Sandy Spring Bancorp Inc
NASDAQ:SASR
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Sandy Spring Bancorp Inc
Earnings Call Analysis
Q2-2024 Analysis
Sandy Spring Bancorp Inc
Sandy Spring Bancorp reported a solid performance in the second quarter of 2024, with a net income of $22.8 million, representing an increase from $20.4 million in the first quarter and a decrease compared to $24.7 million from the same quarter last year. Earnings per diluted share also showed improvement, increasing from $0.45 to $0.51 quarter-over-quarter, though down from $0.55 year-over-year.
Core earnings for the quarter were $24.4 million, up from $21.9 million in the previous quarter, but down from $27.1 million in Q2 2023. The growth in net income was largely driven by increases in both non-interest income and net interest income, which contributed to an improved net interest margin, recorded at 2.46%, up from 2.41% in the previous quarter.
The bank benefited from a lower provision for credit losses, which decreased to $1 million from $2.4 million in the prior quarter. The reserve for unfunded commitments fell by $1.9 million during the same period, reflecting a high utilization rate on lines of credit, thereby enhancing the bank's overall asset quality.
Total deposits saw an increase of $113 million to reach $11.3 billion, representing a 1% growth quarter-over-quarter. Excluding broker deposits, core deposits rose by $271.2 million, reflecting a healthy increase of 3%. This growth led to a loan-to-deposit ratio of 101%. Meanwhile, total loans increased to $11.5 billion, marking a 1% growth, with commercial business loans and lines increasing by 6%.
The bank expects funded loan production to remain robust, projected in the range of $200 million to $250 million per quarter for the remainder of 2024. Management anticipates a commercial loan growth rate of 1% to 2% per quarter, indicating stable demand within their servicing sectors.
Looking forward, management expects net interest margin to expand by 2 to 4 basis points per quarter absent further action from the Federal Reserve. If the Fed begins to cut rates later this year, the margin could accelerate towards a low 3% by the end of 2025, benefiting from lower deposit costs and loan repricing.
Non-interest income increased by 7% compared to the previous quarter, attributed mainly to higher gains from BOLI income and growth in wealth management services. With total non-interest income accounting for a significant share of overall income, these segments remain crucial for future profitability.
Non-interest expenses were flat at $68.1 million, with management indicating a potential slight increase in the second half of the year, estimating expenses to be in the range of $68 million to $70 million per quarter. This uptick is mainly due to investments in their SBA lending segment, which is expected to boost non-interest income going forward.
The total nonperforming loans at the end of Q2 stood at 81 basis points compared to 74 basis points from the previous quarter. Despite this rise, management is confident in their credit portfolio's overall health and continues to closely monitor their exposure in line with prevailing economic conditions.
Management expressed optimism about sustaining profitability and enhancing market share within the Greater Washington, D.C. area, fueled by positive growth trends. The focus remains on innovation and performance, particularly through the new SBA lending program, which is set to contribute positively by the end of the year.
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Hello, and welcome to the Sandy Spring Bancorp, Incorporated Earnings Conference Call and Webcast for the Second Quarter. My name is Elliot, and I'll be coordinating the call today. [Operator Instructions] I would now like to hand over to Aaron Kaslow, General Counsel and Chief Administrative Officer. Please go ahead.
Thank you, Elliot. Good afternoon, everyone, and welcome to Sandy Spring Bancorp's second quarter earnings conference call. Today, I am joined by Dan Schrider, Chair, President and CEO; and Charlie Cullum, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may include forward-looking statements, which 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.
I'll now turn the call over to Dan.
Thank you, Aaron, and thanks, everyone, for joining us today. I'll begin today's call by discussing some of our results for the quarter and then turn it over to Charlie, and I will follow with some commentary and subsequently open up the call for your questions. In the second quarter, we successfully grew core deposits and C&I loans, while also improving the net interest margin. In addition, we prudently managed expenses. We reported net income of $22.8 million or $0.51 per diluted common share for the second quarter of 2024 compared to $20.4 million or $0.45 per diluted common share for the first quarter and $24.7 million or $0.55 per diluted common share for the second quarter of last year.
Core earnings for the current quarter were $24.4 million or $0.54 per diluted common share compared to $21.9 million or $0.49 per diluted common share for the previous quarter and $27.1 million or $0.60 per diluted common share for the second quarter of last year. The increase in net income and core earnings compared to the previous quarter was driven by higher non-interest income and net interest income, which improved the net interest margin for the first time in several quarters. Additionally, second quarter results benefited from a lower provision for credit losses, which declined to $1 million from $2.4 million for the first quarter of this year.
