Sandy Spring Bancorp Inc (SASR) 2020 Q1 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp First Quarter Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dan Schrider. Please go ahead.

Thank you, Grant, and good afternoon, everyone. Thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the first quarter 2020 and to bring you up-to-date on our response to and the impact from COVID-19.

This is Dan Schrider speaking, and I'm joined here at our headquarters for the first time in a few weeks 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, and there will be a live webcast and a replay of the call later on our website. But before we get started covering the 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 probable loan and lease 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.

I'm pleased to be on the line with you today to discuss our first quarter results. But first off, I hope that we find you and your loved ones are healthy and that you're managing well during this unprecedented time that we're all facing. As we stated in today's press release, we came into 2020 in a position of great strength. We've completed another record year, and we are preparing to expand our market presence and close the strategic acquisitions of Rembert Pendleton Jackson as well as Revere Bank. As it is well known to all of you, the global health crisis and economic events that began to unfold late in the first quarter quickly took center stage and required swift action. But despite these significant disruptions, though, we still completed both transactions as planned, closing RPJ on February 2 and Revere Bank on April 1. We implemented our business continuity plans and continue to serve our clients during what continues to be an extraordinary time. We do remain on track for a full conversion of Revere systems this August. We know that this is a critical time for us to come together as a company, and we remain focused on building stronger communities, driving sustainable growth and taking care of our employees and clients. I will discuss our COVID-19 response a little later in the call and talk through the supplemental materials that we issued this morning, but I will first start by going over our first quarter results.

Net income for the first quarter of 2020 was $10 million or $0.28 per diluted share compared to net income of $30.3 million or $0.85 per diluted share for the first quarter of 2019 and a net income of $28.5 million or $0.80 per diluted share for the fourth quarter of 2019. Earnings for the current quarter were negatively impacted by the provision for credit losses of $24.5 million. And while we could have delayed the adoption of CECL under the CARES Act, we elected to move forward with the implementation as planned. A little later in the call, Phil will touch on CECL in more detail.

On the balance sheet, total loans and deposits grew by 2% and 6%, respectively, compared to the prior year. And our loan-to-deposit ratio ended the quarter at 102% compared to 104% at the end of the fourth quarter. Within our deposit portfolio, noninterest-bearing deposits grew 7% compared to the first quarter of 2019 and 2.5% since the linked fourth quarter. Of significance is the fact that for the first time since the Fed began cutting rates last summer, deposits repriced faster than loans as deposit costs were down 12 basis points versus loan yields that contracted only 8 basis points. We continue to focus attention on deposit pricing as we plan to aggressively decrease rates aligned with market trends, and our promotional pricing has already been reduced to levels we believe reflect the current competitive environment.

Given the current environment, it's likely that deposit growth will be limited to new relationships sourced through our online account opening portal and the expansion of existing commercial and retail relationships, both of which we've experienced since social distancing was put into place. On the funding side, we anticipate utilizing the Fed Paycheck Protection Program liquidity facility as the primary funding source for our PPP lending activity and we'll utilize our vast sources of additional liquidity should needs arise throughout the year. We are in a very solid position from a liquidity perspective.

Our outlook entering the year was for a solid quarter of commercial loan demand. And we put some strong numbers up that speak to the momentum we had coming into the year. Our commercial loan production for the first quarter increased $167 million to $351 million or 88% compared to the first quarter of 2019, representing our best first quarter. Noninterest income was $18.2 million for the first quarter of 2020 compared to $17 million for the first quarter of 2019. The current quarter included $200,000 in securities gains, and the prior year quarter included $600,000 in life insurance mortality proceeds. Exclusive of these factors, the growth in noninterest income for the quarter was 10% or $1.6 million compared to the prior year quarter. And this was driven by the 33% increase in wealth management income as a result of the acquisition of RPJ.

Headquartered in Falls Church, Virginia, RPJ has helped us enhance our market presence, diversify our sources of noninterest income and deepen our capacity in the wealth space. As a community bank in the greater Washington region, we're committed to providing financial services to individuals, families and businesses at every stage of life, where our ability to continue to grow in the wealth sector and attract top talent in the market is a testament to the fact that our approach works and our clients do value this service.

