Sandy Spring Bancorp Reports Record Quarterly Earnings of $44.6 Million
Year-Over-Year Operating Earnings Increase 49%
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported record net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020. The current quarter’s result compares to net income of $29.4 million ($0.82 per diluted common share) for the third quarter of 2019 and a loss of $14.3 million ($0.31 per diluted common share) for the second quarter of 2020.
Operating earnings for the current quarter, which excludes the impact of merger and acquisition expense, the provision for credit losses and the effects from the Paycheck Protection Program (“PPP” or “PPP program”), each on an after-tax basis, were $45.9 million ($0.97 per diluted common share), compared to $30.8 million ($0.86 per diluted common share) for the quarter ended September 30, 2019 and $42.0 million ($0.88 per diluted common share) for the quarter ended June 30, 2020.
The current quarter’s results included $1.3 million for merger and acquisition expense related to the second quarter acquisition of Revere Bank (“Revere”) as compared to $22.5 million for the linked quarter. The provision for credit losses for the current quarter was $7.0 million as compared to $58.7 million for the second quarter of 2020. The decrease in the provision for credit losses compared to the prior quarter is a result of the stability of the economic forecast compared to the prior quarter and resiliency of the loan portfolio’s credit quality.
“The record net income and earnings per share that we delivered clearly reflect the value of our Revere Bank acquisition, though we have yet to realize the full potential of the transaction,” said Daniel J. Schrider, President and Chief Executive Officer. “Our team seamlessly completed the systems integration of Revere Bank in the third quarter, notwithstanding the challenging work environment necessitated by the COVID-19 pandemic. As a result, the former Revere clients now have access to all Sandy Spring Bank services and locations. We remain focused on strengthening our client relationships and working closely with borrowers to see them through these extraordinary times.”
Third Quarter Highlights:
- Total assets at September 30, 2020, grew 50% to $12.7 billion compared to September 30, 2019 primarily as a result of the Revere acquisition and participation in the PPP. Loans and deposits grew by 57% and 53%, respectively. On the date of acquisition, Revere’s loans and deposits were $2.5 billion and $2.3 billion, respectively. The Company originated $1.1 billion in commercial business loans through the PPP.
- The net interest margin was 3.24% for the third quarter of 2020, compared to 3.51% for the same quarter of 2019, and 3.47% for the second 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 3.18%, compared to 3.47% for third quarter of 2019, and 3.19% for the second quarter of 2020.
- The provision for credit losses was $7.0 million for the current quarter. The lower provision for the current quarter as compared to the prior quarter’s provision of $58.7 million was the result of the stabilization in economic projections compared to the prior quarter and resiliency of the loan portfolio’s credit quality.
- Non-interest income increased from the prior year quarter by 58% to $29.4 million, as a result of a 220% increase in income from mortgage banking activities and growth of 42% in wealth management income as a result of the acquisition of Rembert Pendleton Jackson (“RPJ”) in the first quarter of the year.
- Non-interest expense for the third quarter of 2020 increased $16.0 million or 36% compared to the prior year quarter. This increase was driven by the impact of the acquisition of Revere and RPJ, which increased compensation costs, facilities and operational costs and merger and acquisition expenses.
- Return on average assets (“ROA”) for the quarter ended September 30, 2020 was 1.38% and return on average on tangible common equity (“ROTCE”) was 18.16%. This compares to 1.39% and 15.13% for ROA and ROTCE, respectively, for the prior year. The non-GAAP efficiency ratio for the third quarter of 2020 was 45.27% compared to 50.95% for the third quarter of 2019.
Response to COVID-19
The Company continues to focus on protecting the health and well-being of its employees and clients and assisting clients who have been impacted by the COVID-19 pandemic. A substantial majority of non-branch employees continue to work remotely and clients are served at branches primarily through drive-thru facilities and limited lobby access. Area jurisdictions continue to monitor and modify their respective pandemic guidelines on a periodic basis. Currently, the Company is maintaining its first phase of its return to work plan.
The Company’s participation in the Small Business Administration’s PPP has resulted in the approval of over 5,400 loans for a total of $1.1 billion in loans to businesses to assist them in maintaining their payroll of an estimated 112,000 employees and cover applicable overhead. The Company is developing a digital PPP forgiveness application that will be submitted to the SBA. The Company anticipates launching the forgiveness application in its PPP client portal in the coming weeks.
