Q4 2020 Sandy Spring Bancorp Inc Earnings Call
[music].
Good day, and welcome Sandy Spring Bancorp earnings conference call and webcast for the fourth quarter of 2020.
All participants will be in listen only mode should you need assistance. Please signal conference specialist pressing the star key followed by zero.
After todays presentation, there will be opportunity to ask questions. Please note that this event is being recorded.
Now I'd like to turn the conference over to.
Mr. Daniel Frieder, President and CEO. Please go ahead.
Thank you and good afternoon, everyone. I appreciate you joining us for our conference call to discuss Sandy Spring Bancorp performance for the fourth quarter of 2020.
Today, we will also bring you up to date on our response to an impact from the COVID-19 pandemic.
This is Dan Schrader and I'm joined here by my colleagues, Phil Mantua, Chief Financial Officer, and Aaron Kaslow General Counsel for Sandy Spring Bancorp.
Today's call is open to all investors analysts and the media there will be a live webcast of todays 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.
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.
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 managements estimates and projections of future interest rate market behavior, other economic conditions future laws and regulations and a variety of other matters, including the impact of <unk>.
The COVID-19, pandemic, which by their very nature are subject to significant uncertainties because of these uncertainties Sandy spring Bancorp actual future results may differ materially from those indicated in addition, the companys past results of operations do not necessarily indicate its future results.
Thank you Aaron and welcome everyone and happy new year to everyone on the line. We certainly hope that you are carrying well and remaining healthy. During this season of time I'm pleased to be here today to talk through our fourth quarter performance and our annual results.
While weathering the global pandemic was a challenge for everyone in 2020.
Our company did so while completing the integrations of Revere Bank and Rembert Pendleton, Jackson as well as helping our clients through this unprecedented crisis.
We demonstrated great resilience and it shows in the record quarter, We announced this morning, we built on our momentum from the third quarter and we finished the year strong.
Today, I will review the financials and our ongoing response to the COVID-19, pandemic and I'll recap some of the company highlights from the year.
Later in the call Phil and I will also walk you through the supplemental materials. We issued this morning and provide more color on our credit quality, our provision expense and allowance.
As you read in the press release today, we reported record net income of 50, $756 7 million or $1 19.
Per diluted common share for the fourth quarter of 2020. The current quarter's result compares to net income of $48 5 million or <unk> 80 per diluted common share for the fourth quarter of 2019, and net income of $44 6 million or <unk> 94 per diluted common share for the third quarter of 2020.
Our operating earnings continue to improve reporting $48 2 million or $1 <unk> per common share in the fourth quarter compared to $30 4 million or <unk> 85 per diluted common share in the fourth quarter of 2019, and $45 8 million or <unk> 97 per diluted common share from the third quarter of <unk>.
<unk> 'twenty these numbers exclude the impact of the provision for credit losses.
Ex of the Paycheck protection program as well as M&A expenses.
The provision for credit losses. This quarter was a credit of $4 5 million compared to a charge of $7 million in the linked quarter. This change is primarily the result of a change in the most recent economic forecasts specifically the projections for our business bankruptcies decreased due to the due to the positive impact of governmental relief programs for individuals and small.
Businesses.
We will cover this in more detail when we review the supplemental materials.
Total assets grew by 48% to $12 8 million compared to $8 6 billion in the fourth quarter of 2019. This growth was primarily driven by the review of bank acquisition and our PPP participation.
During the past year loans and deposits grew by 50, 556% respectively.
We originated $1 1 billion in commercial business loans through the PPP program.
Total loans at year end were $10 4 billion compared to $6 7 billion at the end of 2019, and excluding PPP loans total loans grew by 39% to $9 3 billion at December 31, 2020 compared to the prior year quarter.
As previously stated the acquisition of Revere drove the majority of the increase in loans.
<unk> loans grew 52% or $2 6 billion, excluding PPP and consumer loan growth during the year was 11%.
While loans grew modestly compared to the third quarter of 2020 total commercial loans expanded by 2% on a linked quarter basis, new commercial production for the fourth quarter was very strong at over $500 million.
And new originations up 8% compared to the pre pandemic production in the fourth quarter of 2019.
Over the past year deposit growth was 56% as noninterest bearing deposits experienced growth of 76% and interest bearing deposits grew 47%. This growth again, primarily driven by the revere acquisition and to a lesser extent the PPP program.
Noninterest income for the current quarter increased by 68% with $13 million compared to the prior year quarter. As a result of a 248% increase in income from mortgage banking activities and growth of 28% and wealth management income.
The growth of these two categories more than compensated for the decline in service fee income compared to the prior year quarter.
On the mortgage front, historically low lending rates drove mortgage origination activity and an increase in mortgage banking income of $10 3 million during the current quarter compared to the prior year quarter.
Of note mortgage originations for the year set a company record and exceeded $2 billion.
Within our mortgage production, 57% represented refinance activity, 33% were purchase money transactions and the remaining 10% where construction perm originations, which by their very nature are new home acquisitions.
While we expect mortgage banking income to remain a significant part of our fee based revenue in 2021, we don't expect mortgage production to remain at the current levels.