On the mortgage banking side, production in the first quarter was $315 million, representing a 108% increase compared to the same quarter last year. Refinance activity accounted for $132 million of overall mortgage production, which is a 270% increase compared to the same quarter last year. As for what we're seeing today, application activity has declined from the elevated levels seen in March. Purchased activity is continuing at a modest level within our footprint, and refinance demand remains strong. When social distancing policy begins to be relaxed, we expect purchased activity to rebound due to pent-up demand. Conditions are likely to remain generally favorable for mortgage production throughout the remainder of 2020, with tightening credit standards acting as a modest headwind relative to prepandemic levels.

Mortgage banking income for the first quarter was negatively impacted by illiquid secondary market conditions and widening primary to secondary market spreads at quarter end. These conditions were the result of MBS market volatility, investor capacity constraints and a collapse in the value of mortgage servicing rights due to the broad mortgage forbearance provisions that were included in the CARES Act. Federal Reserve asset purchases have stabilized the MBS markets. And as a result, we are seeing improved secondary market conditions so far in April. Investor capacity constraints and depressed mortgage servicing valuations continue to be headwinds, but they are showing early signs of easing up.

Net interest income for the first quarter of 2020 decreased 4% compared to the first quarter of 2019, reflecting the impact of declining interest rates over the preceding 12 months. The net interest margin declined to 3.29% for the first quarter of 2020 compared to 3.6% for the first quarter of 2019. As the effect of lower rates continues to be realized in deposit pricing and as we integrate Revere into our balance sheet, we would expect our margin to remain in the 3.25% to 3.30% range inclusive of Revere.

On noninterest expense side, expenses increased 8% to $47.7 million for the first quarter of 2020 compared to $44.2 million in the first quarter of 2019. Excluding $1.5 million in merger and acquisition expenses this year, noninterest expense for the quarter increased 5%. This is primarily due to increases in compensation expenses as well as commission for higher levels of mortgage loan originations. And we also incurred additional monthly cost -- operating costs with the acquisition of RPJ back in February.

The non-GAAP efficiency ratio was 54.76% for the current quarter as compared to 51.44% for the first quarter of 2019 and 51.98% for the fourth quarter of 2019. The increase in the efficiency ratio from the first quarter of last year to the current year was a result of the rate of growth in noninterest expense outpacing the growth in net revenues as a result of margin compression during the same time period.

From a credit perspective, nonperforming loans totaled $54 million compared to $41.3 million at December 31, 2019. The growth in nonperforming loans is due to the new accounting standard for expected credit losses as $13.1 million of previously disclosed and accounted-for purchased credit impaired loans are now designated as nonaccrual loans under the new standard's guidance. As of March 31, our overall credit portfolio remained strong as new loans placed on nonaccrual during the current quarter amounted to $2.4 million compared to $6.2 million for the prior year quarter and $5.4 million for the fourth quarter of 2019. As we move through the uncertainty of COVID-19 and its impact on the economy, we will continue to work closely with our clients and manage through what is likely to be a challenging credit environment.

During the first quarter, the company completed a stock repurchase program, purchasing a total of 1.5 million shares for a total of $50 million at an average price of $33.58 per share. Tangible book value remained stable at $21.09 per share at March 31 compared to $21.05 at March 31, 2019, after the completion of the stock repurchase program, an increase in the quarterly dividend to $0.30 per share in the second quarter of 2019 and the addition of $35 million in goodwill and intangible assets.

The company had a total risk-based capital ratio of 14.09%, a common Tier 1 risk-based capital ratio of 10.23%, a Tier 1 risk-based capital ratio of 10.23% and a Tier 1 leverage ratio of 8.78%.

As I mentioned earlier, we elected to proceed with the adoption of CECL on January 1, resulting in an initial increase to the allowance for credit losses of $5.7 million. Exclusive of the $2.8 million reclassification to the allowance for credit losses related to the acquired credit impaired loans, the impact to retained earnings at transition date was only $2.2 million. As mentioned, the provision for credit losses was $24.5 million for the first quarter of 2020 compared to a credit of $100,000 for the first quarter of 2019 and a charge of $1.7 million for the fourth quarter of 2019. The impact of the negative economic projections as a result of COVID-19 accounted for most of the first quarter provision. Excluding the effect of the significant deterioration in the economic outlook late in the first quarter, the provision for credit losses which -- was projected to have been approximately $4.1 million.