The Company has provided for deferment of certain loan payments up to 90 days to provide relief to our qualified commercial, mortgage and consumer loan customers. From March through October 12, 2020, the Company granted payment modifications/deferrals on over 2,500 loans with an aggregate balance of $2.0 billion, of which 481 loans with an aggregate balance of $502 million remain in deferral status.
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 $12.7 billion at September 30, 2020, as compared to $8.4 billion at September 30, 2019, primarily as a result of the acquisition of Revere during the second quarter of the current year. In addition, the Company’s participation in the PPP program had a further positive impact on the year-over-year asset growth. During this period, total loans grew by 57% to $10.3 billion at September 30, 2020, compared to $6.6 billion at September 30, 2019. Excluding PPP loans, total loans grew 41% to $9.3 billion at September 30, 2020 as compared to the prior year quarter. Commercial loans, excluding PPP loans, grew 55% or $2.6 billion while the remainder of the loan portfolio grew 2%. The majority of the commercial loan growth was driven by the acquisition of Revere. Consumer loans grew 9% due to the Revere acquisition. Deposit growth was 53% from September 30, 2019 through September 30, 2020, as noninterest-bearing deposits experienced growth of 66% and interest-bearing deposits grew 47%. This growth was driven primarily by the Revere acquisition. During the current quarter, excess liquidity was used to reduce borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”) program by approximately $580 million.
At September 30, 2020, tangible common equity increased to $1.0 billion or 8.17% of tangible assets compared to $787.3 million or 9.74% at September 30, 2019, as a result of the equity issuance in the Revere acquisition. The year-over-year change in tangible common equity also reflects the effects of the repurchase of $50 million of common stock and the increase in intangible assets and goodwill associated with the two acquisitions during the past twelve months. At September 30, 2020, the Company had a total risk-based capital ratio of 14.02%, a common equity tier 1 risk-based capital ratio of 10.45%, a tier 1 risk-based capital ratio of 10.45% and a tier 1 leverage ratio of 8.65%.
The level of non-performing loans to total loans increased to 0.72% at September 30, 2020, compared to 0.61% at September 30, 2019, and decreased from 0.77% at June 30, 2020. At September 30, 2020, non-performing loans totaled $74.7 million, compared to $40.1 million at September 30, 2019, and $79.9 million at June 30, 2020. Non-performing loans include accruing loans 90 days or more past due and restructured loans. The year-over-year growth in non-performing loans was driven by three major components: loans placed in non-accrual status, acquired Revere non-accrual loans, and loans previously accounted for as purchased credit impaired loans that have been designated as non-accrual loans as a result of the Company’s adoption of the accounting standard for expected credit losses at the beginning of the year. Loans placed on non-accrual during the current quarter amounted to $0.9 million compared to $6.0 million for the prior year quarter and $27.3 million for the second quarter of 2020, which included $11.3 million in Revere non-accrual loans as of the acquisition date.
The Company recorded net charge-offs of $0.2 million for the third quarter of 2020, as compared to net charge-offs of $0.6 million and net recoveries of $0.4 million for the third quarter of 2019 and the second quarter of 2020, respectively.
At September 30, 2020, the allowance for credit losses was $170.3 million or 1.65% of outstanding loans and 228% of non-performing loans, compared to $163.5 million or 1.58% of outstanding loans and 205% of non-performing loans at June 30, 2020. The modest increase in the allowance from the linked quarter resulted from the combination of the impact of the updated projected future economic metrics and qualitative assessment of the loan portfolio.
Income Statement Review
Net interest income for the third quarter of 2020 increased 46% compared to the third quarter of 2019, driven primarily by the acquisition of Revere. The PPP program and its associated funding contributed a net of $6.6 million to net interest income for the quarter. The net interest margin declined to 3.24% for the third quarter of 2020, compared to 3.51% for the third quarter of 2019. Excluding the net $1.9 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.18%.
The provision for credit losses was $7.0 million for the third quarter of 2020, compared to $1.5 million for the third quarter of 2019 and $58.7 million for the second quarter of 2020. The decrease in the current quarter’s provision for credit losses, compared to the prior quarter, is a result of the stability of economic forecast compared to the prior quarter and resiliency of the loan portfolio’s credit quality. The provision for credit losses during the second quarter was primarily the result of deterioration in forecasted economic conditions ($33.8 million) and the initial allowance required on Revere non-purchased credit deteriorated loans ($17.5 million).
