Sandy Spring Bancorp, Inc. (NASDAQ:SASR) Q4 2024 Earnings Call Transcript

Sandy Spring Bancorp, Inc. (NASDAQ:SASR) Q4 2024 Earnings Call Transcript January 23, 2024

Sandy Spring Bancorp, Inc. beats earnings expectations. Reported EPS is $0.6, expectations were $0.53. 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. Thank you for attending today’s Sandy Spring Bancorp Inc. Earnings Conference Call and Webcast for the Fourth Quarter of 2023. My name is Megan and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to Daniel J. Schrider, CEO and President of Sandy Spring Bancorp. Daniel, please go ahead.

Daniel Schrider: Thank you, Megan, and good afternoon, everyone. Thank you for joining our call to discuss Sandy Spring Bancorp’s performance for the fourth quarter of 2023. This is Dan Schrider and I’m joined here by my colleagues, Phil Mantua, our 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 give the customary Safe Harbor statement. Aaron?

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’re based upon or affected by management’s estimates and projections of future interest rates, market behavior, other economic conditions, future laws and regulations and a variety of other matters, which by their very nature, are subject to significant uncertainties.

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

Daniel Schrider: Thanks, Aaron. Once again, good afternoon, everyone, and thank you for joining today’s call. I have to admit, I’m pleased to wrap up 2023 given the challenges our industry faced after the bank failures last spring, which resulted in rapid and significant increases to funding costs, we swiftly and effectively responded to our clients’ needs. Despite the year’s challenges, there were definitely some positive outcomes. We put an immediate emphasis on reaching out to our clients first to allay any fears, answer their questions, and then ultimately find solutions to meet their needs. The results were inspiring and revealed the depth of loyalty to our company and the importance of personal connections. Over the past several quarters, we have successfully grown core deposits, stabilized our deposit base and reducing our reliance on non-core funding.

At the same time, we’ve improved our liquidity position and expanded both our retail and commercial client base over the past year. The year also included a shift in focus and strategies aimed at diversifying the asset base by growing more small business and C&I relationships and de-emphasizing the level of growth in our commercial real estate portfolio. In 2023, we also implemented several new or improved technologies. These enhancements provide clients with greater access to our products and services and give us new ways to deepen existing relationships and develop new ones through digital offerings and digital fulfillment. We’re excited about how these new technologies will continue to enhance our capabilities and client delivery as we progress through 2024.

So with that, let’s jump right into the financial results. Today, we reported net income of $26.1 million or $0.58 per diluted common share for the quarter ended December 31, 2023, compared to net income of $20.7 million or $0.46 per diluted common share for the third quarter of 2023 and $34 million or $0.76 per diluted common share for the fourth quarter of 2022. The increase in the current quarter’s net income compared to the linked quarter was a result of a lower provision for credit losses coupled with lower non-interest expense, partially offset by lower net interest income and non-interest income. The current quarter’s core earnings were $27.1 million or $0.60 per diluted common share compared to $27.8 million or $0.62 per diluted comment share for the quarter ended September 30 and $35.3 million or $0.79 per diluted common share for the quarter ended December 31, 2022.

Core earnings were positively affected by lower provision for credit losses, but it was offset by lower revenues and an increase in non-interest expense after adjusting for the pension settlement expense incurred in the third quarter. So I want to pause here and dig into the movement in our credit quality metrics as well as the allowance for credit losses. Ratios relating to non-performing loans fell during the quarter due to our decision to move two commercial credit relationships to non-accrual. We’ve been working closely with both relationships over several quarters as they’ve migrated towards this current status. No surprises here and our decisions reflect our strong credit risk management practices. The ratio of non-performing loans to total loans was 81 basis points compared to 46 basis points last quarter and 35 basis points at the prior year quarter.

As mentioned, the current quarter’s increase in non-performing loans was related to two investor commercial relationships: one within the custodial care industry and another with a multi-family residential property. These two relationships accounted for $42.4 million of the total $47.9 million if of loans placed on non-accrual during the quarter. The custodial care relationship required an individual reserve during the current quarter. This is a unique circumstance due to the untimely passing of the operator. However, we are working with other principals to sell the underlying properties. As for the multi-family property, we established an individual reserve earlier this year due to challenges with leasing up and generating adequate cash flow to support the loan.

