Company’s Earnings Demonstrate Sustained Success
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income for the second quarter of 2019 of $28.3 million ($0.79 per diluted share) compared to net income of $24.4 million ($0.68 per diluted share) for the second quarter of 2018 and net income of $30.3 million ($0.85 per diluted share) for the first quarter of 2019. The prior year’s earnings for the second quarter contained $2.2 million in merger expenses, while the prior quarter contained a $1.8 million interest recovery from acquired impaired loans, a credit versus a provision for loan losses and $0.6 million in life insurance mortality proceeds. There were no similar items in the current quarter’s earnings.
“We continue to deliver a consistent performance and steady year-over-year earnings, allowing us to once again increase dividends in the second quarter,” said Daniel J. Schrider, President and Chief Executive Officer. “We grew deposits in meaningful ways and our Mortgage, Wealth and Insurance divisions achieved solid results.”
“We also demonstrated a nimble response to a challenging interest rate environment and maintained our strong credit quality,” added Schrider. “Overall, we are well positioned for continued growth and success.”
Second Quarter Highlights:
- Total loans increased 5% compared to the second quarter of 2018. Loans outstanding remained stable compared to the prior quarter, as overall loan production and commitment origination in previously unfunded construction lending was offset by portfolio run-off which was impacted by changes in the interest rate environment and competitive forces in the marketplace. The bank also successfully executed on a strategy to sell the majority of its mortgage loan production for gains versus retaining them in the loan portfolio.
- Total deposits grew 9% from the second quarter of 2018 and 8% from the end of 2018. This deposit growth has reduced the loan to deposit ratio from 111% at year-end 2018 to 103% at the end of the current quarter. The year-to-date deposit growth included a 16% increase in noninterest-bearing deposits and a 20% reduction in wholesale deposits.
- Current quarter has a $1.6 million charge for the provision for loan losses compared to the prior quarter’s $0.1 million credit to the provision.
- The net interest margin was 3.54% for the second quarter of 2019 compared to 3.56% for the second quarter of 2018 and 3.52% for the first quarter of 2019, after adjusting for recovered interest income of $1.8 million on acquired credit impaired loans. The current quarter’s margin benefited from an increase in average noninterest-bearing deposits and a shifting of short-term FHLB borrowings into medium-term lower rate borrowings.
- Second quarter results reflected an annualized return on average assets of 1.37% and annualized return on average equity of 10.32% as compared to 1.23% and 9.66% respectively for the second quarter of 2018. Exclusive of merger costs on an after-tax basis, the return on average assets and return on average equity for the second quarter of 2018 would have been 1.32% and 10.32%, respectively.
- Non-interest income increased 11% from the prior year quarter driven by income from mortgage banking activities that grew 58% during the same period. Growth was experienced in almost every other major category of non-interest income.
- The non-GAAP efficiency ratio was 51.71% for the current quarter as compared to 52.98% for the second quarter of 2018 and 51.44% for the first quarter of 2019. The stability of the current quarter’s non-GAAP ratio, as compared to the previous quarter’s, reflects the slight decline in non-interest expense during the second quarter of 2019 compared to the first quarter of the current year.
- Dividends paid increased by 7% or $0.02 per share during the current quarter to $0.30 per share. Additionally, as a result of net earnings during the past twelve months, tangible book value per share and tangible common equity have grown 11% from the second quarter of 2018.
Review of Balance Sheet and Credit Quality
At June 30, 2019, total assets amounted to $8.4 billion compared to $8.2 billion at June 30, 2018. Total loans at June 30, 2019, were $6.6 billion compared to $6.3 billion at June 30, 2018 and $6.6 billion at December 31, 2018. The loan portfolio has remained level from December 31, 2018 through June 30, 2019 despite $389 million in new funded loan production during this period. In addition, commercial loans originated year-to-date had total unfunded commitments of $209 million as of June 30, 2019. Growth of the loan portfolio during the previous six months was limited due to the attrition attributable to the competitive forces in the regional economy and recent shifts that have occurred in interest rates and the sales of the majority of mortgage loan production.
Tangible common equity totaled $767 million at June 30, 2019, compared to $690 million at June 30, 2018 as the ratio of tangible common equity to tangible assets grew to 9.54% at June 30, 2019, as compared to 8.85% at June 30, 2018. The Company had a total risk-based capital ratio of 12.79%, a common equity tier 1 risk-based capital ratio of 11.43%, a tier 1 risk-based capital ratio of 11.59% and a tier 1 leverage ratio of 9.80% at June 30, 2019.
The ratio of non-performing loans to total loans increased to 0.58% at June 30, 2019, compared to 0.46% at June 30, 2018. Non-performing loans totaled $37.7 million at June 30, 2019, compared to $28.8 million at June 30, 2018, and $40.1 million at March 31, 2019. The growth in non-performing loans over the prior period occurred as a result of modest increases in all segments of the loan portfolio, predominantly loans secured by real estate. Non-performing loans include accruing loans 90 days or more past due and restructured loans, but exclude purchased credit impaired loans acquired in the prior year’s acquisition of WashingtonFirst Bankshares, Inc. (“WashingtonFirst”).