I want to transition now to direct your attention to the supplemental materials that we released this morning in conjunction with our earnings release. I'm going to cover several pages of that deck, and Phil Mantua is going to comment on our CECL adoption as well as our current capital position. I'm going to walk through a number of slides. I'll reference the page numbers as I do and just make some general comments on the first few and then drive into some of the credit-related material to help you understand a little more of where we stand as we work through this COVID situation.

On Slide 3. Like many companies, we did, took all the actions that a lot did in terms of suspending business-related travel, in-person meetings; the closed branches' lobbies to public access, with the exception of private appointments. We actually consolidated branches that did not include drive-throughs, which is a number of 13 branches. And I'm really pleased with the fact that we were able to transition approximately 85% of our nonbranch personnel to teleworking. That has been a very meaningful number for us, and we continue to serve our clients without hesitation or without disruption. On Slide 4, you can see on the outside -- on the onset of the crisis, we established enhanced personal leave, which we'll continue to evaluate, but we provided 2 weeks of paid time off for those that we're unable to work for reasons related to COVID-19. And we also put into place an appreciation bonus for branch personnel or other members of our staff who were not able to work remotely. And then we continue to actively redeploy employees where we need them. In some cases, that's in the mortgage area, consumer lending, our client service center or call center and those that can help out in the PPP loan process as well. We're routinely communicating throughout the company and keeping people up to speed on what's going on.

On Slide 5. From a client outreach perspective, we launched a special web page to provide the latest updates and resources for our clients to understand what's available to them not only from the bank but in terms of federal relief programs as well as state relief programs. We are working with clients, as you might imagine, on a case-by-case basis to help them through this difficulty. And we have many of our bankers working with clients to help them understand programs available through Maryland, Virginia, D.C. and the Paycheck Protection Program, which I'll hit on here in the next slide. In the bottom of the slide, and we commented on this in the press release, a number of different things that we're doing to help clients in the area of fee waivers.

On Slide 6, we hit some of the statistics. These are as of April 15. In terms of our activity with the Paycheck Protection Program, by the time funding ran out, we had received over 4,500 applications for over $1 billion in requests. As of this date, we have over 2,800 loans that have been registered with the SBA, and we're in the process of documenting and funding those, with over $900 million that will go to businesses that -- with an estimated employee base of about 88,000. In addition to the PPP, we've also provided a number of deferrals or interest-only deferrals for clients. Again, this is as of April 15 and does include our new colleagues from Revere Bank and our new clients from Revere Bank. So we've received, to date as of April 15, over 2,000 requests. We've modified 912 commercial accounts and 79 consumer accounts, for a balance of $845 million. And as you'll see in the next slide there's more to do as it relates to the requests. And then a number of waivers in terms of late charges for both commercial and retail clients.

So I'm going to transition to some specific portfolio data to, hopefully, inform you with a little more detail on certain segments of our credit portfolio as we move through the pandemic.

On Slide 7, it's a busy chart. There's 4 different really elements of information here for you. On the top left is a loan composition just to show the diversity in the portfolio. This includes pro forma Revere but as of 3/31 in terms of that loan composition. If you slide down the page to the bottom left quadrant, it's just to give you a snapshot through April 16, again combined company, in terms of utilization trends just going back to December and through -- month by month through the first quarter, and you can see there's pretty stable utilization both in the commercial space as well as home equity loans. So we have not seen what some may have anticipated as significant drawdowns of existing lines of credit, which I think is a good sign.

Moving across the page to the top right. These are the balances and certain segments of our portfolio on, again, combined portfolio of Revere and Sandy Spring and then the quantifying the modification requests by portfolio. And you can see the percentage of the portfolio. So as of 4/16, we had $1.761 billion of modification requests. You can see on the prior page, as of that same date, we had processed $850 million of those requests. And then the bottom right is -- speaks to delinquency trend that we see in commercial, consumer and mortgage; and no real material movements and obviously falling off. What you see in the decline there is, once a credit is deferred, then they are no longer counted in the delinquency percentage, which is why you see a falloff.

