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Sandy Spring Bancorp, inc (NASDAQ:SASR)
Q2 2021 Earnings Call
Jul 22, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Sandy Spring Bancorp Earnings Conference Call and Webcast for the Second Quarter of 2021. [Operator Instructions]

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

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thank you and good afternoon everyone. We appreciate you joining us today for our conference call to discuss Sandy Spring Bancorp's performance for the second quarter of 2021. Today, we're also bringing up to date on our response to and regarding the impact from the COVID-19 pandemic. This is Dan Schrider speaking and I'm joined here today by my colleagues, Phil Mantua, Chief Financial Officer; and Aaron Kaslow, General Counsel for Sandy Spring Bancorp.

Today's call is open to all investors, analysts and the media and there is a live webcast of today's call and a replay will be available on our website later today.

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

Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary

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 that 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 uncertainty -- 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.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thank you Aaron, and thank you all again for joining us today to discuss our second quarter financials. We are pleased to report another strong quarter and we are now one year beyond our acquisition of Revere Bank and the benefits that strategic partnership continue to contribute to our overall performance. And the same goes for our acquisition of Rembert Pendleton Jackson or RPJ. Quarter-after-quarter our results validate that adding RPJ to the Sandy Spring Bank family was the right move. And across our entire Wealth Group, including RPJ, West Financial Services and Sandy Spring Trust, we've seen impressive year-over-year growth.

Overall, our company is in a great position. And let's start by breaking down some of the highlights from the press release and then Phil and I will talk you through the supplemental information we also issued today. Today, we reported net income of $57.3 million or $1.19 per diluted share for the quarter ended June 30, 2021. This quarter's result compares to net loss of $14.3 million or $0.31 per diluted share for the second quarter of 2020 and net income of $75.5 million or $1.58 per diluted share for the first quarter of 2021. Core earnings were $55.1 million or $1.16 per diluted share compared to $51.9 million or $1.10 per diluted share for the quarter ended June 30 of last year and $56.9 million or $1.20 per diluted share for the quarter ended March 31 of 2021.

The provision for credit losses was a credit of $4.2 million compared to a credit of $34.7 million in the linked first quarter. The current and prior quarters provision credits were primarily the result of an improved economic outlook, including a decline in the forecasted unemployment rate. Phil will talk you through the provision credit in more detail when we review the supplemental materials.

Shifting to the balance sheet. Total assets declined 3% to $12.9 billion compared to $13.3 billion at June 30, 2020. This decline was primarily the result of the net reduction of $179.2 million in loans originated under the Paycheck Protection Program and the $251.5 million decline in the residential mortgage loan portfolio, given the robust refinance activity. Excluding PPP, total loan growth compared to the linked-quarter was 1%, with 2% organic growth within the commercial book. Year-over-year we saw non-PPP commercial loan growth of 4% and commercial real estate loan growth was 6%. We continue to operate in the season of lower commercial line utilization higher run-off and significant borrower liquidity, at the same time we have momentum as we look into the third and fourth quarter.

For instance, quarter-over-quarter gross commercial production increased $300 million or 61% and funded production increased $214 million or 75% and our pipeline looks equally strong heading into the third quarter. It's important to note that the higher run-off, we experienced in the first and into the second quarter, was driven primarily by success achieved by our clients as well as traditional refinancing into life company markets, but not the result of the loss of client relationships.

On the deposit side of things. Deposits increased 2% during the linked-quarter, driven by 6% growth in non-interest bearing deposits. Deposit growth was 8% during the past 12 months as non-interest bearing deposits grew 16% and interest-bearing deposits grew by 3%. This growth was primarily driven by PPP and to a lesser extent growth in core deposit relationships. PPP related deposit retention continues to be strong and we estimate that approximately $990 million or 62% of the combined round one and round two PPP deposits are still on the balance sheet, with 81% of these deposits still being retained in customer checking accounts.

Non-interest income increased 15% or $3.3 million compared to the prior year quarter as wealth management income grew 20% and service charges on deposit accounts increased 62%. Bank card fees grew 42% compared to the prior year, given increased transaction volume. Other non-interest income also grew significantly as a result of the full payoff of a purchased credit deteriorated loan as well as contractual vendor incentives.

Wealth management income increased $3.3 million year-over-year as a result of the first quarter of 2020 acquisition of RPJ and $118 million growth in assets under management across our three wealth franchises. We have exceptional professionals and industry experts in RPJ, West Financial Services and Sandy Spring Trust and they continue to attract new clients, deepen existing relationships and deliver sophisticated service in this highly competitive market.

