Q4 2023 Sandy Spring Bancorp Inc Earnings Call

Presentation

Operator

Good afternoon. Thank you for attending today's Sandy Spring Bancorp, Inc. earnings conference call and webcast for the fourth quarter of 2023. My name is Megan, and I'll be your moderator for today's call. (Operator Instructions)
I would now like to pass the conference over to Daniel J. Schrider, CEO and President of Sandy Spring Bancorp. Daniel, please go ahead.

Thank you, Megan, and good afternoon, everyone. Thank you for joining our call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2023 this is Dan Schrider, and I'm joined here by my colleagues, Phil Mantua, our Chief Financial Officer; and Aaron Kaslow, General Counsel and Chief Administrative Officer. Today's call is open to all investors, analysts, and the media. There is a live webcast of today's call, and a replay will be available on our website later today.
Before we get started covering highlights from the quarter and taking your questions. Aaron will give the customary safe harbor statement. Aaron?

Thank you, Dan, and 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, 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 to the company's past results of operations do not necessarily indicate its future results.

Thanks, Aaron. And once again, good afternoon, everyone, and thank you for joining today's call. I have to admit I'm pleased to wrap up 2023. Given the challenges our industry faced after the bank failures last spring, which resulted in rapid and significant increases to funding costs, we swiftly and effectively responded to our clients' needs. Despite the year's challenges, there were definitely some positive outcomes.
We put an immediate emphasis on reaching out to our clients first to allay any fears, answer their questions, and then ultimately, find solutions to meet their needs. The results were inspiring and revealed the depth of loyalty to our company and the port of importance of personal connections. Over the past several quarters, we have successfully grown core deposits, stabilizing our deposit base and reducing our reliance on noncore funding. At the same time, we've improved our liquidity position and expanded both our retail and commercial client base over the past year the year also included a shift in focus and strategies aimed at diversifying the asset base by growing more small business and C&I relationships and deemphasizing the level of growth in our commercial real estate portfolio. In 2023, we also implemented several new or improved technologies. These enhancements provide clients with greater access to our products and services and give us new ways to deepen existing relationships and develop new ones through digital offerings and digital fulfillment. We're excited about how these new technologies will continue to enhance our capabilities and client delivery as we progress through 2024.
So with that, let's jump right into the financial results. Today, we reported net income of $26.1 million, or $0.58 per diluted common share, for the quarter ended December 31, 2023, compared to net income of $20.7 million, or $0.46 per diluted common share, for the third quarter of 2023 and $34 million, or $0.76 per diluted common share, for the fourth quarter of 2022. The increase in the current quarter's net income compared to the linked quarter was a result of a lower provision for credit losses, coupled with lower noninterest expense, partially offset by lower net interest income and non-interest income the current quarter's core earnings were $27.1 million, or $0.6 per diluted common share, compared to $27.8 million or $0.62 per diluted common share for the quarter ended September 30 and $35.3 million or $0.79 per diluted common share for the quarter ended December 31, 2022.
Core earnings were positively affected by lower provision for credit losses, but it was offset by lower revenues and an increase in non-interest expense after adjusting for the pension settlement expense incurred in the third quarter. I want to pause here and dig into the movement in our credit quality metrics as well as the allowance for credit losses from ratios relating to nonperforming loans fell during the quarter due to our decision to move to commercial credit relationships to nonaccrual. We've been working closely with both relationships over several quarters as they've migrated towards this current status. No surprises here and our decisions reflect our strong credit risk management practices. The ratio of nonperforming loans to total loans was 81 basis points compared to 46 basis points last quarter and 35 basis points at the prior year quarter. As mentioned, the current quarter's increase in nonperforming loans was related to two investor commercial relationships, one within the custodial care industry and another with a multi-family residential property. These two relationships accounted for $42.4 million of the total $47.9 million of loans placed on nonaccrual during the quarter. The custodial care relationship required an individual reserve during the current quarter. This is a unique circumstance due to the untimely passing of the operator however, we are working with other principles to sell the underlying properties.
