Loan Growth Remains Strong and Dividends Increase to Record Levels
OLNEY, MARYLAND, July 19, 2018 — Today, Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income for the second quarter of 2018 of $24.4 million ($0.68 per diluted share) compared to net income of $14.7 million ($0.61 per diluted share) for the second quarter of 2017 and net income of $21.7 million ($0.61 per diluted share) for the first quarter of 2018. The current quarter’s results included $2.2 million in merger expenses. Exclusive of the after-tax impact of these expenses, earnings per diluted share would have been approximately $0.73 per share.
The results of operations from the January 1, 2018, acquisition of WashingtonFirst Bankshares (“WashingtonFirst”) are included in the Company’s consolidated results of operations for the first six months of 2018. The current period results reflect increased levels of average and period end balances, income and expense, versus comparable periods of 2017. WashingtonFirst had assets of $2.1 billion, loans of $1.7 billion and deposits of $1.6 billion at the acquisition date. The growth in interest income and expense from the prior year is the result of the growth in the balance sheet. As a result of the synergies from the combination of the two institutions, additional operating cost savings are expected to be realized throughout 2018.
“Our robust loan growth continues to provide the Company with momentum. Strong capital levels and solid results generated by our core operating performance have enabled us to increase dividends to record levels,” said Daniel J. Schrider, President and Chief Executive Officer. “We continue to prove our ability to succeed in a highly competitive market, and we are well positioned to serve the growing needs of both individual clients and businesses of all sizes.”
Second Quarter Highlights:
- Total loans increased 51% compared to the second quarter of 2017, primarily as a result of the WashingtonFirst acquisition. Loan growth momentum remained strong as the loan portfolio grew 3% compared to the first quarter of 2018.
- The net interest margin was 3.56% for the second quarter of 2018, compared to 3.60% for the second quarter of 2017 and 3.58% for the first quarter of 2018. The prior year’s margin was positively impacted by an interest income recovery of $0.7 million. Exclusive of this non-core item, the margin would have been 3.54%.
- Second quarter results reflected an annualized return on average assets of 1.23% and annualized return on average equity of 9.66% as compared to 1.14% and 10.80% respectively for the second quarter of 2017. Exclusive of merger costs on an after-tax basis, the return on average assets and return on average equity would have been 1.32% and 10.32%, respectively.
- Pre-tax merger expenses recognized in the current quarter declined to $2.2 million compared to $9.0 million in the prior quarter.
- The effective tax rate for the current quarter was 23.4% compared to 32.1% for the same quarter of the prior year and 23.6% for the prior quarter.
- The Non-GAAP efficiency ratio was 52.98% for the current quarter as compared to 54.10% for the second quarter of 2017 and 49.54% for the first quarter of 2018.
- The quarterly dividend increased 8% to $0.28 per share in the second quarter of 2018 from $0.26 per share in previous quarters.
Review of Balance Sheet and Credit Quality
At June 30, 2018, total assets amounted to $8.2 billion compared to $5.3 billion at June 30, 2017. The increase was primarily as a result of the WashingtonFirst acquisition. Total loans at June 30, 2018, were $6.3 billion compared to $4.1 billion at June 30, 2017. Loan production continues to provide the source for asset growth as organic loans grew $256 million in the first six months of 2018. This loan growth is net of the sale of $60 million in loans out of the mortgage portfolio during the first quarter.
Tangible common equity totaled $690 million at June 30, 2018, compared to $472 million at June 30, 2017. The growth in intangible assets associated with the WashingtonFirst acquisition resulted in a decline in the ratio of tangible common equity to tangible assets to 8.85% at June 30, 2018, as compared to 9.10% at June 30, 2017. The Company had a total risk-based capital ratio of 12.19%, a common equity tier 1 risk-based capital ratio of 10.85%, a tier 1 risk-based capital ratio of 11.01% and a tier 1 leverage ratio of 9.27% at June 30, 2018.
The ratio of non-performing loans to total loans decreased to 0.46% at June 30, 2018, compared to 0.78% at June 30, 2017, as a result of the growth in the loan portfolio. Non-performing loans totaled $28.8 million at June 30, 2018, compared to $32.2 million at June 30, 2017, and $29.4 million at March 31, 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.
