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spk01: 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. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Daniel J. Schreider, CEO and President of Sandy Spring Bancorp. Daniel, please go ahead.
spk02: Thank you, Megan. 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 Schreider, and I'm joined here by my colleagues Phil Mantua, our Chief Financial Officer, and Aaron Caslow, 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.
spk03: Aaron? Thank you, Dan. Good afternoon, everyone. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings, and other expectations, estimates of risks and future costs and benefits, assessments of expected credit losses, assessments of market risk, and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or affected by management's estimates and projections of future interest rates, market behavior, other economic conditions, future laws and regulations, and a variety of other matters, 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.
spk02: Thanks, Aaron. 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 importance of personal connections. Over the past several quarters, we have successfully grown core deposits, stabilizing our deposit base and reducing our reliance on non-core 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 de-emphasizing 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 non-interest expense, partially offset by lower net interest income and non-interest income. The current quarter's core earnings were $27.1 million, or $0.60 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. So I want to pause here and dig into the movement in our credit quality metrics as well as the allowance for credit losses. Ratios relating to non-performing loans fell during the quarter due to our decision to move two commercial credit relationships to non-accrual. 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 non-performing 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 non-performing loans was related to two investor commercial relationships. one within the custodial care industry and another with a multifamily residential property. These two relationships accounted for $42.4 million of the total $47.9 million of loans placed on non-accrual 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 principals 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 non-accrual during the current quarter, coupled with a slight deterioration and 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 non-performing loans compared to $123.4 million or 1.09% of outstanding loans and 238% of non-performing loans at the end of the previous quarter and $136.2 million or 1.2% of outstanding loans and 346% of non-performing loans at the end of the fourth quarter of 2022. Shifting to the balance sheet, total assets remain 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 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 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 slash warehouse, and hotel portfolios. Each 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 non-performing 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 and prior calls. As you can see as you review these slides, we're lending in our primary market that we know well. We have one delinquent credit among all reference portfolios and just a handful of non-performing 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 the same. 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 in small business and title company commercial checking accounts. The decrease in interest-bearing deposits was due to a $253.1 million reduction in broker 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 did increase to 103% at December 31st 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 a 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 a 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 31 compared to the previous quarter. And at December 31st, contingent liquidity, which consists of available FHLB borrowings, Fed funds, Funds through the Federal Reserve's discount window and the bank term funding loan program, as well as SS cash and unpledged investment securities, totaled $6 billion or 162% of uninsured deposits. Non-interest income for the fourth quarter of 2023 decreased by 5% or $800,000 compared to the lean 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 BOLI 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 activities. As we look forward, future levels of mortgage gain revenue is expected to be between $1.1 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 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 non-interest 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 9 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 non-accrual 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 240s and then to rebound in the second quarter and throughout the remainder of the year by 7 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. Non-interest 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 non-interest expense increased by 2.8 million, or 4%. As I 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 66.16% for the fourth quarter, compared to 60.91% for the third quarter of 2023 and 51.46% 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 non-interest expense as we continue 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 1 risk-based capital ratio of 10.9%, a Tier 1 risk-based capital ratio also of 10.9%, and a Tier 1 leverage ratio of 9.51%. All of these ratios remain well in excess of the mandated minimum regulatory requirements. 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 Cullum has been named Deputy Chief Financial Officer and Treasurer, and he will transition to serve as our CFO upon Phil's retirement. As such, Phil will extend his retirement date until the end of the year to support this transition in leadership. And that concludes my comments, and now we'll move to your questions. So, Megan, we can move to the questions, please.
spk01: Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Casey Whitman with Piper Sandler. Your line is now open. Hey, good afternoon.
spk03: Hi, Casey.
spk00: Hi, 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 2024. So I was just curious, I know fourth quarter There was a little jump there, but I just wanted to make sure we're all on the same page. Are you sort of, are you talking about no growth sort of off that fourth quarter level or the 2023 like full year level and sort of what I guess has changed your outlook between what we were talking about last quarter?
