Earnings Performance Remains Strong
Today Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income of $57.0 million ($1.20 per diluted common share) for the quarter ended September 30, 2021. The current quarter compares to $44.6 million ($0.94 per diluted common share) for the third quarter of 2020 and net income of $57.3 million ($1.19 per diluted common share) for the second quarter of 2021. The results for the current quarter reflect the positive impact of the significant decline in interest expense and a credit to the provision for credit losses, which more than offset a decline in non-interest income and an increase in non-interest expense compared to the third quarter of the prior year.
Core earnings, which exclude the impact of the provision for credit losses and provision on unfunded loan commitments, merger and acquisition expense, loss on FHLB redemptions, amortization of intangibles and investment securities gains, each on an after-tax basis, for the current quarter were $52.0 million ($1.10 per diluted common share), compared to $52.1 million ($1.10 per diluted common share) for the quarter ended September 30, 2020 and $55.1 million ($1.16 per diluted common share) for the quarter ended June 30, 2021.
The provision for credit losses for the current quarter was a credit of $8.2 million as compared to a charge of $7.0 million for the third quarter of 2020 and credit of $4.2 million for the second quarter of 2021. The credits for the provision for credit losses during 2021 reflect the continued declines in the forecasted unemployment rate and, to a lesser degree, improvements in other forecasted macroeconomic indicators. The third quarter's provision also contains the impact of various updated metrics applied in the determination of the allowance for credit losses.
“We delivered another successful quarter and I am pleased with the consistent results from across our various lines of business,” said Daniel J. Schrider, President and CEO of Sandy Spring Bank. “We continue to grow new and existing relationships with wealth, mortgage, retail, and commercial clients, which is evidenced in our significant deposit and commercial loan production this quarter. Our credit quality also remains strong, as well as our proactive management of the margin. We are in a great position, and we look forward to building on the momentum our team has generated."
Third Quarter Highlights:
- Core earnings for the third quarter of 2021 were $52.0 million and $52.1 million for the prior year quarter as the increase in net interest income during the current quarter was offset by lower non-interest income and increased non-interest expense compared to the third quarter of 2020.
- At September 30, 2021, total assets were $13.0 billion, a 3% increase compared to $12.7 billion at September 30, 2020. This increase year-over-year was the result of the $889.8 million growth in cash and cash equivalents, primarily as a result of the funds received from the forgiveness of PPP loans, which declined $601.6 million during the same period. Excluding PPP loans, the total loan portfolio remained at $9.3 billion at September 30, 2021 compared to September 30, 2020, due to the combined run-off of $326.9 million of residential mortgage and consumer loans offset by the year-over-year commercial loan growth of $315.9 million or 4%.
- Year-over-year deposits increased 10%, driven by 15% growth in noninterest-bearing deposits and 8% growth in interest-bearing deposits.
- During the past twelve months, time deposits declined $359.4 million and borrowings of $820.6 million were eliminated. The reduction in borrowings included the redemption of $31 million of 5.65% subordinated debt acquired as part of the Revere Bank ("Revere") acquisition and $25 million of 4.75% subordinated debt acquired as part of the WashingtonFirst Bankshares, Inc. ("WashingtonFirst") acquisition.
- For the third quarter of 2021, the net interest margin was 3.52%, compared to 3.24% for the same quarter of 2020, and 3.63% for the second quarter of 2021. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the current quarter’s net interest margin would have been 3.49%, compared to 3.18% for third quarter of 2020, and 3.60% for the second quarter of 2021. Solely excluding the impact of PPP loans, the current quarter’s net interest margin would have been 3.35%, compared to 3.30% for the third quarter of 2020, and 3.52% for the second quarter of 2021.
- The provision for credit losses was a credit of $8.2 million for the current quarter compared to the prior quarter’s credit to the provision of $4.2 million. The credit to the provision for the current quarter was the result of the continued improvement in forecasted economic variables, in addition to the impact of updated metrics applied in the determination of the allowance for credit losses.
- Non-interest income for the current quarter decreased by 17% or $5.0 million compared to the prior year quarter. The decline was the direct result of the 65% decline in income from mortgage banking activities, which exceeded the 21% growth in wealth management income, a 26% increase in service charges on deposit accounts and 16% growth in bank card fees. Other non-interest income grew by 113% compared to the prior year quarter as a result of increases in credit related fees and activity-based contractual vendor incentives.
- Non-interest expense increased $2.2 million or 4% for the third quarter of 2021, compared to the prior year quarter. This increase was driven by increases in compensation costs, professional fees and other non-interest expense, which were partially offset by the lack of merger and acquisition expense during the current quarter and a significant reduction in FDIC insurance.