The borrower has been extremely cooperative and we will continue to work together towards a resolution. We believe that in both cases we are adequately reserved. The provision for credit loss is attributed to the funded loan portfolio for the current quarter was a credit of $2.6 million compared to a charge of $3.2 million in the previous quarter and $7.9 million in the prior year quarter. The reduction in the provision during the quarter was a result of a change in the composition of the loan portfolio, a decline in the probability of an economic recession, and updates to other qualitative adjustments used within the reserve calculation. These factors were partially offset by the aforementioned individual reserve on the investor real estate loan, designated as non-accrual during the current quarter, coupled with a slight deterioration in other relevant economic factors in the economic forecast.

In addition, we reduced the reserve for unfunded commitments by $900,000, a result of higher utilization rates on lines of credit. Total net recoveries for the current quarter amounted to $100,000 compared to net charge -offs of the same amount for the linked quarter and $100,000 of net recoveries for the fourth quarter of 2022. Overall, the allowance for credit losses was $120.9 million or 1.06% of outstanding loans and 132% of non-performing loans compared to $123.4 million or 1.09% of outstanding loans and 238% of non-performing loans at the end of the previous quarter and $136.2 million or 1.2% of outstanding loans and 346% of non-performing loans at the end of the fourth quarter of 2022. Shifting to the balance sheet, total assets remain stable at $14 billion compared to $14.1 billion at September 30.

Total loans increased by $66.7 million or 1% to $11.4 billion at December 31, 2023 compared to $11.3 billion at September 30. Commercial real estate and business loans increased $62 million quarter-over-quarter due to the $50.3 million and $50.2 million growth in the AD&C and commercial business loan in lines portfolios respectively. However, this growth was partially offset by a $33.3 million decline in the investor commercial real estate loan portfolio. Quarter-over-quarter total mortgage loan portfolio remained relatively unchanged. Commercial loan production totaled $245 million, yielding $153 million in funded production for the quarter, and this compares to commercial loan production of $323 million, yielding $96 million in funded production in the third quarter of the year.

We expect funded loan production to fall between $150 million and $250 million per quarter over the next two quarters. Given the stability we’ve achieved in the core deposit base, we’re open to more lending activity that achieves profitability targets. Shifting to the supplemental deck we provided. Pages 22 to 24, show more detail on the composition of our loan portfolios. Data related to specific property types in our commercial real estate portfolio and specific commercial real estate composition in the urban markets of DC and Baltimore. New this quarter beginning with Slide 25 and ending with Slide 29, you’ll find details related to our retail, multi-family, office, flex/warehouse and hotel portfolios. Each slide details the number of loans, clients and balances, a breakdown of fixed and floating rate, the timing of maturities or interest rate adjustments, delinquency status, the number and balances of non-performing loans in the geographic breakdown of the portfolio.

We thought it would be helpful to provide some more detail on these sub-portfolios given some of your questions in prior calls. As you review these slides, we’re lending in our primary market that we know well. We have one delinquent credit among all reference portfolios and just a handful of non-performing loans that have been subject to early identification and appropriately reserved. Importantly, we are not seeing a theme emerging in any single portfolio. We feel very good with regard to our overall credit quality and our ability to manage the same. On the deposit side, total deposits decreased $154.5 million or 1% to $11 billion compared to $11.2 billion at September 30. During this period, noninterest-bearing and interest-bearing deposits declined $99.7 million and $54.7 million, respectively.

The decline in noninterest-bearing deposit categories was driven by lower balances in small business and title company commercial checking accounts. The decrease in interest-bearing deposits was due to a $253.1 million reduction in broker time deposits and $111.9 million decrease in money market accounts. These declines were partially offset by $265.9 million in growth in our savings deposits. Excluding broker deposits, total deposits increased by $85.5 million or 1% quarter-over-quarter and represented 92% of total deposits compared to 90% at the linked quarter, reflecting continued stability of the core deposit base and reduced reliance on wholesale funding sources. The loan to deposit ratio did increase to 103% at December 31 from 101% at September 30.

Total uninsured deposit at December 31 were approximately 34% of total deposits. Slide 17 of the supplemental deck provides more color on our commercial deposit portfolio. That portfolio represents 57% of the core deposit base, the majority of which is in a combination of noninterest-bearing and money market accounts. Overall, you can see that we have an average length of relationship of nine years. The portfolio is well diversified with no concentration in any single industry or client. Likewise, on Slide 19 of the supplemental deck, you can see the breakdown of our retail deposit book. With an average length of 11.4 years, this portfolio represents 43% of our core deposit base with no single client accounting for more than 2% of total deposits.

