<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20649
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission File Number: 0-19065
-------
Sandy Spring Bancorp, Inc.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland, 52-1532952
----------------------- --------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares of common stock outstanding as of July 22, 1994 is
2,126,685 shares.
<PAGE>
SANDY SPRING BANCORP
INDEX
PAGE
- - --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the
Periods Ended June 30, 1994 and 1993. . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for
the Periods Ended June 30, 1994 and 1993. . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 6
PART 11 - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SANDY SPRING BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $21,418 $29,595
Interest-bearing deposits with banks 183 12,076
Federal funds sold 24,889 23,385
Residential mortgage loans held for sale -- 6,979
Investments available-for-sale (at fair value) 169,053 234,964
Investments held-to-maturity - fair value of $157,375 (1994) 159,580 70,125
and $72,032 (1993)
Other equity securities 3,965 3,924
Total Loans 331,169 324,372
Less: Allowance for credit losses (6,220) (6,177)
---------- ----------
Loans, net $324,949 318,195
Premises and equipment, net 14,670 13,914
Accrued interest receivable 5,280 4,631
Other real estate owned 513 1,387
Other assets 3,107 3,290
---------- ----------
TOTAL ASSETS $727,607 $722,465
---------- ----------
---------- ----------
LIABILITIES
Noninterest-bearing deposits $96,248 $99,899
Interest-bearing deposits 539,484 522,157
---------- ----------
Total deposits 635,732 622,056
Short-term borrowings 23,894 27,307
Long-term borrowings 2,193 2,206
Accrued interest, taxes and other liabilities 545 4,505
---------- ----------
TOTAL LIABILITIES 662,364 656,074
STOCKHOLDERS' EQUITY
Common stock - par value $1.00; shares authorized 6,000,000;
shares issued and outstanding 2,216,685 (1994)
and 2,110,244 (1993) 2,127 2,110
Surplus 26,690 26,100
Retained earnings 37,885 35,223
Net unrealized gain (loss) on investments available-for-sale (1,459) 2,958
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 65,243 66,391
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $727,607 $722,465
---------- ----------
---------- ----------
</TABLE>
See notes to Consolidated Financial Statements.
1
<PAGE>
SANDY SPRING BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
1994 1993 1994 1993
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,490 $5,914 $12,844 $11,660
Interest on loans held for sale 15 78 57 142
Interest on deposits with banks 4 66 33 80
Interest and dividends on securities:
Taxable 3,552 3,213 6,734 6,468
Nontaxable 1,036 1,055 2,081 2,096
Interest on federal funds sold 126 173 274 364
-------- -------- -------- --------
TOTAL INTEREST INCOME 11,223 10,499 22,023 20,810
Interest expense:
Interest on deposits 4,361 4,264 8,609 8,499
Interest on short-term borrowings 181 173 355 283
Interest on long-term borrowings 36 5 71 10
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 4,578 4,442 9,035 8,792
-------- -------- -------- --------
NET INTEREST INCOME 6,645 6,057 12,988 12,018
Provision for Credit Losses 10 300 160 600
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 6,635 5,757 12,828 11,418
Non-interest income:
Securities gains 17 122 52 136
Service charges on deposit accounts 579 490 1,123 943
Gains on mortgage sales 9 206 164 479
Other income 457 386 907 702
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 1,062 1,204 2,246 2,260
Non-interest expenses:
Salaries and employee benefits 2,724 2,215 5,618 4,347
Occupancy expense of premises 463 402 911 760
Equipment expenses 362 295 717 583
Other expenses 1,389 1,414 2,664 2,526
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSES 4,938 4,326 9,910 8,216
-------- -------- -------- --------
Income Before Income Taxes 2,759 2,635 5,164 5,462
Income Tax Expense 777 702 1,401 1,452
-------- -------- -------- --------
NET INCOME $1,982 $1,933 $3,763 $4,010
-------- -------- -------- --------
-------- -------- -------- --------
PER SHARE DATA:
Net Income $0.93 $0.94 $1.77 $1.96
Dividends Declared 0.26 0.23 0.52 0.46
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
SANDY SPRING BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1994 1993
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $3,763 $4,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 676 509
Provision for credit losses 160 600
Deferred income taxes (109) (304)
Origination of loans held for sale (8,508) (18,849)
Proceeds from sales of loans held for sale 15,651 20,649
Gains on sales of loans held for sale (164) (479)
Securities gains (52) (18)
Net change in:
Accrued interest receivable (649) 158
Accrued income taxes (106) (821)
Other accrued expenses (951) (981)
Other - net 332 476
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,043 4,950
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks 11,893 (10,009)
Purchases of investment securities -- (35,560)
Purchases of investments held-to-maturity (43,603) --
Origination of investments held for sale -- (13,124)
Purchases of investments available-for-sale (57,817) --