As a result of the first quarter acquisition of RPG wealth management income increased $1 8 million compared to the same quarter of the previous year. We concluded the year with yet another company milestone of wealth assets under management in excess of $5 2 billion.
On the margin side. The net interest margin was 338 for the fourth quarter of 2020 compared to the same 338 for that same quarter of 2019 and $3 two four for the third quarter of 2020.
Excluding the impact of the amortization of fair value marks derived from acquisitions. The current quarter's net interest margin would have been 331% compared to $3 34 from the fourth quarter of 2019, and <unk> 18 for the third quarter of 2020.
We're really pleased to see the current quarter expansion and broader stability in the core margin as we are actively managing down the cost of funds by allowing higher priced time deposits to run off diligently pricing, our local end market transaction products and funding our remaining needs with the most cost effective wholesale sources available.
These actions have resulted in our cost of interest bearing liabilities being reduced from 77 basis points to 63 basis points.
And the cost of interest bearing deposits from 57 basis points to 39 basis points on a linked quarter basis.
We also chose to eliminate the negative carry related to maintaining in excess cash position by repaying the remaining $254 million of PPP Lf funds.
Noninterest expense for the fourth quarter of 2020 increased $15 6 million or 34% compared to the prior year quarter, primarily as a result of the operational cost of Revere and RPG acquisitions increased compensation expense related to staffing increases and incentive compensation. In addition to an increase in FDIC.
Insurance and the amortization of intangible assets.
Other expense in the current quarter.
Contained one notable item related to the establishment of a contingent liability of $1 $6 million to reserve against unfunded commitments as required by the company's adoption of seasonal.
The non-GAAP efficiency ratio was $45 nine for the current quarter compared to $51 98 for the fourth quarter of 2019 and $45 27 for the third quarter of 2020 <unk>.
The decrease in the efficiency ratio, which reflects an increase in efficiency from the fourth quarter of last year to the current year was a result of the $47 2 million.
Growth in non-GAAP revenue outpacing the $15 $4 million growth in non-GAAP noninterest expense.
As we look ahead, we continue to manage this expense to revenue metric to a targeted range of 48% to 50% and anticipate 2021 efficiency levels to settle into this range as we expect mortgage revenues to eventually decline from current levels and operating expenses to be comparable to current levels absent. The notable other expense items.
I mentioned, a moment ago, we will also look to invest in the people and technologies needed for future growth and success, while identifying opportunities for greater efficiency.
On the credit side, non performing loans to total loans increased 111 basis points compared to.
<unk> 111 basis points compared to 62 basis points at December 31, 2019, and 72 basis points to the linked third quarter nonperforming loans totaled $115 5 million compared to $41 3 million at December 31, 2019, and $74 7 million at September 32020.
<unk>.
The year over year growth in non performers were driven by three major components loans placed on non accrual status acquired revere non accrual loans and loans previously accounted for as purchase credit impaired loans that have been designated as non accrual loans as a result of the company's adoption of the accounting standard for expected credit losses at the beginning.
Of the year.
Loans placed on non accrual during the current quarter amounted to $54 7 million compared to five 4 million from the prior year quarter and 900000 for the third quarter of 2020.
These loans relate primarily to a limited number of large borrowing relationships within the hospitality sector.
These large relationships or collateral dependent and required note individual reserves due to sufficient values of the underlying collateral.
The company recorded net charge offs of half a million for the fourth quarter of 2020 compared to net charge offs of a half a million dollars and 200000 for the fourth quarter of 2019, and the third quarter of 2020, respectively.
The allowance for credit losses was $165 4 million or $1, 59% of outstanding loans, and 143% of nonperforming loans compared to $170 3 million or one.
Or 165% of outstanding loans, and 228% of nonperforming loans at the linked quarter.
Tangible common equity increased to $1 billion or 846% of tangible assets at December 31, compared to $782 3 million or nine 4% at.
At December 31, 2019, as a result of the equity issuance and the Revere acquisition the.
The year over year change in tangible common equity also reflects.
The effects of the purchase repurchase of $50 million of common stock.
And the increase in intangible assets and goodwill associated with the two acquisitions, we completed in 2020.
Excluding the impact of PPP from tangible assets at December 31, the tangible common equity ratio would be 9.25%.
At December 32020, the company had total risk based capital ratio of $13, 93%, a common equity tier one risk based capital ratio of 10, five 8% a tier one risk based capital ratio again, 10, five 8% and a tier one leverage ratio of 892%.
At this point I'd like to turn to the supplemental information we issued.
This morning.
On slide two.
You can see that loans with payment accommodations, where some some folks refer to those as deferrals.
As of December 31, total $217 million, resulting in 2% of our loan portfolio receiving accommodations on slide three we have detailed specific industry information, which we've updated and share in the past three quarters outstanding balances for each segment and the loans and payment accommodations are as of December 31.
And on slide four we've included an update on our PPP efforts as of January 11th we began accepting forgiveness applications this quarter and 70% of loans over $150000 have been invited to apply for forgiveness and all of the applications that have been submitted to the SBA have received one one.
3rd% forgiveness.