Total borrowings were unchanged across all categories at December 31 compared to the previous quarter, and at December 31 contingent liquidity, which consists of available FHLB borrowings, Fed funds, funds through the Federal Reserve’s discount window and the Bank Term Funding Loan program as well as excess cash and unpledged investment securities, totaled $6 billion or 162% of uninsured deposits. Non-interest income for the fourth quarter of 2023 decreased by 5% or $800,000 compared to the linked quarter and grew by 16% or $2.3 million compared to the prior year quarter. The quarter-over-quarter decrease was driven by lower income for mortgage banking activities due to lower sales volume and partially offset by an increase in BOLI income. Income from mortgage banking activities decreased $890,000 compared to the linked quarter due to a reduction in origination activity.

At the same time, total mortgage loans grew $42 million as loans moved out of construction and into the perm portfolio. Originations have been impacted as a result of the interest rate environment, which continues to dampen home sales and refinancing activities. As we look forward, future levels of mortgage gain revenue is expected to be between $1.1 million and $1.3 million in the first quarter, and between a $1.5 million and $2 million in the second quarter due to typical spring seasonality. Wealth management income decreased $172,000 to $9.2 million and assets under management at quarter end totaled $6 billion, representing an 8.4% increase since September 30. For the fourth quarter of 2023, the net interest margin was 2.45%, compared to 2.55% for the third quarter, and 3.26% for the fourth quarter of 2022.

This decline was a result of high market rates, competition for deposits and clients moving excess funds out of noninterest-bearing accounts. Compared to the linked quarter, the rate paid on interest-bearing liabilities rose 25 basis points, while the yield on interest earning assets increased 9 basis points, resulting in the quarterly margin compression of 10 basis points, 2 basis points of which was related to the recognition of the $42.7 million in non-accrual loans late in the quarter, and the corresponding adjustment of interest income. Anticipating three Fed rate cuts during the second half of 2024, we expect the margin to bottom out in the first quarter in the low 240s, and then to rebound in the second quarter and throughout the remainder of the year by 7 to 10 basis points per quarter.

We would also expect the Fed to continue rate cuts throughout 2025, which would allow the margin to move above 3% during the second half of next year. Non-interest expense for the fourth quarter decreased $5.3 million or 7% compared to the linked quarter and $2.8 million or 4% compared to the prior year quarter. The previous quarter included $8.2 million in pension settlement expense related to the termination of the company’s pension plan. Excluding the pension settlement costs, total non-interest expense increased by $2.8 million or 4%. As I shared last quarter, we expected our expense run rate to include additional spending during the fourth quarter related to our technology initiatives, including higher professional and consulting fees.

For 2024, we expect that the overall expense growth for the year to be essentially flat to 2023 levels once you adjust 2023 amounts for the pension termination costs and severance paid, which together were approximately $10 million. The non-GAAP efficiency ratio was 66 16% for the fourth quarter compared to 60.91% for the third quarter of 2023 and 51.46% for the prior year quarter. Both GAAP and non-GAAP efficiency ratios have been negatively impacted by the declines in net revenue and growth in non-interest expense as we continue to invest in the future. And at December 31, the company had a total risk-based capital ratio of 14.92%, a common equity Tier 1 risk-based capital ratio of 10.9%, a Tier 1 risk-based capital ratio also of 10.9% and a Tier 1 leverage ratio of 9.51%.

All of these ratios remain well in excess of the mandated minimum regulatory requirements. And before I move to your questions, I’d like to briefly comment on the retirement of our CFO, Phil Mantua. I’m pleased to announce today that Charlie Cullum has been named Deputy Financial — Chief Financial Officer and Treasurer, and he will transition to serve as our CFO upon Phil’s retirement. As such, Phil will extend his retirement date until the end of the year to support this transition in leadership. And that concludes my comments, and now we’ll move to your questions. So, Megan, we can move to the questions please.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Casey Whitman with Piper Sandler.

