Company Reports Strong Growth in Operating Earnings Following the Revere Bank and Rembert Pendleton Jackson Acquisitions
Operating earnings for the current quarter, which exclude the impact of merger and acquisition expense, the provision for credit losses and the effects from the PPP program, each on an after-tax basis, were $42.0 million ($0.88 per diluted share), compared to $29.5 million ($0.82 per diluted share) for the quarter ended June 30, 2019.
The current quarter’s results included $22.5 million for merger and acquisition expense related to the Revere acquisition. Additionally, earnings for the second quarter were negatively impacted by a $58.7 million provision for credit losses. Of this amount, approximately $33.8 million was related to the change in the current quarter’s economic forecast. In addition, as required by generally accepted accounting principles (“GAAP”), the initial allowance for credit losses on Revere’s acquired non-purchased credit deteriorated loans was recognized through provision for credit losses in the amount of $17.5 million. Comparatively, the provision for credit losses for the first quarter of 2020 was $24.5 million. The Company’s participation in the Paycheck Protection Program (“PPP” or “PPP program”) and the associated funding program had a net positive impact of $4.1 million, net of tax, in the current quarter.
“We successfully completed the acquisition of Revere Bank and we are poised for long-term earnings growth,” said Daniel J. Schrider, President and Chief Executive Officer. “Despite the challenging rate and economic environment, our ability to close our transaction and increase our operating earnings distinguishes us during this unprecedented time. We remain focused on strategically moving our company forward and preparing for future profitable growth, while continuing to help our clients and community navigate the many challenges caused by the global pandemic.”
Second Quarter Highlights:
- Total assets at June 30, 2020, grew 58% to $13.3 billion compared to June 30, 2019, as a result of the Revere acquisition and participation in the PPP. Loans and deposits also each grew by 58%. Revere’s loans and deposits on the date of acquisition were $2.5 billion and $2.3 billion, respectively. Additionally, the Company’s participation in the PPP resulted in the addition of $1.1 billion in commercial business loans during the second quarter of 2020.
- The net interest margin was 3.47% for the second quarter of 2020, compared to 3.54% for the second quarter of 2019 and 3.29% for the first 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 3.19%, compared to 3.49% for the second quarter of 2019 and 3.27% for the first quarter of 2020.
- The provision for credit losses of $58.7 million for the second quarter reflected the change in economic forecast for the current quarter, resulting in an addition of $33.8 million, and the $17.5 million initial provision for credit losses on the acquired Revere non-purchased credit deteriorated loans.
- Non-interest income increased 38% from the prior year quarter, driven by income from mortgage banking activities, which benefited from higher refinance activity and growth in wealth management income as a result of the first quarter acquisition of Rembert Pendleton Jackson (“RPJ”).
- Non-interest expense grew 95% or $41.6 million from the prior year quarter. Excluding the impact of merger and acquisition expense and early prepayment of acquired FHLB borrowings, the year-over-year growth rate of in non-interest expense would have been 27%.
- Tangible book value per share declined by 4% to $20.61 at June 30, 2020 compared to $21.54 at June 30, 2019. During this period, the Company recorded additional goodwill and intangible assets in connection with the acquisitions of Revere and RPJ and repurchased $50 million of common stock.
Acquisition of Revere Bank
The results of operations from the Revere acquisition have been included in the consolidated results of operations from the date of the acquisition. At the acquisition date, Revere had assets of $2.8 billion, loans of $2.5 billion and deposits of $2.3 billion. As a result of the growth in the balance sheet, interest income and expense increased from the prior year’s quarter. Cost savings from the synergies resulting from the combination of the institutions will continue to be realized throughout 2020 and into 2021.
The valuation of acquired loans resulted in an estimated discount of $12.0 million. The initial allowance for credit losses established on $975 million of purchased credit deteriorated (“PCD”) loans was approximately $18.6 million. The amount of PCD loans was directly attributable to the current market conditions in the economy. Additionally, included in the acquired assets was the core deposit intangible asset valued at approximately $18.4 million. Interest-bearing liabilities valuation resulted in a $20.8 million premium.
