Fourth Quarter Earnings Increase 27% over Prior Quarter and Drive Annual Net Income to $97.0 Million
Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported record net income of $56.7 million ($1.19 per diluted common share) for the fourth quarter of 2020. The current quarter’s result compares to net income of $28.5 million ($0.80 per diluted common share) for the fourth quarter of 2019 and net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020.
Operating earnings for the current quarter, which exclude the impact of the provision for credit losses, the effects from the Paycheck Protection Program (“PPP” or “PPP program”) and merger and acquisition expense, each on an after-tax basis, were $48.2 million ($1.02 per diluted common share), compared to $30.4 million ($0.85 per diluted common share) for the quarter ended December 31, 2019 and $45.8 million ($0.97 per diluted common share) for the quarter ended September 30, 2020.
The provision for credit losses for the current quarter was a credit of $4.5 million as compared to a charge of $7.0 million for the third quarter of 2020. The decrease in the provision for credit losses compared to the prior quarter is mainly the result of changes in macroeconomic factors, primarily the reduction in projected near term business bankruptcies as indicated in the most recent economic forecast.
“In 2020 we completed a significant integration of Revere Bank while navigating a global pandemic and helping our clients through unprecedented challenges. This was a massive undertaking, especially in a remote work environment, but our newly combined institutions were unified in our efforts to serve our clients and to keep people safe,” said Daniel J. Schrider, President and Chief Executive Officer. “Given our strong operating results and the resilience we demonstrated throughout the year, we remain very optimistic about our future.”
Fourth Quarter Highlights:
- Total assets at December 31, 2020, grew 48% to $12.8 billion compared to December 31, 2019, primarily as a result of the Revere Bank (“Revere”) acquisition and participation in the PPP. During the past year, loans and deposits grew by 55% and 56%, 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 its participation in the PPP program.
- The net interest margin was 3.38% for the fourth quarter of 2020, compared to 3.38% for the same quarter of 2019, and 3.24% for the third 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 3.31%, compared to 3.34% for fourth quarter of 2019, and 3.18% for the third quarter of 2020.
- The provision for credit losses was a credit of $4.5 million for the current quarter. The credit to the provision for the current quarter as compared to the prior quarter’s provision charge of $7.0 million is primarily the result of the reduction in forecasted business bankruptcies impacted by governmental support programs aimed at individuals and small businesses.
- Non-interest income for the current quarter increased by 68% or $13.0 million compared to the prior year quarter as a result of a 248% increase in income from mortgage banking activities and growth of 28% in wealth management income as a result of the acquisition of Rembert Pendleton Jackson (“RPJ”) in the first quarter of the current year.
- Non-interest expense increased $15.6 million or 34% for the fourth quarter of 2020 compared to the prior year quarter. This increase was driven by the impact of the acquisitions of Revere and RPJ, which increased compensation and operational costs, in addition to intangible asset amortization. FDIC insurance cost increased from the same period of the prior year as a result of the effect of the assessment credit received during the prior year quarter.
- Return on average assets (“ROA”) for the quarter ended December 31, 2020 was 1.78% and return on average tangible common equity (“ROTCE”) was 22.24%. This compares to ROA of 1.32% and ROTCE of 14.39% for the prior year. The non-GAAP efficiency ratio for the fourth quarter of 2020 was 45.09% compared to 51.98% for the fourth quarter of 2019
The Company announced its intention to close three branch locations in 2021. The affected branches are located in Northern Virginia (2) and Montgomery County (1) Maryland. Customer accounts will be consolidated into nearby locations. The changes come into effect as a part of the Company’s continuing analysis of its branch network, including usage, proximity to other Sandy Spring Bank offices and the needs of the Company’s customers. The branch closures are expected to be completed in the second quarter of 2021.
Response to COVID-19
Protecting the health and well-being of its employees and clients in addition to assisting clients who have been impacted by the pandemic remains the focus of the Company. A significant 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 guidelines based on the metrics of the pandemic. Currently, the Company is maintaining the first phase of its return to work plan.
During the current quarter, the Company began accepting digital PPP forgiveness applications. The Company has paused extending invitations to its forgiveness application portal pending updates to reflect recent amendments to the PPP program and to focus on accepting loan applications for both first and second draw loans under the restarted program.
During 2020, the Company has granted payment modifications/deferrals on 2,575 loans with and aggregate balance of $2.1 billion of which 203 loans with an aggregate balance of $217 million remain in deferral status. Currently, the vast majority of loans that had been granted modifications/deferrals have returned to their original payment plans without a significant impact on payment delinquencies.
For additional information about the Company’s response to the 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 $12.8 billion at December 31, 2020, as compared to $8.6 billion at December 31, 2019. Year-over-year asset growth was primarily the result of the acquisition of Revere during the year, as well as the Company’s participation in the PPP program. During this period, total loans grew by 55% to $10.4 billion at December 31, 2020, compared to $6.7 billion at December 31, 2019. Excluding PPP loans, total loans grew 39% to $9.3 billion at December 31, 2020 as compared to the prior year quarter. The acquisition of Revere drove the majority of the increase in commercial loans, which, excluding PPP loans, grew 52% or $2.6 billion. The residential mortgage loan portfolio remained stable year-over-year as the vast majority of loan originations during the past year were sold in the secondary market. Consumer loan growth during the year was 11%, also a result of the acquisition. Deposit growth was 56% during the past twelve months, as noninterest-bearing deposits experienced growth of 76% and interest-bearing deposits grew 47%. This growth was driven primarily by the Revere acquisition and, to a lesser extent, the PPP program.