The provision for credit losses directly attributable to funded loan growth or the funded loan portfolio, I should say, was $3 million for the second quarter of 2024 compared to $3.3 million for the linked quarter. The second quarter provision mainly reflects higher individual reserves on collateral-dependent loans, overall growth of the loan portfolio and lower qualitative adjustments due to the reduction in commercial real estate loans. The reserve for unfunded commitments declined by $1.9 million, a result of higher utilization rates on lines of credit during the quarter. Turning our attention to the balance sheet; total assets increased to $14 billion at the end of the second quarter compared to $13.9 billion at March 31, 2024.
As of June 30, total loans increased by $119.6 million or 1% to $11.5 billion compared to the previous quarter. Commercial business loans and lines grew $91.9 million or 6%. For the remainder of 2024, we expect funded loan production to continue to be in the range of $200 million to $250 million per quarter. And based on pipelines, we expect commercial loan growth of 1% to 2% per quarter. Consistent with our strategy, the commercial investor real estate segment declined by $64.5 million or 1% as compared to the first quarter of this year.
Total mortgage and consumer loan portfolios remained relatively unchanged in the second quarter compared to the first quarter of 2020. As you refer to the supplemental information we also 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. Slide 16 through 20 of the supplemental deck provide a detailed commercial real estate overview for our retail, multifamily, office, flex/warehouse and hotel portfolios.
And as you review the data on these slides, you will notice an increase in criticized loans in each portfolio. In response to regulatory guidance issued last year and due to our continued focus on portfolio management, we reassessed commercial credits where cash flow fell short of covenants despite having a satisfactory payment performance. And based on this review, we recategorized $144 million to special mention and $19.5 million to substandard. There are minimal delinquencies within these credits as repayment has continued to be supported by strong sponsors or guarantors and the reclassification had an impact of $900,000 on the allowance for loan losses, but no loans require specific reserves.
As we also noted in these slides, we are lending in our primary market that we know well. We have five accruing delinquent credits among the five portfolios referenced in the supplemental deck and only a handful of nonperforming loans that have been subject to early identification and appropriately reserved. We continue to focus on our portfolio management, including staying close to our clients, assessing credits that are subject to repricing throughout the year, closely monitoring other portfolios and evaluating the need for specific reserves should credit show further deterioration.
Now I'll turn it to Charlie, who will walk through other aspects of our financial results.
Thanks, Dan. It's good to be with you today. Moving to deposits; we continue to grow core funding and reduced broker time deposits during the second quarter of 2024. Total deposits increased $113 million or 1% to $11.3 billion at June 30 compared to $11.2 billion at the end of the first quarter. Non-interest-bearing deposits increased $113.5 million or 4% compared to the first quarter, driven by commercial and small business checking accounts. Interest-bearing deposits were relatively unchanged. Money Market grew $167.6 million or 6% and savings accounts grew by $99 million or 6% during the second quarter.
These increases were offset by the $172.5 million or 7% reduction in time deposits, of which $154.7 million was a reduction in broker time deposits. Excluding broker deposits, core deposits increased by $271.2 million or 3% compared to the prior quarter. Core deposits represented 94% of total deposits at the end of the quarter as compared to 93% in the prior quarter. The deposit growth during the quarter resulted in a loan-to-deposit ratio of 101% at June 30, 2024. Total uninsured deposits at the end of the quarter were approximately 36% of total deposits. Total borrowings were relatively unchanged at June 30 as compared to the previous quarter.
Contingent liquidity, which consists of available FHLB borrowings, Fed funds, funds through the Federal Reserve Bank's discount window as well as excess cash and unpledged investment securities totaled $6.3 billion or 154% of uninsured deposits. Non-interest income for the second quarter of 2024 increased by 7% or $1.2 million compared to the linked quarter and grew by 14% or $2.4 million compared to the prior year quarter. The main drivers of the linked quarter increase in non-interest income were twofold, a $700,000 increase in BOLI income due to the receipt of debt proceeds and a $500,000 increase in wealth management income.
This increase was due to $50.2 million or 1% growth in assets under management during the quarter. Through June, wealth management income accounts for approximately 54% of the bank's total non-interest income. Income from mortgage banking activities increased 18% on a linked-quarter basis. Our expectations for mortgage banking revenue for the third quarter of 2024 are in the range of $1 million to $1.5 million. The net interest margin was 2.46% for the second quarter of 2024 compared to 2.41% for the first quarter of 2024.