Slide 8 is -- and the next several slides really pull apart of -- a handful of portfolios that may be of interest to you. There certainly are of us as we work with our clients. This is the commercial real estate retail portfolio for the combined company, again, pro forma as of April 1. So we've got nearly a $1 billion portfolio, representing 13.25% of commercial loans. The good news is the average size is $2.6 million from an underwriting perspective. I think these are really good numbers. And these due -- these next 2 bullet points of weighted average loan-to-value and debt service coverage reflect the Sandy Spring portfolio. We have not pulled together the Revere portfolio into that assessment. We don't expect it to be materially different but solid underwriting in market, retail neighborhood centers. You can see at the bottom of Slide 8 I need to make a note of correction. We've refiled this deck. It's -- I believe your deck might see that 26% of the outstanding balances have requested a deferral or interest only. That number is actually 32%. And then a slight number of those have been approved for PPP loans.

Office, very similar information. Nearly 9% of commercial loans, again small average size of slightly over $2 million, very strong metrics in the loan-to-values and debt service coverage, just revealing some of the flexibility that these borrowers have in a difficult market, again in market. And on the same correction, it's 16% of outstanding balances have requested deferrals or interest only as opposed to 12%, I believe, the earlier deck showed. And then modest and very minimal involvement in the PPP program. And then the multifamily on Slide 10, same information, just north of 6% of commercial loans, again a very low average loan size, very good LTVs and coverages, again in market, minimal outside of our primary footprint. And that number of outstanding balances requesting deferrals is 21% compared to what was reported earlier at 18%.

And then the last couple of specific slides are around hospitality, our hotel portfolio at $376 million or 5% of commercial loans, again average size of just under $5 million, a 59% weighted loan-to-value. And this obviously more participation in the PPP program, where 77% have requested deferrals, and about $7 million of PPP loans associated with our hotel portfolio. And then lastly is restaurants with $151 million in outstandings or 2% of commercial loans. Average loan size is slightly over $0.5 million, 70% real estate secured, 56% weighted average loan-to-value. Line usage is in line with overall commercial; and significant participation, as you might imagine, in the Paycheck Protection Program, $65 million from north of 220 client relationships in that space.

So I hope that information is helpful. These are the portfolios that we have zeroed in on and are focusing a great deal of attention and helping our clients through the cycle.

And with that, I'm going to pause and turn it over to Phil and let him talk about CECL and capital.

All right. Thank you, Dan. Good afternoon, everyone. I hope we find everyone well here this afternoon, to those on the call.

As Dan just mentioned, I'm going to take the next few minutes to provide some additional details related to our CECL-driven allowance for credit losses here in the first quarter and for the first time has been adopted. A pickup on Slide 13 here, which has what we would refer to as a waterfall-type presentation of our allowance build for the first quarter of '20. And as you can see, the major component in the build is due to the change in the economic forecast, which is highly dependent on a number of key macroeconomic variables that will be outlined on the next slide.

If you go to Slide 14, we can talk about some of the methodology assumptions. Our CECL methodology uses a Moody's-based forecast which is developed for the local MSA that was released, in this case, by Moody's in early April but effective for conditions that were in place at the end of the first quarter. This baseline forecast integrates the effects of COVID-19 and portrays a peak unemployment rate for our market here of about 5.4% in the second quarter of this year. That's followed by some recovery in the second half of the year and into 2021 with an employment rate that settles in around 4.7% range throughout next year. This local forecast is based on a broader Moody's economic -- national economic forecast that includes an overall national projection for the unemployment rate to peak at actually 8.7% in that same second quarter of this year and then to be maintained at a level of 6% through 2021.

In determining our reasonable and supportable forecast period for purposes of this particular application of CECL, we chose to shorten the time horizon from 2 years to 1 to reflect the uncertainty in the long-term outlook that we have at this time. We did perform calculations of the results using both the 1-year and the 2-year forecast periods, but we then quickly deemed that the difference in the 2 results was considered to be immaterial, so we chose to move forward with a 1-year supportable forecast period. Because of the -- also the aforementioned uncertainty, we also chose to not take into consideration any potential mitigating factors that would be based on what could be perceived as the positive outcome or impact of government programs such as the PPP and others. We just felt that this was the -- most comfortably that this was the best and most conservative stance that we could take in this regard.

If we then look to Slide 15. We've provided some additional granularity, in this case related to the reserve build but depicted by portfolio, where you can see the most significant amount of reserve increase is in the commercial business portfolio, which I assume would not be a big surprise to most, where we added $13.3 million in additional reserves above the level based on our January 1 initial adoption amount.

