Sandy Spring Bancorp Inc
NASDAQ:SASR
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Sandy Spring Bancorp Inc
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Good afternoon, ladies and gentlemen. Welcome to the Sandy Spring Bancorp, Inc. Earnings Conference Call and Webcast for the First Quarter. My name is Jacquetta, I will be your moderator for today's call. All lines will be needed on 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 your host Daniel Schrider with Sandy Spring Bancorp. Daniel, please go ahead.
Thank you, and good afternoon, everyone. Thank you for joining our call to discuss Sandy Spring Bancorp's performance for the first quarter of 2023. This is Dan Schrider speaking, 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 will be 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 provide the customary safe harbor statement. Aaron?
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, which by their very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the company's past results of operations do not necessarily indicate its future results.
Thanks, Aaron. Despite challenges in the banking industry, we remain strong and committed to achieving long-term success for our clients and our shareholders. Our core earnings for the first quarter were $52.3 million, representing an increase of 16% compared to the prior year quarter. Our credit quality remains solid and we maintain a strong capital base and a rigorous risk management program.
Our loan and deposit ratios, our portfolios, I mean, are diverse and represent long-standing relationships here in Greater Washington. The events last month added to an already challenging operating environment, that includes high inflation, ongoing interest rate increases and some recessionary pressures.
However, our fundamentals are solid, which will serve us well as we navigate the complex issues facing our company and our industry. Our priorities for the balance of the year remain growing our core funding as well as managing expenses. Given our revised outlook on the market and other economic factors, we made several changes to our plans for the year, which I’ll outline for you in the call today. We will also dig into the details of our deposit portfolios and commercial real estate position. As always, we look forward to taking your questions at the conclusion of our comments.
With that, let's review the details of our financial performance. Today, we reported net income of $51.3 million or $1.14 per diluted common share for the quarter ended March 31, 2023. This compares to net income of $43.9 million or $0.96 per diluted common share for the first quarter of 2022 and $34 million or $0.76 per diluted common share for the fourth quarter of 2022.
As mentioned, core earnings were $52.3 million or $1.16 per diluted common share compared to $45.1 million or $0.99 per diluted common share for the quarter ended March 31 of 2022 and $35.3 million or $0.79 per diluted common share for the quarter ended December 31, 2022.
The increase in core earnings is primarily the result of the provision for credit losses, which was a credit of $21.5 million compared to a charge of $1.6 million for the first quarter of 2022 and a charge of $10.8 million for the fourth quarter of 2022.
The credit to the provision reflects improved regional unemployment rate forecast, also the lack of loan growth in the first quarter and continued strong credit performance of our loan portfolio.
Taking a look at the balance sheet. Total assets increased 9% to $14.1 billion compared to $13 billion at March 31, 2022 and $13.8 billion in the linked quarter.
Total loans, they remained relatively stable at $11.4 billion compared to the linked quarter as a result of intentionally reduced loan originations in commercial real estate, coupled with softness in demand and lower payoff activity during the quarter.
To give you a little more detail, commercial loan production in the first quarter of 2023 totaled $423 million, yielding $156 million in funded production. This compares to commercial loan production of $662 million in the fourth quarter of last year that yielded $342 million in funded originations.
And looking at the first quarter of 2022, production totaled $874 million with funded production of $545 million. Over the past 12 months, total commercial loans grew by $902 million or 12%.
For the next couple of quarters, we do not expect funded loan production to exceed $150 million each quarter, essentially matching expected runoff as we continue to focus on deposit acquisition and retention. As we see core deposit growth pick up, we will increase funded loan activity.
Pages 21 through 24 of our supplemental information provided this morning gives more detail on the composition of our loan portfolios, the granularity of our commercial real estate portfolio and specific CRE composition in the urban markets of D.C. and Baltimore.
Realizing that commercial real estate has become top of mind in the current environment, I'm pleased to report that our book continues to perform very well, and we are not seeing signs of weakness or deterioration within the client base. We recently completed an analysis and re-underwriting of our office portfolio, which affirmed the underlying quality, accuracy of risk ratings and overall strength.
We routinely performed stress tests on portfolio segments and external loan reviews to obtain an outside evaluation of our underwriting and risk rating systems. And as the current economic environment unfolds, we remain very close to our clients in all segments and will continually assess the performance of our portfolios.
Shifting to deposits. Total deposits increased 1% and to $11.1 billion at March 31, 2023 compared to $11 billion at December 31. Given all that occurred in March, I'm really pleased to report that we have a stable core deposit base.