Loan charge-offs, net of recoveries, totaled $0.2 million for the second quarter of 2018 compared to $0.1 million for the second quarter of 2017. The allowance for loan losses represented 0.78% of outstanding loans and 168% of non-performing loans at June 30, 2018, compared to 1.09% of outstanding loans and 140% of non-performing loans at June 30, 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 second quarter of 2018 net interest income increased 51% to $63.8 million compared to $42.3 million for the second quarter of 2017 as average loans from quarter to quarter increased 51% primarily as a result of the WashingtonFirst acquisition and, to a lesser extent, the Company’s organic loan growth during the period. The net interest margin for the current quarter was 3.56% compared to the net interest margin for the second quarter of 2017 of 3.60%. The margin for the prior year’s quarter included $0.7 million from the full payoff of a previously acquired credit impaired loan. Exclusive of the recovered interest income, the net interest margin would have been 3.54% based on an adjusted net interest income of $41.6 million. 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 recent reduction in the tax rate had on tax-advantaged investments.
The provision for loan losses was $1.7 million for the second quarter of 2018, compared to $1.3 million for the second quarter of 2017 and $2.0 million for the first quarter of 2018. The increase in the provision reflects the impact of organic loan production and the impact of acquired loans being refinanced as they reach maturity under the original lending arrangements during the second quarter of 2018.
Non-interest income increased to $14.9 million for the second quarter of 2018, compared to $13.6 million for the second quarter of 2017. The second quarter of 2017 included gains of $1.3 million on sales of investment securities. Excluding the gains, non-interest income increased 21% due primarily to the impact of increased mortgage banking activities and, to a lesser extent, income from wealth management activities and service charges on deposit accounts.
Non-interest expenses increased 37% to $45.1 million for the second quarter of 2018, compared to $32.9 million in the second quarter of 2017. The current quarter included $2.2 million in merger expenses and the second quarter of 2017 included $1.3 million in penalties on the early payoff of high-rate FHLB advances and $1.0 million in merger expenses. Excluding these transactions, non-interest expenses increased 40% compared to the second quarter of 2017 due to increased compensation and benefit costs and facility and operational expenses. Merger expenses for the current quarter include the costs related to the consolidation of six redundant branches. The non-GAAP efficiency ratio improved to 52.98% for the second quarter of 2018, compared to 54.10% for the second quarter of 2017, as a result of the growth in net interest income.
Net interest income for the first six months of 2018 increased 53%, compared to the first six months of 2017, due the combination of the acquisition and organic loan growth. During the first six months of 2018, the net interest margin was 3.57% compared to 3.56% for the prior year period. The amortization of the fair value adjustments is estimated to be 12 basis points on an annual basis. This favorable margin effect was partially offset by the impact that the recently enacted tax rate reduction had on the tax-advantaged securities in the investment portfolio which adversely affected the margin by 5 basis points. Net interest income for the first six months of 2017 included the previously mentioned $0.7 million recovery of interest income. Exclusive of this recovery, the net interest margin would have been 3.54%.
The provision for loan losses was $3.7 million for the first six months of 2018, compared to $1.5 million for the first six months of 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 refinanced as they reach maturity under the original lending arrangements and ceased to be accounted for as acquired loans.
Non-interest income was $32.0 million for the first six months of 2018, compared to $26.2 million for the first six months of 2017. The first six months of 2017 included gains of $1.3 million on sales of investment securities. Excluding these gains, non-interest income increased 28% compared to the prior year period primarily due to increases in mortgage banking activities, wealth management income and BOLI insurance proceeds. Origination volume associated with the mortgage lending operations acquired as part of the WashingtonFirst acquisition contributed to significant growth in mortgage banking income for the first six months of 2018.
Non-interest expenses increased 51% to $94.7 million for the first six months of 2018, compared to $62.8 million for the prior year period. The increase in non-interest expense excluding merger expense was 35%. The majority of the increase was in compensation, facility costs and other operational expenses resulting from increased size of the Company. The non-GAAP efficiency ratio improved to 51.25% for the first six months of 2018 compared to 54.44% for the first six months of 2017 as a direct result of the growth in net interest income.
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 first 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 www.sandyspringbank.com. Participants may call 1-800-860-2442. 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 2, 2018. A replay of the teleconference will be available through the same time period by calling 1-877-344-7529 under conference call number 10121776.
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