Finally, as it relates to our capital position on Slide 16. We've provided you with the recent 5-quarter trend of our pertinent capital ratios with some brief explanations below regarding the movement in the ratios over the last 3 quarters. We do feel confident that our capital position is strong and that we are really glad that we bolstered this position with a $175 million sub debt raised during the fourth quarter of last year. I will also note that, although not depicted on the slide, we often have recently performed some stress test analysis against our capital position. We reconstructed a baseline in a severe forecast scenario utilizing the same Moody's baseline forecast incorporated in our CECL calculations and a COVID-based which referred to [S4] economy in a severe case. Having done so, we continue to be confident that we have the capital to carry us through this ongoing situation.

With that, Dan, I will turn it back over to you.

Thank you, Phil.

Just before we move to your questions, I'd like to take a moment to express my sincere appreciation to all of our employees, Sandy Spring Bank, RPJ and our new colleagues from Revere. The way that our people have come together while working remotely to take care of our clients and each other has been nothing short of remarkable. And I know that our clients are grateful for all we've done to keep everyone safe and to help them through these uncertain times. Our clients need an advocate now more than ever, and I can't thank my team enough for being there.

With that, we'll conclude my comments and move to your questions. So Grant, we'll take the first question. (Operator Instructions)

(Operator Instructions) Our first question will come from Steve Comery with G Research.

This is Steve Comery at G Research. I wanted to start off, I really appreciate the composition and CECL disclosures. Those were very helpful just kind of going through the portfolios and then kind of CECL adjustments. I was wondering, though, if anything -- if there's anything you guys can say about what has changed in the way you're looking at the reserve or the potential losses since 3/31. Obviously, we've gotten some additional data since then.

Steve, this is Phil. I don't know that we have really gotten a whole lot of additional information relative to what's going on in our own portfolio at this point to make any further kind of judgments on changes we might make to the reserve.

And the -- Steve, the economic forecast used actually was generated by Moody's...

At the very end, yes.

With -- at the very end of the quarter, looking forward.

Right. In fact, just kind of in that regard kind of background, we probably went through, I don't know, 4 or 5 different iterations of forecasts throughout the quarter as we were deciding how we were going to initially implement CECL to then land on the one that was most recent. But I think I mentioned in my comments that they finally published after the end of the quarter.

Okay. Fair enough. Okay. So I'll switch to Revere then. Basically, you guys are going to get the full quarter of Revere in Q2. Maybe you can help us sort of think about the puts and takes on NII and then where we should look for a starting point there.

Yes, Steve. This is Phil again. I think with Dan's initial comments, we suggested that we were looking at a range of the margin in -- going forward in the 3.25% to 3.30% range. That is inclusive of what our thoughts are on the combined balance sheet between our 2 companies. One of the things that we'll probably, though, or could probably make some adjustments to that would be where we ultimately land related to the marks on their balance sheet, which I think we would believe are going to be somewhat different than what we initially thought they would be back in September for 2 obvious reasons, one being the change in the interest rate environment and then the impact on the -- in the interest rate mark which we expect to be larger, I would say, than what we initially assumed; and then of course, the change in the credit marks that are related to the approach and looking at things in a very, very different economic environment. Now some of that may offset each other to some degree, depending on how that plays out, but that would be the only other thing that we would take into consideration in further adjusting that kind of margin outlook for the remainder of the year. But what Dan suggested does include the combined balance sheets.

Okay, okay. And then one more, if I may. So noninterest deposits, it looks like they were down on an average basis but up pretty materially on a period-end basis. I'm wondering if you guys could provide any insight as to like how you expect to see those balances behave going forward.

Yes. Steve, this is Phil again. I think the biggest driver in that kind of period-end buildup in those demand deposit balances was the typical kind of in-month and in-quarter seasonality related to our [title] company businesses. And so I would say, other than that, you effectively, because of the averages, look to see that the DDA balances were effectively flat, I would say, quarter-over-quarter at this particular point. Given the current situation with the ability for business development that's in the market, I'm not sure we would be looking for a tremendous amount of growth in the DDA base. Nor would we probably be looking for other than existing clients adding to their positions, so to speak, either in the commercial or in the retail area both DDA as well as interest bearing. We've taken steps on the rate side in the -- in this quarter to try to mirror what happens in terms of the moves that the Fed made so that we can try to preserve the margin as much as possible, which has probably put us more in the middle of the pack in this market today for pricing, as opposed to for a fairly long period of time we had positioned ourselves in the top 1/3 of ratepayers, even though I think a lot of our competitors will probably come back to where we are eventually given the protracted amount of time we expect rates to be at -- in these kinds of historic lows.