Delinquent improvement in the margin was a result of a 2 basis point increase in the yield on interest-earning assets, coupled with a 3 basis point decline in the rate paid on interest-bearing liabilities. We will continue to employ a disciplined approach to pricing in order to improve the net interest margins. Absent action by the Fed, we believe that our margin will be expanding throughout the remainder of 2024 by 2 basis points to 4 basis points per quarter. We anticipate that the Federal Reserve will cut interest rates later in the year with four rate cuts next year, which should accelerate our margin expansion during 2025 towards a low 3% margin by the end of 2025.
Non-interest expenses for the current quarter were flat compared to the linked quarter at $68.1 million. You may see a slight increase in expenses in the second half of the year, and we look to manage in the range of $68 million to $70 million per quarter. This anticipated increase in expenses is in part due to our recent investments in building our SBA team, which Dan communicated on the call last quarter. We're ahead of schedule with both hiring talent for this new program and building out the necessary infrastructure. While this will contribute to slightly higher expenses in the latter half of the year, we anticipate that the program will contribute to our non-interest income by year-end.
Shifting to credit quality; the level of nonperforming loans to total loans at the end of the second quarter of 2024 was 81 basis points compared to 74 basis points at March 30, 2024. This linked quarter increase was due to a few loans within the commercial owner-occupied real estate segment that were placed on nonaccrual status during the current period. All of these loans are well-secured. Nonperforming loans totaled $93 million at the end of the quarter compared to $84.4 million at March 31, 2024. Total net charge-offs for the second quarter were $200,000 compared to $1.1 million for the first quarter of 2024.
At June 30, 2024, the allowance for credit losses was $125.9 million or 1.1% of outstanding loans and 135% of nonperforming loans compared to $123.1 million or 1.08% of outstanding loans and 146% of nonperforming loans at the end of the previous quarter. The increasing allowance for the second quarter of 2024 compared to the previous quarter reflects higher individual reserves on collateral-dependent nonaccrual loans and overall growth of the loan portfolio during the quarter. These are somewhat offset by lower qualitative adjustments that have resulted from reduced levels of commercial real estate loans.
Our [ CRE to ] capital ratio declined to 346% at quarter end from 348% as of March 31. At June 30, 2024, the company had a total risk-based capital ratio of 15.49%, a common equity Tier 1 risk-based capital ratio of 11.28%, a Tier 1 risk-based capital ratio of 11.28% and a Tier 1 leverage ratio of 9.7%. These ratios remain well in excess of the minimum regulatory requirements. The improvements in our capital ratios over the previous quarter were due to a decline in our risk-weighted assets during the quarter. This was a result of a management review of our unfunded consumer lines of credit and the position is consistent with regulatory guidelines.
With that, I will turn it back to Dan to talk about some things we see on the horizon.
Thanks, Charlie. I'd like to wrap up our prepared comments by reiterating our key priorities. We remain focused on improving our profitability, continuing to bolster core funding, managing expenses and enhancing credit portfolio management while also reducing our commercial real estate exposure. Teams across the organization are challenging the status quo. We're focusing on innovation and performance to better serve our clients.
The Greater Washington, D.C. metro area is a vibrant market characterized by positive growth trends and ample opportunity. So we continue to expand both on our capabilities and our offerings to increase market share. And our new SBA lending program, we mentioned earlier is just one example of that. I'm pleased with the company's stability and positive momentum, and I look forward to building on those accomplishments.
So at this time, Elliot, we'll turn it over to you so we can take your questions.
[Operator Instructions] First question comes from Catherine Mealor with Keefe, Bruyette & Woods.
Thanks. Good afternoon. The commentary on the margin for the back half of the year, I thought was helpful. It's good to see some expansion in that. Can you just talk to us a little bit about some of your assumptions within that, particularly on the funding side? It feels like -- do you feel like you're near a peak in deposit costs and actually could see a decline in deposit costs before we get to rate cuts or how are you kind of thinking about how deposit costs will trend?
Hi Catherine, it's Charlie. So we really have come close to a peak and how are you -- we've certainly gotten close to a peak in deposit costs. Our deposit cost for the month of June were $3.46 compared to -- sorry, wrong number -- our deposit cost for the month of June were $3.56 compared to $3.54 in the quarter. So they were up a little bit. But overall, earning asset yields continue to expand.