Excluding brokered relationships, core deposits represented 88% of total deposits at the end of the quarter compared to 92% at the end of the linked quarter. Total insured deposits represented approximately 65% of total deposits with the majority or 79% from within the commercial portfolio. Slide 16 of the supplemental deck provides that breakdown.
During the quarter, depositors rotated into higher-yielding deposit products, resulting in 12% attrition in noninterest-bearing deposits, primarily commercial checking accounts and an 8% increase in interest-bearing deposits. Excluding broker time deposits, total deposits declined 3% during the quarter. We feel very good about our success managing through the Silicon Valley Bank and Signature Bank failures.
Our employees did an exceptional job mitigating deposit outflows by providing reciprocal deposit arrangements, which provide FDIC insurance for accounts that exceed $250,000. We've had the products and processes in place for many years. So we were able to seamlessly make this product available to clients in the immediate aftermath of the bank failures during the quarter. Overall, our clients have been very receptive to our approach and have expressed their loyalty and appreciation.
Slide 17 of the supplemental deck provides more color on our commercial deposit portfolio, which represents 61% of our core deposit base. The majority of which is in a combination of noninterest-bearing and money market accounts. With an average length of relationship with nine years, the portfolio is well diversified, with no concentration in a single industry or client. In fact, no commercial client represents, our relationship exceeds 2% of total deposits.
Likewise, on slide 18 of the supplemental deck, you can see the breakdown of our retail deposit book which is more diversified in composition among DDAs, money markets and time deposits. With an average length of relationship of 12 years, the retail deposit portfolio is also well diversified with no concentrations.
At March 31, 2023, contingent liquidity amounted to $3.8 billion or 101% of the amount of uninsured deposits, with an additional $1.5 billion in available Fed funds, which provides total coverage of 138% of uninsured deposits. This amount of contingent liquidity does not include any consideration of the held to maturity or available for sale investment portfolios.
The details of available contingent liquidity and the impact of excess cash and free securities are on slide 19 of the supplemental materials. The results of our stress testing at the end of the quarter demonstrates a strong liquidity position with sufficient liquidity in most of your scenarios. Given the current economic environment, liquidity demands are significant.
So we are keenly focused on growing core deposits throughout 2023. As I previously shared, we have several near- and long-term efforts underway to respond to these challenges. Our efforts include sales outreach to our branch network, revamped incentive models and enhanced digital capabilities that allow us to use data analytics to strategically target both clients and prospects.
Most notably, we recently launched a more sophisticated online account opening platform. The new platform provides clients and prospects with 24-hour access to all of our consumer deposit products and an end-to-end account opening process that takes less than eight minutes.
Our advanced systems have reduced fraud, improved operational and compliance efficiency and expanded funding expanded funding options. We've also streamlined the flow for opening multiple products, resulting in an average opening deposit of nearly $8,200.
Overall, our new digital capabilities have given us the opportunity to expand our customer base and provide a seamless and efficient account open experience also providing the flexibility to access deposit relationships in adjacent markets, which we are testing now.
Shifting to non-interest income for the first quarter of 2023, non-interest income decreased $4.6 million or 23% compared to the prior year quarter. This decline reflects the ongoing impact the economic and rate environment is having on mortgage banking activities and wealth management income; also the decline in insurance commission income given the disposition of our insurance business in the second quarter of last year; and lower bank card income due to the regulatory restrictions on fees as we became subject to the Durbin amendment.
Compared to the linked quarter, income from mortgage banking activities increased $500,000 and total mortgage loans grew $40.5 million. Our expectations for mortgage banking revenue should fall in the $1.5 million to $2.5 million range per quarter going forward. Wealth Management income also increased by $500,000 compared to the linked quarter.
Assets under management at quarter end totaled $5.5 billion, representing a 4.2% increase since December 31. Our teams in Sandy Spring Trust and our two wealth subsidiaries continue to do a great job growing new client relationships, despite the volatility that exists in the wealth markets.
Let's talk a bit about margin. For the first quarter of 2023, the net interest margin was 2.99% compared to 3.49% for the first quarter of 2022 and 3.26% for the fourth quarter of 2022. The erosion in the net interest margin for the current quarter was due to higher rates paid on interest-bearing liabilities, which outpaced the increase in the yield on interest-earning assets.