- Return on average assets (“ROA”) for the quarter ended September 30, 2021 was 1.75% and return on average tangible common equity (“ROTCE”) was 19.56% compared to 1.79% and 20.44%, respectively, for the second quarter of 2021. On a non-GAAP basis, the current quarter's core ROA was 1.60% and core ROTCE was 17.85% compared to core ROA of 1.73% and core ROTCE of 19.68% for the prior quarter of 2021.
- For the third quarter of 2021, the GAAP efficiency ratio was 48.23% compared to 48.03% for the third quarter of 2020, and 46.89% for the second quarter of 2021. The non-GAAP efficiency ratio for the third quarter of 2021 was 46.67% compared to 45.36% for the second quarter of 2021.
- During the quarter, the Company repurchased 1,261,828 shares of its common stock at an average price of $43.04 per share. Under the current authorization, 1,038,172 common shares remain available to be repurchased.
Balance Sheet and Credit Quality
Total assets grew 3% to $13.0 billion at September 30, 2021, as compared to $12.7 billion at September 30, 2020. During this period, total loans declined by 6% to $9.7 billion at September 30, 2021, compared to $10.3 billion at September 30, 2020. Excluding PPP loans, total loans at September 30, 2021 remained at $9.3 billion, as compared to the prior year quarter. During the past twelve months, the activity in the loan portfolio reflected the net reduction of loans originated under the PPP Program of $601.6 million and a $261.9 million decline in the residential mortgage loan portfolio, which was partially offset by year-over-year non-PPP commercial loan growth of $315.9 million or 4%. 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.
At September 30, 2021, the remaining outstanding principal balance of PPP loans was $461.0 million. As of October 4, 2021, 6,629 PPP loans totaling $1.1 billion have been forgiven and an additional $50.0 million have been repaid by borrowers. At the end of the current quarter, loans with an aggregate balance of $13.6 million remain in deferral status. Currently, 99% of all commercial loans that had been granted modifications/deferrals due to pandemic-related financial stress have returned to their original payment plans.
Deposit growth was 10% during the past twelve months, as noninterest-bearing deposits experienced growth of 15% and interest-bearing deposits grew 8%. This growth was driven primarily by the impact of the PPP program and, to a lesser extent, growth in interest-bearing transaction relationships.
Tangible common equity increased to $1.1 billion or 9.10% of tangible assets at September 30, 2021, compared to $1.0 billion or 8.31% at September 30, 2020 as a result of accumulated earnings over the preceding twelve months. Excluding the impact of the PPP program from tangible assets at September 30, 2021, the tangible common equity ratio would be 9.44%. At September 30, 2021, the Company had a total risk-based capital ratio of 15.26%, a common equity tier 1 risk-based capital ratio of 12.50%, a tier 1 risk-based capital ratio of 12.50%, and a tier 1 leverage ratio of 9.23%.
Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. At September 30, 2021, the level of non-performing loans to total loans was 0.80% compared to 0.72% at September 30, 2020, and 0.93% at June 30, 2021. At September 30, 2021, non-performing loans totaled $78.2 million, compared to $74.7 million at September 30, 2020, and $94.3 million at June 30, 2021. Loans placed on non-accrual during the current quarter amounted to $5.7 million compared to $0.9 million for the prior year quarter and $1.5 million for the second quarter of 2021. Non-accrual loans at quarter end declined from the prior quarter due primarily to the partial payoffs and eventual charge-offs of a few large borrowings within the hospitality sector with an aggregate balance of $32.9 million. Charged-off amounts of these credits did not exceed their associated individual reserves, and as such, did not result in any additional impact on the current quarter's provision for credit losses. Loans greater than 90 days or more increased from the prior quarter as a result of maturities of existing portfolio loans that were in process of being extended. Loans amounting to $22.2 million were subsequently settled after September 30, 2021.
The Company recorded net charge-offs of $7.8 million for the third quarter of 2021, as compared to net charge-offs of $0.2 million for the third quarter of 2020 and net charge-offs of $2.2 million for the second quarter of 2021. The increase in charge-offs in the current quarter compared to the prior quarter and the prior year quarter was primarily the result of the previously mentioned charge-offs of non-accrual loans.
At September 30, 2021, the allowance for credit losses was $107.9 million or 1.11% of outstanding loans and 138% of non-performing loans, compared to $124.0 million or 1.23% of outstanding loans and 131% of non-performing loans at June 30, 2021. Excluding PPP loans, the allowance for credit losses to outstanding loans was 1.17% and 1.34%, at September 30, 2021 and June 30, 2021, respectively. The decline in the allowance during the current quarter compared to the previous quarter was the result of the removal of individual reserves associated with the charge-offs and continued improvement in forecasted economic metrics, in addition to the impact of various updated metrics applied in the determination of the allowance for credit losses.
