Sandy Spring Bancorp Inc (SASR) Q1 2021 Earnings Call Transcript

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Sandy Spring Bancorp Inc (SASR -2.65%)
Q1 2021 Earnings Call
Apr 22, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to the Sandy Spring Bancorp Incorporated Earnings Conference Call and Webcast for the First Quarter of 2021. All participants will be in a listen-only mode. [Operator Instructions] For your information, today's event is being recorded.

At this time, I would like to turn the conference call over to Mr. Dan Schrider. Sir, please go ahead.

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

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

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

So before we get started covering highlights from the quarter and taking your questions, Aaron will give the customary Safe Harbor statement. Aaron?

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

Thank you, Dan. Good afternoon, everyone. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings and other expectations, estimates of risks and future costs and benefits, assessments of expected credit losses assessments of market risk and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties 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, including the impact of the COVID-19 pandemic, 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.

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

Thanks, Aaron, and thank you all again for joining us today. Today, I will review our first quarter financials, and then Phil and I will walk you through the supplemental materials we issued earlier this morning.

Overall, we are very pleased with our performance this quarter. There are many promising trends in our results, especially as it relates to the resiliency of our loan portfolio and our credit outlook. We continue to be in a great position to help our clients reopen and recover from this pandemic.

And with vaccinations in our region on the rise, we look forward to welcoming more of our clients and our employees back to our offices in the weeks and months ahead. And I will provide more color on our return-to-work plans later in today's call. For now, though, I will run through our first quarter financial highlights.

Today, we reported net income of $75.5 million or $1.58 per diluted share for the first quarter of 2021. The current quarter's results compare to net income of $10 million or $0.28 per diluted share for the first quarter of 2020 and net income of $56.7 million or $1.19 per diluted share for the fourth quarter of 2020.

Core earnings were $56.9 million or $1.20 per diluted share compared to $29.6 million or $0.85 per diluted share for the quarter ended March 31 of 2020 and $58.3 million or $1.23 per diluted share for the linked quarter. Core earnings exclude the impact of the provision for credit losses, M&A expenses, prepayment penalties on early FHLB redemptions and investment securities gains.

The provision for credit losses this quarter was a credit of $34.7 million compared to the linked quarter's credit of $4.5 million. Like many financial institutions that have adopted CECL, improving economic conditions have led to the reversal of the large provisions taken earlier in the pandemic. Currently, our actual credit metrics demonstrate favorable trends, which I will touch on later, and Phil will also explain the provision credit in more detail when we review the supplemental materials.

Total assets grew 44% to $12.9 billion compared to the first quarter of 2020, and during the same period, loans grew by 55%. This year-to-year growth is primarily due to the Revere Bank acquisition in the second quarter of 2020 as well as our participation in both rounds of the PPP program. Excluding PPP, total loans grew 36% to $9.1 billion compared to the prior year quarter, with commercial loans growing 49% or $2.5 billion and consumer loans increasing 6%.

During the first quarter of 2021, total loans, excluding PPP, declined $225 million compared to the linked quarter. We believe this decline is temporary and reflects a high level of early payoffs out of our commercial real estate portfolio, refinances out of our mortgage portfolio and lower seasonal loan production.

For many reasons, we are well positioned for future growth. PPP originations are now behind us. The economic forecast has improved, an increasing percentage of the population is now vaccinated, we have a unique position in the market, both in terms of scale and sophistication and a very highly skilled team of commercial bankers, also aided by a resilient credit portfolio and significant liquidity. For all of these reasons and more, we are confident in our ability to continue to serve our clients and grow our Company.

On the deposit front, our deposit base continues to be an underlying strength of our franchise. Over the past 12-month period, deposit growth was 62%, with non-interest-bearing deposits growing 94% and interest-bearing deposits growing 48%. Once again, this was primarily driven by the acquisition and our ability to retain revere clients despite integrating the companies in the midst of the pandemic.