Tangible common equity increased to $1.0 billion or 8.46% of tangible assets at December 31, 2020 compared to $782.3 million or 9.46% at December 31, 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 completed during the past twelve months. Excluding the impact of the PPP program from tangible assets at December 31, 2020, the tangible common equity ratio would be 9.25%. At December 31, 2020, the Company had a total risk-based capital ratio of 13.93%, a common equity tier 1 risk-based capital ratio of 10.58%, a tier 1 risk-based capital ratio of 10.58% and a tier 1 leverage ratio of 8.92%.
The level of non-performing loans to total loans increased to 1.11% at December 31, 2020, compared to 0.62% at December 31, 2019, and 0.72% at September 30, 2020. At December 31, 2020, non-performing loans totaled $115.5 million, compared to $41.3 million at December 31, 2019, and $74.7 million at September 30, 2020. 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 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 $54.7 million compared to $5.4 million for the prior year quarter and $0.9 million for the third quarter of 2020. Loans placed on non-accrual status during the current quarter relate primarily to a limited number of large borrowing relationships within the hospitality sector. 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 $0.5 million for the fourth quarter of 2020, as compared to net charge-offs of $0.5 million and $0.2 million for the fourth quarter of 2019 and third quarter of 2020, respectively.
At December 31, 2020, the allowance for credit losses was $165.4 million or 1.59% of outstanding loans and 143% of non-performing loans, compared to $170.3 million or 1.65% of outstanding loans and 228% of non-performing loans at September 30, 2020.
Income Statement Review
Net interest income for the fourth quarter of 2020 increased 52% compared to the fourth quarter of 2019, driven primarily by the acquisition of Revere. The PPP program and its associated funding contributed a net of $6.9 million to net interest income for the quarter. The net interest margin remained unchanged at 3.38% for the fourth quarter of 2020 as compared to the same quarter of the prior year. Excluding the net $2.3 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current quarter would have been 3.31%. This compares to the adjusted net interest margin of 3.34% for the fourth quarter of 2019.
The provision for credit losses was a credit of $4.5 million for the fourth quarter of 2020, compared to a charge of $1.7 million for the fourth quarter of 2019, and $7.0 million for the third quarter of 2020. The credit in the current quarter’s provision for credit losses, compared to the provision charge recorded in the prior quarter, is primarily the result of an improvement in the forecasted business bankruptcies indicated in the most recent economic forecast.
Non-interest income increased $13.0 million or 68% during the current quarter compared to the same quarter of the prior year. As a result of the significant decline in lending rates, mortgage origination activity for new and refinanced mortgages resulted in income from mortgage banking activities increasing by $10.3 million during the current quarter compared to the prior year quarter. In addition, wealth management income increased $1.8 million as a result of the first quarter acquisition of RPJ. The growth of these two categories in non-interest income more than compensated for the decline in service fee income compared to the prior year quarter.
Non-interest expense increased 34% or $15.6 million compared to the prior year quarter. Excluding the impact of merger and acquisition expense, non-interest expense grew 37% year-over-year, primarily as a result of the operational costs of the Revere and RPJ acquisitions, increased compensation expense related to staffing increases and incentive compensation, in addition to an increase in FDIC insurance and the amortization of intangible assets.
The non-GAAP efficiency ratio was 45.09% for the current quarter as compared to 51.98% for the fourth quarter of 2019, and 45.27% for the third quarter of 2020. The decrease in the efficiency ratio (reflecting an increase in efficiency) from the fourth quarter of last year to the current year was the result of the $47.2 million growth in non-GAAP revenue outpacing the $15.4 million growth in non-GAAP non-interest expense.
Year to Date Results
The Company recorded net income of $97.0 million for the year ended December 31, 2020 compared to $116.4 million for the prior year, representing a 17% decrease. The net earnings for the current year included the effects of the initial implementation of the accounting standard for current expected credit losses, the impact of the pandemic on the provision for credit losses, which resulted in a significant provision in the second quarter, and the impact of the acquisitions of RPJ and Revere. Pre-tax, pre-provision, pre-merger income was $235.3 million for the year ended December 31, 2020 compared to $158.9 million for the prior year.
Net interest income for the year ended December 31, 2020 increased 37% or $97.9 million compared to the prior year. This increase was driven primarily by the acquisition of Revere in the second quarter of 2020. Additionally, the income generated by the PPP program, net of its associated funding costs, contributed a net of $19.0 million to the growth in net interest income year-over-year. The net interest margin declined to 3.35% for the year ended December 31, 2020, compared to 3.51% for the prior year. Excluding the net $12.7 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.23%. The amortization of the fair value marks recognized during the current year included a benefit realized from the accelerated amortization of the $5.9 million purchase premium on acquired FHLB advances as a result of the prepayment of those borrowings. The net interest margin for 2019, excluding the amortization of fair value marks, would have been 3.46%.
The provision for credit losses for the full year of 2020 amounted to $85.7 million as compared to $4.7 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 ($44.1 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 increased 44% to $102.7 million for 2020 compared to $71.3 million for 2019. During the current year income from mortgage banking activities increased $25.3 million as a result of the high levels of new mortgage and refinancing activity resulting from historically low mortgage lending rates, and wealth management income increased $7.9 million as a result of the first quarter acquisition of RPJ. These increases more than exceeded the declines in deposit service fees and BOLI income.
Non-interest expense increased 43% to $255.8 million for 2020, compared to $179.1 million for 2019. Merger and acquisition expense accounted for $23.9 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 26%. This growth rate was driven by operational and compensation costs associated with the Revere and RPJ acquisitions, increased incentive expense related to the significant level of mortgage loan originations, increased intangible asset amortization, higher FDIC insurance premiums and annual employee merit increases.
The effective tax rate for the year ended December 31, 2020 was 22.1%, compared to 23.8% 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 was 46.53% compared to 51.52% for the prior year. 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 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. 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) February 4, 2021. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10150939.
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.