Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported net income for the first quarter of 2020 of $10.0 million ($0.28 per diluted share) compared to net income of $30.3 million ($0.85 per diluted share) for the first quarter of 2019 and net income of $28.5 million ($0.80 per diluted share) for the fourth quarter of 2019. Earnings for the current quarter were negatively impacted by a provision for credit losses of $24.5 million. Although the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) would permit the Company to delay the adoption of the accounting standard for current expected credit losses (CECL), the Company has elected to adopt CECL as planned, effective January 1, 2020. The provision for credit losses was significantly impacted by the negative projected impact of COVID-19 on specific economic metrics used in the Company’s CECL model. Excluding the effect of the significant deterioration in the economic outlook late in the first quarter, the provision for credit losses was projected to have been approximately $4.1 million. Additionally, the results for the current quarter were negatively impacted by $1.5 million in merger and acquisition expense associated with the acquisition of the wealth advisory firm, Rembert Pendleton Jackson (“RPJ”), which closed on February 1, 2020, and the acquisition of Revere Bank (“Revere”), which closed on April 1, 2020. The acquisition of Revere resulted in the addition of 11 banking offices and approximately $2.9 billion in assets as of March 31, 2020.
“We entered the year in a position of strength after delivering a record year and preparing to expand our market presence with the acquisitions of Rembert Pendleton Jackson and Revere Bank,” said Daniel J. Schrider, President and Chief Executive Officer of Sandy Spring Bank. “Like individuals, families and businesses everywhere, we too had to quickly respond to the unprecedented public health and economic events that began to unfold late in the first quarter. We seamlessly implemented our contingency plans in order to protect the health of our employees, clients, and business and community partners. And while we have made many changes to how and where we all work, we have maintained the continuity of our client service and critical operations. I am grateful to our dedicated team of bankers for making this happen.”
“Our clients are facing a great deal of uncertainty right now, and we are committed to seeing them through this difficult time,” added Schrider. “From helping clients access federal relief programs, to working with individuals and business owners on a case-by-case basis, we are doing all that we can to connect our clients with the financial help they need.”
“We are pleased that RPJ and Revere Bank are now officially part of Sandy Spring Bank. As we continue to come together as a company, we are focused on upholding the tradition of community banking, providing remarkable service, and being the advocate that our clients need now more than ever.”
First Quarter Highlights:
- Total assets grew by 7%, while loans and deposits grew by 2% and 6%, respectively, compared to the prior year.
- The net interest margin was 3.29% for the first quarter of 2020, compared to 3.60% for the first quarter of 2019 and 3.38% for the fourth quarter of 2019. The net interest margin for the first quarter 2019 was 3.52%, after excluding recovered interest income on acquired credit impaired loans.
- The Company proceeded with the adoption of CECL effective January 1, 2020, resulting in an increase to the allowance for credit losses of $5.7 million. Exclusive of the $2.8 million reclassification to the allowance for credit losses related to acquired credit impaired loans, the impact to retained earnings at transition date was $2.2 million.
- The provision for credit losses for the first quarter of $24.5 million was significantly impacted by the specific economic metrics used in the modeling of expected credit losses. Excluding the effect of the significant deterioration in the economic outlook late in the first quarter, the provision for credit losses was projected to have been approximately $4.1 million.
- Non-interest income increased 7% from the prior year quarter driven primarily by the impact from the recent acquisition of Rembert Pendleton Jackson.
- The Company completed its stock repurchase program under which it purchased a total 1.5 million shares for a total of $50.0 million at an average price of $33.58 per share.
- Tangible book value remained stable at $21.09 per share at March 31, 2020 compared to $21.05 at March 31, 2019, after the completion of the stock repurchase program, an increase in the quarterly dividend to $0.30 per share in the second quarter of 2019 and the addition of $34.9 million in goodwill and intangible assets.
Response to COVID-19
The Company has taken significant steps to protect the health and well-being of its employees and clients and to assist clients who have been impacted by the COVID-19 pandemic.
We began implementing our business continuity plan in early March, which led to us taking the following actions to address the health and safety of employees and clients.
- In mid-March, we suspended all business-related travel, limited in-person meetings with outside parties, requested that employees postpone non-essential personal travel, and began transitioning employees to working remotely.
- We established an enhanced personal leave benefit that provides additional paid time off to employees who are unable to work for reasons related to COVID-19 – including having to care for children whose school has been closed – and who cannot work from home.
- We implemented enhanced cleaning and disinfecting procedures for our facilities.
- On March 18, we closed our branch lobbies to the public, established procedures for clients to schedule appointments in our branches for critical needs, such as safe deposit box access, and enhanced procedures to permit a wider range of transactions to be conducted through our drive-thru facilities.
- We notified our clients of reduced access to our facilities, promoted the use of online and mobile banking, and increased the staff in our customer service center to assist clients over the telephone.
- We established regular communications to employees to keep them apprised of the steps we are taking to support employee and client safety and the benefits available to them.