Proceeds from sales of investment available-for-sale 15,096 --
Proceeds from maturities and principal payments of investment securities -- 37,203
Proceeds from maturities of investments held-to-maturity 8,269 --
Proceeds from maturities and principal payments of investments available-for-sale 46,941 --
Proceeds from sales of other real estate owned 1,246 656
Net increase in loans receivable (7,120) (8,778)
Expenditures for premises and equipment (1,376) (932)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (26,471) (30,544)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 15,473 14,852
Net decrease in time and other deposits (1,797) (4,169)
Net increase (decrease) in short-term borrowings (3,413) 13,028
Retirement of long-term borrowings (13) (12)
Proceeds from issuance of common stock 606 478
Dividends paid (1,101) (942)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,755 23,235
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,673) (2,259)
Cash and Cash Equivalents at Beginning of Period 52,980 44,628
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD* $46,307 $42,269
-------- --------
-------- --------
</TABLE>
3
<PAGE>
SANDY SPRING BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1994 1993
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures
Interest payments $8,637 $9,139
Income tax payments $1,632 $2,409
Noncash Investing Activities
Transfers from loans to other real estate owned $323 $0
Transfers from investments available-for sale
to investments held-to-maturity $56,455 ---
Unrealized loss on investments available-for-sale
net of deferred tax effect of $(2,779) $(4,417) ---
<FN>
* Cash and cash equivalents include amounts of "Cash and due from banks" and
"Federal funds sold" on the Consolidated Balance Sheets.
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The foregoing financial statements are unaudited; however, in the opinion
of Management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the results of the interim periods have
been included. These statements should be read in conjunction with the
financial statements and accompanying notes included in Sandy Spring Bancorp's
1993 Annual Report to Shareholders. The results shown in this interim report
are not necessarily indicative of results to be expected for the full year 1994.
The accounting and reporting policies of Sandy Spring Bancorp conform to
generally accepted accounting principles and to general practice within the
banking industry. Certain reclassifications have been made to amounts
previously reported to conform with current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
NOTE 2 - ACCOUNTING STANDARD PERTAINING TO ACCOUNTING FOR CERTAIN INVESTMENTS
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 which established new classifications and criteria
pertaining to accounting for securities (see Note 1 of Notes to the Consolidated
Financial Statements contained in the Company's 1993 Annual Report to
Shareholders).
NOTE 3 - NET INCOME PER COMMON SHARE
Net income per common share is based on weighted average number of shares
outstanding which was, for the second quarter, 2,120,186 in 1994 and 2,053,267
in 1993 and, for the first six months, 2,117,273 in 1994 and 2,049,573 in 1993.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Consolidated basis, dollars in thousands except per share data)
A. FINANCIAL CONDITION
GENERAL
The Company's total assets were $727,607 at June 30, 1994, compared to
$722,465 at December 31, 1993, a $5,142 or 0.7% increase in the first half of
1994.
Earning assets rose $13,014 or 1.9% to $688,839 at June 30, 1994 from
$675,825 at December 31, 1993. Total loans increased $6,797 to $331,169 for the
first six months of 1994 while the balance in the residential mortgage loans
held for sale portfolio, which stood at $6,979 on December 31, 1993, was
liquidated during the period. Overall loan demand has been weak and as a
result, management has begun retaining residential mortgage loan originations
which previously had been sold in the secondary market. lnterest-bearing
deposits with banks decreased $11,893 to $183, as funds considered excess
liquidity were reinvested in medium term securities at more attractive rates.
The investment portfolio, which consists of investments available-for-sale and
held-to-maturity as well as other equity securities, rose $23,585 during the
period from $309,013 to $332,598. At December 31, 1993, the Bank evaluated its
portfolio in accordance with Statement of Financial Accounting Standards (FASB)
No. 115 and classified $234,961 of its investments as available-for-sale,
$70,125 as held-to-maturity and $3,965 as other equity securities. In the
second quarter, securities with a fair value of $56,455 were transferred from
the available-for-sale category to the held-to-maturity category. In accordance
with FASB 115, a total of $1,839 of unrealized loss on the securities
transferred is being amortized over the remaining life of the securities. This
unrealized loss is a component of stockholders' equity.
Growth in total deposits for the six months ended June 30, 1994 amounted to
$13,676, representing an increase of 2.2%, principally in core deposits (defined
to include all deposits, except time deposits of $100,000 or more), to $635,732.