While mortgage banking income in the first two quarters increased $4.5 million compared to the same period last year, mortgage banking income decreased from $10.2 million to $5.8 million compared to the linked-quarter. The overall level of mortgage banking income in the second quarter should hold up as we approach the second half of this year.

We are extremely pleased with our margin this quarter. The net interest margin was 3.63% for the second quarter of 2021 compared to 3.47% for the same quarter of 2020 and 3.56% for the first quarter of 2021. Excluding the impact of the amortization of fair value marks derived from acquisitions, the current quarter's net interest margin would have been 3.60% compared to 3.19% for the second quarter of 2020 and 3.46% for the first quarter of 2021. The strength of our margin continues to be driven by our ability to effectively manage our cost of funds as our core margin adjusted for PPP and fair value impacts expanded on a linked-quarter basis from 3.42% to 3.49%. This was supported by a pay-off of all remaining FHLB advances during the quarter as well.

Non-interest expense decreased $22.5 million or 26% compared to the prior year quarter. The prior year's quarter included $22.5 million in M&A expense as well as $5.9 million in prepayment penalties from the liquidation of acquired FHLB borrowings. These reductions from the prior year more than offset this quarter's $4.7 million increase in salary and benefit expenses, which was driven by staffing increases and annual merit awards that occurred this quarter.

The non-GAAP efficiency ratio was 45.36% for the current quarter compared to 43.85% for the second quarter of 2020 and 42.65% for the first quarter of 2021. This modest increase in the efficiency ratio from the second quarter of the prior year was a result of the 11% growth in non-GAAP expense outpacing the 8% growth in non-GAAP revenue.

Lower levels of gain on mortgage sales coupled with strategic initiative based increases in personnel costs and technology related consulting fees drove the linked-quarter increase in the efficiency ratio. Looking ahead, we continue to manage this expense to revenue metric to a targeted range of 48% to 50%, as PPP revenues eventually abate and we continue to make strategic investments in people and technology.

I want to provide you a little more color on what's playing into these expenses. We are making strategic staffing and technology investments to build a platform for future growth, facilitate an improved client experience and help deepen client relationships. Specifically, we are building an omnichannel digital platform with back-base and implementing an enterprisewide integration layer with a company called MuleSoft, which enables to design and build of APIs to support the back-based project. We are also creating a holistic data infrastructure and all of this is being done with Salesforce.com serving as our main hub for everything we do. Through all this work we will achieve a more seamless integration with new technologies and we'll have the flexibility to move to a new core system should we decide to make that type of move. At this stage we are ramping up on the staffing and consulting front to support this work and we'll continue to update you in the future on our progress.

Shifting to credit quality. Non-performing loans decreased from 94 basis points in the linked-quarter to 93 basis points and increased from -- and increased from 77 basis points in the second quarter of the prior year. Non-performing loans totaled $94.3 million compared to $98.7 million for the first quarter of the year. New loans placed on non-accrual during the current quarter were $1.5 million compared to $27.3 million for the prior year quarter and $421,000 for the first quarter of 2021. Loans in non-accrual status at quarter-end included a few large borrowings within the hospitality sector with an aggregate balance of just under $41 million. These large collateral dependent loans had individual reserves of $5.7 million at quarter end. And we recorded net charge-offs of $2.2 million for the second quarter of 2021 compared to net recoveries of $367,000 for the second quarter of 2020 and net charge-offs of $300,000 for the first quarter of 2021. The increase was primarily a result of the charge-off of an acquired pre-pandemic problem credit. The allowance for credit losses was $124 million or 1.23% of outstanding loans and 131% of non-performing loans, compared to $130.4 million or 1.25% of outstanding loans and 132% of non-performing loans at the linked-quarter. Excluding PPP, the allowance for credit losses as a percentage of total loans outstanding decreased to 1.34% compared to 1.43% at the linked-quarter. All in all, credit quality has remained very solid and the team has done a terrific job managing through the last several quarters.

As a result of the accumulated earnings over the preceding 12 months, tangible common equity increased to $1.2 billion or 9.28% of tangible assets at June 30, 2021, compared to $983.4 million or 7.63% at June 30, 2020. Excluding the impact of the PPP program from tangible assets at June 30, the tangible common equity ratio would be 9.98%.

