Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income for the fourth quarter of 2018 of $25.6 million ($0.72 per diluted share) compared to net income of $8.3 million ($0.34 per diluted share) for the fourth quarter of 2017 and net income of $29.2 million ($0.82 per diluted share) for the third quarter of 2018. The previous quarter’s pre-tax results included $2.0 million of recovered interest and $0.6 million in merger expenses. The third quarter’s net income excluding the after-tax impact of these items would have been $28.2 million or $0.79 per diluted share. The prior year’s fourth quarter results included $1.8 million in post-tax merger expenses and $5.6 million in additional income tax expense from the revaluation of the deferred tax assets as a result of the reduction of the corporate tax rate under the Tax Cuts and Jobs Act that became effective at the end of 2017. The combined impact of those items in the prior year’s fourth quarter resulted in a reduction to quarterly earnings per share of approximately $0.30 per share.
Net income for the full year 2018 was a record $100.9 million ($2.82 per diluted share). The results for 2018 include the effect of merger expenses associated with the acquisition of WashingtonFirst Bankshares (“WashingtonFirst”) totaling $11.8 million and $2.4 million in recovered interest income from previously acquired credit impaired loans. The additional merger expenses, net of the interest recoveries, resulted in an after tax reduction to earnings per share of approximately $0.19 per share for full-year 2018. Net income for 2017, which includes the additional income tax expense and merger expenses, was $53.2 million ($2.20 per share). These items reduced the prior year’s earnings per share by approximately $0.33 per share.
“Last year was a banner year for our organization,” said Daniel J. Schrider, President and Chief Executive Officer. “In 2018 we successfully completed the acquisition of WashingtonFirst, expanded our presence throughout Greater Washington, and marked our 150th anniversary. And, we achieved solid core growth in a competitive marketplace. We are well positioned for 2019.”
The results of operations from the January 1, 2018, acquisition of WashingtonFirst Bankshares are included in the Company’s consolidated results of operations for 2018. At the acquisition date, WashingtonFirst had assets of $2.1 billion, loans of $1.7 billion and deposits of $1.6 billion. Cost savings as a result of the synergies from the combination of the two institutions will continue to be realized into the first half of 2019.
Fourth Quarter Highlights
- Post-acquisition loan growth momentum remained strong during the quarter. Compared to the post-acquisition combined portfolio at the beginning of 2018, the loan portfolio has experienced 9% growth. Overall, total loans increased 52% compared to the fourth quarter of 2017 as a result of strong organic growth and the WashingtonFirst acquisition.
- The bank achieved 6% post-acquisition growth in total deposits in a competitive marketplace and a dynamic interest rate environment.
- The net interest margin for the fourth quarter of 2018 was 3.57% compared to 3.57% for the fourth quarter of 2017 and 3.71% for the third quarter of 2018. Excluding the recovered interest on an acquired credit impaired loan the net interest margin would have been 3.60% for the third quarter of 2018.
- Fourth quarter results reflected an annualized return on average assets of 1.25% and annualized return on average equity of 9.70%. The fourth quarter of 2017 results, which included the impact of the pre-tax merger expenses in addition to the income tax expense recognized as a result of the Tax Cuts and Jobs Act passed at the end of 2017, reflected a return on average assets of 0.61% and a return on average equity of 5.82%.
- The Non-GAAP efficiency ratio was 51.78% for the current quarter compared to 55.69% for the fourth quarter of 2017 and 49.27% for the third quarter of 2018. The efficiency ratio for the third quarter of 2018, excluding the previously mentioned interest recoveries, was 50.48%.
Review of Balance Sheet and Credit Quality
At December 31, 2018, total assets amounted to $8.2 billion compared to $5.4 billion at December 31, 2017. This increase was primarily the result of the acquisition of WashingtonFirst’s $2.1 billion of assets. Total loans at December 31, 2018, were $6.6 billion compared to $4.3 billion at December 31, 2017. Post-acquisition asset growth has been primarily the result of net loan growth in 2018.
Tangible common equity totaled $728 million at December 31, 2018, compared to $484 million at December 31, 2017. At December 31, 2018, the ratio of tangible common equity to tangible assets increased to 9.23% compared to 9.04% at December 31, 2017. The initial impact on tangible common equity of the growth in intangible assets associated with the WashingtonFirst acquisition has been substantially offset during 2018 by increased net earnings. The Company had a total risk-based capital ratio of 12.27%, a common equity tier 1 risk-based capital ratio of 10.91%, a tier 1 risk-based capital ratio of 11.07% and a tier 1 leverage ratio of 9.51% at December 31, 2018.
The ratio of non-performing loans to total loans decreased to 0.55% at December 31, 2018, compared to 0.68% at December 31, 2017, as a result of the growth in the loan portfolio. Non-performing loans totaled $36.0 million at December 31, 2018, compared to $29.3 million at December 31, 2017, and $33.3 million at September 30, 2018. Non-performing loans include accruing loans 90 days or more past due and restructured loans, but exclude non-performing loans acquired in the WashingtonFirst acquisition.
Net loan charge-offs/recoveries were not significant for the fourth quarter of 2018 or the fourth quarter of 2017. The allowance for loan losses represented 0.81% of outstanding loans and 149% of non-performing loans at December 31, 2018, compared to 1.05% of outstanding loans and 154% of non-performing loans at December 31, 2017. The decline in the ratio of the allowance for loan losses to outstanding loans ratio is the result of the accounting for credit losses on the loans acquired in the WashingtonFirst acquisition, as any incurred credit losses have been embedded in the determination of the fair values of those loans.