PPP-related deposits are estimated to be approximately $1 billion at the end of the quarter. $610 million are from round one and $450 million are from round two. The remaining round one deposits represent a 55% retention rate, and those funds from credit, exceeding $0.5 million, are retained at a rate closer to 70%. The majority of all PPP-related deposits or approximately 90% are in our demand deposits and checking categories.

Non-interest income has been very strong throughout the pandemic, increasing by 59% or $10.7 million compared to the prior year quarter. This was a result of a 235% increase in mortgage banking income and a 25% increase in wealth management income.

Mortgage banking income increased by $7.1 million during the current quarter compared to the prior year quarter. And on a linked-quarter basis, mortgage banking income declined to $10.2 million compared to $14.5 million. This decline is the result of decreasing margins on the volume of mortgages sold during the quarter as well as the refinance cycle having run its course.

As we previously shared, mortgage banking will remain a significant part of our fee-based revenue this year. However, given the extremely limited purchase inventory, mortgage production is expected to continue to decline, both nationally and here at Sandy Spring.

This quarter also marked our first full year with Rembert Pendleton Jackson, or RPJ, and the results of this acquisition have been significant. Wealth management income increased $1.8 million over the past 12 months, and wealth income grew $515,000 or 6.27% compared to the linked quarter.

With more than $5 billion in wealth assets under management across RPJ, West Financial Services and Sandy Spring Trust, we are pleased with our increasing presence in the wealth space. We remain focused on continuing to grow our wealth business and differentiate ourselves in this competitive market.

Other non-interest income increased $2.1 million compared to the same quarter of last year, due to prepayment fees earned from early loan payoffs and a recovery from a previously charged-off loan from Revere Bank. We continue to be very pleased with the stability in the margin. Net interest margin for the first quarter of 2021 was 3.56% compared to 3.29% for the same quarter of the prior year. Excluding the net $2.9 million impact of amortization of fair value marks, the net interest margin for the current quarter would have been 3.46% compared to 3.27% for the first quarter of 2020.

The stability we are seeing in our margin is being driven primarily by our ability to continue to reduce overall cost of funding as the cost of interest-bearing liabilities declined by 13 basis points from last quarter and the cost of interest-bearing deposits fell by 11 basis points. The average rate on CDs was reduced by 22 basis points, representing the deposit category with the largest decline in the quarter.

On a go-forward basis, the overall cost of funding should continue to decline as we replace the recently redeemed FHLB advances with more cost-effective alternatives at a favorable average rate differential, up 230 basis points.

On the expense side, non-interest expense increased 43% or $20.4 million compared to the prior year quarter. This quarter's results included $9.1 million in prepayment penalties from the early redemption of $279 million of FHLB advances with an average rate of 2.63%. This action will support our efforts to preserve a stable margin.

Excluding these penalties and M&A expenses, non-interest expense grew 27% year-over-year due to compensation and operational costs associated with both the Revere and RPJ acquisitions as well as an increase in FDIC insurance and the amortization of intangible assets. After adjusting for the prepayment penalties, non-interest expenses are consistent with the linked quarter.

The non-GAAP efficiency ratio was $42.65 for the current quarter compared to $54.76 for the first quarter of 2020 and $45.09 for the fourth quarter of 2020. This decrease in the efficiency ratio from the first quarter of last year to the current year quarter was a result of the $50.9 million growth in non-GAAP revenue, outpacing the $11.6 million growth in non-GAAP non-interest expense.

Looking ahead, we continue to manage this expense to revenue metric to a targeted range of 48% to 50%. We anticipate full year 2021 efficiency levels to settle into this range as we expect mortgage revenues to decline from current levels and operating expenses to be comparable to current levels, absent the FHLB advanced prepayment penalties. And we will also look to invest in the people and technologies needed for future growth and success, while identifying opportunities for greater efficiency.