spk04: Yeah, Casey, this is Phil. First to answer the question about the 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. And so, you know, 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 has some flip-ups in different types of, you know, re-engagement of employee taxes and stuff like that. So overall, though, you know, flat, maybe 1% growth overall in expenses. But what Dan quoted was really looking at the whole year over the whole year.
spk00: Yeah. Okay. Sounds good. Maybe just thinking about deposits and deposit costs, do you think – Given the sort of guide that your NIM is close to inflection next quarter, is the assumption that, I guess, deposit costs will sort of peak then? And then I was also curious just sort of how you're thinking about the level of amount you're sparing. Do you think you can sort of hold those here or start to see some growth or what's the outlook there?
spk04: Yeah, Casey, Phil again. I don't think there's any question that in terms of the overall deposit costs here, there may be a little bit more incremental increase in the deposit costs into the interest bearing area into the first quarter and maybe even a little bit into the second quarter. But we do anticipate our ability to rebuild some of those DDA balances throughout that period, which helps from an overall net basis to allow the margin to bottom in that first quarter and then start to come back up in the second quarter and beyond. We also got some... Yes, go ahead. I'm sorry.
spk00: Go ahead.
spk04: No, go ahead with the rest of your question first. I was just going to say, there's also some... There's also some remix going on in the borrowings area as well. We plan to pay back the bank term funding program in April, so that will help as well. I think the average cost related to that $300 million is about 4.9%. So there's a couple different things going on there and other maturities in the home loan bank advance area that will run off more expensive funds. And we'll probably just reduce the overall cash position to maximize for the margin improvement.
spk00: Okay. Got it. 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 525 yield of the overall book? You've got a lot of room to go there, right? Go up?
spk04: Yeah. This quarter, overall commercial production averaged about 8.3%, and about half of the overall production was floating rated versus fixed. In the, you know, the overall new yields ranged, you know, in the owner-occupied area, 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 seven and a half to eight and a half in terms of new money yield.
spk00: Okay. Thank you. And I appreciate the margin, guys. I'll let someone else jump on.
spk02: Yes, sure.
spk01: Thank you. Our next question comes from the line of Russell Gunther with Stevens Incorporated. Your line is now open.
spk05: Hey, good afternoon, guys. I wanted to follow up on the margin discussion, if I could, in terms of the three cuts that you're expecting in 24. If we think about the beta on the way down, what does your kind of 7 to 10 bps recovery per quarter assume for a deposit beta with those cuts?
spk04: Yeah, that's a great question. So first of all, Russell, this is Phil again, we've got a 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 third and fourth quarter. Within that, we've assumed a similar type of beta relative to our money markets and and other checking products in that 40% range. But on the high yield savings that we've run here and has had significant growth in it, our beta assumption on that is more like 90%, could even be more than 100%, depending on how aggressive we think we can be. And so, you know, we're anticipating a pretty significant pullback for every, you know, every 25 basis points that we get back from the Fed.
spk05: Okay. And then just Has anything shifted in terms of the funding mix? Do you guys have any deposits formally indexed to Fed funds that would reprice more immediately? How should we think about that?
spk04: We don't have anything formally that's 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 um cuts as we can in in various areas and and again we've also got kind of behind the scenes a fairly significant amount of brokered cds that are scheduled to mature throughout the um throughout 2024 as well um in fact we've got about 430 million dollars at four and a half percent scheduled to mature throughout the year 172 million of that at 470 and change in the first quarter alone. And then it was about $250 million of home loan bank advances that are going to mature during the year. And that's average at about 460 and about 50 million of that at 475 is in the first quarter as well.
spk05: Okay. That's great color. So thank you. Maybe just switching gears on the expense conversation that was had. I understand the directional guide, but from a big picture strategic perspective, 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. Just curious from a big picture perspective, you know, where that all stands.
