Sandy Spring Bancorp, Inc. (NASDAQ:SASR) Q1 2024 Earnings Call Transcript

Sandy Spring Bancorp, Inc. (NASDAQ:SASR) Q1 2024 Earnings Call Transcript April 23, 2024

Sandy Spring Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Thank you for joining today’s Sandy Spring Bancorp Earnings Conference Call. My name is Tia, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I will now pass the call over to Daniel J. Schrider, CEO and President. Please proceed.

Daniel J. Schrider: Thank you, and good afternoon, everyone. Thank you for joining us to discuss Sandy Spring Bancorp’s performance for the first quarter of 2024. This is Dan Schrider speaking, and I’m joined here by my colleagues Phil Mantua, our Chief Financial Officer; Charlie Cullum, Deputy Chief Financial Officer; and Aaron Kaslow, General Counsel and Chief Administrative Officer. Today’s call is open to all investors, analysts and the media. There is a live webcast of today’s call and a replay will be available on our website later today. Before we get started covering highlights from the quarter and taking your questions, Aaron will cover the customary Safe Harbor statement.

Aaron Kaslow: 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 or other economic conditions, future laws and regulations and a variety of other matters, which by their very nature, are subject to significant uncertainties.

Because of these uncertainties, Sandy Spring Bancorp’s actual future results may differ materially from those indicated. In addition, the company’s past results of operations do not necessarily indicate its future results.

Daniel J. Schrider: Thanks, Aaron. As you read in our press release today, we reported several strong categories this quarter, including core deposits, fee income, our liquidity position and asset quality. At the same time, we remain focused on improving our profitability as well as continuing to shore up core funding, manage expenses and reduce commercial real estate exposure while diversifying growth in other loan categories. We operate in a region with a strong local economy, which we’ll continue to use to our advantage as we navigate a challenging operating environment for our industry. That includes the shifting economic forecasts and uncertain interest rate picture in a national election in November as well as unrest in many parts of the world.

And despite these external factors, our results show that our fundamentals are solid, and we have 156 years of experience navigating business cycles and much more throughout our history. So with that, let’s review the results for the first quarter. Today, we reported net income of $20.4 million or $0.45 per diluted common share for the quarter ended March 31, compared to net income of $26.1 million or $0.58 per diluted common share for the fourth quarter of 2023 and $51.3 million or $1.14 per diluted common share for the first quarter of 2023. Current quarter’s core earnings were $21.9 million or $0.49 per diluted common share compared to $27.1 million or $0.60 per diluted common share for the quarter ended December 31 and $52.3 million or $1.16 per diluted common share for the quarter ended March 31, 2023.

This quarter’s decline in net income and core earnings compared to the linked quarter was driven by an increase to the provision for credit losses, lower net interest income and higher non-interest expense. Total provision for credit losses for the current quarter is $2.4 million. Provision directly attributable to the funded loan portfolio was $3.3 million for the current quarter compared to a credit of $2.6 million in the previous quarter and a credit of $18.9 million in the prior year quarter. The current quarter also included a credit to provision on unfunded commitments of $900,000 because of higher utilization rates on lines of credit. Within our CECL methodology, we adjusted risk factors for specific industries in the commercial real estate segment this quarter, which caused an increase to the provision.

However, it was partially offset by lower individual reserves and the reduced probability of an economic recession. Shifting to the balance sheet, total assets decreased 1% to $13.9 billion compared to $14 billion at December 31. Total loans were stable at $11.4 billion compared to the previous quarter. Investment in commercial real estate loans decreased $106.5 million or 2% quarter-over-quarter, while the AD&C portfolio grew $101.3 million or 10% during this period. Commercial business loans and total mortgage and consumer loan portfolios remain relatively unchanged. And overall, the loan-portfolio mix remained consistent compared to the previous quarter. As expected, commercial loan production was softer this quarter due to normal seasonality and our continued curtailment of CRE growth.

Commercial loan production totaled $241 million, yielding $168 million in funded production. This compares to commercial loan production of $245 million, yielding $153 million in funded production in the linked quarter. We do expect funded loan production to fall between $200 million and $250 million per quarter over the next couple of quarters. And based on pipelines, we expect commercial loan growth in the 3% in the second – range in the second quarter. Given the stability we achieved in our core deposit base, we are building pipelines of more lending activity that achieves profitability targets. However, we are being margin conscious and exercising pricing discipline with whatever we produce. If you look at the supplemental information we released this morning, Pages 7 through 9 provide more detail on the composition of our loan portfolios.