Shifting to credit quality. Nonperforming loans decreased from 111 basis points to 94 basis points. Nonperforming loans totaled $98.7 million compared to the $115.5 million in the linked quarter. And we are very encouraged by these trends. Loans in nonaccrual status that relate primarily to a limited number of large borrowing relationships within the hospitality sector were $43.8 million at quarter-end. And these large relationships are collateral dependent and require no individual reserves due to sufficient values of the underlying collateral.

The Company recorded net charge-offs of $300,000 for the first quarter of 2021 compared to net charge-offs of $0.5 million for both the first and fourth quarter of 2020, respectively. The allowance for credit losses was $130.4 million or 1.25% of outstanding loans and 132% of nonperforming loans compared to $165.4 million or 1.59% of outstanding loans and 143% of nonperforming loans in the linked quarter.

Excluding PPP loans, the allowance of credit losses as a percentage of total loans outstanding would increase to 1.43% and to 2.86%, looking at the commercial business segment alone. Tangible common equity increased to $1.1 billion or 8.9% of tangible assets at March 31, 2021, compared to $726.8 million or 8.51% at March 31, 2020, as a result of the equity issuance in Revere acquisition.

The year-over-year change in tangible common equity also reflects the increase in intangible assets and goodwill associated with the Revere acquisition. Excluding the impact of the PPP program from tangible assets at March 31, the tangible common equity ratio would be 9.94%. The Company had a total risk-based capital ratio of 15.49%,a common equity Tier 1 risk-based capital ratio of 12.09%, a Tier 1 risk-based capital ratio of 12.09% and a Tier 1 leverage ratio of 9.14%.

And we will now move to the supplemental information that we issued this morning in conjunction with our press release. On Slide 2, you can see the loans with payment accommodations as at March 31 totaled $233 million, resulting in 3% of our loan portfolio receiving accommodations. The slight increase from last quarter was due to one specific hotel credit that was granted an additional accommodation after having come out of a deferral and two relationships that were granted first time payment accommodations.

If you move to Slide 3, we have detailed specific industry information, which we have updated and shared in the past four quarters. Outstanding balances for each segment and the loans and payment accommodations are as of March 31.

On Slides 4 and 5, we have broken out our PPP participation in both rounds one and the second slide in round two of the program. And to update you on our forgiveness efforts, 61% of all round one loans have applied for forgiveness and 99.5% of all forgiveness applications submitted to the SBA have received full forgiveness. In round two, we originated 2,950 PPP loans for a total of $446 million, and we are no longer accepting new applications and are focused on helping our clients through the forgiveness process and expect the majority of forgiveness to fall in this calendar year.

And now, I will pause and turn it over to Phil to talk through CECL and our capital position.

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

Thank you, Dan. Good afternoon, everyone. Pleasure to be here with you this afternoon. I'm going to pick up on Slide 6 of the supplemental deck where we have what become our traditional waterfall representation of the movement in our allowance for the first quarter of 2021. It's broken into components to reflect the key drivers of the change during the quarter.

As you can see, the change over the course of the current quarter was primarily driven by the significant reduction in the projected near-term level of the unemployment rate, a key economic factor in our CECL methodology.

On the next slide, Slide 7, is a comparison of the current and more recent economic forecast variables. Our CECL methodology continues to use a Moody's baseline forecast that for the first quarter of this year was a version that was released on April 5.

This baseline forecast integrates the effects of COVID-19 and portrays an unemployment rate for our local market that has essentially already peaked and it ultimately recover -- is ultimately scheduled to recover to a level of 3.5% in early 2023, which is lower by almost 1.2% than it was in the previous forecast. Significant improvement in the year-over-year growth in business bankruptcies and a better year-over-year change in the home price index were also presented as they are forecasted. These macroeconomic variables are further outlined on the next slide number eight. In determining our reasonable and supportable forecast period, we continue to use a two-year time horizon to reflect less uncertainty in the long-term outlook at this time.

Similar to our approach taken in the last two quarters, we continue to not take into consideration any potential mitigating factors based on what could be perceived as the potential positive outcome or other impact of government programs such as the PPP. We still feel very comfortable that this is a conservative stance and approach to our reserve.