As we noted in our press release today, we temporarily paused invitations to our forgiveness portal pending updates to the PPP program. We also took a pause in order to focus our efforts on preparing to accept applications for first and second draw loans once the program resumed.
We expect to invite the remainder of our ppt borrowers, including those with loans of 150000 or less to submit their forgiveness application within the next few weeks.
And on the origination side, we began <unk>.
<unk> applications for the latest round of PPP loans.
First and second draw loans on Tuesday afternoon and.
Now I'll turn it over to Phil to talk through a CSO and our capital position.
Thank you Dan and good afternoon, everyone I'm going to pick up on slide number five in the supplemental deck, where we have a waterfall representation of our allowance build and a first for all of the year 2020, which is broken down into components that.
To reflect the to build during the year.
As you can see the change over the course of the full year was primarily driven by two significant components the change in economic forecasts and the impact of our Revere acquisition on the required reserve and <unk>.
Although non illustrated here you may recall that the majority of that.
That review both of those impacts was incurred during the second quarter of the year.
On the following slide slide six we had a similar presentation of the fourth quarter.
On this chart, we can see the predominant factor driving reserve release in the provision credit offers.
For this particular quarter.
Expected year over year change in business bankruptcies, which is one of our key economic factors.
This change in the expected.
This change in expectation.
As Dan already mentioned earlier was impacted primarily by the anticipation of the additional stimulus.
We have now.
It's now been announced at the time the forecast was developed.
And which therefore was more than enough to overshadow our other changes in the in our qualitative factors and our other economic factors as well, including the projected.
Unemployment rate.
All of our key macroeconomic variables are outlined on the next slide number seven.
<unk> methodology continues to use the Moody's baseline forecast, which for the fourth quarter was the version released by Moody's on December 21.
This baseline forecast integrates the effects of COVID-19 and include the projected levels of unemployment for our local market that in this forecast peaks at six 6%.
During the year and then ultimately recovers to a level of four 7% by the end of 2000 2022 slightly higher than that that was projected in the prior third quarter forecast.
In determining our reasonable and supportable forecast period, we continue to use a two year time horizon.
The current quarter to reflect the less there is less uncertainty and a long term outlook here at this time.
And similar to our approach taken throughout the year, we continued to not take into consideration any potential mitigating factors based on what could be perceived as a positive outcome or impact of government programs, such as PPP et cetera.
We continue to feel very comfortable with taking this conservative stance.
Slide eight provides some additional granularity related to a reserve from a portfolio view, where you can see the most significant amount of reserve by dollar amount is attributed to the commercial business portfolio, where the total reserves and $46 $8 million or 2.0% of Outstandings, but did decline.
Aligned significantly based on the previously mentioned change in the projection of business bankruptcies.
We should note that that two 2.06% of reserve reflected here includes PPP loans and the balance although there is no reserve required on those loans.
Illustrated in the footnote at the bottom of the slide would it just be the balance between PPE exclude PPP loans outstanding.
The reserve on our commercial business segment would be 387%.
And our total reserve would be 177% of total loans.
Finally on slide nine is a trend of our prudent capital ratios with some brief explanations regarding the treatment of certain items and their impact on the result from ratios.
Included in those comments as an adjusted tangible equity to tangible assets ratio to reflect the impact of PPP loans on the current measure as Dan mentioned earlier in his comments.
We continue to feel confident about our capital position that all of our metrics either held steady or improved slightly as a result of the strength of our earnings during this quarter.
We also recently updated our capital stress tests, where we have constructed a baseline and severe forecast scenario utilizing the same Moody's baseline forecast incorporated in our seasonal calculations and it kind of the basis for the economy and the severe case.
Having done so we continue to be confident that we have the capital to carry us through.
The remaining portion of this ongoing situation.
With that Dan I'll turn it back over to you.
Before we before we move to take your questions I'd like to cover a few other updates from the release and highlights from the year.
As we also shared in the press release, we intend to close three branches in the second quarter of 2021.
These branches include two in Northern Virginia, and one in Montgomery County, Maryland.
Client accounts will be consolidated into nearby locations. These these closures are a result of our continued analysis of branch utilization client needs in the proximity of our many locations.
As it relates to our ongoing response to COVID-19, the health and safety of our people and communities remain our priority and the majority of our workforce continues to work remotely.
Answer served at branches, primarily through drive through facilities and we do have limited lobby access.
And over the summer Sandy Spring Bank Foundation donated $600000 to support COVID-19 response efforts at a dozen local hospitals, serving the greater Washington region.
We're proud of all that we've done and continue to do to support our people and communities throughout these uncertain times.
Hope that we'll be able to welcome back our people two our office is at some point in 2021, but for now we remain in phase one of our return to work plan and as we've done all year. We will continue to evaluate this ongoing situation and we will adapt as needed enable.
Despite the many obstacles caused by the pandemic also want to note that we've continued to grow the company and welcome new people to our team our efforts to recruit hire and onboard new employees have remained steady hiring more than 150, new employees since we transitioned to a remote environment in March while.
While I've had an opportunity to meet many of our new colleagues through virtual orientations were all eager to meet everyone's face to face and personally welcome them to our company.
