Sandy Spring Bancorp, Inc.

Thank you for attending today's Sandy Spring Bancor and 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 Bancor. Daniel, please go ahead.

Thank you, Megan. Good afternoon, everyone. Thank you for joining our call to discuss Sandy Spring Bancor'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.

Aaron. Thank you, Dan. Good afternoon, everyone. Sandy Spring Bancor 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 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.

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 58 cents per diluted common share for the quarter ended December 31, 2023, compared to net income of 20.7 million or 46 cents per diluted common share for the third quarter of 2023, and 34 million or 76 cents 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 60 cents per diluted common share, compared to 27.8 million or 62 cents per diluted common share for the quarter ended September 30 and 35.3 million or 79 cents 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 wanna 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 to 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 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 cashflow 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 also 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 .06% of outstanding loans and 132% of non-performing loans, compared to 123.4 million or .09% of outstanding loans and 238% of non-performing loans at the end of the previous quarter and 136.2 million or .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 ADNC 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 quarter 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, a 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 in 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 this theme. 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 the 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 account 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 link 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 boldly income. Income from mortgage banking activities decreased $890,000 compared to the link 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 gaining revenue is expected to be between 1.1 and 1.3 million in the first quarter and between a million and a half and 2 million in the second quarter due to typical spring seasonality. Wealth management income decreased 172,000 to 9.2 million and after that's under management, quarter end totaled 6 billion, representing an .4% increase since September 30th. For the fourth quarter of 2023, the net interest margin was .45% compared to .55% for the third quarter and .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 link 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 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 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. Non-interest expense for the fourth quarter decreased 5.3 million or 7% compared to the link 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-gap efficiency ratio was .16% for the fourth quarter compared to .91% for the third quarter of 2023 and .46% for the prior year quarter. Both gap and non-gap 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 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 requirements. Before I move to your questions, I'd like to briefly comment on the retirement of RCFO Phil Mantua. I'm pleased to announce today that Charlie Cullum has been named Deputy Financial, Chief Financial Officer and Treasurer, and he will transition to serve as RCFO 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.

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.

Hi, Casey.

Hi. 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 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?

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, 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, re-engagement of employee taxes and stuff like that. So overall though, flat, maybe 1% growth overall in expenses, but what Dan quoted was really looking at the whole year over the whole year.

Yeah, okay. Sounds good. Maybe just thinking about deposits and deposit costs. Do you think, or given the sort of guide that your name is close to inflection next quarter, is the assumption that I guess, deposit costs will sort of peak then, or and then I was also curious just sort of how you're thinking about the level of -inter-sparing. Do you think you can sort of hold those here or start to do some growth or with the outlook there?

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-sparing 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 the- I'll go ahead. Yes, go ahead, I'm sorry.

Go ahead. No, no, I have the rest of your questions

first. I was just gonna say, there's also some remix going on in the barring areas. 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'll run off more expensive funds and will probably just reduce the overall cash position to maximize for the margin improvement.

Okay, got it, thank you. And then on the other side, can you remind us 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.

Yeah, this quarter overall commercial production averaged about .3% and about half of the overall production was floating rated versus fixed. The overall new yields ranged 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 .5% range. And then true commercial lending was anywhere from 7.5 to 8.5 in terms of new money yield.

Okay, thank you and I appreciate the margin guide. I'll let someone else jump on.

Yes,

sure. Thank you. Our next question comes from the line of Russell Gunther with Stevens Incorporated. Your line is now open.

Hey, good afternoon guys. I'll go 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 seven to 10 dips recovery per quarter assume for a deposit beta with those cuts?

Yeah, 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 gonna impact the second, the third and fourth quarter. Within that, we've assumed the similar type of beta relative to our money markets and other, our money markets 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 we're anticipating a pretty significant pullback for every 25 basis points that we get back from the Fed.

Okay, and then just has anything shifted in terms of the funding mix? Like do you guys have any deposits formally indexed to Fed funds that would reprice more immediately? How should we think about that?

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 cuts as we can in various areas. And again, we've also got kind of behind the scenes a fairly significant amount of broker CDs that are scheduled to mature throughout the throughout 2024 as well. In fact, we've got about $430 million that 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 gonna mature during the year. And that's averaged at about 460 and about 50 million of that at 475 is in the first quarter as well.

Okay, that's great, Coler, 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, 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 stand.

Yeah, good, Russell, this is Dan. What we rolled out and 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. So 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 very end of 2024 into 25. And then within that, so that's not built into that run rate for 24 conversation, 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, Dan. 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 what your target is, but if you could share kind of what you're directionally looking for from a loan volume perspective, mix and then just kind of overall comfort zone from loan to deposit ratio, if that's ultimately gonna be the governor.

Yeah, I think going into 2024, and I think we're gonna stay flexible as to what we see happening in the market, both from the 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 in loan growth, driven predominantly by our CNI work, our unoccupied 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 five one, seven one, 10 one type of arm product in the portfolio, but that's really gonna 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 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.

All right, Dan, I appreciate it. That 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 Navas with DA Davidson. Your line is now open.

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?

Yeah, well, this is Phil. As it relates to the current flows within the deposit base, they continue to be in the future time deposit products that we're offering predominantly on the retail side, kind of midterm, you know, 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. You know, 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 then 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, you know, how that should alter the view towards the complimentary type of deposit gathering that would go along with more through commercial lending. So I think that's part of where we are at and kind of how we see it moving forward as well.

Manuel, this is Dan. I'll also mention that we're really optimistic about what our digital capabilities are gonna provide in the generation of new relationships. And, you know, with 23 being what it was, with the noise around deposit outflows or disintermediation, you know, our integrated account opening that we kicked off with some of our new digital technology. You know, we open for us significant, over 2,200 new accounts over the course of time since we kicked that off. But over half of that, or I'm sorry, about a third of that are checking account relationships, over half new client acquisitions, you know, about 46% are deep in the existing relationships. 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. And so we think there's some real outside for us 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. So 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?

Yeah, I think traditionally our first quarter is soft. That's a demand driven soft. So I think it probably builds towards the, you know, second through fourth quarter of the year.

And rates help with that or you feel like you could, you're comfortable in the matter what the rates do? I mean, I expect some types.

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 at the pricing today. But in what we're going after in terms of small business, C and 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. Schreider for closing remarks.

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. And do we have another one? Are we good? No. I guess not. Okay. Thanks everyone. Have a great afternoon.

That concludes the Sandy Spring Bancor 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.