Data related to specific property types in our commercial real estate portfolio and specific commercial real estate composition in the urban markets of D.C. and Baltimore. And on Slides 16 through 20, we provide a detailed commercial real estate overview of our retail, multi-family, office, flex/warehouse and hotel portfolios. As you may notice when reviewing these slides, we are lending in our primary market that we know well. We have three delinquent credits among all referenced portfolios and only a handful of non-performing loans that have been subject to earlier identification and appropriately reserved. We continue to feel good about our overall credit quality and continue to stay close to our clients, assessing credits that are subject to repricing throughout the year and closely monitoring other portfolios.

On the deposit side, we continue to gain momentum in our ability to grow core funding. Many of our key initiatives are tied to core deposit generation. Deposits increased $230.7 million or 2% to $11.2 billion compared to $11 billion at the linked quarter as interest-bearing deposits increased $326.9 million while non-interest-bearing deposits declined $96.2 million. Strong growth in the interest-bearing deposit categories was mainly within savings accounts, which grew by $303.9 million compared to the linked quarter. Interest checking and money market accounts increased $64.5 million and $51.6 million, respectively, while time deposits decreased $93 million. The decline within non-interest-bearing deposit categories was driven by lower balances in commercial and small business checking accounts.

We attribute the first quarter decline in non-interest-bearing deposits to seasonal runoff. But we did start to see DDA growth in the later half of the quarter, which is a positive. We reduced total brokered deposits by $55.8 million during the quarter, excluding brokered deposits, core deposits represented 93% of total deposits compared to 92% in the linked quarter, reflecting continued strength and stability of the core deposit base. The deposit growth during the quarter resulted in a loan-to-deposit ratio declining to 101% from 103% at December 31, and total uninsured deposits at March 31 were approximately 33% of total deposits. So across the company, we continue the shift in strategy to focus on activities driving core deposits. All lines of business are laser focused on deepening relationships with an effort to bring in low-cost deposits.

Over the course of 2023, we generated over 2,200 new deposit accounts with our high-yield savings product. To turn these accounts into full relationships, we recently introduced a new DDA product specifically aimed at this client segment as well as our wealth businesses continue to outreach to these clients as well. Additionally, we know that there’s a high correlation between home equity products and core deposit relationships. To that end, we recently enhanced the automation of our home equity products to make the application process easier and cut the delivery of the closed loan by over 50%. A final example is leveraging our success during PPP. Not that we want to repeat that event, but we did learn the effectiveness of delivering to clients through automation and the small business administration.

With that, we recently brought in a team of SBA lending officers focused on driving small business relationships to the bank, accompanied by their core business accounts. Those are just a few examples of our continued focus on core deposit growth as well as diversification of our lending activity. Shifting to other liabilities, borrowings declined $353.4 million at March 31 compared to the previous quarter. Due to the full payoff of $300 million in outstanding borrowings through the Federal Reserve’s Bank Term Funding Program and $50 million reduction in FHLB advances. I’m pleased to report for the first quarter of 2024 non-interest income increased by 11% to $18.3 million compared to the linked quarter. Over the year-over-year basis, non-interest income grew by 15%.

This improvement is primarily due to wealth management income and the performance of the market during the quarter. Assets under management at quarter end totaled $6.2 billion, representing a 2.8% increase since December 31, we’re pleased with the success of Sandy Spring Trust and our two wealth management subsidiaries, especially as it relates to the retention of our clients and all segments of our wealth business continue to be optimistic about the balance of 2024. Compared to the linked quarter income from mortgage banking activities and credit-related fees increased $1.1 million. Our expectations for mortgage banking revenue should fall in the $1 million to $1.5 million range per quarter. During the first quarter, the mortgage loan portfolio was relatively unchanged.

Housing supply continues to be a challenge, which lowers mortgage demand on the part of consumers. Our net interest margin was 2.41% compared to 2.45% for the fourth quarter of 2023 and 2.99% for the linked quarter. We are encouraging – we’re encouraged that the rate of net interest margin contraction slowed, and we experienced margin improvement during the month of March. Since 2023, the competitive landscape has shifted somewhat in our market and the competition for deposits via rates is generally less aggressive. Compared to the fourth quarter of 2023, the rate paid on interest-bearing liabilities rose 10 basis points, while the yield on interest-earning assets increased 9 basis points. This reflects our disciplined approach to pricing in order to improve the margin over time.