As for the multifamily property, we established an individual reserve earlier this year due to challenges with leasing up and generating adequate cash flow to support the loan. The borrower has been extremely cooperative and we will continue to work together towards a resolution. We believe that in both cases, we are adequately reserved. The provision for credit losses attributed to the funded loan portfolio for the current quarter was a credit of $2.6 million compared to a charge of $3.2 million in the previous quarter and $7.9 million in the prior-year quarter. The reduction in the provision during the quarter was a result of a change in the composition of the loan portfolio, a decline in the probability of an economic recession and updates to other qualitative adjustments used within the reserve calculation. These factors were partially offset by the aforementioned individual reserve on the investor real estate loan designated as nonaccrual during the current quarter, coupled with a slight deterioration in other relevant economic factors in the economic forecast In addition, we reduced the reserve for unfunded commitments by $900,000, a result of higher utilization rates on lines of credit. Total net recoveries for the current quarter amounted to $100,000 compared to net charge-offs of the same amount for the linked quarter and $100,000 of net recoveries for the fourth quarter of 2022. Overall the allowance for credit losses was $120.9 million or 1.06% of outstanding loans and 132% of nonperforming loans compared to $123.4 million or 1.09% of outstanding loans and 238% of nonperforming loans at the end of the previous quarter and $136.2 million or 1.2% of outstanding loans and 346% of nonperforming loans at the end of the fourth quarter of 2022.
Shifting to the balance sheet, total assets remained stable at $14 billion compared to $14.1 billion at September 30, total loans increased by $66.7 million or 1% to $11.4 billion at December 31, 2023, compared to $11.3 billion at September 30. Commercial real estate and business loans increased $62 million quarter over quarter due to the $50.3 million and $50.2 million growth in the AD&C and commercial business loan and lines portfolios, respectively. However, this growth was partially offset by a $33.3 million decline in the investor commercial real estate loan portfolio quarter over quarter, total mortgage loan portfolio remained relatively unchanged.
Commercial loan production totaled $245 million, yielding $153 million in funded production for the quarter. And this compares to commercial loan production of $323 million, yielding $96 million in funded production in the third quarter of the year, we expect funded loan production to fall between $150 million and $250 million per quarter over the next two quarters, given the stability we've achieved in the core deposit base, we're open to more lending activity that achieves profitability targets.
Shifting to the supplemental deck, we provided pages 22 through 24 show more detail on the composition of our loan portfolios, data related specific to specific property types in our commercial real estate portfolio and specific commercial real estate composition in the urban markets of DC and Baltimore new this quarter.
Beginning with slide 25 and ending with slide 29, you'll find details related to our retail multifamily office, Flex flash warehouse and hotel portfolios. This slide details the number of loans, clients and balances, a breakdown of fixed and floating rate, the timing of maturities or interest rate adjustments, delinquency status, the number and balances of nonperforming loans and the geographic breakdown of the portfolio, we thought it would be helpful to provide some more detail on these sub portfolios, given some of your questions in prior calls, as you can see as you review these slides were lending in our primary market that we know well. We have one delinquent credit among all reference portfolios and just a handful of nonperforming loans that have been subject to early identification and appropriately reserved. Importantly, we are not seeing a theme emerging in any single portfolio. We feel very good with regard to our overall credit quality and our ability to manage this thing.
On the deposit side, total deposits decreased $154.5 million or 1% to $11 billion compared to $11.2 billion at September 30. During this period, non-interest bearing and interest bearing deposits declined $99.7 million and $54.7 million, respectively. The decline in non-interest bearing deposit categories was driven by lower balances and small business and title company commercial checking accounts. The decrease in interest-bearing deposits was due to a $253.1 million reduction in brokered time deposits and $111.9 million decrease in money market accounts. These declines were partially offset by $265.9 million in growth in our savings deposits. Excluding broker deposits, total deposits increased by $85.5 million or 1% quarter over quarter and represented 92% of total deposits compared to 90% at the linked quarter, reflecting continued stability of the core deposit base and reduced reliance on wholesale funding sources. The loan to deposit ratio. The net debt increased to 103% at December 31 from 101% at September 30. Total uninsured deposits at December 31 were approximately 34% of total deposits.
