OLNEY, MARYLAND, October 24, 2023 — Sandy Spring Bancorp, Inc. (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income of $20.7 million ($0.46 per diluted common share) for the quarter ended September 30, 2023, compared to net income of $24.7 million ($0.55 per diluted common share) for the second quarter of 2023 and $33.6 million ($0.75 per diluted common share) for the third quarter of 2022. The decline in the current quarter's net income compared to the linked quarter was the result of the one-time pension settlement expense associated with the previously disclosed termination of the Company's pension plan, coupled with lower net interest income. These negative factors were partially offset by lower provision for credit losses and a decline in salaries and employee benefits expense after excluding the impact of the pension settlement expense.
Current quarter core earnings were $27.8 million ($0.62 per diluted common share), compared to $27.1 million ($0.60 per diluted common share) for the quarter ended June 30, 2023 and $35.7 million ($0.80 per diluted common share) for the quarter ended September 30, 2022. Core earnings exclude the after-tax impact of amortization of intangibles, investment securities gains or losses and non-recurring or extraordinary items. The increase in core earnings during the current quarter as compared to the previous quarter was a result of lower provision for credit losses, lower salaries and employee benefits expense, and lower marketing expense, offset by reduced net interest income.
“This quarter we demonstrated the effectiveness of our core funding strategies and ability to expand our reach in the Greater Washington region. We added over 1,500 clients in the quarter, which reflects over 1% growth in our client base,” said Daniel J. Schrider, Chairman, President and CEO of Sandy Spring Bank. "Additionally, we grew the Commercial & Industrial portfolio, reduced our Commercial Real Estate concentration, and maintained our credit quality."
“We are focused on capitalizing on this momentum to deepen existing client relationships and welcome new clients to Sandy Spring Bank,” Schrider added.
Third Quarter Highlights
- Total assets at September 30, 2023 increased by 1% to $14.1 billion compared to $14.0 billion at June 30, 2023.
- Total loans declined by $69.3 million or 1% to $11.3 billion at September 30, 2023 compared to $11.4 billion at June 30, 2023. During the current quarter, the Company reduced its concentration in the commercial real estate segments by $110.3 million, while commercial business loans and lines increased $31.1 million. The total residential mortgage loan portfolio grew $16.0 million mainly due to the migration of construction loans into the portfolio.
- Deposits increased $192.1 million or 2% to $11.2 billion at September 30, 2023 compared to $11.0 billion at June 30, 2023, as interest-bearing deposits increased $258.1 million or 3%, while noninterest-bearing deposits declined $66.0 million or 2%. Growth within interest-bearing deposit categories was driven by savings accounts and core time deposits, which increased by $277.4 million and $263.7 million, respectively. These increases were partially offset by the $155.8 million decrease in brokered time deposits, as the Company reduced its reliance on wholesale funding sources, and the $177.5 million decrease in money market accounts.
- Credit quality metrics remained at low levels during the current quarter. The ratio of non-performing loans to total loans was 0.46% at September 30, 2023 compared to 0.44% at June 30, 2023 and 0.40% at September 30, 2022. Net charge-off activity during the current quarter was insignificant.
- Total borrowings declined in the current quarter by $57.8 million or 4% over the amounts at June 30, 2023, mainly as a result of a $50.0 million reduction in FHLB advances.
- Net interest income for the third quarter of 2023 declined $5.4 million or 6% compared to the previous quarter and $27.9 million or 25% compared to the third quarter of 2022. During the recent quarter, the $4.3 million growth in interest income was more than offset by the $9.7 million increase in interest expense, a result of the increased rates paid on deposits.
- The net interest margin was 2.55% for the third quarter of 2023 compared to 2.73% for the second quarter of 2023 and 3.53% for the third quarter of 2022. The decline in the net interest margin was the result of higher rates paid on interest-bearing liabilities, driven by higher market rates, competition for deposits, and customer movement of excess funds out of noninterest-bearing accounts, outpacing the increase in the yield on interest-earning assets. Compared to the linked quarter, the rate paid on interest-bearing liabilities rose 36 basis points, while the yield on interest-earning assets increased 8 basis points, resulting in the quarterly margin compression of 18 basis points.
