2017 Net Income Reached Record Levels While Also Recognizing the Impact of Recently Enacted Tax Legislation in the Fourth Quarter
OLNEY, MARYLAND, January 18, 2018 — Sandy Spring Bancorp, Inc., (Nasdaq-SASR), the parent company of Sandy Spring Bank, today reported net income for the fourth quarter of 2017 of $8.3 million ($0.34 per diluted share) compared to net income of $13.3 million ($0.55 per diluted share) for the fourth quarter of 2016 and net income of $15.1 million ($0.62 per diluted share) for the third quarter of 2017. The current quarter’s results included $5.6 million in additional income tax expense from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the recently enacted Tax Cuts and Jobs Act, as well as $1.8 million in post-tax merger expenses. The combined impact of these items resulted in a reduction to quarterly earnings per share of approximately $0.30 per share.
Net income for the full year 2017 was a record $53.2 million ($2.20 per diluted share) after the inclusion of the additional tax expense and the expenses associated with the acquisition of WashingtonFirst Bankshares. The additional income tax and merger expenses, net of tax, resulted in a reduction of earnings per share of approximately $0.34 per share for full-year-2017.
“This has been an outstanding year in terms of core performance and our ability to grow our franchise organically. Even in light of the inclusion of the increased tax expense and merger costs, net income for 2017 reached record levels. Core earnings for the fourth quarter continued to positively reflect the effects of loan and deposit growth that we have been experiencing. With the acquisition of WashingtonFirst Bankshares, which became effective on January 1, 2018, we enter the year as one of the premier banks in the region, and with the same steadfast commitment to delivering personalized service to our clients and serving our communities. It’s this commitment that has helped us grow to better serve our clients, employees, and shareholders. We continue to be encouraged by the current economic environment and the prospects for our ongoing growth,” said Daniel J. Schrider, President and Chief Executive Officer.
Fourth Quarter Highlights:
- Total loans increased 10% compared to the fourth quarter of 2016 and 3% compared to the third quarter of 2017. The year-over-year increase was driven primarily by year-over-year growth of 11% in the commercial loan portfolio.
- Total deposits grew 11% from the prior year quarter.
- The net interest margin was 3.57% for the fourth quarter of 2017, compared to 3.52% for the fourth quarter of 2016 and 3.54% for the third quarter of 2017. Net interest income from the fourth quarter of 2017 included $0.4 million recovery of interest income from a previously charged-off loan. Exclusive of this item, the quarter’s margin would have been 3.53%.
- Pre-tax merger expenses recognized in the fourth quarter of 2017 totaled $2.9 million.
- The tax rate reduction associated with the recently enacted tax reform legislation caused a revaluation of net deferred tax assets and resulted in $5.6 million of additional income tax expense in the fourth quarter of 2017.
- Pre-tax, pre-provision income increased 14% compared with the fourth quarter of 2016.
- The Non-GAAP efficiency ratio which excludes merger costs was 55.69% for the current quarter as compared to 57.54% for the fourth quarter of 2016 and 53.76% for the third quarter of 2017.
Review of Balance Sheet and Credit Quality
At December 31, 2017, total assets were $5.4 billion, a 7% increase compared to $5.1 billion at December 31, 2016. Loan growth continues to be the driver of asset growth as total loans ended the period at $4.3 billion compared to $3.9 billion at December 31, 2016. The growth in the loan portfolio was funded primarily by an 11% increase in total deposits from December 31, 2016, to December 31, 2017.
Combined noninterest-bearing and interest-bearing checking account balances at December 31, 2017, an important performance driver of multiple-product banking relationships with clients, increased by 10% compared to balances at December 31, 2016.
Tangible common equity totaled $484 million at December 31, 2017, compared to $454 million at December 31, 2016. As a result of asset growth over the preceding 12 months, the ratio of tangible common equity to tangible assets decreased to 9.04% at December 31, 2017, from 9.07% at December 31, 2016. At December 31, 2017, the Company had a total risk-based capital ratio of 11.85%, a common equity tier 1 risk-based capital ratio of 10.84%, a tier 1 risk-based capital ratio of 10.84% and a tier 1 leverage ratio of 9.24%. These ratios reflect the application of the currently applicable authoritative guidance.
The level of non-performing loans to total loans decreased to 0.68% at December 31, 2017, compared to 0.81% at December 31, 2016, as a result of the growth in the loan portfolio and a reduction in non-performing loans. At December 31, 2017, non-performing loans totaled $29.3 million compared to $31.9 million at December 31, 2016, and $30.2 million at September 30, 2017. Non-performing loans include accruing loans 90 days or more past due and restructured loans.
Loan charge-offs, net of recoveries, totaled $0.2 million for the fourth quarter of 2017 compared to $0.4 million for the fourth quarter of 2016. The allowance for loan losses represented 1.05% of outstanding loans and 154% of non-performing loans at December 31, 2017, compared to 1.12% of outstanding loans and 138% of non-performing loans at December 31, 2016. The decline in the allowance to outstanding loans ratio is a reflection of improved credit quality and growth of the loan portfolio over the past year.