And thanks to our remarkable employees. Our company also earned numerous recognitions throughout the year, including being named a top workplace by both the Washington Post and Baltimore Sun, earning a spot on American Banker's best banks to work for list for the first time.
Ranking the top bank in Maryland, and one of America's Best in state banks by Forbes being certified.
A great place to work by the Great place to work Institute and ranking of number one among mid sized companies for our employee volunteerism and the Washington business Journal.
We're especially honored by the workplace recognitions because they are a direct result of our employee feedback about our company and our culture.
Yes.
In closing I cannot understate, the dedication and resilience of our employees have shown this past year, while this remote and socially distanced environment is far from ideal our team continues to find new and creative ways to serve our clients and continue to move Sandy spring bank forward, so to all of our employees.
A big Thank you and operator that concludes our general comments for today, and we'll now move to questions.
I will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
So draw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question from Casey Whitman of Piper Sandler. Please go ahead.
Hey, good afternoon.
Hi, Casey.
Hi.
No.
I appreciate the clarity on the other expense line. So I guess I'd ask the same question as I look at fees.
Unusual going on in the other the other fee line. This quarter that we should think about or is this a pretty good run rate.
Yeah Casey this is Phil.
There are a couple.
A couple of areas where we.
We had a little bit heightened.
Activity relative to extension or commitment fees prepayment fees alike.
But the biggest thing that was in this quarter.
It was we had pretty significant.
Significant amount of swap fee income of about $900000.
We think we will continue to have some activity in that area, but.
But I don't know that we would continue to forecast that particular line item at that level of quarter in and quarter out.
But otherwise I think by and large the fee levels.
The other fee levels here are around <unk>.
Probably.
Probably in a pretty reasonable pretty reasonable place.
You can probably think that swap fee income and maybe cut it in half or whatever you can think about it that way on a quarter by quarter basis.
And then on the expense side as Stan mentioned, absolutely. The one notable items related.
Related to.
The card.
Contingent liability for the unfunded commitments, which by the way we will look at every quarter and make determinations as to whether that reserve might need to move in one direction or the other.
From a run rate standpoint.
Overall expense number in net $60 million range, a quarter or something that would probably be a good way to a good way to look at it going forward.
That makes sense and and I'm, assuming that that run rate sort of.
Factors that in any sort of cost savings you might have.
The branch closures that you already announced.
Yes, I mean, I think I think as it relates to everything that that to be recognized or absorbed relative to the revere transaction I think we're pretty much there at this point from a cost save integration standpoint, as well as by the way any more merger related expenses I think we're pretty well shut that down by the end of the year.
Yes.
And so I think that that would be.
That would be accurate.
Cost save side related to the branch closures theyre not.
It to happen until little bit later in the year. So in the current.
'twenty one.
That savings might might be I don't know three or $400000 more on a run rate basis, it's probably $1 million or $1 to full year.
Understood. Thanks.
I guess.
I appreciate also your comment or your commentary around the mortgage outlook, but maybe.
Just from some help as to what happened. This quarter can you just give us a little more detail on the underlying trends this quarter.
But between purchase and refi and how does the gain on sale margins. There certainly mortgage held up better in line with that this quarter. So maybe just some help.
What you are seeing this quarter.
Yes, Casey I referred.
Probably a little bit earlier in my comments in terms of the split between.
Okay.
Production one site.
From my note back out here again.
And in terms of.
Purchase money activity versus refill.
Yes, I have it here on a production basis is about 60% of all production in the quarter was refi.
Probably the other.
<unk>, probably about 30 other 30% of it was.
With purchase and then the remainder was the construction type lending that we do.
That production about 84% of it was we've been labeled to be sold or was sold during the during the quarter.
Our overall net gain on that sale by margin was all about 278 basis points, which.
Yes.
Probably about 60 to 70 basis points greater than it was in the prior quarter.
Although that mix that I mentioned was comparable in the third quarter. There was just more of it.
Here in the by about $50 million of total production in the fourth quarter as opposed to the third.
And I think the difference from probably how we viewed it when we talked about this in the third quarter with that.
We didn't have the expectation that that level of business, what's going to be maintained much less grow into the fourth quarter. If nothing else just by virtue of historic cycles and things along those lines, but obviously it did so.
We will probably hear saying, yes, I think we have alluded to in the earlier comments that we don't expect that to occur this quarter as well.
And.
I would.
I think we still believe that that will be the case that it should drop down from from what it was in the last two quarters, but I think.
Time will tell.
Yes.
Understood. Thanks, I'll just ask.
Hi, just a quick one on the on the hotel book and then migration non accruals maybe just.
Some color in terms of.
Yes.
Non accruals previously and in deferral period all day.
For all periods.
Thank.
Yes.
Let me, let me hit that it might be helpful for obviously, others on the call as well.
Because the lion's share of our deferrals today.
Within that hotel book $132 million of a $200 million.
Overall commercial portfolio is from that.
Is from the hotel book, So let me maybe break a couple of things down. So total hotel portfolio was $416 million 132 are still in a deferral of 100.