Income Statement Review
Quarterly Results
The Company recorded net income of $57.0 million for the three months ended September 30, 2021, compared to net income of $44.6 million for the prior year quarter. The results for the current quarter reflect the positive impact of the significant decline in interest expense and the credit to the provision for credit losses, which more than offset the decline in non-interest income and an increase in non-interest expense compared to the third quarter of the prior year. Pre-tax, pre-provision, pre-merger income was $67.8 million for the three months ended September 30, 2021 compared to $67.2 million for the prior year quarter.
For the third quarter of 2021, net interest income increased $9.1 million or 9% compared to the third quarter of 2020, due to a significant reduction in interest expense during the preceding twelve months. During this period, as general market interest rates declined significantly, interest income declined modestly by $1.9 million, interest expense on deposits, notably money market, time deposits, and borrowings declined to a greater extent, resulting in an $11.0 million decrease in interest expense. Interest expense on interest-bearing deposits declined $5.9 million and interest expense on borrowings declined $5.1 million. For the current quarter, the PPP program contributed $11.4 million to net interest income, of which $9.6 million represented origination fees. The net interest margin for the third quarter of 2021 was 3.52% as compared to 3.24% for the same quarter of the prior year, primarily the result of decreased funding costs during the period. Excluding the net $0.8 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current quarter would have been 3.49% compared to the adjusted net interest margin of 3.18% for the third quarter of 2020.
The provision for credit losses was a credit of $8.2 million for the third quarter of 2021 compared to a charge of $7.0 million for the third quarter of 2020. The provision for credit losses for the second quarter of 2021 was a credit of $4.2 million. The credit to the provision for the quarter was the result of the continued improvement in forecasted economic variables, in addition to the impact of various updated metrics applied in the determination of the allowance for credit losses. The overall credit to the provision for the third quarter of 2021 was partially mitigated by the impact of adjustments to certain qualitative factors and the change in the portfolio mix as a result of the origination of new credits.
Non-interest income decreased $5.0 million or 17% during the current quarter compared to the same quarter of the prior year, as a result of a 65% decline in income from mortgage banking activities, which exceeded the 21% growth in wealth management income, a 26% increase in service charges on deposit accounts and 16% growth in bank card fees. In addition, other non-interest income grew 113% compared to the prior year primarily as a result of an increase in credit related fees and activity-based contractual vendor incentives. The growth in wealth management income continued to reflect the positive impact of the Rembert Pendleton Jackson ("RPJ") acquisition in 2020 in addition to the performance in the financial markets and the expansion of the wealth management client base. The growth in service charge income reflects the impact of the prior year's temporary suspension of certain service fees as well as lower transaction volume, both a resulting reaction to the Covid-19 pandemic. Bank card fees grew compared to the prior year quarter driven by transaction volume.
Non-interest expense increased $2.2 million or 4% for the third quarter of 2021, compared to the prior year quarter. The increase was driven by increases in compensation costs, professional fees and other non-interest expense, which were partially offset by the lack of merger and acquisition expense during the current quarter and a significant reduction in FDIC insurance expense. Salary and benefit expense increased $2.6 million as a result of staffing increases and an increase of $1.2 million in professional fees and services, primarily due to consulting fees associated with specific strategic initiatives. The decline in the FDIC insurance expense resulted from the reduction in risk factors applied by the regulatory agency in the determination of the Company's premium.
For the third quarter of 2021, the GAAP efficiency ratio was 48.23% compared to 48.03% for the third quarter of 2020, and 46.89% for the second quarter of 2021. The non-GAAP efficiency ratio was 46.67% for the current quarter as compared to 45.27% for the third quarter of 2020, and 45.36% for the second quarter of 2021. The modest increase in the efficiency ratio (reflecting an decrease in efficiency) from the third quarter of the prior year to the current year quarter was the result of the 7% growth in non-GAAP non-interest expense outpacing the 3% growth in non-GAAP revenue. ROA for the quarter ended September 30, 2021 was 1.75% and ROTCE was 19.56% compared to 1.79% and 20.44%, respectively, for the second quarter of 2021. On a non-GAAP basis, the current quarter's core ROA was 1.60% and core ROTCE was 17.85% compared to core ROA of 1.73% and core ROTCE of 19.68% for the prior quarter of 2021.
Year to Date Results
The Company recorded net income of $189.7 million for the nine months ended September 30, 2021 compared to net income of $40.3 million for the same period in the prior year. Pre-tax, pre-provision, pre-merger income was $204.5 million for the nine months ended September 30, 2021 compared to $164.9 million for the prior year. The current year benefited from increased net interest income of $55.9 million, a $47.1 million credit to the provision for credit losses, and a $9.0 million increase in non-interest income driven primarily by wealth management income and other non-interest income. The prior year's results reflected the combined impact of merger and acquisition expense associated with the Revere acquisition, the impact of the Covid-19 pandemic on economic forecast used in the determination of the allowance for credit losses and the additional provision for credit losses associated with the acquisition of Revere during that period.