Slide 17 of the supplemental deck provides more color on our commercial deposit portfolio. That portfolio represents 57% of the core deposit base, the majority of which is in the combination of non-interest bearing and money market accounts. Overall, you can see that we have an average length of relationship of nine years. The portfolio is well diversified with no concentration in any single industry or client.
Likewise, on slide 19 of the supplemental deck, you can see the breakdown of our retail deposit book with an average length of 11.4 years. This portfolio represents 43% of our core deposit base with no single client accounting for more than 2% of total deposits. Total borrowings were unchanged across all categories at December 31st compared to the previous quarter and at December 31, contingent liquidity, which consists of available FHLB borrowings for Fed funds funds through the Federal Reserve's discount window and the bank term funding loan program as well as excess cash and unpledged investment securities totaled $6 billion or 162% of uninsured deposits.
Noninterest income for the fourth quarter of 2023 decreased by 5% or $800,000 compared to the linked quarter and grew by 16% or $2.3 million compared to the prior year quarter. The quarter-over-quarter decrease was driven by lower income from mortgage banking activities due to lower sales volume and partially offset by an increase in Bali income.
Income from mortgage banking activities decreased $890,000 compared to the linked quarter due to a reduction in origination activity at the same time, total mortgage loans grew $42 million as loans moved out of construction and into the perm portfolio. Originations have been impacted as a result of the interest rate environment, which continues to dampen home sales and refinancing activity. As we look forward, future levels of mortgage gaming revenue is expected to be between $1.1 million and $1.3 million in the first quarter and between $1.5 million and $2 million in the second quarter due to typical spring seasonality. Wealth management income decreased $172,000 to $9.2 million and assets under management at quarter end totaled $6 billion, representing an 8.4% increase since September 30. For the fourth quarter of 2023. The net interest margin was 2.45% compared to 2.55% for the third quarter and 3.26% for the fourth quarter of 2022. This decline was a result of high market rates, competition for deposits and clients moving excess funds out of noninterest-bearing accounts compared to the linked quarter, the rate paid on interest-bearing liabilities rose 25 basis points, while the yield on interest-earning assets increased nine basis points, resulting in the quarterly margin compression of 10 basis points, two basis points of which was related to the recognition of the $42.7 million in nonaccrual loans late in the quarter and the corresponding adjustment of interest income anticipating three Fed rate cuts during the second half of 2024. We expect the margin to bottom out in the first quarter in the low to 40s and then to rebound in the second quarter and throughout the remainder of the year by seven to 10 basis points per quarter. We would also expect the Fed to continue rate cuts throughout 2025, which would allow the margin to move above 3% during the second half of next year.
Noninterest expense for the fourth quarter decreased $5.3 million or 7% compared to the linked quarter and $2.8 million or 4% compared to the prior year quarter. The previous quarter included $8.2 million in pension settlement expense related to the termination of the company's pension plan. Excluding the pension settlement costs, total noninterest expense increased by $2.8 million or 4% for the shared last quarter, we expected our expense run rate to include additional spending during the fourth quarter related to our technology initiatives, including higher professional and consulting fees for 2024 we expect that the overall expense growth for the year to be essentially flat to 2023 levels once you adjust 2023 amounts for the pension termination costs and severance paid, which together were approximately $10 million. The non-GAAP efficiency ratio was 66 point 16% for the fourth quarter compared to 60 point 91% for the third quarter of 2023 and 51 point 46% for the prior year quarter. Both GAAP and non-GAAP efficiency ratios have been negatively impacted by the declines in net revenue and growth in noninterest expense as we continued to invest in the future. And at December 31st, the Company had a total risk-based capital ratio of 14.92%, a common equity Tier one risk-based capital ratio of 10.9%, a Tier one risk-based capital ratio also of 10.9% and a Tier one leverage ratio of 9.51%. All of these ratios remain well in excess of the mandated minimum regulatory requirement.
Before I move to your questions, I'd like to briefly comment on the retirement of our CFO, Phil Mantua. I'm pleased to announce today that Charlie column has been named Deputy Financial Chief Financial Officer and Treasurer, and he will transition to serve as our CFO upon Bill's retirement. As such, Bill will extend his retirement date until the end of the year to support this transition and leadership.
And that concludes my comments and now we'll move to your questions. Megan speaking, move to the questions, please.