Looking ahead, we believe that the margin has bottomed out this quarter and even with the change in the outlook regarding future Fed-driven rate cuts, we see the margin expanding throughout the remainder of 2024 by 2 to 4 basis points per quarter. We believe the Fed will cut rates just once late in the year and we further anticipate 4 rate cuts during 2025, which should accelerate our margin expansion during that next year toward a low 3% margin by year-end 2025. Non-interest expense for the current quarter increased $900,000 or 1% compared to the linked quarter to $68 million. This quarter is representative of where we see expenses going forward and we look to manage in the $66 million to $68 million range per quarter going forward. The non-GAAP efficiency ratio was 66.73% for the first quarter of 2024 compared to 66.16% for the linked quarter and 56.87% for the first quarter of 2023.

The increase in the non-GAAP efficiency ratio, reflecting a decline in efficiency, from the first quarter of 2023 to the first quarter of 2024 was primarily the result of the 13% decline in non-GAAP revenue, while non-GAAP expenses increased only 1%. Shifting to credit quality. The level of non-performing loans to total loans improved to 74 basis points compared to 81 basis points in the fourth quarter of 2023. This quarter’s reduction was due to several full payoffs and the transfer of one investment commercial real estate loan from non-accrual to other real estate owned. Total non-performing loans during the first quarter amounted to $84.4 million compared to $91.8 million for the previous quarter. And new loans placed on non-accrual during the first quarter of 2024 were $1.5 million compared to $47.9 million in the linked quarter and $19.7 million in the first quarter of 2023.

Total net charge-offs for the current quarter amounted to $1.1 million compared to recoveries of $100,000 for the fourth quarter of 2023 and $300,000 of net recoveries for the first quarter of 2023. The change in the current quarter’s allowance is mainly qualitative and is based on more favorable economic forecast assumptions, less portfolio concentration in investor real estate loans and improvement in overall credit administration across all portfolios. At March 31, the company had a total risk-based capital ratio of 15.05%, a common equity Tier 1 risk-based ratio of 10.96%, Tier 1 risk-based capital ratio of 10.96% and a Tier 1 leverage ratio of 9.56%. These ratios remain well in excess of minimum regulatory requirements. And before we conclude our call, I want to update you on a couple of other items.

As I mentioned at the top of the call, Charlie Cullum is with us today. The transition toward Phil Mantua’s retirement during this year is going extremely well. So as with this call and during current – recent and upcoming investor meetings, we’ll continue to introduce Charlie to our partners in the investment community. And we are also pleased to issue our third annual corporate responsibility report entitled Here for the Future of our Community. I encourage you to visit our website to learn more about our efforts to support our clients, communities and our workforce. So this concludes my comments, and we’ll now move to your questions. Operator, we can move to questions.

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Q&A Session

Operator: [Operator Instructions] First question comes from the line of Catherine Mealor with KBW. Please proceed.

Catherine Mealor: Thanks. Good afternoon.

Daniel J. Schrider: Hi, Cath, afternoon.

Catherine Mealor: I wanted to just start on the margin. I appreciate that you took rate cuts out of your guide, and so the per quarter increase is less than maybe we were thinking if we were getting cuts this year. In an environment where we don’t see rate cuts to a stable rate environment, can you talk maybe first about just kind of the pace of loan repricing that you expect to see? Maybe what percentage or dollar amount of loans, fixed rate loans you’ve got on tap to reprice this year. And I think loan yields increased about 6 bps this quarter, is that kind of a pace that we should expect to model over the back half of the year?

Charlie Cullum: Hi, Catherine. This is Charlie. Yes.

Catherine Mealor: Hey, Charlie.

Charlie Cullum: I think the pace of – hey, the pace of loan repricing should remain relatively consistent throughout the rest of the year, but it will pick up a little bit as we approach the second half of 2024 and then even a little higher as we head into 2025. Per quarter, we’ve got between $250 million and $350 million of fixed rate maturities for the rest of this year. That falls a little bit to $200 million to $250 million for 2025. But all of those loans are going to be repricing up the curve in excess of 100 basis points. So that’s really what contributes to the expansion in loan yields without the movement in the yield curve.