- We successfully transitioned approximately 85% of our non-branch personnel to working remotely.
- We developed comprehensive guidance for responding to any COVID-19 diagnoses or exposures in our operations.
- On March 30, we closed the majority of our branches that do not have drive-thru facilities.
- We are providing branch personnel and support staff whose responsibilities do not permit them to work remotely with a bonus of up to $1,200.
With these measures in place, we have continued to effectively serve the needs of our clients.
We have taken several steps to ease the financial burden of the COVID-19 pandemic on our clients:
- We have waived Sandy Spring Bank fees for clients using an ATM, regardless of location.
- We are waiving certain penalties for early certificate of deposit withdrawals less than $10,000.
- We have eliminated fees for remote check deposits by our business clients.
- We are working with clients who are experiencing financial hardship to provide fee waivers and structure loan payment deferrals or other accommodations.
We are participating in the Small Business Administration’s Paycheck Protection Program, which provides forgivable loans to small businesses to enable them to maintain payroll, hire back employees who have been laid off, and cover applicable overhead. After the program was announced, we quickly mobilized resources to maximize the ability of our clients to access this program. We have involved over 150 employees in our participation in the program, while simultaneously working with our technology vendors to implement software solutions to speed the intake of client applications and submission to the SBA. As of April 16, 2020, when the SBA announced that all of the funds appropriated for the program had been allocated, we have processed over 2,800 loans for a total of $923.5 million to businesses with more than an estimated 88,000 employees.
As a further relief to our qualified commercial and mortgage/consumer loan customers, the Company has developed guidelines to provide for deferment of certain loan payments up to 90 days. From March through April 16, the Company (including Revere) had granted approvals for payment modifications/deferrals on nearly 1,000 loans with an aggregate balance of $845.0 million.
For additional information about the Company’s response to the COVID-19 pandemic, segments of the Company’s loan portfolio exposed to industries adversely impacted by the pandemic, and our response to clients who sought loan payment deferral, we have provided supplemental materials available at the Investor Relations section of the Sandy Spring Website.
Balance Sheet and Credit Quality
Total assets grew to $8.9 billion at March 31, 2020, as compared to $8.3 billion at March 31, 2019. Total loans grew by 2% to $6.7 billion at March 31, 2020, compared to $6.6 billion at March 31, 2019. During this period commercial loans grew 8%, while the mortgage loan portfolio declined 11%. Continued reduction in the mortgage portfolio has been the result of heavy mortgage loan refinance activity driven by the low interest rate environment and the strategic decision to sell the majority of new mortgage loan production. Consumer loans also declined as borrowers eliminated their home equity borrowings through the refinancing of their mortgage loans. Deposit growth was 6% from March 31, 2019, to March 31, 2020, as interest-bearing deposits experienced growth of 6% and noninterest-bearing deposits grew 7%.
Tangible common equity declined to $721 million at March 31, 2020, compared to $748 million at March 31, 2019. The decline in common equity reflects the effects of the repurchase of 1.5 million shares of common stock, the increase in dividends beginning in the second quarter of 2019 and the increase in intangible assets and goodwill during the past twelve months. At March 31, 2020, the Company had a total risk-based capital ratio of 14.09%, a common equity tier 1 risk-based capital ratio of 10.23%, a tier 1 risk-based capital ratio of 10.23% and a tier 1 leverage ratio of 8.78%.
The level of non-performing loans to total loans increased to 0.80% at March 31, 2020, compared to 0.61% at March 31, 2019. At March 31, 2020, non-performing loans totaled $54.0 million, compared to $40.1 million at March 31, 2019, and $41.3 million at December 31, 2019. The growth in non-performing loans occurred as a result of the adoption of the accounting standard for expected credit losses as $13.1 million of previously disclosed and accounted for purchased credit impaired loans are now designated as non-accrual loans under the new standard’s guidance. New loans placed on non-accrual during the current quarter amounted to $2.4 million compared to $6.2 million for the prior year quarter and $5.4 million for the fourth quarter of 2019. Non-performing loans include accruing loans 90 days or more past due and restructured loans.
Loan charge-offs, net of recoveries, totaled $0.5 million for the first quarter of 2020 compared to $0.3 million for the first quarter of 2019. The allowance for credit losses represented 1.28% of outstanding loans and 159% of non-performing loans at March 31, 2020, compared to 0.81% of outstanding loans and 132% of non-performing loans at March 31, 2019. The growth in these ratios from 2019 to 2020 was the direct result of the impact on the allowance of the increased provision for credit losses required by recent economic developments.
Income Statement Review
Net interest income for the first quarter of 2020 decreased 4% compared to the first quarter of 2019, reflecting the impact of the declining interest rates over the preceding twelve months. The net interest margin declined to 3.29% for the first quarter of 2020 compared to 3.60% for the first quarter of 2019. The first quarter of 2019 included $1.8 million in recovered interest income on acquired credit impaired loans. Excluding the recovered interest income, the net interest margin for the first quarter of 2019 would have been 3.52%.