Loan charge-offs, net of recoveries, totaled $0.7 million for the second quarter of 2019 compared to $0.2 million for the second quarter of 2018. The allowance for loan losses represented 0.82% of outstanding loans and 143% of non-performing loans at June 30, 2019, compared to 0.78% of outstanding loans and 168% of non-performing loans at June 30, 2018. While non-performing loans increased from June 30, 2018 to the current quarter, the related reserves for those loans remained stable due to adequate collateral values.
Income Statement Review
For the second quarter of 2019, net interest income increased 4% to $66.2 million compared to $63.8 million for the second quarter of 2018 as average loans from quarter to quarter increased 7%, primarily as a result of the Company’s organic loan growth during the period. The net interest margin for the current quarter was 3.54% compared to the net interest margin for the second quarter of 2018 of 3.56%. Amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the WashingtonFirst acquisition had a 5 basis point positive effect on the net interest margin for the current period compared to 12 basis points for the same period of the prior year.
The provision for loan losses was $1.6 million for the second quarter of 2019, compared to $1.7 million for the second quarter of 2018. The current quarter’s provision reflects the impact of organic loan production and the need to establish a loan loss provision for re-underwritten previously acquired loans that had reached their maturity under their original lending arrangements.
Non-interest income increased to $16.6 million, or 11%, for the second quarter of 2019, compared to $14.9 million for the second quarter of 2018. The increase in non-interest income was due primarily to the 58% increase in income from mortgage banking activities due to increased residential lending volumes. Increases occurred in all non-interest income sources during the current quarter with the exception of income from bank-owned life insurance which remained level as compared to the second quarter of 2018.
Non-interest expenses decreased 3% to $43.9 million for the second quarter of 2019, compared to $45.1 million in the second quarter of 2018. The prior year quarter included $2.2 million in merger expenses. Excluding the merger expenses from the prior year, non-interest expense increased 2% compared to the prior year, driven by higher compensation costs and an increase in equipment expenses from software costs. The non-GAAP efficiency ratio improved to 51.71% for the second quarter of 2019, compared to 52.98% for the second quarter of 2018, as a result of the growth in net revenue streams.
Net interest income for the first six months of 2019 increased 5% compared to the first six months of 2018 due principally to loan growth. During the first six months of 2019, the net interest margin was 3.58% compared to 3.57% for the prior year period. The first six months of 2019 included $1.8 million in recovered interest income on acquired credit impaired loans. Excluding the recovered interest income, the interest margin would have been 3.53%. Additionally, year-to-date 2019, the amortization of the fair value adjustments attributable to the WashingtonFirst acquisition had a 6 basis point positive impact on the net interest margin compared to 12 basis points for the prior year period.
The provision for loan losses was $1.5 million for the first six months of 2019, compared to $3.7 million for the first six months of 2018. The decrease in the provision for the current period compared to the prior year was primarily the result of the overall improvement in the qualitative credit metrics of the loan portfolio during the previous twelve months.
Non-interest income was $33.5 million for the first six months of 2019, compared to $32.0 million for the first six months of 2018. Excluding life insurance mortality proceeds of $0.6 million and $1.6 million from the first six months of each year, non-interest income increased 8%. This increase was driven by income from mortgage banking activities, which increased 44% from the prior year-to-date to $6.1 million for the six months ended June 30, 2019 as a result of the rise in mortgage lending activity during the second quarter of 2019. Sales of originated mortgage loans rose 27% during the current period compared to the same period for 2018.
Non-interest expenses decreased 7% to $88.1 million for the first six months of 2019, compared to $94.7 million for the prior year period. The prior year period included $11.2 million in merger expenses. Excluding merger expenses, non-interest expense rose 5%, driven by increases in salaries and benefits, software costs and expenses from outside data services. The non-GAAP efficiency ratio remained relatively stable at 51.57% for the first six months of 2019 compared to 51.25% for the first six months of 2018.
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 details on the earnings impact of these items.
The Company’s management will host a conference call to discuss its second 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 1-866-235-9910. 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) August 1, 2019. A replay of the teleconference will be available through the same time period by calling 1-877-344-7529 under conference call number 10132793.
About Sandy Spring Bancorp, Inc.
Sandy Spring Bancorp, Inc., headquartered in Olney, Maryland, is the holding company for Sandy Spring Bank. Independent and community-oriented, Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, 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 makes forward-looking statements in this news release and in the conference call regarding this news release. These forward-looking statements may include: statements of goals, intentions, earnings expectations, and other expectations; estimates of risks and of future costs and benefits; assessments of probable loan losses; assessments of market risk; and statements of the ability to achieve financial and other goals.
Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. Sandy Spring Bancorp does not assume any duty and does not undertake to update its forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that Sandy Spring Bancorp anticipated in its forward-looking statements and future results could differ materially from historical performance.
Sandy Spring Bancorp’s forward-looking statements are subject to the following principal risks and uncertainties: 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, 2018, 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.