Catherine Mealor: Okay. Great. And then on the deposit side, it seems like you mentioned, Dan, that it started – deposit cost started to stabilized in the back half of the quarter and March would be even down a little bit. Can you talk a little bit about where deposit costs ended the quarter? And is there – I mean are we in a scenario where you could actually see deposit costs decline as we move into 2Q or not quite there yet?

Charlie Cullum: Hi, Catherine. This is Charlie, again. So overall deposit costs did decline from February to March by 3 basis points. So our cost of interest-bearing deposits was $355 million in February and $352 million in March. I would anticipate some moderation of deposit costs. I don’t know if I would expect a continued decline. The recent expectations around Fed cuts have caused time deposit rates to spike back up a bit. But I don’t expect significant increases in deposit costs as we go forward. I think that has stabilized at this point.

Catherine Mealor: Great. And maybe one follow-up on that. Where is your high-yield savings account kind of average rate right now?

Charlie Cullum: So we pulled the retail high-yield savings rate down to 4.5% as of the end of the quarter.

Catherine Mealor: And then your new CD costs are coming on around where today?

Charlie Cullum: We have a 5% CD for seven months out there currently and a 14-month at 4.75%, a pretty healthy blend of the two.

Catherine Mealor: Great. Very helpful. Thank you.

Charlie Cullum: Thanks, Catherine.

Operator: Thank you. The next question comes from the line of Casey Whitman with Piper Sandler. Please proceed.

Casey Whitman: Hey, good afternoon. Hey, so just going along with Catherine’s questions on the margin. I guess, how helpful – can you remind us just how helpful the first rate cuts would be for you? Can you drop deposit rates quickly then? Thanks.

Charlie Cullum: Our expectation is that we would be able to move our deposit base relatively quickly once the Fed does begin to reduce interest rates. So here, we’re guiding somewhere in the 2 to 4 basis points per quarter improvement without the cuts. With the cuts, it’s a little more than twice that, closer to 10 basis points per quarter of margin improvement. And part of that expectation isn’t just related to the short end moving, but it’s anticipating the long end doesn’t drop significantly. So we get some value out of some normalization in the shape of the yield curve as well as the short end coming down.

Casey Whitman: And that’s 10 basis points a quarter with every 25-basis point-cut, you mean?

Charlie Cullum: Exactly. Yes, we get about 40% of the cut.

Casey Whitman: Okay. Okay. And then on the asset side, I think Catherine asked about the loan yields, but same question just on the securities book. Like, what do you have naturally repricing over the next year or two, or maturing?

Charlie Cullum: The securities portfolio reprices about $15 million to $20 million per month. Those yields are pretty low, low 2s to mid-2s. So they’re repricing up the curve quite a bit. Our strategy right now is to buy seasoned MBS and floating rate kind of a blend of the two, a barbell strategy. So we’re getting average yields close to 6% or greater on a blended basis between the two. So we should see some nice improvement in the overall yield on that securities portfolio as we progress throughout the year.

Casey Whitman: Okay. I’ll switch gears. But I do want to say we appreciate the outlook slide you guys provided today. Okay, just looking at capital, just given where the stock is today, can you remind us your view on buybacks? Is buying back shares here something that might make sense for you? Or would you rather hold on to capital?

Daniel J. Schrider: I would answer it this way, Casey. It makes entire sense to us to be repurchasing shares. But I think that just with some of the uncertainty and as we work our way back from a profitability standpoint, I think preserving is probably item number one. But – so I regret that we’re not in a position to be active at the moment. But that could change with more clarity in the environment around us, but we’re not looking to be active in the immediate future.

Casey Whitman: Got it. Thank you, guys.

Daniel J. Schrider: Thanks, Casey.

Operator: Thank you. The next question comes from the line of Russell Gunther with Stephens. Please proceed.

Russell Gunther: Good afternoon, guys.

Daniel J. Schrider: Hi, Russell.

Russell Gunther: Hey, I wanted to – hey, Dan. Hi, guys. Just on the loan growth discussion, Dan, you mentioned expectations in the second quarter around 3% for commercial. Can you just expand upon that a bit if you’re able to share where the pipeline stands today versus maybe linked quarter? And then from a mix perspective, your target between kind of CRE, C&I, what the drivers may be?