Core deposits were 87.8% of earning assets at June 30, 1994. Short-term
borrowings fell $3,413 or 12.5% during the first half as a $5,000 advance from
the Federal Home Loan Bank of Atlanta matured while repurchase agreements
associated with business accounts rose $1,823.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company's liquidity position exceeds anticipated short and long term
funding needs at June 30, 1994.
Funds available at June 30, 1994 to meet loan demand and potential deposit
outflows consisted primarily of cash and cash equivalents, interest-bearing
deposits with banks, maturities of investments held-to-maturity due within one
year and investments available-for-sale and totaled $266,692 or 36.7% of total
assets.
6
<PAGE>
Core deposits rose by $13,286 during first half of 1994 while loans
increased by $6,797.
At June 30, 1994, the company had an essentially matched position of rate
sensitive assets to liabilities, cumulative to one year, indicating the
assumption of relatively low interest rate risk.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 18.34% at June 30,
1994 compared to 17.74% at December 31, 1993; a Tier 1 risk-based capital ratio
of 17.09% compared to 16.48%; and a capital leverage ratio of 9.21% compared to
9.48%. Capital adequacy, as measured by these ratios, was well above regulatory
requirements.
Stockholders' equity of $65,243 at June 30, 1994 was down from $66,391 at
December 31, 1993. The 1.7% decline resulted from recording a $1,459 net
unrealized loss on investments available-for-sale at June 30, 1994 compared to a
$2,958 net unrealized gain at December 31, 1993. Internal capital generation
provided $2,662 in additional equity during the first six months of 1994,
occurring at an annualized rate of 8.3% versus 10.3% for the year ended December
31, 1993. External capital formation amounted to $606 for the six month period
ended June 30, 1994, resulting from issuance of 8,141 shares under the dividend
reinvestment plan, 4,950 shares through employee related programs and 3,356
shares through stock option exercises.
First half demands were $1,101 or $O.52 per share in 1994 compared to $942
or $0.46 per share in 1993, for payout ratios of 29.26% and 23.49%,
respectively.
B. RESULTS OF OPERATIONS - 6 MONTHS ENDED JUNE 30, 1994 AND 1993
GENERAL
Net income for the first six months of the year declined 6.2% or $247 in
1994, to $3,763 ($1.77 per share) from $4,010 ($1.96 per share) recorded in the
first half of 1993. During the first quarter of 1994, the Company had a non-
recurring expense, after tax, of approximately $178 ($0.08 per share)
attributable to the accounting recognition of special early retirement benefits
extended to certain long term employees.
Net income equates to an annualized first half return an average assets of
1.07% in 1994 compared to 1.28% in 1993 and returns an average equity of 11.70%
versus 14.38%
NET INTEREST INCOME
First half net interest income was $12,988 in 1994, an increase of 8.1%
over $12,018 in 1993, as a decline in net interest spread to 3.65% from 3.91%
(down 26 basis points) was more than offset by a higher volume of earning
assets.
7
<PAGE>
First half tax-equivalent interest income increased $1,198 or 5.5% in 1994,
compared to 1993. Average earning assets rose 12.8% over the period while the
average yield earned on those assets declined by 48 basis points.
Comparing the first half of 1994 versus 1993, average loans grew 18.8% to
$324,364 (48.4% of average earning assets) while experiencing a 63 basis point
decline in average yield. Most of the increase in loans outstanding involved
the commercial sector of the portfolio, reflecting in part the merger with First
Montgomery Bank effective December 1, 1993. Average investments rose 14.9% to
$326,010 (48.7% of average earning assets) and recorded a 73 basis point
decrease in average yield.
First half interest expense increased $243 or 2.8%, as a net result of 9.5%
higher average interest-bearing liabilities and a 21 basis point decline in
average rate paid.
Declines in the net interest margin and spread were similar for the first
six months of 1994 versus the comparable period of 1993, at 26 and 22 basis
points, respectively.
CREDIT RISK MANAGEMENT
The provision for credit losses for the first six months of 1994 was $160,
significantly below the provision for the first six months of 1993 due to
improved asset quality measures. Nonperforming assets, expressed as a
percentage of total loans plus other real estate owned, fell significantly to
0.85% at June 30, 1994 from 1.48% at December 31, 1993.
Net charge-offs of $117 were recorded for the first six months of 1994.
There were net recoveries of $171 a year earlier. At June 30, 1994, commercial
construction and development credits, considered to be a higher risk category of
loans, comprised only 2.5% of total loans, while traditional first and second
home mortgages, generally considered to be a lower risk category, amounted to
33.6%.
At June 30, 1994, the allowance for credit losses was 1.88% of total loans,
virtually the same level reported at December 31, 1993. The allowance for
credit losses covered nonperforming loans better than two and a half times at
June 30, 1994, versus coverage of less than two times at December 31, 1993.