The overall rate and yield increases were driven by the multiple Fed funds rate increases that occurred over the preceding 12 months, coupled with the competition for deposits in our market. Compared to the first quarter of 2022, the rate paid on interest-bearing liabilities rose 223 basis points, while the yield on interest-earning assets increased 98 basis points, resulting in the margin compression of 50 basis points.
Looking ahead, we see the margin remaining sub-3% for the remainder of 2023, with the second quarter settling in, in the mid-280s and then gradual increments throughout the remaining two quarters. This outlook assumes one additional 25 basis point move by the Fed in May and then no other action throughout the rest of the year.
Non-interest expense for the current quarter increased $4.2 million or 7% compared to the prior year quarter, driven primarily by increases in the FDIC insurance assessment, professional fees and services and other expenses. We expected certain compensation-related costs early in the year and increases to the run rate related to some of our completed technology initiatives. However, the cost of funding and the economic realities of the past quarter have intensified our need to manage operating expenses.
To offset these overall profitability pressures, we are taking immediate action including halting plans to add staff, we will only hire mission-critical this year. We're also assessing our current staffing to ensure we are aligned with business volumes and market demands. And lastly, we are delaying over a half dozen projects until early 2024 and scaling back discretionary spending in categories such as consulting fees.
We will look to manage operating expenses in the $63 million to $64 million per quarter range, fully realized in the third quarter. Absent of any significant growth in revenues, we look to manage quarter-over-quarter growth by targeting a non-GAAP efficiency ratio within the range of 54% and 55%. As more significant revenue growth reoccurs, we look to manage this ratio more towards the 50% to 52% range.
The non-GAAP efficiency ratio was 56.87% for the first quarter of 2023 compared to 49.34% for the prior year quarter and 51.46% for the fourth quarter of last year. The increase, reflecting a decrease in efficiency in the current quarter compared to previous quarter and the first quarter of the prior year was a result of declines in net revenue from the prior period coupled with growth in non-interest expense.
And then shifting to credit quality. Our level of non-performing loans to total loans improved 41 basis points compared to 46 basis points in the prior year quarter. These levels of non-performing loans compared to 35 basis points for the linked quarter and continue to indicate stable credit quality during a period of significant loan growth and a degree of economic uncertainty.
Loans placed on non-accrual during the current quarter amounted to $19.7 million compared to $1.5 million for the prior year quarter and $5.5 million for the fourth quarter of 2022. We realized net recoveries of $300,000 for the first quarter of 2023 compared to net charge-offs of $200,000 for the first quarter of 2022 and $100,000 in recoveries for the fourth quarter of 2022.
Slide 25 of the supplemental deck displays the change in allowance for credit losses based on our current CECL methodology. The components of the change are mainly qualitative and are based on more favorable economic forecast assumptions, less portfolio concentration in investor real estate loans and improvement in overall credit administration across all portfolios.
And lastly, at March 31, the company had a total risk-based capital ratio of 14.43%, a common equity Tier 1 risk-based capital ratio of 10.53%, a Tier 1 risk-based capital ratio also at 10.53% and a Tier 1 leverage ratio of 9.44%. So that wraps up our general comments for today.
And operator, now we can move to the questions.
Absolutely [Operator Instructions] The first question comes from the line of Casey Whitman with Piper Sandler. You may proceed.
Good afternoon.
Hi, Casey.
Hi. Just wanted to start out the commentary around flattening loan growth for the foreseeable future. Does that -- are you also assuming that deposits are pretty flat and then the overall balance sheet will remain flat? Are you hoping to build cash, or sort of what's the outlook on the funding side?
Casey, this is Phil. Yes, we're anticipating a flat position on the deposit side as well. I mean, maybe 1%, 1.5% overall – overall growth, but by and large, flat. And we're also probably going to maintain the current cash position here, which is about $300 million over where we would traditionally have carried throughout the foreseeable future. If some of that deposit growth comes back and we see some other opportunities that will change our stance. But I think we're basically looking at an overall flat balance sheet here for the remainder of 2023.
Got it. Can you walk us through sort of the deposit trends, I guess, monthly through the quarter? I mean, specifically in the noninterest-bearing category as well. Was there -- and then walk us through also, was there some seasonality towards the end of the quarter, or just I think that would be helpful just to sort of see what was going on monthly?
Yeah, Casey, this is Phil. So first couple of months of the quarter, we're -- we continue to see some of the traditional kind of -- well, we saw some of the traditional runoff, the seasonal runoff in the first part of the quarter. And just about as we were starting to see a turn come the other way is when the SVB situation occurred, which really changed the dynamic completely. So we were starting to see some normal behavior and especially in the demand deposit area up until the point where the whole environment changed. We had probably run down overall deposits in those first couple of months, about $100 million each month before we started seeing it going the other way.
