Improved Economic Forecast Drives $35 Million Provision Credit
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported net income of $75.5 million ($1.58 per diluted common share) for the first quarter of 2021. The current quarter’s result compares to net income of $10.0 million ($0.28 per diluted common share) for the first quarter of 2020 and net income of $56.7 million ($1.19 per diluted common share) for the fourth quarter of 2020.
Core earnings for the current quarter, which exclude the impact of the provision for credit losses and provision on unfunded loan commitments, merger and acquisition expense, loss on FHLB redemptions, amortization of intangibles and investment securities gains, each on an after-tax basis, were $56.9 million ($1.20 per diluted common share), compared to $29.6 million ($0.85 per diluted common share) for the quarter ended March 31, 2020 and $55.7 million ($1.18 per diluted common share) for the quarter ended December 31, 2020.
The current quarter's provision for credit losses was a credit of $34.7 million as compared to a credit of $4.5 million for the fourth quarter of 2020. The current quarter's large credit for the provision for credit losses compared to the prior quarter is principally the result of a decline in the forecasted unemployment rate and, to a lesser degree, improvements in other forecasted macroeconomic indicators.
“We delivered a solid first quarter. We are pleased with the stability in the margin, the contributions of our fee-based lines of business, the improved economic forecast and the resiliency of our loan portfolio’s credit quality. Our credit outlook is strong, and we are ready to help our clients reopen, recover and emerge stronger than ever,” said Daniel J. Schrider, President and CEO.
“We also look forward to entering the next phase of our return-to-work plan. We will apply the lessons we have learned about remote work and how we can use technology to do our jobs more effectively, but it is our goal to welcome our employees back to our offices in the months ahead. As a company that prioritizes people and relationships, we believe that in-person collaboration is what is best for our culture and how we do business.”
First Quarter Highlights:
- Total assets at March 31, 2021, grew 44% to $12.9 billion compared to March 31, 2020, primarily due to the Revere Bank (“Revere”) acquisition in the second quarter of 2020. During this period, the participation in the Paycheck Protection Program ("PPP" or "PPP Program") resulted in the addition of $1.3 billion in outstanding commercial business loans. As a result of these strategic initiatives, loans and deposits grew by 55% and 62%, respectively.
- The net interest margin was 3.56% for the first quarter of 2021, compared to 3.29% for the same quarter of 2020, and 3.38% for the fourth quarter of 2020. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the current quarter’s net interest margin would have been 3.46%, compared to 3.27% for first quarter of 2020, and 3.31% for the fourth quarter of 2020.
- The provision for credit losses was a credit of $34.7 million for the current quarter compared to the prior quarter’s credit to the provision of $4.5 million. The significant credit to the provision was primarily the result of the improvement in the forecasted unemployment rate.
- Non-interest income for the current quarter increased by 59% or $10.7 million compared to the prior year quarter, as a result of a 235% increase in income from mortgage banking activities and 25% growth in wealth management income as a result of the acquisition of Rembert Pendleton Jackson (“RPJ”) in the first quarter of the prior year.
- Non-interest expense increased $20.4 million or 43% for the first quarter of 2021, compared to the prior year quarter. This increase was driven primarily by two factors: the impact of the acquisitions of Revere and RPJ, which increased compensation and operational costs, in addition to intangible asset amortization, and $9.1 million in prepayment penalties incurred on the early redemption of FHLB advances in the first quarter of the current year.
- Return on average assets (“ROA”) for the quarter ended March 31, 2021 was 2.39% and return on average tangible common equity (“ROTCE”) was 28.47%. This compares to ROA of 1.78% and ROTCE of 21.89% for the prior quarter. The non-GAAP efficiency ratio for the first quarter of 2021 was 42.65% compared to 45.09% for the fourth quarter of 2020.
- During the quarter, the dividend was increased to $0.32 from $0.30 per common share.