Question and Answer Session

Operator

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

Good afternoon.
I do by Casey.
I just wanted to touch on that expense guide you just gave, Dan, because I think last quarter you were guiding to a little bit more growth in 24. So I was just curious, I know fourth quarter there was little jump there. I want to make sure we're on the same page or are you sort of are you talking about no growth sort of off that Q4 level or 2023 like full year level and sort of what I guess has changed your outlook between, but we're talking about last quarter?
Yes, Casey, this is Phil. I'll first answer the question about the that projection. I would we're talking flat basically year over year annual amounts after adjusting for the couple of one-time things that occurred through in 2023 on and so quarter to quarter, it may look similar to the fourth quarter, and it may not just depending on different things that come through from a seasonal standpoint. First quarter had some blips ups and done different types of Nino on reengagement of employee taxes and stuff like that. So overall, though, flat maybe maybe 1% growth overall and expenses, but it didn't what they quoted was really looking at the whole year over the whole year?
Yes.
Okay.
And Scott, maybe just thinking about deposits and deposit costs, or do you think or given the sort of guide that you name has is close to inflection next quarter. I'll make the assumption that I guess deposit costs will sort of peak peak then.
And then I was also curious on just sort of how you're thinking about the level of noninterest bearing, do you think you can, but a whole those here are starting to see some growth with that, Casey, Phil, again, I don't think there's any question that in terms of the overall deposit costs here and there may be a little bit more incremental increase in the on the deposit costs into the on the interest bearing area into the first quarter and maybe even a little bit into the second quarter. And but we do anticipate our ability to rebuild some of those DDA balances throughout that period, which helps from a from an overall net basis to allow that the margin to bottom in that first quarter and then start to come back up in the second quarter and beyond.
We also got a phenom.
Okay.
Yes, go ahead.
I'm sorry because I know I don't know if I have unless you have questions. First on, I was just going to say there's some there's also the remix going on in the borrowings area as well. We plan to pay back the young bank term funding program in April. So that will help as well. I think the average costs related to that $300 million is about 4.9% comp. So there's a couple of couple of different things going on there and other maturities in the home loan bank advance area that will run off more more expensive funds. And we'll probably just reduce the overall cash position to maximize for the for the margin on margin improvement.
Okay, thank you. And then on the other side, can you remind us sort of where new production new loan production is coming on versus the five 25 yield of the overall book. You've got a lot of room to go there, right, go up.
Yes, this quarter overall commercial on production averaged about 8.3% and come out half of the overall production was floating rated it versus fixed in the the overall new yields ranged in the in the owner-occupied areas. Some of those rates were in the 6.5% to 7% range. The ADC portfolio was more in the 8% to 8.5% range. And then true commercial lending was anywhere from 7.5 to 8.5 in terms of new new money, new money yield.
But thank you. And I appreciate the margin get a little extra bump.
Yes, sure, Caio.

Our next question comes from the line of Russell Gunther with Stephens Inc. Your line is open.

