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    Sandy Spring Bancorp Inc (SASR)

    Q4 2023 Earnings Summary

    Reported on Feb 18, 2025 (Before Market Open)
    Pre-Earnings Price$26.58Last close (Jan 22, 2024)
    Post-Earnings Price$26.82Open (Jan 23, 2024)
    Price Change
    $0.24(+0.90%)

    What went well

    • Anticipated Net Interest Margin Expansion: Sandy Spring Bancorp expects its net interest margin to bottom out in the first quarter of 2024 in the low 2.40% range and then rebound by 7 to 10 basis points per quarter, reaching above 3% during the second half of next year. This improvement is expected due to anticipated Federal Reserve rate cuts, the bank's ability to aggressively manage deposit costs, and the maturing of high-cost borrowings and brokered CDs throughout 2024.
    • Higher Loan Growth with Improved Yields: The bank plans to achieve mid to upper single-digit loan growth in 2024, driven predominantly by C&I and owner-occupied real estate loans. New loan production is coming on at significantly higher yields, with overall commercial production averaging about 8.3%, compared to the existing loan portfolio's yield of 5.25%, indicating potential for increasing net interest income.
    • Successful Digital Initiatives Boosting Deposit Growth: Sandy Spring Bancorp is optimistic about generating deposit growth through its new digital capabilities, including integrated account opening and enhanced online banking services. Since launching these technologies, they have opened over 2,200 new accounts, with over half being new client acquisitions. This digital transformation is expected to drive deposit growth, deepen existing relationships, and support funding needs for loan growth.

    What went wrong

    • The company expects minimal expense growth in 2024, projecting expenses to be flat or grow by maybe 1% overall after adjusting for one-time costs in 2023. However, upcoming investments in digital transformation, particularly in building out small business and commercial online capabilities planned for late 2024 into 2025, are not included in the 2024 expense run rate. This could lead to higher expenses than forecasted, potentially impacting earnings.
    • Net interest margin (NIM) is expected to bottom out in Q1 2024 and improve with anticipated Fed rate cuts in the second half of 2024. The company's margin recovery plan assumes a significant reduction in deposit costs, especially on high-yield savings accounts where they expect a beta assumption of more than 100%. If the rate cuts do not occur as expected, or deposit costs do not decrease as planned, the NIM may remain compressed, impacting profitability.
    • The bank has significant amounts of high-cost funding sources maturing in 2024, including $430 million in brokered CDs at 4.5% and $250 million in FHLB advances averaging 4.6%. If these funds are not replaced with lower-cost deposits or if market rates remain high, the bank may face continued pressure on funding costs, which could negatively affect margins.

    Q&A Summary

    1. Net Interest Margin Outlook
      Q: Will deposit costs peak next quarter, improving NIM?
      A: Deposit costs may increase slightly into Q1 and Q2, but we anticipate our net interest margin to bottom in the first quarter and start to rise from the second quarter onward. This improvement will be aided by rebuilding non-interest-bearing deposits and repaying higher-cost funding sources like the bank term funding program in April.

    2. Expense Guidance
      Q: Are expenses expected to be flat in 2024?
      A: We are projecting expenses to be flat year-over-year in 2024 after adjusting for one-time items in 2023, with overall growth of maybe 1%.

    3. Loan Growth Targets
      Q: What's your loan growth target and timing?
      A: We plan for mid to upper single-digit loan growth in 2024, driven mainly by C&I lending and owner-occupied real estate, with growth building from the second quarter onward.

    4. Deposit Costs and Funding Mix
      Q: How will deposit betas affect margins with rate cuts?
      A: Assuming Fed cuts in June, September, and December, we expect deposit betas of about 40% on money market and checking products, and around 90% or more on high-yield savings. This should lead to significant cost reductions as rates decline.

    5. Deposit Growth Strategies
      Q: Where are you seeing core deposit inflows?
      A: Core inflows are coming from featured time deposits with mid-term maturities of 1 to 2 years at rates near 5%, and strong growth in high-yield savings accounts. We're optimistic about leveraging our digital capabilities to drive new deposit growth.

    6. Loan Yields and Production
      Q: What are yields on new loan production?
      A: New commercial loan production averaged yields of about 8.3% this quarter, with owner-occupied real estate loans at 6.5% to 7%, ADC loans at 8% to 8.5%, and other commercial loans at 7.5% to 8.5%.

    7. Digital Transformation and Expenses
      Q: What's the status of digital transformation spending?
      A: We completed our retail digital initiatives in 2023, which are now in the run rate. Future projects, like small business and commercial online capabilities, are in design and won't significantly impact 2024 expenses.

    8. Loan-to-Deposit Ratio
      Q: What's your comfort level with loan-to-deposit ratio?
      A: Currently around 100%, we aim to bring it down to the mid-90s over time, but we're not in a hurry.

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