Sandy Spring Bancorp Reports Record Quarterly Earnings
Company Demonstrates Strong Performance and Momentum Across the Organization
OLNEY, MARYLAND, October 18, 2018 — Today, Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, reported net income for the third quarter of 2018 of $29.2 million ($0.82 per diluted share) compared to net income of $15.1 million ($0.62 per diluted share) for the third quarter of 2017 and net income of $24.4 million ($0.68 per diluted share) for the second quarter of 2018. The current quarter’s results included $2.0 million of recovered interest income from a previously acquired credit impaired loan and $0.6 million in merger expenses. Excluding the after-tax impact of these items, the net income for the third quarter would have been $28.2 million or $0.79 per diluted 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 nine months of 2018. The current period results reflect increased levels of average and period end balances, income and expense, versus comparable periods in 2017. At the acquisition date, WashingtonFirst had assets of $2.1 billion, loans of $1.7 billion and deposits of $1.6 billion. The growth in interest income and expense from the prior year is the result of the growth in the balance sheet.The cost savings initiatives as a result of the synergies from the combination of the two institutions will continue to be realized into the first half of 2019.
“As the largest locally-headquartered community bank, our success is evident in our record quarterly earnings and growth momentum,” said Daniel J. Schrider, President and Chief Executive Officer. “We are thriving in a highly competitive market and among our peer group. To continue to be a high-performing company, we will remain grounded in our core strengths: effectively funding the bank by deepening our client relationships and enhancing our funding strategies, driving robust loan growth, and managing expenses. All of these performance drivers have been key to this quarter’s strong results.”
Third Quarter Highlights:
- Total loans increased 52% compared to the third quarter of 2017, primarily as a result of the WashingtonFirst acquisition. 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 6% growth.
- Total deposits have experienced post-acquisition growth of 6%, primarily in noninterest-bearing demand deposit accounts, which have grown 13% subsequent to the acquisition.
- The net interest margin for the third quarter of 2018 was 3.71% compared to 3.54% for the third quarter of 2017 and 3.56% for the second quarter of 2018. The current quarter’s margin was positively impacted by an interest income recovery of $2.0 million. The net interest margin for the current quarter was 3.60% after excluding the interest income recovery.
- Third quarter results reflected an annualized return on average assets of 1.45% and annualized return on average equity of 11.26% as compared to 1.13% and 10.74% respectively for the third quarter of 2017. Exclusive of merger costs and the interest income recovery on an after-tax basis, the return on average assets and return on average equity for the current quarter would have been 1.40% and 10.85%, respectively.
- Pre-tax merger expenses recognized in the current quarter declined to $0.6 million compared to $2.2 million in the prior quarter.
- The Non-GAAP efficiency ratio was 49.27% for the current quarter compared to 53.76% for the third quarter of 2017 and 52.98% for the second quarter of 2018. Excluding the previously mentioned interest recovery, the Non-GAAP efficiency ratio for the current quarter was 50.48%.
Review of Balance Sheet and Credit Quality
At September 30, 2018, total assets amounted to $8.0 billion compared to $5.3 billion at September 30, 2017. This increase was primarily the result of the acquisition of WashingtonFirst’s $2.1 billion of assets. Total loans at September 30, 2018, were $6.4 billion compared to $4.2 billion at September 30, 2017. Post-acquisition asset growth has been primarily the result of net loan growth in the first nine months of 2018.
Tangible common equity totaled $711 million at September 30, 2018, compared to $482 million at September 30, 2017. At September 30, 2018, the ratio of tangible common equity to tangible assets has increased to 9.26% compared to 9.18% at September 30, 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 12.38%, a common equity tier 1 risk-based capital ratio of 11.02%, a tier 1 risk-based capital ratio of 11.18% and a tier 1 leverage ratio of 9.46% at September 30, 2018.