Conversely though, we have chosen to include an additional qualitative factor this quarter related to concentration risk that we believe captures the additional risk levels that could exist in certain industry segments of our portfolio, which would include the hotel, office and retail-based portions of our loans. This additional factor is also the majority of the increase of the qualitative factors component noted on the waterfall slide earlier presented.

On Slide 9, we provide some additional granularity related to the reserve from a portfolio view, where you can see the most significant amount of reserve by dollar amount continues to be attributed to the commercial business portfolio where the total reserve this quarter is $31.8 million or 1.32% of outstandings, but again, declined from the prior quarter.

We should note that that 1.32% of the reserve reflected here includes PPP loans in the balance, although there is no reserve required on those loans. And as illustrated in the footnote at the bottom of the slide, when adjusting the balance to exclude the PPP loans outstanding, the reserve on our commercial business segment would be 2.86%, and our total reserve would be 1.43% of total lines.

Finally, on Slide 10 is the trend of our pertinent capital ratios with some brief explanations regarding the treatment of certain items and their impact on resultant ratios. Included in those comments is an adjusted tangible equity to tangible assets ratio to reflect the impact of PPP loans on the current measure, as Dan mentioned earlier. We continue to feel confident about our capital position as all of the metrics improved nicely this quarter, primarily as a result of the strength of our reported earnings.

We have also recently updated our capital stress test where we have constructed a baseline and severe forecast scenario, continuing to utilize the same Moody's baseline forecast incorporated in our CECL calculations and a COVID based S4 economy in the severe case. Having done so, as we have in the past, we continue to be confident that we have the capital base to carry us through the remainder of this ongoing pandemic situation and provide us a strong basis for future growth.

That's it, Dan.

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

Thanks, Phil. Now before we move to take your questions, I would like to briefly cover just a few other updates. As I mentioned earlier, and noted in the release, we look forward to welcoming more of our employees and clients back to our offices. So far, we have been operating at a 25% capacity, but we will increase that percentage in the weeks and months ahead.

We have, like so many others, learned so much about working from home, staying flexible and using technology to do our jobs more efficiently and effectively. And we will apply these lessons as we move forward, but we will leave with the mindset that we are going to return to our offices. We believe that in person collaboration is what's best for our relationships with our clients and our colleagues. And included in these return-to-work efforts, we will also begin to reopen our branch lobbies this summer.

As it relates to our branch network, I'm pleased to report that in February, we expanded our presence in D.C. and opened our fourth branch in the city. This full-service branch is located in the vibrant retail and business community near the Washington Convention Center. We see a great deal of growth potential, especially as this region continues to recover from the pandemic.

Last month, we also released our first Annual Corporate Responsibility Report. This report goes beyond our financial reporting to show how we support our clients, our employees, communities as well as the environment. And we are committed to transparency and are proud to share our progress with you. If you haven't seen it, you can find the report at sandyspringbank.com and on our Investor Relations site.

Our Company continues to earn recognition that demonstrates we are a premier community bank, an employer of choice and a Company with top talent. Most recently, Forbes named Sandy Spring Bank to its 2021 list of America's 100 Best Banks.

As I mentioned earlier today and in prior quarters, we truly have a unique position in our market and among our peer group. As a nearly $13 billion company, we have the size, scale and diversification of products to meet our clients' banking mortgage, private banking, trust, wealth and insurance needs. Our employees live and work in the communities we serve and all decision-making is local.

We all feel a sense of pride in ownership in taking care of our clients because they are our neighbors and our friends, and they are the community we exist in. We operate in a highly desirable market. Greater Washington region is home to the federal government and a massive government contracting presence.

Amazon's HQ2 and many other national and international companies are headquartered here. Small businesses thrive in this region, and we are surrounded by several top-tier universities and hospital systems. So as we look forward, we see endless opportunities to grow our company and build on our existing strength.