Hey, good afternoon, guys. I'm going to ask one follow up. Follow up on the margin discussion, if I could, in terms of and the three cuts that you're expecting in 24, if we think about the beta on the way down, what is your kind of seven to 10 recovery per quarter assume for a deposit beta with those cuts?
Yes. Yes, that's great question. So first of all, on process, Phil, again, we've got to cut anticipated in June, September and then in December. So effectively for the second half, it's really two cuts that are going to impact the second, the third and fourth quarter on. Within that aggregate, we've assumed a similar type of beta relative to our money markets and other from our money markets and done in other checking products in that 40% range. But on the high yield savings that we've run here and has had significant growth in at our beta assumption on that is more like 90% could even be more than 100% depending on how growth how aggressive we think we can be. And so we're anticipating a pretty significant pullback for every and every 25 basis points that term that we get back from the Fed.
Okay. And then just has any anything shifted in terms of the funding mix like you guys have any deposits formerly indexed to Fed funds would reprice more immediately. How should we think about that?
We don't have anything formally on the Nets per se, tied directly. Everything's really management discretion, but that's the way we look at it is trying to mimic or mirror as much of the Fed funds, some cuts as we can in various areas. And again, we've also got kind of behind the scenes, this fairly significant amount of brokered CDs that are scheduled to mature throughout the year throughout 2024 as well. In fact, we've got about $430 million at 4.5% scheduled to mature throughout the year, 172 million of that at four 70 and change in the first quarter alone. And then there's about 250 million of home loan bank advances that are I'm going to mature during the year, and that's averaging about 40 60 and about 50 million of that at 40 75 is in the first quarter as well.

Okay. That's great color.

So thank you. And maybe just switching gears on the expense conversation that was had, I understand the directional guide, but from a big picture strategic perspective, kind of where do you stand in the digital transformation phase and that spend that I believe is now in the run rate, are there ongoing projects below the radar that are captured into that flat expense guidance? I know when spread was more challenged, I think you guys had strategically pushed some things a bit further. So just curious from a big picture perspective where that all stands.

Yes, good Russell. This is Dan. What we what we rolled out and kind of fully completed in 23 in the end of the beginning of the fourth quarter was everything retail related, retail, online banking, retail, mobile P2P capabilities in integrated online account opening. So those are all running and there will be obvious iterations to that, but not at the same expense rate as the initial build.
And on the on the planning side of things, he's taking that platform and building out our small business and then our commercial online capabilities that's in the design phase right now in all likelihood, the buildout of that would probably not begin to occur until very end of 2024 into 25 and then and then within that, right. So that's not built into that run rate for 24 conversations what I'm trying to say. And then what is built in are a number of smaller projects that are just aimed at helping us to put into practice some of the digital capabilities we have in terms of automated underwriting, automated, small business delivery and those types of things. And those will be things that are being built out throughout the course of 2024.

Okay, got it down. That's very helpful. And then the last one for me, just on the loan growth side of things, I think I missed your comment in terms of where you are, what your target is, but if you could share kind of what you're directionally looking for from a loan volume perspective and mix and then just kind of overall comfort zone from loan to deposit ratio, if that's ultimately going to be the governor?

Yes, I think, you know, going into 2024, and I think we're going to stay flexible as to what we see happening in the market, both from a pricing demand and then having obviously, the funding side of the things also be a driver there. But our plan was to be somewhere in the mid to upper single digits by the end of the year. And loan growth driven predominantly by our C&I work on owner-occupied real estate probably up low single digits on the commercial real estate side of things, really overcoming runoff that we see in that we could see some growth if depending upon what the long end of the curve does in the mortgage space and have a more of an appetite to put some of five, one seven, one 10 one type of ARM product in the portfolio. But that's really going to be driven by what we're able to achieve from a profitability standpoint. So there's a little bit of So from an overall plan standpoint, mid to upper single digits that could move more favorably if conditions allow that to happen.
On the loan-to-deposit ratio, we actually the last handful of months. We're tracking on either side of 100%. And in our case, we always have a little deposit runoff, particularly within the commercial book at the end of the year, which is what kicked it back up. We went into December with right around 100 over time. We think that needs to come down into the mid 90s, but we're not sprinting towards that. We just think that will happen over over time.