Yes. And Steve, Dan. The only other comment I'll make is on a temporary basis we'll see a significant amount of DDA increase by virtue of the PPP program because that's how we're funding everything into DDA accounts. But timing will determine whether that's seen in quarter ends or anything like that but certainly within the quarter.

Yes, which is -- which, Steve, also kind of reminds me that within that margin kind of guidance, there's been -- I have not taken anything related to the PPP program into consideration in looking at that range. And I think we know that by its nature, that could end up being a fairly kind of a lumpy result in a quarter-to-quarter basis just because of the great buildup and then potential for forgiveness all within a couple months period.

Our next question will come from Catherine Mealor with KBW.

I also want to thank you for all this disclosure. It was really helpful and a lot more than what we're seeing from everyone. So great job there. And I wanted to start, wanted to follow up on the PPP program and just timing of when you think those fees will hit. How should we kind of think about maybe what percentage you're expecting or modeling to be forgiven and then how much you think is in at the end of the second quarter versus third?

Yes, Catherine. This is Phil. Our current view towards the program and the potential forgiveness level was our -- we've been kind of estimating somewhere in the 25%, maybe 30% range that may not be forgiven. That may be somewhat high, but that's kind of what we are operating under. I think we're also expecting that the fees related to this would be amortized across the spectrum of the maturity of the loans and then would be brought back according to those that would be prepaid at that point of forgiveness. So that's kind of my comment maybe about the margin is, if that's truly the way to handle, it will come back through, I think, to interest income and have a pretty big blip into the margin in that given part of the quarter. But right now, that's about the best that we're kind of operating under because I really don't really know where -- how much of it would be truly forgiven. But that's kind of what we're working with at this point.

Yes. In terms of timing of funding, we're -- that first round of PPP, our fundings will need to all be done or out by, I believe it's, the 23rd or 24th. So it's all -- that funding will come back. It's a little bit uncertain as to exactly how those fees are going to get paid.

Right.

Makes sense. Okay. And then back to the Revere mark, it's can you -- as you're thinking about the purchase accounting marks for this quarter, can you factor in the impact from COVID-19 and increase your credit mark? And how -- I guess we went into this deal thinking it was going to be about -- I think it was about 3% dilutive to book. So that was the higher mark. How are you kind of thinking about maybe a range of what book dilution can look like?

Yes, Catherine. I mean I think first part of your question initially related to the impact of the COVID situation, I think, have to clearly come through into the mark. I think it will also, therefore, impact the [day 2] double count that we all are fond of. And I think that -- that number, depending on in that regard how many of the loans, again given the current environment, are going to get carved out to be PCD versus not, as opposed to what we thought before, I would imagine that number of the PCD components will probably be larger than before. So the day 2 number, in one way, could be smaller because of population loans that are going to be provisioned against right away would be smaller. But at the same time, some of that's going to be offset by, [this year], calculations based under a different, very different, economic environment. I mean I guess we've started looking through trying to get a handle on what those reserve numbers against the Revere portfolio are. I mean our best estimate right now, and this, again, doesn't try to delineate how much is in PCD versus not, would be if you're just looking to reserve against their entire portfolio, we might be adding somewhere between $30 million, $35 million of reserve. I mean that's probably right -- at the moment, it's probably the best I can give you in that regard.

Got it. And included in that is the -- is both the PCD piece and the non-PCD piece. That will be kind of twice.

Yes. Exactly. Yes. Just because right now we're still not sure how much is going to fall into which bucket per se. So if you're looking at it from a broader overall level of reserve against it, that's our best estimate at this point.

Okay. Yes, that's helpful. Okay. And then my last question is just in the slide deck you talk about 2 -- I guess on one page you have the $845 million of payment deferrals and then there's $1.7 billion that -- or I guess $845 million have been approved. $1.7 billion have been requested. So are these -- [can we continue to] talk about the difference? And do you think these are payment deferrals that you think will be granted over the next couple of weeks? And then if that's the case, how does that impact your reservings as you -- I guess really the question is, as loan deferrals continue to increase, how does that play into your incremental reserve over the next couple of quarters?

