Sandy Spring Bancorp, Inc.
Q4 2024 Earnings Call Transcript

Published: 23 Jan 2024

[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

[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.

[Russel Gunther:]

Okay. That's a great color, Phil. Thank you. Maybe just switching gears on the expense conversation that was had. I understand the directional guide, but from a big picture strategic perspective, kind of where do you stand in the digital transformation phase and that spend, that I believe is now in the run rate? Are there ongoing projects below the radar that are captured into that flat expense guidance? I know when the spread was more challenged, I think you guys had strategically pushed some things a bit further. So just curious from a big picture perspective, where that all stand?

[Daniel Schrider:]

Russell, this is Dan. What we rolled out and kind of fully completed in ‘23, in the end of the -- beginning of the fourth quarter, was everything retail related, retail online banking, retail mobile, P2P capabilities, integrated online account opening. So those are all running and there will be obvious iterations to that, but not at the same expense rate as the initial build. On the planning side of things is taking that platform and building out our small business and then our commercial online capabilities. That's in the design phase right now. And in all likelihood, the build out of that would probably not begin to occur until very end of 2024 into ‘25. And then within that run, so that's not built into that run rate for ‘24 conversations what I'm trying to say. And then what is built in are a number of smaller projects that are just aimed at helping us to put into practice some of the digital capabilities we have in terms of automated underwriting, automated small business delivery and those types of things. And those will be things that are being built out throughout the course of 2024.

[Russell Gunther:]

Okay. Got it. Dan, that's very helpful. And then the last one for me, just on the loan growth side of things. I think I missed your comment in terms of where your -- what your target is, but if you could share kind of what you’re directionally looking for from a loan volume perspective mix, and then just kind of overall comfort zone from loan to deposit ratio, if that's ultimately going to be the endeavor?

[Daniel Schrider:]

Yes. I think going into 2024, and I think we're going to stay flexible as to what we see happening in the market, both from a pricing demand and then having obviously the funding side of the things also be a driver there. But our plan was to be somewhere in the mid to upper-single digits by the end of the year in loan growth. Driven predominantly by our C&I work, our owner-occupied real estate, probably low-single digits on the commercial real estate side of things really overcoming runoff that we see in that. We could see some growth if depending upon what the long end of the curve does and in the mortgage space and have a more of an appetite to put some 5.1, 7.1, 10.1 type of arm product in the portfolio. But that's really going to be driven by what we're able to achieve from a profitability standpoint. So there's a little bit of, -- so from an overall plan standpoint, mid to upper-single digits that could move more favorably if conditions allow that to happen. On a loan to deposit ratio, we actually -- the last handful of months, we're tracking on either side of a 100%. And in our case, we always have a little deposit runoff particularly within the commercial book at the end of the year, which has what kicked the it back up. We went into December with it right around a hundred. Over time, we think that needs to come down into the mid-90s, but we're not sprinting towards that. We just think that will happen over time.

[Operator:]

Our next question comes from the line of Manuel Navas with D.A. Davidson.

[Manuel Navas:]

Can you talk a little bit more about the kind of comfort on the deposit side and kind of where you're seeing the core inflows that kind of drives a little bit better growth expectations on the loan side next year?

[Philip Mantua:]

Manuel, this is Phil. As it relates to the current flows within the deposit base, they continue to be in the feature time deposit products that we're offering predominantly on the retail side. Kind of mid-term one-year to two-year type of maturity tenures currently with the best offered rated at around 5%, but I don't know that we're looking for that particular rate to last a whole lot longer into the future. Still seeing good growth on the high yield savings account that continues to lead the way. Our other interest checking products are fairly stable. The money market area still is one that we think needs to kind of turn the corner and go in the other direction. That's been a little more difficult. And then I think we're optimistic about the things we can do on the demand deposit side here given the nature of the type of lending we want to do going forward and how that should alter the view towards the complementary type of deposit gathering that would go along with more true commercial lending. I think that's part of where we are at in kind of how we see it moving forward as well.

[Daniel Schrider:]

Hey, Manuel, this is Dan. I'll also mention that we're really optimistic about what our digital capabilities are going to provide in the generation of new relationships. And with ‘23 being, what it was with the noise around deposit outflows or disintermediation, our integrated account opening that we kicked off with some of our new digital technology. We opened for us significant, over 2,200 new accounts in the over the course of time since we kicked that off. But over half of that, or -- I'm sorry, about a third of that are checking account relationships. Over half new client acquisitions, about 46% are deep in the existing relationships. So we have our teams in retail and commercial mortgage and wealth laser focused on digging into the relationships that they have within those verticals that may not have full banking relationships. So they're going after that really hard. We're using some outside data to be able to go out after prospective clients again using our digital tools. And so we think there's some real upside for us to drive some deposit growth, new relationship growth and with capabilities that we just never had before. So, we're counting on that to be meaningful as we move through ‘24.

[Manuel Navas:]

That’s very helpful. Did I understand right on the loan growth guidance about like mid to upper-single digits across the whole year or kind of accelerating to the back half or both? Can you just kind of help with the timing a bit?

[Philip Mantua:]

Yeah, I think traditionally our first quarters is soft. That's a demand driven soft. So I think it probably builds towards the, you know, second through fourth quarter of the year.

[Manuel Navas:]

And rates help with that or you feel like you could -- you're comfortable no matter what the rates do?

[Philip Mantua:]

I think, I mean, I expect some cut. Yeah, I don't think that's necessarily, you know, cut driven. I mean rates clearly have had an impact on a number of real estate related projects that they just don't work at the rates at pricing today. But in what we're going after in terms of small business, C&I relationships and winning more market share from existing, you know, lenders in the market, it won't be rate dependent. But it's more second half of the year.

[Manuel Navas:]

Thank you, guys. Appreciate the comments.

[Operator:]

Thank you. There are currently no further questions registered. [Operator Instructions] There are no additional questions waiting at this time, so I'll pass the conference back over to you, Mr. Schrider for closing remarks.

[Daniel Schrider:]

Thank you, Megan, and thanks everyone for joining today's call and for your questions. If you have any others, please reach out and let us know how valuable the call was. Thanks, everyone. Have a great afternoon.

[Operator:]

That concludes the Sandy Spring Bancorp Inc. Earnings Conference Call and Webcast for the Fourth Quarter of 2023. Thank you for your participation. I hope you have a wonderful rest of your day.