spk02: Yeah, good. Russell, this is Dan. What we rolled out and, you know, kind of fully completed in 23 in the beginning of the fourth quarter was everything retail related. Retail online banking, retail mobile, P2P capabilities, 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. On the planning side of things is 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 build out of that would probably not begin to occur until the very end of 2024 into 2025. And then within that, 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
spk05: of automated underwriting automated you know 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 dan that's very helpful and then the last one for me just on the loan growth side of things uh i think i missed your comment in terms of where your what your target is but if you could share kind of what you're directionally uh looking for from a loan volume perspective and then just kind of overall comfort zone from loan to deposit ratio, if that's ultimately going to be the governor.
spk02: Yeah. 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, you know, having obviously the funding side of 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 in loan growth, driven predominantly by our CNI work, our owner-occupied real estate, probably 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 more of an appetite to put some 5-1, 7-1, 10-1 type of RM product in the portfolio. But that's really going to be driven by what we're able to achieve from a profitability standpoint. So from an overall plan standpoint, mid to upper single digits, that could move more favorably if conditions allow that to happen. On a 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 it 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 time.
spk05: All right, Dan, I appreciate it. That was very helpful. That's it for me, guys. Thank you for taking my question. Thanks, Russell.
spk01: Thank you. Our next question comes from the line of Emmanuel Navas with DA Davidson. Your line is now open.
spk06: Hey, good afternoon. Can you talk a little bit more about the kind of comfort on a deposit side and kind of where you're seeing the core inflows that kind of drives a little bit better growth expectations on the loan side next year.
spk04: Yeah, Manuel, this is Phil. As it relates to the current flows within the deposit base, they continue to be in the featured time deposit products that we're offering predominantly on the retail side. Kind of midterm, one year to two year type of maturity tenures currently with 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. Still seeing good growth on the high yield savings account. That continues to lead the way. Our other interest-checking products are fairly stable. The money market area still is one that we think needs to kind of turn the corner and go in 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 how that should – alter the view towards the complementary type of deposit gathering that would go along with more commercial lending. So I think that's part of where we are at and kind of how we see it moving forward as well.
spk02: Manuel, this is Dan. I'll also mention that we're really optimistic about what our digital capabilities are going to provide in the generation of new relationships. And with 23 being what it was with the noise around um deposit outflows or disintermediation you know our our integrated account opening that we kicked off with some of our new digital technology you know we we open for us significant over 2200 new accounts uh in the over the course of of time since we kicked that off but over half of that um or i'm sorry about a third of that or checking account relationships uh over half new client acquisitions You know, about 46% are deep in the existing relationship. So we have our teams in retail and commercial mortgage and wealth laser focused on deep, you know, 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. We think there's some real upside for us to drive some deposit growth, new relationship growth with capabilities that we just never had before. So we're counting on that to be meaningful as we move through 24.
spk06: 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 to the back half or both? Can you just kind of help with the timing a bit?
spk02: Yeah. I think traditionally our first quarter is soft. That's a demand-driven soft. So I think it probably builds towards the second through fourth quarter of the year.
spk06: And rates help with that or you feel like you're comfortable no matter what the rates I mean, I expect some cuts.
spk02: Yeah. I don't think that's necessarily, you know, cut-driven. I mean, rates clearly have had an impact on a number of real estate-related projects. They just don't work at the rates pricing today. But in what we're going after in terms of small business, C&I relationships, and winning more market share from existing, you know, lenders in the markets, It won't be rate dependent. But it's more second half of the year.
spk06: Thank you, guys. Appreciate the comments.
spk02: Sure.
spk01: Thank you. There are currently no further questions registered. So as a reminder, it is star 1 on your telephone keypad. There are no additional questions waiting at this time, so I'll pass the conference back over to you, Mr. Schroeder, for closing remarks.
spk02: Thank you, Megan, and thanks, everyone, for joining today's call and for your questions. If you have any others, please reach out and let us know how valuable the call was. Do we have another one? Are we good? No. I guess not. Okay. Thanks, everyone. Have a great afternoon.
spk01: 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.
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