So that concludes our general comments for today, and we will now move to your questions. So Jamie, you can have the first question. If you could identify your name and the company affiliation you're with as you come on the line that will be really helpful.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Casey Whitman from Piper Sandler. Please go ahead with your question.

Casey Whitman -- Piper Sandler -- Analyst

Hey. Good afternoon.

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

Good afternoon, Casey.

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

Hi, Casey.

Casey Whitman -- Piper Sandler -- Analyst

Hi. Hi. Maybe, Phil, can you start off by just filling us in on your core margin outlook from here? I know the next few quarters are going to be probably with PPP forgiveness, but maybe you can fill us in on sort of what you're thinking about the core margin ex PPP and accretion?

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

Yeah, Casey, I'd be glad to. So first of all, as it relates to the PPP forgiveness aspect of things, I think what you can expect here is that from a timing perspective, the large majority of the impact to our earnings as well as, therefore, the margin are going to really be in this next quarter here in the second quarter of the year, with that kind of continuing into the third quarter and trailing off more toward the fourth quarter.

In the current quarter, the forgiveness aspect of what took place was probably worth about 4 basis points to the -- 4 basis points of benefit to the core margin in addition to what's going on with the ongoing fair value adjustments, which are beginning to decline, especially on the asset side.

So all-in-all, what I would suggest is on a core basis, underneath all of that throughout the remainder of the year, that margin is probably going to be in the mid-3.40% range, not terribly different than I think what we basically reported here, 3.40%, 3.45%, 3.46%, somewhere in that range. And again, that's with the assumption that there are no significant changes in the overall level of market rates other than whatever fluctuations could occur on the tenure.

Casey Whitman -- Piper Sandler -- Analyst

Great. That's helpful. Thank you. And while we are talking about PPP, Dan, I think you gave some numbers in your prepared remarks around deposit retention with that program. Can you repeat those numbers that you gave? I just missed them, sorry.

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

Yeah, I sure can. I'm getting there.

Casey Whitman -- Piper Sandler -- Analyst

Sure. No problem.

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

I'm getting there as fast as I thought I would. So all-in-all, at the end of the quarter, we had about $1 billion in deposits related to PPP. What I commented on is in round one, about $610 million are on the books; and from round two, about $450 million. Of the remaining round one deposits that represents about a 55% retention rate of those deposits. But when you break it down a little further on the credits originations that exceeded $0.5 million initially that retention rate is closer to 70%. And obviously, all those round two were done in the quarter. So there's no retention data on that.

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

Yeah. And Casey, just from a standpoint of trying to estimate where that goes from here, we are, for the most part, modeling that by the end of the year, we think we will still be retaining between 30% and 40% of the remaining deposits as we see them today based on what the numbers that Dan just suggested. So we have some expectation they will continue to run down, but we also believe that there will be some element of them that will continue to hold on to. And a lot of that, I believe we will know by virtue of when folks get forgiven and feel like they've -- the money belongs to them, so to speak. And therefore, it will be interesting to see whether they deploy those funds or they continue to just kind of hang on to them and they stay in our deposit base.

Casey Whitman -- Piper Sandler -- Analyst

Understood. Thank you, both.

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

Thanks, Casey.

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

Thanks.

Operator

Our next question comes from Steve Comery from G. Research. Please go ahead with your question.

Steve Comery -- G. Research -- Analyst

Hey, guys. Good afternoon.

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

Good afternoon, Steve.

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

Hi, Steve.

Steve Comery -- G. Research -- Analyst

Wanted to actually maybe ask a little clarification on the core margin outlook, if we start there. During the quarter, it seems like you benefited from higher PPC, obviously. I was wondering what the impact of the higher pay-offs was in the quarter? Was there any kind of prepayment element in the margin in this quarter? And if there was, kind of what's going to make up the difference in the back half of the year?