And it's gone the other way because we had introduced some additional rates and products during that period of time and we're starting to get a little bit of traction there. And then of course, from that point forward, as Dan reported, we had the runoff and transfer of the DDA balances over into those areas like ICS, which gave the client a greater security in terms of their deposit insurance. And ICS grew during the month of March by $283 million, which is pretty much what we saw come out of DDA for the most part and move over there.
And the ICS, that's included in the insured bucket, right?
It is. Yes, it is.
Okay.
Yeah. So that insured number actually improved as we move through the end of the quarter as well partly because of that transfer into that other product line.
Okay. And then last question would be, can you guys give us a sense for how you ended the quarter with either the cost of funds or cost of deposits or just sort of how we ended the quarter, but I appreciate the margin guide, we should be able to work with that?
Yeah. Yeah. March's overall margin was around 2.93, but that did include one interest recovery that occurred at the end of the quarter. So the pure margin that we really kind of started this quarter with was in the mid-2.80 range. And that's kind of where and why we're guiding towards what we have here in terms of 2.80-ish kind of levels for the foreseeable future and then over the rest of the year kind of migrating back up in a pattern that we've really been anticipating from before, just at a lower starting point and overall lower level going forward.
And sorry, I'll actually ask just one more. That expense range you guys gave, would you -- could you get to that as early as the second quarter, or is that a little bit too because that seems like a big jump down from the first quarter level. Is that sort of what you hope to get to by the end of the year, or is it going to be immediate?
It's what we're striving to get to fully realized in the third quarter.
Perfect.
So second quarter will have some additional noise as we look at postponing some projects as well as realigning resources based on current volumes.
Got it. All right. Thank you guys.
Thanks, Casey.
Thanks, Casey.
Thank you. The next question comes from the line of Catherine Mealor with KBW. You may proceed.
Thanks. Good afternoon.
Good afternoon, Catherine.
Hi, Catherine.
I want to just dig into the ACL release. And just I know you mentioned that part of that was just from a lower regional unemployment rate. But just hoping you could give us a flavor for it kind of interesting that we would release a reserve that such magnitude at this part of the cycle at a point where everyone's kind of building or anticipating credit issues over the next couple of years? And if there are other factors at play that drove that, or is it just truly just an unemployment rate assumption? Thanks.
Yes, Catherine, this is Phil. There were clearly other qualitative factors that based on just what happened with the underlying portfolio, the change in mix, the lack of growth in certain categories that came back during the quarter and contributed to the overall credit that was involved. So there are other components to it other than on the piece related to the forecast. Forecast piece, I think, alone was around $5 million. And then of the $21 million and there's another $2 million that was related to the unfunded commitment. So the remainder was really all qualitative in nature. And that included an adjustment to one of the qualitative factors that is connected to the way we do the forecast that it also was implemented during the quarter.
So those are the components that really drove what occurred. But just from the forecast change alone, which was -- we didn't anticipate that Moody's forecast for unemployment in this market was actually going to improve during the quarter. That by itself would have driven the credit even without the other things that went on from a qualitative standpoint.
And how much -- I noticed that your -- this is tied to March, Moody's. How much of it do you have on the baseline case versus some of the more adverse scenarios? Do you scenario at it like that as well?
We look at those, but we don't use those per se in the base calculation. We use those when we do our stress testing and the like for capital purposes, but we don't use the other scenarios other than, but the one factor that we have in there now, which we talked about before, which is related to the potential for a recessionary period there, we do use one of the other scenarios. But that's solely in that factor, and the probability, by the way, that we used for recession did not change this quarter. So that's part of why that one didn't move really much at all in either direction.
Okay.
And by the way, there are…
I know Moody’s put out there…
I'm sorry, Catherine none other scenario is for a moderate recession, it's not for anything too severe.
Got it. Okay. And I know I'm like beating a dead horse, but -- so I noticed Moody's April is out just for the whole U.S. I don't know if the regionals are out yet. So is there -- and Moody's increased their unemployment for the whole U.S. in April. Is there any sense as to what they've done for the regional space yet?
Yes. Actually, the one we used also reflected the national unemployment rate actually moving up. It was the fact that we've been traditionally using the local one that happened to go down. So we did recognize that. We just chose to stay consistent with our methodology, which uses the local MSA, which for whatever reason, there was improvement in the unemployment rate.