- Provision for credit losses directly attributable to the funded loan portfolio for the current quarter was $3.2 million compared to $4.5 million in the previous quarter and $14.1 million in the prior year quarter. The provision for the current quarter was the product of increases in individual reserves on a few commercial lending relationships, which were partially offset by a qualitative adjustment related to reduced probability of an economic recession. In addition, during the current quarter the Company reduced its reserve for unfunded commitments by $0.8 million as a result of higher utilization of lines of credit.
- Non-interest income for the third quarter of 2023 increased by 1% or $0.2 million compared to the linked quarter and grew by 3% or $0.5 million compared to the prior year quarter. The quarter-over-quarter increase was mainly driven by higher wealth management income and higher lending-related fees, offset by lower BOLI income.
- Non-interest expense for the third quarter of 2023 increased $3.3 million or 5% compared to the second quarter of 2023 and $6.7 million or 10% compared to the prior year quarter. The current quarter included $8.2 million of pension settlement expense related to the termination of the Company's pension plan, while the previous quarter included $1.9 million of severance related expense associated with staffing adjustments. Excluding these items from the current and previous quarters, total non-interest expense declined by $2.9 million or 4% driven by lower salaries and employee benefits expense and lower marketing expense.
- Return on average assets (“ROA”) for the quarter ended September 30, 2023 was 0.58% and return on average tangible common equity (“ROTCE”) was 7.42% compared to 0.70% and 8.93%, respectively, for the second quarter of 2023 and 0.99% and 12.49%, respectively, for the third quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.78% and core ROTCE was 9.51% compared to 0.77% and 9.43%, respectively, for the previous quarter and 1.05% and 12.86%, respectively, for the third quarter of 2022.
- The GAAP efficiency ratio was 70.72% for the third quarter of 2023, compared to 64.22% for the second quarter of 2023 and 50.66% for the third quarter of 2022. The non-GAAP efficiency ratio was 60.91% for the third quarter of 2023 compared to 60.68% for the second quarter of 2023 and 48.18% for the prior year quarter. The increase in both the GAAP and non-GAAP efficiency ratios (reflecting a decrease in efficiency) in the current quarter compared to the previous quarter and the third quarter of the prior year was the result of declines in net revenue from the prior periods coupled with the growth in non-interest expense.
Balance Sheet and Credit Quality
Total assets were $14.1 billion at September 30, 2023, as compared to $14.0 billion at June 30, 2023. Total loans declined by $69.3 million or 1% to $11.3 billion at September 30, 2023 compared to $11.4 billion at June 30, 2023. Total commercial real estate and business loans declined $79.2 million quarter-over-quarter due to a $107.1 million or 10% decline in the AD&C loan portfolio, while investor and owner-occupied commercial real estate loan portfolios were relatively unchanged. Commercial business loans and lines increased $31.1 million or 2%. Total residential mortgage loans grew $16.0 million or 1% mainly due to the migration of construction loans into the residential mortgage portfolio. Overall, the loan portfolio mix remained relatively unchanged compared to the previous quarter.
Deposits increased $192.1 million or 2% to $11.2 billion at September 30, 2023 compared to $11.0 billion at June 30, 2023. During this period total interest-bearing deposits increased $258.1 million or 3%, while noninterest-bearing deposits declined $66.0 million or 2%. Growth within interest-bearing deposit categories was driven by savings accounts and core time deposits, which increased by $277.4 million and $263.7 million, respectively. These increases were partially offset by the $155.8 million decrease in brokered time deposits, as the Company reduced its reliance on wholesale funding sources, and the $177.5 million decrease in money market accounts. Total deposits, excluding brokered deposits, increased by $349.5 million or 4% quarter-over-quarter and represented 90% of the total deposits as of September 30, 2023 compared to 88% at June 30, 2023, reflecting the continued stability of the core deposit base. The deposit growth experienced during the current quarter resulted in the loan to deposit ratio declining to 101% at September 30, 2023 from 104% at June 30, 2023. Total uninsured deposits at September 30, 2023 were approximately 33% of the total deposits. The Company offers its customers reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits. During the quarter ended September 30, 2023, balances in the Company's reciprocal deposit accounts increased by $131.6 million.
