Company Delivers Strong Financial Performance and Balanced Results Across All Key Segments
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported net income for the third quarter of 2019 of $29.4 million ($0.82 per diluted share) compared to net income of $29.2 million ($0.82 per diluted share) for the third quarter of 2018 and net income of $28.3 million ($0.79 per diluted share) for the second quarter of 2019.
“In the third quarter we executed our business strategies with precision, focus and company-wide coordination. As a result, we delivered growth in every key category and solid financial metrics,” said Daniel J. Schrider, President and Chief Executive Officer. “We continue to succeed in one of the most desirable markets in the country, and we are deepening our presence in Greater Washington through the acquisition of Revere Bank. We are in a tremendous position of strength as we prepare to close out the year and begin preparing the integration of Revere Bank into Sandy Spring Bank.” said Daniel J. Schrider, President and Chief Executive Officer.
Third Quarter Highlights:
- Total loans at September 30, 2019 increased 3% compared to September 30, 2018. During this period, the impact of the 6% growth in commercial loans was offset by the decline in the mortgage loan portfolio due to the impact of mortgage loan refinance activity driven by the current interest rate environment and the sale of the majority of new mortgage loan production.
- Total deposits grew 10% from the third quarter of 2018 and compared to the end of 2018. Deposit growth reduced the loan-to-deposit ratio from 111% at year-end 2018 to 102% at the end of the current quarter. The year-to-date deposit growth included a 19% increase in noninterest-bearing deposits and a 45% reduction in wholesale deposits.
- The provision for loan losses for the current quarter was $1.5 million compared to $1.9 million for the third quarter of 2018 and $1.6 million for the prior quarter of the current year.
- The net interest margin was 3.51% for the third quarter of 2019, compared to 3.71% for the third quarter of 2018 and 3.54% for the second quarter of 2019. The prior year’s quarterly margin was positively impacted by an interest income recovery of $2.0 million. Excluding the recovery, the net interest margin for the prior year quarter was 3.60%.
- On September 24, 2019, the Company entered into a definitive agreement and plan of merger pursuant to which Revere Bank will merge with and into Sandy Spring Bank in a transaction valued at approximately $461 million. Revere Bank, headquartered in Rockville, Maryland, has 11 banking offices and more than $2.6 billion in assets (as of June 30, 2019).
- Quarterly non-interest income increased 24% as compared to the same period in the prior year driven by income from mortgage banking activities that grew 164%. Growth was experienced in almost every other major category of non-interest income for the second consecutive quarter.
- Non-interest expense for the quarter increased $2.5 million or 6% compared to the same quarter of the prior year. Increases occurred in most major expense categories, notably compensation and benefits driven by incentive-based programs and an increase in marketing costs. A large portion of the overall expense increases were offset by a decrease in FDIC insurance due to the receipt of an assessment credit during the current quarter.
- The non-GAAP efficiency ratio continued to remain stable at 50.95% for the current quarter as compared to 49.27% for the third quarter of 2018 and 51.71% for the second quarter of 2019. Excluding the previously mentioned interest recovery in the prior year quarter, the non-GAAP efficiency ratio was 50.48%.
Review of Balance Sheet and Credit Quality
At September 30, 2019, total assets amounted to $8.4 billion compared to $8.0 billion at September 30, 2018 and $8.2 billion at December 31, 2018. Total loans at September 30, 2019 were $6.6 billion compared to $6.4 billion at September 30, 2018 and $6.6 billion at December 31, 2018. Overall, the loan portfolio has remained relatively level from December 31, 2018 through September 30, 2019. During this period, commercial loans grew 3% while mortgage loans have declined 2% due to the refinance activity and the strategic decision to sell the majority of new mortgage loan production. During this period, total funded loan production was $618 million. Commercial loans originated year-to-date had total unfunded commitments of $359 million as of September 30, 2019.
Total deposits at September 30, 2019 were $6.5 billion compared to $5.9 billion at both September 30, 2018 and December 31, 2018. The 10% increase from year-end 2018 was driven by increases in the majority of deposit categories. The impact of the increase in deposits and rates during the first nine months of 2019 was partially offset by the benefit realized from an increase in noninterest-bearing deposits and a reduction in wholesale deposits. The increase in deposits enabled the reduction of higher cost borrowings, which declined $533 million from year-end through September 30, 2019, providing a positive impact on net interest income.
Tangible common equity totaled $787 million at September 30, 2019, compared to $711 million at September 30, 2018 as the ratio of tangible common equity to tangible assets grew to 9.74% at September 30, 2019, as compared to 9.26% at September 30, 2018. The Company had a total risk-based capital ratio of 12.70%, a common equity tier 1 risk-based capital ratio of 11.37%, a tier 1 risk-based capital ratio of 11.52% and a tier 1 leverage ratio of 9.96% at September 30, 2019.
