Q2 2024 Earnings Summary
- Broad-Based Deposit Growth Enhancing Funding Mix: SASR is experiencing success across multiple initiatives to grow deposits, increasing core deposits by 3% quarter-over-quarter and reducing reliance on brokered deposits. This improvement in funding mix positions the bank to manage funding costs more effectively and support net interest margin expansion.
- Anticipated Net Interest Margin Expansion: The bank expects net interest margin to expand by 2 to 4 basis points per quarter in 2024, with potential acceleration to 5 to 10 basis points per quarter in 2025 following anticipated Federal Reserve rate cuts. SASR is targeting a net interest margin of approximately 3% by the end of 2025.
- Growing Non-Interest Income Diversifying Revenue Streams: SASR anticipates fee income growth reaching high single digits to low double digits in 2024, driven by strong performance in wealth management and the forthcoming contributions from its new SBA lending program. This growth enhances non-interest income and diversifies the bank's revenue streams.
- The bank's projections for net interest margin (NIM) improvement are heavily dependent on the assumption that the Federal Reserve will cut interest rates later in the year, with four rate cuts next year. If the Fed does not reduce rates as expected, margin expansion may be limited to 2 to 4 basis points per quarter, potentially impacting earnings growth.
- The bank is experiencing increased credit risk, having reclassified $144 million to special mention and $19.5 million to substandard loans due to credits falling below covenants. This increase in criticized loans could lead to higher credit losses in the future.
- The improvement in the bank's capital ratios was due to a reduction of $360 million in risk-weighted assets achieved by reclassifying certain home equity lines of credit as unconditionally cancellable. This method of capital ratio improvement may not be sustainable, and further such adjustments may not be available.
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Margin Outlook and Deposit Costs
Q: Are deposit costs near their peak and will they decline?
A: Management believes deposit costs have come close to peaking, with June's deposit cost at $3.56 compared to $3.54 for the quarter. They project deposit costs may increase by only 1 to 2 basis points over the next couple of quarters until the Fed cuts rates. Earning asset yields continue to expand, leading to expected margin expansion of a few basis points. -
Loan Repricing Opportunities
Q: What is the fixed rate repricing opportunity ahead?
A: In the next two quarters, about $500 million per quarter of commercial loans will reprice from rates in the mid- to upper 6% range. While not significant for near-term loan yields, as we enter 2025, repricing rates fall to the mid-6%, and by early 2026, to the upper 5% to low 6%, leading to gradual improvement in loan yields. -
Credit Quality and Reserves
Q: Why is there confidence in low loss content of stressed credits?
A: Management doesn't view rate outlook as a catalyst for moving credits to special mention and substandard. Issues are due to specific circumstances like new projects stabilizing or short-term lease turnovers causing covenant breaches. If rates stay higher for longer, some projects could be impacted, but overall, they're not concerned about reserves and aren't seeing many credits deteriorate further. -
Deposit Initiatives and Loan Growth
Q: What's driving better deposit growth and loan mix?
A: Success is across the board, with branch networks, digital marketing, and commercial bankers contributing to deposit growth. The pipeline has grown from the mid-$600 million range to the low $800 million, predominantly in C&I and owner-occupied real estate loans. -
Net Interest Margin Improvement with Rate Cuts
Q: How will NIM improve with expected rate cuts?
A: Management expects margin expansion to accelerate once the Fed cuts rates. Initial cuts may have a muted effect due to pricing pressures, but subsequent cuts should allow deposit betas to improve significantly. They anticipate quarterly margin improvement of 5 to 10 basis points with rate cuts, compared to 2 to 4 basis points without them. -
Risk-Weighted Asset Optimization
Q: What was the impact of RWA optimization initiatives?
A: By reclassifying certain home equity lines of credit as unconditionally cancelable, they reduced risk-weighted assets by about $360 million during the quarter. They changed the classification for over $700 million in HELOCs. Further optimizations are expected in the third quarter. -
Fee Income Outlook
Q: Is fee income growth outlook conservative?
A: Double-digit fee income growth is possible. Wealth management fees could perform well if markets remain strong. However, one-time BOLI income won't recur, and SBA gains may be delayed until Q4 or Q1 next year. Management considers high single-digit to low double-digit improvement likely.