The ratio of non-performing loans to total loans decreased to 0.52% at September 30, 2018, compared to 0.72% at September 30, 2017, as a result of the growth in the loan portfolio. Non-performing loans totaled $33.3 million at September 30, 2018, compared to $30.2 million at September 30, 2017, and $28.8 million at June 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 third quarter of 2018 compared to $1.1 million for the third quarter of 2017. The allowance for loan losses represented 0.79% of outstanding loans and 151% of non-performing loans at September 30, 2018, compared to 1.07% of outstanding loans and 149% of non-performing loans at September 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 third quarter of 2018 net interest income increased 58% to $67.6 million compared to $42.7 million for the third 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. The net interest margin for the current quarter was 3.71% compared to the net interest margin for the third quarter of 2017 of 3.54%. The current quarter’s margin included $2.0 million in recovered interest income from a previously acquired credit impaired loan compared to $0.7 million in recovered interest for the prior year’s quarter. Excluding these amounts, the net interest margin for the current quarter was 3.60% compared to the prior year’s 3.54%. Amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the acquisition had an 18 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 $1.9 million for the third quarter of 2018, compared to $0.9 million for the third quarter of 2017 and $1.7 million for the second 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 matured under the original lending arrangements during the third quarter of 2018.
Non-interest income increased to $15.0 million or 18% for the third quarter of 2018, compared to $12.7 million for the third quarter of 2017. The increase in non-interest income was due primarily to the impact of increased mortgage banking activities and, to a lesser extent, income from wealth management activities and bank card fees.
Non-interest expenses increased 36% to $42.4 million for the third quarter of 2018, compared to $31.2 million in the third quarter of 2017. The current quarter included $0.6 million in merger expenses compared to $0.3 million for the third quarter of 2017. Excluding these expenses, non-interest expenses increased 36% compared to the third quarter of 2017 due to increased compensation and benefit costs and facility and other operational expenses as a result of the acquisition. The non-GAAP efficiency ratio improved to 49.27% for the third quarter of 2018, compared to 53.76% for the third quarter of 2017, as a result of the growth in net interest income. The Non-GAAP efficiency ratio for the current quarter was 50.48% after excluding the interest income recovery.
Net interest income for the first nine months of 2018 increased 55%, compared to the first nine months of 2017, due to the combination of the acquisition and organic loan growth. During the first nine months of 2018, the net interest margin was 3.62% compared to 3.55% for the prior year period. Net interest income for the first nine months of 2018 includes the previously mentioned $2.0 million of recovered interest income. This compares to the interest recovery of $0.7 million for the same period of 2017. Excluding these recoveries, the net interest margin would have been 3.59% compared to 3.54% for the nine months ended 2018 and 2017, respectively. The amortization of the fair value adjustments is estimated to be 14 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.
The provision for loan losses was $5.6 million for the first nine months of 2018, compared to $2.5 million for the first nine 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 cease to be accounted for as acquired loans.
Non-interest income was $47.0 million for the first nine months of 2018, compared to $38.9 million for the first nine months of 2017. The first nine months of 2018 included gains of $0.1 million on sales of investment securities compared to $1.3 million in 2017. Excluding these gains, non-interest income increased 24% 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 first nine months of 2018.
Non-interest expenses increased 46% to $137.1 million for the first nine months of 2018, compared to $94.0 million for the prior year period. Excluding merger expense from both years in addition to the prior year’s loss on the FHLB redemption, the year-over-year increase in non-interest expense was 37%. The majority of the increase was in compensation, facility costs and other operational expenses as a result of the acquisition of WashingtonFirst. The non-GAAP efficiency ratio improved to 50.57% for the first nine months of 2018 compared to 54.21% for the first nine months of 2017 as a direct result of the growth in net interest income. The Non-GAAP efficiency ratio for the current year-to-date was 50.99% excluding the interest income recovery.
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 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 at www.sandyspringbank.com. 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) November 1, 2018. A replay of the teleconference will be available through the same time period by calling 1-877-344-7529 under conference call number 10124406.
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.