The ratio of non-performing loans to total loans increased to 0.61% at September 30, 2019, compared to 0.52% at September 30, 2018. Non-performing loans totaled $40.1 million at September 30, 2019, compared to $33.3 million at September 30, 2018, and $37.7 million at June 30, 2019. The modest growth in non-performing loans over the prior periods occurred primarily as a result of increases in segments of the loan portfolio 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, for the third quarter of 2019 totaled $0.6 million. Charge-offs for the third quarter of 2018 were not significant. The allowance for loan losses represented 0.83% of outstanding loans and 137% of non-performing loans at September 30, 2019, compared to 0.79% of outstanding loans and 151% of non-performing loans at September 30, 2018. While non-performing loans increased from September 30, 2018 to the current quarter, the related reserves for those loans remained stable due to adequate collateral values.
Income Statement Review
For the third quarter of 2019, net interest income decreased to $66.8 million compared to $67.6 million for the third quarter of 2018. During this period, interest income increased 3% primarily due to loan growth and interest expense increased 21% related to deposit growth resulting in the decline in net interest income. The net interest margin for the current quarter was 3.51%, compared to the net interest margin for the third quarter of 2018 of 3.71%. The prior year’s quarterly margin was positively impacted by an interest income recovery of $2.0 million. Excluding this recovery, the prior year’s net interest margin was 3.60%. The current quarter’s margin benefited from the decrease in average borrowed funds in addition to an increase in average noninterest-bearing deposits compared to the prior year quarter. Amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the WashingtonFirst acquisition had a 4 basis point positive effect on the net interest margin for the current period, compared to 8 basis points for the same period of the prior year. The resulting adjusted net interest margin for the current quarter was 3.47% as compared to 3.52% for the prior year quarter.
The provision for loan losses was $1.5 million for the third quarter of 2019, compared to $1.9 million for the third 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 previously acquired loans that had reached their maturity under their original lending arrangements and were renewed by Sandy Spring Bank.
Non-interest income increased 24% to $18.6 million for the third quarter of 2019, compared to $15.0 million for the third quarter of 2018. The increase in non-interest income was due primarily to the 164% increase in income from mortgage banking activities as the volume of residential mortgages sold increased. 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 third quarter of 2018.
Non-interest expense increased 6% to $44.9 million for the third quarter of 2019, compared to $42.4 million in the third quarter of 2018. The current year quarter included $0.4 million in merger expenses compared to $0.6 million for the prior year quarter. Excluding merger expenses, non-interest expense increased 7% compared to the prior year, driven by higher compensation costs associated with incentive-based sales programs, marketing campaign expenses and an increase in occupancy and equipment costs. A portion of these increases were offset by a decrease in FDIC insurance due to the industry deposit insurance fund reaching the stipulated benchmark levels. The non-GAAP efficiency ratio was 50.95% for the third quarter of 2019, compared to 49.27% for the third quarter of 2018. The non-GAAP efficiency ratio for the prior year quarter was 50.48% after excluding the previously mentioned interest income recovery.
Net interest income for the nine months ended September 30, 2019 increased 3% compared to the first nine months of 2018 due principally to loan growth. During the first nine months of 2019, the net interest margin was 3.55% compared to 3.62% for the prior year period. The first nine months of 2019 included $1.8 million in recovered interest income on acquired credit impaired loans compared to $2.0 million for the same period of the prior year. Excluding the recovered interest income from both periods, the interest margin would have been 3.52% for the current year versus 3.59% for the prior year. Amortization of the fair value adjustments attributable to the WashingtonFirst acquisition had a 5 basis point positive impact on the net interest margin for the nine months ended September 30, 2019, compared to 14 basis points for the prior year period.
The provision for loan losses was $3.0 million for the first nine months of 2019, compared to $5.6 million for the first nine 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 in addition to lower loan growth than experienced in the prior year.
Non-interest income was $52.1 million for the first nine months of 2019, compared to $47.0 million for the first nine months of 2018. Excluding life insurance mortality proceeds of $0.6 million and $1.6 million from the first nine months of 2019 and 2018, respectively, non-interest income increased 13%. This increase was driven by income from mortgage banking activities, which increased 77% from the prior year-to-date, to $10.5 million for the nine months ended September 30, 2019, as a result of the rise in mortgage lending activity during 2019. Sales of originated mortgage loans rose 51% during the current period compared to the same period for 2018. Increases also occurred in service charges, wealth management income, insurance commissions and other non-interest income.
Non-interest expenses decreased 3% or $4.1 million to $133.0 million for the first nine months of 2019, compared to $137.1 million for the prior year period. The prior year period included $11.8 million in merger expenses. Excluding merger expenses, non-interest expense rose 6%, driven by increases in salaries and benefits, software costs, marketing costs and expenses from outside data services. A portion of the increases in non-interest expense was offset by the decrease in FDIC insurance during the year. The non-GAAP efficiency ratio was 51.36% for the first nine months of 2019 compared to 50.57% for the first nine 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:
- 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 third 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 at www.sandyspringbank.com. 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) October 31, 2019. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10135193.
About Sandy Spring Bancorp, Inc./Sandy Spring Bank
Sandy Spring Bancorp, Inc., headquartered in Olney, Maryland, is the holding company for Sandy Spring Bank, the largest locally-headquartered community bank in the Greater Washington, D.C. region. With over 50 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, 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; risks, uncertainties and other factors relating to the acquisition of Revere Bank by Sandy Spring Bancorp, including the ability to obtain regulatory and shareholder approvals and meet other closing conditions to the transaction, and delay in closing the merger; 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.