$80 million, however that had a deferral have resumed normal payments and $104 million of that portfolio never requested or granted a deferral.
Assets that moved into non performing.
Our.
Certainly we're part of a deferral, but in our assessment through our portfolio review process Thats really has settled into two relationships and the characteristics of those caused us to question the ability to perform long term, namely the financial wherewithal of.
The owners and sponsors to support their properties throughout this pandemic period. So.
At the same time under a stressed liquidation scenario.
Did not result in any meaningful reserves being assigned to those credits.
We conducted the same type of portfolio review evaluation of the entire book.
And those that are continuing within the deferral period at this point, we feel like there is.
Enough wherewithal to two to work through.
Not only the deferral period, but.
Beyond.
Mhm.
I'll give you a little bit more color, then maybe you're asking but I think it is important because that is the bulk of our deferrals.
Of the total portfolio.
We've got a pretty diverse mix of national flags as well as diversity in the locations throughout our market footprint and there is no like sub market concentration there.
Largest percentage of national brands as Mary at 21%, followed by Hilton at 20% and then it breaks down further from there.
And about 81% of the book or would be considered a limited service properties and those are the ones that have fared much better on a national level, given lower overhead and lower occupancy required to breakeven.
That's the lion's share of what we have in our hotel portfolio.
17% of the portfolio will be considered full service hotels.
Hotels, and 72% would be considered either mid scale or economy property. So all of that aims at a segment of it.
The hotel industry that as it is currently having a better result in terms of breakeven and better opportunity to emerge from the crisis.
With less on.
Unscathed.
We'll continue to evaluate it Fortunately, we feel like we're in a pretty good position with about a 59%.
Weighted average loan to value on that portfolio.
As a whole and so while we have.
Obviously, we will likely have more credits from from the overall book that struggled through the pandemic season, we feel like we're in a good position to add.
Adequately reserved in a good position to successfully work through it.
Understood. Thanks, Thanks, so much for the color.
Thanks for the questions.
Thank you. The next question is from Catherine Mealor with <unk>. Please go ahead.
Thanks, Good afternoon.
Good afternoon, Hi, Catherine.
I wanted to see if we could talk all day about the margin in your outlook for this year. It looks like you had.
I guess, maybe just kind of wonder how youre thinking about the margin in terms of rate and where youre seeing loan yields and deposit pricing. There. But then also on just the balance sheet restructuring looks like you had a decline in Cds and some borrowings.
We should expect any kind of further balance sheet remix equity next year 'twenty one.
Yes, Catherine this is Phil.
So I would start with cash.
On a broad statement about.
There is a level of margin through the year I'm anticipating that it's going to stay fairly steady to the kind of levels. We finished the year with a net high $3 33, $3 40 ish range.
On a reported basis, we're starting to get away from especially on the asset side a lot of the.
The fair value impact of fair value Mark impacts to the to the yield accretive part of the yield. So I think that's starting to clear its way out of the equation.
And yet we still have the dilutive effect of PPP lending for the existing PPP loans that are there.
And probably now have some <unk>.
Either replacing it or in addition to it related to second round PPP lending, which we don't know what that it is going to look like per se in terms of volumes yet at this point, but but nevertheless, putting those things aside again I think that because of the things we've already done on the liability side, which we'll talk about here in a second.
And our ability to continue to I think pushed that down a little bit further.
<unk>.
I think that that kind of steady.
Stable margin position is doable throughout all of from all over the year on the on the cost side. We have continued to let high priced Cds continue to run off I think that will.
Contribute to what's going on here and therefore, the mix of liability side should change accordingly, probably.
Similar speed, although we had a pretty good block of.
Intermediate type of special Cds that are certainly have worked their way off the balance sheet are continuing to do so.
We don't have anything that we're pricing in the market today Cds or otherwise exceeding 30 basis points.
So when you think about where rates were 18 months ago or whatever more and what we would effectively replaced the math, that's why I feel that that can continue to happen.
We with Bard, we have done some borrowings from time to time as necessary, especially on a very short term basis, but I also think that we have found that there are other ways within the deposit base through either brokered money markets or a broker Cds, which we used in the past to be add less expenses.
Or just is less expensive than doing anything through either fed funds, our home loan bank type advances and so I think we will just continue as Dan said in his comments to look for the best.
Best price advantage to augmenting with wholesale whatever we're doing in the in our current markets.
And then finally I think you asked about the yields on the asset side on the commercial loan side just from a production standpoint here in the last quarter.
Last quarter's yields at the margin, we're probably only 15 or 20 basis points off our rolling.
12 month average, which was in the low.
Flow, 4% to 415% to $4 20 range.
And yet so that will that will certainly have.
The overall yields on our portfolio to continue to come down, but again I think not not any more so than two to the degree like I mentioned when we started this.
To the point, where we'll be able to keep the margin fairly constant even in face in the face of that.
Great.
Helpful color. Thank you and maybe one follow up is just on share buybacks you have got that.
Authorization at Sandy when do you think youll be.
<unk> to be more active and index.
Yes, Catherine Dan.
We always want to have the authorization in place, which is the essence of the timing there. So there's no specific timeframe.