Income Statement Review
Net interest income for the fourth quarter of 2017 increased 12% compared to the fourth quarter of 2016 as average loans compared to the prior year quarter increased 10%. The net interest margin improved to 3.57% for the fourth quarter of 2017 compared to 3.52% for the fourth quarter of 2016. Exclusive of the recovered interest income, the net interest margin would have been 3.53%. The maintenance of the current quarter’s margin compared to the prior year’s quarter, exclusive of the recovered interest, reflects the impact of loan growth coupled with rate increases during the year, benefits associated with the execution of funding strategies and higher yields associated with the investment portfolio that offset the increased funding costs for the current quarter compared to the prior year quarter.
The provision for loan losses was $0.5 million for the fourth quarter of 2017 compared to $0.6 million for the fourth quarter of 2016 and $0.9 million for the third quarter of 2017. The relative stability in the provision reflects the improved credit quality of the growing loan portfolio.
Non-interest income remained stable for the fourth quarter of 2017 as compared to the fourth quarter of 2016. Wealth management income increased 10% while deposit service charges and insurance commissions both increased 6% for the fourth quarter compared to the same period of the prior year. These results were offset by a 49% decline in mortgage banking income from the prior year as mortgage loan origination activity declined in the current quarter compared to the prior year quarter.
Non-interest expenses increased 15% to $35.1 million for the fourth quarter of 2017 compared to $30.5 million in the fourth quarter of 2016. The increase in the current quarter compared to the prior year quarter was driven primarily by a $2.9 million in merger related expenses and $0.6 million increase in salary and benefit costs. The non-GAAP efficiency ratio was 55.69% for the fourth quarter of 2017 compared to 57.54% for the fourth quarter of 2016 as a result of the growth in net interest income.
Due to the recently enacted tax legislation that results in a rate reduction in future years, authoritative guidance requires a revaluation of the deferred tax assets in 2017. Accordingly, this revaluation resulted in $5.6 million in additional income tax expense in the fourth quarter of 2017. The impact of the additional tax expense and the post-tax effect of the merger expenses resulted in a $0.30 per share reduction in quarterly earnings per share.
Net interest income for the year ended December 31, 2017, increased 13% compared to 2016 due primarily to an increase in average loans and investments, which was funded primarily by an 11% increase in average deposits. As a result, the net interest margin was 3.55% for 2017 compared to 3.49% for the prior year. Net interest income for 2017 included $1.1 million in interest recoveries. Exclusive of these recoveries the net interest margin would have been 3.53%.
The provision for loan losses was $3.0 million for the year ended December 31, 2017, compared to $5.5 million for 2016 reflecting the effect of improved credit quality of the loan portfolio that offset the impact of the growth of the loan portfolio from the prior year.
Non-interest income was $51.2 million for 2017 compared to $51.0 million for 2016. The year ended December 31, 2017, included gains of $1.3 million on sales of investment securities while the prior year included a $1.2 million gain on the extinguishment of subordinated debentures and $1.9 million in gains on the sales of investment securities. Excluding these gains, non-interest income increased 4% compared to the prior year primarily due to increases in wealth management income, insurance agency commissions and deposit service charges.
Non-interest expenses increased 5% to $129.1 million for the year ended December 31, 2017, compared to $123.1 million for the prior year. Included in 2017 were increases from the prior year of $1.8 million in salaries and benefits, $0.6 million in FDIC insurance as a result of asset growth, and $4.3 million in merger expenses. These increases were partially offset by the decrease in prepayment penalties of $1.9 million for the early payoff of high-rate FHLB advances as compared to the year ended December 31, 2016. Excluding the impact of the FHLB prepayment penalties from the current and prior year’s results and the exclusion of merger expenses for 2017, non-interest expense increased 3%. The non-GAAP efficiency ratio decreased to 54.59% for 2017 compared to 58.66% for 2016 as a direct result of the growth in net interest income.
The additional income tax expense of $5.6 million and merger expenses, net of tax, resulted in a reduction of earnings per share of approximately $0.34 per share for full- year 2017. Pre-tax, pre-provision income, which adjusts for these items, increased 23% from full-year 2016 to full-year 2017 to a record $95.2 million.
Conference Call
The Company’s management will host a conference call to discuss its second 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 at the Web site until 9:00 am (ET) February 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 10115505.
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
1-800-399-5919
Email:
DSchrider@sandyspringbank.com
PMantua@sandyspringbank.com
Website: www.sandyspringbank.com
Media Contact:
Amalia Kastberg
Division Executive, Marketing
Sandy Spring Bank
301-774-8465
akastberg@sandyspringbank.com
Forward-Looking Statements
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, 2016, 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.