So our projection would be that they come close to leveling off, we may see a basis point or 2 basis point increase in total deposit costs here over the next couple of quarters, at least until the Fed begins to cut interest rates, but we should see some corresponding decreases in our wholesale funding through advances and other Fed funds purchased which should offset some of those costs. And that's really where we're getting that improvement in margin from. So a few basis points improvement in the overall earning asset yields and pretty stable on the total cost of interest-bearing liabilities getting us to a couple of basis points to a few basis points of margin expansion.
Okay. Okay, great. And then can you remind us and quantify the fixed rate repricing opportunity we've got in the back half of the year, maybe in '25 as well?
Yeah. So if we're looking at total commercial loans, we've got the next two quarters, the third quarter of 2024 and the fourth quarter have right around $500 million in total each quarter of repricing. And those rates are repricing from the mid- to upper 6s. So you're not going to see significant improvement in loan yields as a result of the repricing in the second half of the year. But then as we head into 2025, the rate on repricing falls into the mid-6s and then by early 2026, the repricing rate falls into the upper 5s to low 6s. So we'll see a gradual improvement over that period of time in loan yields as those loans reprice.
Okay, great. And if I could just [indiscernible] one more on credit. You talked about the credits that you moved to special mention and substandard. Is part of the assumption in why there's not additional reserve needed or there's a low risk of loss. Is the rate outlook kind of a piece of that? And if we were in a higher for longer rate scenario, do you believe there would potentially be more stress in these projects? Just some kind of commentary on what gives you comfort that there's just not a lot of lost content in those credits.
Yeah. Catherine, this is Dan. I wouldn't say that the rate outlook was a catalyst for those moves. I think it was more of -- what we're seeing in the -- here and now, and it's not -- there isn't one aspect of those credits that would drive those decisions. In some cases, it might be a project that we had come out of the ground recently and we're waiting for it to stabilize and the sponsors and guarantors are covering it or some short-term lease turnover that created a fall below covenant level.
I do think if rates stayed higher, longer on some of the projects that we have in our construction portfolio that will come on the market here in the next quarters, few quarters or so. That could have an impact on those because those are generally floating rate assets that could certainly use the relief of some Fed cuts. But that was not a driver. I think the overall assessment of those loans is recognizing that they're below covenant.
It's in line with kind of the Fed guidance that they laid out about a year ago in terms of how we should be looking at those and then assessing the overall project, underlying collateral if it's a collateral-dependent loan. And that's causing us to not be concerned about where we stand from a reserve standpoint today. But we'll continue to stay close to it if something -- things change then our customary portfolio management practices would have us do valuations and appraisals and the like. And we're not seeing a number of credits kind of going toward that direction.
Great. And did you have to get updated appraisals on the credits when you move to them?
No, we do not. No. We'll selectively do [Technical Difficulty]. Yeah.
Our next question comes from Russell Gunther with Stephens.
Just wanted to follow up on comments you made with regard to the RWA optimization in the quarter. Could you guys provide us with the size of the loan pool that, that applied to and then whether or not there's opportunity for similar actions going forward?
Hi Russ, this is Charlie. We started a project during the quarter to look at risk-weighted assets and how we're classifying our various asset classes within that risk-weighted asset assignments. And so far, the one item we changed during this quarter was related to consumer loans, specifically home equity lines of credit, where we had them classified as conditionally cancelable, so that they carried -- the unfunded commitment portion of those credits carried a 50% risk weighting. However, FDIC guidelines allow you to classify them as unconditionally cancelable as long as they are cancelable up to federal law, which is [ Reg Z ].
We did an internal legal review, worked with our auditors and determined that our equity line of credit population should be classified as unconditionally cancelable and carry a 0% risk weighting, at least for the majority of those credits. That pulled a little over $700 million. So it was about a $360 million reduction in risk-weighted assets during the quarter. We'll continue to work through the project to look at a variety of other risk-weighted asset classes to determine if any other changes are needed with those changes taking effect sometime during the third quarter.
Okay. That's really helpful. And then I wanted to circle back to Catherine's question earlier in terms of the fixed repricing you guys gave a lot of helpful color in terms of the rate in '25 and '26. I'm wondering if we could follow up in terms of the amount of the fixed repricing opportunity. Is it similar to the $500 million a quarter in the back half of this year?
That's a good question. As we head into 2025, the amount of repricing is between $200 million and $300 million per quarter. So it certainly falls a bit. We've got a little bit of a bubble of repricing that will occur here in the next two quarters but then somewhere in the $200 million to $300 million per quarter range on the total commercial loan portfolio.