That we would engage in share buybacks probably more on.
Times, when we think there is opportunity based on weakness in shares.
Okay me given the moving the stock can you feel like you've been authorization is just more opportunistic if the stock price pulled back from current levels versus a.
Our strategy to try to get the buyback complete by year end just looking at the capital Yes, No I think it's probably more of an opportunistic approach.
Okay great.
Okay.
So with that day look like this year.
I am sorry, we lost you there for a second Catherine do you mind repeating that one.
Yes, So I was just going to sneak in one more just because you were talking about capital.
In terms of M&A and then we've got Revere.
How are you thinking about your at your activity and acquisitions in the near term.
Yes.
Good question.
Having some issue with the line cutting out and then a little bit so thanks for repeating repeating that.
As it relates to our longer term growth strategy M&A, we will continue to be a part of what we we do both bank and non bank fee based businesses.
But there is a at.
At this point Theres nothing to.
Reported at this time and unlikely that there would be anything in 2021.
Great. Thanks, so much.
Q.
Thank you. Our next question is from Steve <unk> G Research. Please go ahead.
Hey, guys good afternoon.
Happy new year.
I'm wondering if you could go back to to the hotel book for a second I don't want to belabor. This too much but wondering if you guys could give us any any color on sort of these two these two credits that were moved to non accrual and how what cash flows and occupancy has trended and if you guys had seen any.
The improvement or declination there.
Yes.
I don't have details to share on this specific.
Credit relationships, but what I will say is that I.
I guess the unique aspects that drove them into the nonperforming category as many many of our hotel relationships. Even those that have moved into some form of accommodation have been on the heels of the sponsors are the guarantors stepping up and providing some type of enhancement to the credit.
Through through other resources that they may they may have in this particular case. These these.
These situations, we are unique relative to the other in terms of the ability of <unk>.
Sponsors to step in and support during a time when when occupancy was not sufficient to.
To breakeven and so.
And the different other aspects of the remaining portfolio, we're seeing where most of our limited service hotels are.
That breakeven can be achieved in the 30% to 50% occupancy range.
The loan to values that we're sitting in.
And most are close to achieving that if not having achieved that so.
Really.
Not that we're not going to continue to manage that book and assess each relationship with.
These couple of relationships had characteristics that were clearly weaker not necessarily based upon the brand or the or the sub market, but the individual operator itself.
Okay. Okay. That's definitely helpful. Maybe.
Maybe moving on to wealth management. Another good good fee quarter or is this a good run rate to look at it for 2021 absent big.
Big market moves.
Yeah in terms of revenue from the wealth management space, Yes, I would think so okay. Those are those are all three of our legs of that stool, which is to <unk> as well as the trust division of the bank or kind of contributing equally to the overall assets under management.
Pretty close and they are all all operating very well so we would expect.
That's a good run rate.
Okay very good maybe one more from me.
With regard to the branch closures I was wondering if you guys could give maybe a little more color around the decision process.
Specific branches and whether or not.
Covid or the or the shutdown.
Change the thinking on these branches.
Got it.
In context of the rest to Sandy spring <unk> branch network.
Steve. Good question, we have an ongoing kind of branch rationalization or optimization kind of effort ongoing and I would say in these cases. We've also looked a lot of banks have learned a good bit about client behavior through through 2020, and the pandemic season.
But that clearly in our case marries up with our evaluation of when leases come due and win those opportunities.
Based on client behavior and proximity to other locations would allow us to.
To downsize and Thats, what those were the kind of the two drivers here in these branches and that we'll continue to have those evaluations as we go forward. It may not always result in.
A declining number of branches, but it will open up the opportunity for us to put resources and maybe parts of our market, where we don't have.
Location and so.
It's not just about.
Reducing branches, but making sure we're in the right places.
Okay. Thank you that's it from me.
Thanks, Steve.
Thank you next question from Mark Hughes Lafayette investments. Please go ahead.
Good afternoon, I hope you all are well.
Thanks, Marc good afternoon.
I had a short term question, but I think it's just it was covered pretty well by a couple of the previous people and so.
So I thought I might ask a long term question that you might think is kind of a tough question, but I think it's a fair question.
That is ours.
I was recently looking at the 2002 annual report for you all.
And the reason I picked that year was.
First year, yet your stock traded at the price. It's currently trading at today.
And I look at what's happened since then and we've made a number of acquisitions.
The banks about five or six times the size. It was back then you've added some fee based businesses.
Geographic expansion seems sensible you Havent go into an open branches in Ohio.
Tennessee or something shorter it seems like you've executed the small day.
Playbook pretty well.
And yet at the end of the day, we sit here as shareholders that you all are all large shareholders.
In the same place we were way back then.
So my question to you all is.
Realize youre not.
Your share price is similar to many others smaller banks and this is not to put anything on new.
So my question is a shareholder is what changes going forward.
Mike.
Sandy spring and small banks in general.
Attractive or lead to better returns going forward.
What we've seen for all of his two decades, now and I realized part of it is banks trade at higher valuations back then versus now.
Maybe where we trade today is just where we're always going to be but.