Net interest income for the nine months ended September 30, 2021 increased 21% or $55.9 million compared to the prior year as net interest income was driven by the increase in interest income from the commercial loan portfolio and the overall decrease in interest expense during the current year. These positive impacts were partially offset by the decrease in interest income on the investment securities and the mortgage and consumer loans portfolios. Contributing to the growth in net interest income, the PPP program generated $35.6 million, net of its associated funding costs, year-over-year. The net interest margin improved to 3.57% for the nine months ended September 30, 2021, compared to 3.33% for the prior year. Excluding the net $4.6 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.52%. The net interest margin for 2020, excluding the amortization of fair value marks, would have been 3.21%.
The provision for credit losses for the nine months ended September 30, 2021 amounted to a credit of $47.1 million as compared to a charge of $90.2 million for the same period in 2020. For the nine months ended September 30, 2021, the credit for the provision for credit losses, compared to the prior year's charge to the provision, reflects the impact of the continued improvement in forecasted economic metrics, notably the rate of unemployment, anticipated business bankruptcies and the housing price index. These decreases were partially offset by qualitative factors applied in the determination of the allowance. The charge to the provision for credit losses for the same period in 2020 predominantly reflected the combined results of the impact of the deteriorated economic forecasts during the first half of 2020 and the initial allowance on acquired Revere non-purchased credit deteriorated loans.
Non-interest income increased 13% to $79.5 million for the nine months ended September 30, 2021, compared to $70.5 million for 2020. During the current year, wealth management income increased $4.9 million year over year as a result of the acquisition of RPJ in the first quarter of 2020, in addition to the $699 million growth in assets under management and the increase in the client base during the past twelve months. Service charge income also increased 15% as customer activity increased. As a result of increased transaction volume, bank card fees grew 24% compared to the prior year period. Other non-interest income also grew significantly compared to the prior year as a result of the combination of the full payoff of a purchased credit deteriorated loan, credit related fees and activity-based contractual vendor incentives. Income from mortgage banking activities decreased during the year compared to the prior year.
Non-interest expense was $194.3 million for the nine months ended September 30, 2021, compared to $194.1 million for 2020. The current year included $9.1 million in prepayment penalties on FHLB borrowings compared to $5.9 million in prepayment penalties in the prior year. The prior year included $25.2 million in merger and acquisition expense. Excluding the impact of these items results in a year-over-year growth rate in non-interest expense of 14%. This growth rate was driven by operational and compensation costs associated with the 2020 acquisitions, staffing increases and professional fees and services associated with certain strategic initiatives, increased incentive expense associated with mortgage lending and other volume based activities, increased intangible asset amortization, marketing and outside data services cost.
The effective tax rate for the nine months ended September 30, 2021 was 24.60%, compared to a tax rate of 18.66% for the same period in 2020. The current year's effective tax rate reflects a more normalized rate while the prior year's rate reflected the favorable result of the changes to tax laws in 2020 that expanded the time permitted to utilize previous net operating losses. The Company applied this change to the 2018 acquisition of WashingtonFirst to realize a tax benefit of $1.8 million for 2020, resulting in a greater proportional benefit from the operating income in the first nine months of 2020.
For the nine months ended September 30, 2021, the GAAP efficiency ratio was 48.73% compared to 58.15% for the same period in 2020. The non-GAAP efficiency ratio for the first nine months of the current year was 44.88% compared to 47.10% for the same period in the prior year. The improvement in the current year’s non-GAAP efficiency ratio compared to the prior year was the result of the 19% growth in non-GAAP revenue, which outpaced the 14% 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 goodwill and other intangible assets.
- The non-GAAP efficiency ratio excludes amortization of intangible assets, loss on FHLB redemption, merger and acquisition expense and investment securities gains and includes tax-equivalent income.
- Core earnings and the related measures of core earnings per diluted common share, core return on average assets and core return on average tangible common equity reflect net income exclusive of the provision/(credit) for credit losses, provision/(credit) for credit losses on unfunded loan commitments, merger and acquisition expense, amortization of intangible assets, loss on FHLB redemption, and investment securities gains, on a net of tax basis.
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.
Conference Call
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 844.200.6205. Please use the following access code: 896716. 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 November 4, 2021. A replay of the teleconference will be available through the same time period by calling 866.813.9403 under conference call number 472010.
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 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
800.399.5919
Email:
DSchrider@sandyspringbank.com
PMantua@sandyspringbank.com
Media Contact:
Jen Schell
301.570.8331
jschell@sandyspringbank.com
Forward-Looking Statements
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 effect of the pandemic on our borrowers and their ability to make payments on their obligations, the effectiveness of vaccination programs, and the effect of remedial actions and stimulus measures adopted by federal, state and local governments; 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, 2020, 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.