Given the strength of our earnings and capital position, we are likely to be active under our share repurchase program in the coming months and we also continue to build relationships with both banks and non-banks as part of our M&A strategy. At June 30, the company had total risk based capital ratio of 15.82%, common equity tier 1 risk-based capital ratio of 12.5%, tier one risk-based capital ratio of 12.5% and a tier 1 leverage ratio of 9.5%.

We will now turn to the supplemental information, we also issued this morning. On Slide 2 you can see that loans with payment accommodations as of June 30 totaled $216 million resulting in 2% of our loan portfolio receiving accommodations, compared to 3% in the linked-quarter. As we noted in the press release 93% of the loans that have been granted modifications or deferrals due to pandemic related financial stress have returned to their original payment plans.

Moving to Slide 3, we have detailed specific industry information which we've updated and shared in the past five quarters. Outstanding balances for each segment and the loans and payment accommodations are as of June 30. On Slides 4 and 5, we broken out where we stand on forgiveness for rounds one and two of the program. As of July 9, 86% of round one loans have applied for forgiveness and 99.6% of all forgiveness applications submitted to the SBA have received forgiveness. On Slide 5, you can see we're in the early stages of round two forgiveness and we expect those efforts to continue throughout this calendar year.

Now I'm going to take a break and turn it over to Phil, who can talk you through CECL and our capital position.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Thanks, Dan. Good afternoon everyone. I'm going to pick up on Slide number 6, where we have our waterfall representation of the movement in our allowance for the second quarter of 2021, which is broken down into the components that reflect the key drivers of the change during the quarter. The change over the course of the current quarter was primarily driven by the reduction in the projected near term level of the unemployment rate, which as you know is a key economic factor in our CECL methodology. This element of reserve release was offset this quarter by an increase due to adjustments to certain qualitative factors and also an increase of $3.2 million in specific reserves.

On Slide 7 is comparison of our current and more recent economic forecast variables. Our CECL methodology continues to use Moody's baseline forecast that for the second quarter was a version that was released by Moody's on June 21. This baseline forecast integrate the effects of COVID-19 and portrays an unemployment rate for our local market that is essentially are in peak and ultimately recovers to a level of 3.12% in the second quarter of 2023, which as protected unemployment level that would continue to improve but at a slower pace than in previous quarters. Additionally, the projected levels of year-over-year growth and business bankruptcies and the changes in home price Index has presented contribute to the provision credit for the quarter.

Our key -- our key macroeconomic variables are further outlined on Slide 8. In determining our reasonable and supportable forecast period, we continue to use a two-year time horizon to reflect less uncertainty in the long-term outlook at this time. Similar to the approach taken in previous quarters, we continue to not take into consideration any potential mitigating factors based on what could be perceived as a positive outcome or impact of government programs such as PPP etc. We feel very comfortable that this continues to be the right conservative stance. Conversely, we have chosen to continue to include an additional qualitative factor related to concentration risk and we believe could exist in certain higher risk industry segments of our portfolio.

Slide 9 provides some additional granularity related to our reserve from a portfolio view, where you can see that all of our major categories of commercial loans with the exception of AD&C reflect the continuing trend of reserve release. We should note that 1.26% of reserve reflected here for commercial business loans includes PPP loans in the balance, although there is no reserve required on those loans. As illustrated in the footnote, at the bottom of the slide, when adjusting the balance to exclude PPP loans outstanding, the reserve on our commercial business segment would be 2.26% and our total reserve would be 1.34% of our total loans.

Finally on Slide 10 is a trend of our prudent capital ratios with some brief explanations regarding the treatment of certain items and their impact on the resulted ratios. Included in those comments is an adjusted tangible equity to tangible assets to reflect the impact of PPP loans on the current measure. We feel confident about our capital position as all of our metrics continue to improve as a result of the strength of our earnings this quarter. We've also recently updated our capital stress tests, we have constructed our baseline severe forecast scenarios utilizing the same Moody's baseline forecast incorporated in our CECL calculations and a COVID based S4 economy in a severe case. We view our overall capital position is strong, which allows us to consider the various capital deployment strategies, some of which Dan mentioned in some of his earlier comments. Dan, back to you.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thank you, Phil. Beyond our financials, I just have a few other updates to share with you today. Last quarter, I reported that we were beginning to welcome more employees and clients back to our branches and offices, and those efforts are well underway. Nearly two months ago, our branches fully open to our clients and no appointment is needed to access our more than 60 branch locations. I should note that our clients came to appreciate our enhanced drive through capabilities during the pandemic, so those expanded options will continue to be available at all of our drive-thru locations. Non-branch personnel is also back in the office at least 50% of the time and we will expand in person operations after the Labor Day weekend. However, we will continue to offer our employees increased flexibility and remote work options.