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

Yeah, Steve. This is Phil. If there were any implications of any prepayment penalties or things that we might have accrued by having some of those earlier payoffs this quarter, they would to run through the non-interest income element of things as opposed to the net interest income or the margin. So there wouldn't have been any implications from that standpoint related to that runoff. I would say, certainly, whatever yields that those loans ran off at would have had some detrimental impact to the overall level of the margin currently.

And in giving that guidance, I would also tell you that even with the a prepayment that we made on the advances, which we would predominantly pick up probably five or six basis points effect to the margin. We still have some continuing pricing down on the asset side of the balance sheet. So my guidance is to really kind of give a truly stable margin position between now and then knowing the cause and effect on both sides, both in asset yields as well as what happens to deposits even with the pickup that we are going to enjoy from having paid down those advances.

Steve Comery -- G. Research -- Analyst

Okay. That's very good detail. And then maybe on the loan balances, I noticed that essentially all the commercial loan categories were up slightly, and all the consumer categories were down. Is there like a bifurcation in demand or is this a credit choice by the bank?

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

In terms of the runoff levels or the ending balances?

Steve Comery -- G. Research -- Analyst

Pending balances?

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

Yeah. Steve, I think as it relates to the consumer portfolio, that is predominantly client behavior and choice. We are not really doing anything differently there, whether it is in the underlying approach to credit or the way that we are just promoting or offering those. And the majority of our consumer portfolio, as you probably can recall are home equity lines, which I think are just becoming less and less favorable to the consumer these days. So as it relates to that component of it, I don't see anything being -- anything out of the ordinary in that regard. I don't know, Dan, if you have any comments on the commercial side, you want to offer?

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

Yeah. What we desire standpoint, there has been no change in our appetite for any elements of our portfolio. First quarter, we spoke to some outsized runoff, which was really in a lot of ways, the result of success of our clients' number of commercial real estate projects, which changed hands and sold. A lot of our small builders have been outpacing our expectations in terms of turning construction loans with the sale of properties. And in a couple of cases, we had some clients take advantage of the market conditions. And so nothing from a loss of client standpoint, more some of just -- higher runoff, we typically would expect, have appetite to grow every aspect of our commercial portfolio.

Steve Comery -- G. Research -- Analyst

Okay. Very good. Maybe one more for me. Period end non-interest balances showed a lot more of an increase than like the average balance should. Was there anything unusual going on there?

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

Probably just the timing of the funding of PPP loans that were probably more heavily weighted toward the end of the quarter than during the quarter since we went from the timing when we reopen the portal, etc.

Steve Comery -- G. Research -- Analyst

Okay. Yeah, that is what I figured. Okay. Thanks, guys.

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

Yeah. You bet.

Operator

Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Catherine Mealor -- KBW -- Analyst

Thanks. Good afternoon.

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

Good afternoon, Catherine.

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

Hi, Catherine.

Catherine Mealor -- KBW -- Analyst

I just wanted to ask just on the provision you gave a lot of great kind of color on what drove the large reserve release this quarter, Phil. And maybe just a follow-up to all of that is, do you feel like this is most of the reduction in the reserve release just from the better economic baseline and from here, you kind of more keep than there this level in charge offs or do you see the ability to bring the reserve down even further from here?

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

Yeah, Catherine. So I think the first answer is that this is probably within a quarter, the largest amount of release we might see. But I would also say that, again, and hopefully, this is the case, we don't really experience any significant charge-off -- through losses and charge-offs as we go forward, it will continue to mute the amount of provisioning and potentially create further releases and therefore, provision credits in subsequent quarters. So that is a possibility. But I don't know that I would suggest to you that they would be nearly as large as the one that we just took, which means that there is still further room for the overall level of reserves to loans to decline over some period of time here going forward.

Catherine Mealor -- KBW -- Analyst

Great. And then on the expense side, the expenses came down a little bit more than I had expected. Is this a good run rate to grow from or how do you -- what is your outlook toward the expenses this year?