Yes. Catherine, Dan. The difference -- you hit it. The difference in those 2 numbers is the requests versus those that have been granted. And that, the delta there, which is, what, $900 million or so, is in some form of process and hasn't been determined whether those will be -- those modifications will be granted or not. And in many cases, they will. But I don't think that at this point there's been a determination as to how those modification assets or modified assets are going to be treated differently within our reserve calculation. I think it's just a matter of digging into those from a credit-by-credit basis and determine what do they look like coming out on the other side. So I think there's more work to be done there in terms of the overall reserve-related impact.

(Operator Instructions) Our next question will come from Erik Zwick with Boenning and Scattergood.

Maybe first, I'll just start with a follow-up on that last question. I'm curious if the pace of deferral requests that you're seeing has changed. Was there -- has it sped up or kind of remained constant over that period? Or has it kind of tailed off in recent days or weeks?

I think, obviously, there was probably on the front end a lot of immediate activity, but since that time, it's been pretty stable. And I think a lot of clients have been, as you might imagine, working on making sure they're getting their place in line on the PPP program while at the same time working through the deferral process, but it's been a pretty stable process of requests.

And that's maybe a good segue to kind of the PPP program. So you had about 4,500 applications, 2,800 approved. So what's the status of the remaining 1,700? Were any of those not submitted for any reason? Or were you just waiting for the second round of funding? And -- or do you continue to accept those applications today?

Yes, I'll give you a little more color there. We've got right around 150 folks dedicated to the PPP program, and they did really a Herculean type of effort to get those through the process that we did. The only reason why we didn't do more is funding ran out. And so we've prepared and geared up so that when, hopefully -- I don't know. Maybe the house is already acted, but if the next phase gets approved, we'll work diligently to get those remaining applications through as well as consider additional applications that may come in through our portal. But it's all -- it's really all just about -- all about funding running out.

That makes sense. And do you have any confidence or insight into whether, kind of the remaining applications you have, that there will be enough funding to meet all of those requests?

That's a great question. Our -- this is -- our sense is that many banks across the country have probably spent the last week gearing up for a phase 2. That is making sure that the many applications that they were unable to get through -- so our guess is that, this next phase, the money is probably going to go much faster than the first because we spent a few days everybody kind of gearing up with what seemed like daily changes to what the SBA expected. So if they don't change the program and it's the same application, then it's probably going to go pretty fast. So we're hopeful that those remaining applications in terms of dollars are not as significant as the front end. It's the best we can to quantify that at this point. But so there should be adequate resources. It's just a matter of how quickly they get eaten up.

Understood. And then moving to the tax rate. Is there any additional benefit remaining due to that CARES Act provision? Or would you expect the effective tax rate in 2Q to kind of go back to that 24.5% level?

Erik, this is Phil. I would expect the tax rate to go back to a more normalized level from this point forward.

Okay. And then just last one for me. Trying to think about the run rate of the wealth management line going forward. The 1Q result had the 2 months of RPJ in there, so another month to put in. But maybe just a reminder in terms of how many of the assets under management you have the fees are based off, the market value levels and whether that's an average value or a period-end level. And just kind of thinking about the trajectory of that line item going forward.

Yes, I'm looking for my AUM at the end of the quarter...

Yes. I believe, Erik, I think the AUM declined from -- quarter-to-quarter from somewhere around $4.7 billion to about $4.05 billion. So just in terms of market implications, $650-some million decline in the balance and an offsetting decline in the revenues of about $800,000. And that's netting out -- that's true netting decline relative to market value, for the most part, outside of the additional revenues that were added through RPJ.

Okay. So most of that decline is reflected in those numbers. So obviously, tough to know where equity market values go from here, but if it were to stay flat, you should have another month of RPJ in there. So potentially at least kind of flat, maybe up if the market stays where it is. Obviously, that's the big question.

Yes. I think that's a reasonable way to look at it. As you say, not really knowing exactly what else could potentially happen to those values, I think that's a reasonable way to look at it, yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Schrider for any closing remarks.

Thank you, Grant, and thanks, everyone, for participating with our call today. We welcome your feedback on these calls, so please e-mail your comments to ir@sandyspringbank.com. But most importantly, we continue to hope that you stay safe and healthy as we move through this difficult season of time. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.