Company Announces Fifth Consecutive Record Year and $116.4 Million in Annual Net Income
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported net income for the fourth quarter of 2019 of $28.5 million ($0.80 per diluted share) compared to net income of $25.6 million ($0.72 per diluted share) for the fourth quarter of 2018 and net income of $29.4 million ($0.82 per diluted share) for the third quarter of 2019.
Net earnings for 2019 were $116.4 million ($3.25 per diluted share) compared to $100.9 million ($2.82 per diluted share) for 2018. The results from 2019 and 2018 included recovered interest income from previously acquired impaired loans of $1.8 million and $2.4 million, respectively. The results for 2018 also included the effect of merger expenses associated with the acquisition of WashingtonFirst Bankshares (“WashingtonFirst”) totaling $11.8 million (an after tax impact of $0.19 per share) compared to $1.3 million for 2019, which are associated with the pending acquisition of Revere Bank that is expected close in the beginning of the second quarter of 2020. Revere Bank has 11 banking offices and more than $2.8 billion in assets (as of September 30, 2019).
“We delivered a strong financial performance in 2019, which was our first full year following the successful integration of WashingtonFirst Bank. We rose to the occasion with record results and announced another wave of strategic expansion through the acquisitions of Revere Bank and Rembert Pendleton Jackson, a registered investment advisor headquartered in Falls Church, Virginia,” said Daniel J. Schrider, President and Chief Executive Officer.
“Throughout the year we adjusted our strategies in response to the competitive market and interest rate environment, while consistently growing deposits, delivering impressive fee-income growth, and staying laser focused on providing exceptional experiences for the individuals and businesses we serve,” added Schrider. “We finished the year on a high note and the momentum from our fourth quarter performance will serve us well in 2020.”
Fourth Quarter Highlights:
- Total loans at December 31, 2019 increased 2% compared to December 31, 2018. During this period, the Company experienced 7% growth in total commercial loans as investor real estate loans and owner occupied real estate loans grew by 11% and 7%, respectively. The impact of commercial loan growth 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 and the decline in consumer loan balances.
- Total deposits grew 9% compared to the end of 2018. Deposit growth reduced the loan-to-deposit ratio to 104% at the end of 2019 compared to 111% at the end of 2018. The year-over-year deposit growth included an 8% increase in noninterest-bearing deposits, a 13% increase in core interest-bearing deposits and a 38% reduction in wholesale deposits.
- The provision for loan losses for the current quarter was $1.7 million compared to $3.4 million for the fourth quarter of 2018 and $1.5 million for the prior quarter of the current year.
- Preparation for the implementation of the Current Expected Credit Losses (“CECL”) accounting standard in the first quarter of 2020 has been completed. Exclusive of the $2.8 million reclassification to the allowance for loan losses related to the acquired credit impaired loans, the estimated impact to retained earnings at transition date is expected to be approximately $2.0 million based on the expected performance of the economy.
- During the quarter, the Company repurchased 668,191 shares of common stock at an average price of $36.34 per share as part of its existing share repurchase program.
- The net interest margin was 3.38% for the fourth quarter of 2019, compared to 3.57% for the fourth quarter of 2018 and 3.51% for the third quarter of 2019.
- The Company successfully issued $175 million in subordinated debt at an advantageous rate during the quarter. The debt provides capital to support future growth in the real estate lending portfolio and fund anticipated future redemptions of existing higher priced funding sources.
- Driven by income from mortgage banking activities, wealth management and fees related to customer level commercial loan swaps, quarterly non-interest income increased 37% as compared to the same period in the prior year. Income from mortgage banking activities grew 269% compared to the same quarter of the prior year.
- Non-interest expense for the quarter increased $3.4 million or 8% 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, merger costs and professional fees and services. A portion of the non-interest expense increases were offset by the decrease in FDIC insurance expense due to the application of the remaining assessment credit during the current quarter.
- The non-GAAP efficiency ratio was 51.98% for the current quarter as compared to 51.78% for the fourth quarter of 2018 and 50.95% for the third quarter of 2019.
Review of Balance Sheet and Credit Quality
At December 31, 2019, total assets amounted to $8.6 billion compared to $8.2 billion at December 31, 2018. Total loans were $6.7 billion at December 31, 2019 compared to $6.6 billion at the end of 2018. During this period, the composition of the portfolio shifted as total commercial loans grew 7% while mortgage loans have declined 8% due to the refinance activity and the strategic decision to sell the majority of new mortgage loan production. Consumer loans experienced a 10% decline related to recent mortgage refinancing activity. During this period, total funded commercial loan production was a record $884 million. Commercial loans originated during the current year had total unfunded commitments of $479 million as of December 31, 2019.
Total deposits at December 31, 2019 were $6.4 billion compared to $5.9 billion at December 31, 2018, a 9% increase during the period. The increase from year-end 2018 was driven by increases in non-interest bearing demand, interest-bearing demand and money market deposit categories. The impact of the increase in rates associated with these additional deposits during 2019 was partially offset by the benefit realized from an increase in noninterest-bearing deposits and a reduction in wholesale deposits. During the current quarter, the Company issued $175 million in subordinated debt. The proceeds from the debt provides capital for future growth in the real estate lending portfolio, in addition to providing funds to reduce higher priced funding sources.