Non-interest income increased $10.8 million or 58% during the current quarter compared the same quarter of the prior year. During this period, income from mortgage banking activities increased $9.7 million as a result of a high level of refinancing activity and wealth management income increased $2.3 million as a result of the first quarter acquisition of RPJ. This growth more than compensated for the $1.4 million of the combined declines in service fee and other non-interest income as compared to the prior year quarter.
Non-interest expense grew 36% or $16.0 million from the prior year quarter. Excluding the impact of merger and acquisition expense, non-interest expense grew 34% year-over-year, primarily as a result of the operational cost of the Revere and RPJ acquisitions, increased compensation expense related to staffing increases, incentive compensation and annual merit increases, in addition to an increase in FDIC insurance and the amortization of intangible assets.
The non-GAAP efficiency ratio was 45.27% for the current quarter as compared to 50.95% for the third quarter of 2019 and 43.85% for the second quarter of 2020. The decrease in the efficiency ratio (reflecting an increase in efficiency) from the third quarter of last year to the current year was the result of the $41.0 million growth in non-GAAP revenue outpacing the $13.6 million growth in non-GAAP non-interest expense.
Year to Date Results
Net interest income for the nine months ended September 30, 2020 increased 32% or $63.6 million compared to the same period of 2019. This increase was driven primarily by the acquisition of Revere in the second quarter of the current year. Additionally, the income generated by the PPP program, net of its associated funding, contributed a net of $12.1 million to the growth in net interest income year-over-year. The net interest margin declined to 3.33% for the nine months ended September 30, 2020, compared to 3.55% for the same period of the prior year. Excluding the net $10.5 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.21%. Included in the current period net interest income is a benefit realized from the accelerated amortization of the $5.8 million purchase premium on acquired FHLB advances as a result of the prepayment of those borrowings.
The provision for credit losses for the nine months ended September 30, 2020 amounted to $90.2 million as compared to $3.0 million for the same period in 2019. The provision for credit losses under the CECL standard reflects the combined results of the impact of the deteriorated economic forecasts during the year ($59.3 million) and the initial allowance on acquired Revere non-purchased credit deteriorated loans ($17.5 million). The change in the portfolio mix and various qualitative adjustments resulted in the remainder of provision growth for the period.
Non-interest income rose to $70.5 million or 35% above prior year levels. Income from mortgage banking activities increased $15.0 million as a result of the high levels of refinancing activity, and wealth management income increased $6.1 million as a result of the first quarter acquisition of RPJ. These increases more than offset declines in deposit service fees, the reduction in BOLI income, due to the absence of mortality income that occurred in 2019, and lower other non-interest income.
Non-interest expense increased 46% or $61.1 million for the first nine months of 2020, compared to the first nine months of 2019. Merger and acquisition expense accounted for $24.8 million of the growth of non-interest expense. The non-interest expense growth also included $5.9 million in prepayment penalties resulting from the liquidation of acquired FHLB borrowings. Excluding the impact of these items results in a year-over-year growth rate of 23%. This growth rate was driven by operational and compensation cost associated with the Revere and RPJ acquisitions, increased incentive expense related to the significant level of mortgage loan originations, intangible amortization and annual employee merit increases.
The effective tax rate for the nine months ended September 30, 2020 was 18.7%, compared to 24.0% for the same period in 2019. This decrease was the result of the recent changes to tax laws that expanded the time permitted to utilize previous net operating losses. The Company applied this change to the 2018 acquisition of WashingtonFirst Bankshares, Inc. to realize a tax benefit of $1.8 million for the current year.
The non-GAAP efficiency ratio for the current year-to-date was 47.10% compared to 51.36% for the prior year period. The improvement in the current year’s efficiency ratio compared to the prior year was the result of the growth in non-GAAP revenue, which outpaced the 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 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 securities gains and includes tax-equivalent income.
- Operating earnings - and the related measures of operating earnings per share, operating return on average assets and operating return on average tangible common equity - reflect net income exclusive of the provision for credit losses, merger and acquisition expense and the income and expense associated with the PPP program, 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 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. 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) November 5, 2020. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10148248.
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 65 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.