Sandy Spring also continues to earn local and national recognitions. For the third year in a row Forbes named Sandy Spring Bank, one of America's Best in State Banks and the number one bank in Maryland. The Washington Post, also named us Top Workplace for the third consecutive year. These recognitions and our strong financial results are only made possible by our remarkable employees, the majority of whom are shareholders as well. So on behalf of the executive leadership team, thank you to all of our people for your tremendous contributions to the success of our company and our culture, and we look forward to continuing to come together in finishing 2021 strong.

This concludes our general comments today and we will now move to your questions. So, operator, we'll take the question, if you can please identify your name and company affiliation as you come on the line, that will be great.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Casey Whitman of Piper Sandler. Please go ahead.

Casey Whitman -- Piper Sandler -- Analyst

Hey, good afternoon.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Good afternoon Casey.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Hi Casey.

Casey Whitman -- Piper Sandler -- Analyst

Hi. Phil, any update, first just the range of the core margin over maybe the back half of the year from the 3.49% or so range that you had this quarter?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yes, I would probably give you that core margins most likely going to compress a bit here as we move through the remaining half of the year, probably 3.43%, 3.45% range is where I would put the true core. And we're getting to a point where the fair value piece of things is only a basis point or two difference anyway. So we're going to be pretty close to -- absent the PPP impacts from quarter to quarter will be pretty close to reporting that kind of a core as we move forward anyway, but I would go 3.40% to 3.45%.

Casey Whitman -- Piper Sandler -- Analyst

Okay. And we saw a big jump in the demand deposit -- non-interest bearing deposit this quarter. But what are sort of your bigger picture thoughts on how long those deposits stay with you or how are you thinking about liquidity in back half of the year and how that plays into the margin commentary?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, Casey I think that first of all, as Dan mentioned in his comments that we're still carrying a significant amount of PPP related deposits. And in our internal projections -- well, first of all, we're at 61% or 62% of what we think was the total to begin with today. Our internal projection is that always had that finally bottoming out and maybe 30% to 35% of the originally -- original oriented deposits from those originations. And so you could see some of that just naturally if our projections [Indecipherable] come down could eat into the liquidity position. I mean, we certainly know that we're sitting on a much larger kind of cash and interest-bearing balance predominantly with the Fed here at the end of the quarter than we normally would. I think it's probably about $600 million, about 4% of assets, which in comparison to lot of other banks, I believe is still fairly small relative to the size of our balance sheet. But I think that our first deployment of that over time here through the end of the year would be through additional loan growth that I'm sure we'll talk about here before we're done. As well as we do, we are sitting on about 7% of our total deposits in brokered, of which about $300 million of that is brokered CDs and about $250 million of that is scheduled to mature in the next six months. So we've got some different levers there to look at is that how to absorb that excess liquidity here for the rest of the year.

Casey Whitman -- Piper Sandler -- Analyst

Got it. Do you have any idea how much that $250 million pass off-hand?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

That average about 7 basis points. So it's fairly inexpensive to begin with, but nevertheless, throughout -- it's somewhere -- it ranges up to about 10 basis points for any one of those blocks.

Casey Whitman -- Piper Sandler -- Analyst

Okay, understood. I'll just turn the conversation quickly before I hop off to fees. First, I was just wondering, can you remind us the expected impact of Durbin on the bank card fees and when that is going to occur for you guys?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, it doesn't actually occur for us now until next year this time. And I think our estimation on that is $3.5 million if I'm not mistaken, roughly.

Casey Whitman -- Piper Sandler -- Analyst

Okay. All right, thank you. I'd let someone else hop on.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Thanks, Casey.

Operator

The next question comes from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor -- KBW -- Analyst

Thanks. Good afternoon.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Hi, Catherine.

Catherine Mealor -- KBW -- Analyst

Phil you teed up the loan growth conversation, so I'll start there and just wanted to get your thoughts on where you think loan growth can improve to in the back half of the year?