Balance Sheet and Credit Quality
Total assets grew to $12.9 billion at March 31, 2021, as compared to $8.9 billion at March 31, 2020. Year-over-year asset growth was primarily the result of the acquisition of Revere in April 2020, in addition to the Company’s participation in the PPP program. During this period, total loans grew by 55% to $10.4 billion at March 31, 2021, compared to $6.7 billion at March 31, 2020. Excluding PPP loans, total loans grew 36% to $9.1 billion at March 31, 2021 as compared to the prior year quarter. The 2020 acquisition of Revere drove the majority of the increase in commercial loans, which, excluding PPP loans, grew 49% or $2.5 billion. The residential mortgage loan portfolio decreased 8% year-over-year as the majority of loan originations during the past year were sold in the secondary market. Consumer loan growth during the year was 9%, also a result of the acquisition. Deposit growth was 62% during the past twelve months, as noninterest-bearing deposits experienced growth of 94% and interest-bearing deposits grew 48%. This growth was driven primarily by the Revere acquisition and, to a lesser extent, the PPP program.
During the current quarter the Company originated $446.0 million in first and second draw loans under the reinitiated PPP program. During the quarter, the Company recognized $7.9 million of fees into interest income from the total fees received under the program. In addition to processing applications for new loans under the reinitiated PPP program, the Company began accepting digital PPP forgiveness applications. As of April 9, 2021, $218.2 million of the Company's PPP loans have been granted forgiveness by the SBA.
During the first quarter of 2021, total loans, excluding PPP, declined $194.7 million as compared to December 31, 2020. This decline was a reflection of the high level of early pay-offs coupled with lower seasonally affected loan production. It is believed that this trend is temporary, and that due to the current credit resiliency of the portfolio and significant availability of liquidity, that the Company is well positioned for future loan growth.
At the end of the current quarter, 176 loans with an aggregate balance of $233.0 million remain in deferral status, of which non-accrual loans comprised $56.7 million. Currently, the vast majority of loans that had been granted modifications/deferrals due to pandemic related financial stress have returned to their original payment plans.
Tangible common equity increased to $1.1 billion or 8.90% of tangible assets at March 31, 2021, compared to $726.8 million or 8.51% at March 31, 2020, as a result of the equity issuance in the Revere acquisition. The year-over-year change in tangible common equity also reflects the increase in intangible assets and goodwill associated with the Revere acquisition. Excluding the impact of the PPP program from tangible assets at March 31, 2021, the tangible common equity ratio would be 9.94%. At March 31, 2021, the Company had a total risk-based capital ratio of 15.49%, a common equity tier 1 risk-based capital ratio of 12.09%, a tier 1 risk-based capital ratio of 12.09%, and a tier 1 leverage ratio of 9.14%.
The level of non-performing loans to total loans was 0.94% at March 31, 2021, compared to 0.80% at March 31, 2020, and 1.11% at December 31, 2020. At March 31, 2021, non-performing loans totaled $98.7 million, compared to $54.0 million at March 31, 2020, and $115.5 million at December 31, 2020. During the current quarter, the Company realized the full settlement of $16.0 million in non-accrual loans and recognized $1.3 million in interest income. Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. The year-over-year growth in non-performing loans was driven by two major components: loans placed on non-accrual status and acquired Revere non-accrual loans. Loans placed on non-accrual during the current quarter amounted to $0.4 million compared to $2.4 million for the prior year quarter and $54.7 million for the fourth quarter of 2020. Loans in non-accrual status at quarter end included a small number of large borrowing relationships within the hospitality sector with an aggregate balance of $43.8 million. These large relationships are collateral dependent and required no individual reserves due to sufficient values of the underlying collateral.
The Company recorded net charge-offs of $0.3 million for the first quarter of 2021, as compared to net charge-offs of $0.5 million for both the first quarter of 2020 and fourth quarter of 2020.
At March 31, 2021, the allowance for credit losses was $130.4 million or 1.25% of outstanding loans and 132% of non-performing loans, compared to $165.4 million or 1.59% of outstanding loans and 143% of non-performing loans at December 31, 2020. Excluding PPP loans, the allowance for credit losses to outstanding loans was 1.43% and 1.77%, at March 31, 2021 and December 31, 2020, respectively.