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. As area jurisdictions relax their stay at home orders, the Company is cautiously executing the first phase of its return to work plan.
The Company’s participation in the Small Business Administration’s Paycheck Protection Program has resulted in the approval of over 5,200 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.
Applying a set of developed guidelines, the Company has provided for deferment of certain loan payments up to 90 days to provide relief to our qualified commercial and mortgage/consumer loan customers. From March through July 14, the Company had granted approvals for payment modifications/deferrals on over 2,400 loans with an aggregate balance of $2.0 billion.
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 $13.3 billion at June 30, 2020, as compared to $8.4 billion at June 30, 2019, primarily as a result of the acquisition of Revere during the current quarter. In addition, the Company’s participation in the PPP program had a further positive impact on the asset growth year-over-year. During this period, total loans grew by 58% to $10.3 billion at June 30, 2020, compared to $6.6 billion at June 30, 2019. Excluding PPP loans, total loans grew 42% to $9.3 billion at June 30, 2020. Commercial loans, excluding PPP loans, grew 58% or $2.7 billion while the remainder of the portfolio grew 2%. The majority of the commercial loan growth was driven by the acquisition of Revere. The year-over-year decline in the mortgage loan portfolio resulted from mortgage loan refinance activity driven by the low interest rate environment and the strategic decision to sell the majority of new mortgage loan production. Overall, consumer loans grew 14% due to the Revere acquisition. However, organic consumer loans experienced a 10% decline as borrowers reduced their home equity borrowings through the refinancing of their mortgage loans. Deposit growth was 58% from June 30, 2019 to June 30, 2020, as noninterest-bearing deposits experienced growth of 70% and interest-bearing deposits grew 52%. This growth was driven primarily by the Revere acquisition.
Tangible common equity increased to $1.0 billion at June 30, 2020, compared to $767.0 million at June 30, 2019, as a result of the equity issuance associated with 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, an increase in dividends beginning in the second quarter of 2019 and the increase in intangible assets and goodwill associated with the two acquisitions during the past twelve months. At June 30, 2020, the Company had a total risk-based capital ratio of 13.79%, a common equity tier 1 risk-based capital ratio of 10.23%, a tier 1 risk-based capital ratio of 10.23% and a tier 1 leverage ratio of 8.35%.
The level of non-performing loans to total loans increased to 0.77% at June 30, 2020, compared to 0.58% at June 30, 2019, and 0.80% at March 31, 2020. At June 30, 2020, non-performing loans totaled $79.9 million, compared to $37.7 million at June 30, 2019, and $54.0 million at March 31, 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 $27.3 million compared to $3.4 million for the prior year quarter and $2.4 million for the first quarter of 2020. Acquired Revere non-accrual loans were $11.3 million. Excluding the impact of the acquisition of Revere, the current quarter’s growth in non-accrual loans was primarily the result of three large relationships.
The Company recorded net recoveries of $0.4 million for the second quarter of 2020 as compared to net charge-offs of $0.7 million and $0.5 million for the second quarter of 2019 and the first quarter of 2020, respectively.
The allowance for credit losses was $163.5 million or 1.58% of outstanding loans and 205% of non-performing loans at June 30, 2020, compared to $85.8 million or 1.28% of outstanding loans and 159% of non-performing loans at March 31, 2020. The acquisition of Revere’s PCD loans resulted in an increase to the allowance for credit losses of $18.6 million, which did not affect the current quarter’s provision expense. The remaining growth in the allowance was attributable to the provision for credit losses during the current quarter.
Income Statement Review
Net interest income for the second quarter of 2020 increased 53% compared to the second quarter of 2019, primarily driven by the acquisition of Revere. The PPP program and its associated funding contributed a net of $5.5 million to net interest income for the quarter. The net interest margin declined to 3.47% for the second quarter of 2020 compared to 3.54% for the second quarter of 2019. Excluding the net $8.6 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.19%. Included in the current quarter is the accelerated amortization of the $5.8 million purchase premium on FHLB advances as a result of the prepayment of those borrowings. The effect of the accelerated amortization accounts for approximately 20 basis points in the current quarter’s net interest margin.