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Yeah, Kate [Phonetic], this is Dan, good afternoon. The -- what we saw in the second quarter and I'm focusing my comments predominantly on the commercial book was, as I said in my prepared remarks, we were -- our production was about $300 million north of where we were in the first quarter and to put numbers on that taken it from about $490 million to over $790 million in production. And our pipeline going into the third quarter, I should point to a pretty consistent level of production. So all of that to say is we are still feel pretty good about that mid single to a little north of that single-digit growth in the commercial book, just based on the contraction we saw in the first quarter. The only other thing that would -- that could modify the overall loan growth picture is if court along the lines of what we do with some of this excess liquidity, we could choose to hold some additional mortgages on balance sheet and that's probably something likely that we would do for the remainder of the year, which would -- we'd like to see our mortgage balances kind of get back to where they were, which would allow that commercial growth to make a little bit of a greater impact for us.

Catherine Mealor -- KBW -- Analyst

Right. And my follow-up question is just kind of how you're thinking about the M&A landscape, there was seen a number of acquisitions in -- smaller in the southeastern space and just how you're thinking about M&A potential for you all in this environment?

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

No, we're certainly thinking about it and as well as building continuing to build relationships with those that we think might be good matches for us. So we're certainly not on the sidelines and we'll look at transactions that we think will benefit the franchise and further our strategic goals. I think our -- as we probably mentioned before, I mean, our kind of circle geographically is, it probably goes north into southern PA down through Richmond West into the Shenandoah Valley and then all the way to the Atlantic. And that's kind of the immediate area that we are focused on building relationships. And -- but M&A is going to be a part of what we do as it has been the last few years.

Catherine Mealor -- KBW -- Analyst

Great. And that's all I've got. Very straightforward quarter. Thank you.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thanks, Catherine.

Operator

The next question comes from Brody Preston of Stephens, Inc. Please go ahead.

Brody Preston -- Stephens, Inc. -- Analyst

Hey, good afternoon, everyone.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Hey, Brody.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Hey, Brody.

Brody Preston -- Stephens, Inc. -- Analyst

Hey. I was just hoping to touch on, just maybe utilization rates, Dan you mentioned that it remain sort of near historical low levels. I just wanted to get a sense for what that utilization rate percentages and where that stacks up relative to this time in 2019?

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Sure. We are -- give you an idea of where we are, as I pull out my data here because I don't want to misquote. So on the commercial side, end of 12/31 of '20, we were at a 26% utilization rate. That dropped to 23% at the end of the first quarter and then just slightly under 23% as of 6/30. And to give you some context, normal for us and that tends to range anywhere from the 35% to 40% range. So that's the big delta is between kind of what's normal, and it's drifted down a bit here in the last couple of quarters.

Brody Preston -- Stephens, Inc. -- Analyst

Got it. Okay, thank you for that. And then, I did want to ask just on -- you mentioned some of the investments that you've made on the expense side. And so I guess, just you mentioned the MuleSoft partnership. And so I want to just ask about the nature of that partnership. Are they helping -- are they helping you build APIs to allow other FinTechs or BaaS platforms to sort of connect to you? Or is it -- or is like MuleSoft the BaaS provider with its own set of APIs that's allowing you to partner with FinTechs just kind of help me sort of understand the partnership.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Yeah. Yeah, good, great question. MuleSoft is actually building what we refer to as the integration layer. And then will work with us to build the APIs to allow that connectivity to be much more effective than what it is today, but they're actually the integration layer company for us.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, got it. And then I guess just maybe on that. So is this kind of $63 million or so in core expenses that the run rate from which we should build off of moving forward or will there be some ebbs and flows there, Phil?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah. Brody, I would say there'll be some ebbs and flows. And I think we may have a talked about this in the last quarter in terms of just looking down the road, and kind of year-over-year growth in expenses, taking the current quarter and annualizing it and looking for it to grow 4% to 5% from there. It won't be even. It's just because some of the spends will be in certain periods and some things will get capitalized and some things won't but and then reabsorbed into the run rate. So I would use that as a general view toward the future here in terms of what that number will look like in total expenses. And it probably continue to be growth in those areas. We just reported as well related to both personnel cost as well as consulting professional type fees and things that are all kicked together in support of these varying initiatives.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, understood. And then just on the loan portfolio. Could you remind us what percent of the loan portfolio is floating rate and then what percent of that floating rate portfolio is currently at floor levels?