Could you just give us some big picture long term thoughts around.
What changes the equation in terms of how shareholders get rewarded in the investment community might look at thanks.
Different light that they've been looking at for quite some time now.
Yes that is.
That's a good question Mark this is Dan and perhaps Phil may have some thoughts to offer.
In addition to mine.
I think probably more than ever given the competitive nature of banking.
And the.
And client behavior in terms of.
What's important to them in a banking relationship.
Scale and operating leverage youre going to be of critical importance going forward.
You probably remember for us.
Kind of.
Inflection point was probably the third quarter of 2016 when we.
We finally moved away from kind of always being in that below 60% efficiency ratio on a non-GAAP basis to beginning a process of having that.
<unk> South and.
I think thats.
So it's a combination of of having.
Having scale, which also provides for a little better operating leverage and the ability to invest in future technologies.
That would have us compete favorably with with some of the larger institutions, but the.
The multiples seem to be what the multiples are and so on.
Our long term focus.
Which will like I said earlier will likely include conclude additional growth is not for growth sake, but the ability to drive.
Earnings on an EPS basis double digit over the course of time, which.
Which we think is going to be the driver for shareholder value.
Okay.
That's going to be important for it to play out for us over the course of time, Phil I don't if you have anything.
No I don't know that I have a whole really a whole lot if anything.
To add to it other than to recognize I think it's mark you did that isn't that is.
That is a really tough question to try to.
Try to.
To respond to.
<unk>.
For a lot of reasons.
I mean, I think we try to focus predominantly on where we sit within the industry. We're in.
<unk> tried to evaluate just how well we're performing against those that we compete with or our peers of ours on a relative basis, but where it makes it hard is your question about how on an absolute basis, you look over a period of time in the absolute numbers for us and maybe for the industry at large have not changed dramatically.
And I don't know how to I don't know how to address that aspect of it.
Because I guess that's in the.
In the realm of how the broader market Joseph you use banking in general.
And I, just don't know how to how to address that aspect of it.
Well just to follow up then.
Is there anything completely out of the box that you were thinking about maybe.
Traditional small bank play book.
Violating the lawyers.
Code of never asking a question you don't know the answer to because I don't have the answer to this one.
Is there.
Some direction.
You can go that maybe is non traditional debt.
You know that Youre thinking about or these are hard questions Thats true in the middle of a pandemic.
Got that.
Doing everything you can to maintain your current book, it's going to shape as you can so this may not be the time to be thinking outside the box but.
Or is there anything in the industry that people are thinking about in terms of.
Non traditional business is to get into order fee businesses maybe.
It can be increase that you werent doing right now.
And Mark I would tell you that.
When we think about our focus so I'm not going to answer your question directly because I think we're always we're always evaluating ways in which we can complement.
Our business to serve our clients.
Whether that be in.
In traditional ways or non traditional fee based ways.
When we look at ourselves today sitting here in one of the best markets.
In the country, we've got a company that's got the scale and sophistication to move up market and.
And where we can handle a commercial enterprises, whether it's in lending and Treasury management and wealth management.
And that's really where we're putting our resources is too.
Do more of what we do better than our competition now that we have greater scale.
And the ability to do that and.
We believe and I think.
And our people do.
But we are really one of a kind in this marketplace and we just want to focus on taking advantage of that.
And creating building railway franchise value.
Over time, but it's to your I guess your point around share price.
About driving earnings growth.
And for US, it's about growing organically and then adding adding in ways that it makes sense for us to do just that over time.
Yes, Mark one thing I would add to it is.
And not so much to day part of your question about what we could do that would be unique or whatever but I think our.
Our outlook towards are.
Our strategic view towards having as much of a diversified stream of revenue as we can potentially have as a part of that the answer to that which is to continue to strive for that to be is to have our revenues be as diversified as they can.
And part of that would most likely ultimately come from something that might be different or unique from what we've done for.
150 years or whatever it might be so.
I think some of it lies in that but I.
I couldn't point, you to something specific that would.
That would that would pop out that would lead the way on that.
Much as just striving for having net revenue stream day is diverse as possible.
Well the part of it that makes it tough for me is that I think youre doing things well.
You talked about your efficiency ratio coming down it's been remarkable what you've done there.
I don't ask the question, because I think youre doing something wrong I ask it because I think youre doing.
Actually what is right.
And.
I'm kind of beside myself, just trying to think of what's going to change this win.
There arent obvious areas that need improvement.
While we appreciate that.
Because we felt the same way a lot of times too so.
Well. Thank you very much I wish you luck for the current year.
Thank you Mark Thanks, Mark.
Thank you next question is from Brody Preston with Stephens, Inc. Please go ahead.
Hey, good afternoon, everyone.
Hey, Brian.
From a follow up on the mortgage the 60 40 refi is that similar to your historical net previously or was it more purchase heavy in the past.
Yes, Bruce we transitioned over the course of the last couple of years from being more of a boutique shop that did a lot more construction perm as a percentage of overall production.
And would take take advantage of kind of the refi waves as they came but probably not nearly as effective on the purchase transaction fees.