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

Yes. I think that the decline in the expense rate here in the first quarter will not continue going forward. I think we will start to grow here in the next quarter and beyond. In some advance prepared comments here, he made some mention of things that we are starting to invest in from a technology and people standpoint. And I think that, that is going to start manifesting itself in the expense line and the run rate as we go in through the second quarter and through the rest of the year.

So I think absent of the netting of the prepayment penalties and the offset against the liability for unfunded commitments, we probably had a base of expense this quarter of around 60. I would expect that to go north of that into the next quarter and beyond. You could see our expense base grow in the low single-digits here, low to middle-single digits through the rest of the year.

Catherine Mealor -- KBW -- Analyst

Okay. Great. And then one last question just on M&A that we have seen some deals announced. Any kind of updated your thoughts on what pending and M&A activity this year? Thanks.

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

Yeah. Thanks, Catherine. It continues to be an element of our view forward from a growth standpoint, and we will continue to have those types of discussions. Nothing imminent to certainly report and probably nothing different than my comments from the prior quarter, and that is, you know at this point, we have focused on continuing to emerge from the pandemic and a strong focus on organic growth. But M&A will be a part of our story going forward, both bank and non-bank.

Catherine Mealor -- KBW -- Analyst

Great, helpful. Great quarter. Thanks

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

Thank you.

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

Thanks, Catherine.

Operator

Our next question comes from Eric Zwick from Boenning and Scattergood. Please go ahead with your question.

Eric Zwick -- Boenning and Scattergood -- Analyst

Good afternoon, guys.

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

Hi, Eric.

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

Hi, Eric.

Eric Zwick -- Boenning and Scattergood -- Analyst

First one for me, apologies if I missed it earlier. Just curious with regard to the PPP loans in the 2020 originations, what is the remaining amount of unamortized fees from those?

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

That's a good question, Eric. I'm not sure I have that specific number at my disposal. But I can certainly follow-up with you on that. I don't know that it really has been identified.

Eric Zwick -- Boenning and Scattergood -- Analyst

That's OK. And then looking at Slide 5, it looks like it is about 19 million or so for those 2021 originations. Is that right?

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

Well, that's probably related mainly to round two. And in that case, those fees, I believe, are higher than on a loan-by-loan basis than those of round one. But yes, I think that is a correct number.

Eric Zwick -- Boenning and Scattergood -- Analyst

Okay. That's good. And then you talked about the outlook for mortgage revenue to likely decline throughout the year for this kind of several factors you mentioned. I guess I'm curious about the cost side of that. As you view that business, how you manage it is variable versus fixed? And what is kind of the longer-term efficiency ratio of your mortgage operations?

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

Yeah, Eric, Dan. Our outlook, as I mentioned, for the reasons stated is that it is going to come off. We are it is largely a variable piece of our business from an expense based standpoint. And so we have the ability to modify the spigot there in terms of what we have invested in mortgage I say that at the same time that we have got a very efficient and highly productive shop that we still will look to grab our fair share of the market as -- even as the market diminishes. So Phil is pulling out data with regard to your question about the efficiency of that business.

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

Yeah, Eric. I think that, that from the internal calculations that we make there, the efficiency ratio on that business is in the mid-20% range, if I'm not mistaken, and is usually managed consistently in that range. So I mean, clearly, in relation to the rest of the bank, it is a highly efficient component of our business.

Eric Zwick -- Boenning and Scattergood -- Analyst

Okay. Great. Thanks for the color there. And I guess last one for me is a bit of a follow-up on Catherine's question I believe about the reserve. We have heard a number of banks indicate that potentially timing is obviously hard to predict. But once we get back to a more stable economic outlook and once the deferrals are resolved, that the longer-term reserve levels could converge back to kind of what the day 1 CECL adoption levels were. And I guess looking at Slide 9, let's call it, 90 basis points or so for you, is that appropriate for Sandy Spring over the longer term or how do you think about the kind of natural level of the reserve overtime?