Casey Whitman : Just wanted to touch on that expense guide you just gave Dan, because I think last quarter you were guiding to a little bit more growth in 2024. So, I was just curious is, I know, fourth quarter there was a little jump there, but I just wanted to make sure we’re on the same page. Are you talking about no growth sort of off that fourth quarter level or the 2023 full year level and sort of what I guess has changed your outlook between what we were talking about last quarter?

Philip Mantua : Casey, this is Phil. First to answer the question about the projection, we’re talking flat basically year-over-year annual amounts after adjusting for the couple of one -time things that occurred through in 2023. Quarter-to-quarter, it may look similar to the fourth quarter, and it may not, just depending on different things that come through from a seasonal standpoint. First quarter has some blip-ups in different types of re-engagement of employee taxes and stuff like that. So, overall though, flat maybe 1% growth overall in expenses. But what Dan quoted was really looking at the whole year, over the whole year.

Casey Whitman : Maybe just thinking about deposits and deposit costs here, do you think, or given the sort of guide that your name has is close to inflection next quarter is the assumption that I guess, deposit costs will sort of peak then. Or and then I was also curious just sort of how you’re thinking about the level of noninterest-bearing? Do you think you can sort of hold those here or start to see some growth or what’s the outlook there?

Philip Mantua : Phil again. I don’t think there’s any question that in terms of the overall deposit costs here, there may be a little bit more incremental increase in the deposit costs in the interest-bearing area into the first quarter and maybe even a little bit into the second quarter. But we do anticipate our ability to rebuild some of those DDA balances throughout that period, which helps from a, from an overall net basis to allow the margin to bottom in that first quarter and then start to come back up in the second quarter and beyond. We also got some assumption that I was just going to say, there’s also some remix going on in the borrowings area as well. We plan to pay back the Bank Term Funding program in April. So that will help as well.

I think the average cost related to that $300 million is about 4.9%. There’s a couple different things going on there and other maturities in the home loan, bank advance area that’ll run off more expensive funds and we’ll probably just reduce the overall cash position to maximize for the margin improvement.

Casey Whitman : And then on the other side, can you remind us sort of where like new production, new loan production is coming on versus the 525 yield of the overall book? You’ve got a lot of room to go there, right? Go up.

Philip Mantua: Yeah. This quarter, overall commercial production averaged about 8.3% and about half of the overall production was floating rate versus fixed, in that, you know, the overall new yields ranged — in the owner-occupied area, some of those rates were in the 6.5% to 7% range. The ADC portfolio is more in the 8% to 8.5% range. And then true commercial lending was anywhere from 7.5% to 8.5% in terms of new money yield.

Casey Whitman : Okay. Thank you. And I appreciate the margin guide. I’ll let someone else jump on.

Operator: Thank you. Our next question comes from the line of Russell Gunther with Stephens Incorporated. Your line is now open.

Russel Gunther: Hey, good afternoon, guys. I wanted to follow-up on the margin discussion if I could. In terms of the three cuts that you’re expecting in ‘24, if we think about the beta on the way down, what does your kind of 7 to 10 bps recovery per quarter assume for a deposit beta with those cuts?

Philip Mantua: Yeah, that’s a great question. So first of all, Russell, this is Phil again. We’ve got a cut anticipated in June, September and then in December. So effectively for the second half, it’s really two cuts that are going to impact the second, you know, the third and fourth quarter. Within that, we’ve assumed the similar type of beta relative to our money markets and other — our money markets and other checking products in that 40% range. But on the high yield savings that we’ve run here and has had significant growth in it, our beta assumption on that is more like 90%, could even be more than 100% depending on how aggressive we think we can be. And so, you know, we’re anticipating a pretty significant pullback for every, you know, every 25 basis points that we get back from the Fed.

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

Philip Mantua: We don’t have anything formally, that’s per se tied directly. Everything’s really management discretion. But that’s the way we look at it is trying to, you know, mimic or mirror as much of the Fed funds cuts as we can in various areas. And again, we’ve also got kind of behind the scenes a fairly significant amount of brokered CDs that are scheduled to mature throughout 2024 as well. In fact, we’ve got about $430 million at 4.5% scheduled to mature throughout the year. $172 million of that at 4.70% and change in the first quarter alone. And then there’s about $250 million of home loan bank advances that are going to mature during the year and that’s averaging at about 4.60% and about $50 million of that at 4.75% is in the first quarter as well.