Income Statement Review
Net interest income for the first quarter of 2021 increased 63% compared to the first quarter of 2020, driven primarily by the acquisition of Revere. The PPP program contributed $10.9 million to net interest income for the quarter, of which $7.9 million represented PPP fees. The net interest margin for the first quarter of 2021 was 3.56% as compared to 3.29% for the same quarter of the prior year. Excluding the net $2.9 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current quarter would have been 3.46% compared to the adjusted net interest margin of 3.27% for the first quarter of 2020.
The provision for credit losses was a credit of $34.7 million for the first quarter of 2021, compared to a charge of $24.5 million for the first quarter of 2020, and a credit of $4.5 million for the fourth quarter of 2020. The significant credit in the current quarter’s provision for credit losses, compared to the prior quarter's credit to the provision, reflects the impact of the improvement in the most recent forecasted unemployment rate. Other economic metrics and factors also contributed to benefit the current quarter's credit to the provision, which were partially offset by qualitative factors applied in the determination of the allowance.
Non-interest income increased $10.7 million or 59% during the current quarter compared to the same quarter of the prior year. Income from mortgage banking activities increased by $7.1 million during the current quarter compared to the prior year quarter. Mortgage banking income declined to $10.2 million for the three months ended March 31, 2021 compared to $14.5 million for the previous quarter as a result of decreasing margins on mortgages sold during the quarter. Additionally, wealth management income increased $1.8 million as a result of the first quarter 2020 acquisition of RPJ. During the quarter, other non-interest income increased $2.1 million compared to the same quarter of last year due to income from loan pay-off activity. The growth of these three categories of non-interest income more than compensated for the decline in service fee income from the prior year quarter.
Non-interest expense increased 43% or $20.4 million compared to the prior year quarter. The current quarter's results contained prepayment penalties of $9.1 million from the early redemption of $279.0 million of FHLB advances with an average rate of 2.63%. Excluding the impact of the prepayment penalties and merger and acquisition expense, non-interest expense grew 27% year-over-year primarily as a result of the compensation and operational costs relating to the 2020 Revere and RPJ acquisitions, in addition to an increase in FDIC insurance and the amortization of intangible assets.
The effective tax rate for the current quarter was significantly higher compared to the prior year quarter. The first quarter of 2020 included the impact of a tax provision contained in the Coronavirus Aid, Relief, and Economic Security Act that expanded the time permitted to utilize previous net operating losses. The Company applied this change in conjunction with 2018 acquisition of WashingtonFirst Bankshares, Inc. to realize a tax benefit of $1.8 million in the prior year quarter.
The non-GAAP efficiency ratio was 42.65% for the current quarter as compared to 54.76% for the first quarter of 2020, and 45.09% for the fourth quarter of 2020. The decrease in the efficiency ratio (reflecting an increase in efficiency) from the first quarter of last year to the current year quarter was the result of the $50.9 million growth in non-GAAP revenue outpacing the $11.6 million growth in non-GAAP non-interest expense.
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:
- Tangible common equity and related measures are non-GAAP measures that exclude the impact of goodwill and other intangible assets.
- The non-GAAP efficiency ratio is non-GAAP in that it excludes amortization of intangible assets, loss on FHLB redemption, merger and acquisition expense and investment securities gains and includes tax-equivalent income.
- Core earnings and the related measures of core earnings per share, core return on average assets and core return on average tangible common equity reflect net income exclusive of the provision/(credit) for credit losses, provision/(credit) for credit losses on unfunded loan commitments, merger and acquisition expense, amortization of intangible assets, loss on FHLB redemption, and investment securities gains, in each case net of tax.
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 tables 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 May 6, 2021. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10153566.
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 60 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 imposition or re-imposition of stay-at-home orders and restrictions on business activities or travel; 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.