Sandy Spring Bancorp, Inc. (NASDAQ:SASR), the bank holding company for Sandy Spring Bank, reported solid financial results for the second quarter of 2024, with net income of $22.8 million, or $0.51 per diluted common share. This compares to net income of $20.4 million, or $0.45 per diluted common share, in the first quarter of 2024 and $24.7 million, or $0.55 per diluted common share, in the second quarter of 2023.
For the full year 2023, the company reported annual net income of $122.8 million on revenue of $704.6 million. The company generated annual operating cash flow of $137.8 million and annual free cash flow of $123.8 million.
Core earnings for the second quarter of 2024 were $24.4 million, or $0.54 per diluted common share, compared to $21.9 million, or $0.49 per diluted common share, in the previous quarter and $27.1 million, or $0.60 per diluted common share, in the second quarter of 2023. The increase in net income and core earnings compared to the previous quarter was driven by higher noninterest income and net interest income, which improved the net interest margin for the first time in several quarters. Additionally, the second quarter results benefited from a lower provision for credit losses, which declined to $1 million from $2.4 million in the first quarter.
Business Overview
Sandy Spring Bancorp is an independent and community-oriented bank that offers a broad range of commercial banking, retail banking, mortgage, and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, West Financial Services, Inc. and SSB Wealth Management, Inc. (d/b/a Rembert Pendleton Jackson), the company also offers wealth management services.The company's fundamental lending business is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. Sandy Spring Bancorp's loan portfolio is subject to varying degrees of credit risk, with commercial lending generally having the highest risk and residential mortgage and home equity loans having the lowest. To manage this risk, the company has a credit process in place to ensure that credit standards are maintained, accompanied by various oversight and review procedures.
Financial Performance
Total assets increased to $14 billion at the end of the second quarter, compared to $13.9 billion at the end of the first quarter. Total loans grew by $119.6 million, or 1%, to $11.5 billion, with commercial business loans and lines increasing by $91.9 million, or 6%. The company expects funded loan production to continue in the range of $200 million to $250 million per quarter for the remainder of 2024, with commercial loan growth of 1% to 2% per quarter.Deposits increased by $113 million, or 1%, to $11.3 billion, with non-interest-bearing deposits growing by $113.5 million, or 4%, driven by commercial and small business checking accounts. Interest-bearing deposits were relatively unchanged, with money market accounts growing by $167.6 million, or 6%, and savings accounts increasing by $99 million, or 6%, offset by a $172.5 million, or 7%, reduction in time deposits, including a $154.7 million decrease in broker time deposits. Excluding broker deposits, core deposits increased by $271.2 million, or 3%, compared to the prior quarter, representing 94% of total deposits.
The net interest margin improved to 2.46% in the second quarter, compared to 2.41% in the first quarter, driven by a two-basis-point increase in the yield on interest-earning assets and a three-basis-point decline in the rate paid on interest-bearing liabilities. The company expects the net interest margin to continue expanding throughout the remainder of 2024, with potential increases of two to four basis points per quarter, absent any action by the Federal Reserve. If the Federal Reserve cuts interest rates later this year, as the company anticipates, the margin expansion could accelerate during 2025, potentially reaching a low 3% by the end of that year.
Non-interest income increased by 7% on a linked-quarter basis and 14% compared to the prior year quarter, driven by a $700,000 increase in bank-owned life insurance (BOLI) income and a $500,000 increase in wealth management income due to growth in assets under management. Mortgage banking income also increased by 18% on a linked-quarter basis. The company expects mortgage banking revenue to be in the range of $1 million to $1.5 million in the third quarter of 2024.
Non-interest expenses were flat compared to the linked quarter at $68.1 million. The company anticipates a slight increase in expenses in the second half of the year, with quarterly expenses expected to range between $68 million and $70 million, partly due to investments in building out the company's new SBA lending program.
Credit Quality and Capital Strength
The level of non-performing loans to total loans increased to 81 basis points at the end of the second quarter, compared to 74 basis points at the end of the first quarter, primarily due to a few loans within the commercial owner-occupied real estate segment being placed on non-accrual status. The allowance for credit losses was $125.9 million, or 1.1% of outstanding loans and 135% of non-performing loans, at the end of the second quarter, compared to $123.1 million, or 1.08% of outstanding loans and 146% of non-performing loans, at the end of the first quarter.The company's capital ratios remain well in excess of regulatory minimums, with a total risk-based capital ratio of 15.49%, a common equity Tier 1 risk-based capital ratio of 11.28%, a Tier 1 risk-based capital ratio of 11.28%, and a Tier 1 leverage ratio of 9.7% at the end of the second quarter. These ratios improved from the previous quarter due to a decline in risk-weighted assets, primarily related to the reclassification of consumer home equity lines of credit.
Risks and Outlook
While the company's geographic footprint in the vibrant Washington, D.C. metro area provides ample growth opportunities, it also exposes the company to risks associated with the local economy and real estate market. The company's commercial real estate portfolio, which accounts for a significant portion of its loan book, could be vulnerable to any downturn in the regional economy or changes in interest rates.The company's management team remains focused on improving profitability, bolstering core funding, managing expenses, and enhancing credit portfolio management, while also reducing its commercial real estate exposure. The new SBA lending program is one example of the company's efforts to expand its capabilities and increase market share.
For the remainder of 2024, the company expects funded loan production to continue in the range of $200 million to $250 million per quarter, with commercial loan growth of 1% to 2% per quarter. The company also anticipates that the net interest margin will continue to expand, with potential increases of two to four basis points per quarter, absent any action by the Federal Reserve. If the Federal Reserve cuts interest rates later this year, as the company expects, the margin expansion could accelerate during 2025, potentially reaching a low 3% by the end of that year.