NON-INTEREST INCOME AND EXPENSES
Non-interest income for the first six months of 1994 decreased slightly to
$2,246 in 1994 from $2,260 in 1993, reflecting $315 less in gains on mortgage
sales achieved in 1994 as rising interest rates adversely affected both loan
production and the secondary market for residential mortgages. This development
overshadowed growth in service charge income (up $180 or 19.1%) reflecting
additional deposit accounts and a rise in commissions and fees from trust
services, annuity sales and servicing of mortgages sold (aggregate increase of
$117 or 30.6%).
8
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
6 Months Ended 12 Months Ended
June 30, 1994 December 31, 1993
- - -------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $6,177 $3,816
Provision for credit losses 160 950
Allowance from merger transaction -- 1,158
Loan charge-offs:
Real estate-mortgage (135) 0
Real estate construction 0 0
Consumer (10) (104)
Commercial (70) (29)
------------- -------------
Total charge-offs (215) (133)
Loan recoveries:
Real estate-mortgage 16 54
Real estate-construction 0 0
Consumer 24 79
Commercial 58 253
------------- -------------
Total recoveries 98 386
------------- -------------
Net recoveries (charge-offs) (117) 253
------------- -------------
BALANCE, PERIOD END $6,220 $6,177
------------- -------------
------------- -------------
Net recoveries (charge-offs) to
average loans (1994 annualized) (0.07)% 0.09%
Allowance to total loans 1.88% 1.90%
</TABLE>
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $1,851 $2,933
Loans 90 days past due 446 517
------------- -------------
Total Nonperforming Loans* 2,297 3,450
Other real estate owned 513 1,387
------------- -------------
TOTAL NONPERFORMING ASSETS $2,810 $4,837
------------- -------------
------------- -------------
Nonperforming assets to total assets 0.39% 0.67%
- - -------------------------------------------------------------------------------
<FN>
* There were no restructured loans at the end of either period. Those
performing loans considered potential problem loans, as defined and identified
by management, amounted to $13,632 at June 30, 1994, compared to $15,174 at
December 31, 1993. Although these are loans where known information about the
borrowers' possible credit problems causes management to have serious doubts as
to their ability to comply with the present loan repayment terms, most are well
collateralized and are not believed to present significant risk of loss.
</TABLE>
9
<PAGE>
Non-interest expenses for the first six months of 1994 increased $1,694 or
20.6% to $9,910 in 1994 from $8,216 in 1993. This increase was attributable
primarily to staff increases, nonrecurring early retirement benefits (discussed
above), and to costs associated with the First Montgomery Bank merger effective
December 1, 1993. This year's higher operating expense levels, which are
contributing to lower earnings, are seen as an essential requirement toward
building a more solid base of operations necessary to better service a growing
customer base.
Average full-time-equivalent employees rose to 283 from 243 (up 16.5%),
reflecting the staffing of three additional branches (two of which were from the
merger with First Montgomery Bank completed in December 1993).
INCOME TAXES
The effective tax rate for the first six months of 1994 was 27.1% compared
to 26.6% in 1993.
C. RESULTS OF OPERATIONS - SECOND QUARTER 1994 AND 1993
Second quarter earnings of $1,982 ($0.93 per share) in 1994 were slightly
higher than the second quarter of 1993, $1,933 ($0.94 per share).
Tax-equivalent net interest income rose 8.7% during the second quarter of
1994 compared to the same three month period of 1993 as a 12.0% increase in the
earning asset base was partially offset by a 21 basis point decline in the
interest rate spread.
During the second quarter of 1994, the provision for credit losses was only
$10, reflecting favorable asset quality, and there were net charge-offs of $146.
By contrast, a $300 provision was believed necessary in second quarter 1993,
when net recoveries of $192 were recorded.
Non-interest income for the second quarter decreased 11.8% in 1994 compared
to 1993 while non-interest expenses rose 14.1%, reflecting in both cases the
same factors discussed above for year-to-date performance.
The second quarter effective tax rate was 28.2% in 1994, slightly above
26.6% shown in 1993.
10
<PAGE>
PART 11 - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 20, 1994, the Company held its Annual Meeting of Shareholders at
which the election of three directors was considered and voted upon. Each of
the nominees, Andrew N. Adams, Jr., Robert L. Mitchell, and Robert L. Orndorff,
Jr., was elected to a three-year term.
There were no abstentions or broker non-votes.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By:/s/ Hunter R. Hollar
-----------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: August 11, 1994
By:/s/ Thomas O. Keech
-----------------------------------------
Thomas 0. Keech
Vice President and Treasurer
Date: August 11, 1994
12