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

I think the answer to the first part of the question, continue to be somewhere between 25% and 30% of the total portfolio. I don't know that I can tell you exactly what percentage is currently residing at the floor, I'd have to research that for you to give you the appropriate answer, Brody.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, understood. And then just one last one, maybe for Dan. Just wanted to get a sense from you guys as to how you're thinking about permanently repositioning the deposit base here. So last cycle, you had an above average deposit beta and a big chunk of that was due to the time deposits which you've run down here similar to other banks. But are you also kind of thinking about shifting away from money market exposure? Or how do you kind of get customers to maybe may stay more in transaction-oriented accounts as opposed to money markets because the money markets can be pretty high beta as well.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Yeah, I think that -- I think the money market piece of the business will always be part of what we do, given our kind of the demographics of this market particularly in the retail book. But I think the strategic answer to your question is our ability to continue to drive small business and commercial relationships and that's where we've got a tremendous amount of emphasis today and we know that that's by far the most valuable piece of what we can create from a deposit book. And the teams is doing a solid job of that and -- but that's where we would be focusing our energy.

Brody Preston -- Stephens, Inc. -- Analyst

Great. Thank you all for taking my questions. I appreciate it.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thank you, Brody.

Operator

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

Erik Zwick -- Boenning & Scattergood. -- Analyst

Good afternoon, guys.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Hi, Erik.

Erik Zwick -- Boenning & Scattergood. -- Analyst

First, I just want to check and make sure I heard something right from the prepared comments. Did you indicate that you thought the second quarter run rate for the mortgage revenue was kind of a good base to use for the second half of the year?

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

You did hear that correctly. Yeah.

Erik Zwick -- Boenning & Scattergood. -- Analyst

Okay, great. Thank you. And then in terms of the PPP loans with regard to the Round one, do you have the dollar figure, the remaining fees on that portfolio? I may have missed that. I don't see it on the slide.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

I don't -- Erik, this is Phil. I don't believe that that particular number was on there, but given the term of those loans and how close we are to working through that, there's probably only a couple of million dollars left of the fees that are related to Round one PPP loans. The majority of the fees that are still yet to be recognized related to Round two. And I think that number is in our deferred account is around $19 million.

Erik Zwick -- Boenning & Scattergood. -- Analyst

Okay, that's helpful. I appreciate it. And then I'm just curious as I was looking on Slide 6 at the waterfall table and kind of curious about the $3.5 million build for the change in qualitative factors. Could you just provide any color to what changed within those factors? And then I think, Phil, you may have also said that you've added a new additional qualitative factor to the model and any color on that as well, if I heard that correctly.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Yeah, actually, Erik, we had added or adjusted some of those qualitative factors a couple of quarters ago, that were related to trying to recognize the -- the additional potential risk in predominantly the segments like the hotel industry or whatever where we felt there were higher risk levels of things relative to those. So we kind of beefed up those factors around certain industry segments. But we really didn't add that this quarter, we had added that before. So it might have sounded like we had here, but that wasn't the case. I think the increase in the actual factors this quarter were due to some other concentration levels that hit us in a couple of places. I think might have been a couple of credits that popped through and the acquisition evolve and construction portfolio, if I'm not mistaken, that bumped up the basis points that we assigned into that area relative to the size of that portfolio to the overall portfolio into the way we look at it relative to capital. So that was really the genesis of that additional piece this quarter.

Erik Zwick -- Boenning & Scattergood. -- Analyst

That's helpful. Thanks, Dan. And then just last one for me kind of tying back with some of the earlier questioning on the loans and what growth may look like in the back half of the year? And I appreciate the color on the pipeline. Just curious if maybe you could add a little bit on the composition of the pipeline between kind of commercial and consumer from that perspective?

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Yeah. Everything I talked about with regard to pipeline being level is all -- was all commercially related. The other kind of main consumer loan outside of mortgage that we generate are on the home equity side. And as you might imagine given refinance activity that portfolio has been under pressure from a balance standpoint. So the great pipeline -- pipeline going into the third quarter is really level with what it was going into the second quarter, give you -- and so still good momentum.

Erik Zwick -- Boenning & Scattergood. -- Analyst

That's helpful. Thanks for taking my questions this afternoon.

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Thanks, Erik.

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Thanks, Erik.

Operator

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

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Great. Thank you. And thanks everyone for taking the time to participate this afternoon. We love to get your feedback on these calls, so you can email your comments to ir@sandyspringbank.com. Hope you all have a great afternoon.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Daniel J. Schrider -- Vice Chairman, President and Chief Executive Officer

Aaron M. Kaslow -- Executive Vice President, General Counsel and Secretary

Philip J. Mantua -- Executive Vice President and Chief Financial Officer of Bancorp and Bank

Casey Whitman -- Piper Sandler -- Analyst

Catherine Mealor -- KBW -- Analyst

Brody Preston -- Stephens, Inc. -- Analyst

Erik Zwick -- Boenning & Scattergood. -- Analyst

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