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

Yes, Eric. I think the 90 basis points is probably a bit lean. Although I have seen and certainly heard that, that is the sentiment in a lot of cases that a lot of the reserve levels could go back to -- reserves could go back to those pre-COVID levels. I don't know, I would have a hard time seeing or potentially get below one, but it is yet to be seen how this plays out. But I understand the sentiment that is out there on that.

Eric Zwick -- Boenning and Scattergood -- Analyst

Appreciate the color there. Thanks for taking my questions today.

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

Thanks, Eric.

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

You're welcome.

Operator

[Operator Instructions] Our next question comes from Brody Preston from Stephens. Please go ahead with your question.

Brody Preston -- Stephens -- Analyst

Good afternoon, everyone.

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

Hi, Brody.

Brody Preston -- Stephens -- Analyst

Just wanted to follow-up on PPP. So it is about, call it, $1.3 billion in outstanding is currently correct?

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

Yes.

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

Yes.

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

Net of what has been given. Yes.

Brody Preston -- Stephens -- Analyst

Okay. And do you have to know what the average balance is for 1Q were?

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

Yes. Hang on one second, I will tell you if that is -- and by the way, Eric, the answer to Eric's earlier question of remaining deferred fees is about a little less than $27 million. Let me see if I can find for you the average here real quick. Hang on a second. Yes. Average PPP balance this quarter was about $1.17 billion [Phonetic].

Brody Preston -- Stephens -- Analyst

Thank you for that. And so I did want to clarify. So it was about 10 basis points of accrued yield this quarter, correct?

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

For...

Brody Preston -- Stephens -- Analyst

The switch in the PAA. Yes, the purchase loans?

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

Yeah, I'm sorry. Hang on a second. I will find that. It sounds about right, but let me confirm that for you.

Brody Preston -- Stephens -- Analyst

Yeah. I just wanted to confirm that what you had put in the release was just the margin was just ex PAA, it wasn't inclusive of the PPP?

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

That's correct. Yes, that's about 9 basis points. That is correct. Yeah.

Brody Preston -- Stephens -- Analyst

Okay. All right. And then I wanted to ask on the C&I balances right, so just kind of excluding PPP, the balances were actually down about 8% in the linked quarter, but that was after they were up 5% in the previous quarter. So I just wanted to better understand what was driving that variability?

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

We had a couple of things at play, but the largest were a couple of business sales that impacted that portfolio. Our utilization on lines is held pretty constant through the whole pandemic, including through the first quarter. We had a couple of large credits move out through the successful sale of those businesses as probably the most significant kind of larger hits in that book.

Brody Preston -- Stephens -- Analyst

Understood. Okay. And then on the expenses, I just wanted to follow-up on the other expense line item. Kind of setting aside the FHLB prepayment penalty, there is some variability there from 4Q to 1Q. So just -- is the five million rate sort of the right run rate to use on that other expense line item moving forward in addition to any growth?

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

Let me take a look at that for you real quick. It is probably a little bit more in the $6 million range then $5 million because there is an additional offset to what we set aside for unfunded commitments last quarter that we reversed backed out in this quarter. So I would add that back and get you close to the $6 million before growth. Yeah.

Brody Preston -- Stephens -- Analyst

Okay. Thank you for that. And then, I just did want to ask what percent of your loan portfolio is floating rate at this point?

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

I think the overall portfolio is probably in the 25% to 30% range.

Brody Preston -- Stephens -- Analyst

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

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

Thank you, Broderick.

Operator

And ladies and gentlemen, at this time, showing no additional questions, I would like to turn the floor back over to the management team for any closing remarks.

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

Thank you, Jamie and thank you, everyone, for their participation today. We always welcome your feedback on these calls, so please email your comments to [email protected]. And I hope you all have a terrific afternoon.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

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

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

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

Casey Whitman -- Piper Sandler -- Analyst

Steve Comery -- G. Research -- Analyst

Catherine Mealor -- KBW -- Analyst

Eric Zwick -- Boenning and Scattergood -- Analyst

Brody Preston -- Stephens -- Analyst

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