So we put a lot of effort in.
And resources in terms of originators.
They have done just a tremendous job of driving driving the percentage of our production from from purchase money up.
And I think that's going to help us as is.
Is the expectation of perhaps.
Rates moving in the opposite direction and slowing down that mortgage production will still capture a good piece of that purchase money business.
But that's so we are definitely making inroads on the purchase money percentage.
Thank you again, if you have a question. Please press Star then one.
Next question is for Eric Zwick of Boenning <unk> Scattergood. Please go ahead.
Good afternoon guys.
Sure.
I've got a couple of questions just trying to think about how average earning assets Mike.
Kind of shape up throughout the year and I guess first I'll start on the PPP loans and I appreciate all the commentary you've given in terms of.
The updates on the size and reopening.
The portal at this point and inviting customers to apply for forgiveness I guess at this point there is a little less than.
$1 1 billion of those outstanding what are your expectations for what percentage of those will be forgiven and then just the timing I guess, how many quarters does that potentially.
Take is kind of that's the first part of my question.
Yeah, Eric this is Phil.
So I think that we've been running our estimates assuming about 80% of existing.
$1 1 billion in PPP Outstandings would would give would be given forgiveness.
And we're probably now.
Having pushed back given the things that Dan mentioned earlier about the <unk>.
Forgiveness portal etcetera, and some of the client behavior on trying to accomplish forgiveness thinking that thats going to be end of this quarter into the early part of the second quarter.
So probably the months of February March April as opposed to as much of it in the first quarter here, having already have more than halfway through the month of January and having very little activity in that regard so.
I think that's the way we're evaluating the current book of PPP loans in the way, we would leave the balance sheet.
That's helpful. Thank you and then I guess in terms of the recent kind of reauthorization in an opening that up again for funding I guess are you seeing much demand there and how do you potentially think about size.
Size of a new round of PPP entering the balance sheet.
Yes.
Eric it's tough to predict.
The amount of activity, but I'll give you I'll give you our experience in less than 48 hours. Since we opened opened the portal we've had over 1000 applications.
So there's clearly demand.
But the average average size of those requests here to for US has been on the smaller side relative to the first wave and we'll likely get smaller as additional applications come in but tough to tough to predict exactly what this second round is going to yield in terms of.
Overall outstandings.
Okay.
Tough to estimate at this point.
To be clear it was clear we clearly do not expect it to.
Come near what we did the first time.
But could it be half of that much.
Possible, but we just don't know at this point, it's too early.
That's helpful. I appreciate that the early commentary there and then I guess switching towards away from that that will certainly be a headwind to the net growth.
<unk> for the year thinking on the organic side, just any commentary you have got from price.
Thinking about commercial loans, where the pipeline stands today and how you would think about organic growth in the commercial portfolio in 2021.
Yes, good question with with.
It is tough to.
Adequately articulate the the lift that the PPP process.
Requires.
On the team and Thats both.
Those that are.
Helping clients as relationship managers, all the way through through the system. So it is really right now all hands on deck for these next few weeks as we work through this next round of origination so.
Say that because I think it's going to it's going to dampen first quarter.
Organic production.
Just due to the PPP program.
But our outlook for the year is kind of mid single digit.
Commercial growth as we as we think forward we make we may.
We may outperform that but that's kind of the way we were thinking and thats really based upon the heavy lift of both originations and that forgiveness process on our PPP as well as just the economic demand.
That's helpful again, and then I guess just in terms of the pipeline have you seen any material change in the pipeline given the kind of success.
The success, we had in late fourth quarter with vaccines coming on line and awesome improvement in economic forecast or still kind of steady as she goes there.
I would not say there has been a significant lift in pipeline since since vaccine.
Very encouraged with that.
You have $1 billion of commercial production in the fourth quarter on fourth quarter is normally very strong, but when you consider that level during the pandemic I think it's as much an indication of.
The attractiveness of doing business with Sandy spring bank from from borrowers.
With other organizations are particularly larger institutions and I think despite a slower economic environment I think we will win our fair share of opportunities.
Folks that want a real relationship with with a local player.
But going into the first quarter I think pipeline is probably a little softer which is typical.
From a seasonal standpoint.
Got it and then just last one from me, it's kind of a housekeeping items just in terms of modeling probably fulfill is 24% still a good rate to use for the effective tax rate looking into 2021.
Yes, certainly absent of anything that Mr.
Mr Biden might do to us during.
During the course of the year, but.
And anything they decide in that regard obviously beyond.
The president would probably not.
Really not hit us.
During 'twenty one so we are using the <unk> 2424, 5% effective rate is probably a good one too.
To go with at this point.
Excellent well. Thank you guys. So much for taking my questions today.
They have to thank you Rob Thank you.
This concludes our question and answer session now I'll like to turn the conference back over to Mr. <unk>, Mr. Daniel Schreiber.
Please go ahead.
And thanks, Thanks, everyone for your questions and the discussion is very helpful and hopefully helpful. For you. We welcome your feedback on these calls so please E mail your comments to IR at Sandy Spring Bank Dot com.
Thanks, again for participating and have a great great afternoon.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.