Total borrowings declined by $57.8 million or 4% at September 30, 2023 as compared to the previous quarter, driven by a $50.0 million reduction in FHLB advances. The outstanding balance of borrowings through the Federal Reserve Bank's Bank Term Funding Program remained unchanged at $300.0 million at September 30, 2023. At September 30, 2023, contingent liquidity, which consists of available FHLB borrowings, fed funds, funds through the Federal Reserve Bank's discount window and the Bank Term Funding Program, as well as excess cash and unpledged investment securities totaled $6.1 billion or 168% of uninsured deposits. At September 30, 2023, total cash and cash equivalents were $717.6 million, an increase of $287.5 million or 67% compared to the linked quarter, primarily a result of strong deposit growth.
The tangible common equity ratio decreased to 8.42% of tangible assets at September 30, 2023, compared to 8.51% at June 30, 2023. This decrease reflected the impact of higher tangible assets while tangible common equity remained relatively unchanged quarter-over-quarter, as net retained earnings were offset by an increase in unrealized losses on available-for-sale investment securities.
At September 30, 2023, the Company had a total risk-based capital ratio of 14.85%, a common equity tier 1 risk-based capital ratio of 10.83%, a tier 1 risk-based capital ratio of 10.83%, and a tier 1 leverage ratio of 9.50%. All of these ratios remain well in excess of the mandated minimum regulatory requirements.
Non-performing loans include non-accrual loans and accruing loans 90 days or more past due. Overall credit quality remained stable at September 30, 2023 compared to June 30, 2023, as the ratio of non-performing loans to total loans was 0.46% compared to 0.44%. These levels of non-performing loans compare to 0.40% at September 30, 2022 and continue to indicate stable credit quality during a period of economic uncertainty. At September 30, 2023, non-performing loans totaled $51.8 million, compared to $49.5 million at June 30, 2023 and $44.5 million at September 30, 2022. Total net charge-offs for the current quarter amounted to $0.1 million compared to $1.8 million for the second quarter of 2023 and $0.5 million of net recoveries for the third quarter of 2022.
At September 30, 2023, the allowance for credit losses was $123.4 million or 1.09% of outstanding loans and 238% of non-performing loans, compared to $120.3 million or 1.06% of outstanding loans and 243% of non-performing loans at the end of the previous quarter and $128.3 million or 1.14% of outstanding loans and 289% of non-performing loans at the end of the third quarter of 2022. The increase in the allowance for the current quarter compared to the previous quarter mainly reflects increases in individual reserves recorded on a few commercial real estate relationships, partially offset by the reduction of the qualitative adjustment related to the probability of an economic recession.
Income Statement Review
Quarterly Results
Net income was $20.7 million ($0.46 per diluted common share) for the three months ended September 30, 2023 compared to $24.7 million ($0.55 per diluted common share) for the three months ended June 30, 2023 and $33.6 million ($0.75 per diluted common share) for the prior year quarter. The current quarter's core earnings were $27.8 million ($0.62 per diluted common share), compared to $27.1 million ($0.60 per diluted common share) for the previous quarter and $35.7 million ($0.80 per diluted common share) for the quarter ended September 30, 2022. The decline in the current quarter's net income compared to the previous quarter was the result of one-time pension settlement expense of $8.2 million, as the Company completed the termination of its pension plan, coupled with lower net interest income, partially offset by lower provision for credit losses and lower salaries expense. The increase in core earnings during the current quarter as compared to the previous quarter was a result of lower provision for credit losses, lower salaries and employee benefits expense, and lower marketing expense, offset by reduced net interest income.
Net interest income for the third quarter of 2023 decreased $5.4 million or 6% compared to the previous quarter and $27.9 million or 25% compared to the third quarter of 2022. Both quarterly and year-over-year decreases in net interest income were driven by higher interest expense, a result of higher funding costs, which outpaced growth in interest income. The rising interest rate environment was primarily responsible for a $32.0 million year-over-year increase in interest income. This growth in interest income was more than offset by the $59.9 million year-over-year growth in interest expense as funding costs have also risen in response to the rising rate environment and significant competition for deposits. Interest income growth occurred in all categories of commercial loans and, to a lesser degree, in residential mortgage loans, consumer loans and investment securities income.
The net interest margin was 2.55% for the third quarter of 2023 compared to 2.73% for the second quarter of 2023 and 3.53% for the third quarter of 2022. The contraction of the net interest margin for the current quarter reflects the higher rate paid on interest-bearing liabilities, which outpaced the increase in the yield on interest-earning assets. The overall rate and yield increases were driven by the multiple federal funds rate increases that occurred over the preceding twelve months coupled with competition for deposits in the market, and customer movement of excess funds out of noninterest-bearing accounts into higher yielding products. As compared to the prior year quarter, the yield on interest-earning assets increased 76 basis points while the rate paid on interest-bearing liabilities rose 241 basis points, resulting in the margin compression of 98 basis points.