Tangible common equity totaled $782 million at December 31, 2019, compared to $727 million at December 31, 2018 as the ratio of tangible common equity to tangible assets grew to 9.46% at December 31, 2019, as compared to 9.21% at December 31, 2018. The decline in the tangible common equity ratio from 9.74% at the end of the prior quarter was the result of the impact on stockholder’s equity of stock repurchases in the current quarter. The Company had a total risk-based capital ratio of 14.85%, a common equity tier 1 risk-based capital ratio of 11.06%, a tier 1 risk-based capital ratio of 11.21% and a tier 1 leverage ratio of 9.70% at December 31, 2019.
The ratio of non-performing loans to total loans increased to 0.62% at December 31, 2019, compared to 0.55% at December 31, 2018. Non-performing loans totaled $41.3 million at December 31, 2019, compared to $36.0 million at December 31, 2018, and $40.1 million at September 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.
Loan charge-offs, net of recoveries, for the fourth quarter of 2019 totaled $0.5 million as compared to $0.3 million for the fourth quarter of 2018. The allowance for loan losses represented 0.84% of outstanding loans and 136% of non-performing loans at December 31, 2019, compared to 0.81% of outstanding loans and 149% of non-performing loans at December 31, 2018. While non-performing loans increased from the prior year-end to December 31, 2019, the related reserves for those loans remained stable due to adequate collateral values.
Income Statement Review
For the fourth quarter of 2019, net interest income decreased 1% to $65.6 million compared to $66.1 million for the fourth quarter of 2018. Interest income remained level while interest expense increased 2% driven by deposit growth. The rise in interest expense was partially offset by the decline in the cost of borrowings from the prior year quarter to the current quarter.
The net interest margin for the current quarter was 3.38%, compared to the net interest margin for the fourth quarter of 2018 of 3.57%. The current quarter’s margin benefited from the decrease in average borrowed funds and their associated rates as this decrease offset the increase in the average rate paid on deposits. The average rate on interest-bearing liabilities remained at 1.48% for the quarter ended December 31, 2019 compared to the same quarter of the prior year. During this same period, the yield on interest-earning assets declined from 4.60% for the quarter ended December 31, 2018 to 4.38% for the quarter ended December 31, 2019 due to the interest rate environment, resulting in margin compression. The 9% increase in average noninterest-bearing deposits compared to the prior year quarter provided an interest free funding source that benefited the current quarter’s net interest margin. 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 12 basis points for the same period of the prior year. The resulting adjusted net interest margin for the current quarter was 3.34% as compared to 3.45% for the prior year quarter.
The provision for loan losses was $1.7 million for the fourth quarter of 2019, compared to $3.4 million for the fourth quarter of 2018. The decline in the loan loss provision for the current quarter compared to the prior year quarter reflects the impact of the decline in the amount of loans subject to the allowance for loan losses.
Non-interest income increased 37% to $19.2 million for the fourth quarter of 2019, compared to $14.0 million for the fourth quarter of 2018. The increase in non-interest income was due primarily to the 269% increase in income from mortgage banking activities, as the volume of residential mortgages sold increased. In addition, wealth management income increased 17% and other income rose 58% due to fees from customer level commercial loan swaps during this period.
Non-interest expense increased 8% to $46.1 million for the fourth quarter of 2019, compared to $42.7 million in the fourth quarter of 2018. The current year quarter included $0.9 million in merger expenses. Excluding merger expenses, non-interest expense increased 6% compared to the prior year, driven by higher compensation costs associated with incentive-based sales programs and professional fees and services. A portion of these increases were offset by the decrease in FDIC insurance as a result of the application of the remaining assessment credit during the current quarter. The non-GAAP efficiency ratio was 51.98% for the fourth quarter of 2019, compared to 51.78% for the fourth quarter of 2018.
Net interest income for the full year of 2019 increased 2% compared to 2018 due principally to loan growth. The net interest margin for 2019 was 3.51% compared to 3.60% for the prior year. The year ended December 31, 2019 included $1.8 million in recovered interest income on acquired credit impaired loans compared to $2.4 million for the same period of the prior year. Excluding the recovered interest income from both periods, the interest margin would have been 3.48% for the current year versus 3.58% for the prior year. Amortization of the fair value adjustments had a 5 basis point positive impact on the net interest margin for 2019, compared to 13 basis point positive impact for the prior year.
The provision for loan losses was $4.7 million for the year ended December 31, 2019, compared to $9.0 million for 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 increased 17% to $71.3 million for 2019, compared to $61.1 million for 2018. Excluding life insurance mortality proceeds of $0.6 million and $1.6 million in 2019 and 2018, respectively, non-interest income increased 19%. This increase was driven by income from mortgage banking activities, which increased 108% from the prior year, to $14.7 million for the year ended December 31, 2019, as a result of the rise in mortgage lending activity during the year. Sales of originated mortgage loans rose 74% during 2019 compared to 2018. Excluding income from bank owned life insurance, increases occurred in the majority of the other categories of non-interest income.
Non-interest expense decreased $0.7 million to $179.1 million for 2019, compared to $179.8 million for the prior year. The prior year included $11.8 million in merger expenses compared to $1.3 million for the current year. Excluding merger expenses, non-interest expense rose 6%, driven primarily by increases in salaries and benefits. Increases in non-interest expense also occurred in occupancy and equipment costs, software and outside data services, professional fees and marketing. 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 51.52% for 2019 compared to 50.87% for 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 fourth 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) February 6, 2020. A replay of the teleconference will be available through the same time period by calling 1.877.344.7529 under conference call number 10137689.
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 50 locations, the bank offers a broad range of commercial and retail banking, mortgage, private banking, and trust services throughout central 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.