment rates are at that point. And that will have then altered what we got effectively back into for overall provisioning if we have to replenish. So I think that, that's the best way to kind of look at the way that the model kind of operates off of that pretty significant factor.

That's helpful. And maybe just one quick follow-up on that replenishment for any charge-offs, is it dollar-for-dollar? Or how does the CECL model treat that? Or is it less percent assuming that the rest of the portfolio may not have the same level of content if something has already been realized.

Yes. I think I'm not sure if it's quite dollar-for-dollar, depending on, again, which I didn't comment on, but you also asked about what happens with some of the other more overriding or qualitative factors. And there's probably some influence that's related to that as well. So I'm not quite sure if it's quite dollar-for-dollar or not.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you, Rocco. Thanks, everyone, again, for joining us this afternoon for our call. We always welcome your feedback on these calls. So please feel free to e-mail us at ir@sandyspringbank.com. Thanks again for participating, and hope you have a great and safe afternoon.

Thank you. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.