The total provision for credit losses was $2.4 million for the third quarter of 2023 compared to $5.1 million for the previous quarter and $18.9 million for the third quarter of 2022. The provision for credit losses directly attributable to the funded loan portfolio was $3.2 million for the current quarter compared to $4.5 million for the second quarter of 2023 and the prior year quarter’s provision of $14.1 million. The current quarter's provision mainly reflects an increase in individual reserves established on a few commercial real estate relationships.
Non-interest income for the third quarter of 2023 increased by 1% or $0.2 million compared to the linked quarter and grew by 3% or $0.5 million compared to the prior year quarter. The current quarter's increase in non-interest income as compared to the previous quarter was mainly driven by higher wealth management income coupled with higher lending-related fees, partially offset by lower BOLI income due to mortality proceeds received in the prior quarter.
Non-interest expense for the third quarter of 2023 increased $3.3 million or 5% compared to the second quarter of 2023 and $6.7 million or 10% compared to the third quarter of 2022. The current quarter included $8.2 million of pension settlement expense related to the termination of the Company's pension plan, while the previous quarter included $1.9 million of severance related expense associated with staffing adjustments. Excluding these items from the current and previous quarters, total non-interest expense declined by $2.9 million or 4% driven by lower salaries and employee benefits and lower marketing expense. Excluding pension settlement expense from the current quarter, non-interest expense declined by $1.5 million or 2% year-over-year. This decline is primarily attributable to lower compensation expense, partially offset by higher professional fees related to the Company's investments in technology projects, and higher FDIC insurance expense, due to an increase in the assessment rate for all banks that became effective in 2023.
For the third quarter of 2023, the GAAP efficiency ratio was 70.72% compared to 64.22% for the second quarter of 2023 and 50.66% for the third quarter of 2022. The GAAP efficiency ratio rose from the prior year quarter primarily as a result of the 21% decrease in GAAP revenue in combination with the 10% increase in GAAP non-interest expense. The non-GAAP efficiency ratio was 60.91% for the current quarter as compared to 60.68% for the second quarter of 2023 and 48.18% for the third quarter of 2022. The increase in the non-GAAP efficiency ratio (reflecting a decrease in efficiency) from the third quarter of the prior year to the current year quarter was primarily the result of the 21% decline in non-GAAP revenue, while non-GAAP expenses were relatively unchanged.
ROA for the quarter ended September 30, 2023 was 0.58% and ROTCE was 7.42% compared to 0.70% and 8.93%, respectively, for the second quarter of 2023 and 0.99% and 12.49%, respectively, for the third quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.78% and core ROTCE was 9.51% compared to 0.77% and 9.43% for the second quarter of 2023 and 1.05% and 12.86%, respectively, for the third quarter of 2022.
Year-to-Date Results
The Company recorded net income of $96.7 million for the nine months ended September 30, 2023 compared to net income of $132.3 million for the same period in the prior year. Core earnings were $107.2 million for the nine months ended September 30, 2023 compared to $125.0 million for the same period in the prior year. Year-to-date net income declined as a result of the gain recognized on the sale of the Company's insurance segment during the prior year in combination with lower net interest income and higher non-interest expense, partially offset by lower provision for credit losses as a result of significant credit recorded during the first quarter of the current year.
For the nine months ended September 30, 2023, net interest income decreased $47.5 million compared to the prior year as a result of the $169.0 million increase in interest expense, partially offset by the $121.5 million increase in interest income. The increase in interest expense was driven by the interest expense on deposits, primarily associated with money market and time deposit accounts and, to a lesser degree, FHLB and Federal Reserve Bank borrowings. The net interest margin declined to 2.75% for the nine months ended September 30, 2023, compared to 3.50% for the prior year, primarily as a result of higher funding cost due to the rising interest rate environment and market competition for deposits during the period.
The provision for credit losses for the nine months ended September 30, 2023 amounted to a credit of $14.1 million as compared to a charge of $23.6 million for 2022. Credit to the provision for the nine months ended September 30, 2023 was a reflection of the improving regional forecasted unemployment rate, observed during the early part of the current year, coupled with the continued strong credit quality performance of the loan portfolio.
