Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sandy Spring Bancorp Inc (SASR, Financial) successfully grew core deposits and C&I loans in the second quarter.
- Net interest margin improved for the first time in several quarters.
- Reported net income increased to $22.8 million compared to $20.4 million in the previous quarter.
- Provision for credit losses declined to $1 million from $2.4 million in the first quarter.
- Total assets increased to $14 billion at the end of the second quarter compared to $13.9 billion at the end of the first quarter.
Negative Points
- Core earnings for the current quarter were lower compared to the same quarter last year.
- There was an increase in criticized loans across various portfolios.
- Nonperforming loans increased to $93 million from $84.4 million in the previous quarter.
- The allowance for credit losses increased to $125.9 million from $123.1 million in the previous quarter.
- CRE 2 capital ratio declined to 346% from 348% as of March 31.
Q & A Highlights
Q: Can you talk to us a little bit about some of your assumptions within the margin expansion, particularly on the funding side? Do you feel like you're near a peak in deposit costs?
A: Hi, Catherine. It's Charlie. We have come close to a peak in deposit costs. Our deposit cost for June was $3.56 compared to $3.54 in the quarter. We may see a slight increase in total deposit costs over the next couple of quarters until the Fed cuts interest rates. However, we should see decreases in wholesale funding costs, which should offset some of those costs, leading to a few basis points of margin expansion.
Q: Can you remind us and quantify the fixed rate repricing opportunity we've got in the back half of the year and in 2025?
A: For the next two quarters, we have around $500 million each quarter of repricing, with rates repricing from the mid- to upper 6s. In 2025, the repricing rate falls into the mid-6s and by early 2026, into the upper 5s to low 6s. The amount of repricing in 2025 will be between $200 million and $300 million per quarter.
Q: You talked about the credits that you moved to special mention and substandard. Is the rate outlook a piece of that?
A: The rate outlook was not a catalyst for those moves. It was more about the current assessment of those loans. Some projects might be waiting to stabilize, and sponsors or guarantors are covering them. If rates stayed higher for longer, it could impact some projects in our construction portfolio, but that was not a driver for the reclassification.
Q: Could you provide us with the size of the loan pool that the RWA optimization applied to and whether there are opportunities for similar actions going forward?
A: We reviewed our risk-weighted assets and reclassified home equity lines of credit as unconditionally cancelable, reducing the risk weighting to 0% for most credits. This affected a little over $700 million, reducing risk-weighted assets by about $360 million. We will continue to review other asset classes for potential changes.
Q: Could you update on some of the deposit initiatives that are driving better guidance and strong growth?
A: We are seeing success across the board through our branch network, digital marketing, and commercial bankers. We are also tweaking products and promotions to turn new clients into full banking relationships. Overall, the teams are fully engaged in driving new relationships through both branches and digital means.
Q: Can you talk about the mix of loan growth, particularly the 1% to 2% growth?
A: The pipeline is predominantly C&I and owner-occupied real estate. We will still see some growth in the AD&C portfolio, but new opportunities are mainly in C&I and owner-occupied real estate.
Q: Could you speak to the pace and acceleration of NIM improvement with rate cuts?
A: We expect improvement once the Fed begins to cut rates. Initially, we may be cautious, but with subsequent cuts, we expect higher deposit betas. The benefit will also depend on changes in the yield curve. We project margin expansion at 5 to 10 basis points per quarter with rate cuts, compared to 2 to 4 basis points without them.
Q: What is the outlook for fee income, considering the mortgage outlook for Q3?
A: Double-digit growth is possible, especially with strong market performance in wealth management. BOLI income received this quarter was one-time, and we expect SBA gains in Q4 or Q1 next year. High single digits to low double digits improvement is likely.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
