Q1 2024 Earnings Summary
- Sandy Spring Bancorp expects improved net interest margin due to the upward repricing of assets. Approximately $250 million to $350 million of fixed-rate loans are maturing per quarter in 2024, which are expected to reprice up the curve by over 100 basis points, contributing to higher loan yields even in a stable rate environment.
- The bank's wealth management segment is performing well, with Assets Under Management (AUM) increasing to $6.2 billion, and there is potential for continued growth driven by market performance and the ability to attract new clients.
- Sandy Spring Bancorp has limited exposure to large office properties in the D.C. market and expects minimal impact from potential government reductions in office space, indicating strong asset quality and risk management.
- Potential impact from reductions in government office space in the D.C. market, which could affect commercial real estate investors and lead to increased credit risk. While management believes their own exposure is limited, the broader market could be affected if the government reduces its office space significantly.
- Declining net interest margin (NIM), which has decreased from 2.99% in Q1 2023 to 2.41% in Q1 2024, indicating pressure on profitability. Management expects only a modest improvement of 2 to 4 basis points per quarter without Fed rate cuts, which may not be sufficient to offset margin pressures. ,
- High deposit costs, with the bank offering a 5% CD for 7 months and a 14-month CD at 4.75%, which could continue to pressure margins if interest rates remain high and loan yields do not rise accordingly.
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Margins and Impact of Rate Cuts
Q: How will rate cuts affect your margins?
A: We expect to improve our margin by 2 to 4 basis points per quarter without rate cuts. If the Federal Reserve cuts rates, we can reduce deposit costs quickly, leading to a margin improvement of about 10 basis points per quarter, capturing approximately 40% of each 25-basis-point cut. This assumes the long end of the yield curve remains stable. -
Deposit Costs Stabilization
Q: Are deposit costs stabilizing, and can they decline?
A: Deposit costs declined by 3 basis points from February to March, with the cost of interest-bearing deposits moving from $355 million to $352 million. We anticipate some moderation but don't expect significant increases going forward. Our retail high-yield savings rate is at 4.5%, and new CDs are offered at 5% for 7 months and 4.75% for 14 months. -
Loan Growth Outlook and C&I Focus
Q: What's your outlook for loan growth and mix?
A: We expect around 3% commercial loan growth in the second quarter, focusing on C&I and owner-occupied lending, while keeping CRE exposure flat or reducing its concentration of capital. Our pipeline is strong in C&I, ranging from small business to middle market, which will drive funded production quarter over quarter. -
Credit Quality and Net Charge-offs
Q: What are your expectations for net charge-offs?
A: While it's tough to predict, we typically anticipate about 5 basis points of annualized net charge-offs in any given year. Recent experience shows a few smaller credits moving through the cycle, but nothing material. Ending up in the 5 to 10 basis point range for the year would be reasonable, though we have no specific projection pointing to that. -
Exposure to D.C. Office Market Risks
Q: How could government office space reduction impact you?
A: A substantial reduction in government office space could materially affect the D.C. office market, especially large floor-plate buildings that are hard to re-tenant. However, we have minimal exposure to those properties, focusing instead on small professional office spaces that are easier to re-tenant. We don't expect a material impact on us from such developments. -
Securities Portfolio Repricing
Q: What's the outlook for your securities portfolio yields?
A: Our securities portfolio reprices about $15 million to $20 million per month, with current yields in the low to mid-2% range increasing significantly upon repricing. We're employing a barbell strategy, buying seasoned MBS and floating-rate securities, achieving average yields close to 6% or greater. This should enhance overall portfolio yields throughout the year. -
Capital Allocation and Buybacks
Q: Will you consider share buybacks given your stock price?
A: While repurchasing shares makes sense given our stock price, preserving capital is our priority amid current uncertainties and profitability considerations. We're not positioned to be active in buybacks at the moment, but that could change with more clarity in the environment. -
Fee Income and Wealth Management
Q: What's driving fee income growth in wealth management?
A: Fee income growth is driven by market performance and our ability to attract new assets under management. Occasionally, one-time fees from trust dispositions may contribute, but for the remainder of the year, growth will depend on these factors. -
Cross-selling High-Yield Savings Accounts
Q: Can you elaborate on cross-selling high-yield savings accounts?
A: We're focusing on deepening relationships with high-yield savings clients through outreach by our commercial bankers, retail offices, and wealth management professionals. We've created a DDA account with attractive features for these clients. While it's early, we believe our relationship approach gives us a higher probability of turning them into full banking clients.
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