Got it. Okay. That makes sense. Okay. And aside from just the reserve build just generally from what you're seeing on the ground with your clients, any kind of labor or color you can give us on just the health of your client base and what you're concerned with and Dan mentioned you're doing some stress testing on the CRE and office space and you got great disclosures. I think were really helpful to frame that. But just kind of walk us through what you're seeing in your markets in terms of where the most, I guess, concern you have today and what your clients are saying?
Yes. Catherine, Dan. Obviously, staying extremely close to our clients, and I guess what occurred with SVB and Signature had us reaching out to our top 1,000 clients, which many of those are borrowing relationships. I think there's probably more concern about how -- what the -- what will happen from a recessionary standpoint and how it's going to affect their business as opposed to them feeling pain from anything specific in the market.
When we look at particularly our CRE book, cash flows, occupancy continues to be good. Obviously, cap rates are having an impact on LTVs for those that might be looking to sell a property, but not -- we're not seeing significant concern from the client base. Obviously, office, and we obviously did some more disclosure to help understand kind of what our office is, which tends to be more and a professional office space, not big floor plates. Our five largest office loans in our portfolio, all range from $20 million to $30 million in total exposure, so we're not making big bets on large office. And so we're particularly staying close to that, more around the trends of return to work and that.
But in terms of color from our client base, I think it's steady as she goes. We spent a lot of time holding hands with clients and helping them discerned kind of what they're reading in the media was legitimate or whether it was hype about the degree of conserved regional banks. That seems to have settled down, but in terms of credit itself, not seeing signs of concern. But like everyone, I mean we're looking closely and we'll continue to monitor things as we go through the year.
And do you have a sense as to how -- what percentage of your commercial real estate book matures in the next year or two? And then, as you're seeing some of those maturities comes through. Can you talk about how -- what the impact of the higher rate is doing to your clients? Are they able to afford that jump or where that stress is do you think?
Yes. So far, we've been good. We've got about 13% to 14% of the commercial real estate book. This is total, including AD&C maturing within the next year, another 10% in the year after. So we haven't seen pressure as it relates to rates -- the rate impact on the portfolio as of yet, not to say it couldn't happen on select relationships, but not thus far. But so, over the next two years, you're talking about 23%, 24% of the book maturing.
Great. Okay. Thanks for the additional color. Appreciate it.
Thanks.
Thank you. The next question comes from the line of Manuel Navas with D.A Davidson. You may proceed.
Hey good afternoon. With your adjustments to expenses, is that -- what kind of counts as mission-critical and doesn't in terms of initiatives to look at like C&I lenders or hire some new more like diversified product set lenders?
Yes, I think, Manuel, this is Dan. I think it's on the on the revenue side as well as on the infrastructure side. So, we are -- so let me speak to the infrastructure first from a mission-critical standpoint. Having crossed $10 billion a couple of years back, there's still some infrastructure builds that we're doing are in technology and in data and data governance and those are compliance-related type of expectations around how the organization matures.
And so we're going to be -- we don't want to obviously lose momentum in some of that build. And then on the revenue side, we have indicated previously and we'll continue to focus on driving our ability to generate more C&I commercial deposit, commercial loan business with less reliance on commercial real estate.
And so as those resources and skill sets become available, we certainly want to attract that to the organization. But my comments with regard to expense management and the short-term actions we're taking there, it's really about looking at where we have -- we -- our expectation, as we've certainly mentioned, is that our volume of lending is going to be off this year as we focus on deposit gathering.
And we want to make sure we're aligning from kind of front line to back office in accordance with the realities of the market demand at the same time while we build in areas we need to build. So, mission-critical would be key infrastructure, key technology, key compliance, and with an eye towards the revenue areas where we need help.
That's helpful. With some of your deposit flows, is that mainly some of the DDA declines, is that any use of funds and you still have those clients, or did you actually see some clients kind of changed banks?
Yes Manuel. I mean, well, by and large, we retained client relationships even if the balances themselves either fluctuated in or out or shifted within the balance sheet. But overall, over the course of the three months of the quarter, our overall total number of clients actually went up to a small degree, but nevertheless, it was a net increase, not a net decrease. So, we didn't reflect client losses by any means, if it's nothing else, we picked up some additional relationships.
Great. Great. A lot of my credit questions have been -- go ahead.