The provision for credit losses was $58.7 million for the second quarter of 2020, compared to $1.7 million for the second quarter of 2019 and $24.5 million for the first quarter of 2020. The provision for credit losses during the quarter reflects the results of the impact of economic developments during the quarter ($33.8 million), the initial allowance required on non-purchased credit deteriorated loans ($17.5 million) and various qualitative adjustments to the allowance ($3.6 million). The change in the portfolio mix adjustments resulted in the remainder of provision growth for the period.
Non-interest income increased $6.4 million or 38% from the prior year quarter. Income from mortgage banking activities increased $5.2 million as a result of a high level of refinancing activity, while wealth management income increased $2.1 million as a result of the first quarter acquisition of RPJ. This growth more than compensated for the $1.4 million of the combined decline in service and bank card fees as compared to the prior year quarter as a result of the decline in consumer activity.
Non-interest expense grew 95% or $41.6 million from the prior year quarter. Merger and acquisition expense accounted for $22.5 million of the growth of non-interest expense. The non-interest expense growth also included $5.9 million in prepayment penalties from the liquidation of the acquired FHLB borrowings. These prepayment penalties offset the impact of the accelerated amortization noted previous in the discussion on net interest income. Excluding the impact of these non-core expenses, the year-over-year growth rate would have been 27% as a result of the operational cost of the Revere and RPJ acquisitions, increased compensation expense related to the high level of mortgage loan originations and annual employee merit increases.
The non-GAAP efficiency ratio was 43.85% for the current quarter as compared to 51.71% for the second quarter of 2019 and 54.76% for the first quarter of 2020. The decrease in the efficiency ratio (reflecting an increase in efficiency) from the second quarter of last year to the current year was the result of the rate of growth in non-GAAP revenue, at 50%, outpacing the non-GAAP non-interest expense growth of 27%.
Year to Date Results
Net interest income for the six months ended June 30, 2020 increased 25% or $32.9 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 $5.5 million to the growth in net interest income year-over-year. The net interest margin declined to 3.39% for the six months ended June 30, 2020 compared to 3.58% for the same period of the prior year. Excluding the net $8.6 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin would have been 3.23%. Included in the current period is the accelerated amortization of the $5.8 million purchase premium on FHLB advances as a result of the prepayment of those borrowings. The effect of the accelerated amortization accounts for approximately 6 basis points in the net interest margin for the six months ended June 30, 2020.
The provision for credit losses for the six months ended June 30, 2020 amounted to $83.2 million as compared to $1.5 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 ($53.8 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 $7.6 million or 23% above prior year levels. Income from mortgage banking activities increased $5.3 million as a result of the high levels of refinancing activity and wealth management income increased $3.8 million as a result of the first quarter acquisition of RPJ. These increases more than offset declines in deposit and bank card fees and the reduction in BOLI income due to the absence of mortality income that occurred in 2019.
Non-interest expense increased 51% or $45.1 million for the first six months of 2020, compared to the first six months of 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 17%. 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 and annual employee merit increases.
The increase in the effective tax rate for the six months ended June 30, 2020 was the result of the impact of the amount of tax-advantaged income in proportion to the net loss before taxes as compared to the prior year period. Additionally, recent changes to tax laws expand 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 48.21% compared to 51.57% for the prior year period. The improvement in the current year’s efficiency ratio compared to the prior year was the result of the 24% rate of growth in non-GAAP revenue which outpaced the non-GAAP non-interest expense 16% rate of growth.
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, operating earnings per share, operating return on average assets and operating return on average tangible common equity. Operating earnings 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 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 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 7, 2020. A replay of the teleconference will be available through the same time period by calling 877.344.7529 under conference call number 10145405.
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.