Income Statement Review
For the fourth quarter of 2018, net interest income increased 52% to $66.1 million compared to $43.5 million for the fourth quarter of 2017 as average loans increased 52% primarily as a result of the WashingtonFirst acquisition and, to a lesser extent, the Company’s organic loan growth. The net interest margin for the current quarter was 3.57% compared to the net interest margin for the fourth quarter of 2017 of 3.57%. Amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the acquisition had a 12 basis point positive effect on net interest margin for the current period. This favorable margin impact was offset by approximately 5 basis points as a result of the impact that the current year’s reduction in the tax rate had on tax-advantaged investments.
The provision for loan losses was $3.4 million for the fourth quarter of 2018, compared to $0.5 million for the fourth quarter of 2017 and $1.9 million for the third quarter of 2018. The increase in the provision reflects the impact of organic loan production and the impact of acquired loans being re-underwritten as they matured under their original lending arrangements during the fourth quarter of 2018.
Non-interest income increased 14% to $14.0 million for the fourth quarter of 2018, compared to $12.3 million for the fourth quarter of 2017. The increase in non-interest income was due primarily to the impact of increased mortgage banking activities, income from wealth management activities and credit related fees.
Non-interest expenses increased 22% to $42.7 million for the fourth quarter of 2018, compared to $35.1 million in the fourth quarter of 2017. The prior year’s quarter included $2.9 million in merger expenses. Excluding these expenses, non-interest expenses increased 33% compared to fourth quarter of 2017 due to increased compensation and benefit costs, occupancy and other operational expenses as a result of the acquisition. The non-GAAP efficiency ratio improved to 51.78% for the fourth quarter of 2018, compared to 55.69% for the fourth quarter of 2017, as a result of the growth in net interest income.
Net interest income for the year ended 2018 increased 54%, compared to 2017, due to the combination of the acquisition and organic loan growth. For the year ended December 31, 2018, the net interest margin was 3.60% compared to 3.55% for the prior year. Net interest income for the year ended December 31, 2018 includes $2.4 million in recovered interest income on acquired credit impaired loans. This amount compares to interest recoveries of $1.1 million for 2017. Excluding these recoveries, the net interest margin would have been 3.58% for the year ended December 31, 2018 compared to 3.53% for the year ended December 31, 2017. The amortization of the fair value adjustments is estimated to be 13 basis points on an annual basis. This favorable margin effect was partially offset by the impact that the current year’s reduction in the tax rate had on the tax-advantaged securities in the investment portfolio, which adversely affected the margin by 5 basis points.
The provision for loan losses was $9.0 million for the year ended December 31, 2018, compared to $3.0 million for 2017. The increase in the provision reflects the organic growth in the loan portfolio year over year in addition to the impact of acquired loans being re-underwritten as they reached maturity under their original lending arrangements and cease to be accounted for as acquired loans.
Non-interest income was $61.0 million for 2018, compared to $51.2 million for 2017. The year ended December 31, 2018, included gains of $0.2 million on sales of investment securities compared to $1.3 million in 2017. Excluding these gains, non-interest income increased 22% compared to the prior year period primarily due to increases in mortgage banking activities, wealth management income and BOLI insurance mortality proceeds. Mortgage lending operations acquired as part of the WashingtonFirst transaction has resulted in significant growth in mortgage banking income for the year ended December 31, 2018.
Non-interest expenses increased 39% to $179.8 million for the year ended December 31, 2018, compared to $129.1 million for the prior year period. Excluding merger expense from both years in addition to the prior year’s prepayment penalties on the early pay-off of high rate FHLB advances, the year-over-year increase in non-interest expense was 36%. The majority of the increase was in compensation and benefit costs, occupancy costs and other operational expenses as a result of the acquisition of WashingtonFirst. The non-GAAP efficiency ratio improved to 50.87% for 2018 compared to 54.59% for 2017 as a direct result of the growth in net interest income. Excluding the interest recoveries the non-GAAP efficiency ratio for 2018 was 51.24% compared to 55.34% for 2017.
Explanation of Non-GAAP Financial Measures
Reported amounts are presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s management uses supplemental non-GAAP financial measures in its analysis of the Company’s performance. These non-GAAP financial measures include: reported net income excluding intangible asset amortization, merger related expenses and the loss on the FHLB redemption from non-interest expense; non-interest income excluding securities gains (losses); and tax-equivalent net interest income, which adjusts the interest earned on tax-advantaged loans and tax-exempt investment securities to an amount comparable to interest subject to normal income taxes. Because the adjustments made to derive non-GAAP financial measures can vary from period to period, the Company’s management believes that the non-GAAP financial measures are useful in comparing 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. 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 Non-GAAP Reconciliation table included with this release.
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 at AR. Participants may call 1-866-235-9910. 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) January 31, 2019. A replay of the teleconference will be available through the same time period by calling 1-877-344-7529 under conference call number 10127438.
About Sandy Spring Bancorp, Inc.
Sandy Spring Bancorp, Inc., headquartered in Olney, Maryland, is the holding company for Sandy Spring Bank. Independent and community-oriented, Sandy Spring Bank 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, 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 makes forward-looking statements in this news release and in the conference call regarding this news release. These forward-looking statements may include: statements of goals, intentions, earnings expectations, and other expectations; estimates of risks and of future costs and benefits; assessments of probable loan losses; assessments of market risk; and statements of the ability to achieve financial and other goals.
Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. Sandy Spring Bancorp does not assume any duty and does not undertake to update its forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that Sandy Spring Bancorp anticipated in its forward-looking statements and future results could differ materially from historical performance.
Sandy Spring Bancorp’s forward-looking statements are subject to the following principal risks and uncertainties: 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, 2017, 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.