For the nine months ended September 30, 2023, non-interest income decreased 31% to $50.5 million compared to $72.7 million for 2022. During the prior year, the Company realized a $16.5 million gain on the sale of its insurance segment. Excluding the gain, non-interest income decreased 10% or $5.7 million, driven by a $2.9 million decrease in insurance commissions, a $2.6 million decrease in bank card fees and a $0.6 million decrease in income from mortgage banking activities. Insurance commission income declined due to the disposition of the Company's insurance business during the second quarter of the prior year. Fees from bank cards declined as a result of regulatory restrictions on transaction fees effective in the second half of the prior year. The decline in income from mortgage banking activities is the result of the rising interest rate environment, which continues to dampen home sales and refinancing activity. These decreases in non-interest income year-over-year were partially offset by a $0.8 million increase in BOLI mortality-related income.
Non-interest expense increased 8% to $207.9 million for the nine months ended September 30, 2023, compared to $192.9 million for 2022. Current year expense included pension settlement expense of $8.2 million and severance expense of $1.9 million, while the prior year included contingent earn-out expense associated with the 2020 acquisition of Rembert Pendleton Jackson of $1.2 million and merger, acquisition and disposal expense of $1.1 million. Excluding these items, non-interest expense increased by $7.2 million or 4% in the current year over the prior year. The drivers of the increase in non-interest expense were a $5.8 million increase in professional fees, a $3.5 million increase in FDIC expense, and a $1.4 million increase in software amortization expense. Excluding the pension settlement expense, total salaries and benefits expense declined by $3.5 million from the prior year period. Year-over-year increases in both professional fees and software amortization expense were mainly associated with the Company's investments in technology and software projects. The increase in FDIC insurance expense was a result of the two basis points increase in the assessment rate for all banks that became effective in 2023.
For the nine months ended September 30, 2023, the GAAP efficiency ratio was 64.29% compared to 49.08% for the same period in 2022. The non-GAAP efficiency ratio for the current year was 59.42% compared to the 49.09% for the prior year. The growth in the current year’s non-GAAP efficiency ratio compared to the prior year, indicating a decline in efficiency, was the result of the 14% decrease in non-GAAP revenue combined with the 4% 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, investment securities gains/(losses), merger, acquisition and disposal expense, gain on disposal of assets, pension settlement expense, severance expense and contingent payment expense, 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 amortization of intangible assets, pension settlement expense, investment securities gains/(losses) and other non-recurring or extraordinary items, on a net of tax basis.
- Pre-tax pre-provision net income excludes income tax expense and the provision (credit) for credit losses.
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 that 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 833.470.1428. Please use the following access code: 724249. 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 7, 2023. A replay of the teleconference will be available through the same time period by calling 866.813.9403 under conference call number 896518.
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, Virginia, and Washington, D.C. Through its subsidiaries, Rembert Pendleton Jackson, and West Financial Services, Inc., Sandy Spring Bank also offers a comprehensive menu of wealth management services.
For additional information or questions, please contact:
Daniel J. Schrider, Chair, 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
Senior Vice President
301.570.8331
jschell@sandyspringbank.com
Forward-Looking Statements
Sandy Spring Bancorp’s forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in our quarterly and annual reports and the following: changes in general business and economic conditions nationally or in the markets that we serve; changes in consumer and business confidence, investor sentiment, or consumer spending or savings behavior; changes in the level of inflation; changes in the demand for loans, deposits and other financial services that we provide; the possibility that future credit losses may be higher than currently expected; the impact of the interest rate environment on our business, financial condition and results of operations; the impact of compliance with changes in laws, regulations and regulatory interpretations, including changes in income taxes; changes in credit ratings assigned to us or our subsidiaries; the ability to realize benefits and cost savings from, and limit any unexpected liabilities associated with, any business combinations; competitive pressures among financial services companies; the ability to attract, develop and retain qualified employees; our ability to maintain the security of our data processing and information technology systems; the impact of changes in accounting policies, including the introduction of new accounting standards; the impact of judicial or regulatory proceedings; the impact of fiscal and governmental policies of the United States federal government; the impact of health emergencies, epidemics or pandemics; the effects of climate change; and the impact of natural disasters, extreme weather events, military conflict, terrorism or other geopolitical events. Sandy Spring Bancorp provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2022, 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.