No. What I was going to mention, what we did experience, and we haven't commented on in the call yet today during the quarter post-SVB and Signature is probably a handful of clients, but important nonetheless where they were the local or regional branch of a national enterprise that that kind of demanded the local office moved their deposits to a larger institution for a period of time which was not a loss of the relationship, it was to decrease in balances that we believe we can attract back to the company as things have settled down a bit.
All right, I appreciate that color. Is that already starting to happen here in April?
I don't know if it started happening yet in April, but that's been the indication from the client base.
Okay. And what's the current -- what's the current level of your offers in the marketplace on deposit side, money market, CD?
Yeah. Manuel, this is Phil again. Top offer rate at this point is an eight-month CD specialist 4.5, followed by a 14-month at 4.25%, and our newly introduced high-yield savings account that's at 4.25% as well. So those things would lead the market for us.
And then our premier money market guarantee rate for six months is still in the $3.50 range. We really didn't feel compelled during the last part of the, a quarter with everything else going on to move the rates position to any large degree.
Given that we felt that what was going on was not necessarily rate related. But going forward here, we'll be back in that vein, looking at how we need to continue to be competitive as rates continue to shift.
I appreciate that. Most of my credit questions have been answered, but how should we think about the provision going forward, just to kind of kick things cover net charge-offs, keep the reserve relatively steady. And then there might be some model adjustments. But taking those model adjustments out of the equation, is that the right to think about it?
Yeah. Manuel, Phil again, I don't see the provision -- the amount of the provision and therefore, the build to reserve being terribly significant throughout the rest of the year without any loan growth or any change in the overall charge-off position. So I mean, I think it will be fairly muted as we move through the rest of the year at this point given that those things play out as we would expect them to.
I appreciate that. Thank you.
You're welcome.
Thank you. The next question comes from the line of Russell Gunther with Stephens. You may proceed.
Hey. Good afternoon, guys.
Hi Russell.
Hey guys. First question I just had a point of clarification. So the loan growth guidance, the $150 million, that's -- is that a net number, or is that your expectation, but runoff will eat into it to kind of flat balances for the time being?
Yeah. That will be at the latter, Russell. That $150 million approximates…
Okay.
… what we expect to runoff, yeah.
And then, Dan, how should we think about the bogey you want to achieve before you appetite or willingness to grow loans returns? Is it a loan-to-deposit ratio in a certain range, or just trying to think of what we should look for?
Yes, Russell, this is Phil. I think that we're quickly coming to the realization that the ability to run the balance sheet with a loan-to-deposit ratio of 100% is probably not going to be realistic as we move forward. So, I think that, that ratio needs to clearly approach 100 or get below it before we think that we'll be in a position to kind of completely reengage on the loan side.
Okay. Very good. And then, I appreciate all the color and follow-up on margin expectations. We could probably triangulate a bit, but do you have a formal kind of shift in view on what you're through-the-cycle deposit data, where that will ultimately shake out? And then the follow-up will be, any change in your expectations when rates begin to move the other way?
Yes, Russel, Phil again. I think that we've been fairly consistent to the way -- in reality to the way that we've modeled the beta in that 40% range. Now, I think, it was elevated some here in the last portion of the quarter, just because the Fed change was 25 basis points. It wasn't larger, and yet our costs continue to escalate in -- to some degree.
But, for us, we said it before, we need the Fed to stop and then we need them to start ultimately, to your question, cutting and going in the other direction. And we model it the same way, on the downside to the degree that we can really introduce those kinds of changes into the market on that kind of a commensurate basis. So, if we can go faster and still retain and/or bring deposits to the table, we'll do so. But, I think, we've kind of looked at it in somewhat of a parallel fashion at this point.
Okay. And so, is that sort of order of magnitude with the rate cuts still 5 to 10 basis points roughly?
In terms of what, improvement in the margin?
Yes, once we start to see the Fed cut or have --
Yes. I would think.
-- the dynamics over the quarter accelerated.
Yes.
Okay.
Yes. I would say on the -- if we're talking about on the downside, yes, that seems to still be a reasonable assumption.
Okay. Fantastic. Well, you guys tackle all of my other questions already, so I appreciate your help.
Sure.
Thanks, Russell.
Perfect. [Operator Instructions] There are no additional questions waiting at this time. So I would now like to pass the conference back to the management team for closing remarks.
Thank you, and thank you, everyone, for your engagement this afternoon. Please provide feedback to us on ways that we can enhance the call for future quarters. And thanks again for your time, and have a great afternoon.
That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.