Okay. And then next point for me guys is the -- sorry, go ahead.
I was just going to say that is specifically related to the fixed rate. There will be additional repricing related to floating and adjustable credits.
The last one for me is on the fee outlook, which I think for the year, you've got it high single digits. You mentioned the mortgage outlook for 3Q. Anything else that you would expect to step down? Otherwise, it looks to me like potentially could be closer to low double digits, maybe being conservative or maybe something I'm missing. Would just appreciate any thoughts.
No, I mean I think double digits are certainly possible. Certainly on the wealth side, the market, it's highly market-dependent. Here recently, the market is performing really well. So those areas will perform well as well. Obviously, the BOLI income we received during the quarter was onetime income with no anticipation that, that could recur. And then we do have some expectation that we'll see some of those SBA gains start to occur during the fourth quarter. We're just not confident if they're going to be a fourth quarter event or a first quarter event at this time. So I think your comments around high single digits to low double digit improvement somewhere in that range is likely.
Okay. I appreciate your thoughts.
[Operator Instructions] We now turn to Manuel Navas with D.A. Davidson.
Could you update on some of the deposit initiatives that are kind of driving a little bit better guidance, strong growth this quarter and last? Where are you seeing the most success?
Hi Manuel, this is Dan. We are -- there's not one specific area. We're seeing success really across the board as our folks in our branch network are out driving deposit growth through their client relationships. We're having success with our digital marketing and digital fulfillment through our online platform. Commercial bankers are continuing to mind our client relationships there and driving new client deposits.
And one thing we talked about last time we were together, I believe, was some initiatives we had in reaching into the new clients that we attracted through our high-yield savings account. And we developed some products for that segment hasn't hit the ground as well as we had expected. So we're tweaking the products as well as the promotion to get more success in turning those into full banking relationships. But there's not one initiative underway that's driving our success. I think it's really across the board. The teams are fully engaged on driving new relationships through both branches and through digital means.
And that's showing in better pipelines and kind of better -- a little bit increase a positive outlook for the year.
I think overall, yes. I think the one thing that came back to us a good bit in the second quarter was the commercial and small business DDAs. So we're -- there's some seasonality in that inter-quarter, but driving new relationships, both in the retail and small business space.
And then can you talk about the mix of loan growth, that 1% to 2% growth, it's going to be primarily on the C&I side?
I would say, yeah, the pipeline -- coming out of last quarter, just to give you a sense, first quarter pipeline was in the mid-$600 million range. This quarter, as we wrap up is in the low $800 million range. So we're seeing some pipeline build, and it is predominantly C&I and owner-occupied real estate, which is closely tied to the C&I relationships.
We will still see some growth by virtue of what we've already have on our books in the AD&C portfolio that we'll fund in res homebuilding construction as well as some other multifamily that we have in the AD&C book that will still continue to fund. But the pipeline of new opportunities is predominantly C&I and owner-occupied real estate.
Could you just speak to the pace and acceleration of pace of NIM improvement with rate cuts. I think you talked about it for -- in your comments that you could get to 3% plus by the end of next year based on your rate assumption. So that builds in a little bit of an acceleration of NIM improvement. Is that still represented in those comments?
Yes. So we do expect that once the Fed begins to cut interest rates, we'll see some improvement. We'll say we're a little more cautious about the first rate cut or so and whether pricing across the board in our marketplace is going to come down enough for us to be as aggressive on our deposit betas as we'd like to be early on. But we do expect once the Fed makes to the second, third cut, that those betas will be much higher than we've historically seen within our portfolios.
Quite a bit of the benefit that we expect to see from the Fed movements is related to changes in the shape of the yield curve. So that's one thing to be cautious with the overall yield curve comes down, so the long end comes down right with the short end, but the benefit won't be as great as what we're projecting to be a little bit more difficult for us to achieve that 3% by the end of 2025.
But certainly, falling deposit costs and then the continued repricing of the loan portfolio as yields similar to where they are today or even slightly lower would allow our margin to expand at pretty close to twice the rate that it would without Fed cut. So you'd be looking somewhere in the maybe 5 basis point to 10 basis point range of quarterly improvement once we can start pulling those deposit costs down versus the 2 basis points to 4 basis points of quarterly improvement that we're projecting absent movement benefit.
Ladies and gentlemen, we have no further questions. So this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.