Sorry, Dan, I appreciate it. It was very helpful. That's it for me, guys. Thank you for taking my question.

Thanks, Russ.

Thank you. Our next question comes from the line of Emmanuel NOVeA with DA. Davidson. Your line is now open.

Yes, good afternoon. Can you talk a little bit more about the kind of comfort on the deposit side and kind of where you're seeing on the core inflows that that kind of drives a little bit better growth expectations on the loan side?
Yes.
Yes, Manuel, this is Phil. And as it relates to the current flows within the deposit base and they continue to be in the on feature time deposit products that we're offering predominantly on the retail side, some kind of mid term, one year to 15, one year to two year type of some maturity, 10 years currently with some. But you know that the best offered rate at around 5%. But I don't know that we're looking for that particular rate to last a whole lot longer into the future and still seeing good growth on the high-yield savings account that continues to to lead the way on our other interest checking products are fairly stable. The money market area still is one that we think needs to kind of turn turn the corner and go going the other direction. That's been a little more difficult. And I think we're optimistic about the things we can do on the demand deposit side, here, given the nature of the type of lending we want to do going forward and then how that should on alter the view towards the complementary type of deposit gathering we would go along with more true commercial lending. So I think that's part of where we are at and kind of how we see it moving forward as well.
Emanuele, this is Dan, I'll also mention that we're really optimistic about what our digital capabilities are going to provide and the generation of new relationships. And with 23 being what it was with the noise around and deposit outflows or disintermediation are our integrated account opening that we kicked off with some of our new digital technology. We open for us significant over 2,200 new accounts in the over the course of time since we kicked that off. But over half of that or I'm sorry about a third of that or checking account relationships over half new client acquisitions, about 46% are deepening existing relationships. So we have our teams in retail and commercial mortgage and wealth laser focused on deeper digging into the relationships that they have within those verticals that may not have full banking relationships. So they're going after that really hard. We're using some outside data to be able to go out after prospective clients, again using our digital tools. And so we think there's some real upside for us too, to drive some deposit growth, new relationship growth and with capabilities that we've never had before. So we're counting on that to be meaningful as we move through 24.
That's really helpful. Did I understand right on the loan growth guidance about like mid to upper single digits across the whole year or kind of accelerating into the back half or both.

Can you just kind of help with the timing a bit?
Yes.

I think traditionally, our first quarters is soft and that's a demand-driven soft. So I think it probably builds towards the second through through Q4 of the year and rates help with that or you're you feel like you're comfortable in the manner what rates are doing.

I mean, I expect some account we're comfortable yet.

I don't think that's necessarily a cut driven. I mean they equate rates clearly have had an impact on a number of real estate related projects that they just don't work at the rates. It's the pricing today. But in what we're going after in terms of small business, C&I relationships and winning more market share from existing lenders in the market. It won't be rate dependent, but it's more second half of the year.

Thank you, guys.

Appreciate the comments.
Sure.

Thank you. There are currently no further questions registered. So as a reminder, it is star one on your telephone keypad. There are no additional questions waiting at this time. So I'll pass the conference back over to you, Mr. Schrider, for closing remarks.

Thank you, Megan, and thanks, everyone, for joining today's call and for your questions with us. If you have any others, please reach out and let us know how valuable the call was And do we have another? Are we good now? I guess, not.
Okay.

Thanks, everyone.

Have a great afternoon.

That concludes the Sandy Spring Bancorp Inc. Earnings Conference Call and Webcast for the Fourth Quarter of 2023. Thank you for your participation. I hope you have a wonderful rest of your day.