The provision for credit losses was $24.5 million for the first quarter of 2020, compared to a credit of $0.1 million for the first quarter of 2019 and $1.7 million for the fourth quarter of 2019. The impact of the negative economic projections on the credit portfolio resulted in a provision for credit losses of $24.5 million for the quarter.
Non-interest income was $18.2 million for the first quarter of 2020, as compared to $17.0 million for the first quarter of 2019. The current quarter included $0.2 million in securities gains and the prior year quarter included $0.6 million in life insurance mortality proceeds. Exclusive of these proceeds and securities gains, the growth in non-interest income for the quarter was 10% or $1.6 million compared to the prior year quarter. This increase was driven by the 33% increase in wealth management income as a result of the acquisition of the wealth advisory firm during the quarter. While the decline in residential mortgage lending rates during the quarter led to significant increase in loan originations, lower investor demand, in addition to a reduction in pricing, adversely affected the valuations of the forward commitments and loans held for sale, resulting in a significant decline in mortgage banking income for the current quarter compared to recent quarters.
Non-interest expenses increased 8% to $47.7 million for the first quarter of 2020 compared to $44.2 million in the first quarter of 2019. The current year’s quarter included $1.5 million in merger and acquisition expense. Exclusive of this expense, non-interest expense for the current quarter increased 5% primarily due to the increase in compensation expense as a result of annual merit increases over the preceding twelve months, commission compensation related to higher levels of residential mortgage loan originations and the additional monthly operating costs as a result of the acquisition of Rembert Pendleton Jackson.
The effective tax rate for the current quarter was significantly lower than prior periods due to the impact of certain tax provision contained within the recent passage of the CARES Act. The CARES Act expands the time permitted to utilize previous net operating losses. The Company was able to apply this change in conjunction with the 2018 acquisition of WashingtonFirst Bankshares, Inc. to realize a tax benefit of $1.8 million for the current quarter.
The non-GAAP efficiency ratio was 54.76% for the current quarter as compared to 51.44% for the first quarter of 2019 and 51.98% for the fourth quarter of 2019. The increase in the efficiency ratio (reflecting a reduction in efficiency) from the first quarter of last year to the current year was the result of the rate of growth in non-interest expense outpacing the growth in net revenues as a result of margin compression during the same time period.
Explanation of Non-GAAP Financial Measures
This news release contains financial information and performance measures determined by methods other than in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s management believes that the supplemental non-GAAP information provides a better comparison of period-to-period operating performance. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. Non-GAAP measures used in this release consist of the following:
- Adjusted diluted earnings per share is non-GAAP in that it excludes merger expenses and other selected items, net of tax.
- Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets.
- The non-GAAP efficiency ratio is non-GAAP in that it excludes amortization of intangible assets, merger expenses and securities gains and includes tax-equivalent income.
These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Please refer to the non-GAAP Reconciliation table included with this release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.
The Company’s management will host a conference call to discuss its first quarter results today at 2:00 p.m. (ET). A live Webcast of the conference call is available through the Investor Relations section of the Sandy Spring Website. Participants may call 866.235.9910. A password is not necessary. Visitors to the Website are advised to log on 10 minutes ahead of the scheduled start of the call. An internet-based replay will be available on the website until 9:00 am (ET) May 7, 2020. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10140486.
About Sandy Spring Bancorp, Inc.
Sandy Spring Bancorp, Inc., headquartered in Olney, Maryland, is the holding company for Sandy Spring Bank, a premier community bank in the Greater Washington, D.C. region. With over 55 locations, the bank offers a broad range of commercial and retail banking, mortgage, private banking, and trust services throughout Maryland, Northern Virginia, and Washington, D.C. Through its subsidiaries, Rembert Pendleton Jackson, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank also offers a comprehensive menu of insurance and wealth management services.
For additional information or questions, please contact:
Daniel J. Schrider, President & Chief Executive Officer, or
Philip J. Mantua, E.V.P. & Chief Financial Officer
Sandy Spring Bancorp
17801 Georgia Avenue
Olney, Maryland 20832
Sandy Spring Bancorp’s forward-looking statements are subject to the following principal risks and uncertainties: risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues, the duration of shelter in place orders and the potential imposition of further restrictions on travel in the future; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, the inability of employees to work due to illness, quarantine, or government mandates; general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit, loan, and investment products and other financial services; changes in real estate values; changes in the quality or composition of the Company’s loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Company’s ability to retain key members of management; changes in legislation, regulations, and policies; the possibility that any of the anticipated benefits of acquisitions will not be realized or will not be realized within the expected time period; and a variety of other matters which, by their nature, are subject to significant uncertainties. Sandy Spring Bancorp provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2019, including in the Risk Factors section of that report, and in its other SEC reports. Sandy Spring Bancorp’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this news release or in its filings with the SEC, accessible on the SEC’s Web site at www.sec.gov.